Boston University Dura Pharmaceuticals Inc v Broudo Case Analysis

Case3:13-cv-00301-CRB Document23 Filed11/26/13 Page1 of 20
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IN THE UNITED STATES DISTRICT COURT
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FOR THE NORTHERN DISTRICT OF CALIFORNIA
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Master File No. C 12-05980 CRB
I IN RE HP SECURITIES LITIGATION
I This Document Relates to All Actions
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CLASS ACTION
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ORDER RE MOTIONS TO DISMISS
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Defendant Hewlett-Packard (“HP”) and seven individual defendants who are current
and former HP directors and executives, (collectively “Defendants”) move the Court,
collectively and individually, to dismiss this securities class action. The suit stems from
HP’s acquisition of British software company Autonomy Corporation plc (“Autonomy”) and
the subsequent write-down of approximately $9 billion of HP’s assets. The motions to
dismiss argue, in brief, that: (1) the complaint fails to allege facts supporting a strong
inference of fraudulent intent; (2) the complaint fails to allege facts showing that Defendants’
statements were false when made; and (3) the claim under § 20(a) of the Securities Exchange
Act of 1934 (“Exchange Act”) fails to plead a primary violation of § 10(b) by HP and the
complaint fails to establish that the individual defendants exercised actual power or control
over HP, the other defendants, or their challenged statements during the class period. Lead
Plaintiff, PGGM Vermogensbeheer B.V. (“Plaintiff”), opposes the motions. In addition,
there are nine requests for the Court to take judicial notice of myriad documents relating to
this litigation. The Court GRANTS the unopposed requests to take judicial notice. The
Court GRANTS the motion to dismiss as to Defendants Apotheker, Lane, Lynch, Murrin,
and Robison because Plaintiff has failed to plead facts establishing a strong inference of
scienter or a primary violation of § 10(b). The Court DENIES the motions to dismiss as to
HP and Whitman only with regard to statements and omissions made beginning on May 23,
2012.
Case3:13-cv-00301-CRB Document23 Filed11/26/13 Page2 of 20
BACKGROUND
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In August 2011 HP acquired Autonomy for over $11 billion. Compl. (dkt. 100) ¶ 44.
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On November 20, 2012, HP announced that it had been the victim of a fraud in the
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Autonomy deal and wrote down approximately 85 percent of the purchase price. Id. ¶ 84.
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The Autonomy deal and the resulting write-down of $8.8 billion caused a significant decline
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in the value of HP’s stock price. Id. ¶ 90. Litigation ensued. On March 4, 2013, this Court
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consolidated three categories of cases: “derivative shareholder suits, nonderivative securities
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class actions, and ERISA suits” which all “share[d] common facts.” Order Consolidating
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Cases, Appoint Lead Plaintiffs, and Appointing Lead Counsel and Interim Lead Counsel
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(dkt. 90) at 1-2. The class period in this case runs from August 19, 2011 through November
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20, 2012, inclusive. Compl. ¶ 3. The details of the fraud, acquisition, and write-down are
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complicated and lengthy but necessary background here.
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I.
HP is a Delaware corporation headquartered in Palo Alto, California. Comp. ¶ 108.
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The Players
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HP is a computer, technology, and software company servicing individual consumers,
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businesses of all sizes, and the government. Id. HP’s common stock trades on the NASDAQ
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exchange with the ticker HPQ. Id.
Autonomy was a software company based in the United Kingdom. Id. ¶ 15.
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acquisition, Autonomy was traded publically on the LSE exchange. Id.
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Lead Plaintiff, PGGM, is a Dutch pension administrator in the healthcare and social
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Autonomy was founded by Defendant Michael R. Lynch in 1996. Id. Prior to HP’s
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work sector managing over $1.5 billion of pension assets for more than 2.5 million Dutch
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participants. Id. ¶ 107. Plaintiff bought HP stock during the class period and lost money as a
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result. Id.
Plaintiff also names seven individual defendants who were officers or members of the
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Board of Directors (“Board”). These individual defendants allegedly “participated and had
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exclusive authority and control over the content of HP’s false and misleading statements,
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financial results,” and more, during the class period. Id. ¶ 120. Each of the individual
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Case3:13-cv-00301-CRB Document23 Filed11/26/13 Page3 of 20
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Michael R. Lynch was founder and CEO of Autonomy before the acquisition. Id.
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¶ 15. After the acquisition Lynch became HP’s Executive Vice President of Information
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Management, a position he held for less than six months. Id. ¶ 109. As Executive Vice
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President of Information Management, Lynch was one of HP’s 15 top executive officers. Id.
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Lynch allegedly earned $800 million in cash by selling his company to HP. Id. ¶ 45.
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Leo Apotheker was HP’s CEO and President from November 2010 until he was
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ousted on September 22, 2011. Id. ¶ 112. Apotheker took the lead on arranging the
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acquisition of Autonomy, and personally negotiating the deal with Lynch. Id. ¶ 31.
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Apotheker was ousted before the Autonomy deal was finalized. Apotheker signed HP’s
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quarterly reports and participated in investor conference calls during the class period before
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his ouster. Id. ¶ 112.
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136, 147, 130, 142, 139.
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I defendants filed a separate motion to dismiss making similar arguments. See dkts. 127, 131,
Margaret C. Whitman is, and has been since September 22, 2011, HP’s President,
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CEO and Director. Id. ¶ 110. Whitman took over as CEO immediately after Apotheker left
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HP and has been a Board member since January 2011. Id. Whitman signed various of HP’s
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regulatory reports, and participated in investor conference calls and interviews during the
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class period. Id. ¶ 111.
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Catherine A. Lesjak is, and was throughout the Class Period, HP’s CFO and Executive
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Vice President. Id. ¶ 113. Lesjak has been at HP for more than 24 years. Id. Lesjak was
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one of the only Board members to speak out against the Autonomy acquisition at the July
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2011 Board meeting. Id. ¶ 6. Lesjak signed various of HP’s regulatory reports and
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participated in investor conference calls during the class period. Id. ¶ 114.
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Raymond J. Lane was HP’s Executive Chairman from September 2011 until he
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stepped down in April 2013. Id. ¶ 115. Lane served on HP’s Board in other capacities
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beginning in November 2010. Id. Lane signed various of HP’s regulatory reports and
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participated in a conference call announcing Apotheker’s termination and an annual investor
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meeting during the class period. Id.
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James T. Murrin was Senior Vice President Controller and Principal Accounting
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Officer at HP from March 2007 until May 2012. Id. ¶ 116. Murrin worked at HP for 24
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years and was listed as one of the company’s 15 top executives in the 2011 Annual Report.
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Id. Murrin signed various of HP’s regulatory reports and participated in an investor
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conference during the class period. Id. Murrin is a named defendant solely as a control
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person under §20(a) of the Exchange Act. Id.
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Shane V. Robison was HP’s Executive Vice President and Chief Strategy and
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Technology Officer from May 2002 to November 2011. Id. ¶ 117. Robison was, allegedly,
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one of the HP executives most actively supporting the Autonomy acquisition. Id. ¶ 33.
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Robison participated in an investor conference during the class period. Id. ¶ 117.
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II.
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The Moves
In September 2010, HP announced that it had hired Apotheker as the new CEO. Id.
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¶ 26. Apotheker was hired with the unanimous approval of HP’s Board, despite the fact that
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the majority of Board members had not yet met him in person. Id. An HP director explained
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the “highly unusual” procedure saying “we were just too exhausted from all the infighting.”
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Id. Four months after taking over as CEO, Apotheker announced that he intended to quickly
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“transform” HP from a hardware producer into a software and services provider. Id. ¶ 27.
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In April 2011 Apotheker and Lynch met to discuss a possible acquisition of
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Autonomy. Id. ¶ 31. In May 2011, HP’s Board approved Apotheker’s proposal to look into
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the acquisition and hired Barclays Bank PLC and Perella Weinberg Partners to evaluate the
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possible deal. Id. According to the complaint, Apotheker aggressively pushed the
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acquisition on the Board over Lesjak’s objections. Id. ¶ 32. In July 2011, Apotheker and
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Lynch agreed to a deal-in-principal for HP’s acquisition of Autonomy. Id. ¶ 33. Due
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diligence on the deal occurred between July 28 and August 18, 2011. Id. The due diligence
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conducted by KPMG LLC was allegedly limited to Autonomy’s publicly-reported financial
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statements (which had been previously audited by Deloitte Touche Tohamtsu Limited) and
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approximately 25 sales contracts. Id. ¶¶ 34, 36. According to the complaint, this due
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diligence failed to thoroughly investigate various “whistleblower” allegations as to
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Autonomy’s accounting practices that had surfaced in the 18 months prior to the acquisition.
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Id. ¶ 39. On August 18, 2011, HP and Autonomy released a joint press release announcing
the planned acquisition. Id. ¶ 44.
Plaintiff alleges that prior to HP’s announcement of the acquisition, the individual
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defendants had access to information concerning Autonomy’s accounting improprieties and
overvaluation. Id. ¶ 42. Specifically, Plaintiff alleges that the Insider Defendants knew or
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(i) corporate governance firms, auditors, media and analysts
had questioned Autonomy’s market value due to concerns
about its accounting practices, and whether its reported
growth rates and margins had been artificially inflated; (ii)
Autonomy only was providing HP limited information in the
form of approximately 25 or so sales contracts during HP’s
three-week due diligence; (iii) the enormous 11 times revenue
premium that HP was paying for Autonomy despite its
aggressive accounting practices; (iv) Defendant Lesjak
vehemently opposed the acquisition to the full HP Board in
July 2011 stating, in part, “I’m putting a line down. This is
not in the best interests of the company;” and (v) red flags
were raised during HP’s Autonomy due diligence, including
Whistleblower No. 1’s allegations that Autonomy was
manipulating its revenue recognition practices.
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Id.
The day after the acquisition announcement, on August 19, 2011 HP’s stock price
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dropped by approximately 20 percent. Id. ¶ 45. This was the first day of the class period. In
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the weeks and months that followed, other whistleblower allegations emerged suggesting that
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HP had overpaid for Autonomy. Id. ¶¶ 47-57. Apotheker responded to the market’s negative
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reaction at an investor conference by making assurances that HP had been “very
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conservative” and “rigorous” in evaluating the Autonomy deal. Id. ¶ 58.
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On September 22, 2011, a week before the Autonomy deal closed, Whitman replaced
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Apotheker as CEO. Id. ¶ 68. Plaintiff alleges that Whitman and other HP executives sought
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to withdraw the offer to purchase Autonomy. Id. ¶ 69. Plaintiff alleges that HP’s executives
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were told that the United Kingdom’s “takeover rules made [withdrawing the offer]
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impossible.” Id. ¶ 72. Meanwhile, HP executives continued to publically endorse the deal.
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Id. ¶ 76. The Autonomy acquisition closed in October 2011. Id. ¶ 74.
