1 2 3 4 5 IN THE UNITED STATES DISTRICT COURT 6 FOR THE NORTHERN DISTRICT OF CALIFORNIA 7 8 EVANSTON POLICE PENSION Case No. 18-cv-06525-CRB FUND, 9 Plaintiff, ORDER DENYING MOTION TO 10 DISMISS v. 11 MCKESSON CORPORATION, et al., 12 Defendants. 13 This case arises out of government investigations of anticompetitive agreements in the 14 generic pharmaceutical industry. The resulting complaint, brought by forty-nine states’ Attorneys 15 General (the “AG complaint”), alleges that the generic drug industry is rife with price-fixing and 16 market-allocation agreements. The scandal has already resulted in congressional attention, 17 multiple guilty pleas, and a plethora of antitrust and Securities Act lawsuits against generic drug 18 manufacturers. 19 McKesson Corporation (“McKesson”) is (mostly) not a generic drug manufacturer, but a 20 generic drug wholesaler. Nonetheless, the plaintiffs in this putative class action (collectively, 21 “Evanston”) allege that McKesson must have participated in illegal anticompetitive conduct. At 22 the very least, Evanston alleges, McKesson was aware of and profited from the illegal agreements. 23 Evanston claims that by failing to disclose the conspiracy McKesson and its executives violated 24 the Securities Exchange Act of 1934. McKesson has moved to dismiss the complaint for failure to 25 state a claim. Because the Court finds that Evanston has adequately plead the required elements of 26 its Rule 10(b) claim, including falsity, scienter, and loss causation, the motion to dismiss is denied. 27 1 I. BACKGROUND 2 McKesson is a pharmaceutical wholesaler. Compl. ¶ 2 (dkt. 43). Most of its business 3 involves buying drugs from manufacturers and reselling them to pharmacies and hospitals. Id. 4 However, one of McKesson’s subsidiaries, NorthStar Rx (“NorthStar”), does manufacture generic 5 drugs. Id. 6 In the last several years, evidence has come to light of widespread anti-competitive 7 conduct in the generic drug market. Id. ¶ 5. Investigations by Congress, the Department of 8 Justice, and forty-nine state Attorneys General have led to multiple guilty pleas and a complaint 9 alleging a wide-ranging price-fixing conspiracy. Id. ¶ 5, 10. The AG complaint alleges that 10 generic drug manufacturers agreed to divide market share rather than compete on price. Id. ¶ 5. It 11 does not name McKesson as a defendant. Id. 12 Evanston alleges McKesson, its former Chief Executive Officer John Hammergren, and 13 former Chief Financial Officer James Beer, violated Section 10(b) of the Exchange Act and 14 Rule 10b-5 by concealing the collusive activity. Id. ¶¶ 215–24. It also charges the defendants 15 with control person liability under Section 20(a), and Hammergren with violating Section 20A by 16 selling stock while “in possession of material non-public information.” Id. ¶¶ 225–35. 17 The Consolidated Amended Complaint (“CAC”) alleges that McKesson was a party to 18 unlawful price-fixing agreements. McKesson ostensibly participated in anticompetitive conduct 19 both in its role as a wholesaler and through NorthStar. The CAC seizes on the AG complaint’s 20 allegations that generic drug manufacturers Heritage Pharmaceuticals, Inc. (“Heritage”), Mayne, 21 and Milan conspired to divide the market for Doxy DR. Because Heritage and Mayne supplied 22 Doxy DR to McKesson, the CAC reasons McKesson must also have been a party to this 23 agreement. Id. ¶¶ 74–77. It also alleges there is direct evidence that NorthStar colluded to fix the 24 price of Leflunomide, and circumstantial evidence, including parallel conduct and various “plus” 25 factors, that it conspired to fix the price of other drugs. Id. ¶¶ 97–128. 26 According to the CAC, McKesson benefited from the conspiracy both by charging 27 supracompetitive prices for NorthStar’s drugs, and because its wholesale business was more 1 not directly participate in anticompetitive conduct, it made false and misleading statements 2 covering up the manufacturer’s illegal agreements. Opp’n at 16 (dkt. 53). The alleged false and 3 misleading statements fall into six categories: claims that generic drug price inflation was driven 4 by “supply disruption,” statements touting McKesson’s role as a negotiator on behalf of its 5 purchasers, claims that the generic drug market remained competitive, descriptions of NorthStar as 6 a “growth driver,” announcements of McKesson’s financial results, and statements that 7 McKesson’s earnings had been derisked. See, e.g., id. at ¶¶ 138, 155, 196. 8 Evanston further alleges that Hammergren and Beer made the challenged statements 9 knowing they were false, or with deliberate recklessness. Opp’n at 24–30. Evidence of the 10 defendant’s scienter includes statements touting their knowledge of generic drug pricing and 11 compensation arrangements tying Hammergren and Beer’s stock and cash awards to McKesson’s 12 financial performance. See, e.g., Compl. ¶¶ 125–26, 185–92. Evanston also points to the 13 executives’ positions at McKesson, the magnitude of the alleged scheme, and the governmental 14 investigations. See Opp’n at 28–29. 15 Eventually, generic drug prices dropped, and with them, McKesson’s earnings. This 16 development was disclosed in a series of three financial announcements from October 27, 2016, to 17 January 25, 2017. Compl. ¶¶ 196–98, 200. In the same time period, two articles revealing the 18 government investigations were published in Bloomberg and Reuters. Id. ¶ 199. Each of the four 19 disclosures was followed by a significant decrease in McKesson’s stock price. Id. at 196–200. 20 II. LEGAL STANDARD 21 Pursuant to Federal Rule of Civil Procedure 12(b)(6), a complaint may be dismissed for 22 failure to state a claim upon which relief may be granted. Dismissal may be based on either “the 23 lack of a cognizable legal theory or the absence of sufficient facts alleged under a cognizable legal 24 25 theory.” Godecke v. Kinetic Concepts, Inc., 937 F.3d 1201, 1208 (9th Cir. 2019). A complaint 26 must plead “enough facts to state a claim to relief that is plausible on its face.” Ashcroft v. Iqbal, 27 556 U.S. 662, 697 (2009) (citing Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007)). A claim is plausible “when the plaintiff pleads factual content that allows the court to draw the 1 2 reasonable inference that the defendant is liable for the misconduct alleged.” Id. When evaluating 3 a motion to dismiss, the Court “must presume all factual allegations of the complaint to be true and 4 draw all reasonable inferences in favor of the nonmoving party.” Usher v. City of Los Angeles, 828 5 F.2d 556, 561 (9th Cir. 1987). “Courts must consider the complaint in its entirety, as well as other 6 sources courts ordinarily examine when ruling on Rule 12(b)(6) motions to dismiss, in particular, 7 documents incorporated into the complaint by reference, and matters of which a court may take 8 judicial notice.” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322 (2007). 9 10 Claims for fraud must meet the pleading standard of Federal Rule of Civil Procedure 9(b), 11 which requires a party “alleging fraud or mistake [to] state with particularity the circumstances 12 constituting fraud or mistake.” Fed. R. Civ. P. 9(b). Rule 9(b) “requires . . . an account of the time, 13 place, and specific content of the false representations as well as the identities of the parties to the 14 misrepresentations.” Swartz v. KPMG LLP, 476 F.3d 756, 764 (9th Cir. 2007) (internal quotation 15 marks omitted). This standard “applies to all elements of a securities fraud action, including loss 16 causation.” Or. Public Emps. Ret. Fund v. Apollo Grp. Inc., 774 F.3d 598, 605 (9th Cir. 2014). 