The opinion of the court was delivered by: Blanche M. Manning United States District Judge
On July 18, 2002, the value of shares of Baxter International, Inc. dropped 25% on news that revenues had not met expectations. This suit followed. It began as a proposed class action lawsuit but, following denial of class certification, is now being maintained by just two individuals plaintiffs, Elizabeth Sherry and Tommy Newman. They allege that the dramatic drop in the value of their Baxter shares is the result of securities fraud on the part of the remaining defendants-Baxter, its former CEO Harry Kraemer, and its former CFO Brian Anderson. Baxter, Kramer and Anderson have moved for summary judgment on both counts of the amended complaint, one a claim of securities fraud under § 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 (Count I), and the other a claim against the individual defendants for controlling person liability under § 20(a) of the Exchange Act (Count II). For the reasons that follow, the motion for summary judgment is granted.
The following facts are undisputed except where noted. Actual and projected sales figures do not account for foreign currency fluctuations except where noted.
On October 18, 2001, Baxter issued a press release reporting its financial results for the third-quarter of 2001, its year-to-date results for 2001, and its projections (which it calls financial commitments) for 2002. According to the release, Baxter's year-to-date sales grew 16% and its earnings grew 15% when compared to the same period the year before. Baxter also projected that in 2002 sales would grow in the low teens, earnings per share would grow in the mid-teens, and that Baxter would generate operational cash flow of more than $500 million. During a conference call for investors that same day, Baxter provided sales growth targets for its three business segments: Renal sales were projected to grow in the low double-digits, Medication Delivery sales were projected to grow in the mid-teens, and BioScience sales were also projected to grow in the mid-teens.
Issuing projections for the coming year was standard practice for Baxter. The process began each summer, when executives from Baxter's business segments collaborated to develop first a budget, and then an internal operating plan for the coming year. Defendants Kraemer and Anderson then used the operating plan to develop the full-year sales, earnings and cash flow commitments that Baxter released to the public each October. The publicly-announced commitments were more conservative than the projections in the internal operating plan.
Shortly after releasing its commitments for 2002, Baxter issued a press release on November 5, 2001, announcing the discontinuation of its Althin line of dialyzers, which were being blamed for the deaths of multiple patients in Europe. In the press release, Baxter stated that it did not expect the discontinuation of the Althin dialyzers to impact the financial commitments it had previously announced for 2002.
However, on January 24, 2002, Baxter did indeed change its financial commitments. In a press release issued that day, Baxter announced that it was lowering its sales forecast for the Renal business segment from growth in the low double-digits to growth in the high single-digits. In addition to attributing the reduction to the discontinuation of the Althin line of dialyzers, the press release also attributed the reduction to a slowdown in the acquisition of Renal Therapy Services centers in Latin America and Asia due to unfavorable economic conditions in those regions. Despite the reduced forecast for Renal sales, Baxter reiterated its forecast of sales growth in the mid-teens for the BioScience and Medication Delivery business segments, as well as its commitment to sales growth in the low-teens for Baxter overall.
On January 24, 2002, Baxter also announced its financial results for the fourth quarter of 2001 as well as for the full year of 2001. According to the announcement, Baxter had achieved its full-year commitments. Specifically, it had forecast sales growth in the low double-digits and achieved 15% growth. It was the eighth consecutive year that Baxter had met its annual earnings and cash flow commitments.
Baxter reiterated its financial commitment to overall sales growth two more times during the coming months. On March 13, 2002, Baxter issued its 2001 Annual Report, in which it reiterated that Baxter expected to meet its full-year 2002 commitments of overall sales growth in the low-teens. On April 18, 2002, defendant Kraemer reiterated the commitments again in a press release reporting financial results for the first quarter of 2002. Kraemer announced that, based on first quarter results, Baxter remained on track to meet its full-year 2002 financial commitments of overall sales growth in the low teens.