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Case3:13-cv-00301-CRB Document23 Filed11/26/13 Page6 of 20
III. The End Game
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After the transaction closed, HP began studying Autonomy’s software revenue
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recognition practices to optimize for US Generally Accepted Accounting Practices
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(“GAAP”). Id. ¶ 75. It turned out that Autonomy’s earnings and growth numbers were not
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what they had seemed: integrating Autonomy into HP did not result in the revenue or growth
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anticipated. Id. ¶¶ 77-79. In an earnings conference call with investors in February 2012,
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Lesjak attributed weak revenue numbers to “acquisition-related integration costs and
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accounting adjustments, as well as [a] lower mix of license revenue in the quarter.” Id. ¶ 79.
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In April 2012, Lynch was terminated from HP. Id.
In May 2012, “Whistleblower No. 4,” a senior member of Autonomy’s leadership
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team came forward to raise concerns about Autonomy’s accounting improprieties with HP’s
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General Counsel. Id. ¶ 80. Whitman learned of the allegations and immediately authorized
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hiring PricewaterhouseCoopers LLP (“PwC”) to do an investigation. Id. While the
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investigation was still ongoing, HP reported that its software segment results were worsening
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and that it might record a goodwill impairment. Id. ¶ 82. The news was followed by a drop
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of over 11 percent in the value of HP’s stock in a single day. Id.
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On November 20, 2012, HP announced the results of the PwC investigation. Id. ¶ 87.
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HP conceded that hundreds of million of dollars of Autonomy’s pre-acquisition revenue had
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been improperly recorded, that key Autonomy documents were missing, that HP had
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substantially overpaid for Autonomy, and that, as a result, HP would write down 85 percent
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of Autonomy’s purchase price. Id. ¶¶ 80-85. HP’s stock dropped another 12 percent on this
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news. Id. ¶ 90. HP’s announcement pointed the finger at Apotheker and Lynch. Id. ¶¶ 85-
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86. This was the final day of the class period.
LEGAL STANDARD
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Pursuant to Federal Rule of Civil Procedure 12(b)(6), a complaint may be dismissed
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for failure to state a claim upon which relief may be granted. Dismissal may be based on
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either “the lack of a cognizable legal theory or the absence of sufficient facts alleged under a
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cognizable legal theory.” Balistreri v. Pacifica Police Dep’t, 901 F.2d 696, 699 (9th Cir.
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1990). For purposes of evaluating a motion to dismiss, a Court “must presume all factual
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allegations of the complaint to be true and draw all reasonable inferences in favor of the
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nonmoving party.” Usher v. City of Los Angeles, 828 F.2d 556, 561 (9th Cir. 1987). A
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complaint must plead “enough facts to state a claim to relief that is plausible on its face.”
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Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009) (citing Bell Atlantic Corp. v. Twombly, 550
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U.S. 544, 570 (2007)). A claim is plausible “when the plaintiff pleads factual content that
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allows the court to draw the reasonable inference that the defendant is liable for the
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misconduct alleged.” Id.
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Claims for fraud must meet the pleading standard of Federal Rule of Civil Procedure
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9(b), which requires a party “alleging fraud or mistake [to] state with particularity the
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circumstances constituting fraud or mistake.” Fed. R. Civ. P. 9(b). Rule 9(b) “requires an
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account of the time, place, and specific content of the false representations as well as the
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identities of the parties to the misrepresentations.” Swartz v. KPMG LLP, 476 F.3d 756, 764
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(9th Cir. 2007) (internal quotation marks omitted). Security fraud claims must also meet the
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heightened pleading requirements of the Private Securities Litigation Reform Act (PSLRA):
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“[T]he complaint shall specify each statement alleged to have been misleading, the reason or
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reasons why the statement is misleading, and, if an allegation regarding the statement or
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omission is made on information and belief, the complaint shall state with particularity all
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facts on which that belief is formed.” 15 U.S.C.A. § 78u-4(b)(1).
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A section 10(b) claim under the PSLRA has six elements: a statement, falsity,
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scienter, reliance, loss causation, and damages. Dura Pharm., Inc. v. Broudo, 544 U.S. 336,
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341-42. The PSLRA requires plaintiffs to state with particularity facts giving rise to a strong
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inference of defendants’ scienter–“that defendants acted with the intent to deceive or with
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deliberate recklessness as to the possibility of misleading investors.” See 15 U.S.C. § 78u-
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4(b)(2); Berson v. Applied Signal Tech., Inc., 527 F.3d 982, 987 (9th Cir. 2008) (internal
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quotation and citations omitted). “The inference of scienter must be more than merely
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‘reasonable’ or ‘permissible’” – “it must be cogent and at least as compelling as any
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opposing inference one could draw from the facts alleged.” See Tellabs v. Makor Issues &
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Rights, Ltd., 551 U.S. 308, 324 (2007). Therefore, a court “must consider plausible
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nonculpable explanations for the defendant’s conduct.” Id.
DISCUSSION
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Section 10(b)
A section 10(b) claim under the PSLRA has six elements: a statement, falsity,
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scienter, reliance, loss causation, and damages. Dura Pharm., Inc., 544 U.S. at 341-42.
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Defendants argue Plaintiff’s 10(b) claim should be dismissed for two reasons: (1) failure to
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plead facts giving rise to a “strong inference” of scienter; and (2) failure to plead facts
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sufficient to establish that Defendants’ public statements were materially false or misleading
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when made. Here, the Court’s ruling hinges primarily on the issue of scienter.
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The Complaint Fails to Plead Facts Supporting a Strong Inference of
Scienter in Statements Made Before May 23, 2012
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The Court first considers whether the complaint pleads facts sufficient to support a
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strong inference that Defendants acted with scienter in making their statements prior to May
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23, 2012. “In a § 10(b) action, scienter refers to a mental state embracing intent to deceive,
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manipulate, or defraud.” Merck & Co., Inc. v. Reynolds, 559 U.S. 633, 648 (2010) (internal
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quotation and citation omitted). “To adequately demonstrate that the defendant acted with
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the required state of mind, a complaint must allege that the defendants made false or
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misleading statements either intentionally or with deliberate recklessness.” Zucco Partners,
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LLC v. Digimarc Corp., 552 F.3d 981, 991 (9th Cir. 2009) (internal quotations and citations
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omitted). To establish deliberate recklessness “the plaintiff must plead a highly unreasonable
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omission, involving not merely simple, or even inexcusable negligence, but an extreme
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departure from the standards of ordinary care, and which presents a danger of misleading
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buyers or sellers that is either known to the defendant or is so obvious that the actor must
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have been aware of it.” Id. (internal quotation and citation omitted). Here, Plaintiff has
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failed to plead facts that meet the high standard for establishing a strong inference of scienter.
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The complaint details numerous statements attributed to Defendants before May 23,
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2012. See generally Compl. ¶¶ 126-200. These statements amount to little more than
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restatements of the information provided by Autonomy as to Autonomy’s market
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dominance, 1 its financial results, 2 and its growth rate. 3 Id. ¶¶ 163-174. Other statements
2 pertain to Defendants’ motivations for acquiring Autonomy, 4 and the due diligence process. 5
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Id. ¶¶ 172-178. The complaint fails to allege any facts showing that any defendant
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disbelieved either the information they regurgitated from Autonomy, or the optimistic
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opinions they expressed about HP’s due diligence and growth outlook. 6
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In an attempt to establish scienter, Plaintiff makes four main arguments: (1)
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Defendants had a motive; (2) Defendants were “hands-on” managers; (3) HP’s Autonomyrelated purge is evidence of scienter; and (4) the size of the write-down supports scienter.
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See Opp’n to Mot. to Dismiss (dkt. 168) at 51-56. These arguments largely fail.
First, the complaint fails to establish any coherent motive as to why Defendants would
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knowingly purchase a company for several times its actual value or that they knew
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Autonomy’s accounting was problematic. Second, that Whitman and Apotheker were
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allegedly “monitoring every detail about Autonomy’s acquisition and/or integration into
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HP,” Opp’n to Mot. to Dismiss at 52, is not inconsistent with the inference that they simply
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failed to act prudently, or even that they acted recklessly. 7 Plaintiff’s theory requires an
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inference of conspiracy which is less plausible. The Ninth Circuit has held that “mere
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See, e.g., Compl. ¶ 168 (Autonomy is “basically a de facto industry standard.”) (quoting
Apotheker’s statement on August 18, 2011 conference call).
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See, e.g., Compl. ¶ 163 (“Autonomy has a consistent track record of double-digit revenue
growth, with 87 percent gross margins and 43 percent operating margins in calendar year 2010”)
(quoting August 18, 2011 Press Release).
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See, e.g., Compl. ¶ 172 (“So the IDOL growth year on year is about 17%.”) (quoting Robison’s
statement at the September 13, 2011 conference).
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See, e.g., Compl. ¶ 164 (“We’re buying a very strong business and we believe that we can
extract a lot more out of this business by combining it with HP”) (quoting Apotheker’s statement on
August 18, 2011 conference call).
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See, e.g., Compl. ¶ 172 (“We have a pretty rigorous process inside HP that we follow for all
of our acquisitions, which is a DCF-based model, and we try to take a very conservative view at this.”)
(quoting Apotheker’s statement at the September 13, 2011 conference).
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See Glen Holly Entm’t, Inc. v. Tektronix Inc., 352 F.3d 367, 379 (9th Cir. 2003) (“The
statements were generalized, vague and unspecific assertions, constituting mere ‘puffery’”).
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Nor does it shed any light on specifically when they became aware of HP’s over-payment for
Autonomy.
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recklessness or a motive to commit fraud and opportunity to do so . . . are not sufficient to
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establish a strong inference of deliberate recklessness.” In re Silicon Graphics Inc. Sec.
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Litig., 183 F.3d 970, 974 (9th Cir. 1999) abrogated on other grounds by South Ferry LP, No.
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2 v. Killinger, 542 F.3d 776, 784 (9th Cir. 2008).
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Nor do the “red flags” Plaintiff emphasizes, Opp’n to Mot. to Dismiss at 12, 20-22,
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suffice to establish scienter. Plaintiff relies heavily on New Mexico State Inv. Council v.
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Ernst & Young LLP for the proposition that “the more likely an auditor would have
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discovered the truth if a reasonable audit had been conducted, the stronger the scienter
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inference.” 641 F.3d 1089, 1098 (9th Cir. 2011). Opp’n to Mot. to Dismisss at 26.
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However, Ernst & Young concerned auditor liability for the financial statements of a
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company it audited–a significantly different situation than the one here. In Ernst & Young,
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the Ninth Circuit’s reversal of the district court’s order granting a motion to dismiss relied on
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the fact that Ernst & Young had ignored red flags in the context of allegations of failure to
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comply with Generally Accepted Auditing Standards (GAAS), and allegations of “in your
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face facts that cry out, ‘how could [defendants] not have known.’” 641 F.3d at 1102 ( quoting
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In re Oxford Health Plans Inc. Sec. Litig., 51 F. Supp. 2d 290, 294 (S.D.N.Y. 1999)). Not so
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here. The complaint fails to establish with sufficient clarity when exactly any particular
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defendant actually became aware of these red flags. Thus, it is a reasonable inference that no
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defendant was aware of the red flags, or at least that they were not taken seriously at the time
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the statements were made. See Tellabs, 551 U.S. at 324 (“The inference of scienter . . . must
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be cogent and at least as compelling as any opposing inference one could draw from the facts
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alleged.”). On balance, Plaintiff’s theory is less compelling.
