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January 25, 2001


The opinion of the court was delivered by: James B. Moran, Senior United States District Judge.


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, 1999.

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 21, 1999.*fn2

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 similar suit.


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 do not allege any misstatements but, instead, rely solely on omissions. Abbott clearly omitted facts about its ongoing problems with the FDA from its public filings and statements. Defendants did not disclose their prior violations — the warning letter, the May-July 1999 reinspection, the number of continuing violations or the status of their negotiations with the FDA — until the September 29, 1999 press release. To determine whether these omissions are sufficient to state a securities fraud claim we will focus on three (partially overlapping) questions. Were the omitted facts material? Were defendants' existing statements misleading? And did defendants have the necessary mental state to be liable for fraud?

I. Materiality

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 bit.

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 ...

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