17 18 Security fraud claims must also meet the heightened pleading requirements of the Private 19 Securities Litigation Reform Act (“PSLRA”), which states that the complaint “shall specify each 20 statement alleged to have been misleading, the reason or reasons why the statement is misleading, 21 and, if an allegation regarding the statement or omission is made on information and belief, the 22 complaint shall state with particularity all facts on which that belief is formed.” 15 U.S.C. § 78u- 23 4(b)(1); Tellabs, 551 U.S. at 321. The Court must dismiss any complaint that does not meet these 24 25 requirements. See 15 U.S.C. § 78u-4(b)(3)(A). 26 The PSLRA also requires plaintiffs to state with particularity facts giving rise to a strong 27 inference of the defendants’ scienter. See 15 U.S.C. § 78u-4(b)(2). “[A]n inference of scienter must opposing inference of nonfraudulent intent.” Tellabs, 551 U.S. at 314. Therefore, a court “must 1 2 consider plausible, nonculpable explanations for the defendant’s conduct.” Id. at 324. “Where 3 pleadings are not sufficiently particularized or where, taken as a whole, they do not raise a ‘strong 4 inference’ that misleading statements were knowingly or deliberate recklessness [sic] made to 5 investors, a private securities fraud complaint is properly dismissed under Rule 12(b)(6).” Ronconi 6 v. Larkin, 253 F.3d 423, 429 (9th Cir. 2001). 7 8 III. DISCUSSION 9 A. Evidentiary Issues 10 1. Judicial Notice and Incorporation by Reference 11 McKesson has requested judicial notice of twenty-five documents (Exhibits 1–25) cited in 12 its motion to dismiss. RJN (dkt. 50). It also argues that the Court may consider most of these 13 materials “under the doctrine of incorporation by reference.” RJN at 1. Evanston does not oppose 14 McKesson’s request, but maintains that the documents “cannot be noticed for the truth of the matters 15 asserted therein.” Opp’n at 5 n.5. 16 In reviewing a motion to dismiss, a district court is usually limited to the facts stated in the 17 complaint. Arpin v. Santa Clara Valley Transp. Agency, 261 F.3d 912, 925 (9th Cir. 2001). “A 18 court may, however, consider certain materials—documents attached to the complaint, documents 19 incorporated by reference in the complaint, or matters of judicial notice—without converting the 20 motion to dismiss into a motion for summary judgment.” United States v. Ritchie, 342 F.3d 903, 21 908 (9th Cir. 2003). 22 Courts may take judicial notice of facts that are “not subject to reasonable dispute” because 23 they (1) are “generally known within the trial court’s territorial jurisdiction,” or (2) “can be 24 accurately and readily determined from sources whose accuracy cannot reasonably be questioned.” 25 Fed. R. Evid. 201(b). Matters of public record may be judicially noticed, but disputed facts 26 contained in those records may not. Khoja v. Orexigen Therapeutics, Inc., 899 F.3d 988, 999 (9th 27 1 The doctrine of incorporation-by-reference “treats certain documents as though they are part 2 of the complaint.” Id. at 1002. Documents are subject to incorporation by reference if the plaintiff 3 refers to them “extensively” or they form the basis of the complaint. Id. Unlike documents subject 4 to judicial notice, courts may properly assume the truth of documents incorporated by reference. Id. 5 at 1003. But “it is improper to assume the truth of an incorporated document if such assumptions 6 only serve to dispute facts stated in a well-pleaded complaint.” Id. 7 Exhibits 1–13 and 15–17 are transcripts of earnings calls and corporate presentations that 8 the CAC alleges contained materially false statements or corrective disclosures. RJN at 1–3; see 9 also, generally, Compl. Because these documents form the basis of Evanston’s complaint, they are 10 subject to incorporation by reference. See Khoja, 899 F.3d at 1005 (documents containing alleged 11 misrepresentations and corrective disclosures form the basis of a Section 10(b) and are subject to 12 incorporation by reference). Similarly, Exhibits 18 and 19 are news articles the CAC identifies as 13 corrective disclosures. RJN at 3, Compl. ¶ 199. They are also subject to incorporation by reference. 14 Khoja, 899 F.3d at 1005. 15 Exhibits 20–23 are excerpts from McKesson’s FY 2013, 2014, 2015 and 2016 Proxy 16 Statements. RJN at 4. The CAC cites the proxy statements as evidence that McKesson’s 17 compensation arrangements created a motive for its executives to commit fraud. See Compl. 18 ¶¶ 185–92. This discussion spans three pages and conveys numerous facts gleaned from the proxy 19 statements about Hammergren and Beer’s compensation. Id. The Ninth Circuit has held that a 20 document was “extensively” discussed, even though the complaint quoted it only one, because the 21 quote was a “page and a half” long and “convey[ed] numerous facts.” Khoja, 899 F.3d at 1004. 22 The proxy statements are extensively referenced in the CAC and subject to incorporation. Similarly, 23 Exhibit 25, the AG complaint, is cited throughout the CAC. See generally Compl. Additionally, 24 an eighteen-page excerpt is attached to the CAC as Exhibit A. Compl Ex. A. The AG complaint is 25 also subject to incorporation by reference. 26 In contrast, Exhibits 14 (McKesson’s July 27, 2017 earnings call for Q1 2017) and 24 27 (Hammergren’s SEC Forms 4 filed with the SEC between October 24, 2013 and January 25, 2017), 1 are not cited in the CAC.1 See RJN at 3–4. These documents not subject to incorporation by 2 reference. See Khoja, 899 F.3d at 1006 (SEC filings that were not extensively referenced in the 3 complaint and “merely demonstrated that there was some financial incentive” to commit fraud not 4 subject to incorporation by reference). Nonetheless, both the transcript of the earnings call and the 5 SEC filings are publicly-filed documents whose accuracy cannot reasonably be questioned and are 6 therefore subject to judicial notice. Wochos v. Tesla, Inc., No. 17-cv-05828-CRB, 2019 WL 7 1332395, at *2 (N.D. Cal. March 25, 2019). 8 2. The AG Complaint 9 The parties dispute whether the CAC may rely on allegations in the AG Complaint. 10 McKesson cites a line of cases holding that “paragraphs in a complaint that are either based on, or 11 rely on, complaints in other actions that have been dismissed, settled, or otherwise not resolved are, 12 as a matter of law, immaterial within the meaning of Fed. R. Civ. P. 12(f).” Mot. at 7 n.3 (citing In 13 re Countrywide Fin. Corp. Mortg.-Backed Sec. Litig., 934 F. Supp. 2d 1219, 1226 (C.D. Cal. 2013)). 14 Evanston responds that several other courts have considered allegations from the AG Complaint 15 when ruling on motions to dismiss. Opp’n at 9 n.7. Because the Ninth Circuit has relied on 16 comparable documents when deciding motions to dismiss Section 10(b) and antitrust claims, the 17 Court holds it is appropriate to do so here. See In re VeriFone Holdings, Inc. Sec. Litig., 704 F.3d 18 694, 706–07 (9th Cir. 2012) (relying on allegations in an SEC complaint incorporated into the 19 plaintiff’s pleadings); In re Musical Instruments and Equip. Antitrust Litig., 798 F.3d 1186, 1199 20 (9th Cir. 2015) (relying on allegations in an FTC complaint and settlement). 