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Third, that Apotheker and other HP executives left before the Autonomy deal even
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closed, or shortly thereafter, fails to establish the requisite strong inference of scienter as to
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pre-May 23, 2012 statements. Even assuming that the executive terminations occurred solely
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as a result of the Autonomy acquisition, the 20 percent decline in the value of HP’s stock the
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day after the Autonomy acquisition was announced, Compl. ¶ 45, provides a cogent
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explanation for reshuffling the company’s leadership even absent any knowledge of HP’s
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overpayment. Tellabs, 551 U.S. at 324. So, too, does the negative market reaction provide a
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compelling explanation for Whitman and Lane’s alleged efforts to rescind the offer while
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simultaneously making positive statements about Autonomy. See Opp’n to Mot. to Dismiss
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at 32-33. Rather, it is implausible that had Defendants known about the fraud being
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perpetrated on them before the deal closed that they would have gone ahead with the deal.
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Plaintiff’s arguments in the papers and at hearing about the difficulties of withdrawing an
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offer under the laws of the United Kingdom fail to persuade the Court that, had Defendants
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known of the fraud being perpetrated before the deal closed, Defendants would have gone
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ahead with the acquisition. Finally, Plaintiff rightly points out that the size of the write-down
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was massive–85 percent of the value HP attributed to Autonomy. Opp’n to Mot. to Dismiss
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at 53. However, Plaintiff fails to plead facts establishing when exactly any particular
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defendant knew the full extent of the overpayment for Autonomy prior to the conclusion of
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the PwC investigation.
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Additionally, many of Defendants’ qualitative statements made during the class period
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amount to mere puffery. See, e.g., Compl. ¶ 171 (Autonomy “gives us the opportunity to
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really provide a return very quickly for our shareholders”) (quoting Apotheker). In Philco,
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this Court discussed generally the non-actionable nature of vague expressions of enthusiasm.
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Philco Inv., Ltd. v. Martin, No. 10–2785, 2011 WL 500694 (N.D. Cal. Feb. 9, 2011).
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“[T]erms like ‘strong’ and ‘spectacular’ are not actionable under the securities laws.” Id. at
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*6. See also Glen Holly Entm’t Inc., 352 F.3d at 379 (a reasonable consumer cannot rely on
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“generalized, vague and unspecific assertions, constituting mere ‘puffery’”). This sort of
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optimistic language, even in the context of answering specific questions, is not actionable
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absent a strong inference of scienter.
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Even assuming that all of Defendants’ pre-May 23, 2012 statements were materially
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I false or misleading, Plaintiff has failed to plead facts with sufficient specificity so as to
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establish a strong inference of scienter. Therefore the Court GRANTS the motions to
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dismiss as to all pre-May 23, 2012 statements by all Defendants.
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B.
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Statements Made Beginning on May 23, 2012
The Court next considers whether the complaint pleads facts sufficient to support a
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strong inference that Defendants acted with scienter in making their statements from May 23,
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2012 until the end of the class period. Here the issue is a closer one. Plaintiff fails to meet
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the standards of the PSLRA as to post-May 23, 2012 statements by most Defendants, because
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the complaint falls short of establishing “that the defendants made false or misleading
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statements either intentionally or with deliberate recklessness.” Zucco Partners, 552 F.3d at
991 (internal quotations and citations omitted). However, Plaintiff’s claims survive as to
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statements made by Whitman and HP beginning on May 23, 2012.
The complaint details numerous statements attributed to Defendants after May 23,
2012. See generally Compl. ¶¶ 154-58, 190-200. These statements fall into two broad
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lackluster performance 10 or discussing the integration of Autonomy into HP. 11
Plaintiff makes a variety of piecemeal arguments which ultimately fail. Plaintiff’s
16
attempt to burden shift–“HP does not plausibly explain how it could possibly have missed
17
Autonomy’s problems by [year-end 2011]”–fails to compensate for the absence of specific
18
19
20
21
22
23
24
8
See, e.g., Compl. ¶ 154 (“HP[‘s third quarter 2012 financial statements] reported goodwill of
approximately $6.8 billion (including $224 million of goodwill that HP added during the nine months
ended July 31, 2012, as a result of a change in the allocation of purchase price to the fair value of
purchased intangibles for the Autonomy Acquisition) and purchased intangibles of approximately $4.2
billion.”).
9
See, e.g., Compl. ¶ 155 (“In the opinion of management, the accompanying Consolidated
Condensed Financial Statements of Hewlett-Packard Company and its consolidated subsidiaries (“HP”)
HP’s
contain all adjustments, including normal recurring adjustments, necessary to present fairly
financial position”) (emphasis in original).
10
25
26
27
See, e.g., Compl. ¶ 191 (“second-quarter operating profit for software was $172 million, or
17.7% of revenue, unfavorably impacted by acquisition-related integration costs and accounting
adjustments, as well as a lower mix of license revenue in the quarter .”) (emphasis in original) (quoting
Lesjak’s statements from a May 23, 2012 conference call).
11
See, e.g., Compl. ¶ 194 (“My view was that we needed to make a change to someone who can
take Autonomy to the next level. I have every confidence that Autonomy will be a very big and very
28 profitable business .”) (emphasis in original) (quoting Whitman’s statements from a June 5, 2012
interview).
12
Case3:13-cv-00301-CRB Document23 Filed11/26/13 Page13 of 20
pleadings establishing a strong inference of scienter. 12 Opp’n to Mot. to Dismiss at 13.
2
Similarly, the exodus of “roughly 250 Autonomy employees” in the months after the
3
acquisition, id. at 15 citing Compl. ¶ 81, could be a sign of major problems but also could be
4
a planned part of the integration of Autonomy into HP. Both explanations are plausible. The
5
departures, then, fail to establish a strong inference that Defendants intended to deceive when
6
they announced that the integration efforts were “going well.” Id. citing Compl. ¶ 185. See
7
Tellabs, 551 U.S. at 324 (“The inference of scienter . . . must be cogent and at least as
compelling as any opposing inference one could draw from the facts alleged.”). Plaintiff
9
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10
specific allegations of potential misconduct at Autonomy.” Opp’n to Mot. to Dismiss at 25.
11
This pleading is insufficient, even assuming the falsity of all statements, to establish that a
12
particular defendant knew that the specific allegations held water prior to making a statement
13
in question.
14
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notes that “the Complaint also alleges that HP’s due diligence team was made aware of
Eventually, on November 20, 2012, HP did announce a substantial write-down of the
15
Autonomy related assets. Compl. ¶ 217. The question, then, is when did Defendants learn
16
the true value of Autonomy? The complaint does not answer this question as Plaintiff fails to
17
make particularized allegations that Defendants became aware of the full extent of HP’s
18
overpayment for Autonomy before the PwC investigation concluded. The parties also
19
addressed this question at length during the hearing but no clear answer emerged. Notably
20
absent from the complaint are references to any emails, internal reports, documents, or
21
specific meetings establishing when each defendant became aware of the extent to which HP
22
had overpaid for Autonomy.
23
To the extent the complaint establishes with any certainty that Defendants knew
24
during the class period HP had overpaid for Autonomy, it is only beginning with
25
Whistleblower No. 4. Whistleblower No. 4 was a senior member of Autonomy’s leadership
26
27
28
12
For example, the fact that HP began making changes to Autonomy’s accounting practices in
order to optimize for GAAP is insufficient to establish that any defendant, even those charged with
signing off on the accounting changes, comprehended the fact or the extent of Autonomy’s fraud. See,
e.g., Opp’n to Mot. to Dismiss at 13.
13
Case3:13-cv-00301-CRB Document23 Filed11/26/13 Page14 of 20
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team who raised concerns about Autonomy’s accounting improprieties with HP’s General
2
Counsel. Compl. ¶ 80. Whitman learned of the allegations and immediately authorized
3
hiring PwC to do an investigation. Id. The complaint establishes that after Whistleblower
4
No. 4 came forward, at least some Defendants may have thought that HP had substantially
5
overpaid for Autonomy. The complaint is vague as to when in May Defendants learned of
6
the allegations and initiated the PwC investigation. The complaint quotes Whitman as saying
7
that Whistleblower No. 4 came forward after Lynch was fired on May 23. Compl. ¶ 84.
8
This suggests that the earliest possible date Whitman could have learned of Whistleblower
9
No. 4’s allegations would have been May 23. Construing the pleadings in the light most
10
favorable to Plaintiff, the Court assumes that some Defendants knew of the allegations on
11
May 23. Thus, the Court addresses in turn each of the allegedly false statements made
12
beginning on May 23, 2012.
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1.
Statements on May 23 and June 5, 2012
HP published a press release and held a conference call on May 23, 2012 to
15
accompany its filing of SEC Form 8-K announcing financial results for the second quarter of
16
2012. Compl. ¶ 190. These materials did not make any reference to Whistleblower No. 4’s
17
allegations or the PwC investigation, id., which Defendants would have only learned about
18
that day, at the earliest.
19
During the May 23 call, Lesjak stated that HP’s “second-quarter operating profit for
20
software was $172 million, or 17.7% of revenue, unfavorably impacted by acquisition-
21
related integration costs and accounting adjustments, as well as a lower mix of license
22
revenue in the quarter .” Id. ¶ 191. There is nothing actionable in this statement: Lesjak
23
made a factual representation about profit and problems impacting the software segment of
24
HP’s business. While Lesjak omitted any direct reference to the major problems with
25
Autonomy’s valuation, the complaint does not allege that Lesjak would have known about
26
Whistleblower No. 4’s allegations by this point, nor was her comment in a context that would
27
have a required a statement about the overall valuation of Autonomy assets. Lesjak was not
28
asked about, nor did she choose to comment on Autonomy’s performance.
14
Case3:13-cv-00301-CRB Document23 Filed11/26/13 Page15 of 20
On the same call, Whitman answered a question about Autonomy’s weakness.
2 I Whitman said:
[w]hen Autonomy turned in disappointing results, [HP]
actually did a fairly deep dive to understand what had
happened here. And in my view, this is not the product.
Autonomy is a terrific product. It’s not the market. There is an
enormous demand for Autonomy. It’s not the competition. I
was wondering, is there a competitor that we didn’t see, and
the answer to that is no. This is classic entrepreneurial
[c]ompany scaling challenges .
3
4
5
6
7
Id. A couple weeks later, during a press interview on June 5, 2012, Whitman similarly
stated:
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In my view, this is the classic case of scaling a business
[Autonomy] from startup to grownup.[43] Going through that
barrier of a billion dollars in sales is not easy because you
can’t run the organization at $1.5 billion the same way you
did at $500 million. You just can’t . And for many
entrepreneurs, processes and discipline are dirty words , and
you have to have those things, especially within the context of
HP. I know exactly how this world [works] . My view was
that we needed to make a change to someone who can take
Autonomy to the next level. I have every confidence that
Autonomy will be a very big and very profitable business .
It’s taking advantage of a big shift in the industry toward big
data and unstructured data.But we needed different
leadership to age Autonomy, and by that I mean age it kind of
like wine .
