Gerald W. Palmer (State Bar No. 58968)
JONES, DAY, REAVIS & POGUE
555 West Fifth Street
Suite 4600
Los Angeles, CA 90013-1025
Telephone: 213/489-3939
Robert C. Micheletto
Eric P. Berlin
Susan L. Winders
JONES, DAY, REAVIS & POGUE
77 West Wacker Drive
Suite 3500
Chicago, IL 60601-1692
Telephone: 312/789-3939
Attorneys for Defendants
UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF CALIFORNIA
|
HOWARD HERTZBERG, JOHN DeROSA Plaintiffs, v. DIGNITY PARTNERS, INC., et al.,
Defendants. |
) |
Civ. No. 96-C-4558 (CAL) Judge Charles A. Legge MEMORANDUM OF POINTS AND Date: April 16, 1999 |
STATEMENT OF UNCONTESTED FACTS
I. THE RELIANCE REQUIREMENT OF RULE 10b-5 CANNOT BE SATISFIED IN THIS CASE
1. The Non-Protease Inhibitor Drugs Received Substantial News Media Coverage
2. The Protease Inhibitor Saquinavir Received Substantial News Media Coverage
3. The Protease Inhibitor Ritonavir Received Substantial News Media Coverage
4. The Protease Inhibitor Indinavir Received Substantial News Media Coverage
5. The News Media Reported That The FDA Would Quickly Approve Protease Inhibitors
6. The "'Triple-Punch' Combination" Received An Incredible Amount of News Media Coverage
7. The Washington, D.C. AIDS Conference Received Substantial News Media Coverage
II. PLAINTIFFS CANNOT ESTABLISH LOSS CAUSATION AS TO THE DIGNITY STOCK PRICE DECLINE ON JUNE 26, 1996
In re 3Com Sec. Litig.,
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Ackerman v. Oryx,
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Anderson v. Liberty Lobby, Inc.,
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In re Apple Computer Sec. Litig.,
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Matsushita Electric Industrial Co. v. Zenith Radio Corp.,
475 U.S. 574 (1986), cert. denied, 481 U.S. 1029 (1987)
McMahan & Co. v. Wherehouse Entertainment, Inc.,
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Michaels v. Internet Entertainment Group, Inc., Case No. CV98-0583 DDP,
1998 U.S. Dist. LEXIS 20786 (C.D. Cal. Sept. 14, 1988)
Mutual Fund Investors, Inc. v. Putnam Management Co.,
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Nielsen v. Greenwood,
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Orloff v. Cleland,
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Pleasant Overseas Corp. v. Hajjar, C 93-20197 RMW,
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Pleasant Overseas Corp. v. Hajjar,
No. C-93-20197 RMW (EIA), 1993 U.S. Dist. LEXIS 19154
(N.D. Cal. Nov. 17, 1993)
Raab v. General Physics Corp.,
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Rogal v. Costello,
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Schneider v. Apple Computer, Inc.,
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In re Seagate Tech. II Sec. Litig.,
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Shaw v. Digital Equipment Corp.,
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Soules v. Kauaians for Nukolii Campaign Committee,
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aff'd, 89 F.3d 1399 (9th Cir. 1996)
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aff'd, 95 F.3d 922 (9th Cir. 1996)
TSC Industrial v. Northway, Inc.,
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FEDERAL STATUTES
15 U.S.C. § 78u-4(b)(4)
Fed. R. Civ. P. 56(a), (b)
Fed. R. Civ. P. 56(c)
During the relevant time period, defendant Dignity Partners, Inc. ("Dignity") was engaged in the business of providing viatical settlements almost exclusively for individuals with terminal illnesses related to Acquired Immune Deficiency Syndrome ("AIDS").1 Dignity's operations and financial results were thus highly dependent on the ability of its medical consultants to accurately predict the life expectancies of individuals afflicted with AIDS. The life expectancy estimate was a significant factor in Dignity's determination of the purchase price of a policy and the period over which Dignity recognized income on the policy.
