Securities Snapshot
October 10, 2017

AmerisourceBergen Specialty Group Pleads Guilty to Distributing Misbranded Drugs, Sentenced to Pay $260 Million

AmerisourceBergen pleads guilty to FDCA misdemeanor and agrees to pay $260 million fine for distributing misbranded oncology drugs; Arkansas federal district court denies Wal-Mart’s bid to dismiss stockholder suit seeking “build-up method” damages under PLSRA; Southern District of New York dismisses securities class action against Amex, holding company adequately disclosed risk of losing its co-branding agreement with Costco; Ninth Circuit revives putative stockholder class action against Thoratec for allegedly failing to disclose risks associated with heart assist device; Southern District of New York dismisses investors’ class action alleging conspiracy to manipulate Swiss franc LIBOR; and SEC approves new “pay-to-play” rule for capital acquisition brokers.

AmerisourceBergen Specialty Group Pleads Guilty to Distributing Misbranded Drugs, Sentenced to Pay $260 Million

On September 27, AmerisourceBergen Specialty Group, a subsidiary of drug distribution giant AmerisourceBergen Corporation, pleaded guilty in the U.S. District Court for the Eastern District of New York to a misdemeanor Federal Food, Drug and Cosmetic Act violation for introducing misbranded oncology drugs into interstate commerce. ABSG agreed to pay $260 million to resolve its criminal liability. In connection with the plea, ABSG also entered into an agreement with the Department of Justice to maintain a compliance program designed to strengthen the company’s adherence to the FDCA. ABSG’s liability arises from a “pre-filled syringe program” maintained by its now-defunct subsidiary Medical Initiatives Inc., which from 2001 to 2014 shipped millions of syringes pre-filled with oncology drugs from its Alabama facility to healthcare providers nationwide. MII prepared these syringes, the one-count Information charges, by removing the drug products from their original, FDA-approved glass vials, “pooling” the contents of multiple vials, and repackaging the drugs into plastic syringes. This process enabled MII to extract excess medicine contained in the vials, and in turn to prepare and sell more pre-filled syringes. Many of these vials, however, were designated for “single use,” meaning that opening the vials more than once, as MII’s technicians did during the pooling process, created a risk of contamination. According to a stipulated statement of facts filed with the company’s plea agreement, moreover, MII often shipped the syringes without a prescription signed by a physician, sometimes in doses exceeding plausible or safe usage for an individual. ABSG also failed to register MII as a re-packager or manufacturer with the FDA as required by the FDCA. While ABSG’s plea resolves its criminal liability, according to Amerisource’s Form 10-Q filed with the SEC June 30, federal prosecutors have also indicated that they “intend[] to pursue alleged civil claims under the False Claims Act.”  Amerisource stated in its filing that discussions to resolve such claims are ongoing, but “it remains unclear whether a settlement can be reached at this time or whether the matter will proceed to litigation,” as there are “significant disagreements between the parties.”

Arkansas District Court Denies Wal-Mart's Bid to Throw Out Securities Class Action Seeking “Build-Up Method” Damages Under PLSRA

