Wednesday, January 17, 2018

Valeant defendants remain in price-gouging hot seat

By Anne Sherry, J.D.

A private lawsuit filed by funds that invested in Valeant Pharmaceuticals overcame 20 motions to dismiss filed by Valeant and individual defendants. The District of New Jersey, in an unpublished opinion, held that the Exchange Act Section 18(a) claims adequately pleaded reliance on Valeant’s alleged false statements. The court also declined to limit the Section 10(b) and 18 claims to securities purchases made within certain date ranges (T. Rowe Price Growth Stock Fund, Inc. v. Valeant Pharmaceuticals International, Inc., January 12, 2018, Shipp, M.).

The complaints are direct actions under Sections 10(b), 18(a), and 20(a) of the Exchange Act, not to be confused with the class action pending before the same court and arising out of the same facts and circumstances. The plaintiffs allege that Valeant concealed practices that carried enormous risk, which in turn caused securities to trade at artificially inflated prices. Specifically, Valeant allegedly hid the use of a secret pharmacy network, “extraordinary price gouging,” fictitious and improper accounting, and other deceptive practices. As the misconduct came to light between September 2015 and August 2016, Valeant’s stock price fell from $262 to $25 per share.

Section 18 claims. Section 18 creates a private remedy for damages when a purchaser or seller relied on a false or misleading statement contained in any SEC-filed document. Scienter is not an element of a Section 18 claim. The defendants sought dismissal of these claims on the basis that the plaintiffs did not tie every purchase to a relied-upon statement; instead, they listed year-long periods and estimated the number of purchases made. The court, however, agreed with the plaintiffs that they were not required to link particular misrepresentations with particular trades. The complaint identified the alleged misstatements in SEC-filed documents and pleaded “eyeball” reliance on those statements in purchasing Valeant securities.

The court also denied the defendants’ request to limit certain Section 18 claims to purchases occurring after the date of the earliest SEC filing at issue in those claims. The court was able to read the complaint reasonably as alleging that the plaintiffs purchased the securities after the filing of the 2014 10-K.

Section 10(b) and Rule 10b-5 claims. The defendants also moved to time-limit the 10(b) and 10b-5 claims. They argued that the “truth was revealed” by October 30, 2015, so the plaintiffs cannot rely on the fraud-on-the-market theory for purchases after this date. The plaintiffs countered that this argument had already been rejected in the class action and that based on the allegations, the defendants could not establish this defense as a matter of law. The complaints alleged that the truth was only partially revealed on the October date and identified subsequent corrective disclosures. The court agreed that the complaints did not conclusively establish that the full truth was revealed to the market in October.

Individuals’ motions to dismiss. Finally, Valeant’s former controller and an executive vice president sought in vain to be taken out of the case entirely. The controller argued that the complaints did not allege that she made any false statements or acted with scienter. Although the plaintiffs identified two statements during an investor call, the controller defendant argued that these were accurate recitations of Valeant’s historical disclosure analysis concerning the mail-order pharmacy Philidor. But the court reasoned that literally true statements can, in context, mislead, and whether the controller “made” the statements within the meaning of Janus was a fact-intensive inquiry to be made at a later stage of litigation.

The court also found that the complaints created a strong inference of scienter with respect to all of the alleged statements by the controller, including allegations that she approved improper accounting relating to Philidor, publicly defended that accounting in response to a report questioning whether Valeant was inflating revenue, and was ultimately placed on administrative leave in connection with Valeant’s accounting restatement.

The executive vice president, who led Valeant’s dermatology department, argued that being an executive was not enough to establish scienter. The complaints went further, though, piecing that fact together with other allegations, such as her direct responsibility for several drugs sold in large quantities through Philidor, her involvement in improper copay practices, and her sudden departure from the company. These allegations together created a strong inference of scienter.

The case is No. 16-5034.