Case 1:16-cv-06467-RMB Document 48 Filed 01/17/17 Page 3 of 4
eBanker USA.com, Inc., 295 F.3d 352, 357 (2d Cir. 2002), which held that “the inquiry is not whether isolated statements within a document are true, but whether defendants’ representations or omissions, considered together and in context, would... mislead a reasonable investor regarding the nature of the securities offered.” Forest, 2006 WL 5616712, at *7.
Defendants ignore that, at the pleading stage, the court must accept as true all reasonable inferences in Plaintiff’s favor. See In re Ambac Fin. Grp., Inc. Sec. Litig., 693 F. Supp. 2d 241, 261 (S.D.N.Y. 2010). In assessing the Complaint’s well-pleaded allegations of falsity, this Court may not accept Defendants’ alternative, unreasonable inferences. See In re Initial Public Offering Sec. Litig., 241 F. Supp.2d 281, 370 (S.D.N.Y. 2003) (“The role of the Court on a motion to dismiss is not to weigh evidence but merely to determine whether a claim has been pled.”).
Defendants wrongly posit that the Complaint must allege that the Defendants knew, on May 13, 2016, that failing to mention the firings would affect the stock price. Plaintiffs have adequately alleged a material misrepresentation or omission, scienter, and loss causation.3 The firing of half of the sales force for your most important drug is material, failing to mention this fact when directly asked about the sales force (or even if you were not asked) is an actionable omission, the defendants knew the firings were occurring the day they spoke with the analysts yet omitted any mention of the firings, establishing, at a minimum, recklessness, and thus scienter, and revelation of the disappointing Donnatal sales at the end of the Class Period, which can reasonably be tied to the firing of that same sales force and the drug being removed from many formularies, led to a 38% drop in the stock price, ¶¶12, 94, establishing loss causation.
In addition, the Complaint adequately pleads Defendants’ scienter. Plaintiffs may adequately allege scienter either through strong circumstantial evidence of recklessness or conscious misbehavior, or through evidence of motive. Ganino v. Citizens Utilities Co., 228 F.3d 154, 168- 69 (2d Cir. 2000). While the Complaint strongly pleads recklessness regarding the failure to disclose the firing of the Donnatal salesforce and the drug’s removal from formularies, Plaintiffs further adequately allege motive. Defendants were motivated to keep the stock price high and present a positive picture of cash flow as other companies considered a buyout, and Defendant Thompson was motivated to keep the stock price high because his shares were encumbered by a personal loan and subject to a margin call. ¶¶8, 104-106, 109-110. See, e.g., In re Worldcom, Inc. Sec. Litig., 294 F. Supp.2d 392, 416-17 (S.D.N.Y. 2003) (finding motive and scienter from the pressure of a margin call); see also Goldstein v. MCI Worldcom, 340 F.3d 238, 250 (5th Cir. 2003) (same).4
3 While a “formulaic recitation of the elements of a cause of action” does not suffice, the complaint “does not need detailed factual allegations” to survive a motion to dismiss. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007).
4 Defendants citation to In re Dynegy, Inc. Sec. Litig., 339 F. Supp.2d 804, 899 (S.D. Tex. 2004) for the general proposition that threat of a margin call is insufficient motive is directly contrary to the binding Fifth Circuit precedent in Goldstein which holds the opposite, 340 F.3d at 250, and to Worldcom, precedent in this Court that they ignore. 294 F. Supp.2d at 416 (while “motives ‘possessed by virtually all corporate insiders’ such as protecting the appearance of corporate profits or increasing executive compensation by maintaining a high stock price are insufficient to plead scienter, Novak, 216 F.3d at 307,” Judge Cote wrote, a complaint sufficiently pleads motive and scienter where “to avoid or mitigate margin calls from lenders, Ebbers faced substantial pressure to maintain the price of the WorldCom stock that was serving as his collateral”).