The opinion of the court was delivered by: Hon. Blanche M. Manning
Plaintiffs filed this proposed class action on behalf of shareholders who acquired stock in defendant Baxter International, Inc. between November 5, 2001 and July 17, 2002. In the Amended Consolidated Class Action Complaint, plaintiffs allege that Baxter and several of its key executives*fn1 made materially false or misleading public statements ("the Public Statements")*fn2 in violation of section 10(b) of the Securities Exchange Act of 1934, see 15 U.S.C. § 78j(b), and the Securities and Exchange Commission's Rule 10b-5, see 17 C.F.R. § 240.10b-5. Defendants also allege control person liability under section 20(a) of the 1934 Act against Kraemer, B. Anderson, and Beard. The present matter comes before this court on defendants' motion for judgment on the pleadings under Federal Rule of Civil Procedure 12(c) on the grounds that plaintiffs have failed to adequately plead loss causation, a required element of a securities fraud claim.
Baxter is a diversified multinational healthcare company. It has three principal divisions:
(1) the "Medication Delivery Division," which sells products used in the intravenous delivery of medication; (2) the "BioSciences Division," which markets pharmaceuticals, vaccines, and blood collection products and services; and (3) the "Renal Division," which offers products used to treat kidney diseases, such as dialysis machines and products.
Plaintiffs consist of two groups: (1) purchasers of Baxter stock on the open-market during the class period; and (2) former shareholders of Fusion Medical Technologies who exchanged their shares of Fusion for stock in Baxter as part of Baxter's acquisition of Fusion on May 3, 2002. To complete its acquisition of Fusion, Baxter exchanged $157 million of its stock to the Fusion shareholders for their Fusion shares.
The plaintiffs allege that during the class period, the defendants made numerous misstatements and omissions about Baxter's financial situation, including problems in its Renal and Biosciences Divisions. According to the complaint, instead of being honest, the defendants issued optimistic, though unattainable, financial predictions in order to conceal Baxter's problems. Plaintiffs allege that the result was an artificially inflated share price for Baxter stock.
On July 18, 2002, Baxter reported second-quarter results that did not meet analysts' or Baxter's expectations, and Baxter's stock price dropped from $43 to $32 a share. Plaintiffs contend that the rosy financial commitments defendants made knowing that the commitments were unattainable caused the dramatic price drop when Baxter's true financial picture came to light in July 2002. In turn, the July price drop damaged the plaintiffs by diminishing the value of their Baxter holdings.
Alleged Misstatements and Omissions of Material Fact
Plaintiffs allege that before and during the class period, Baxter faced numerous business and financial problems. One of the most pressing issues arose shortly before the class period, in October of 2001, when Baxter-produced dialysis filters were linked to the deaths of over 50 people. In an attempt to hide this and other problems during the class period, defendants allegedly made the public statements concealing Baxter's true predicament.
For example, on the first day of the class period, November 5, 2001, Baxter issued a press release stating that after investigating the deaths, Baxter would discontinue the dialysis product and take a charge of $100-$150 million. This press release, however, also contained what Baxter termed "our 2002 full-year commitments" ("the commitments"), which stated that in 2002, it would "meet its 2002 full-year commitments of sales growth in the low-teens, earnings per share in the mid-teens and operational cash flow of at least $500 million." A short time later, on January 24, 2002, Baxter issued another press release reiterating the commitments and predicting growth in sales in the BioSciences and Medication Delivery Divisions in the "mid-teens" and "in the high single-digits" in the Renal Division. For the rest of the class period, Baxter continued to publicly state that it was "on track to achieve" the commitments.
Despite these rosy predictions, on the last day of the class period, Baxter released its actual second-quarter 2002 financial results, which plaintiffs contend revealed Baxter's "true financial condition." Instead of sales growing in the "low-teens," Baxter's sales grew by only 8%, which was $100 million less than predicted in the commitments. These disappointing numbers were the result of: (1) the Renal Division's sales, which accounted for 25% of Baxter's total sales the previous year, being down 1%; and (2) the BioSciences Division's sales only growing by 7%. These numbers were well off the commitments, which predicted growth in sales in the BioSciences Division in the "mid-teens" and "in the high single-digits" in the Renal Division. According to plaintiffs, these results "shocked the market," resulting in an $11 drop in Baxter's stock price (from $43 to $32) in one day.
Plaintiffs contend that the public statements, which included the sales commitments, contained material misstatements and omissions because defendants failed to disclose that:
(1) Baxter was forced to close the plants where the defective dialysis products were manufactured, which left Baxter without any low-cost dialysis products, thereby exposing it to increased competition and the loss of customers and market-share; (2) economic instability in Latin America resulting in a drop in sales in that region; (3) a supply glut in blood-plasma products leading to lower prices and revenues for the BioSciences Division, which also experienced manufacturing ...