In re: MERCK & CO., INC. SECURITIES LITIGATION Union Investments Privatfonds GmbH, Lead Plaintiff and the Class, Appellants.
No. 04-3298.
United States Court of Appeals, Third Circuit.
Argued Sept. 29, 2005. Filed Dec. 15, 2005.
261
Before ALITO, and AMBRO, Circuit Judges and RESTANI,* Chief Judge.
We agree with the Hammer court that the text of a statute controls our interpretation of it. The Holzman Amendment means what it says, and what it says is that Szehinskyj is deportable if he assisted in Nazi persecution. In so holding we are in agreement with other Circuits that have faced this question. See, e.g., Dailide v. United States Att‘y. Gen., 387 F.3d 1335, 1344 (11th Cir.2004) (“[A] plain reading of the Holtzman Amendment reveals that an individual‘s assistance, or some other form of participation in the persecution of any person, would be sufficient [for removal]“); Tittjung v. Reno, 199 F.3d 393, 398-99 (7th Cir.1999) (“[T]his Court has consistently held that Nazi concentration camp guards assisted in persecution.... [Such conduct] falls squarely within the meaning of the Holtzman Amendment.“).
VI.
Because Szehinskyj has been fairly adjudicated to have assisted in Nazi persecution under a statute whose provisions are identical to those of the Holzman Amendment, he is estopped from relitigating that issue in these removal proceedings. Accordingly we will deny the petition for review.
Daniel J. Kramer, (Argued), Paul, Weiss, Rifkind, Wharton & Garrison, New York, NY, Gregory B. Reilly, Deborah A. Silodor, Lowenstein Sandler, Roseland, NJ, for Appellees.
Before ALITO, and AMBRO, Circuit Judges and RESTANI,* Chief Judge.
AMBRO, Circuit Judge.
Merck & Co., Inc. planned an initial public offering of its wholly owned subsidiary—Medco Health Solutions, Inc. Before the IPO was to occur, however, information about Medco‘s aggressive revenue-recognition policy came to light. Some details about the policy were disclosed in Merck‘s registration statements filed with the Securities and Exchange Commission, but a Wall Street Journal article reading between the lines of this disclosure precipitated a decline in Merck‘s stock. After further disclosures and larger declines in Merck‘s stock price, the Medco IPO was canceled. Union Investments Privatfonds GmbH, as lead plaintiff for a class of Merck stockholders, claims that Merck and Medco committed securities fraud under
I. Factual Background and Procedural History
Because we review this case at the
Merck first announced its plans for the Medco IPO in a January 2002 press release, in which Raymond Gilmartin, Merck‘s Chairman and CEO, said that the two companies would pursue independent strategies for success. On April 17, 2002, Merck filed its first Form S-1 with the SEC. The SEC did not approve this S-1, and Merck kept trying, finally securing SEC approval with its fifth S-1, filed on July 9. Market reaction led Merck to drop Medco‘s offering price, to postpone indefinitely the IPO, and finally to drop the IPO altogether.
A. Medco‘s revenue-recognition policy
Medco is a pharmacy benefits manager (PBM). It saves its clients (plan sponsors) money by negotiating discount rates with pharmacies and influencing doctors to prescribe cheaper, but still therapeutically appropriate, medicines. When a customer buys drugs at a local pharmacy, the pharmacist checks with Medco to ensure that the customer is an approved beneficiary. Then the customer makes a co-payment—usually between $5 and $15—which goes directly to the pharmacy, not to Medco.
Although Medco did not handle these co-payments, it interpreted the accounting standards to allow it to recognize the co-payments as revenue.2 But it did not disclose this revenue-recognition policy. In fact, Merck‘s 1999 SEC Form 10-K stated that Medco recognized revenue “for the amount billed to the plan sponsor.” After Merck changed auditors, and before it began filings for the Medco IPO, it changed this language in its 2001 Form 10-K to state that revenues were “recognized based on the prescription drug price negotiated with the plan sponsor.”
Merck‘s April 17 Form S-1 disclosed for the first time that Medco had recognized as revenue the co-payments paid by consumers, but it did not disclose the total amount of co-payments recognized. The day this S-1 was filed, Merck‘s stock price went up $0.03—from $55.02 to $55.05.3 Merck filed an amendment to its S-1 on May 21 and another on June 13.
Merck filed its fourth S-1 on July 5, 2002, finally disclosing the full amount of co-payments it had recognized as revenue. The S-1 showed that Medco had recognized over $12.4 billion dollars in co-payments as revenue, $2.838 billion in 1999, $4.036 billion in 2000, and $5.537 billion in 2001. Four days later, Merck announced that it would postpone the Medco IPO indefinitely, even as it filed its last S-1, which was approved by the SEC.
