In Re: Alpharma Inc

• Court: Court of Appeals for the Third Circuit
• Decided: June 15, 2004
• Docket: 02-3348
• Status: Published

Opinion

Opinions of the United 2004 Decisions States Court of Appeals for the Third Circuit

6-15-2004

In Re: Alpharma Inc Precedential or Non-Precedential: Precedential

Docket No. 02-3348

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Recommended Citation "In Re: Alpharma Inc " (2004). 2004 Decisions. Paper 556. http://digitalcommons.law.villanova.edu/thirdcircuit_2004/556

This decision is brought to you for free and open access by the Opinions of the United States Court of Appeals for the Third Circuit at Villanova University School of Law Digital Repository. It has been accepted for inclusion in 2004 Decisions by an authorized administrator of Villanova University School of Law Digital Repository. For more information, please contact Benjamin.Carlson@law.villanova.edu. PRECEDENTIAL Joseph J. DePalma, Esquire UNITED STATES COURT OF Lite, Depalma, Greenberg & Rivas, LLC APPEALS Two Gateway Center, 12 th Floor FOR THE THIRD CIRCUIT Newark, New Jersey 07102 ____________ Marc I. Willner, Esquire (Argued) No: 02-3348 David Kessler, Esquire _____________ Three Bala Plaza East, Suite 400 Bala Cynwyd, PA 19004 IN RE: ALPHARMA INC. SECURITIES LITIGATION Counsel for Appellant

Maverick Capital, Ltd., Anthony J. Marchetta, Esquire John P. Scordo, Esquire Appellant Pitney, Hardin, Kipp & Szuch, LLP P.O. Box 1945 Morristown, New Jersey 07962 Appeal from the United States District Court William H. Pratt, Esquire for the District of New Jersey Frank Holozubiec, Esquire (D.C. Civil Action Nos. 00-cv-05452, Wendy E. Long, Esquire (Argued) 00-cv-05507, 00-cv-05508, 00-cv-05630, Kirkland & Ellis 00-cv-05657 and 00-cv-06267) 153 East 53rd Street District Judge: Honorable Joel A. Pisano New York, New York 10022 ______________________ Argued on June 16, 2003 Counsel for Appellees

Before: ALITO, ROTH, and HALL* , __________________ Circuit Judges OPINION (Opinion filed June 15, 2004) __________________

ROTH, Circuit Judge: This case involves a proposed class action suit brought by investors who *The Hon. Cynthia H. Hall, Circuit purchased shares of Alpharma, Inc., Judge for the United States Court of common stock between April 1999 and Appeals for the Ninth Circuit, sitting by October 2000. Specifically, plaintiffs designation. allege that defendants made materially

1 false or misleading statements by reporting 2000. They allege that the company and and then commenting on inflated revenue, four of its executives caused the issuance net income, and earnings per share results of materially false and m isleading during the proposed class period. These financial results during the proposed class results are alleged to have artificially period, thereby artificially inflating the inflated the company’s stock price, thereby value of the company’s common stock. damaging members of the proposed class. Plaintiffs further allege that these misstatements were the result of improper The District Court, concluding that accounting procedures which inflated the plaintiffs failed to state a claim for relief company’s reported revenue, net income, under federal securities laws and that and earnings per share. granting leave to amend would be futile, dismissed the Complaint with prejudice B. Parties pursuant to Federal Rule of Civil As stated above, plaintiffs seek to Procedure 12(b)(6). For the reasons set represent a proposed class of investors forth below, we will affirm the final who purchased shares of Alpharma stock judgment of the District Court. during the class period. Defendant I. Factual Background Alpharma, Inc., is a multinational corporation that produces pharmaceuticals A. Overview for both animal and human use. Its This case began as six separate domestic headquarters is located in Fort proposed class actions, all of which were Lee, New Jersey. At all times relevant to brought by shareholders alleging they the Complaint, the company’s common suffered damages as a result of being stock traded on the New York Stock induced to purchase shares of Alpharma’s Exchange (NYSE). Alpharma sold a total common stock on the basis of false or of $537 million of common stock to misleading statements made by the underwriters during the class period. company and its top executives. On Defendant Einar Sissener is March 27, 2001, the District Court Alpharma’s Chairman. Sissener served as consolidated these actions, appointed Chief Executive Officer (CEO) between Maverick Capital, Ltd., as lead plaintiff, June 1994 and June 1999, and then as and ordered the filing of a consolidated Chairman of the Office of the Chief amended complaint Executive from June 1999 to December Plaintiffs filed the Consolidated 1999. He signed Alpharma’s Form 10-K Amended Class Action Complaint (the annual report for 1999. The Complaint “Complaint”) on June 8, 2001. In the alleges that he, together with relatives, Complaint, plaintiffs seek to represent owns sufficient voting shares to effectively investors who purchased Alpharma stock control the company. between April 28, 1999, and October 30, Defendant Ingrid Wiik assumed the