Not surprisingly, one of the primary risks attendant to an investment in Dignity was that an effective treatment for AIDS would be developed which would render Dignity's life expectancy estimates materially inaccurate and/or prevent Dignity from accurately estimating life expectancies in the future. Although the market and any reasonable investor would have been fully aware of this risk, Dignity nevertheless warned of it in the Prospectus issued in connection with its initial public offering and in subsequent filings with the Securities and Exchange Commission ("SEC"). In addition, Dignity expressly and repeatedly warned that (i) "[r]ecently announced studies by several drug manufacturers indicate that certain existing medications and medications currently under development may, when used in combination, eliminate or reduce a high percentage of the AIDS virus detectable in persons previously diagnosed with AIDS"; and (ii) the development of any effective medical treatments for AIDS could "materially reduce" Dignity's rate of return (yield) on its portfolio and "materially adversely affect" Dignity's cash flow, not to mention the market price of Dignity stock. (Prospectus, a copy of which is attached as Ex. A to the Declaration of Gerald W. Palmer ("Def. Dec."), at 11; 1995 Form 10-K, a copy of which is attached as Ex. B to Def. Dec., at 5.)
At the XI International Conference on AIDS, which was held from July 7-12, 1996, in Vancouver, British Columbia (the "Vancouver AIDS Conference"), results from studies involving clinical trials of protease inhibitors were announced which demonstrated more so than ever before that, when protease inhibitors were used in combination with other AIDS medications, they greatly reduced or eliminated levels of the virus in the blood. On July 16, 1996, four days after the conclusion of the Vancouver AIDS Conference, Dignity announced it was ceasing processing new applications for viatical settlements for individuals afflicted with AIDS while it further analyzed the results announced at the Vancouver AIDS Conference. The next day, July 17, 1996, the market price of Dignity stock dropped approximately 77%.
Notwithstanding the obviousness of the risk that an effective treatment for AIDS could be developed and that Dignity expressly warned of the potential efficacy of AIDS treatments and the detrimental effect they could have on Dignity's business, plaintiffs have spun a tale of alleged securities fraud from the decline in Dignity's stock price. The story plaintiffs have concocted with the benefit of hindsight, however, falls apart completely in the face of the undisputed facts, which the Court can now consider.
Plaintiffs claim that defendants artificially inflated the market price of Dignity stock during the class period by failing to disclose (i) the alleged fact that treatments not only might be, but actually were effective in substantially prolonging the lives of individuals with AIDS; and (ii) Dignity's collection results for the 4th quarter of 1995, which allegedly revealed a significant deterioration in Dignity's collection experience as a consequence of AIDS treatments. (Second Amended Complaint ("SAC"), a copy of which is attached as Ex. C to Def. Dec., ¶¶ 7-8, 25-28, 32-33, 35, 37, 39, 42, 65-66, 72-73, 91-101.) According to plaintiffs, the allegedly omitted information demonstrated that, contrary to the representations in the Prospectus and in certain other subsequent SEC filings, Dignity could no longer accurately estimate life expectancies. (Id. ¶¶ 6, 12, 25-28, 30, 32, 35, 39, 42, 56, 70-71, 75, 91, 99.) From that conclusion, plaintiffs argue that Dignity's use of the accrual accounting methodology was improper, and that, consequently, Dignity's financial statements contained in the Prospectus and other SEC filings were false and misleading and violated Generally Accepted Accounting Principles ("GAAP") in that revenues were improperly recognized and assets and net worth were overvalued. (Id. ¶¶ 46, 49, 51, 54, 58-61, 63-68.)2
Because plaintiffs' claims under Sections 11 and 15 of the Securities Exchange Act of 1933 (the "1933 Act") have been dismissed with prejudice, this action is proceeding only under Section 10(b) of the Securities Exchange Act of 1934 (the "1934 Act"), Rule 10b-5 promulgated thereunder and Section 20 of the 1934 Act. In essence, therefore, this is now a Rule 10b-5 case, which means plaintiffs must prove: (i) a misstatement or an omission, (ii) of a material fact, (iii) made with scienter, (iv) justifiably relied on by plaintiffs, (v) which was causally related to plaintiffs' injury. In re 3Com Sec. Litig., 761 F. Supp. 1411, 1415 (N.D. Cal. 1990).