17
Id. ¶ 194. In making these two sets of statements, Whitman chose to speak about
0
18
19
Autonomy’s weak performance: she could have declined to offer a specific explanation in
answer to the questions. 13 Once Whitman decided to speak on the topic, she omitted material
20
information which the complaint alleges she possessed at the time, namely that she was
21
considering accounting fraud at Autonomy as the explanation for its weak performance.
22
Whitman knew that if Whistleblower No. 4’s allegations were true, the fraud would explain
23
Autonomy’s under performance rather than “classic entrepreneurial [c]ompany scaling
24
challenges.” Whitman was not required to speak about Autonomy’s weakness at this stage.
25
Nor was Whitman required to reveal every detail of what she knew about Whistleblower No.
26
27
13
28
Nor is this a Hobson’s choice. Whitman could have honestly answered the question by saying
she did not know the explanation for Autonomy’s under performance but was actively investigating its
cause.
15
Case3:13-cv-00301-CRB Document23 Filed11/26/13 Page16 of 20
4’s allegations, nor that she had authorized a PwC investigation. However, Whitman’s
2
decision to put forward entrepreneurial challenges as an explanation while choosing not even
3
to mention the alternative possibility of accounting fraud, which she knew to be plausible,
4
constitutes a material omission. The PSLRA treats pleadings as to statements and omissions
5
similarly. See 15 U.S.C.A. § 78u-4(b)(1) (“the complaint shall specify each statement
6
alleged to have been misleading, the reason or reasons why the statement is misleading, and,
7
if an allegation regarding the statement or omission is made on information and belief, the
complaint shall state with particularity all facts on which that belief is formed.”). Context
9
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matters. Whitman’s May 23 comment was on an investor conference call to accompany
10
HP’s filing of SEC Form 8-K announcing financial results for the second quarter of 2012.
11
Whitman’s qualitative comments on that call provided crucial context for investors and
12
analysts seeking to understand the SEC filing. Whitman’s June 5 statement was in response
13
to question about Autonomy and the news that Lynch had left HP. The context of
14
Whitman’s statements would have called for her to either decline to answer the question with
any specific explanation or to at least mention the possibility that something other than
16 entrepreneurial scaling challenges explained Autonomy’s lackluster performance. 14
15
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0
Therefore, Defendants’ motions are DENIED as to these statements.
2.
18
19
Second Quarter 2012 SEC 10-Q Form
HP’s second quarter 2012 SEC Form 10-Q, filed on June 8, 2012 reported that:
For the three and six months ended April 30, 2012, Software
earnings from operations as a percentage of net revenue
decreased by 2.1 percentage points and 0.9 percentage points,
respectively. The operating margin decrease for both periods
was due primarily to a lower mix of license revenue, higher
deferred revenue write-downs and integration costs
associated with the Autonomy acquisition , the effect of
which was partially offset by rate increases in hosted license
services and lower integration costs associated with our fiscal
2010 acquisitions. . . .
20
21
22
23
24
25
26
14
27
28
On May 23, 2012, Whitman did mention and rule out various other explanations–“this is not
the product. Autonomy is a terrific product. It’s not the market. There is an enormous demand for
Autonomy. It’s not the competition.” Compl. ¶ 191. However, Whitman omitted any mention of
accounting fraud, a possible explanation for Autonomy’s weak results which she then knew to be
plausible.
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Case3:13-cv-00301-CRB Document23 Filed11/26/13 Page17 of 20
2
3
4
5
6
Software net revenue increased 21.7% (21.4% when adjusted
for currency) and 25.9% (25.1% when adjusted for currency)
for the three and six months ended April 30, 2012,
respectively. The net revenue increase for both periods was
due to revenues from acquired companies, primarily
Autonomy, as well as modest growth in the organic business,
including solid growth in our security support offerings. For
the three months ended April 30, 2012, net revenue from
services, support and licenses increased by 72%, 17% and
7%, respectively. For the six months ended April 30, 2012,
net revenue from services, support and licenses increased by
89%, 19% and 10%, respectively.
7
Compl. ¶ 197. At the time of these quantitative statements in regular SEC filings, PwC’s
investigation was ongoing. This Court has found that “taking time to investigate a situation
9
prior to disclosing the situation to the investing public is not fraudulent.” In re Yahoo! Inc.
10
Sec. Litig., No. 11-02732, 2012 WL 3282819 at *22 (N.D. Cal. Aug. 10, 2012) citing
11
Higginbotham v. Baxter Int’l Inc., 495 F.3d 753, 760-61 (7th Cir. 2007); Slayton v. Am.
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Express Co., 604 F.3d 758, 763-64, 774, 777 (2d Cir. 2010); N.J. Carpenters Pension &
13
.-
Annuity Funds v. Biogen IDEC Inc., 537 F.3d 35, 57-58 & n.23 (1st Cir. 2008).
14
Whistleblower No. 4’s allegations required time to investigate–the PwC investigation took
15
approximately six months. Compl. ¶ 141. “Taking the time necessary to get things right is
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both proper and lawful. Managers cannot tell lies but are entitled to investigate for a
17
reasonable time, until they have a full story to reveal.” Higginbotham, 495 F.3d at 761.
0
18
Defendants have no obligation to prematurely report allegations, even if well-founded; nor
19
would Defendants have been able to accurately determine the true amount of the required
20
write-down absent a thorough investigation. See Acito v. IMCERA Grp., Inc., 47 F.3d 47,
21
53 (2d Cir. 1995) (“Mere allegations that statements in one report should have been made in
22
earlier reports do not make out a claim of securities fraud.”). Accordingly, Defendants’
23
motions are GRANTED as to the statements in HP’s Second Quarter SEC form 10-Q.
24
3.
Third Quarter 2012 SEC 8-K Form and Investor Call
25
HP filed third quarter 2012 results on SEC Form 8-K and an accompanying press
26
release on August 22, 2012. Compl. ¶ 199. On the same day, HP executives held a
27
conference call with investors in which Whitman revealed that “ Autonomy still requires a
28
17
Case3:13-cv-00301-CRB Document23 Filed11/26/13 Page18 of 20
great deal of attention and we’ve been aggressively working on that business.
2
” Id. ¶ 200.
During the same call, Lesjak stated:
With that context, we expect fiscal year 2012 non-GAAP EPS
to be between $4.05 and $4.07, at the low end of our previous
outlook for the fiscal year. From a GAAP perspective, we
expect a full-year GAAP loss per share to be in the range of
$2.23 to $2.25. We typically conduct an annual review of the
carrying value of goodwill during the fourth quarter of each
fiscal year.
3
4
5
6
Any one of these factors or any combination thereof may
require us to record in Q4 an additional impairment charge
against the carrying value of the goodwill in the HP portfolio.
Our largest balance for goodwill is in the Software segment.
7
9
Id. ¶ 201. Here, the Court GRANTS the motions as to Whitman’s statement because her
10
statement accurately reflected the fact that Autonomy “require[d] a great deal of attention”
11
and that HP continued to focus on it. Whitman did not proffer any particular explanation for
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Autonomy’s shortcomings, nor was she required, at this stage, to reveal the fraud allegations
13
.-
or the PwC investigation. “[T]aking time to investigate a situation prior to disclosing the
14
situation to the investing public is not fraudulent.” In re Yahoo! Inc. Sec. Litig., No.
15
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11-02732, 2012 WL 3282819 at *22 (N.D. Cal. Aug. 10, 2012).
16
The Court GRANTS Lesjak’s motion because Lesjak accurately alerts the market to
17
the danger of a write-down in the software segment: “Any one of these factors or any
0
18
combination thereof may require us to record in Q4 an additional impairment charge against
19
the carrying value of the goodwill in the HP portfolio. Our largest balance for goodwill is in
20
the Software segment.” Id. While Lesjak stopped short of a full disclosure, her statements
21
accurately foreshadowed the write-down of goodwill from the Autonomy acquisition.
22
4.
Third Quarter 2012 SEC 10-Q Form
23
HP’s third quarter 2012 SEC Form 10-Q, released on September 10, 2012, reported
24
that:
25
26
27
28
During its fourth quarter of fiscal 2012, HP will perform its annual goodwill
impairment review for all of its reporting units as of August 1, 2012. If there are
changes in HP’s stock price, or significant changes in the business climate or
operating results of its reporting units , HP may incur additional goodwill
impairment charges. The Software segment includes $14.6 billion of goodwill, of
which $7. 7 billion relates to the legacy HP software business and $6 .9 billion
relates to the Autonomy acquisition . Based on HP’s last annual goodwill
18
Case3:13-cv-00301-CRB Document23 Filed11/26/13 Page19 of 20
impairment review completed as of August 1, 2011, the excess of fair value over
carrying value of the legacy HP software business was 38% of the carrying value,
which is lower than that of HP’s other reporting units. At the time of the Autonomy
acquisition in October 2011, the fair value of Autonomy approximated the carrying
value .
1
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Id. ¶ 204. This filing went too far when it stated: “At the time of the Autonomy acquisition
5
in October 2011, the fair value of Autonomy approximated the carrying value.” This
6
statement was misleading. By September 2012, Defendants knew there was a real possibility
7
that HP had substantially overpaid for Autonomy. While there was no obligation for
8
Defendants to announce the investigation or choose a specific dollar amount for the write-
9
down until the PwC investigation was completed, “[m]anagers cannot tell lies.”
10
Higginbotham, 495 F.3d at 761. Defendants may not have known for certain that HP had
11
overpaid for Autonomy as of that date, but they did know that a credible alternative
12
explanation was under investigation. For that reason, it could not be asserted with certainty
13
and without qualification that as of the date of acquisition, “the fair value of Autonomy
14
approximated the carrying value.” Accordingly, Defendants’ motions are DENIED as to this
15
statement in HP’s Second Quarter SEC form 10-Q.
16
II.
Section 20(a) allows recovery against persons who exercise control over primary
17
0
Section 20(a)
18
violators of Section 10(b). Zucco, 552 F.3d at 990. Because the Court finds that Plaintiff
19
failed to plead a primary violation under section 10(b) as to all Defendants except for
20
Whitman and HP, the Court finds that the Section 20(a) claim also fails as to all Defendants
21
except for Whitman and HP.
22
/
23
/
24
/
25
/
26
/
27
/
28
/
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Case3:13-cv-00301-CRB Document23 Filed11/26/13 Page20 of 20
CONCLUSION
1
2
3
For the foregoing reasons, the Court GRANTS the motions to dismiss except as to
Whitman and HP. The Court GRANTS the unopposed requests for judicial notice.
4
5 I IT IS SO ORDERED.
6
7
8
Dated: November 26, 2013
CHARLES R. BREYER
UNITED STATES DISTRICT JUDGE
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(Slip Opinion)
OCTOBER TERM, 2010
1
Syllabus
NOTE: Where it is feasible, a syllabus (headnote) will be released, as is
being done in connection with this case, at the time the opinion is issued.
The syllabus constitutes no part of the opinion of the Court but has been
prepared by the Reporter of Decisions for the convenience of the reader.
See United States v. Detroit Timber & Lumber Co., 200 U. S. 321, 337.
SUPREME COURT OF THE UNITED STATES
Syllabus
MATRIXX INITIATIVES, INC., ET AL. v. SIRACUSANO
ET AL.
CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR
THE NINTH CIRCUIT
No. 09–1156. Argued January 10, 2011—Decided March 22, 2011
Respondents filed this securities fraud class action, alleging that peti
tioners (hereinafter Matrixx) violated §10(b) of the Securities Ex
change Act of 1934 and Securities and Exchange Commission Rule
10b–5 by failing to disclose reports of a possible link between Ma
trixx’s leading product, Zicam Cold Remedy, and loss of smell (anos
mia), rendering statements made by Matrixx misleading. Matrixx
moved to dismiss the complaint, arguing that respondents had not
pleaded the element of a material misstatement or omission and the
element of scienter. The District Court granted the motion, but the
Ninth Circuit reversed. It held that the District Court erred in re
quiring an allegation of statistical significance to establish material
ity, concluding instead that the complaint adequately alleged infor
mation linking Zicam and anosmia that would have been significant
to a reasonable investor. It also held that Matrixx’s withholding of
information about reports of adverse effects and about pending law
suits by Zicam users gave rise to a strong inference of scienter.
Held: Respondents have stated a claim under §10(b) and Rule 10b–5.
Pp. 8–22.
(a) To prevail on their claim, respondents must prove, as relevant
here, a material misrepresentation or omission by Matrixx and sci
enter. See Stoneridge Investment Partners, LLC v. Scientific-Atlanta,
Inc., 552 U. S. 148, 157. Matrixx contends that they failed to plead
these required elements because they did not allege that the reports
Matrixx received reflected statistically significant evidence that Zi
cam caused anosmia. Pp. 8–9.
(b) Respondents have adequately pleaded materiality. Pp. 9–19.
(1) Under Basic Inc. v. Levinson, 485 U. S. 224, §10(b)’s material
2
MATRIXX INITIATIVES, INC. v. SIRACUSANO
Syllabus
ity requirement is satisfied when there is “ ‘a substantial likelihood
that the disclosure of the omitted fact would have been viewed by the
reasonable investor as having significantly altered the “total mix” of
information made available.’ ” Id., at 231–232. The Court declined to
adopt a bright-line rule for determining materiality in Basic, observ
ing that “[a]ny approach that designates a single fact or occurrence as
always determinative of an inherently fact-specific finding such as
materiality, must necessarily be overinclusive or underinclusive.”
Id., at 236. Here, Matrixx’s bright-line rule—that adverse event re
ports regarding a pharmaceutical company’s products are not mate
rial absent a sufficient number of such reports to establish a statisti
cally significant risk that the product is causing the events—would
“artificially exclud[e]” information that “would otherwise be consid
ered significant to [a reasonable investor’s] trading decision.” Ibid.
Matrixx’s premise that statistical significance is the only reliable in
dication of causation is flawed. Both medical experts and the Food
and Drug Administration rely on evidence other than statistically
significant data to establish an inference of causation. It thus stands
to reason that reasonable investors would act on such evidence. Be
cause adverse reports can take many forms, assessing their material
ity is a fact-specific inquiry, requiring consideration of their source,
content, and context. The question is whether a reasonable investor
would have viewed the nondisclosed information “ ‘as having signifi
cantly altered the “total mix” of information made available.’ ” Id., at
232. Something more than the mere existence of adverse event re
ports is needed to satisfy that standard, but that something more is
not limited to statistical significance and can come from the source,
content, and context of the reports. Pp. 9–16.
(2) Applying Basic’s “total mix” standard here, respondents ade
quately pleaded materiality. The complaint’s allegations suffice to
“raise a reasonable expectation that discovery will reveal evidence”
satisfying the materiality requirement, Bell Atlantic Corp. v.
Twombly, 550 U. S. 544, 556, and to “allo[w] the court to draw the
reasonable inference that the defendant is liable,” Ashcroft v. Iqbal,
556 U. S. ___, ___. Assuming the complaint’s allegations to be true,
Matrixx received reports from medical experts and researchers that
plausibly indicated a reliable causal link between Zicam and anos
mia. Consumers likely would have viewed Zicam’s risk as substan
tially outweighing its benefit. Viewing the complaint’s allegations as
a whole, the complaint alleges facts suggesting a significant risk to
the commercial viability of Matrixx’s leading product. It is substan
tially likely that a reasonable investor would have viewed this infor
mation “ ‘as having significantly altered the “total mix” of informa
tion made available.’ ”
Basic, supra, at 232.
Assuming the
Cite as: 563 U. S. ____ (2011)
3
Syllabus
complaint’s allegations to be true, Matrixx told the market that reve
nues were going to rise 50 and then 80 percent when it had informa
tion indicating a significant risk to its leading revenue-generating
product. It also publicly dismissed reports linking Zicam and anos
mia and stated that zinc gluconate’s safety was well established,
when it had evidence of a biological link between Zicam’s key ingre
dient and anosmia and had conducted no studies to disprove that
link. Pp. 16–19.
(c) Respondents have also adequately pleaded scienter, “ ‘a mental
state embracing intent to deceive, manipulate, or defraud,’ ” Tellabs,
Inc. v. Makor Issues & Rights, Ltd., 551 U. S. 308, 319. This Court
assumes, without deciding, that the scienter requirement may be sat
isfied by a showing of deliberate recklessness. Under the Private Se
curities Litigation Reform Act of 1995, a complaint adequately pleads
scienter “only if a reasonable person would deem the inference of sci
enter cogent and at least as compelling as any opposing inference one
could draw from the facts alleged.” Id., at 324. Matrixx’s proposed
bright-line rule requiring an allegation of statistical significance to
establish a strong inference of scienter is once again flawed. The
complaint’s allegations, “taken collectively,” give rise to a “cogent and
compelling” inference that Matrixx elected not to disclose adverse
event reports not because it believed they were meaningless but be
cause it understood their likely effect on the market. Id., at 323, 324.
“[A] reasonable person” would deem the inference that Matrixx acted
with deliberate recklessness “at least as compelling as any [plausible]
opposing inference.” Id., at 324. Pp. 19–22.
585 F. 3d 1167, affirmed.
SOTOMAYOR, J., delivered the opinion for a unanimous Court.
Cite as: 563 U. S. ____ (2011)
1
Opinion of the Court
NOTICE: This opinion is subject to formal revision before publication in the
preliminary print of the United States Reports. Readers are requested to
notify the Reporter of Decisions, Supreme Court of the United States, Wash­
ington, D. C. 20543, of any typographical or other formal errors, in order
that corrections may be made before the preliminary print goes to press.
SUPREME COURT OF THE UNITED STATES
_________________
No. 09–1156
_________________
MATRIXX INITIATIVES, INC., ET AL., PETITIONERS v.
JAMES SIRACUSANO ET AL.
ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF
APPEALS FOR THE NINTH CIRCUIT
[March 22, 2011]
JUSTICE SOTOMAYOR delivered the opinion of the Court.
This case presents the question whether a plaintiff can
state a claim for securities fraud under §10(b) of the Secu­
rities Exchange Act of 1934, 48 Stat. 891, as amended, 15
U. S. C. §78j(b), and Securities and Exchange Commission
(SEC) Rule 10b–5, 17 CFR §240.10b–5 (2010), based on a
pharmaceutical company’s failure to disclose reports of
adverse events associated with a product if the reports do
not disclose a statistically significant number of adverse
events. Respondents, plaintiffs in a securities fraud class
action, allege that petitioners, Matrixx Initiatives, Inc.,
and three of its executives (collectively Matrixx), failed to
disclose reports of a possible link between its leading
product, a cold remedy, and loss of smell, rendering state­
ments made by Matrixx misleading. Matrixx contends
that respondents’ complaint does not adequately allege
that Matrixx made a material representation or omission
or that it acted with scienter because the complaint does
not allege that Matrixx knew of a statistically significant
number of adverse events requiring disclosure. We con­
clude that the materiality of adverse event reports cannot
2
MATRIXX INITIATIVES, INC. v. SIRACUSANO
Opinion of the Court
be reduced to a bright-line rule. Although in many cases
reasonable investors would not consider reports of adverse
events to be material information, respondents have al­
leged facts plausibly suggesting that reasonable investors
would have viewed these particular reports as material.
Respondents have also alleged facts “giving rise to a
strong inference” that Matrixx “acted with the required
state of mind.” 15 U. S. C. A. §78u–4(b)(2)(A) (Feb. 2011
Supp.). We therefore hold, in agreement with the Court of
Appeals for the Ninth Circuit, that respondents have
stated a claim under §10(b) and Rule 10b–5.
I
A
Through a wholly owned subsidiary, Matrixx develops,
manufactures, and markets over-the-counter pharmaceu­
tical products. Its core brand of products is called Zicam.
All of the products sold under the name Zicam are used to
treat the common cold and associated symptoms. At the
time of the events in question, one of Matrixx’s products
was Zicam Cold Remedy, which came in several forms
including nasal spray and gel. The active ingredient in
Zicam Cold Remedy was zinc gluconate. Respondents
allege that Zicam Cold Remedy accounted for approxi­
mately 70 percent of Matrixx’s sales.
Respondents initiated this securities fraud class action
against Matrixx on behalf of individuals who purchased
Matrixx securities between October 22, 2003, and Febru­
ary 6, 2004.1 The action principally arises out of state­
ments that Matrixx made during the class period relating
to revenues and product safety. Respondents claim that
Matrixx’s statements were misleading in light of reports
that Matrixx had received, but did not disclose, about
——————
1 According to the complaint, Matrixx securities were traded on the
NASDAQ National Market. App. 99a.
Cite as: 563 U. S. ____ (2011)
3
Opinion of the Court
consumers who had lost their sense of smell (a condition
called anosmia) after using Zicam Cold Remedy. Respon­
dents’ consolidated amended complaint alleges the follow­
ing facts, which the courts below properly assumed to be
true. See Ashcroft v. Iqbal, 556 U. S. ___, ___ (2009) (slip
op., at 14).
In 1999, Dr. Alan Hirsch, neurological director of the
Smell & Taste Treatment and Research Foundation, Ltd.,
called Matrixx’s customer service line after discovering a
possible link between Zicam nasal gel and a loss of smell
“in a cluster of his patients.” App. 67a–68a. Dr. Hirsch
told a Matrixx employee that “previous studies had dem­
onstrated that intranasal application of zinc could be
problematic.” Id., at 68a. He also told the employee about
at least one of his patients who did not have a cold and
who developed anosmia after using Zicam.
In September 2002, Timothy Clarot, Matrixx’s vice
president for research and development, called Miriam
Linschoten, Ph.D., at the University of Colorado Health
Sciences Center after receiving a complaint from a per­
son Linschoten was treating who had lost her sense of
smell after using Zicam. Clarot informed Linschoten that
Matrixx had received similar complaints from other cus­
tomers. Linschoten drew Clarot’s attention to “previous
studies linking zinc sulfate to loss of smell.” Ibid. Clarot
gave her the impression that he had not heard of the
studies. She asked Clarot whether Matrixx had done any
studies of its own; he responded that it had not but that it
had hired a consultant to review the product. Soon there­
after, Linschoten sent Clarot abstracts of the studies she
had mentioned. Research from the 1930’s and 1980’s had
confirmed “[z]inc’s toxicity.” Id., at 69a. Clarot called
Linschoten to ask whether she would be willing to partici­
pate in animal studies that Matrixx was planning, but she
declined because her focus was human research.