21 B. Section 10(b) 22 To state a claim for securities fraud under Section 10(b) of the Securities Exchange Act, a 23 plaintiff must plead: (1) a misrepresentation or the use or employment of any manipulative or 24 deceptive device or contrivance; (2) scienter; (3) a connection with the purchase or sale of a security; 25 (4) reliance; (5) economic loss; and (6) loss causation. Stoneridge Inv. Partners, LLC v. Scientific- 26 27 1 Atlanta, Inc., 552 U.S. 148, 157 (2008). “SEC Rule 10b–5 implements [Section] 10(b) by declaring 2 it unlawful: ‘(a) To employ any device, scheme, or artifice to defraud, (b) To make any untrue 3 statement of a material fact or to omit to state a material fact necessary in order to make the 4 statements . . . not misleading, or (c) To engage in any act, practice, or course of business which 5 operates or would operate as a fraud or deceit upon any person, in connection with the purchase or 6 sale of any security.’” Tellabs, 551 U.S. at 318 (quoting 17 CFR § 240.10b–5). McKesson moves 7 to dismiss Evanston’s Section 10(b) claim on the grounds that the CAC fails to adequately plead a 8 misrepresentation, scienter, or loss causation. Mot. at 12. 9 1. False or Misleading Statements 10 To prevail on a Section 10(b) claim, a plaintiff must show that the defendant made a 11 statement that was “ misleading as to a material fact.” Basic Inc. v. Levinson, 485 U.S. 224, 238 12 (1988) (emphasis omitted). The materiality requirement is satisfied when there is “a substantial 13 14 likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor 15 as having significantly altered the ‘total mix’ of information made available.” Id. at 231–232. 16 Moreover, “[Section] 10(b) and Rule 10b–5(b) do not create an affirmative duty to disclose any and 17 all material information.” Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27, 44 (2011). 18 Disclosure is required only when necessary “to make . . . statements made, in the light of the 19 circumstances under which they were made, not misleading.” Id. (citing 17 C.F.R. § 240.10b–5(b). 20 21 “Even with respect to information that a reasonable investor might consider material, companies 22 can control what they have to disclose under these provisions by controlling what they say to the 23 market.” Id. at 45. 24 Evanston identifies six categories of false or misleading statements. First, statements 25 attributing McKesson’s earnings to increased generic drug prices, without acknowledging that the 26 price inflation was the result of collusive activity. Some of these statements attributed increased 27 negotiator on behalf of its purchasers. Third, statements that the market for generic drugs was 1 2 competitive. Fourth, statements that NorthStar was a growth vehicle for McKesson. Fifth, 3 statements describing McKesson’s financial results, without attributing its revenue to illegal 4 activity. Sixth, statements that McKesson’s earnings had been derisked. See Opp’n at 6–7. 5 Evanston alleges these statements were materially misleading or false because McKesson either 6 participated in, or was aware of, a conspiracy to fix prices for generic drugs. Id. at 17–24. It alleges 7 these statements were false and misleading either because McKesson itself participated in unlawful 8 price-fixing agreements, or because it was aware of such agreements in the generic pharmaceuticals 9 10 industry. 11 a. Participation in a Price-Fixing Conspiracy 12 “An impermissible conspiracy can be alleged through either direct or circumstantial 13 evidence.” B&R Supermarket, Inc. v. Visa, Inc., No. 16-01150 WHA, 2016 WL 5725010, at *6 14 (N.D. Cal. Sept. 30, 2016) (citing Musical Instruments, 798 F.3d at 1193). Circumstantial evidence 15 includes parallel conduct combined with “plus factors . . . that are largely inconsistent with 16 unilateral conduct but largely consistent with explicitly coordinated action.” Musical Instruments, 17 798 F.3d at 1194. 18 The parties dispute what legal standard applies to Evanston’s allegations that McKesson 19 participated in unlawful agreements. According to McKesson, the PSLRA’s heightened pleading 20 requirement applies to both the challenged statements and Evanston’s allegations of underlying 21 misconduct. Mot. at 8. Evanston claims that allegations of underlying misconduct need only be 22 “plausible.” Opp’n at 7 n.6. It is not clear what pleading standard applies to allegations of 23 misconduct that, if true, would render the challenged statements materially false or misleading. 24 Compare Gamm v. Sanderson Farms, Inc., No. 16 CV. 8420 (RMB), 2018 WL 1319157, at *3 25 (S.D.N.Y. Jan. 19, 2018) (“Where the plaintiffs’ underlying allegation in a Rule 10b-5 case is that 26 a defendant participated in an antitrust conspiracy, the plaintiffs must plead the facts of the alleged 27 1 No. 16-2805, 2018 WL 3601229, at *11 (D.N.J. July 27, 2018) (“When a securities fraud action 2 rests on the failure to disclose uncharged illegal conduct, the complaint must state a plausible claim 3 that the underlying conduct occurred.”). However, it is unnecessary to decide this issue, because 4 Evanston fails to sufficiently allege McKesson’s participation in a price-fixing conspiracy even 5 under the less stringent plausibility standard. 6 Direct Evidence of Conspiracy. Evanston pleads no direct evidence of McKesson’s 7 participation in an unlawful price-fixing agreement. Instead, it pleads direct evidence of unlawful 8 agreements among generic drug manufacturers. The CAC alleges facts showing an illegal 9 agreement between Heritage, Mylan, and Mayne to allocate the market for the generic drug Doxy 10 DR. Compl. ¶¶ 73–77, Opp’n at 9–11. The conspiracy included illegal promises not to compete 11 for McKesson’s business. Compl. ¶¶ 73–77. But the more plausible inference from this evidence 12 is that McKesson was a victim of, not a participant in, the Doxy DR conspiracy. Allegations that 13 Heritage told other manufactures it was “strategically aligned” with McKesson, and thus likely to 14 keep the wholesaler’s business, are consistent with this interpretation. See Compl. ¶ 75. Heritage 15 could have been indicating that it would offer McKesson more favorable terms than other 16 manufacturers, or simply making baseless claims to scare off competition. Nor is it suspicious that 17 McKesson ignored or declined certain bids, absent allegations that those bids were more favorable 18 than competing offers. See Compl. ¶¶ 74–75. The CAC does not allege any other direct evidence 19 of McKesson’s participation in the Doxy DR conspiracy. 20 Allegations that McKesson participated in a conspiracy to fix the price of the generic drug 21 Leflunomide are even more tenuous. Evanston alleges direct evidence of an illegal agreement in 22 2015 between Heritage, Teva, and Apotex to fix the price of Leflunomide. Compl. ¶¶ 97; Opp’n at 23 11–12. It then alleges that NorthStar raised the price of Leflunomide in 2015, and that Heritage and 24 Apotex implemented similar price increases several months later. Compl. ¶ 98. The CAC alleges 25 direct evidence of the 2014 conspiracy, not the 2015 conspiracy. Evanston cannot transmute direct 26 evidence of an agreement in 2014 between Heritage, Teva, and Apotex, into direct evidence of an 27 agreement in 2015 between NorthStar, Heritage, and Apotex. 1 has plead sufficient circumstantial evidence that McKesson participated in an antitrust conspiracy. 2 This argument relies on evidence of parallel conduct, and five plus factors: actions against self- 3 interest, deviation from pre-collusion behavior, state and federal investigations, a market susceptible 4 to collusion, and participation in trade organizations. Opp’n at 12–15. Even assuming Evanston 5 has adequately plead parallel conduct, its plus factors are insufficient to create a plausible inference 6 of McKesson’s participation in an unlawful agreement. 