Merck‘s stock continued to fall, reaching $45.75 on July 9, the end of the class period, and $43.57 on July 10.
B. Merck‘s and Medco‘s independence
In the January 2002 press release, Gilmartin said, regarding the planned Medco IPO, “[W]e believe the best way to enhance the success of both businesses going forward is to enable each one to pursue independently its unique and focused strategy.” The independence of Merck and Medco had been and was to become a subject of some debate.
The Federal Trade Commission had launched an investigation of Medco in 1996 to determine whether it was giving preferential treatment to Merck‘s drugs. (The FTC also investigated some of Merck‘s competitors for similar reasons.) Other drug manufacturers divested their PBMs, but Merck kept Medco. In 1998 Merck entered into an FTC consent decree, which suggested, inter alia, that Medco had given favorable treatment to Merck‘s drugs.
Merck and Medco throughout the class period asserted that the two companies stayed independent. Both companies maintained policies of independence posted on their websites.
But Union produced data suggesting that Merck‘s market share of drugs sold by Medco was in several instances much higher than Merck‘s national market share. In its April 2002 S-1, Merck disclosed that post-IPO Medco would be obligated to continue this elevated level of Merck drug sales; the two companies had signed an agreement requiring Medco to sell a higher share of Merck drugs than Merck‘s national third-party market share. The May and June amendments to the S-1 fleshed out the terms of this agreement, which required Medco to pay Merck 50% of its lost revenue if it failed to hit the sales targets.
C. The class action is filed
The initial complaint was filed in July 2002. Union was appointed lead plaintiff in November 2002, and it filed its corrected amended complaint in March 2003. At the time, Union‘s lead counsel was Bernstein Litowitz Berger & Grossman LLP. Defendants filed a motion to dismiss pursuant to
II. Jurisdiction and Standard of Review
The District Court had subject matter jurisdiction under
We exercise plenary review of the District Court‘s grant of a
III. Discussion
A. May Union retain Milberg Weiss to prosecute this appeal?
Lead plaintiffs in securities class actions must secure court approval of their counsel, but Union retained Milberg Weiss as appellate counsel after the notice of appeal was filed and without any court‘s approval. We decide that Milberg Weiss may prosecute this appeal but that future lead plaintiffs must obtain court approval for any new counsel, including appellate counsel.
Congress passed the PSLRA in part to reduce abusive class action litigation. S.Rep. No. 104-98, at 10-11 (1995), reprinted in 1995 U.S.C.C.A.Ν. 679, 689–90. To this end, the PSLRA requires courts to appoint as lead plaintiff the “most adequate plaintiff“—the plaintiff with the most money at stake.
Although Congress was confident that the lead plaintiff would select the best counsel, it relied on the courts’ power to “approve or disapprove the lead plaintiff‘s choice of counsel when necessary to protect the interests of the plaintiff class.” S.Rep. No. 104-98, at 12, reprinted in 1995 U.S.C.C.A.N. 679, 691. Thus, the PSLRA provides that the “most adequate plaintiff shall, subject to the approval of the court, select and retain counsel to represent the class.”
Union was selected lead plaintiff, and the District Court approved Bernstein Litowitz Berger & Grossman LLP as lead counsel. But as noted, after the notice of appeal was filed, Union retained Milberg Weiss as appellate counsel. Bernstein Litowitz consented to Milberg Weiss‘s retention, but Union neither sought nor obtained the District Court‘s approval of Milberg Weiss as class counsel.
In its brief, Merck challenges Milberg Weiss‘s ability to prosecute this appeal without court approval, and Union responds with three arguments. We deal with each in turn.
First, Union argues that Merck does not have standing to protest the choice of lead counsel. We find few cases, from our
On the other hand, it may be that defendants’ ability to challenge lead counsel is separate from their inability to challenge lead plaintiff‘s appointment. At least one court has allowed a defendant to challenge the selection of lead counsel. See In re USEC Sec. Litig., 168 F.Supp.2d 560, 568 (D.Md.2001) (“The defendants challenge the [plaintiffs‘] selection of two separate law firms as lead counsel.“). When the challenge is not to adequacy but is, as here, to a lead plaintiff‘s procedural failure to secure court approval, we hold that defendants do have standing to challenge the retention of lead counsel.
Second, Union claimed that the PSLRA does not prevent it from retaining unapproved appellate counsel, which it characterized as somehow different from lead counsel. Merely stating this argument lays out the span of such a stretch. The PSLRA does not distinguish between lead counsel and appellate counsel; it simply requires court approval of class “counsel.”