2 position of President and CEO in January accounting irregularities which caused 2000 and became a director in February Alpharma to report inflated revenue 2000. She too signed the company’s Form figures. These revenue figures, in turn, 10-K annual report for 1999. Wiik sold affected the accuracy of its net income and forty-six percent of her shares in Alpharma earnings per share calculations, thereby for a total of $839,075 during a four day fueling an increase in the value of the period in the first week of August 2000 company’s stock during the class period. when the value of Alpharma’s stock was More specifically, plaintiffs allege near its high point of $71 per share. that the individual defendants violated Defendant Jeffrey Smith served as both Generally Accepted Accounting Alpharma’s Vice President and Chief Principles (GAAP) and Alpharma’s own Financial Officer (CFO) at all times revenue recognition policy2 by recording relevant to the Complaint. He signed the AHD sales as revenue even though the Form 10-K annual report for 1999, as well products sold were not shipped to as each of the Form 10-Q quarterly reports customers until as long as six months after issued during the proposed class period. the purported sale. In practice, this meant During the first week of August 2000, that AHD customers had agreed to Smith sold twenty-six percent of his purchase Alpharma products but delayed holdings in the company for a total of receipt and payment until subsequent $1,240,549. quarters. The purchased products were then put on “customer hold” and shipped Defendant Bruce Andrews served to a warehouse until the customers were as president of Alpharma’s Animal Health ready to receive and pay for them. These Division (AHD) during all times relevant so-called “pre-sales” began when Andrews to the Complaint. Andrews sold seventy- became president of the AHD in May 1997 seven percent of his shares in the company and had allegedly become part of for a total of $1,658,965 during the first Alpharma’s “corporate culture” by the week of August 2000.1 beginning of the class period. As a result, C. Substantive Allegations plaintiffs allege that defendants either knew or recklessly disregarded the fact The primary basis for the proposed that (1) instances would arise in which class action is plaintiffs’ allegation that the customers would later refuse to receive financial results released by defendants and pay for orders already recognized as during the class period were the product of revenue in previous quarters, (2) they had

1 2 Adopting the language used in the Alpharma’s revenue recognition Complaint, we will refer to Sissener, policy stated that revenue would not be Wiik, Smith, and Andrews collectively as recognized until its products were the “individual defendants”. shipped to customers.

3 failed to disclose that pre-sales essentially October 30, the stock traded at $56.50. By sapped future demand for the company’s the time the NYSE closed the following products, and (3) the use of pre-sales day, the value of Alpharma’s shares had encouraged the creation of fictitious sales. fallen to $38.81. Alpharma restated its results for the In placing the blame for this drop in full year 1999, each quarter during 1999, share price on the individual defendants, and the first two quarters of 2000 plaintiffs allege in their complaint: following the close of trading on the Each of the Individual NYSE on October 30, 2000. In its press Defendants by virtue of his release, the company placed the blame for or her executive and the overstatements on employees in the managerial positions with Brazil division of the AHD and noted that, the Compa ny, directly after a full investigation, it was convinced participated in the daily that the problem had not spread beyond management of the Brazil.3 Prior to the announcement on Company, and was directly involved in the day-to-day 3 operations of the Company In connection with the press release, at the highest level, and was Wiik stated as follows: p ri v y t o c o n f i d e n t i a l proprietary inform ation We are extremely concerning the Company disappointed by the actions and its business and of these employees who operations, and revenue breached our established recognition policies. The policies and controls and Individual Defendants were who violated the trust we involved or participated in placed in them. We have d r a f t in g , prod ucin g , removed the individuals reviewing and/or involved and appointed disseminating the false and new management to run m i s l e a d i n g s t a te m e n t s our Animal Health alleged [in the Complaint]. operations in Brazil. While we do not consider the net They further assert that the individual financial impact of this defendants “had a duty to promptly matter material to the dissem inate truthful and accurate period affected, we will information with respect to Alpharma and restate our financial results to promptly correct any public statements because it is the right thing to do.

4 issued by or on behalf of the Company that reports and financial statements directly to had become false or misleading.” Alpharma’s New Jersey headquarters, Plaintiffs allege this duty was violated which then entered the data into the BPCS. when defendants knowingly or recklessly Further, Michael Weaver, AHD’s vice disregarded the fact that “the misleading president of finance and one of Andrews’ statements and omissions would adversely subordinates, made monthly trips to Brazil affect the integrity of the market for the to review sales records and audit Company’s stock and would cause the inventory. Based on these facts, plaintiffs price of the Company’s common stock to allege that personnel in Alpharma’s New become artificially inflated.” Jersey headquarters were “aware of or should have been aware of and able to D. Details of AHD’s Pre-Sales access sales results from its Brazilian A lpharma’s AHD conducts operations.” business with its customers through a staff Beginning when he became of sales representatives. At all times president of the AHD in May 1997, relevant to the Complaint, these sales Andrews is alleged to have engaged in a representatives were supervised by number of questionable practices, regional sales managers. The sales including (1) telling AHD staff that he managers reported to Randy Maclin, would take whatever action was necessary AHD’s vice president of sales and to raise Alpharma’s stock price, (2) firing marketing within the United States, and AHD sales representatives and managers Loren Williams, vice president of sales and replacing them with former co- and marketing for AHD in Latin America. workers from his prior employer, and (3) I n a t yp i c a l t r a nsaction , sale s no longer seeking input from sales representatives wo uld provide the representatives as to appropriate yearly company’s Customer Service Department sales quotas. This last action was relevant, (CSD) with the details of the purchase, as year-end bonuses were tied to the staff’s including whether the product was to be ability to meet the sales goals set by shipped, picked up, or placed on Andrews. Plaintiffs allege that these “customer hold.” The CSD would then purportedly unrealistic sales targets caused enter the transaction into the company’s employees to engage in questionable Business Planning and Control System activities such as the pre-sales described (BPCS), which allocated inventory for the above. Because the number of products on sale and created an invoice. Each customer hold could be determined from warehouse would conduct a monthly an examination of BPCS entries, plaintiffs inventory, the results of which were conclude that examination of such entries submitted to Alpharma’s headquarters in “did or could have alerted [defendants] to New Jersey. However, the Brazil division the fact that [AHD] was inflating its of AHD did not use the BPCS. Instead, it results by, essentially, shipping to itself.” recorded sales by sending copies of sales

