OPINION AND ORDER
The plaintiff, Plumbers & Pipefitters National Pension Fund, brought this securities class action against Orthofix International N.V. (“Orthofix”) and four of its former officers. The plaintiff alleges that the defendants misrepresented Orthofix’s financial health to the public at various times. The plaintiff alleges that these mis
The defendants move to dismiss the Second Amended Complaint for failure to state a claim pursuant to Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure. The defendants argue that the plaintiff has failed to allege facts supporting a strong inference of scienter, and has not alleged loss causation.
The Court has jurisdiction over the alleged Exchange Act violations pursuant to 15 U.S.C. § 78aa, and 28 U.S.C. § 1331. For the reasons explained below, the defendants’ motion is granted in part and denied in part.
I.
In deciding a motion to dismiss pursuant to Rule 12(b)(6), the allegations in the complaint are accepted as true, and all reasonable inferences must be drawn in the plaintiffs favor. McCarthy v. Dun & Bradstreet Corp.,
A claim under Section 10(b) of the Securities Exchange Act sounds in fraud and must meet the pleading requirements of Rule 9(b) of the Federal Rules of Civil Procedure and of the PSLRA, 15 U.S.C. § 78u-4(b). Rule 9(b) requires that the complaint “(1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent.” ATSI Commc’ns, Inc. v. Shaar Fund, Ltd.,
When presented with a motion to dismiss pursuant to Rule 12(b)(6), the Court may consider documents that are referenced in the complaint, documents that the plaintiff relied on in bringing suit and that are either in the plaintiffs possession or that the plaintiff knew of when bringing suit, or matters of which judicial notice may be taken. See Chambers v.
II.
The following facts are undisputed or accepted as true for purposes of the defendants’ motion to dismiss.
A.
Orthofix is a medical device company engaging in the design, development, manufacture, and distribution of medical equipment used principally for spine and orthopedic applications. SAC ¶ 25. Orthofix distributes its products domestically. and internationally by coordinating with doctors to sell nonsurgical devices to patients, selling devices to hospitals, of selling products by piece or in bulk to independent distributors. SAC ¶ 3.
The individual defendants were all officers of Orthofix during some portion of the class period. Defendant Alan Milinazzo served as President and Chief Executive Officer (“CEO”) of Orthofix from April 2006 until July 2011. SAC ¶ 26. Defendant Robert Vaters served as the Chief Financial Officer (“CFO”) and then Chief Operating Officer (“COO”) of Orthofix’s Global Spine Business Unit from September 2008 to July 2011, and then served as President and CEO of Orthofix from August 2011 to March 2013. SAC ¶ 27. Defendant Brian McCollum served as the CFO of Orthofix from March 2011 to November 2012, and then served as President of the Global Spine Business Unit from November 2012 until July 2013. SAC ¶ 28. Defendant Emily Buxton served as the CFO of Orthofix’s Global Orthopedics unit from July 2010 until November 2012, and then served as CFO of Orthofix from November 2012 until April 2014. SAC ¶ 29.
According to the plaintiff, from 2010 to 2013, the individual defendants and Ortho-fix conducted a “scheme” to “inflate [Or-thofix’s] revenue and to distort the truth about its profitability.” SAC ¶ 14. The plaintiff alleges, based on several confidential sources, that Orthofix employed various methods to recognize revenue improperly when the revenue, was not yet actually received or unlikely ever to be received. This scheme allegedly ended with Ortho-fix’s announcement on July 29, 2013, that it would delay filing its quarterly report with the SEC because “additional time [was] needed to review matters relating to revenue recognition for prior periods.” ' SAC ¶ 14. Orthofix’s July 29 press release stated that an “Audit Committee has commenced an independent review into these matters, with the assistance of outside professionals. The Audit Committee cannot predict the length of time or outcome of its review.” SAC ¶ 145. Orthofix also stated that it would not be “providing annual or quarterly guidance for 2013.” Id.