7 The Ninth Circuit found parallel conduct and a very similar set of plus factors insufficient 8 to plead an antitrust conspiracy in In re Musical Instruments and Equipment Antitrust Litigation. In 9 that case, the plaintiffs alleged that Guitar Center, Inc., five guitar manufacturers, and the National 10 Association of Music Merchants conspired to “fix[ ] the minimum price at which any retailer could 11 advertise the manufacturers’ guitars and guitar amplifiers.” Musical Instruments, 798 F.3d at 1189. 12 The plaintiffs alleged parallel conduct and six “plus factors” evidencing an illegal conspiracy. Id. 13 at 1194. The Ninth Circuit’s holding that this evidence was insufficient to plead an antitrust 14 violation is instructive in assessing Evanston’s very similar plus factors. 15 Actions Against Self-Interest. NorthStar raised prices on some generic drugs and failed to 16 undercut its competitors’ pricing for others. Opp’n at 13–14. Evanston argues this would be 17 economically irrational in a genuinely competitive market, because it foregoes an opportunity to 18 increase market share by offering better prices. Id. Ergo, NorthStar’s pricing evidences collusion. 19 Id. But Musical Instruments rejects this syllogism for “fail[ing] to account for conscious parallelism 20 and the pressures of an interdependent market.” 798 F.3d at 1195. “[S]o long as prices can be easily 21 readjusted without persistent negative consequences, one firm can risk being the first to raise prices, 22 confident that if its price is followed, all firms will benefit.” Id. “Follow the leader” pricing can 23 raise prices across the board without any unlawful agreement. Id. It therefore takes “individual 24 action [that] would be so perilous in the absence of advance agreement that no reasonable firm 25 would make the challenged move without such an agreement” to suggest prior agreement. Id. 26 Evanston’s allegations do not fall into the latter category. The CAC alleges that NorthStar 27 raised prices on two drugs and failed to undercut prices on four others. Compl. ¶ 92. This behavior 1 higher prices or was willing to be led rather than sacrifice existing favorable pricing in pursuit of 2 increased market share. Under Musical Instruments, these allegations do not suffice to plead 3 NorthStar’s participation in the conspiracy. Musical Instruments, 798 F.3d at 1195. 4 Deviations from Pre-Collusion Behavior. Evanston next argues that decreased price, 5 decreased market share volatility, and McKesson’s increased profitability are “deviation[s] from 6 pre-collusion behavior” demonstrating unlawful agreement. Opp’n at 14. It is true that “complex 7 and historically unprecedented changes in pricing structure made at the very same time by multiple 8 competitors . . . for no other discernible reason” may support a plausible inference of conspiracy. 9 See Twombly, 550 U.S. at 556 n.4. But the mere “progressive adoption of similar policies” may 10 reveal nothing “more than similar reaction to similar pressures within an interdependent market, or 11 [lawful] conscious parallelism.” Musical Instruments, 798 F.3d at 1196. As explained above, 12 stability in price and market share is consistent with conscious parallelism. And as the CAC 13 explains, McKesson’s wholesale business model meant that it would profit from generic drug price 14 inflation, regardless of whether it actually participated in illegal agreements. Compl. ¶¶ 58–61. 15 Government Investigations. McKesson also cites government investigations and Heritage 16 executives Jeffrey Glazer and Jason Malek’s guilty pleas to the Doxy DR conspiracy. Opp’n at 14. 17 But “government antitrust investigations ordinarily carry no weight in pleading an antitrust 18 conspiracy.” In re German Auto. Mfrs. Antitrust Litig., 392 F. Supp. 3d 1059, 1071 (N.D. Cal. 19 2019) (internal quotation marks omitted). This general rule is especially applicable here, since the 20 CAC does not allege that either the guilty pleas or any government investigation named McKesson 21 as a party to an unlawful agreement. See generally Compl. Ex. A; cf. Musical Instruments, 798 F.3d 22 at 1196 (finding irrelevant an FTC investigation because the resulting complaint and consent decree 23 did not allege a conspiracy or agreement to adopt collusive pricing policies). 24 Susceptibility to Collusion. McKesson argues the market for generic drugs is highly 25 susceptible to collusion, because it is a commodity market, dominated by a few companies, and 26 rigorously regulated. Other relevant features are its inelastic demand, high barriers to entry, and 27 lack of viable substitutes. Opp’n at 14–15; Compl. ¶¶ 105–16. This plus factor is analogous to one 1 “alleging ‘common motive to conspire’ simply restates that a market is interdependent (i.e., that the 2 profitability of a firm’s decisions regarding pricing depends on competitor’s reactions.).” 798 F.3d 3 at 1195. Evanston’s argument that the market is susceptible to collusion boils down to an argument 4 that the market is interdependent, creating a motive to collude. The Ninth Circuit’s observation that 5 “interdependent firms may engage in consciously parallel conduct through observation of their 6 competitors’ decisions, even absent an agreement” is therefore equally relevant in this case. Id. 7 Participation in Trade Organizations. Evanston alleges that McKesson participated in 8 trade organizations. Compl. ¶¶ 117–21. Such allegations are insufficient evidence of an antitrust 9 conspiracy when the complaint fails to “identify what was agreed to in the[ ] meetings.” German 10 Auto. Mfrs., 392 F. Supp. 3d at 1071–72. Without specific allegations of what McKesson agreed 11 to at the trade organizations, Evanston has alleged “mere participation in trade organization 12 meetings,” which is not enough to constitute a meaningful plus factor supporting a finding of an 13 antitrust conspiracy. Musical Instruments, 798 F.3d at 1196. This is true regardless of the positions 14 McKesson executives held in the trade organizations or evidence that other companies used these 15 meetings to execute unlawful agreements—what matters is evidence of McKesson’s activity. 16 Even cumulatively and combined with parallel conduct Evanston’s five plus factors do not 17 adequately allege that McKesson entered an unlawful agreement. This conclusion accords with 18 Musical Instruments, which held parallel conduct and six plus factors (five of them very similar to 19 Evanston’s) insufficient to plead an antitrust conspiracy. Id. at 1198. It also accords with the result 20 in In re Generic Pharmaceuticals Pricing Antitrust Litigation, 386 F. Supp. 3d 477 (E.D. Penn. 21 2019), which dismissed an antitrust claim against McKesson alleging very similar facts. The 22 complaint in Generic Pharmaceuticals also alleged a strong motive to collude, actions against self- 23 interest, opportunities to conspire at trade events, and government investigations. Id. at 483–86. 24 Judge Rufe found these allegations insufficient to state a Sherman Act claim, even assuming parallel 25 conduct and considering several additional plus factors not alleged by McKesson. Id. at 483–87. 