89 F. Supp. 3d 602
S.D.N.Y.2015Background
- Plaintiff (Plumbers & Pipefitters National Pension Fund) brought a securities class action alleging Orthofix and four former officers made materially false SEC disclosures about revenue and internal controls from March 2, 2010–July 29, 2013; class alleges violations of Section 10(b), Rule 10b-5 and Section 20(a).
- Orthofix announced on July 29, 2013 that it would delay filing to review revenue recognition; stock fell ~17%; company later announced restatements for fiscal 2011, 2012 and Q1 2013 and internal-investigation findings of material weaknesses in revenue recognition and controls.
- Complaint alleges specific improper practices: end-of-quarter bulk “dope deals” with side rebates and extended payment terms that inflated reported revenue, and aggressive distributor sales practices at Orthofix do Brasil with extended terms and large discounts.
- Plaintiff relies on several confidential witnesses who describe participation in or knowledge of the bulk-sale program and Brazil practices; defendants signed SOX certifications attesting to effective disclosure controls.
- Defendants moved to dismiss for failure to plead scienter and loss causation; Court granted dismissal as to Milinazzo but denied the motion as to Orthofix and three officers (Vaters, McCollum, Buxton).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Scienter for individual officers | Alleged conscious or reckless misconduct: specific CW allegations about bulk sales and Brazil practices, reports sent to CFOs, attendance at meetings | Defendants say CWs lack contact with officers, allegations are vague or industry-standard discounts, SOX certifications alone insufficient | Court found strong inference of scienter for Vaters, McCollum, Buxton based on CW detail, restatement, magnitude of adjustments, resignations; dismissed scienter claims against Milinazzo |
| Corporate scienter (Orthofix) | Corporate scienter follows from scienter of key officers | Orthofix argues corporate scienter not shown | Court held corporate scienter pleaded because individual scienter adequately alleged for key officers |
| Loss causation | July 29, 2013 delay/ investigation announcement and subsequent restatement revealed the concealed revenue risks and caused the stock drop | Defendants contend announcement of an investigation alone is not corrective; cite Loos | Court held July 29 announcement sufficiently disclosed a problem with revenue recognition and was enough to plead loss causation given the proximate stock decline and later restatement |
| Section 20(a) control-person liability | Officers were culpable participants and exercised control over Orthofix | Some officers argue lack of primary violation or culpable participation | Court allowed 20(a) claims as to Vaters, McCollum, Buxton (culpable participants) but dismissed 20(a) claim as to Milinazzo |
Key Cases Cited
- McCarthy v. Dun & Bradstreet Corp., 482 F.3d 184 (2d Cir.) (standard for Rule 12(b)(6) motion)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (plausibility standard for complaints)
- Ashcroft v. Iqbal, 556 U.S. 662 (pleading standard for legal conclusions)
- ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87 (9(b) and PSLRA particularity requirements for securities fraud)
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (comparative Tellabs scienter test)
- Novak v. Kasaks, 216 F.3d 300 (scienter inference from access to contradictory information and CW guidance)
- Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (loss causation pleading requirement)
- Lentell v. Merrill Lynch & Co., 396 F.3d 161 (market-concealment theory of loss causation)
- Loos v. Immersion Corp., 762 F.3d 880 (announcement-of-investigation and loss causation discussion)