In City of Pontiac General Employees’ Retirement System v. Wal-Mart Stores, Inc., the Western District of Arkansas recently denied Wal-Mart’s motion to dismiss a securities class action based on the company’s alleged misrepresentations in an SEC filing, rejecting Wal-Mart’s contention that the plaintiffs’ proposed damages calculation method would violate the Private Securities Litigation Reform Act of 1995. The certified class of investors, led by PGERS, contend that Wal-Mart made materially misleading statements in its December 2011 Form 10-Q by failing to disclose an alleged bribery scheme at subsidiary Wal-Mart de México. Those misstatements, class members allege, artificially inflated the company’s stock price until the New York Times exposed the bribery allegations in an April 2012 report, which in turn caused Wal-Mart’s market value to plummet over the following days. Arguing that they overpaid for the company’s stock based on Wal-Mart’s misstatements, the plaintiffs filed suit in 2012 for alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and related Rule 10b-5. As one alternative for establishing damages, the plaintiffs proposed using the “build-up method,” which measures damages by combining direct loss to stockholders with the company’s “reputational loss” stemming from the misconduct. Wal-Mart moved to dismiss, arguing that plaintiffs lacked standing to pursue build-up method damages, which were sustained by the company directly, not by its stockholders. The court disagreed. The plaintiffs, Judge Susan O. Hickey opined, alleged that Wal-Mart’s misrepresentations caused them to overpay for their shares of company stock, which is in fact a “direct injury that they have standing to pursue.”  Wal-Mart further asserted that the PSLRA-prohibits “build-up method” damages, and instead requires plaintiffs to establish damages based on market price fluctuations. Rejecting that argument as well, the court held that the PLSRA’s damages-limitation provision “does not mandate the establishment of damages by reference to market price.” However, while Judge Hickey left the door open for the build-up method, she held that it was premature to decide which damages methodology to use, “given that discovery is not complete and PGERS’s damages proof will likely require expert analysis and testimony.”

American Express Wins Dismissal of Stockholder Suit Over Costco Co-Branding Agreement

On October 3, the Southern District of New York dismissed a putative securities class action against American Express Company, holding that Amex adequately disclosed the risk of losing an exclusive co-branding relationship with Costco Wholesale Corp. In February 2015, Amex’s stock price fell after the company disclosed it had failed to renew a long-standing co-branding agreement with Costco. A union pension fund then filed suit on behalf of a putative class of Amex stockholders, alleging that the company, its CEO, and its CFO violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder, by downplaying the risk that the agreement would lapse and the impact that non-renewal would have on Amex’s financial condition. The court disagreed, holding that none of Amex’s representations regarding negotiations with Costco were “false, misleading, or incomplete.”  Judge Paul G. Gardephe observed, for instance, that Amex CFO Jeff Campbell’s statements on the topic during a January 2015 earnings call were not “incomplete”—rather, he “refused to address this subject at all.” The court also rejected the plaintiff’s assertion that Amex intentionally understated the financial significance of the Costco relationship. Just because analysts were wrong in estimating the agreement’s financial impact, the court opined, “does not demonstrate that Amex’s statements were responsible.” Nor was the company required to “precisely quantify” the impact of losing the Costco agreement, as Amex did not know whether its other existing co-branding agreements would be renewed, and how that would affect its overall financial picture. The court also rejected the plaintiff’s contention that Amex inaccurately characterized an agreement with Delta as its most important co-branding relationship. Rather, Amex’s SEC filings described the Delta agreement as the “largest airline co-brand portfolio,” which the court found “cannot reasonably be read as addressing how the Delta relationship compares to non-airline co-brand relationships.” Finally, the court held, the plaintiff failed to allege particularized facts supporting a strong inference that Amex acted with scienter, as required to meet the heightened pleading standard for alleging securities fraud under the Private Securities Litigation Reform Act of 1995. However, though Judge Gardephe granted Amex’s motion to dismiss, he also gave the plaintiff a second chance, granting leave to file an amended complaint by October 26.