5 income, and earnings per share compared to the first quarter of 1998. Because a The Complaint goes on to detail a report issued by a Wall Street analyst number of setbacks and expensive following the announcement of first acquisitions which purportedly weighed on quarter results mentioned increased sales the company and pressured executives to in Latin America and Southeast Asia, increase revenue in AHD. Plaintiffs allege plaintiffs allege that defendants “were that, as a result of these difficulties, the use aware that the market was attributing of pre-sales spread beyond AHD. Alpha rma’s a ppa re n t s u c c e s s to Specifically, they assert that Knut international oper ations, in cludin g Moksnes and Laritz Valderhaug, the specifically Latin America.” president and senior controller of the Aquatic Animal Health Division (AAHD), The company filed its Form 10-Q asked AAHD controllers to record for the first quarter of 1999 with the unreceived cash as accounts receivable Securities and Exchange Commission despite the fact that the products in (SEC) on May 12, 1999.4 This form, question had not yet been shipped to the signed by vice president and CFO Smith customer. This resulted in the resignation on behalf of himself and the company, of one AAHD controller, who cited her contained the same inflated numbers as the concerns during an exit interview, which, April 28 press release. These numbers she believes, was documented and placed were revenue of $156,759,000, net income in her personnel file at Alpharma’s New of $7,436,000, and earnings per share of Jersey headquarters. The Complaint twenty-seven cents. In its October 30, further alleges that Loren Williams, who 2000, restatement, Alpharma lowered served until October 2000 as AHD’s vice revenue by $810,000, net income by president of sales and marketing for Latin $238,000, and earnings per share by one Am eric a , r e s i g n e d o v e r s imila r cent. disagreements with management but that (2) Second Quarter of 1999 Williams is unable to assist plaintiffs’ counsel due to a non-disclosure agreement.

4 Each of the 10-Q Forms filed by E. Statements Made During the Class Alpharma contained a notes section Period which stated, in part, that “[t]he (1) First Quarter of 1999 accompanying consolidated condensed financial statements include all The class period began on April 28, adjustments (consisting only of normal 1999, when Alpharma announced results recurring accruals) which are, in the for the first quarter of 1999. The company opinion of management, considered issued a press release which highlighted necessary for a fair presentation of the the marked improvement in revenues, net results for the periods presented.”

6 Alpharma announced results for the highlighted increases in revenue, net second quarter of 1999 on July 28, 1999. income, and earnings per share. The Comparing results to the second quarter of earnings per share number exceeded Wall 1998, the accompanying press release Street’s consensus estimate by two cents, highlighted increases in revenue, net extending Alpharma’s streak of consensus- income, and earnings per share. The beating quarters to eleven. The value of earnings per share number exceeded Wall the company’s stock increased by Street’s consensus estimate by one cent, approximately thirteen percent following thereby continuing Alpharma’s streak of the issuance of third quarter results. ten consecutive quarters of exceeding The company filed its Form 10-Q analysts’ expectations. The value of the for the third quarter of 1999 with the SEC c o m p a n y ’ s s t o c k in c r e a s e d b y on November 2, 1999. This form, signed approximately twelve percent following by Smith on behalf of himself and the the issuance of second quarter results. company, contained the same inflated The company filed its Form 10-Q numbers as the October 25 press release. for the second quarter of 1999 with the These num bers w ere revenue of SEC on August 9, 1999. This form, signed $203,131,000, net income of $11,263,000, by Smith on behalf of himself and the and earnings per share of thirty-eight company, contained the same inflated cents. In its October 30, 2000 restatement, numbers as the July 28 press release. Alpharma lowered revenue by $3,302,000, These numbers were revenue of net income by $890,000, and earnings per $163,839,000, net income of $7,772,000, share by three cents. As with the second and earnings per share of twenty-eight quarter, Alpharma would have missed cents. In the October 30, 2000, analysts’ earnings estimates absent the restatement, Alpharma lowered revenue by overstatement of revenue. $1,622,000, net income by $404,000, and (4) Fourth Quarter and Full Year earnings per share by two cents. The 1999 consensus estimate for the second quarter of 1999 had called for earnings per share The company’s fourth quarter and of twenty-seven cents. Thus, Alpharma full year results for 1999 were issued on would have missed this estimate by one February 23, 2000. The accompanying cent had its results been reported correctly press release highlighted both quarterly in the first instance. and yearly growth in revenue, net income, and earnings per share. The earnings per (3) Third Quarter of 1999 share number exceeded expectations for Alpharma announced its third the twe lf th c o n s e cutive quar te r. quarter results on October 25, 1999. Highlighting this fact, Sissener issued the Comparing results to the third quarter of following statement: 1998, the accompanying press release Alpharma has now achieved

7 12 conse cutive February 23 press release. The fourth quarters of growth quarter numbers were revenue of above the goals we $218,447,000, net income of $13,080,000, have set. I am and earnings per share of forty-one cents. pleased with these In its October 30, 2000, restatement, exceptional results, Alpharma lowered fourth quarter revenue w hich I believe by $3,999,000, net income by $1,047,000, reflect the success of and earnings per share by three cents. The the focused growth full year numbers for 1999 were similarly strategies we have lowered following restatement. Revenue established and of of $742,176,000, net income of the efforts of our $39,551,000, and earnings per share of employees all around $1.34 were decreased by $9,733,000, the world. The $2,579,000, and nine cents, respectively. record results are The 10-K for 1999 further stated “that p art icu la rly ‘revenue is recognized upon shipment of gratifying because products to customers.’” they were achieved (5) First Quarter of 2000 as we continued to m a k e a n d Alpharma announced results for the successfully absorb first quarter of 2000 on April 26, 2000. As significant strategic before, the company highlighted increases acquisitions that are in revenue, net income, and earnings per an integral part of share compared to the first quarter of our long-term growth 1999. In connectio n w ith this strategy. announcement, Wiik stated that “[t]hese record first quarter results reflect the continued successful implementation of Similarly, Wiik stated that “[c]learly, our growth strategies to build the global Alpharma’s established strategies for Alpharma enterprise. We are experiencing growth are working. By continuing to strong top line growth due to both new execute, we look for this profitable growth product introductions and complimentary to continue in 2000 and beyond.” acquisitions . . . we expect continued strong revenue growth throughout 2000.” The company filed its Form 10-K The earnings per share number exceeded for the fourth quarter and full year 1999 Wall Street’s consensus estimate by two with the SEC on M arch 29, 2000. This cents, extending Alpharma’s streak of form, signed by Smith, Sissener, and W iik consensus-beating quarters to thirteen. on behalf of themselves and the company, Between April 25 and May 1, the value of contained the same inflated numbers as the Alpharma’s stock increased by nine

