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Teamsters Affiliates Pension Plan and International Brotherhood of Teamsters General Fund v. Walgreen Co.

September 29, 2010


The opinion of the court was delivered by: Judge Joan B. Gottschall


Teamsters Affiliates Pension Plan and International Brotherhood of Teamsters General Fund and Retirement and Protection Plan ("plaintiffs") have brought suit against Walgreen Co. ("Walgreens"), Jeffrey A. Rein, and Gregory D. Wasson (collectively, "defendants") under §§ 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and SEC Rule 10b-5, 17 C.F.R. § 240.10b-5. After plaintiffs' Corrected Amended Complaint was dismissed by this court on September 24, 2009, plaintiffs filed a Second Amended Complaint ("SAC"). Defendants have moved to dismiss the current complaint with prejudice. To the extent plaintiffs rely on the same six statements the court already addressed in its September 24, 2009 order, plaintiffs' claims relating to those statements are dismissed for the reasons already provided by the court. The court now turns to the new allegations in the SAC involving the statements in the Lehman Brothers report.

I. Background

Plaintiffs are investors in Walgreens stock. The genesis of Plaintiffs' complaint involves a stock drop occurring on or around October 1, 2007. Walgreens announced on that day its fourth quarter earnings per share ("EPS") for 2007, and the number was lower than analysts had expected. The Walgreens stock dropped 15% after the news was announced, from $47.24 to $40.16 per share. Plaintiffs allege, and at this stage defendants do not dispute, that the lowered EPS was a result of two predictable facts. First, Walgreens was receiving substantial profits from one of its generic drugs, simvastatin, and because of the nature of the generic drug market it was predictable that the profits from simvastatin would decline in the fourth quarter of 2007.*fn1 Second, plaintiffs allege that Walgreens had increasing sales, occupancy and administration expenses ("SO&A") during the fourth quarter, which were predictable because of the manner in which Walgreens monitored its revenue and expenses on a weekly basis.

II. Legal Standards

Defendants bring their motion to dismiss for failure to state a claim under Rule 12(b)(6), arguing that plaintiffs fail to state a claim under section 10(b) of the Exchange Act and SEC Rule 10b-5, and that they fail to plead fraud with particularity under the Private Securities Litigation Reform Act ("PSLRA") and Rule 9(b). Rule 12(b)(6) permits a court to dismiss a claim where a plaintiff fails to state a claim upon which relief can be granted. Fed. R. Civ. P. 12(b)(6). The court must accept as true the allegations of the complaint and draw all reasonable inferences in favor of plaintiff. Pisciotta v. Old Nat'l Bancorp, 499 F.3d 629, 633 (7th Cir. 2007) (internal citation omitted). To survive a Rule 12(b)(6) motion, "the complaint need only contain a 'short and plain statement of the claim showing that the pleader is entitled to relief.'" EEOC v. Concentra Health Servs., Inc., 496 F.3d 773, 776 (7th Cir. 2007) (quoting Fed. R. Civ. P. 8(a)(2)). The facts in the complaint must provide the defendant with "'fair notice of what the . . . claim is and the grounds upon which it rests.'" Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (quoting Conley v. Gibson, 355 U.S. 41, 47 (1957)).