Third, Union argues that its retention of Milberg Weiss is valid by virtue of a jurisdictional loophole: the District Court lost jurisdiction after the filing of the notice of appeal, and our Court is not in a position to make the findings required to approve new lead counsel. While it is generally true that district courts are divested of jurisdiction—and lose the power to act—once the notice of appeal is filed, there are “exceptions to this general rule.” Bensalem Twp. v. Int‘l Surplus Lines Ins. Co., 38 F.3d 1303, 1314 (3d Cir.1994). We have identified several, but “limited,” in-
The power to approve lead plaintiffs’ counsel under the PSLRA would not engender this same kind of “confusion and inefficiency“—the approval or disapproval of counsel would lie with the district court, and we typically would not need to second-guess or make this decision ourselves. Therefore, we add this approval power to the short list of actions a district court may take during the pendency of an appeal.
That leaves this case, in which for the sake of efficiency we eschew a remand and proceed as if Milberg Weiss were approved as appellate counsel. Moreover, because we affirm the District Court‘s opinion, we do not require Union to secure ex post approval for this appeal.
B. Does Union have a valid claim under section 10(b)?
To make out a securities fraud claim under
1. When Merck disclosed information regarding its revenue calculations, was the disclosure material?
We have said that establishing materiality is the “first step” for a plaintiff with a
In Oran, information was disclosed on July 8, and the stock price rose for four days afterward. We held that the failure to disclose the information earlier was immaterial. Id. at 283. Similarly, in In re NAHC, Inc. Securities Litigation, we discerned “no negative effect” on a company‘s stock price “immediately following” the date of disclosure. 306 F.3d 1314, 1330 (3d Cir.2002). Again, we held the disclosed information immaterial as a matter of law. Id.
In this case, the disclosure occurred on April 17, and there was no negative effect on Merck‘s stock.6 The Wall Street Journal‘s article, accompanied by a significant decline in Merck‘s stock, appeared two months later. Union claims that this June stock decline demonstrates the materiality of the information Merck disclosed. But the situation we faced in NAHC was similar: the company‘s stock price plunged 75% just three weeks after the disclosure was made. Id. at 1321. That disclosure was made on November 2, with no negative effect on the stock price, but the stock plummeted on November 26, after another disclosure. Id. at 1321, 1330. We held the first disclosure not material. Merck‘s stock did not drop after the first disclosure, and that is generally when we measure the materiality of the disclosure, not two months later.
In Basic Inc. v. Levinson, the Supreme Court declined to resolve “how quickly and completely publicly available information is reflected in market price.” 485 U.S. 224, 248 n. 28 (1988). Union tells us that we cannot therefore apply the Oran-Burlington standard. But it overlooks that our Court has resolved how “quickly and completely” public information is absorbed into a firm‘s stock price. We have decided that this absorption occurs “in the period immediately following disclosure.” Oran, 226 F.3d at 282.
This does not mean instantaneously, of course, but in this case there was no adverse effect to Merck‘s stock price from the disclosure “in the period immediately following disclosure.” In fact, Merck‘s stock continued to rise from its baseline of $55.02, including the April 17 S-1 filing date, for five trading days after the disclosure. The five-trading-day rise was followed by a five-trading-day decline, which reached a low of $54.34. Then, starting on May 1, 2002, Merck‘s stock remained above $55.02 until June 4. But Union expects us to ignore this one-month increase in Merck‘s stock price in favor of a five-
Union also argues that the April 17 disclosure was so opaque that it should not have counted as a disclosure. Although Merck disclosed that it had recognized co-payments as revenue in April, it did not disclose the sum total of those co-payments until July. This is why, Union claims, the stock price did not drop until The Wall Street Journal‘s reporter made public the estimated magnitude of the co-payment recognition. In effect, Union is arguing that investors and analysts stood in uncomprehending suspension for over two months until the Journal brought light to the market‘s darkness.
The Journal reporter arrived at an estimate of $4.6 billion of co-payments recognized in 2001 by using one assumption and performing one subtraction and one multiplication on the information contained in the April S-1. She determined the number of retail prescriptions filled (462 million) by subtracting home-delivery prescriptions filled (75 million) from total prescriptions filled (537 million). She then assumed an average $10 co-payment and multiplied that average co-payment by the number of retail prescriptions filled to get $4.6 billion.7
The issue is whether needing this amount of mathematical proficiency to make sense of the disclosure negates the disclosure itself. We scrutinized a disclosure requiring calculation in Ash v. LFE Corp., 525 F.2d 215 (3d Cir.1975). A proxy statement disclosed directors’ current pension amounts and, in another section, their newly proposed pension amounts, but it did not disclose the increase. Id. at 218. We held that requiring readers to perform the subtraction themselves was immaterial because the “facts [we]re disclosed prominently and candidly.” Id. at 219 (“We decline to hold that those responsible for the preparation of proxy solicitations must assume that stockholders cannot perform simple subtraction.“). The calculation from Merck‘s S-1 was somewhat more complex—it required some close reading and an assumption as to the amount of the co-payment. But the added, albeit minimal, arithmetic complexity of the calculation hardly undermines faith in an efficient market.
