To state a violation of Section 10(b) of the Exchange Act and Rule 10b-5, plaintiff must allege 1) that defendant made untrue statements or omitted to disclose material information in connection with the purchase or sale of securities, 2) that plaintiffs relied on these misrepresentations or omissions, 3) that this reliance resulted in injury to plaintiffs, and 4) that defendants acted with an intent to deceive or manipulate. See Arlington Heights Police Pension Fund v. Poder, 700 F. Supp 405, 406 (N.D. Ill. 1988). Plaintiffs have alleged that defendants made material omissions regarding Omniflox, that they relied on Abbott's misleading statements, that the stock lost approximately 14% of its value, and that defendants acted with an intent to defraud. Since they have stated a claim, we deny defendants' motion to dismiss under 12(b)(6).
B. Dismissal on Rule 9(b) Grounds
In seeking to dismiss this class action, Abbott also claims that the lawsuit represents a "classic example of an impermissible 'fraud by hindsight' claim," which must be dismissed at the pleading stage for failing to specifically allege how and when defendants must have known that Omniflox would be withdrawn from the market. Def. Memo at p. 1. While this is not a "classic" case of fraud by hindsight, we agree that plaintiffs fail to satisfy the requirements of Rule 9(b).
(i) False and Misleading Statements
Plaintiffs' allegations of false and misleading statements stem from Abbott's January 31 and April 8, 1992 press releases and its May 13, 1992 10-Q filing. Plaintiffs contend that in making those statements, Abbott neglected to disclose 1) that the company submitted fraudulent or recklessly prepared tests and reports on Omniflox to the FDA, 2) that there had been dozens of seriously adverse reactions in Omniflox users, and 3) that the FDA had begun an investigation and review of the drug.
Although they come close, plaintiffs have not pled adequate facts to support these claims. Rule 9(b) requires that plaintiffs seeking to allege fraud must state the circumstances constituting the fraud with particularity. Fed.R.Civ.P. 9(b). This rule is designed, in part, to ensure that defendants are adequately apprised of the conduct which they must defend. See In re First Chicago Corporation Securities Litigation, 769 F. Supp. 1444, 1452 (N.D. Ill. 1991). The Seventh Circuit has explained that Rule 9(b) requires plaintiffs to allege "the who, what, when, where, and how" of the fraud. DiLeo v. Ernst & Young, 901 F.2d 624, 628 (7th Cir.), cert. denied, 498 U.S. 941, 111 S. Ct. 347, 112 L. Ed. 2d 312 (1990). Moreover, when a complaint is based on information and belief, as it is here, plaintiffs must set forth the facts on which that information and belief rests. In re First Chicago, 769 F. Supp. at 1453. Although plaintiffs have alleged some facts, we do not believe that they are sufficient to support its claim.
First, plaintiffs appear to infer that because Omniflox was eventually withdrawn from the market, Abbott must have engaged in wrongdoing when obtaining FDA approval. Plaintiffs, however, allege no facts to support this inference. Such pleadings are patently inadequate to survive a motion to dismiss under Rule 9(b).
Second, while Omniflox's withdrawal is sufficient to create an inference that at some point prior to June 5, 1992 Abbott knew of the serious adverse reactions to Omniflox, plaintiffs do not plead any facts indicating when Abbot obtained this knowledge. Instead, plaintiffs merely conclusorily assert that Abbott was aware of the reactions prior to April 8 and May 13, 1992. However, plaintiffs have not alleged facts from which this Court can reasonably infer that Abbott knew of these reactions prior to their press releases or their 10-Q filing.
Finally, plaintiffs have not alleged any facts indicating that it was misleading for Abbott not to disclose the FDA's decision to investigate and review quinolone antibiotics in its press release or 10-Q filing. First, plaintiffs neglect to allege that the FDA began its investigation of the quinolone antibiotics before Abbott issued its press release or filed its 10-Q. Second, and more importantly, plaintiffs fail to allege the purpose or scope of the investigation. Without such allegations, there is no way of knowing whether Abbott knew, or should have known, that the investigation warranted discussion or disclosure. Accordingly, plaintiffs have failed to sufficiently plead facts supporting their claim that Abbott omitted material facts in issuing its press releases and 10-Q statement.