8 percent. announcement on October 30. They further claim that employees in the The company filed its Form 10-Q company’s New Jersey headquarters were for the first quarter of 2000 with the SEC notified of incidents of improper on May 8, 2000. This form, signed by accounting by Paulo Andreoli, a technical Smith on behalf of himself and the sales manager in AHD’s Brazil division. company, contained the same inflated Andreoli allegedly was told that there numbers as the April 26 press release. would be no investigation into his These numbers were revenue of allegations. However, plaintiffs contend $118,280,000, net income of $11,114,000, that the information submitted by Andreoli and earnings per share of thirty-five cents. “was reviewed or available for review by Following restatement, revenue was all Defendants, and in particular, lowered by $2,202,000, net income by defendant Andrews, president of[AHD].” $749,000, and earnings per share by two As an example of the activities occurring cents. As in previous quarters, Alpharma at Alpharma, plaintiffs allege that the would have missed analysts’ earnings Brazil division’s December 1999 sales estimates absent the overstatement of report contained nineteen fraudulent sales, revenue. eighteen of which occurred three days (6) Second Quarter of 2000 before the end of the quarter and reflected sales activity that was “grossly out of line Alpharma announced its results for with the sales made during the rest of the the second quarter of 2000 on July 31, month.” 2000. As before, the company highlighted increases in revenue, net income, and Quoting 17 C.F.R. § 229.303(a)(1)- earnings per share compared to the second 3(3) and Instruction 3, plaintiffs further quarter of 1999. On August 1, the value of allege that defendants had a duty under Alpharma’s stock rose ten percent to applicable SEC regulations to “disclose in $71.94, the highest close reached at any periodic reports filed with the SEC ‘known time during the class period. trends or a ny known de man d s , commitments, events or uncertainties’ that F. The Discovery of the Accounting are reasonably likely to have a material Irregularities impact on a company’s sales revenues, Plaintiffs assert that the internal income or liquidity, or cause previously i n v e s ti g a t io n o f the ac coun tin g reported financial information not to be irregularities described by Alpharma indicative of future operating results.” would have taken a significant amount of Ad ditionally, plaintiffs assert that time to complete and that the company defendants had “a duty ‘to make full and must therefore have been aware of the prompt announcements of material facts accounting irregularities occurring in regarding the company’s financial B r a z i l l o n g b e f o r e t h e pu b l i c

9 condition.’” 5 They allege that these duties On May 20, 2002, the District Court, were violated by defendants’ issuance of concluding that plaintiffs failed to state a financial results that violated both GAAP claim under either Rule 10b-5 or Section and Alpharma’s own revenue recognition 20(a), dismissed the Complaint with policy. As noted by the District Court, this prejudice pursuant to Federal Rule of Civil section of the Complaint is followed by Procedure 12(b)(6). Plaintiffs’ motion for additional allegations of scienter which reconsideration was denied by the District add nothing of substance to the claims Court on August 12, 2002, and this appeal described above. followed. H. Plaintiffs’ Rule 10b-5 and Section III. Jurisdiction and Standard of 20(a) Claims Review The above-described allegations lay the Plaintiffs filed this proposed class groundwork for the two counts asserted in action pursuant to Sections 10(b) and 20(a) of the Exchange Act, 15 U.S.C. §§ 78j(b) the Complaint. Count I is brought against and 78t(a). As such, the District Court all defendants pursuant to Rule 10b-5. In exercised jurisdiction over this case broad terms, it asserts that defendants pursuant to 28 U.S.C. § 1331. We have acted both individually and collectively to jurisdiction to review the final judgment of defraud investors by making materially the District Court pursuant to 28 U.S.C. § false or misleading statements in 1291. connection with the sale of the company’s stock. Count II alleges that the individual Our review of the District Court’s defendants were “controlling persons” of dismissal of the Complaint pursuant to Alpharma, and thus violated Section 20(a) Rule 12(b)(6) is plenary. Brown v. Philip of the Securities Exchange Act of 1934, 15 Morris, Inc., 250 F.3d 789, 796 (3d Cir. U.S.C. § 78, et seq. (the “Exchange Act”), 2001). As the District Court did, “[w]e by causing the Section 10(b) violation must accept as true all of the factual described in Count I. allegations in the complaint as well as the reasonable inferences that can be drawn II. Procedural History from them,” and “may dismiss the As noted above, the Complaint was complaint only if it is clear that no relief filed on June 8, 2001, following could be granted under any set of facts that consolidation of the six initial proposed could be proved consistent with the class actions pending against Alpharma. allegations.” Id. We similarly exercise plenary review over the District Court’s interpretation of the applicable federal 5 Quoting SEC Release No. 34-8995, securities laws. In re Rockefeller Center 3 Fed. Sec. L. Rep. (CCH) ¶ 23,120A, at Properties, Inc. Sec. Litig., 311 F.3d 198, 17,095, 17 C.F.R. § 241.8995 (October 215 (3d Cir. 2002). However, we review 15, 1970).