Immediately following the July 29 announcement, the price of Orthofix shares declined from $27.40 per share on July 29 to $22.71 per share on July 31, falling 17% on a volume of 1.3 million shares. SAC ¶ 146. On August 6, 2013, Orthofix announced that it intended to restate its financial statements for the fiscal years 2011 and 2012 and the first quarter of 2013. SAC ¶ 14.
B.
On March 24, 2014, Orthofix restated its financial statements for the 2010, 2011, and 2012 fiscal years, and the first quarter of
In connection with the Restatement, Or-thofix released the results of an internal investigation triggered by concerns raised by “senior management” and conducted by the Audit Committee in consultation with Ernst & Young LLP. SAC ¶ 110. The Audit Committee concluded “that certain revenues recognized during 2012 and 2011 should not have been recognized, or should not have been recognized during the periods in which they were recognized,” and that therefore, Orthofix’s previously released financial statements “should no longer be relied upon.” Id.
The background to the Restatement stated that the internal investigation into the company’s practices indicated:
(i) the existence of extra-contractual terms or arrangements at the onset of the sale and concessions agreed to subsequent to the initial sale (such as extended payment terms and return and exchange rights for sales to distributors ■with respect to certain transactions), including some with which certain senior-level personnel were involved, (ii) that at the time of some sales collection was not reasonably assured, and (iii) that certain amounts previously characterized as commissions were paid to related parties of the applicable customer.
Id. Accordingly, the Audit Committee concluded that Orthofix “had material weaknesses in its internal control over financial reporting as of December 31, 2012 related to revenue recognition practices for sales to the Company’s distributors, inventory reserves and foreign subsidiary oversight.” SAC ¶ 111. The Audit Committee further concluded that the weaknesses in these controls “resulted in material misstatements in our previously filed annual audited and interim unaudited consolidated financial statements.” SAC ¶ 112.
Although the Restatement does not reveal the specific practices that were under investigation or the names of the “senior-level personnel” that were involved with the practices, the plaintiff relies on its confidential sources to describe the individual defendants’ purported knowing or reckless personal involvement in Orthofix’s improper revenue recognition. The plaintiff alleges that Orthofix and the individual defendants encouraged several practices that led to its misstated revenue for the years 2010 to 2013.
C.
According to the plaintiff, in 2012, Or-thofix engaged in what it informally termed “dope deals” — large bulk sales to distributors designed to inflate revenue before the end of a quarter. SAC ¶¶ 41-42, 51. These bulk sales allegedly began in late 2011 or early 2012, and each bulk sale involved multiple contracts in order to separate the terms of the sale, which would be recognized immediately, from the sale’s substantial rebates, which would not be recognized in that quarter. SAC ¶¶ 39-40, 51.
In 2012, Orthofix made one such sale to Synergy Medical Systems (“Synergy”), as described by two confidential sources-an Orthofix distributor (“CW 1”) and the President of Synergy (“CW 2”). Accord
Another confidential source, the Director of Sales for Spinal Stimulation in Orthofix’s Western region for four years until April 2013 (“CW 3”), claimed to have been involved in many “dope deals” starting in early 2012. SAC ¶ 51. According to CW 3, this program was initiated by nondefendant Bryan McMillan, the President of Global Spine from October 2011 until October 2012, and defendant Yaters, who was CEO of Global Spine until July 2011, when he became CEO of Orthofix. SAC ¶¶ 27, 41, 51. When defendant McCollum replaced McMillan as President of Global Spine, the practice continued. SAC ¶ 51. McMillan, Vaters, and McCol-lum all allegedly pressured regional distributors to execute these deals in order to meet revenue quotas by a quarter’s end. SAC ¶ 41. The plaintiff alleges that whatever revenue was recognized at the end of each quarter due to the bulk sale deals would then “disappear” the next quarter due to the substantial rebates, whereupon employees would be directed to complete more bulk sales. SAC ¶ 51.