Plaintiffs, however, cannot prove that they directly relied on the Prospectus -- the very document upon which their personal claims are based -- because they have admitted they never even saw, much less read it. For this reason, plaintiffs have sought to avail themselves of the "fraud on the market" theory, under which they would be afforded a rebuttable presumption of reliance on the Prospectus if they could establish the materiality of the alleged omissions from it, and that in purchasing their Dignity shares, they relied on the integrity of the price established by the market for Dignity stock. This, plaintiffs simply cannot do, for the undisputed facts in this case establish that neither the omission of the information regarding the alleged efficacy of AIDS treatments nor the omission of the collection results for the 4th quarter of 1995 was material to the market.
As plaintiffs themselves effectively have conceded, all relevant information regarding AIDS treatments was immediately and widely reported by the news media and thus known to the market. Any additional disclosure of such information by defendants, therefore, would not have significantly altered the total mix of information available to the market. Moreover, not only have plaintiffs blatantly mischaracterized the collection results for the 4th quarter of 1995, but when those results were disclosed in Dignity's 1995 Form 10-K, which was filed with the SEC on April 1, 1996, the market price of Dignity stock was not affected thereby, demonstrating conclusively the immateriality of the omission of that data from the Prospectus. Under these circumstances, pursuant to well-established, dispositive case law, plaintiffs are not entitled to the fraud on the market reliance presumption. Without the benefit of that presumption, plaintiffs cannot satisfy the reliance requirement of Rule 10b-5, and summary judgment must be issued in defendants' favor.
In addition to their inability to satisfy the reliance requirement of Rule 10b-5, plaintiffs cannot prove loss causation. As to the Dignity stock price decline on June 26, 1996, plaintiffs admit that the price of Dignity stock declined approximately 32% that day because of an Oppenheimer report which reduced its estimates for future earnings of Dignity. Oppenheimer, however, reduced its earning estimates for Dignity because Dignity's medical evaluation costs had increased and Dignity had experienced a declining closing-to-application ratio, neither of which has anything to do with the alleged fraud in this case. For these reasons, the June 26 Dignity stock price decline cannot be charged to defendants' alleged omissions. Nor can plaintiffs establish that Dignity's alleged accounting improprieties or allegedly inflated financial statements in the Prospectus caused Dignity's stock price decline on July 17, 1996. That decline occurred following Dignity's announcement that it would stop processing AIDS viators' applications. It therefore cannot be tied to the alleged problems with the Prospectus - - the omission of the 4th quarter 1995 collection experience or the alleged erroneous financial statements. Summary judgment should be issued in defendants' favor on these issues as well.
On February 14, 1996, Dignity commenced an initial public offering of 2,702,500 shares of its common stock at a price of $12.00 per share. (SAC ¶¶ 1, 3.) In connection with the public offering, Dignity filed with the SEC a Registration Statement on Form S-1 under the 1933 Act. (Prospectus at 2.) Included as part of that Registration Statement, which became effective on February 13, 1996, was Dignity's 85-page Prospectus, which described in tremendous detail all aspects of the offering and Dignity's business, including the attendant risk factors, and provided audited and unaudited financial statements for Dignity. (Id. at 10-11, 22-23, 30, 36-37, F-3-F-23.)
The Prospectus revealed that Dignity accounted for its operations on an accrual basis. (Id. at 22 ("Method of Accounting").) Dignity explained that it:
recognizes income ("earned discount") on each purchased policy by accruing, over the period between the acquisition date of the policy and [Dignity's] estimated date of collection of the policy (the "Accrual Period"), the difference between (a) the face value of the policy less the amount of fees, if any, payable to a referral source upon collection of the face value, and (b) the carrying value of the policy.