10 the District Court’s denial of plaintiffs’ Solutions, Inc., 277 F.3d 658, 666 (3d Cir. alternative request for leave to amend the 2002) (quoting 15 U.S.C. § 78j(b)). Complaint for abuse of discretion. See In Section 10(b) is enforced through Rule re NAHC, Inc. Sec. Litig., 306 F.3d 1314, 10b-5, which creates a private cause of 1323 (3d Cir. 2002); In re Burlington Coat action for investors harmed by materially Factory Sec. Litig., 114 F.3d 1410, 1434 false or misleading statements. In re (3d Cir. 1997). Advanta Corp. Sec. Litig., 180 F.3d 525, 535 (3d Cir. 1999). Specifically, Rule IV. Discussion 10b-5 “makes it unlawful for any person Plaintiffs’ argument is straightforward. ‘[t]o make any untrue statement of a They contend that the District Court erred material fact or to omit to state a material fact necessary to make the statements in dismissing the Complaint for failure to made in light of the circumstances under state a claim upon which relief may be which they were made, not misleading . . . granted and, in the alternative, that the in connection with the purchase or sale of court abused its discretion in failing to any security.’” In re Ikon, 277 F.3d at 666 grant them leave to amend. We begin our (quoting 17 C.F.R. § 240.10b-5(b)). analysis with an overview of the relevant pleading requirements and then address in In order to state a claim pursuant to turn each of plaintiffs’ assignments of Rule 10b-5, plaintiffs must allege that error. defendants “(1) made a misstatement or an omission of a material fact (2) with A. Overview scienter The gravamen of the Complaint is (3) in connection with the purchase or the the Rule 10b-5 claim asserted against all sale of a security (4) upon which defendants in Count I.6 Thus, we begin by [plaintiffs] reasonably relied and (5) that noting that “Section 10(b) prohibits the [plaintiffs’] reliance was the proximate ‘use or employ, in connection with the cause of [their] injury.” Id. In so doing, purchase or sale of any security, . . . [of] the Private Securities Litigation Reform any manipulative or deceptive device or Act (PSLRA), 15 U.S.C. § 78u-4 et seq., contrivance in contravention of such rules requires plaintiffs to “specify each and regulations as the Commission may statement alleged to have been misleading, prescribe . . ..’” In re Ikon Office the reason or reasons why the statement is misleading, and, if an allegation regarding 6 the statement or omission is made on As discussed in greater detail below, information and belief, the complaint shall the viability of Count II, which alleges state with particularity all facts on which controlling person liability pursuant to that belief is formed.” 15 U.S.C. § 78u- Section 20(a) of the Exchange Act against the individual defendants, is contingent upon the success of Count I.

11 4(b)(1)(B). 7 Of particular significance ‘strong inference’ of fraud may be here, the PSLRA also requires that the established either (a) by alleging facts to applicable mental state be pled with show that defendants had both motive and particularity. In re Advanta, 180 F.3d at opportunity to commit fraud, or (b) by 530. Specifically, it states, in relevant alleging facts that constitute strong part, as follows: circumstantial evidence of conscious misbehavior or recklessness.” In re In any private action arising Burlington Coat Factory, 114 F.4d at 1418. under this chapter in which The appropriate sanction for complaints the plaintiff may recover which fail to meet these requirements is money damages only on dismissal. In re Advanta, 180 F.3d at 531 proof that the defendant (citing 15 U.S.C. § 78u-4(b)(3)(A)). acted with a particular state of mind, the complaint shall, In addition to the requirements with respect to each act or contained in the PSLRA, Plaintiffs also omission alleged to violate must comply with those set forth in this chapter, state with Federal Rule of Civil Procedure 9(b). Id. particularity facts giving rise Rule 9(b) provides, in relevant part, that to a strong inference that the plaintiffs alleging fraud must state “the defendant acted with the circumstances constituting fraud or required state of mind. mistake . . . with particularity.” Fed. R. Civ. P. 9(b). However, plaintiffs may 15 U.S.C. § 78u-4(b)(2). “The requisite generally alleg e “[m]a lice, intent, knowledge, and other condition of mind of a person.” Id. As applied to Rule 10b-5 7 The purpose of the heightened claims, “Rule 9(b) requires a plaintiff to pleading requirements contained in the plead (1) a specific false representation [or PSLRA is “to restrict abuses in securities omission] of material fact; (2) knowledge class-action litigation, including: (1) the by the person who made it of its falsity; (3) practice of filing lawsuits against issuers ignorance of its falsity by the person to of securities in response to any whom it was made; (4) the intention that it significant change in stock price, should be acted upon; and (5) that the regardless of defendants’ culpability; (2) plaintiff acted upon it to his damage.” In targeting of ‘deep pocket’ defendants; (3) re Rockefeller Center Properties, 311 F.3d the abuse of the discovery process to at 216 (citation and internal quotations coerce settlement; and (4) manipulation omitted); GSC Partners CDO Fund v. of clients by class action attorneys.” In Washington, F.3d [14](3d Cir. 2004). re Advanta, 180 F.3d at 531 (citing H.R. Further, “Rule 9(b) requires plaintiffs to Conf. Rep. No. 104-369, at 28 (1995), identify the source of the allegedly reprinted in 1995 U.S.C.C.A.N. 679, fraudulent misrepresentation or omission.” 748).