In addition to the requirements of Rule 12(b)(6), Federal Rule of Civil Procedure 9(b) requires all allegations of fraud to be "state[d] with particularity," although "[m]alice, intent, knowledge, and other conditions of a person's mind may be alleged generally." "The rule requires the plaintiff to state the identity of the person who made the misrepresentation, the time, place, and content of the misrepresentation, and the method by which the misrepresentation was communicated to the plaintiff." Vicom, Inc. v. Harbridge Merch. Servs., Inc., 20 F.3d 771, 777 (7th Cir. 1994) (internal quotations omitted); see also DiLeo v. Ernst & Young, 901 F.2d 624, 627 (7th Cir. 1990) ("Although states of mind may be pleaded generally, the 'circumstances' must be pleaded in detail. This means the who, what, when, where, and how: the first paragraph of any newspaper story."). The PSLRA amendments to the Exchange Act raise the pleading standard in securities cases even higher. "[T]he PSLRA essentially returns the class of cases it covers to a very specific version of fact pleading -- one that exceeds even the particularity requirement of Federal Rule of Civil Procedure 9(b)." Makor Issues & Rights, Ltd. v. Tellabs, Inc., 437 F.3d 588, 594 (7th Cir. 2006), vacated on other grounds, 551 U.S. 308 (2007). Under the PSLRA, a securities fraud complaint must: (1) "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"; and (2) "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(1), (2).

"In general, to prevail on a Rule 10b-5 claim, a plaintiff must prove that the defendant:

1) made a misstatement or omission, 2) of material fact, 3) with scienter, 4) in connection with the purchase or sale of securities, 5) upon which the plaintiff relied, and 6) that reliance proximately caused the plaintiff's injury." Stransky v. Cummins Engine Co., Inc., 51 F.3d 1329, 1331 (7th Cir. 1995).

III. Analysis

In the SAC, plaintiffs argue that Walgreens is liable for statements made in a June 26, 2007 Lehman Brothers analyst report. SAC ¶ 34. The report stated, "The company continues to reiterate that generics are very positive for its business and that there are no meaningful changes in reimbursement from third-party payers . . [Walgreens] says that it negotiates with payers for what it considers an acceptable gross profit dollar per script, looked at as an average of all the scripts it fills for a particular plan. The company says it remains happy with the outcome of those negotiations." Id. Plaintiffs argue that Walgreens used "conversations with securities analysts to artificially inflate its stock price in furtherance of the fraud," id. ¶ 35, and that they need not identify the name of the source of the information at Walgreens in order to meet the heightened pleading standard. Walgreens, in arguing for dismissal, maintains that any statements made in the Lehman Brothers report must be attributed to Lehman Brothers, not Walgreens. Further, Walgreens argues that Rule 9(b) requires, at a minimum, that plaintiffs identify the speaker of the allegedly fraudulent statements.

"Generally, securities issuers are not liable for statements or forecasts disseminated by securities analysts or third parties unless they have 'sufficiently entangled [themselves] with the analysts' forecasts [so as] to render those predictions 'attributable to [the issuers]." Southland Securities Corp. v. INSpire Ins. Solns. Inc., 365 F.3d 353, 373 (5th Cir. 2004) (quoting Elkind v. Liggett & Myers, Inc., 635 F.2d 156, 163 (2d Cir. 1980)). Put another way, when investors seek to hold a corporate defendant liable for statements made by a third party in an analyst's report, the investors "must demonstrate that the statements were adopted by the defendant[] or attributable to the defendant[] in some way, such as when officials of a company 'have, by their activity, made an implied representation that the information they have reviewed is true or at least in accordance with the company's views.'" Id. (quoting Elkind, 635 F.2d at 163).

For their part, plaintiffs argue that Walgreens made false and misleading statements to a Lehman Brothers analyst, with the knowledge that the analyst would communicate those statements to the market. The Fifth Circuit, in Southland Securities, acknowledged this scenario when it explained, "[I]nvestors could . allege that the defendants used the analysts as a conduit, making false and misleading statements to securities analysts with the intent that the analysts communicate those statements to the market." 365 F.3d at 373. However, the Fifth Circuit made clear that,

The plaintiff must plead with particularity how [this] exception[] appl[ies], including who supplied the information to the analyst, how the analyst received the information, and how the defendant was entangled with or manipulated the information and the analyst. Since the allegation of entanglement is central to the overall allegation of securities fraud, it must be pleaded with the required degree of specificity. The pleading should (1) identify the specific forecasts and name the insider who adopted them; (2) point to specific interactions between the insider and the ...

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