By September 2003, one of Linschoten’s colleagues at
4
MATRIXX INITIATIVES, INC. v. SIRACUSANO
Opinion of the Court
the University of Colorado, Dr. Bruce Jafek, had observed
10 patients suffering from anosmia after Zicam use.
Linschoten and Jafek planned to present their findings at
a meeting of the American Rhinologic Society in a poster
presentation entitled “Zicam® Induced Anosmia.” Ibid.
(internal quotation marks omitted). The American Rhi­
nologic Society posted their abstract in advance of the
meeting. The presentation described in detail a 55-year­
old man with previously normal taste and smell who
experienced severe burning in his nose, followed immedi­
ately by a loss of smell, after using Zicam. It also reported
10 other Zicam users with similar symptoms.
Matrixx learned of the doctors’ planned presentation.
Clarot sent a letter to Dr. Jafek warning him that he did
not have permission to use Matrixx’s name or the names
of its products. Dr. Jafek deleted the references to Zicam
in the poster before presenting it to the American Rhi­
nologic Society.
The following month, two plaintiffs commenced a prod­
uct liability lawsuit against Matrixx alleging that Zicam
had damaged their sense of smell. By the end of the class
period on February 6, 2004, nine plaintiffs had filed four
lawsuits.
Respondents allege that Matrixx made a series of public
statements that were misleading in light of the foregoing
information. In October 2003, after they had learned of
Dr. Jafek’s study and after Dr. Jafek had presented his
findings to the American Rhinologic Society, Matrixx
stated that Zicam was “ ‘poised for growth in the upcoming
cough and cold season’ ” and that the company had “ ‘very
strong momentum.’ ”2 Id., at 72a–74a. Matrixx further
——————
2 At oral argument, counsel for the United States, which submitted an
amicus curiae brief in support of respondents, suggested that some of
these statements might qualify as nonactionable “puffery.” Tr. of Oral
Arg. 51–52. This question is not before us, as Matrixx has not ad­
vanced such an argument.
Cite as: 563 U. S. ____ (2011)
5
Opinion of the Court
expressed its expectation that revenues would “ ‘be up in
excess of 50% and that earnings, per share for the full year
[would] be in the 25 to 30 cent range.’ ” Id., at 74a. In
January 2004, Matrixx raised its revenue guidance, pre­
dicting an increase in revenues of 80 percent and earnings
per share in the 33-to-38-cent range.
In its Form 10–Q filed with the SEC in November 2003,
Zicam warned of the potential “ ‘material adverse effect’ ”
that could result from product liability claims, “ ‘whether
or not proven to be valid.’ ” Id., at 75a–76a. It stated that
product liability actions could materially affect Matrixx’s
“ ‘product branding and goodwill,’ ” leading to reduced
customer acceptance.3 Id., at 76a. It did not disclose,
however, that two plaintiffs had already sued Matrixx for
allegedly causing them to lose their sense of smell.
On January 30, 2004, Dow Jones Newswires reported
that the Food and Drug Administration (FDA) was “ ‘look­
ing into complaints that an over-the-counter common-cold
medicine manufactured by a unit of Matrixx Initiatives,
Inc. (MTXX) may be causing some users to lose their sense
of smell’ ” in light of at least three product liability law­
suits. Id., at 79a–80a. Matrixx’s stock fell from $13.55 to
$11.97 per share after the report. In response, on Febru­
ary 2, Matrixx issued a press release that stated:
“All Zicam products are manufactured and mar­
keted according to FDA guidelines for homeopathic
medicine. Our primary concern is the health and
safety of our customers and the distribution of factual information about our products. Matrixx believes
statements alleging that intranasal Zicam products
caused anosmia (loss of smell) are completely un­
——————
3 Respondents
also allege that Matrixx falsely reported its financial
results in the Form 10–Q by failing to reserve for or disclose potential
liability, in violation of Generally Accepted Accounting Principles. The
Court of Appeals did not rely on these allegations.
6
MATRIXX INITIATIVES, INC. v. SIRACUSANO
Opinion of the Court
founded and misleading.
“In no clinical trial of intranasal zinc gluconate gel
products has there been a single report of lost or di­
minished olfactory function (sense of smell). Rather,
the safety and efficacy of zinc gluconate for the treat­
ment of symptoms related to the common cold have
been well established in two double-blind, placebo­
controlled, randomized clinical trials. In fact, in nei­
ther study were there any reports of anosmia related
to the use of this compound. The overall incidence of
adverse events associated with zinc gluconate was ex­
tremely low, with no statistically significant difference
between the adverse event rates for the treated and
placebo subsets.
“A multitude of environmental and biologic influ­
ences are known to affect the sense of smell. Chief
among them is the common cold. As a result, the
population most likely to use cold remedy products is
already at increased risk of developing anosmia.
Other common causes of olfactory dysfunction include
age, nasal and sinus infections, head trauma, ana­
tomical obstructions, and environmental irritants.”
Id., at 77a–78a (internal quotation marks omitted).
The day after Matrixx issued this press release, its stock
price bounced back to $13.40 per share.
On February 6, 2004, the end of the class period, Good
Morning America, a nationally broadcast morning news
program, highlighted Dr. Jafek’s findings. (The complaint
does not allege that Matrixx learned of the news story
before its broadcast.) The program reported that Dr. Jafek
had discovered more than a dozen patients suffering from
anosmia after using Zicam. It also noted that four law­
suits had been filed against Matrixx. The price of Matrixx
stock plummeted to $9.94 per share that same day. Zicam
again issued a press release largely repeating its February
Cite as: 563 U. S. ____ (2011)
7
Opinion of the Court
2 statement.
On February 19, 2004, Matrixx filed a Form 8–K with
the SEC stating that it had “ ‘convened a two-day meeting
of physicians and scientists to review current information
on smell disorders’ ” in response to Dr. Jafek’s presenta­
tion. Id., at 82a. According to the Form 8–K, “ ‘In the
opinion of the panel, there is insufficient scientific evi­
dence at this time to determine if zinc gluconate, when
used as recommended, affects a person’s ability to smell.’ ”
Ibid. A few weeks later, a reporter quoted Matrixx as
stating that it would begin conducting “ ‘animal and hu­
man studies to further characterize these post-marketing
complaints.’ ” Id., at 84a.
On the basis of these allegations, respondents claimed
that Matrixx violated §10(b) of the Securities Exchange
Act and SEC Rule 10b–5 by making untrue statements of
fact and failing to disclose material facts necessary to
make the statements not misleading in an effort to main­
tain artificially high prices for Matrixx securities.
B
Matrixx moved to dismiss respondents’ complaint, argu­
ing that they had failed to plead the elements of a mate­
rial misstatement or omission and scienter. The District
Court granted the motion to dismiss. Relying on In re
Carter-Wallace, Inc., Securities Litigation, 220 F. 3d 36
(CA2 2000), it held that respondents had not alleged a
“statistically significant correlation between the use of
Zicam and anosmia so as to make failure to public[ly]
disclose complaints and the University of Colorado study a
material omission.” App. to Pet. for Cert. 50a. The Dis­
trict Court similarly agreed that respondents had not
stated with particularity facts giving rise to a strong
inference of scienter. See 15 U. S. C. A. §78u–4(b)(2)(A)
(Feb. 2011 Supp.). It noted that the complaint failed to
allege that Matrixx disbelieved its statements about Zi­
8
MATRIXX INITIATIVES, INC. v. SIRACUSANO
Opinion of the Court
cam’s safety or that any of the defendants profited or
attempted to profit from Matrixx’s public statements.
App. to Pet. for Cert. 52a.
The Court of Appeals reversed. 585 F. 3d 1167 (CA9
2009). Noting that “ ‘[t]he determination [of materiality]
requires delicate assessments of the inferences a “reason­
able shareholder” would draw from a given set of facts and
the significance of those inferences to him,’ ” id., at 1178
(quoting Basic Inc. v. Levinson, 485 U. S. 224, 236 (1988);
some internal quotation marks omitted; alterations in
original), the Court of Appeals held that the District Court
had erred in requiring an allegation of statistical signifi­
cance to establish materiality. It concluded, to the con­
trary, that the complaint adequately alleged “information
regarding the possible link between Zicam and anosmia”
that would have been significant to a reasonable investor.
585 F. 3d, at 1179, 1180. Turning to scienter, the Court of
Appeals concluded that “[w]ithholding reports of adverse
effects of and lawsuits concerning the product responsible
for the company’s remarkable sales increase is ‘an extreme
departure from the standards of ordinary care,’ ” giving
rise to a strong inference of scienter. Id., at 1183.
We granted certiorari, 560 U. S. ___ (2010), and we now
affirm.
II
Section 10(b) of the Securities Exchange Act makes it
unlawful for any person to “use or employ, in connection
with the purchase or sale of any security . . . any manipu­
lative or deceptive device or contrivance in contravention
of such rules and regulations as the Commission may
prescribe as necessary or appropriate in the public interest
or for the protection of investors.” 15 U. S. C. §78j(b).
SEC Rule 10b–5 implements this provision by making
it unlawful to, among other things, “make any untrue
statement of a material fact or to omit to state a material
Cite as: 563 U. S. ____ (2011)
9
Opinion of the Court
fact necessary in order to make the statements made, in
the light of the circumstances under which they were
made, not misleading.” 17 CFR §240.10b–5(b). We have
implied a private cause of action from the text and pur­
pose of §10(b). See Tellabs, Inc. v. Makor Issues & Rights,
Ltd., 551 U. S. 308, 318 (2007).
To prevail on their claim that Matrixx made material
misrepresentations or omissions in violation of §10(b) and
Rule 10b–5, respondents must prove “(1) a material mis­
representation or omission by the defendant; (2) scienter;
(3) a connection between the misrepresentation or omis­
sion and the purchase or sale of a security; (4) reliance
upon the misrepresentation or omission; (5) economic loss;
and (6) loss causation.” Stoneridge Investment Partners,
LLC v. Scientific-Atlanta, Inc., 552 U. S. 148, 157 (2008).
Matrixx contends that respondents have failed to plead
both the element of a material misrepresentation or omis­
sion and the element of scienter because they have not
alleged that the reports received by Matrixx reflected
statistically significant evidence that Zicam caused anos­
mia. We disagree.
A
We first consider Matrixx’s argument that “adverse
event reports that do not reveal a statistically significant
increased risk of adverse events from product use are not
material information.” Brief for Petitioners 17 (capitaliza­
tion omitted).
1
To prevail on a §10(b) claim, a plaintiff must show that
the defendant made a statement that was “misleading as
to a material fact.”4 Basic, 485 U. S., at 238. In Basic, we
——————
4 Under the Private Securities Litigation Reform Act of 1995
(PSLRA), when a plaintiff’s claim is based on alleged misrepresenta­
tions or omissions of a material fact, “the complaint shall specify each
10
MATRIXX INITIATIVES, INC. v. SIRACUSANO
Opinion of the Court
held that this materiality requirement is satisfied when
there is “ ‘a substantial likelihood that the disclosure of
the omitted fact would have been viewed by the reasonable
investor as having significantly altered the “total mix” of
information made available.’ ” Id., at 231–232 (quoting
TSC Industries, Inc. v. Northway, Inc., 426 U. S. 438, 449
(1976)). We were “careful not to set too low a standard of
materiality,” for fear that management would “ ‘bury
the shareholders in an avalanche of trivial information.’ ”
485 U. S., at 231 (quoting TSC Industries, 426 U. S., at
448–449).