26 b. Knowledge of Price-Fixing Conspiracy 27 Evanston argues that even if McKesson did not participate in an antitrust conspiracy, its 1 statements would still be materially false and misleading if it knew that the generic drug 2 manufacturers were engaged in a price-fixing conspiracy. Opp’n at 16. McKesson does not appear 3 to contest that Evanston has adequately plead the existence of unlawful agreements between generic 4 drug manufacturers. Nor could it—the CAC alleges specific, direct evidence of unlawful 5 agreements between those companies’ executives. See, e.g., Compl. ¶¶ 74–77, Ex. A. 6 Instead, McKesson argues that the existence of a conspiracy among generic drug 7 manufacturers does not render any statement identified in the complaint materially misleading or 8 false. Mot. at 14–22. McKesson also contends, both in its briefing and again at argument, that the 9 challenged statements could not have been misleading because McKesson’s executives could not 10 have known about a conspiracy between the manufacturers when those statements were made. 11 However, as explained below in the section on scienter, Evanston has adequately alleged that 12 McKesson’s executives were aware of price-fixing in the generic pharmaceutical industry when the 13 challenged statements were made. The rest of this section addresses which of the six categories of 14 challenged statements were false or misleading in light of that knowledge. 15 Supply Disruptions. The CAC alleges that McKesson executives repeatedly attributed the 16 company’s increased profitability to generic drug price increases driven by “supply disruption.” 17 See, e.g., Compl. ¶¶ 46, 63–64. McKesson executives also identified the ostensible reasons for 18 those disruptions. For example, Beer told analysts, “[W]e continue to see the underlying drivers as 19 some sort of supply disruption whether it’s the FDA backlog, whether it’s the FDA actions around 20 a particular manufacturer’s planned or line, or whether it’s an individual manufacturer taking a 21 decision around their own capacity.” Id. ¶ 63. Evanston alleges that there were no supply 22 disruptions that affected the drugs driving McKesson’s increased profitability. The price increases 23 were the result of collusive activity. Id. ¶ 152. 24 Evanston argues that even if there was a price-fixing conspiracy, statements regarding a 25 supply disruption were not false for two reasons. First, the manufacturers may have experienced 26 supply disruptions of the type McKesson described,2 even if they were also engaged in a price-fixing 27 1 conspiracy. Mot. at 15. Second, if two manufacturers illegally agreed that only one of them would 2 supply McKesson with a certain drug, that would technically be a “supply disruption.” Id. at 16. 3 Neither argument is persuasive. “Even if a statement is not false, it may be misleading if it 4 omits material information.” Khoja, 899 F.3d at 1008–09. “[O]nce defendants choose to tout 5 positive information to the market, they are bound to do so in a manner that won’t mislead investors, 6 including disclosing adverse information that cuts against the positive information.” Id. at 1009 7 (alterations omitted). So, in Khoja, once a pharmaceutical company released positive interim 8 results, it was obligated to disclose new information “that diminished the weight of those results.” 9 Id. at 1015. 10 The duty to disclose obligated McKesson to reveal that the price increases it had announced 11 were driven, in part, by collusive activity. Having touted the good news that supply disruptions 12 were leading to increased prices and thus increased profits, McKesson had a duty to also disclose 13 that some portion of its increased profits was actually due to far riskier and less sustainable unlawful 14 agreements. And even if those unlawful agreements technically led to “supply disruptions,” a 15 reasonable investor would not interpret that phrase to encompass illegal market allocation 16 agreements. The duty to disclose also means that McKesson is incorrect that it had no duty to accuse 17 the generic drug manufacturers of antitrust violations. 18 Value to Purchasers. The next category of challenged statements claimed that McKesson 19 provided value to its pharmaceutical customers by obtaining competitive prices for generic drugs. 20 Opp’n at 6. For example, Beer told analysts at the Bank of America Merrill Lynch Health Care 21 Conference that “we buy at scale in an extremely efficient way and are able to pass through the 22 benefits of those drug prices to . . . independent stores.” Compl. ¶ 153. Evanston argues these 23 statements were false or misleading because in fact McKesson was acquiescing to supra-competitive 24 prices driven by anticompetitive agreements. Id. ¶ 166. 25 These statements were not rendered false by the manufacturers’ price-fixing conspiracy. 26 They simply described the value of a wholesaler to independent pharmacies. Mot. at 17–19. They 27 were not a guarantee that McKesson was obtaining the best possible price, just a description of its 1 role as a wholesaler, and the advantages of buying from a wholesaler, were accurate regardless of 2 whether or not McKesson’s prices were impacted by the manufacturers’ collusion. 3 Competitive Market. Evanston claims statements describing the generic drug market as 4 competitive were false or misleading because that market was, in fact, rife with anticompetitive 5 conduct. Opp’n at 6. McKesson claims these statements were not broad claims about the overall 6 competitiveness of the generic drug market, but rather limited observations about specific aspects 7 of its business. Reply at 8–9. The Court finds that the relevant statements could plausibly be read 8 to speak to the overall generic drug market. See Compl. ¶¶ 155–57, 164 (“I think that the [generic 9 drug] market remains competitive”). Claiming the generic drug market is competitive would be 10 misleading if there was in fact widespread price fixing. See Utesch v. Lannett Co., 385 F. Supp. 3d 11 408, 420 (E.D. Penn. 2019) (holding the statement “We face strong competition in our generic [drug] 12 business” misleading given allegations “the generic pharmaceutical industry was riddled with 13 anticompetitive conduct”). 14 NorthStar. The fourth category of challenged statements claimed that NorthStar was a 15 “growth vehicle” and attributed its success to legitimate causes, such as launching new drugs. Opp’n 16 at 6. Because Evanston has not sufficiently alleged NorthStar’s participation in an unlawful 17 conspiracy, it has also failed to plead that this category of statements was false or misleading. Even 18 assuming NorthStar was able to charge higher prices thanks to other companies’ unlawful collusion, 19 a general discussion of its growth and other merits would not be rendered misleading by failing to 20 disclose other companies’ antitrust violations. 21 Financial Results. The fifth category of challenged statements are McKesson’s financial 22 results and explanations for those results. Opp’n at 6–7. Evanston argues these statements were 23 false because they attributed the company’s positive financial results to “legitimate market forces” 24 rather than “industrywide collusion.” Opp’n at 7. The Ninth Circuit has held that “the PSLRA’s 25 falsity requirement is not satisfied by conclusory allegations that a company’s class period 26 statements regarding its financial well-being are per se false based on the plaintiff’s allegations of 27 fraud generally.” Metzler Inv. GMBH v. Corinthian Colleges, Inc., 540 F.3d 1049, 1070 (9th Cir. 1 illegal revenue at issue without disclosing the illegality. See, e.g., In re Syncor Int’l Corp. Sec. 2 Litig., 239 F. App’x 318, 320 (9th Cir. 2007) (statements that acknowledged legitimate income 3 sources for defendant’s overseas earnings while omitting unlawful ones were misleading). 