12 Id. In sum, “Rule 9(b) requires, at a must “alleg[e] facts ‘establishing a motive minimum, that plaintiffs support their and an opportunity to commit fraud, or . . allegations of securities fraud with all of . set[] forth facts that constitute the essential factual background that circumstantial evidence of either reckless would accompany ‘the first paragraph of or conscious behavior.’” In re Advanta, any newspaper story’ — that is, the ‘who, 180 F.3d at 534-35 (quoting Weiner v. what, when, where and how’ of the events Quaker Oats Co., 129 F.3d 310, 318 n.8 at issue.” Id. at 217 (quoting In re (3d Cir. 1997)); In re Digital Island Burlington Coat Factory, 114 F.3d at Securities Litigation, 357 F.3d 322, 328-29 1422); GSC Partners at [20]. Importantly, (3d Cir. 2004). In so doing, plaintiffs to the extent that Rule 9(b)’s allowance of “must allege facts that could give rise to a general pleading with respect to mental ‘strong’ inference of scienter”; general state conflicts with the PSLRA’s allegations that defendants knew or requirement that plaintiffs “state with recklessly disregarded the false nature of particularity facts giving rise to a strong the statements at issue are insufficient. In inference that the defendant acted with the re Burlington Coat Factory, 114 F.3d at required state of mind,” 15 U.S.C. § 78u- 1422. 4(b)(2), the PSLRA “supersedes Rule 9(b) Plaintiffs pleading scienter through as it relates to Rule 10b-5 actions.” In re motive and opportunity must support their Advanta, 180 F.3d at 531 n.5. allegations with “facts stated ‘with Here, the primary basis for the particularity’” that “give rise to a ‘strong District Court’s dismissal of the Complaint inference’ of scienter.” In re Advanta, 180 was plaintiffs’ failure to adequately plead F.3d at 535 (quoting 15 U.S.C. § 78u- the essential element of scienter. We have 4(b)(2)). Thus, under the PSLRA, “catch- previously defined “scienter” in the all allegations that defendants stood to context of securities fraud as “a mental benefit from wrongdoing and had the state embracing intent to deceive, opportunity to implement a fraudulent manipulate or defraud, or, at a minimum, scheme are no longer sufficient, because highly unreasonable (conduct), involving they do not state facts with particularity or not merely simple, or even excusable give rise to a strong inference of scienter.” negligence, but an extreme departure from Id.; GSC Partners, F3d at [15-16]. the standards of ordinary care, . . . which Plaintiffs attempting to satisfy their burden presents a danger of misleading buyers or of pleading scienter by alleging facts sellers that is either known to the establishing recklessness must allege a defendant or is so obvious that the actor statement “involving not merely simple, or must have been aware of it.” In re Ikon, even inexcusable negligence, but an 277 F.3d at 667 (citations and internal extreme departure from the standards of quotations omitted). In order to properly ordinary care, and which presents a danger plead scienter under the PSLRA, plaintiffs of misleading buyers or sellers that is

13 either known to the defendant or is so They argue that motive and opportunity obvious that the actor must have been are established by their allegations aware of it.” In re Advanta, 180 F.3d at regarding the defendants’ sale of stock 535 (citation and internal quotations during the class period. omitted). It is against this backdrop that We disagree. Turning first to the we examine the Complaint at issue here. issue of recklessness, we concur with the B. Dismissal of the Complaint District Court’s conclusion that, at bottom, plaintiffs’ allegations rest primarily upon (1) Plaintiffs’ Rule 10b-5 Claim the premise that the individual defendants As noted above, the District Court are liable simply by virtue of the positions held that plaintiffs failed to adequately they hold within the company. We plead the essential element of scienter, and recently rejected similar allegations in In thus failed to state a claim under the re Advanta, holding that “[g]eneralized federal securities laws. In particular, the imputations of knowledge” do not satisfy court concluded that the allegations the scienter requirement “regardless of the contained in the Complaint failed to satisfy defe ndan ts’ positio ns w ithin the the strict pleading requirements of Rule company.” 180 F.3d at 539. Rather, 9(b) and the PSLRA. In reaching this plaintiffs must allege “an extreme conclusion, the District Court noted that departure from the standards of ordinary the Complaint merely imputes scienter to care,” in order to establish recklessness. the individual defendants as a result of Id. at 535. As explained below, they fail to their positions within the company, and do so here with respect to any of the four thus fails to establish that either they or, by individual defendants. extension, the corporation were involved The Complaint fails to allege that with the accoun ting irreg ularities Sissener, Wiik, or Smith were involved in occurring in AHD’s Brazil division. any way with the violations of GAAP and On appeal, plaintiffs assert that the Alpharma’s revenue recognition policy Complaint adequately pleads scienter by occurring in Brazil. The allegations alleging both recklessness and motive. against Andrews similarly fail. As More specifically, they contend they have defendants note, the Complaint fails to demonstrated recklessness by alleging that identify any pre-sales made pursuant to (1) defendants violated GAAP as well as Andrews’ instruction. Rather, plaintiffs Alpharma’s internal revenue recognition simply allege that Andrews set “lofty” policy, and (2) that “whistleblowers” quarterly sales goals and then pressured within AHD’s Brazil division reported the sales representatives to meet them.8 We use of pre-sales and questionable accounting practices to Alpharma’s New Jersey headquarters where it could be 8 Paragraphs 53 and 55 of the accessed by the individual defendants. Complaint allege the following:

14 hold that such conclusory allegations are rather, “Plaintiffs must accompany their insufficient to state a claim under the legal theory with factual allegations that applicable pleading requirements. See In make their theoretically viable claim re Burlington Coat Factory, 114 F.3d at plausible”) (emphasis deleted); see also 1418 (holding that “even under a relaxed Kushner v. Beverly Enterprises, Inc., 317 application of Rule 9(b), boilerplate and F.3d 820, 827-28 (8th Cir. 2003) (holding conclusory allegations will not suffice”; that allegations that defendants “designed and implemented” improper accounting policies failed to state a claim for securities fraud in the absence of [I]n order to move volumes “ a l l e g a t i o n s o f p a r t ic u l a r fa c ts of products necessary to demonstrating how the defendants knew of meet the lofty quarter-end the scheme at the time they made their numbers set by defendant statements of compliance, that they knew Andrews, sales the financial statements overrepresented representatives were the company’s true earnings, or that they instructed to offer were aware of a GAAP violation and customers incentives and disregarded it . . .. Rote allegations that special sales terms in order the defendants knowingly made false to get the customers to buy statements of material fact fail to satisfy product they already had in the heightened pleading standard of the stock. To this end, sales Reform Act.”) (citation and internal representatives were quotations omitted). Further, allegations instructed to extend the that Williams, Andrews’ subordinate, payment and shipping knew of the irregularities occurring in period from 30 days to as Brazil provide an insufficient basis upon much as 180 days. which to impute knowledge to Andrews. See Kushner, 317 F.3d at 828 (holding that *** an allegation that someone involved in the relevant scheme reported to one of the [I]n response to defendant named defendants was “not specific Andrews’ directive, sales enough to support a strong inference that invoices were issued and [the defendant] knew of or participated in sales were immediately the fraudulent practice while it was recorded on Alpharma’s occurring”). books and identified as accounts receivable, even if Indeed, “[w]hile under Rule the product was not paid for 12(b)(6) all inferences must be drawn in and shipped out to the plaintiffs’ favor, inferences of scienter do c u s t o m e r f o r s e v e ra l not survive if they are merely reasonable . months.