D.
Another set of the plaintiffs allegations concerns improper revenue recognition practices at Orthofix’s Brazilian subsidiary, Orthofix do Brasil (“Brasil”). In early 2011, allegedly at the direction of defendant Buxton, Brasil began to recognize income for Orthofix hospital products as soon as they were used, several months before relevant authorizing documents and payment were eventually received. SAC ¶ 72. Furthermore, after Brasil lost a significant client in 2012, it began a more aggressive approach to increase sales to distributors. SAC ¶¶ 73, 75. Brasil was pressured to maintain the same level of sales before it lost the big client, but did not have many additional distributors to which it could market. SAC ¶ 87. According to a confidential witness, Brasil’s controller from 2009 to 2012 (“CW 10”), Brasil consequently began to loosen its policies around sales to distributors to encourage a high volume of sales to each distributor. SAC ¶ 76. For example, Bra-sil would provide extended payment plans and then not charge distributors or report them to credit monitoring services when distributors failed to make payments. Id. Thus, Brasil was able to increase its reported sales, SAC ¶¶ 76, 84, 87, but did not receive a corresponding increase in revenue. SAC ¶ 76.
Brasil informed top management internationally about these loosened terms and discounts in sales to distributors, including discounts up to 70%. SAC ¶¶ 77, 87. CW 10 sent monthly reports to an email listserv that included defendant Buxton. SAC ¶ 77. CW 10 discussed Brasil’s finances directly with Brasil’s financial director, who interacted with defendant Buxton regarding Brasil’s finances. Id. CW 10 also attended meetings where Buxton was present and Brasil’s finances were discussed. SAC ¶ 78. In 2012, CW 10 attended a meeting in Germany, with Buxton present, where some international Orthofix representatives discussed their concerns with sales to distributors. Id.
In 2012, Orthofix negotiated one particularly large sale with Grupo Implamed, a Brazilian spinal products distributor. According to Confidential Witness 11 (“CW 11”), the operations director of Grupo Imp-lamed, on September 27, 2012, Implamed agreed to receive a $1.5 million shipment of Orthofix products on consignment. SAC ¶ 83. CW 11 purportedly negotiated this sale with Brian McMillan, the President of Global Spine at the time. Id. The products were housed in a shipping warehouse in Atlanta, Georgia, and would be sent to Implamed in Brazil if the products received regulatory approval in Brazil. Id. Implamed had been awaiting approval for those products for two years, and when the necessary approval never came, the products were returned to Orthofix. Id. Nevertheless, Orthofix allegedly recorded the sale as revenue in 2012. SAC ¶¶ 83 n. 5,144h.
E.
The plaintiff also takes Orthofix to task for a “morally deficient corporate culture.” SAC ¶ 4. In so doing, much of the Second Amended Complaint details various criminal and civil actions against Orthofix representatives. SAC ¶¶ 4-8, 88-107. The Second Amended Complaint does not explain how any of these actions or offenses are tied to any of the specific misstatements or omissions alleged in the Second Amended Complaint.
F.
The plaintiff alleges that throughout the class period, Orthofix and the individual defendants made misleading statements in Orthofix’s public disclosure documents filed with the SEC. United States Generally Accepted Accounting Principles (“GAAP”) generally require that revenue not be recognized until it is “realized” or “realizable,” and until it is “earned.” SAC ¶ 122. From 2010 through the first quarter of 2013, Orthofix filed public disclosure reports with the SEC, including a Form 10-K for each fiscal year, and a Form 10-Q for each quarter of each fiscal year. SAC ¶¶ 131-140. In the reports, Orthofix represented that its financial statements to the SEC were “prepared in accordance with [GAAP].” Id. The reports also stated that Orthofix had conducted evaluations of “the effectiveness of the design and operation of our disclosure controls and procedures,” and of “the effectiveness of the Company’s system of internal control over financial reporting,” and affirmed that these controls were effective. Id.