4 Some of McKesson’s financial guidance put the source of profits from collusively priced 5 drugs at issue by attributing revenue to “drug . . . price increases.” See, e.g., Compl. ¶¶ 171–72. 6 These portions of its financial guidance were false, because they put generic drug price increases at 7 issue, and therefore obligated McKesson to disclose the collusion helping to drive the inflation. See 8 Khoja, 899 F.3d at 1008–09. 9 But Evanston has otherwise failed to allege that the financial statements were false. 10 Evanston does not explain why any other aspects of the lengthy financial statements excerpted in 11 the CAC put generic drug price increases at issue (other than asserting the inappropriate inference 12 that the fraud rendered all of McKesson’s financial statements false). See Metzler, 540 F.3d at 1070. 13 And although it asserts that the guidance was false because it was premised on the 14 misrepresentations regarding supply disruptions, it does not adequately explain how the guidance 15 was based on those statements. See Compl. ¶¶ 169–82, Opp’n at 22–23. 16 Derisked Earnings. The final category of challenged statements claimed that McKesson 17 had derisked its FY17 earnings from generics inflation. These statements were essentially forward- 18 looking. 15 U.S.C. §§ 78u-5(i)(1)(A), (C). They are therefore actionable only if the CAC pleads 19 facts supporting a strong inference that McKesson made these statements with actual knowledge of 20 their falsity. 15 U.S.C. §§ 78u-5(c)(1)(B). The CAC contains no allegations supporting that 21 inference, see Compl. ¶ 163, nor does Evanston’s briefing lay out any basis for such a claim, Opp’n 22 at 23–24; see also Oracle Corp., 627 F.3d at 389 (“[T]he fact that Oracle’s forecast turned out to be 23 incorrect does not retroactively make it a representation.”). 24 In sum, Evanston has adequately plead that the first and third categories of challenged 25 statements were materially false and misleading, but not the second, fourth, or sixth categories. The 26 fifth category of challenged statements, McKesson’s financial results, were materially false or 27 misleading only insofar as they referenced generic drug “price increases.” 1 2. Scienter 2 Scienter is “a mental state embracing intent to deceive, manipulate, or defraud.” Tellabs, 3 551 U.S. at 308. To demonstrate scienter, a complaint must allege that the defendants made “false 4 or misleading statements either intentionally or with deliberate recklessness.” See Zucco Partners, 5 LLC v. Digimarc Corp., 552 F.3d 981, 991 (9th Cir. 2009); Ronconi v. Larkin, 253 F.3d 423, 432 6 (9th Cir. 2001). “[M]ere recklessness or a motive to commit fraud” is not enough. Reese v. Malone, 7 747 F.3d 557, 569 (9th Cir. 2014), overruled on other grounds by City of Dearborn Heights Act 345 8 Police & Fire Retirement System v. Align Tech., Inc., 856 F.3d 605, 616 (9th Cir. 2017). Rather, 9 the complaint must allege “a highly unreasonable omission” and “an extreme departure from the 10 standards of ordinary care” that “presents a danger of misleading buyers or sellers that is either 11 known to the defendant or is so obvious that the actor must have been aware of it.” See Zucco, 552 12 F.3d at 991. The court must “assess all the allegations holistically,” not “scrutinize each allegation 13 in isolation.” Tellabs, 551 U.S. at 326. Courts in the Ninth Circuit sometimes conduct a dual 14 inquiry, which first considers “whether any of the plaintiff’s allegations, standing alone, are 15 sufficient to create a strong inference of scienter.” Verifone Holdings, 704 F.3d at 702. If not, the 16 court asks whether the individually inadequate allegations suffice when considered as a whole. Id. 17 Considered as a whole, Evanston’s allegations regarding the scope of the conspiracy, its 18 importance to McKesson’s bottom line, Hammergren and Beer’s statements about their knowledge 19 of the generic drug market, their positions at McKesson, and their compensation arrangements are 20 sufficient to plead scienter. The Court therefore need not consider whether these allegations would 21 be individually sufficient. Evanston’s other allegations of scienter add little to the analysis, so they 22 are not addressed. 23 “Core Operations” Theory of Scienter. Hammergren and Beer’s statements touting their 24 knowledge of the generics market, combined with the magnitude of the price-fixing conspiracy, its 25 significance to McKesson’s revenues, and the executive defendants’ roles at the company, are 26 sufficient to satisfy a “core operations” theory of scienter. See Dearborn Heights, 856 F.3d at 620. 27 “[F]alsity may itself be indicative of scienter where it is combined with allegations regarding a 1 access to the disputed information, and where the nature of the relevant fact is of such prominence 2 that it would be absurd to suggest that management was without knowledge of the matter.” Zucco, 3 552 F.3d at 1000 (quotation marks omitted). This standard can be satisfied by “specific admissions 4 from top executives” about their “access to information within the company.” Id. 5 Evanston argues that Hammergren and Beer’s statements regarding their knowledge of 6 generic drug pricing show they must have been aware that collusion was driving price inflation. 7 The CAC alleges that McKesson touted a “huge analytics machine” that captured information on 8 generic drug pricing and the market for generic drugs. Compl. ¶ 122. Hammergren claimed that 9 NorthStar provided McKesson with insight into the generic drug market, including “some of the 10 challenges that may exist, whether it’s plant closures, limited supply of raw materials, or other issues 11 that may come along.” Id. McKesson executives claimed that they were “extremely intimate 12 globally” to generic drug manufacturers, and thus positioned “to see how price is behaving,” 13 “monitor pricing trends,” and “analyze[ ] . . . the inflationary elements in the market place.” Id. 14 ¶ 125–26. 15 It is true that evidence that a company collects and tracks data that would reveal fraud is 16 insufficient, on its own, to establish scienter on the part of its executives. Metzler, 540 F.3d at 1068 17 (“[C]orporate management’s general awareness of the day-to-day workings of the company’s 18 business does not establish scienter—at least absent some additional allegation of specific 19 information conveyed to management and related to the fraud.”). But Evanston alleges more than 20 just a “general awareness of the day-to-day workings of the company’s business.” Id. Hammergren 21 and Beer touted intimate knowledge of generic drug manufacturers, generic drug pricing, and 22 challenges that might impede supply. They went on to falsely attribute generic drug price increases 23 to non-existent supply disruptions. If Hammergren and Beer really had the intimate knowledge of 24 generic drug pricing and conditions in the generic drug market that they claimed, it was at least 25 deliberately reckless not to investigate the accuracy of their statements that price increases were 26 being driven by specific, legitimate supply disruptions, rather than collusive activity. For the same 27 reason, these statements are sufficient allegations that it was at least deliberately reckless for 1 McKesson argues that Evanston mischaracterizes many of the statements touting the 2 executives’ knowledge of the generic drug market. Specifically, McKesson argues that because 3 Hammergren and Beer used the pronoun “we” (as in, “we have been able to look carefully at the 4 generic purchasing patterns”), their statements reveal, at most, that some branch of the company 5 was monitoring generic pricing trends, not the executives themselves. Mot. at 23–24. The 6 difference is immaterial. The Ninth Circuit has held that a top executive’s admission that “[w]e 7 know exactly how much we have sold in the last hour” was sufficient to demonstrate that executive’s 8 access to the relevant sales figures. Zucco, 552 F.3d at 1000 (alteration in original, emphasis added, 9 quotation marks omitted). At the very least, whether Hammergren and Beer’s statements suggest 10 personal knowledge or just knowledge on the part of some employee at McKesson is a question of 11 fact not appropriate for resolution on a motion to dismiss. 