The opinion of the court was delivered by: SPENCER WILLIAMS
Plaintiffs allege in this class action lawsuit that Syntex Corp. and its directors and officers ("Defendants") defrauded investors in violation of § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Securities and Exchange Commission Rule 10b-5, 17 C.F.R. § 240.10b-5 (1993), promulgated thereunder, by creating and maintaining the image of a successful company through the issuance of positive public statements and projections in press releases and other statements to the financial community, when in fact, the outlook for the company's products was poor. Plaintiffs also seek to hold Defendants liable for these misstatements and omissions under § 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78t. Defendants Syntex, Paul Freiman, James Wilson, John Fried, Thomas Gutshall, Melvin Booth and Thomas Hoffmeister now move to dismiss plaintiffs' Consolidated Amended Complaint and alternatively, for partial summary judgment. In response, plaintiffs move to strike declarations Defendants filed in support of their motion for partial summary judgment. Defendants Melvin Booth and Thomas Hoffmeister also move to dismiss on the ground that Plaintiffs' claims against them are barred by the statute of limitations. Finally, Defendant Marvyn Carton moves to dismiss, adopting the arguments of the other defendants and presenting additional arguments that are specific to his position as an outside director of Syntex. For the reasons expressed below, all Defendants' motions to dismiss are GRANTED and Plaintiffs' claims are DISMISSED WITH PREJUDICE; Defendants' motion for partial summary judgment is DENIED; and Plaintiffs' motion to strike is DENIED.
Syntex, a Panamanian corporation headquartered in Palo Alto, California, is an international health care company involved in the research, development, manufacture and marketing of pharmaceuticals. Syntex derives most of its earnings (65% in fiscal 1991) from the sale of Naprosyn, a drug used to treat arthritis pain and inflammation. The company's patent on Naprosyn expired in December 1993, exposing the drug to competition from generic substitutes.
Plaintiffs allege that during the last half of 1991 and throughout 1992, Syntex's top managers were under pressure to boost the price of the company's stock as high as possible and to maintain it at inflated levels. Two factors were apparently responsible for this pressure. First, in recent years, Syntex was frequently mentioned as a potential takeover candidate, and managers feared they would lose their jobs if such a takeover would occur. Second, the managers were allegedly motivated by the financial incentives they had as owners of Syntex stock and options to purchase substantial numbers of shares at favorable prices.
According to plaintiffs, Syntex's managers could not raise and maintain the price of the company's stock without overcoming securities analysts' and the investing public's concern that Syntex's ability to continue to achieve profitable growth during the 1990s would be impaired by the expiration of its Naprosyn patent. To accomplish this goal, Plaintiffs allege that Defendants concealed and misrepresented the true impact this development would have on Syntex's profitability in the 1990s. In addition, Defendants are alleged to have misrepresented the company's prospects for obtaining FDA approval of over-the-counter Naprosyn and the demand for and benefits of two other new Syntex products, Oral Toradol, a nonnarcotic pain killer, and Ticlid, a stroke preventative. In this regard, Defendants allegedly misrepresented to investors that the new drugs would offset any of the profits lost due to the decline in prescription Naprosyn sales, even though the Defendants had information at the time indicating that safer and more effective products already on the market would limit their use and acceptance. Finally, Plaintiffs allege that Syntex misrepresented the effect of a consent decree it entered with the FDA concerning the company's promotion of Naprosyn.
Plaintiffs claim that because of the rosy picture Defendants painted for the company, the price of Syntex's stock increased from $ 38-1/4 per share in late November 1991, to a peak of $ 54-1/8 per share in mid-January, 1992. On May 26, 1992, the company announced that its earnings for its third quarter fiscal 1992 had declined. Over the next several days, the price of the stock fell from $ 43-5/8 per share to $ 35-3/8. In an attempt to cushion the effects of this report, Syntex allegedly continued to make false positive representations about the company's future earnings. However, after the company revealed disappointing 1992 fourth quarter sales estimates in August, the stock fell to $ 29-3/8.
In addition to the misrepresentation and nondisclosure claims, Plaintiffs allege that several of the Defendants sold shares of their Syntex stock for proceeds in excess of $ 3 million in violation of federal securities laws.
On September 1, 1993, this Court dismissed Plaintiffs' First Amended Complaint with leave to amend because (1) Plaintiffs' claims that were based on misinformation contained in the analysts' reports were not sufficiently plead; and (2) the documents cited in the complaint accurately disclosed the information Plaintiffs allege that Defendants misrepresented or omitted. Plaintiffs filed a Second Amended Complaint on November 30, 1993.
A. Legal Standard on a Motion to Dismiss
Under the liberal federal pleading policies, a plaintiff need only give defendant fair notice of the claims against it. Conley v. Gibson, 355 U.S. 41, 47, 78 S. Ct. 99, 102, 2 L. Ed. 2d 80 (1957). A claim should not be dismissed unless it is certain that the law would not permit the requested relief even if all of the allegations in the complaint were proven true. Durning v. First Boston Corp., 815 F.2d 1265, 1267 (9th Cir. 1987), cert. denied, 484 U.S. 944, 108 S. Ct. 330, 98 L. Ed. 2d 358 (1987). Therefore, for purposes of this motion to dismiss, the Court assumes the truth of all factual allegations in the complaint as well as all reasonable inferences drawn from them.
In deciding a motion to dismiss, the court is not limited by the allegations contained in the complaint if the complaint is accompanied by attached documents. Such documents are deemed part of the complaint and may be considered in determining whether the plaintiff can prove any set of facts in support of the claim. Durning, 815 F.2d at 1267. The court may also consider "documents whose contents are alleged in a complaint and whose authenticity no party questions, but which are not physically attached to the pleading." Branch v. Tunnell, 14 F.3d 449, 454 (9th Cir. 1994), petition for cert. filed, 62 U.S.L.W. 3575 (Feb. 17, 1994) (No. 93-1327).
Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j, makes it unlawful to use, in connection with "the mails or facilities of interstate commerce" any "manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe . . . ." Rule 10b-5 promulgated under section 10(b) provides as follows:
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails, or of any facility of any national securities exchange,
(1) to employ any device, scheme, or artifice to defraud,
(3) to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,
in connection with the purchase or sale of any security.
17 C.F.R. § 240.10b-5 (1993).
Despite the fact that Rule 10b-5 says nothing about intent to defraud or knowledge of falsity, the Supreme Court has ruled that recovery in a private Rule 10b-5 lawsuit requires proof of the defendant's scienter. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193, 96 S. Ct. 1375, 1381, 47 L. Ed. 2d 668 (1976); see also Aaron v. SEC, 446 U.S. 680, 690, 100 S. Ct. 1945, 1952-1953, 64 L. Ed. 2d 611 (1980) (scienter also required in lawsuit brought by SEC). The Hochfelder Court defined this scienter as "a mental state embracing intent to deceive, manipulate, or defraud." Hochfelder, 425 U.S. at 194, n.12, 96 S. Ct. at 1381, n.12.
A. Defendants Syntex Corporation, Paul E. Freiman, James N. Wilson, John Fried, Thomas Gutshall, Melvin Booth and Thomas Hoffmeister's Motion to Dismiss and Alternative Motion for Partial Summary Judgment
In support of their motion to dismiss, Defendants argue that (1) the misrepresentations and omissions alleged in the Second Amended Complaint are not actionable; and (2) Plaintiffs have not sufficiently alleged facts to support their claims that Defendants adopted analysts' reports containing misrepresentations and omissions. Defendants also argue that Plaintiffs' ...