Ninth Circuit Panel Revives Putative Securities Class Action Against Thoratec

In Bradley Cooper, et al. v. Thoratec Corp., et al., a Ninth Circuit panel recently revived a putative securities class action against medical device manufacturer Thoratec Corp., finding that a lower court erred in dismissing the suit because the plaintiff stockholders sufficiently alleged that the company misled them by hiding risks associated with one of its heart assist devices. Lead plaintiff Bradley Cooper filed the putative class action lawsuit in January 2014, alleging that he overpaid for his shares of Thoratec stock due to the company’s failure to disclose that its HeartMate II Left Ventricular Assist Device carried with it a risk of fatal pump thrombosis. Thoratec’s material misstatements and omissions, plaintiffs alleged, artificially inflated its stock price until a negative medical study and an FDA recall caused the company’s shares to plummet. In November 2015, the Northern District of California dismissed the suit, holding that plaintiffs failed to plead adequate facts to support scienter and loss causation under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder. On October 5, the Ninth Circuit reversed, holding that Thoratec received—but did not disclose—data during the class period that “strongly suggested that thrombosis rates” associated with its HeartMate II device were “significantly higher than advertised.” The company’s affirmative statements, the panel opined, “downplayed this increase”—and plaintiffs’ allegations to this effect were sufficiently specific to survive dismissal.  In its two-page unpublished order, the Ninth Circuit cited its 2010 decision in In re Cutera Securities Litigation, which held that a statement could be misleading if “it would give a reasonable investor the impression of a state of affairs that differs in a material way from the one that actually exists.” In reviving Cooper’s suit, the Ninth Circuit found that Thoratec’s statements gave stockholders an “impression” that materially differed from the reality of company affairs.

Southern District of New York Dismisses Investors' Putative LIBOR-Rigging Class Action

In Sonterra Capital Master Fund Ltd. v. Credit Suisse Group AG, et al., Judge Sidney H. Stein of the Southern District of New York dismissed investors’ claims that some of the world’s largest banks, including Credit Suisse, RBS, UBS, and Deutsche Bank, conspired to rig the Swiss franc LIBOR in order to undercut competition and benefit their own trading positions in Swiss franc currency derivatives. Specifically, the putative class of plaintiff investors accused the banks of conspiring to charge investors more for certain LIBOR-based derivative “bid-ask spread” buys than they charged themselves. In so doing, the investors alleged, the banks violated the Sherman Act, the Racketeer Influenced and Corrupt Organizations Act, the Commodity Exchange Act, and various state laws.  In their motion to dismiss, the banks raised various challenges to the investors’ complaint, including standing, timeliness, extraterritoriality, and personal jurisdiction. Ultimately, in a 108-page decision, Judge Stein concluded that the investors indeed lacked Article III standing to sue the banks for alleged bid-ask spread manipulation, as they failed to allege they had suffered any injury as a result of that manipulation. Further, Judge Stein opined, dismissing the investors’ antitrust claims, the complaint was “devoid of specific or plausible allegations” that the defendant banks conspired with each other to manipulate the Swiss franc LIBOR. And the investors’ RICO allegations, the court held, should be “dismissed as impermissibly extraterritorial” because the alleged scheme to manipulate the Swiss franc LIBOR was “centered in Europe and touched the United States only as part of a global scheme.” However, though the court dismissed the plaintiffs’ claims in their entirety, it also gave the investors until October 16 to file a second amended complaint.

SEC Broadens “Pay to Play” Rules to Include Capital Acquisition Brokers

On September 29, the SEC approved a FINRA proposal extending “pay to play” regulations—which bar investment advisers from soliciting government business for two years after a political contribution—to capital acquisition brokers, a class of broker-dealers whose activities are generally limited to advising firms on capital raising, corporate restructuring, and securities offerings. Adopted in 2010, the SEC’s pay-to-play rule, Rule 206(4)-5 under the Investment Advisers Act, prohibits investment advisers from providing paid advisory services to public pension funds and other government entities within two years following the date of covered political contributions made by the investment adviser or the adviser’s covered affiliates. In August 2016, the SEC approved FINRA’s similar pay-to-play rules, designed to regulate the activities of member firms that engage in distribution or solicitation activities for compensation with government entities on behalf of investment advisers. Those rules, however, did not state explicitly that they applied to CABs, which are governed by a more streamlined set of FINRA rules than traditional broker-dealers, given the limited set of activities in which they engage. Seeking to clarify this ambiguity, FINRA submitted a proposed rule change in August 2017 seeking to make clear “that FINRA’s existing pay-to-play rules and related recordkeeping requirements apply to CABs.” By approving that proposal on September 29, the SEC has now removed any doubt that CABs are “subject to the same restrictions designed to halt pay to play practices as non-CAB member firms.”