Union points out nonetheless that Merck was followed by many analysts, including J.P. Morgan, Morgan Stanley, and Salomon Smith Barney, who “closely examine a company‘s revenue and revenue growth when valuing a company‘s stock” in Merck‘s industry. Compl. ¶ 9. The logical corollary of Union‘s argument then is the following rhetorical question: If these analysts—all focused on revenue—were unable for two months to make a handful of calculations, how can we presume an efficient market at all? Union is trying to have it both ways: the market understood all the good things that Merck said about its revenue but was not smart enough to understand the co-payment disclosure.8
But we do not wish to reward opaqueness. We decline to decide how many mathematical calculations are too many or how strained assumptions must be, but Merck was clearly treading a fine line with this delayed, piecemeal disclosure. It should have disclosed the amount of co-payments recognized as revenue in the April S-1; it should have disclosed this revenue-recognition policy as soon as it was adopted. Sunshine is a fine disinfectant, and Merck tried for too long to stay in the shade. The facts were disclosed, though, and it is simply too much for us to say that every analyst following Merck, one of the largest companies in the world, was in the dark.
2. Did Union properly allege that “false or misleading” statements were made by Merck and Medco?9
i) Were the Merck and Medco statements regarding their independence false or misleading?
Union‘s complaint alleges that Medco made false statements about Merck‘s and Medco‘s independence. The District Court held that these statements were not actionable because Union‘s supporting evidence came mostly from dates outside the class period. Medco‘s website contained statements about Medco‘s independence policy. The website stated, among other things, that Medco would “make decisions on the therapeutic aspects of its programs without substantive influence from Merck” and would “treat Merck products no differently from those of any other manufacturer, observing the same procedures for independent clinical review as it does for drugs of any other manufacturer.” Compl. ¶ 126. Union produced data showing the extent to which Merck‘s market share among Medco beneficiaries was significantly higher than its nationwide market share.
The District Court discarded this market-share evidence, holding it unusable because most of it arose from outside the class period. To support its holding, the Court cited only a case from the Northern District of California, Clearly Canadian, which held “statements made or insider trading” done outside the class period “irrelevant to [the] plaintiffs’ fraud claims.” In re Clearly Canadian Sec. Litig., 875 F.Supp. 1410, 1420 (N.D.Cal.1995). The Clearly Canadian Court, though, had just denied the defendants’ motion to dismiss and was striking from the plaintiffs’ complaint nearly 20 pages of allegations of statements and insider trading from outside the class period. Id. The Court was removing out-of-period claims because the defendants were not liable for them; it was not addressing their relevance as evidence.
Two Second Circuit cases have, however, addressed out-of-period information for the purposes of allowing inferences to be drawn. In Novak v. Kasaks the plaintiffs’ complaint provided facts about inventory write-offs from after the expiration of the class period, and the Court held that those facts supported the plaintiffs’ allegations
The District Court in our case found that Union could not “rely on statistical data collected prior to the commencement of the class period ... to buttress [its] contention that the statements on Medco‘s website were misleading.” In re Merck & Co., Inc. Sec. Litig., No. 02-CV-3185 (SRC), slip op. at 34 (D.N.J. July 6, 2004). This finding directly conflicts with the Second Circuit‘s holding in Scholastic, and the Clearly Canadian case is meager support. We shall follow the Second Circuit here and hold the pre-class data regarding Merck‘s market share relevant to showing Medco‘s statements to be misleading. The District Court therefore incorrectly disregarded the evidence of Medco‘s favoritism toward Merck products.10
ii) Did Gilmartin‘s January 2002 statement fall within the “forward-looking statement” safe harbor?
Union alleged that Gilmartin‘s statement in a January 2002 press release was false and misleading. As we noted, Gilmartin, discussing the planned Medco IPO, said, “[W]e believe the best way to enhance the success of both businesses going forward is to enable each one to pursue independently its unique and focused strategy.” The District Court held that this statement fell within the “forward-looking statement” safe harbor, thereby foreclosing liability for the statement. Union argues that this statement cannot meet the safe harbor‘s requirements because it was about a planned initial public offering.