12 Finally, McKesson cites cases holding that alleging knowledge of pricing is insufficient to 13 allege knowledge of price-fixing. Mot. at 25 (citing Fleming v. Impax Labs., Inc., No. 16-cv-06557- 14 HSG, 2018 WL 4616291, at *4 (N.D. Cal. Sept. 7, 2018). It is true that in another Section 10(b) 15 action arising from allegations of price-fixing in the generic drug market, Judge Gilliam held that 16 “statements . . . regarding Defendants’ willingness to monitor the market, maximize product 17 opportunities, and exploit positive pricing,” were insufficient to plead scienter. Fleming, 2018 WL 18 4616291, at *4. He concluded that “the more compelling inference . . . is that Defendants made a 19 good faith but mistaken determination that price increases resulted from natural market conditions.” 20 Id. (internal alterations and quotation marks omitted). Impax is distinguishable. Hammergren and 21 Beer’s statements indicate not just a willingness to monitor the market, but access to information 22 putting them on notice that the price increases were not driven by legitimate supply disruptions. 23 Compensation Structure. Evanston asserts that “McKesson’s unique compensation 24 structure incentivized defendants . . . to perpetuate the fraud.” Opp’n at 29; Compl. ¶ 183–92. 25 Because “it is common for executive compensation, including stock options and bonuses, to be 26 based partly on the executive’s success in achieving key corporate goals,” courts generally “will not 27 conclude that there is fraudulent intent merely because a defendant’s compensation was based in 1 However, a “strong correlation between financial results and stock options or cash bonuses for 2 individual defendants may occasionally be compelling enough to support an inference of scienter.” 3 Zucco, 552 F.3d at 1004. Particularized allegations regarding the correlation between financial 4 results and stock options or cash bonuses are necessary to plead a sufficiently strong correlation. Id. 5 In No. 84 Employer-Teamster Joint Council Pension Trust Fund v. America West Holding Corp., 6 allegations of the number of additional stock options executives received thanks to improved 7 financial performance were sufficient to show scienter. 320 F.3d 920, 944 (9th Cir. 2003). 8 The CAC pleads a sufficiently strong correlation between McKesson’s financial 9 performance and Hammergren and Beer’s stock and cash awards to support a finding of scienter. 10 The CAC alleges specific stock and cash award multipliers that tied Hammergren and Beer’s 11 compensation to McKesson’s financial performance in 2014, 2015, 2016, and 2017. Compl. ¶ 189. 12 It also provides tables alleging precise amounts each executive received in base salary, stock award, 13 and cash awards for each year. The numbers Evanston pleads demonstrate that the executives’ 14 compensation from stock and cash awards far outstripped their base salaries. Id. ¶¶ 190–92. These 15 allegations are comparable to those in America West. 16 McKesson takes issue with Evanston’s characterization of certain aspects of the 17 compensation arrangements that protected the executives’ pay from at least some negative earnings 18 impacts from litigation. Mot. at 26–27. But this dispute is irrelevant. The most salient allegations 19 about McKesson’s compensation arrangements are the multipliers and tables showing Hammergren 20 and Beer’s earnings. Those allegations demonstrate a “strong correlation” between financial results 21 and Hammergren and Beer’s compensation. See Zucco, 552 F.3d at 1004. 22 Considered as a whole, the core operations theory and Hammergren and Beers’ 23 compensation arrangements adequately allege scienter. 24 3. Loss Causation 25 Loss causation is the “causal connection between the material misrepresentation and the 26 [economic] loss” faced by the plaintiff. Dura Pharm., 544 U.S. at 342. A complaint must give the 27 defendant “notice” of this causal connection; in other words, “the complaint must allege that the defendant’s share price fell significantly after the truth became known.” Metzler, 540 F.3d at 1062 1 2 (internal citations omitted). The misrepresentation need not be the “sole” reason for the decline as 3 long as it is a “substantial cause,” see In re Daou Sys., Inc., 411 F.3d 1006, 1025 (9th Cir. 2005), 4 and the allegations, “if assumed true, are sufficient” to indicate a causal relationship between the 5 company’s “financial misstatements” and “the drop in [its] stock price,” see id. at 1026. “At the 6 pleading stage, however, the plaintiff need only allege that the decline in the defendant’s stock price 7 was proximately caused by a revelation of fraudulent activity,” rather than other factors. Loos v. 8 Immersion Corp., 762 F.3d 880, 887 (9th Cir. 2014). The ultimate question is “whether the 9 10 defendant’s misstatement, as opposed to some other fact, foreseeably caused the plaintiff’s loss.” 11 Lloyd v. CVB Fin. Corp., 811 F.3d 1200, 1210 (9th Cir. 2016). 12 The CAC identifies four corrective disclosures ostensibly demonstrating loss causation. 13 Compl. ¶¶ 196–200. Three of the disclosures are announcements of disappointing financial results 14 or projections, attributed in part to slowing generic drug price inflation. Compl. ¶¶ 196–97, 200. 15 The fourth consists of two news articles, published in Bloomberg and Reuters, announcing 16 government investigations of generic drug price-fixing. Compl. ¶ 199. Evanston alleges that all 17 18 four corrective disclosures were followed by significant drops in McKesson’s stock price. Compl. 19 ¶ 196–202. 20 It is true, as McKesson argues, that on their own neither the disappointing financial results 21 nor the mere announcement of an investigation would be sufficient to demonstrate loss causation. 22 See Oracle Corp., 627 F.3d at 392 (“Loss causation requires more than an earnings miss.”); Loos, 23 762 F.3d at 890 (“[T]he announcement of an investigation, without more, is insufficient to establish 24 25 loss causation.”). However, taken together, these allegations adequately plead loss causation. 26 This case is analogous to Lloyd v. CVB Financial Corp. The plaintiffs in Lloyd alleged that 27 CVB had fraudulently represented “that there was no basis for ‘serious doubt’ about Garrett’s 22% after it announced a Securities and Exchange Commission subpoena “request[ing] information 1 2 regarding our loan underwriting guidelines, our allowance for credit losses and our allowance for 3 loan loss calculation methodology, our methodology for grading loans and the process for making 4 provisions for loan losses, and our provision for credit losses.” Id. at 1204. “About a month after 5 it announced the SEC subpoena, CVB disclosed that it was charging off millions in Garrett loans.” 