15 . .. Rather, inferences of scienter survive required state of mind.” 15 U.S.C. § 78u- a motion to dismiss only if they are both 4(b)(2). Looked at as a whole, plaintiffs’ reasonable and ‘strong’ inferences.” In re allegations rest on nothing more than a Navarre Corp. Sec. Litig., 299 F.3d 735, “series of inferences . . . too tenuous to 741 (8th Cir. 2002) (citation and internal amount to one of those highly quotations omitted). Such clearly cannot unreasonable omissions or be said here. Thus, the District Court misrepresentations that involve not merely correctly concluded that the Complaint simple or even inexcusable negligence, but fails to “link Alpharma’s executives or any an extreme departure from the standards of of the named Individual Defendants to the ordinary care.” Ziemba v. Cascade Int’l, Brazil incidents.” Inc., 256 F.3d 1194, 1210 (11th Cir. 2001). Plaintiffs’ so-called “whistleblower” allegations — which Moreover, we note that the assert that Alpharma’s New Jersey Complaint is devoid of any allegations headquarters was alerted to the violation of which would establish that AHD’s Brazil the company’s revenue recognition policy division was so central to Alpharma’s by employees within AHD’s Brazil business that its increased revenue figures division and that the individual defendants should have received particular attention therefore had access to this information — from company executives. Indeed, the fare little better. As defendants note, the Brazil division’s total revenue accounted Complaint simply alleges that a sales for only slightly more than one half of one manager in AHD’s Brazil division notified percent of the company’s total revenue in employees in New Jersey of the 1999. In view of this, it strains credulity to accounting irregularities in Brazil. There assert that company executives must have was no investigation of these allegations, known that a spike in the Brazil division’s nor does the Complaint allege that the sales was the result of violations of GAAP allegations of improper accounting were and of the company’s revenue recognition ever passed up the chain of command to policies rather than a normal increase in Sissener, Wiik, or Smith. In addition, business. See In re Advanta, 180 F.3d at plaintiffs’ allegation that Andrews knew of 539 (noting that “[i]t is well established this information is wholly conclusory and that a pleading of scienter may not rest on thus cannot survive a motion to dismiss. a bare inference that a defendant must See In re Burlington Coat Factory, 114 have had knowledge of the facts.”) F.3d at 1418. Moreover, the mere fact that (citation and internal quotations omitted); the information was sent to Alpharma’s see also Kushner, 317 F.3d at 829 (noting headquarters and therefore was available that “‘the failure of a parent company to for review by the individual defendants is i n t e rp r e t e x t r a or d i n a rily positiv e insufficient to “giv[e] rise to a strong performance by its subsidiary . . . as a sign inference that [defendants] acted with the of problems and thus to investigate further

16 does not amount to recklessness under the claims premised on recklessness. securities laws’”) (quoting Novak v. We turn next to plaintiffs’ Kasaks, 216 F.3d 300, 309 (2d Cir. 2000)); allegations as to motive and opportunity. Chill v. General Elec. Co., 101 F.3d 263, To summarize, plaintiffs assert that the 270 (2d Cir. 1996) (holding that, “[g]iven existence of scienter is established by the the significant burden on the plaintiff in fact that (1) both the company and three of stating a fraud claim based on the four individual defendants sold shares recklessness, the success, even the of common stock at inflated prices during extraordinary success, of a subsidiary will the class period, and (2) that all defendants not suffice in itself to state a claim that the thus benefitted from the alleged fraud at parent was reckless in failing to further the expense of investors. The District investigate. Fraud cannot be inferred Court rejected these allegations, noting simply because [the parent corporation] that (1) Sissener, Alpharma’s largest might have been more curious or shareholder, and thus the one who stood concerned about the activity at [its gain the most from the alleged fraud, sold subsidiary].”); In re Comshare, Inc. Sec. no stock during the class period and Litig., 183 F.3d 542, 554 (6th Cir. 1999) therefore failed to benefit from the (citing Chill for the proposition that courts fraudulent scheme of which he is alleged “should not presume recklessness or to have been a major participant; and (2) intentional misconduct from a parent the Complaint fails to allege how much corporation’s reliance on it subsidiary’s stock the individual defendants received as internal controls”). At worst, the a portion of their regular compensation. Complaint alleges little more than mismanagement. As we have previously Having carefully reviewed the held, such claims “are not cognizable Complaint we similarly reject plaintiffs’ under federal law.” In re Advanta, 180 arguments. In so doing, we note, as the F.3d at 540 (citations and internal District Court did, that “‘[a] large number quotations omitted); In re Digital Island, of today’s corporate executives are 357 F.3d at 332. compensated in terms of stock and stock options.’” In re Advanta, 180 F.3d at 541 Thus, we conclude that plaintiffs’ (quoting In re Burlington Coat Factory, allegations as stated that (1) defendants 114 F.3d at 1424). Thus, “‘[i]t follows . . violated GAAP and Alpharma’s revenue . that these individuals will trade those recognition policy, and (2) that employees securities in the normal course of events.’” within the Brazil division reported these Id. Although we have recognized that an violations to the company’s headquarters inference of scienter may be created when in New Jersey do not amount to “an plaintiffs demonstrate that sales are extreme departure from the standards of “unusual in scope or timing,” id. at 540, ordinary care,” In re Advanta, 180 F.3d at we concluded that the plaintiffs in both In 535, and therefore fail to state Rule 10b-5 re Burlington Coat Factory and In re