Concerned about the effect of litigation‘s specter on corporate disclosure, Congress created in the PSLRA a safe harbor for forward-looking statements. S.Rep. No. 104-98, at 16, reprinted in 1995 U.S.C.C.A.N. 679, 695. This safe harbor is designed to shield statements like those regarding revenue projections and future business plans from leading to liability. Id. at 17, reprinted in 1995 U.S.C.C.A.N. 679, 696.
But the safe harbor does not apply to statements “made in connection with an initial public offering.”
C. Was the April 17 registration statement disclosure material under section 11?
The District Court dismissed Union‘s section 11 claims as by law immaterial. Union claims that the market‘s failure to react to a disclosure is an invalid basis for dismissing a section 11 claim, and it cites a 2004 case from our Circuit, In re Adams Golf, Inc. Sec. Litig., 381 F.3d 267 (3d Cir.2004), for the proposition that the Oran-Burlington 10(b) materiality standard does not apply to section 11 claims.
A section 11 claim looks to whether a registration statement “contain[s] an untrue statement of a material fact or omit[s] to state a material fact required to be stated therein or necessary to make the statements therein not misleading.”
We first noted that section 11(a) and
We created a test for materiality under
Our opinion in Adams Golf, however, may be read by some to hold that the Oran-Burlington materiality inquiry did not apply to actions brought under
Under
With that backdrop, we do not read Adams Golf as altering the Oran-Burlington materiality standard for section 11 claims. First, because our Court in Adams Golf both knew of and referred to Westinghouse, Trump, and Craftmatic, and inasmuch as precedential cases cannot be overruled unless by the Circuit en banc, Third Circuit Internal Operating Procedure 9.1, it is obvious that Adams Golf did not intend to conflict with the three earlier decisions equating section 11‘s materiality element with section 10(b)‘s.
Second, the Oran-Burlington standard applies only to “efficient markets,” Bur-
Third, the language in Adams Golf at issue likely was dicta. The defendants would have lost on appeal even had the Court found Oran-Burlington directly applicable. That is, the Adams Golf panel held that Costco‘s unauthorized, out-of-network selling of 5,000 Tight Lies clubs was not “unquestionably immaterial to a reasonable investor.” Adams Golf, 381 F.3d at 276. We reversed the District Court‘s conclusion that the disclosure was immaterial as a matter of law because of the nature and magnitude of the unauthorized sales. In addition, the company‘s stock price did decline following the disclosure; it dropped 17% along with a twentyfold increase in trading volume. Id. at 277 n. 11. Under the Oran-Burlington standard this decline would have been material. The Court‘s refusal to apply that standard was irrelevant to its decision, and the language about its refusal was in essence dicta.
Fourth, reading materiality and loss causation in Adams Golf to be synonymous is incorrect. They are different concepts. In Burlington we did not even mention the phrase “loss causation.” Rather, our creation of the stock-price rule was explicitly to determine whether information was material. Burlington, 114 F.3d at 1425 (“In this case, plaintiffs have represented to us that the July 29 release of information had no effect on BCF‘s stock price. This is, in effect, a representation that the information was not material.” (emphasis added)). Also, loss causation and materiality are two separate elements of a
Merck‘s disclosure was not material under the Oran-Burlington standard. This standard is applicable to
D. Is there controlling-person liability?
Because the District Court was correct in dismissing Union‘s other claims, leaving Union with no valid
IV. Conclusion
Union failed to establish a material statement or omission by Merck, so Union did not sufficiently plead a
Richard T. Clark; Joan A. Reed; Richard J. Rubino; Lawrence A. Bossidy; Jeanetta B. Cole; William N. Kelly; William G. Bowen; Niall Fitzgerald; Anne M. Tatlock; Edward M. Skolnick; Arthur Andersen, LLP * Merck & Co., Inc., A New Jersey Corporation and Medco Health Solutions, Inc., a Delaware Corporation, Nominal Appellees.
No. 04-3735.
United States Court of Appeals, Third Circuit.
Argued Sept. 29, 2005. Filed Dec. 15, 2005.
Ellen FAGIN; Judith Fagin, derivatively and on behalf of Merck & Co., Inc.,* a New Jersey Corporation and Medco Health Solutions, Inc., a Delaware Corporation, Appellants v. Raymond V. GILMARTIN; Judith C. Lewent; William B. Harrison, Jr.; Heidi G. Miller; Thomas E. Shenk; Samuel O. Thier; Merck & Co., Inc.;