Basic involved a claim that the defendant had made
misleading statements denying that it was engaged in
merger negotiations when it was, in fact, conducting pre­
liminary negotiations. See 485 U. S., at 227–229. The
defendant urged a bright-line rule that preliminary
merger negotiations are material only once the parties to
the negotiations reach an agreement in principle. Id., at
232–233. We observed that “[a]ny approach that desig­
nates a single fact or occurrence as always determinative
of an inherently fact-specific finding such as materiality,
must necessarily be overinclusive or underinclusive.” Id.,
at 236. We thus rejected the defendant’s proposed rule,
explaining that it would “artificially exclud[e] from the
definition of materiality information concerning merger
discussions, which would otherwise be considered significant to the trading decision of a reasonable investor.”
Ibid.
Like the defendant in Basic, Matrixx urges us to adopt a
bright-line rule that reports of adverse events5 associated
——————
statement alleged to have been misleading, [and] the reason or reasons
why the statement is misleading.” 15 U. S. C. §78u–4(b)(1).
5 The FDA defines an “[a]dverse drug experience” as “[a]ny adverse
event associated with the use of a drug in humans, whether or not
considered drug related.” 21 CFR §314.80(a) (2010). Federal law
imposes certain obligations on pharmaceutical manufacturers to report
Cite as: 563 U. S. ____ (2011)
11
Opinion of the Court
with a pharmaceutical company’s products cannot be
material absent a sufficient number of such reports to
establish a statistically significant risk that the product is
in fact causing the events.6 Absent statistical significance,
Matrixx argues, adverse event reports provide only “anec­
dotal” evidence that “the user of a drug experienced an
adverse event at some point during or following the use
of that drug.” Brief for Petitioners 17. Accordingly,
it contends, reasonable investors would not consider such
reports relevant unless they are statistically significant
because only then do they “reflect a scientifically reliable
basis for inferring a potential causal link between product
use and the adverse event.” Id., at 32.
As in Basic, Matrixx’s categorical rule would “artificially
exclud[e]” information that “would otherwise be consid­
ered significant to the trading decision of a reasonable
investor.” 485 U. S., at 236. Matrixx’s argument rests on
the premise that statistical significance is the only reliable
indication of causation. This premise is flawed: As the
SEC points out, “medical researchers . . . consider multiple
——————
adverse events to the FDA. During the class period, manufacturers of
over-the-counter drugs such as Zicam Cold Remedy had no obligation to
report adverse events to the FDA. In 2006, Congress enacted legisla­
tion to require manufacturers of over-the-counter drugs to report any
“serious adverse event” to the FDA within 15 business days. See 21
U. S. C. §§379aa(b), (c).
6 “A study that is statistically significant has results that are unlikely
to be the result of random error . . . .” Federal Judicial Center, Refer­
ence Manual on Scientific Evidence 354 (2d ed. 2000). To test for
significance, a researcher develops a “null hypothesis”—e.g., the asser­
tion that there is no relationship between Zicam use and anosmia. See
id., at 122. The researcher then calculates the probability of obtaining
the observed data (or more extreme data) if the null hypothesis is true
(called the p-value). Ibid. Small p-values are evidence that the null
hypothesis is incorrect. See ibid. Finally, the researcher compares the
p-value to a preselected value called the significance level. Id., at 123.
If the p-value is below the preselected value, the difference is deemed
“significant.” Id., at 124.
12
MATRIXX INITIATIVES, INC. v. SIRACUSANO
Opinion of the Court
factors in assessing causation.” Brief for United States as
Amicus Curiae 12. Statistically significant data are not
always available. For example, when an adverse event is
subtle or rare, “an inability to obtain a data set of appro­
priate quality or quantity may preclude a finding of statis­
tical significance.” Id., at 15; see also Brief for Medical
Researchers as Amici Curiae 11. Moreover, ethical con­
siderations may prohibit researchers from conducting
randomized clinical trials to confirm a suspected causal
link for the purpose of obtaining statistically significant
data. See id., at 10–11.
A lack of statistically significant data does not mean
that medical experts have no reliable basis for inferring a
causal link between a drug and adverse events. As Ma­
trixx itself concedes, medical experts rely on other evi­
dence to establish an inference of causation. See Brief for
Petitioners 44–45, n. 22.7 We note that courts frequently
permit expert testimony on causation based on evidence
other than statistical significance. See, e.g., Best v. Lowe’s
Home Centers, Inc., 563 F. 3d 171, 178 (CA6 2009); West
berry v. Gislaved Gummi AB, 178 F. 3d 257, 263–264 (CA4
1999) (citing cases); Wells v. Ortho Pharmaceutical Corp.,
788 F. 2d 741, 744–745 (CA11 1986). We need not con­
sider whether the expert testimony was properly admitted
in those cases, and we do not attempt to define here what
constitutes reliable evidence of causation. It suffices to
——————
7 Matrixx
and its amici list as relevant factors the strength of the
association between the drug and the adverse effects; a temporal
relationship between exposure and the adverse event; consistency
across studies; biological plausibility; consideration of alternative
explanations; specificity (i.e., whether the specific chemical is associ­
ated with the specific disease); the dose-response relationship; and the
clinical and pathological characteristics of the event. Brief for Petition­
ers 44–45, n. 22; Brief for Consumer Healthcare Products Assn. et al. as
Amici Curiae 12–13. These factors are similar to the factors the FDA
considers in taking action against pharmaceutical products. See infra,
at 13–14.
Cite as: 563 U. S. ____ (2011)
13
Opinion of the Court
note that, as these courts have recognized, “medical pro­
fessionals and researchers do not limit the data they
consider to the results of randomized clinical trials or to
statistically significant evidence.” Brief for Medical Re­
searchers as Amici Curiae 31.
The FDA similarly does not limit the evidence it consid­
ers for purposes of assessing causation and taking regula­
tory action to statistically significant data. In assessing
the safety risk posed by a product, the FDA considers
factors such as “strength of the association,” “temporal
relationship of product use and the event,” “consistency of
findings across available data sources,” “evidence of a
dose-response for the effect,” “biologic plausibility,” “seri­
ousness of the event relative to the disease being treated,”
“potential to mitigate the risk in the population,” “feasibil­
ity of further study using observational or controlled
clinical study designs,” and “degree of benefit the product
provides, including availability of other therapies.”8 FDA,
Guidance for Industry: Good Pharmacovigilance Practices and Pharmacoepidemiologic Assessment 18 (2005)
(capitalization omitted), http://www.fda.gov/downloads/
RegulatingInformation/Guidances/UCM126834.pdf (all In­
ternet materials as visited Mar. 17, 2011, and available in
Clerk of Court’s case file); see also Brief for United States
as Amicus Curiae 19–20 (same); FDA, The Clinical Impact of Adverse Event Reporting 6 (1996) (similar),
http://www.fda.gov/downloads/safety/MedWatch/UCM1685
05.pdf. It “does not apply any single metric for determin­
ing when additional inquiry or action is necessary, and it
certainly does not insist upon ‘statistical significance.’ ”
Brief for United States as Amicus Curiae 19.
Not only does the FDA rely on a wide range of evidence
of causation, it sometimes acts on the basis of evidence
that suggests, but does not prove, causation. For example,
——————
8 See
also n. 7, supra.
14
MATRIXX INITIATIVES, INC. v. SIRACUSANO
Opinion of the Court
the FDA requires manufacturers of over-the-counter drugs
to revise their labeling “to include a warning as soon as
there is reasonable evidence of an association of a serious
hazard with a drug; a causal relationship need not have
been proved.” 21 CFR §201.80(e). More generally, the
FDA may make regulatory decisions against drugs based
on postmarketing evidence that gives rise to only a suspi­
cion of causation. See FDA, The Clinical Impact of Ad­
verse Event Reporting, supra, at 7 (“[A]chieving certain
proof of causality through postmarketing surveillance is
unusual. Attaining a prominent degree of suspicion is
much more likely, and may be considered a sufficient basis
for regulatory decisions” (footnote omitted)).9
This case proves the point. In 2009, the FDA issued a
warning letter to Matrixx stating that “[a] significant and
growing body of evidence substantiates that the Zicam
Cold Remedy intranasal products may pose a serious risk
to consumers who use them.” App. 270a. The letter cited
as evidence 130 reports of anosmia the FDA had received,
the fact that the FDA had received few reports of anosmia
associated with other intranasal cold remedies, and “evi­
dence in the published scientific literature that various
salts of zinc can damage olfactory function in animals and
——————
9 See
also GAO, M. Crosse et al., Drug Safety: Improvement Needed
in FDA’s Postmarket Decision-making and Oversight Process 7 (GAO–
06–402, 2006) (“If FDA has information that a drug on the market may
pose a significant health risk to consumers, it weighs the effect of the
adverse events against the benefit of the drug to determine what
actions, if any, are warranted. This decision-making process is complex
and encompasses many factors, such as the medical importance and
utility of the drug, the drug’s extent of usage, the severity of the
disease being treated, the drug’s efficacy in treating this disease,
and the availability of other drugs to treat the same disorder”),
http://www.gao.gov/new.items/d06402.pdf; Federal Judicial Center,
supra n. 6, at 33 (“[R]isk assessors may pay heed to any evidence that
points to a need for caution, rather than assess the likelihood that a
causal relationship in a specific case is more likely than not”).
Cite as: 563 U. S. ____ (2011)
15
Opinion of the Court
humans.” Ibid. It did not cite statistically significant
data.
Given that medical professionals and regulators act on
the basis of evidence of causation that is not statistically
significant, it stands to reason that in certain cases rea­
sonable investors would as well. As Matrixx acknowl­
edges, adverse event reports “appear in many forms,
including direct complaints by users to manufacturers,
reports by doctors about reported or observed patient
reactions, more detailed case reports published by doctors
in medical journals, or larger scale published clinical
studies.” Brief for Petitioners 17. As a result, assessing
the materiality of adverse event reports is a “fact-specific”
inquiry, Basic, 485 U. S., at 236, that requires considera­
tion of the source, content, and context of the reports.
This is not to say that statistical significance (or the lack
thereof) is irrelevant—only that it is not dispositive of
every case.