The reports each included a Sarbanes-Oxley Act (“SOX”) Certification affirming the truth and completeness of the reports, and attesting to the company’s internal controls over financial reporting and disclosure systems. SAC ¶ 131. Each individual defendant signed at least one SOX Certification. Defendant Milinazzo signed Certifications for Form 10-K reports for the 2009 and 2010 fiscal years, and for the Form 10-Q report for the first quarter of 2011. SAC ¶¶ 26, 131-133. Milinazzo resigned from his position of CEO of Ortho-fix in July 2011. SAC ¶ 26. Defendant Vaters signed Certifications for Form 10-K reports for the 2009, 2011, and 2012 fiscal years, and for Form 10-Q reports for the second quarter of 2011 through the third quarter of 2012. SAC ¶¶ 27, 134-40.
Defendant McCollum signed SOX Certifications for Form 10-K reports for the 2010 and 2011 fiscal years, and for Form 10-Q reports from the first quarter of 2011 through the third quarter of 2012. SAC ¶¶ 28, 132-39. On June 18, 2013, Orthofix announced that McCollum, then the President of the Global Spine Business Unit, would resign from Orthofix in July 2013. SAC ¶¶ 28, 143. Finally, defendant Bux-ton signed Certifications for the Form 10-K report for the 2012 fiscal year, and the Form 10-Q report for the first quarter of 2013. SAC ¶¶ 29, 140, 142. Buxton resigned from the company in April 2014. SAC ¶ 29.
According to the plaintiff, Orthofix’s public disclosure reports for the class period and the individual defendants’ corresponding affirmations were materially false and misleading when they were made because each defendant was aware that Orthofix’s financial statements failed to conform to GAAP and that there were material weaknesses in the company’s internal controls, as described in the Restatement issued on March 24, 2014. Although Orthofix’s public disclosure documents claimed that its financial statements were “prepared in accordance with [GAAP]” and that Orthofix’s internal controls over financial reporting and disclosure procedures were effective, SAC ¶ 131, the Restatement stated that Orthofix “had material weaknesses in its internal control over financial reporting as of December 31, 2012 related to. revenue recognition practices ... [and] disclosure controls and procedures and internal control over financial reporting were not effective as of December 31, 2012.” SAC ¶ 111. The Restatement also made clear that the company’s “controls were not effective to reasonably ensure accurate recognition of revenue in accordance with GAAP for certain distributor sales transactions previously recorded by the Company’s domestic and international business units.” SAC ¶ 113. Orthofix explained that the material weaknesses in its internal controls over financial reporting “resulted in material misstatements in our previously filed annual audited and interim unaudited consolidated financial statements.” SAC ¶ 112.
The plaintiff contends that the practices described in Sections II.C, II.D, and II.E of this Opinion are among those being referred to in the Restatement. The Re-statemént describes an internal investigation that indicated “(i) the existence of extra-contractual terms or arrangements at the onset of the sale and concessions agreed to subsequent to the initial sale (such as extended payment terms and re- ■ turn and exchange rights for sales to distributors with respect to certain transactions), including some with which certain senior-level personnel were involved.” SAC ¶ 110. The plaintiff argues that this passage includes the “dope deals,” or discounted bulk sales, orchestrated by Ortho-fix distributors. The plaintiff alleges that, contrary to the statements made in Ortho-fix’s public disclosure documents at the time, the revenue from these bulk sales was not recorded in accordance with GAAP because the extra-contractual terms made Orthofix’s revenues appear greater than they actually were. SAC ¶ 127.