17 Advanta failed to establish such an to give rise to a strong inference of inference based in part on the fact that scienter. Thus, we will affirm the District some key insiders sold no stock during the Court’s refusal to impute knowledge of the class period. See In re Burlington Coat false accounting practices to the individual Factory, 114 F.3d at 1423; In re Advanta, defendants based solely upon their stock 180 F.3d at 540-41. sales. Here, in addition to the fact that the We reach a similar conclusion with company’s controlling shareholder did not respect to the motive allegations leveled engage in any sales during the class period, against the company, which, as defendants we note that the Complaint fails to allege note, could be made against virtually any that the sales of the remaining three for-profit entity. See In re K-Tel Int’l, Inc. individual defendants were unusual in Sec. Litig., 300 F.3d 881, 895 (8th Cir. scope (e.g., compared to their total level of 2002) (holding that “general allegations of compensation or the size of previous sales) a desire to increase stock prices, increase or timing (e.g., compared to the timing of officer compensation or maintain past trades).9 The allegations therefore fail continued employment are too generalized and are insufficient” to establish scienter); Chill, 101 F.3d at 268 (holding that 9 Even plaintiffs’ assertion that these general motives that can “be imputed to defendants had not sold any stock during any publicly-owned, for-profit endeavor, the preceding fifteen months, standing [are] not sufficiently concrete for purposes alone, is insufficient. Defendants assert of inferring scienter”); see also In re The that they were precluded from doing so Vantive Corp. Sec. Litig., 283 F.3d 1079, as a result of a “blackout period” during 1097 (9th Cir. 2002) (concluding that a which insiders were prohibited from corporation’s desire to increase its stock engaging in such transactions. While we value as part of an acquisition strategy is cannot credit defendants’ explanations at an insufficient basis upon which to this stage of the litigation, we note their maintain a claim for violation of federal argument that the existence of such a securities laws); In re Nice Systems, Ltd. blackout period may be inferred from the Sec. Litig., 135 F. Supp.2d 551, 583-84 Complaint, which alleges a series of (D.N.J. 2001) (same); In re Cendant Corp. corporate acquisitions during the class Sec. Litig., 76 F. Supp.2d 539, 548 (D.N.J. period. Because the individual 1999) (same) (citing Chill, 101 F.3d at defendants are alleged to have known 267). Thus, we conclude that plaintiffs about these acquisitions, and thus possessed material non-public information, they would have been blackout period or other facts which prohibited by law from trading during would demonstrate that the fifteen month much of the class period. Moreover, period of inactivity was in any way plaintiffs failed to allege the absence of a unusual.

18 have similarly failed to allege facts giving that “a District Court may deny leave to rise to a strong inference of scienter as to amend on the grounds that amendment the corporation. We therefore will affirm would cause undue delay or prejudice, or the District Court’s dismissal of Count I that amendment would be futile.” Oran v. for failure to state a claim. Stafford, 226 F.3d 275, 291 (3d Cir. 2000); In re Digital Island, 357 F.3d at (ii) Plaintiffs’ Section 20(a) Claim 337; GSC Partners, F.3d at [34]. As we have previously noted, Here, the District Court cited “Section 20(a) imposes joint and several futility, the “significant extensions of liability on any person who ‘controls a time” already provided to plaintiffs, and person liable under any provision of’ the the aim of the PSLRA to filter out weak [Exchange Act].” Shapiro v. UJB claims at the early stages of litigation as Financial Corp., 964 F.2d 272, 279 (3d the bases for its denial of leave to amend Cir. 1992). Accordingly, under the plain and dismissal of the Complaint with language of the statute, plaintiffs must prejudice. Focusing in particular on “prove not only that one person controlled futility, the District Court noted that another person, but also that the plaintiffs failed to proffer any proposed ‘controlled person’ is liable under the Act. amendment, let alone one that would If no controlled person is liable, there can satisfy the stringent pleading requirements be no controlling person liability.” Id. which govern Rule 10b-5 claims. Here, the alleged “controlled person” is Alpharma. Thus, because plaintiffs failed Following careful review of the to state a Rule 10b-5 claim against the record, we conclude that this was not an company, its Section 20(a) claim against abuse of discretion. As we have the Individual Defendants fails as well. previously held, “‘[f]utility’ means that the See Shapiro, 964 F.2d at 279; In re Digital complaint, as amended, would fail to state Island, 357 F.3d at 337. Thus, we also will a claim upon which relief could be affirm the District Court’s dismissal of granted.” In re Burlington Coat Factory, Count II for failure to state a claim. 114 F.3d at 1434. Thus, “[i]n assessing ‘futility,’ the district court applies the same C. Denial of Leave to Amend standard of legal sufficiency as applies Having concluded that the District under Rule 12(b)(6).” Id. Court properly granted defendants’ motion Had plaintiffs satisfied the to dismiss as to both counts, we must now requirements of the PSLRA and merely determine whether the court abused its failed to allege facts with sufficient discretion by failing to grant plaintiffs particularity under Federal Rule of Civil leave to amend the Complaint. Although Procedure 9(b) we would be presented Federal Rule of Civil Procedure 15 states with a closer issue. See id. at 1435. that leave to amend “shall be freely given However, because plaintiffs (1) failed to when justice so requires,” we have held

19 satisfy the stringent pleading requirements of the PSLRA, and thus failed to state a claim under federal securities law, and (2) failed to propose an amendment that would satisfy these requirements, we agree that leave to amend would be futile. Moreover, we note, as the District Court did, that its denial of leave to amend is further supported by the fact that plaintiffs (1) had already filed previous complaints and (2) were given an extension of time to assemble the amended consolidated complaint currently at issue. See id. Thus, we will affirm the District Court’s denial of leave to amend and dismissal of the Complaint with prejudice. V. Conclusion For the reasons stated above, we will affirm the final judgment of the District Court.