But the financial news Baxter delivered on July 18, 2002, was not so rosy. Baxter reported that Renal sales had dropped 1% during the second quarter of 2002. Baxter attributed the drop in Renal sales to four primary factors. First, economic volatility in Latin America and Asia had caused Baxter to put on hold its acquisition of any new renal therapy service centers in those regions. Second, former users of the cheaper but now discontinued line of Althin dialyzers had not been switching to Baxter's other, more expensive, dialyzers and Baxter had not developed a cheaper dialyzer to replace the Althin as expected. As a result, users were switching to dialyzers produced by Baxter's competitors. Third, Baxter's problems with the Althin dialyzer had a spillover effect that made some patients reluctant to buy any Baxter hemodialysis product. Fourth, economic volatility in foreign markets had negatively affected Baxter's sale of peritoneal dialysis products.
In addition to the drop in Renal sales, Baxter also reported that its BioScience sales during the second quarter of 2002 had also been adversely affected by two factors. First, Baxter's sales of intravenous immonoglobin ("IGIV") had been limited by capacity constraints. Second, late in the second quarter, a number of competitors had unexpectedly slashed the price they charged for albumin, dramatically driving down the market price for Baxter's albumin.
Despite this news, in the July 18, 2002, press release Baxter nevertheless reiterated that it still expected to meet its full-year 2002 commitment to overall sales growth in the low teens. However, the market responded negatively to Baxter's announcement. Shares of Baxter closed at $32 a share that day, a 26.3% decline from the closing price of $43.41 the day before. As a result of that decline, the value of the shares owned by shareholders like plaintiffs Sherry and Newman dropped 26.3%. On July 18, 2002, Newman owned a total of 1,000 shares (R.140 at 2 n.2), so the value of his shares dropped that day by approximately $11,410. Sherry owned a total of 300 shares (id.), so the value of her shares dropped that day by approximately $3,423.
On October 3, 2002, Baxter announced that it was lowering its forecast of sales growth for 2002 from the low teens to the low double digits. According to the announcement, Baxter's sales had increased 10% for the full year (compared to its original forecast of growth in the low teens and revised forecast of growth in the low double digits), its earnings per share increased 13% (compared to its forecast of growth in the mid teens) and Baxter generated operational cash flow of $468 million (compared to its forecast of $500 million). BioScience sales had increased 11% (compared to Baxter's forecast of growth in the mid-teens), Medication Delivery sales increased 14% (compared to Baxter's forecast of growth in the mid-teens), while Renal sales increased 2% (compared to Baxter's original forecast of growth in the low double-digits and revised forecast of growth in the high single-digits).
The plaintiffs contend that the defendants knew all along that Baxter's financial commitments had become unattainable, but continued to reaffirm those commitments (with the exception of Renal sales) in order to artificially inflate the value of Baxter shares. As a result, the plaintiffs contend that they overpaid when they purchased their shares*fn1 between the November 5, 2001, announcement that the Althin line of dialyzers had been discontinued-the point at which Baxter allegedly became aware that its forecasts were unattainable-and when the share price plummeted after Baxter's July 18, 2002, announcement that sales had fallen short of expectations.
The plaintiffs filed their original complaint on December 6, 2002, which has been superseded by their amended complaint dated November 23, 2004. In the amended complaint, they have alleged two counts. In Count I, the plaintiffs allege that Baxter, Kraemer and Anderson violated § 10(b) of the Securities Exchange Act and Rule 10b-5 by making material misstatements and omissions of facts in Baxter's SEC filings, press releases, and oral statements to the media. In Count II, they allege that Kraemer and Anderson were control persons under § 20(a) of the Act and therefore are personally liable for the alleged misstatements and omissions of Baxter.
The defendants have moved for summary judgment on both Counts I and II. In support, they argue that the plaintiffs cannot establish securities fraud (Count I) because there is no evidence that (1) Baxter's 2002 projections were false or misleading, (2) that the defendants acted with improper scienter in issuing these projections, or (3) the plummet in the value of Baxter shares was caused by the alleged falsity of Baxter's projections. They further argue that, because the plaintiffs cannot establish securities ...