The Restatement also reported that the company’s internal investigation found that “at the time of some sales collection was not reasonably assured.” SAC ¶ 110. According to the plaintiff, this passage includes Orthofix do Brasil’s alleged dealings with distributors, where Brasil recorded
Orthofix’s executives are paid annual performance-based bonuses that are tied to the company’s “immediate financial performance,” among other'retention bonuses. SAC ¶ 155. When Orthofix restated its financial statements in March 2014, all of its numbers were adjusted downward, except for the 2010 fiscal year, which the plaintiff alleges increased due to revenue rolling forward from 2008 and 2009 after it had been inappropriately recognized in those years. SAC ¶ 154. According to the plaintiff, the individual defendants misrepresented and inflated Orthofix’s revenue in order to receive higher annual bonuses. SAC ¶ 155.
III.
Section 10(b), as effectuated by Rule 10b-5, makes it “unlawful for any person ... [t]o make any untrue statement of a material fact or to omit a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading.” 17 C.F.R. § 240.10b — 5(b). To state a claim under Section 10(b) and Rule lob-5, the plaintiff must allege that the defendants, in connection with the purchase or sale of securities, made a materially false statement or omitted a material fact, with scienter, and that the plaintiffs reliance on the defendants’ action caused injury to the plaintiff. Ganino v. Citizens Utils. Co.,
A.
The defendants argue that this action should be dismissed because the plaintiff has not alleged facts sufficient to support a strong inference of scienter. The scienter required to support a securities fraud claim can be “intent to deceive, manipulate, or defraud, or at least knowing misconduct.” SEC v. First Jersey Sec., Inc.,
In this case, the plaintiff does not attempt to allege scienter by showing that the defendants had a “motive and opportunity” to commit fraud, relying instead on the defendants’ alleged “conscious misbehavior or recklessness.”
The defendants argue that the plaintiff has not alleged facts sufficient to show that the individual defendants had knowledge of facts or access to information showing that Orthofix’s financial statements were materially misleading or that Orthofix’s internal controls had material weaknesses prior to July 2013, when Or-thofix management first raised concerns that eventually led to the Restatement. Defendants McCollum, Vaters, and Buxton argue that the facts alleged against them are conclusory, not credible, and do not support an inference of scienter. Defendant Milinazzo argues that the plaintiff has not alleged any facts against him at all, other than that he signed SOX Certifications for several public disclosure documents.
1.
The plaintiff has failed to raise a strong inference of scienter with respect to Milinazzo. The only facts alleged against Milinazzo in the Second Amended Complaint are that he signed SOX Certifications for the company’s public disclosure documents, and one conclusory allegation that “Defendants Vaters and McCollum instituted a culture of revenue-at-all costs, and, along with Milizzano [sic], promoted a
2.
The allegations against Vaters and McCollum regarding Orthofix’s alleged “dope deals” are significantly more particularized than the allegations against Mili-nazzo. The plaintiff describes in detail Orthofix’s alleged practice of making bulk sales to distributors combined with large discounts on those sales on separate contracts, and then reporting the full undis-counted amount of the sale as revenue. Based on confidential sources, the plaintiff alleges that Vaters was involved in this program, and that McCollum assumed a role in the program when he became President of the Global Spine Unit. SAC ¶ 41. The defendants respond that the Court cannot credit the plaintiffs confidential witnesses because there is no showing that the witnesses “had any contact with the Individual Defendants or would have knowledge of what they knew or should have known during the Class Period.” In re Am. Express Co. Sec. Litig., No. 02cv5533,
This argument is without merit. “Information presented through Confidential Witnesses in a complaint is allowed as long as the witnesses ‘are described in the complaint with sufficient particularity to support the probability that a person in the position occupied by the source would possess[ ] the information alleged.’ ” Cornwell v. Credit Suisse Grp.,
Although several courts within this District have declined to credit the allegations of confidential witnesses where they do not specifically allege “contact” with the individual defendants, see, e.g., Glaser v. The9, Ltd.,