(ii) Duty to Update
Even if Abbott's statements on January 31, April 8 and May 13, 1992 were not false and misleading at the time they were made, plaintiffs claim that defendants had a duty to update the market once Abbott became aware of the concerns about Omniflox. While in general, Rule 10b-5 does not create a duty to speak, DiLeo v. Ernst and Young, 901 F.2d 624 (7th Cir. 1990), in Backman v. Polaroid Corp., 910 F.2d 10, 16 (1st Cir. 1990), the First Circuit stated that "if a disclosure is in fact misleading when made, and the speaker thereafter learns of this, there is a duty to correct it." Id. The Backman court further noted that "we may agree that, in special circumstances, a statement, correct at the time, may have a forward intent and connotation upon which parties may be expected to rely," and that "if this is a clear meaning, and there is a change, correction, more exactly, further disclosure, may be called for." Id. at 17.
Under this standard, there is no duty to update here. First, as explained above, plaintiffs have not alleged sufficient facts to establish that any of Abbott's statements were false or misleading at the time they were made. Moreover, the statements were not forward-looking, hence they did not require updating. The most forward-looking statements made were 1) that [Omniflox and Biaxin] significantly strengthen [Abbot's] position in the worldwide anti-infective market," and 2) that "with Biaxin and Omniflox, we are well-positioned to compete successfully in this marketplace during the 1990's." These, however, are not the sort of statements on which investors may be reasonably be expected to rely, nor are they sufficiently particular statements regarding financial projections, future operations, or forecasts of economic performance to warrant updating. See 17 C.F.R. § 230.175(c) (describing what constitutes a forward-looking statement). Accordingly, Abbott had no duty to update.
C. Common Law Claims
Counts II and III of the Complaint state claims of fraud and deceit and negligent representation. Since these claims do not raise any independent federal questions, they must be dismissed. See Simkunas v. Tardi, 930 F.2d 1287 (7th Cir. 1991) (citing United Mine Workers v. Gibbs, 383 U.S. 715, 726, 86 S. Ct. 1130, 1139, 16 L. Ed. 2d 218 (1966)).
D. Rule 11 Sanctions
(i) Insider Trading Allegations
Under Rule 11 of the Federal Rules of Civil Procedure, an attorney or party is required to sign every paper presented to the district court. That signature constitutes a certificate
that to the best of the signer's knowledge, information, and belief formed after reasonable inquiry it is well grounded in fact and is warranted by existing law. . . .
Fed.R.Civ.P. 11. Defendants claim that plaintiffs' allegations of insider trading were not well grounded in fact and ask this Court to impose Rule 11 sanctions on plaintiffs. However, because selling suspicious amounts of securities at suspicious times may establish scienter,
and because plaintiffs did, in fact, sell large amounts of Abbott stock during the class period, their allegations of insider trading are grounded in fact. Although we do not approve of plaintiffs' selective editing of the Form 4's, we do not believe plaintiffs' allegations of insider trading warrant sanctions.
(ii) Lack of Reasonable Inquiry
Additionally, defendants claim that plaintiffs, in their rush to the courthouse, filed a complaint based on information and belief despite the fact that this circuit requires such complaints to plead particular facts upon which the information and belief is founded. Defendants ask this court to impose sanctions in order to discourage such conduct.
Although plaintiffs did, in fact, file a complaint on information and belief, and while we believe that plaintiffs filed to plead their claim with sufficient particularity under Rule 9(b), that does not necessarily mean that plaintiffs have disregarded governing law. DiLeo does not, as the defendants suggest, stand for the proposition that filing based on information and belief is impermissible. Moreover, plaintiffs have alleged facts supporting their information and belief.
Accordingly, we do not find the kind of callous disregard for governing law that justifies sanctions.
See Allison v. Dugan, 951 F.2d 828, 834 (7th Cir. 1992).
For the foregoing reasons we dismiss the complaint in its entirety
and deny defendants' motion for Rule 11 sanctions. It is so ordered.
MARVIN E. ASPEN
United States District Judge