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ANDERSON v. ABBOTT LABORATORIES
January 25, 2001
TOM ANDERSON, ON BEHALF OF HIMSELF AND ALL OTHERS SIMILARLY SITUATED, PLAINTIFF,
ABBOTT LABORATORIES, AN ILLINOIS CORPORATION, AND MILES D. WHITE, DEFENDANTS. LENA GALLAGHER, ON BEHALF OF HERSELF AND ALL OTHERS SIMILARLY SITUATED, PLAINTIFF, V. ABBOTT LABORATORIES, AN ILLINOIS CORPORATION, AND MILES D. WHITE, DEFENDANTS.
The opinion of the court was delivered by: James B. Moran, Senior United States District Judge.
MEMORANDUM OPINION AND ORDER
Plaintiffs have sued Abbott Laboratories (Abbott), Miles D.
White (White) and Thomas D. Brown (Brown) (collectively
"defendants"), alleging securities fraud in violation of §§ 10(b)
and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j
(b) and 78t(a), and SEC Rule 10b-5. We have two complaints
before us, one on behalf of Abbott shareholders and one on behalf
of ALZA Corp. (ALZA) shareholders.*fn1 Both complaints involve
the same core facts: defendants' failure to disclose FDA
compliance issues, so we decide them together. Defendants move to
dismiss for failure to state a claim under Fed. R. Civ. P.
12(b)(6) and failure to plead fraud with particularity under Fed.
R. Civ. P. 9(b) and the Private Securities Litigation Reform Act
of 1995 (PSLRA), 15 U.S.C. § 78u-4(b)(1). For the following
reasons, defendants' motions are granted.
The FDA has inspected ADD's facilities several times since
1993. Each time it has noted shortcomings in Abbott's quality
control policies and practices. Abbott operated under an
FDA-monitored compliance plan from July 19, 1995, through February
26, 1998. Upon terminating the plan, the FDA noted its continuing
concerns about Abbott's compliance. The FDA conducted another
inspection from September 8 through November 4, 1998, and
informed Abbott of regulatory violations at meetings on November
12, 1998 and January 8, 1999. Abbott made no mention of these
outstanding regulatory issues in its 1998 10K, filed March 9,
The Abbott shareholders' alleged class period began on March
17, 1999, when the FDA issued a warning letter to Abbott. This
letter identified several continuing violations and advised
Abbott that the FDA would take enforcement measures without
further warning if the company did not immediately resolve its
compliance issues. Abbott did not amend its recently filed 10K.
The company made several additional public statements during the
class period through SEC filings and press releases. Drawing from
both complaints, we list the statements chronologically (all
dates in 1999).
(1) March 9 10K
(2) March 9 Annual report
(3) April 8 First quarter press release
(4) April 23 White's comments to shareholders
(5) May 14 10Q
(6) June 21 ALZA acquisition announcement
(7) July 9 Perclose acquisition announcement
(8) July 9 Second quarter press release
(9) August 13 10Q
(10) August 16 Joint proxy statement (with ALZA)
(11) September 29 Press release
(12) October 11 Third quarter press release
Other than the September 29 release, none mentioned the ongoing
FDA compliance issues.
During this period several pertinent events occurred. On April
13, 1999, White exercised options to purchase 130,453 Abbott
shares. He financed this transaction by "selling" 89,895 shares,
representing 30 per cent of his Abbott holdings, at the $52.72
market price. Bloomberg News reported the warning letter on June
15, with no substantial market reaction. The FDA conducted
another inspection from May 10 through July 8, 1999, at the
conclusion of which it served Abbott with a Form 483, noting
further regulatory violations. During and immediately following
this audit Abbott announced two acquisitions: ALZA on June 21,
1999, and Perclose, Inc. on July 9, 1999. The target companies'
shareholders were to receive Abbott shares, so their stocks began
to track Abbott's once the deals were announced. June 22, 1999,
therefore, marks the beginning of the ALZA shareholders' class
period. ALZA's shareholders approved the acquisition on September
Then, on November 2, 1999, Abbott entered a consent decree with
the FDA, agreeing to pay a $100 million civil fine and to
withdraw 125 products from the market. This was the largest civil
fine ever imposed by the FDA. The company announced it would
record a $168 million pretax charge to account for the fine and
inventory write-down, driving shares down from $40.31 on November
1, 1999, to $36.81 on November 3, 1999.