6 Id. at 1210. The market hardly reacted to that “bombshell” announcement. Id. Lloyd held that this 7 “confirm[ed] that investors understood the SEC announcement as at least a partial disclosure of the 8 inaccuracy of the previous ‘no serious doubts’ statements. Id. 9 10 Similarly, the government investigation into generic drug price-fixing, combined with 11 McKesson’s disappointing earnings, is sufficient to show that investors would have understood the 12 investigation as a revelation of the collusive activity McKesson’s fraud concealed. McKesson’s 13 disappointing financial results had already put investors on notice that falling drug prices were 14 hurting the company’s bottom line. See Compl. ¶¶ 196–97, 200. It is reasonable to infer that thanks 15 to this context, investors would have understood the investigation as “at least a partial disclosure” 16 of the collusive activity responsible for those pricing trends. See Lloyd, 811 F.3d at 1210. Indeed, 17 18 the Reuters article explicitly tied increased scrutiny of generic drug pricing to McKesson’s financial 19 results, noting that “[g]eneric drugmakers, possibly reacting to political headwinds, reined in price 20 hikes this year,” and “[t]he price erosion has been felt by drug wholesalers like McKesson.” Mot. 21 Ex. 19. McKesson’s stock price dropped yet further when the investigation was announced, 22 showing that investors considered this revelation material. Compl. ¶ 199. This sequence of events 23 is sufficient to show that Evanston’s claimed “economic loss was caused by [McKesson’s] 24 25 misrepresentations” about generic drug pricing and the generic drug market. See Lloyd, 811 F.3d 26 at 1209. 27 It is true that in Lloyd the disclosures occurred in the opposite order. In that case, an understood the investigation as a disclosure of the fraud. Id. at 1210. But a recent Ninth Circuit 1 2 case, Mineworkers’ Pension Scheme v. First Solar Inc., 881 F.3d 750 (9th Cir. 2018), makes it clear 3 that it would be a mistake to apply the loss causation standard so rigidly as to reject any theory that 4 does not precisely align with the facts of previous cases. First Solar reiterated that the standard for 5 loss causation “requires no more than the familiar test for proximate cause.” Id. at 753. The Ninth 6 Circuit recognized that there are an “‘infinite variety’ of causation theories a plaintiff might allege 7 to satisfy proximate cause” and “our approval of one theory should not imply our rejection of 8 others.” Id. at 753–54 (internal citations omitted). Based on First Solar, the Court concludes that it 9 10 would be a mistake to read Lloyd to require that an investigation be announced before any other 11 relevant disclosures. That is just one of an “infinite variety” of theories that adequately allege loss 12 causation. See id. at 754. Loss causation is also adequately alleged, when, as here, prior revelations 13 clearly gave investors the context necessary to interpret the investigation as revealing the fraud. 14 15 C. Section 20(a) Section 20(a) provides a right of action against any person “who, directly or indirectly, 16 controls any person liable under any provision of this chapter or of any rule or regulation 17 thereunder.” 15 U.S.C. § 78t(a). McKesson’s only argument that Evanston’s control person 18 claims should be dismissed is that Evanston has failed to plead an underlying Section 10(b) 19 violation. See MTD at 34 n.19. Because Evanston has adequately pled an underlying 20 Section 10(b) violation, the motion to dismiss the Section 20(a) claims is denied. 21 22 D. Section 20(a) Section 20A of the Exchange Act provides a right of action against “[a]ny person who 23 violates any provision of this chapter or the rules or regulations thereunder by purchasing or 24 selling a security while in possession of material, nonpublic information.” 15 U.S.C. § 78t-1(a). 25 To plead a Section 20A claim, plaintiffs must allege “a predicate insider trading violation of the 26 Exchange Act.” In re Volkswagen “Clean Diesel” Mktg., Sales Practices, & Prods. Liab. Litig., 27 1 Evanston has successfully pled a “predicate insider trading violation” for the same reasons 2 it has adequately alleged its Section 10(b) claim. The allegations giving rise to a strong inference 3 of scienter also support an inference that Hammergren’s sales of McKesson stock during the class 4 period were made “while in possession of material, nonpublic information.” See VeriFone 5 Holdings, 704 F.3d at 711 (reversing dismissal of Section 20A claims where district court 6 erroneously held that plaintiffs “failed to sufficiently plead scienter”). Specifically, Hammergren 7 was in possession of the “material, nonpublic information” that the price increases driving 8 McKesson’s profits were driven by collusive behavior, not legitimate supply disruptions, when he 9 sold McKesson’s stock.3 See supra Section III.B.2. 10 McKesson also argues that two of the three challenged trades were not made 11 “contemporaneously” with Evanston’s trades, as required to establish Section 20A claims. MTD 12 at 35. The Ninth Circuit has not endorsed McKesson’s preferred standard for 13 contemporaneousness (trading “on the same day . . . or at most the day after”). Id.; see also Brody 14 v. Transitional Hosps. Corp., 280 F.3d 997, 1002 (9th Cir. 2002) (recognizing that the Ninth 15 Circuit has not yet “decide[d] the length of the contemporaneous trading period for insider trading 16 violations under Section 10(b) and Rule 10b-5”). Some courts have adopted McKesson’s 17 standard, see, e.g., In re AST Research Sec. Litig., 887 F. Supp. 231, 234 (C.D. Cal. 1995), but 18 others have found trades contemporaneous even though they were separated by much greater 19 lengths of time, see, e.g., In re Petco Animal Supplies Inc. Sec. Litig., 2006 WL 6829623, at *37 20 (S.D. Cal. Aug. 1, 2006). The Court will follow the reasoning of the latter group and holds that, at 21 this stage of the litigation, Evanston has adequately pled contemporaneousness as to all three 22
23 3 Citing SEC filings subject to judicial notice (but not incorporation by reference), McKesson argues that Hammergren made each sale under a Rule 10b5-1 trading plan, negating the inference 24 that the trades were made on the basis of material, nonpublic information. MTD at 28, 34–35; see also supra Section III.A.1. But McKesson’s own authority holds that not every 10b5-1 plan is 25 sufficient to negate the inference that trading was made on the basis of insider knowledge. See In re Countrywide Fin. Corp. Sec. Litig., 2009 WL 943271, at *4 (C.D. Cal. Apr. 6, 2009) (finding 26 that “unusual 10b5-1 plan modifications” made it inappropriate to dismiss Section 20A claims on the basis of said plan). Even if McKesson’s judicially noticeable documents establish that 27 Hammergren was trading under a Rule 10b5-1 plan, at this stage of the litigation the Court will not 1 challenged sales. The motion to dismiss the Section 20A claims is denied. 2 || IL. CONCLUSION 3 For the foregoing reasons, the motion to dismiss is DENIED. 4 IT ISSO ORDERED. SE 5 Dated: October 29, 2019 CHARLES R. BREYER 6 United States District Judge 7 8 9 10 11 g
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