Application of Basic’s “total mix” standard does not
mean that pharmaceutical manufacturers must disclose all reports of adverse events. Adverse event reports
are daily events in the pharmaceutical industry; in
2009, the FDA entered nearly 500,000 such reports into
its reporting system, see FDA, Reports Received and
Reports Entered in AERS by Year (as of Mar. 31, 2010),
http://www.fda.gov/Drugs/GuidanceComplianceRegulatory
Information/Surveillance/AdverseDrugEffects/ucm070434.
htm. The fact that a user of a drug has suffered an
adverse event, standing alone, does not mean that
the drug caused that event. See FDA, Annual Adverse
Drug Experience Report: 1996, p. 2 (1997), http://drugand
devicelaw.net/Annual%20Adverse%20Drug%20Experience
%20Report%201996.pdf. The question remains whether a
reasonable investor would have viewed the nondisclosed
information “ ‘as having significantly altered the “total
mix” of information made available.’ ” Basic, 485 U. S., at
16
MATRIXX INITIATIVES, INC. v. SIRACUSANO
Opinion of the Court
232 (quoting TSC Industries, 426 U. S., at 449; emphasis
added). For the reasons just stated, the mere existence of
reports of adverse events—which says nothing in and of
itself about whether the drug is causing the adverse
events—will not satisfy this standard. Something more is
needed, but that something more is not limited to statisti­
cal significance and can come from “the source, content,
and context of the reports,” supra, at 15. This contextual
inquiry may reveal in some cases that reasonable inves­
tors would have viewed reports of adverse events as mate­
rial even though the reports did not provide statistically
significant evidence of a causal link.10
Moreover, it bears emphasis that §10(b) and Rule 10b–
5(b) do not create an affirmative duty to disclose any and
all material information. Disclosure is required under
these provisions only when necessary “to make . . . state­
ments made, in the light of the circumstances under which
they were made, not misleading. 17 CFR §240.10b–5(b);
see also Basic, 485 U. S., at 239, n. 17 (“Silence, absent a
duty to disclose, is not misleading under Rule 10b–5”).
Even with respect to information that a reasonable inves­
tor might consider material, companies can control what
they have to disclose under these provisions by controlling
what they say to the market.
2
Applying Basic’s “total mix” standard in this case, we
conclude that respondents have adequately pleaded mate­
riality. This is not a case about a handful of anecdotal
——————
10 We note that our conclusion accords with views of the SEC, as ex­
pressed in an amicus curiae brief filed in this case. See Brief for United
States as Amicus Curiae 11–12; see also TSC Industries, Inc. v. North
way, Inc., 426 U. S. 438, 449, n. 10 (1976) (“[T]he SEC’s view of the
proper balance between the need to insure adequate disclosure and the
need to avoid the adverse consequences of setting too low a threshold
for civil liability is entitled to consideration”).
Cite as: 563 U. S. ____ (2011)
17
Opinion of the Court
reports, as Matrixx suggests. Assuming the complaint’s
allegations to be true, as we must, Matrixx received in­
formation that plausibly indicated a reliable causal link
between Zicam and anosmia. That information included
reports from three medical professionals and researchers
about more than 10 patients who had lost their sense of
smell after using Zicam. Clarot told Linschoten that
Matrixx had received additional reports of anosmia. (In
addition, during the class period, nine plaintiffs com­
menced four product liability lawsuits against Matrixx
alleging a causal link between Zicam use and anosmia.)11
Further, Matrixx knew that Linschoten and Dr. Jafek had
presented their findings about a causal link between
Zicam and anosmia to a national medical conference de­
voted to treatment of diseases of the nose.12 Their presen­
tation described a patient who experienced severe burning
in his nose, followed immediately by a loss of smell, after
using Zicam—suggesting a temporal relationship between
Zicam use and anosmia.
Critically, both Dr. Hirsch and Linschoten had also
drawn Matrixx’s attention to previous studies that had
demonstrated a biological causal link between intranasal
application of zinc and anosmia.13 Before his conversation
——————
11 It
is unclear whether these plaintiffs were the same individuals
whose symptoms were reported by the medical professionals.
12 Matrixx contends that Dr. Jafek and Linschoten’s study was not
reliable because they did not sufficiently rule out the common cold as a
cause for their patients’ anosmia. We note that the complaint alleges
that, in one instance, a consumer who did not have a cold lost his sense
of smell after using Zicam. More importantly, to survive a motion to
dismiss, respondents need only allege “enough facts to state a claim to
relief that is plausible on its face.” Bell Atlantic Corp. v. Twombly, 550
U. S. 544, 570 (2007). For all the reasons we state in the opinion,
respondents’ allegations plausibly suggest that Dr. Jafek and Linscho­
ten’s conclusions were based on reliable evidence of a causal link
between Zicam and anosmia.
13 Matrixx contends that these studies are not reliable evidence of
18
MATRIXX INITIATIVES, INC. v. SIRACUSANO
Opinion of the Court
with Linschoten, Clarot, Matrixx’s vice president of re­
search and development, was seemingly unaware of these
studies, and the complaint suggests that, as of the class
period, Matrixx had not conducted any research of its own
relating to anosmia. See, e.g., App. 84a (referencing a
press report, issued after the end of the class period, not­
ing that Matrixx said it would begin conducting “ ‘animal
and human studies to further characterize these post­
marketing complaints’ ”). Accordingly, it can reasonably
be inferred from the complaint that Matrixx had no basis
for rejecting Dr. Jafek’s findings out of hand.
We believe that these allegations suffice to “raise a
reasonable expectation that discovery will reveal evidence”
satisfying the materiality requirement, Bell Atlantic Corp.
v. Twombly, 550 U. S. 544, 556 (2007), and to “allo[w] the
court to draw the reasonable inference that the defendant
is liable for the misconduct alleged,” Iqbal, 556 U. S., at
___ (slip op., at 14). The information provided to Matrixx
by medical experts revealed a plausible causal relation­
ship between Zicam Cold Remedy and anosmia. Consum­
ers likely would have viewed the risk associated with
Zicam (possible loss of smell) as substantially outweighing
the benefit of using the product (alleviating cold symp­
toms), particularly in light of the existence of many alter­
native products on the market. Importantly, Zicam Cold
Remedy allegedly accounted for 70 percent of Matrixx’s
sales. Viewing the allegations of the complaint as a whole,
——————
causation because the studies used zinc sulfate, whereas the active
ingredient in Matrixx is zinc gluconate. Respondents’ complaint,
however, alleges that the studies confirmed the toxicity of “zinc.” App.
68a. Matrixx further contends that studies relating to fish cannot
reliably prove causation with respect to humans. The complaint
references several studies, however, only one of which involved fish. In
any event, the existence of the studies suggests a plausible biological
link between zinc and anosmia, which, in combination with the other
allegations, is sufficient to survive a motion to dismiss.
Cite as: 563 U. S. ____ (2011)
19
Opinion of the Court
the complaint alleges facts suggesting a significant risk to
the commercial viability of Matrixx’s leading product.
It is substantially likely that a reasonable investor
would have viewed this information “ ‘as having signifi­
cantly altered the “total mix” of information made avail­
able.’ ” Basic, 485 U. S., at 232 (quoting TSC Industries,
426 U. S., at 449). Matrixx told the market that revenues
were going to rise 50 and then 80 percent. Assuming the
complaint’s allegations to be true, however, Matrixx had
information indicating a significant risk to its leading
revenue-generating product. Matrixx also stated that
reports indicating that Zicam caused anosmia were “ ‘com­
pletely unfounded and misleading’ ” and that “ ‘the safety
and efficacy of zinc gluconate for the treatment of symp­
toms related to the common cold have been well estab­
lished.’ ” App. 77a–78a. Importantly, however, Matrixx
had evidence of a biological link between Zicam’s key
ingredient and anosmia, and it had not conducted any
studies of its own to disprove that link. In fact, as Matrixx
later revealed, the scientific evidence at that time was
“ ‘insufficient . . . to determine if zinc gluconate, when used
as recommended, affects a person’s ability to smell.’ ” Id.,
at 82a.
Assuming the facts to be true, these were material facts
“necessary in order to make the statements made, in the
light of the circumstances under which they were made,
not misleading.” 17 CFR §240.10b–5(b). We therefore
affirm the Court of Appeals’ holding that respondents
adequately pleaded the element of a material misrepre­
sentation or omission.
B
Matrixx also argues that respondents failed to allege
facts plausibly suggesting that it acted with the required
level of scienter. “To establish liability under §10(b) and
Rule 10b–5, a private plaintiff must prove that the defen­
20
MATRIXX INITIATIVES, INC. v. SIRACUSANO
Opinion of the Court
dant acted with scienter, ‘a mental state embracing intent
to deceive, manipulate, or defraud.’ ” Tellabs, 551 U. S., at
319 (quoting Ernst & Ernst v. Hochfelder, 425 U. S. 185,
193–194, and n. 12 (1976)). We have not decided whether
recklessness suffices to fulfill the scienter requirement.
See Tellabs, 551 U. S., at 319, n. 3. Because Matrixx does
not challenge the Court of Appeals’ holding that the
scienter requirement may be satisfied by a showing of
“deliberate recklessness,” see 585 F. 3d, at 1180 (internal
quotation marks omitted), we assume, without deciding,
that the standard applied by the Court of Appeals is suffi­
cient to establish scienter.14
Under the PSLRA, a plaintiff must “state with par­
ticularity facts giving rise to a strong inference that the
defendant acted with the required state of mind.” 15
U. S. C. A. §78u–4(b)(2)(A) (Feb. 2011 Supp.). This stan­
dard requires courts to take into account “plausible oppos­
ing inferences.” Tellabs, 551 U. S., at 323. A complaint
adequately pleads scienter under the PSLRA “only if a
reasonable person would deem the inference of scienter
cogent and at least as compelling as any opposing infer­
ence one could draw from the facts alleged.” Id., at 324.
In making this determination, the court must review “all
the allegations holistically.” Id., at 326. The absence of a
motive allegation, though relevant, is not dispositive. Id.,
at 325.
Matrixx argues, in summary fashion, that because
respondents do not allege that it knew of statistically
significant evidence of causation, there is no basis to
consider the inference that it acted recklessly or know­
ingly to be at least as compelling as the alternative infer­
——————
14 Under
the PSLRA, if the alleged misstatement or omission is a
“forward-looking statement,” the required level of scienter is “actual
knowledge.” 15 U. S. C. §78u–5(c)(1)(B). Matrixx has not argued that
the statements or omissions here are “forward-looking statement[s].”
Cite as: 563 U. S. ____ (2011)
21
Opinion of the Court
ences. “Rather,” it argues, “the most obvious inference is
that petitioners did not disclose the [reports] simply be­
cause petitioners believed they were far too few . . . to
indicate anything meaningful about adverse reactions to
use of Zicam.” Brief for Petitioners 49. Matrixx’s pro­
posed bright-line rule requiring an allegation of statistical
significance to establish a strong inference of scienter is
just as flawed as its approach to materiality.
The inference that Matrixx acted recklessly (or inten­
tionally, for that matter) is at least as compelling, if not
more compelling, than the inference that it simply thought
the reports did not indicate anything meaningful about
adverse reactions. According to the complaint, Matrixx
was sufficiently concerned about the information it re­
ceived that it informed Linschoten that it had hired a
consultant to review the product, asked Linschoten to
participate in animal studies, and convened a panel of
physicians and scientists in response to Dr. Jafek’s pres­
entation. It successfully prevented Dr. Jafek from using
Zicam’s name in his presentation on the ground that he
needed Matrixx’s permission to do so. Most significantly,
Matrixx issued a press release that suggested that studies
had confirmed that Zicam does not cause anosmia when,
in fact, it had not conducted…
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