The defendants argue that even if this Court were to credit the confidential witnesses’ account of Orthofix’s discounted sales, discounted sales are a common practice in the industry, and the plaintiff has not alleged anything to show that Vaters and McCollum were aware of anything improper. This argument misses the full picture of wrongdoing presented by the plaintiff. While “offering discounts to stimulate sales is not automatically manipulation and may well stimulate demand,” In re Smith & Wesson Holding Corp. Sec. Litig.,
GAAP requires that income not be recognized until it is “realized or realizable” and “earned,” SAC ¶ 122 (citing Financial Accounting Standards Board (“FASB”) Concepts Statement No. 5, ¶ 83), and the SEC cautions that parties entering into “side agreements” to contracts affecting revenue recognition must have sufficient controls to ensure that they are accounted for in accordance with GAAP. SAC ¶ 126 (citing SEC Staff Accounting Bulletin No. 101: Revenue Recognition in Financial Statements, 17 C.F.R. Part 211, at 4 (Dec. 3, 1999)). Indeed, among its concessions regarding material misstatements and weaknesses in internal controls, Orthofix’s Restatement noted “extra-contractual terms or arrangements at the onset of sale,” and that such terms “were not evaluated, or not evaluated correctly” in the company’s files. SAC ¶¶ 110, 113. The plaintiff has alleged sufficient facts that raise a strong inference that Vaters and McCollum were aware of the revenue recognition problems that gave rise to the Restatement. See Varghese v. China Shenghuo Pharm. Holdings, Inc.,
3.
The plaintiff alleges that it has raised a strong inference of - scienter at least with regard to defendant Buxton based on Orthofix do Brasil’s allegedly improper revenue recognition practices. The plaintiff alleges that Brasil mounted an aggressive campaign to increase recorded revenue by making large volume sales to distributors with “loosened terms,” rendering collection of payment for those sales less likely. According to the plaintiff, Buxton’s awareness or reckless disregard of the accounting treatment of these sales
The defendants contend that the reference to “top management” is too vague to support an inference of scienter with respect to any individual defendant. See Plumbers & Pipefitters Local Union No. 719 Pension Trust Fund v. Conseco Inc., No. 09cv6966,
The plaintiffs allegations about the Germany meeting and the reports are not conclusive, but the plaintiff does not need a smoking gun to allege sufficient facts to support a strong inference of scienter. The plaintiff argues that the meeting in Germany supports Buxton’s knowledge of Brasil’s issues with sales to distributors, but the Second Amended Complaint only states, “Several issues were discussed, including practices concerning sales to distributors in France, Italy, and Brazil. In particular, the Italian representatives expressed concerns over their sales to distributors.” SAC ¶78 (emphasis added). The plaintiff argues that the reports sent to Buxton put her on notice of the loosened terms in the sales to distributors, but the Second Amended Complaint’s description of those reports is imprecise, stating that “[t]he reports contained data showing that there was a trend of many months of fast-increasing receivables, and thus that clients were effectively being financed by Orthofix do Brasil.” SAC ¶ 77. A separate confidential witness alleged that “the changes in sales to distributors, as well as the effects of the relaxed policies, were easy to see in the financial reports.... These reports showed there were discounts of as much as 70% given to distributors.” SAC ¶ 87.
At the motion to dismiss stage, the Court must read the Complaint “in toto and most favorably to [the] plaintiff.” In re Regeneron Pharm., Inc. Sec. Litig., No. 03cv3111,
The defendants argue that the plaintiff does not specifically allege that Buxton read the reports, but such an allegation is not required in this case. Buxton was the CFO of Orthofix’s Global Orthopedics Unit at the time, and the plaintiff has alleged that the reports were sent to her and that she discussed Brasil’s finances, the subject matter of those reports, with Brasil’s financial director.. SAC ¶¶ 29, 77, 87. Therefore, information regarding the loosened terms was “reasonably available” to Buxton, and she either knew about the information or showed a reckless disregard for it. See Novak,
Orthofix also argues that for the Imp-lamed sale, the plaintiff has not alleged sufficient facts to establish scienter for any individual defendant. It is not necessary to reach the issue of whether scienter is established for the Implamed sale because the plaintiff argues that McCollum is the only defendant implicated, and the Court has already concluded that the plaintiff has alleged sufficient facts to establish scienter as to McCollum.