Several groups of Abbott shareholders filed separate suits
against Abbott. We consolidated them into one, a class action
including all Abbott shareholders who purchased stock between
March 17, 1999, when Abbott received the warning letter, and
November 2, 1999, when Abbott announced the consent decree. See
Minute Order (Feb. 1, 2000). A group of ALZA shareholders, who
had purchased stock between June 21, 1999, when Abbott announced
its agreement to acquire ALZA, and November 2, 1999, filed a
To state a Rule 10b-5 claim plaintiffs must prove that
defendants made a misstatement or omission of material fact, with
scienter, in connection with the purchase or sale of securities,
upon which plaintiff relied, and that reliance proximately caused
plaintiff's injury. See Stransky v. Cummins Engine Co.,
51 F.3d 1329, 1331 (7th Cir. 1995). As always, we accept all well-pleaded
facts as true m considering a motion to dismiss. See
Turner/Ozanne v. Hyman/Power, 111 F.3d 1312, 1319 (7th Cir.
1999). But Fed. R. Civ. P. 9(b) requires that the complaints
state fraud allegations with particularity. Unlike notice
pleading, where it is sufficient that we be able to imagine some
set of facts under which plaintiffs could prevail, a fraud
complaint must explicitly set forth all the pertinent facts.
"This means the who, what, when, where and how: the first
paragraph of any newspaper story." DiLeo v. Ernst & Young,
901 F.2d 624, 627 (7th Cir. 1990). Congress, in enacting the PSLRA,
reinforced the importance of specificity in alleging securities
fraud and added some particularly stringent requirements. See
15 U.S.C. § 78u-4(b)(1) ("[T]he complaint shall specify each
statement alleged to have been misleading, the reason or reasons
why the statement is misleading, and, if an allegation regarding
the statement or omission is made on information and belief, the
complaint shall state with particularity all facts on which that
belief is formed."). Moreover, it is no longer sufficient that
fraud be one reasonable inference from the pleaded facts. The
facts must provide a "strong inference" of impropriety. See
15 U.S.C. § 78u-4(b)(2).
Plaintiffs must first establish that these omissions were
material, meaning "there is a substantial likelihood that
disclosure of the information would have been viewed by the
reasonable investor to have significantly altered the total mix
of information." Searls v. Glasser, 64 F.3d 1061, 1066 (7th Cir.
1995). The history between Abbott and the FDA makes all the
undisclosed information, viewed in context, seem fairly
inconsequential. An investor with full information would see a
series of inspections, Forms 483, negotiations, re-inspections,
more Forms 483 and more negotiations. Abbott had also been in,
and out of an FDA monitoring plan. Plaintiffs appear to concede
that events prior to March 17 did not require disclosure to that
point.*fn4 Given the repeating cycle of inspections, findings
and negotiations, without any FDA sanctions, plaintiffs must give
us a reason to believe this time was different — something that
shows Abbott's prospects had genuinely changed or something from
the FDA that said, "This time we're serious." This plaintiffs
have failed to do.
There is nothing magical about the warning letter. Although the
language sounds ominous, it really is rather boilerplate. See In
re Herbalife Sec. Liti., 1996 U.S. Dist. LEXIS 11484 at *11 n.3
(C.D. Cal. Jan. 26, 1986). This is affirmed by the market's
reaction, or lack thereof, to its eventual disclosure. The
Bloomberg News report prompted no substantial movement.*fn5 If
reasonable investors believed the letter altered the total mix of
information, the market would have reacted, at least a little
The May-July 1999 inspection also undermines plaintiffs'
claims. Clearly, if the FDA were planning another audit, the
agency had not yet decided to sanction Abbott, certainly so far
as defendants could tell. Abbott had no reason to say anything,
at least until after the new inspection. See Acito v. Imcera
Group, Inc., 47 F.3d 47, 53 (2d Cir. 1995) (finding no duty to
disclose violations because not a forgone conclusion company
would fail reinspection); see also Ballan v. Wilfred
American Educational Corp., 720 F. Supp. 241, 248 (E.D.N Y
1989) (finding corporate officer's imminent indictment and
resulting financial disaster were not "facts" and need not be
disclosed while investigation was pending). Even after the
inspection and the resulting Form 483, plaintiffs have not
alleged facts suggesting this was any different from the many
prior inspections and ...