4.
In order to determine whether a plaintiff has established scienter, courts must “engage in a comparative evaluation,” considering “not only inferences urged by the plaintiff ... but also competing inferences rationally drawn from the facts alleged.” Tellabs,
As shown by Orthofix’s Restatement, Orthofix undisputedly has made material misstatements and admitted to violations of GAAP. The GAAP regarding revenue recognition that were admittedly violated by the defendants are basic accounting principles. See S.E.C. v. Egan,
The Second Circuit Court of Appeals has held that the size of the purported fraud may also contribute to an inference of scienter. See In re Scholastic Corp. Sec. Litig.,
Moreover,- the timing and circumstances of individual defendants’ resignations may add some further weight to an overall inference of scienter. See In re OSG Sec. Litig.,
In light of the foregoing, a reasonable person would deem an inference of scien-ter for defendants Vaters, McCollum, and Buxton “at least as compelling as any opposing inference one could draw from the facts alleged.” Tellabs,
5.
Orthofix moves to dismiss the plaintiffs Section 10(b) claim as against it, arguing that the plaintiff has failed to plead scienter by the corporation. But because the Second Amended Complaint properly alleges scienter against three key officers of Orthofix, it necessarily alleges scienter against Orthofix itself. See Dynex Capital,
B.
The defendants argue that the plaintiff has failed to plead that the alleged misrepresentations and omissions caused the plaintiffs loss. To allege loss causation under Section 10(b) and Rule 10b-5, the plaintiff must provide'in the Second Amended Complaint “notice of what the relevant economic loss might be and what the causal connection might be between that loss and the [alleged] misrepresentation.” Dura Pharms., Inc. v. Broudo,
The plaintiff argues that the defendants’ misstatements or omissions first materialized on July 29, 2013, when Or-thofix announced that it would be delaying the release of its financial statement for the second quarter of 2013 in order to “review matters relating to revenue recognition for prior periods.” SAC ¶ 145. Following that disclosure, the price of Or-thofix stock dropped by 17%. The defendants argue that this announcement was not a corrective disclosure because it did not reveal any misconduct. The defendants rely heavily on Loos v. Immersion Corp.,
In any event, Loos is plainly not controlling within the Second Circuit, and this Court and other courts within this District have concluded that the disclosure of an investigation “into a particular business practice can be sufficient to allege loss causation with respect to alleged misstatements regarding that practice.” In re New Oriental,
IV.
The plaintiffs also allege that the individual defendants and Orthofix are liable under Section 20(a) of the Exchange Act because they controlled Orthofix, which in turn violated Section 10(b) and Rule 10b-5. Section 20(a) provides:
Every person who, directly, or indirectly, controls any person liable under any provision of this chapter or of any rule or regulation thereunder shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable ... unless the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action.
15 U.S.C. § 78t(a). “To establish a prima facie case of control person liability, a plaintiff must show (1) a primary violation by the controlled person, (2) control of the primary violator by the defendant, and (3) that the defendant was, in some meaningful sense, a culpable participant in the controlled person’s fraud.” ATSI,
CONCLUSION
The Court has considered all of the remaining arguments of the parties. To the extent not specifically addressed above, they are either moot or without merit. For the foregoing reasons, the defendants’ motion to dismiss is granted in part and denied in part. The claims against defendant Milinazzo are dismissed with prejudice and the motion to dismiss is otherwise denied. The Clerk is directed to close Docket Nos. 49, 53, 63, and 66.
SO ORDERED.
Notes
. Indeed, the only motive to inflate revenue alleged in the Complaint is the individual defendants’ desire to increase their annual bonuses. SAC ¶ 155. Such incentives are “possessed by virtually all corporate insiders,” and therefore “not sufficient to plead scienter through motive and opportunity.” Shemian v. Research In Motion Ltd..,