(Id.)3 The Accrual Period assigned to each life insurance policy in Dignity's portfolio was based on Dignity's estimate of the life expectancy of that specific insured, taking into account his or her medical condition:
The length of the Accrual Period is determined by [Dignity] based upon its estimate of the date on which it will collect the face value of the policy. Such estimate is based upon [Dignity's] estimate of life expectancy of the insured, after review of the medical records of the insured by one or more [medical] Consultants, and is also adjusted to reflect the historical accuracy of the life expectancies estimated by [Dignity's] Consultants and the typical period (the "collection period") between the date of an insured's death and the date on which [Dignity] collects the face value of the policy.
(Id. at 22-23 (emphasis added).)
The life expectancy estimates were determinative not only of the Accrual Periods Dignity assigned to the policies, but also in large part of the price Dignity paid for the policies. (Id. at 10.) Thus, the ability to estimate accurately life expectancies was key to Dignity's ability to achieve its expected percentage rates of return on investments and cash flows, a fact made abundantly clear in the Prospectus:
The Company's operations and financial results are highly dependent on the ability of the Company, with the assistance of its Consultants, to predict accurately life expectancy. Life expectancy is a significant factor in the Company's determination of the purchase price of a policy and the Accrual Period over which the Company recognizes income on the policy. Unanticipated delays in the collection of policies will reduce the Company's actual yield on its portfolio and adversely affect the Company's cash flows and could result in a future extension of Accrual Periods prospectively for then existing and future acquired policies.
(Id. (emphasis added).)
Not surprisingly, Dignity's estimates of insureds' life expectancies were seldom, if ever, 100% accurate to the day -- policies were either collected earlier or later than estimated, based on the insureds' actual dates of death. There is no dispute that the Prospectus revealed those facts in exacting detail. Indeed, the Prospectus disclosed the historical performance of Dignity's entire portfolio of policies as of September 30, 1995, and identified the percentages, numbers and face values of policies collected early and late, open past expected collection date and not yet due for collection. (Id. at 36-37.)4
The "Portfolio Analysis" section of the Prospectus set forth the following table regarding the collection status by number of policies:
Collection Status by Number of Policies
Cumulative Number of Policies
December 31, 1993 December 31, 1994 September 30, 1995
Number Percent Number Percent Number Percent
Collected Early --
Estimated Collection Date Prior to 0 0.0% 29 4.4% 95 9.8%
Date Indicated
Collected Early --
Estimated Collection Date After 9 4.6 66 9.9 99 10.2
Date Indicated
Collected Late 0 0.0 23 3.5 61 6.3
Open Past Expected Collection Date 15 7.6 28 4.2 93 9.6
Open and Not Due For Collection 173 87.8 520 78.1 622 64.1
Total1 197 100.0% 666 100.0% 970 100.0%
1 Percent total may not add to 100.0% due to rounding.
(Prospectus at 36.) Dignity thus fully disclosed that (i) from December 31, 1993 to December 31, 1994, the percentage of policies, in terms of number of policies, collected late or open past expected collection date increased from 7.6% (0% collected late + 7.6% open past collection date) to 7.7% (3.5% collected late + 4.2% open past expected collection date) of the total number of policies purchased from the inception of Dignity's business; and (ii) from December 31, 1994 to September 30, 1995, the percentage of policies collected late or open past expected collection date increased from 7.7% to 15.9% (6.3% collected late + 9.6% open past expected collection date) of the total number of policies purchased from inception. (Id. at 36.)5
The "Portfolio Analysis" section of the Prospectus also contained the following table regarding the collection status by face value of policies:
Collection Status by Face Value of Policies
Cumulative Face Value of Policies
December 31, 1993 December 31, 1994 September 30, 1995
Face Value Percent Face Value Percent Face Value Percent
Collected Early --
Estimated Collection Date Prior $ 0 0.0% $ 1,718,973 3.4% $ 6,134,410 8.3%
to Date Indicated
Collected Early --
Estimated Collection Date After 704,729 4.5 4,785,422 9.4 7,722,183 10.5
Date Indicated
Collected Late 0 0.0 1,336,000 2.6 4,649,406 6.3
Open Past Expected Collection Date 770,000 5.0 2,475,690 4.8 7,684,244 10.4
Open and Not Due For Collection 14,015,242 90.5 40,729,079 79.8 47,463,751 64.4
Total1 $15,489,971 100.0% $51,045,164 100.0% $73,653,995 100.0%
1 Percent total may not add to 100.0% due to rounding.
(Id. at 37.) Thus, Dignity also disclosed that: (i) from December 1, 1993 to December 31, 1994, the percentage of policies, in terms of face value of policies, that were collected late or open past expected collection date increased from 5% (0% collected late + 5% open past expected collection date) to 7.4% (2.6% collected late + 4.8% open past expected collection date) of the total face value of the policies purchased from the inception of Dignity's business; and (ii) from December 31, 1994 to September 30, 1995, the percentage of policies, in terms of face value, that were collected late or open past expected collection date increased from 7.4% to 16.7% (6.3% collected late + 10.4% open past expected collection date) of the total face value of the policies purchased since inception. (Id.)6
Dignity's disclosures did not stop there. Dignity also revealed the negative impact late collections would have on the actual annualized yield on its portfolio of policies:
Unlike other speciality financial services companies whose performance depends primarily on the ability to collect on a receivables portfolio, the Company's performance depends primarily on the timing of collection on its portfolio. To a great extent, the Company determines its purchase price for policies based on the estimated date of collection. To the extent that the Company collects a policy earlier than expected, the actual annualized yield on such policy will be higher than the original estimated annual yield. Conversely, to the extent that the Company collects on a policy later than expected, the actual annualized yield on such policy will be lower than the original estimated annual yield.
(Id. at 37 (emphasis added).) When read in conjunction with the Portfolio Analysis section of the Prospectus, setting forth Dignity's collection experience, this disclosure made clear that as of September 30, 1995, 15.9% of the total number of policies purchased since inception (which represented 16.7% of the total face value of policies) would have a lower actual percentage yield than Dignity originally had estimated.7
In the Prospectus, Dignity specifically advised that approximately 99% of the policies in its portfolio insured individuals with AIDS. (Prospectus at 3.) In addition, under the heading "Risk Factors," Dignity cautioned that "[r]ecently announced studies by several drug manufacturers indicate that certain existing medications and medications currently under development may, when used in combination, eliminate or reduce a high percentage of the AIDS virus detectable in persons previously diagnosed with AIDS." (Id. at 11, 30 (emphasis added).)8 Finally, although it was obvious that the development of any cures or significant medical treatments for . Any such delay could materially reduce [Dignity's] actual yield on its portfolio, materially adversely affect [Dignity's] cash flows. . . . Public announcements regarding potential cures or treatments for terminal illnesses (particularly AIDS) may also affect the market price of the common stock.
(Id. at 11 (emphasis added).)
The Prospectus included the consolidated balance sheets of Dignity as of December 31, 1993 and 1994, and June 30, 1995, and the related statements of operations, stockholders' equity, and cash flows for the period January 2, 1993 (the date of inception of Dignity's business) to December 31, 1993, for the year ended December 31, 1994, and for the six month periods ended June 30, 1994 and 1995. (Id. at F-3-F-18.) These financial statements were audited by the independent accounting firm of KPMG Peat Marwick LLP ("KPMG").9 In its "Independent Auditor's Report," KPMG wrote:
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
(Id. at F-2 (emphasis added).) In KPMG's opinion, "the financial statements referred to above present fairly, in all material respects, the financial position of Dignity as of [the various balance sheet dates] and the results of its operations and its cash flows for the [various periods] in conformity with generally accepted accounting principles." (Id. (emphasis added).)10
As previously stated, the Dignity public offering was made at $12.00 per share on February 12, 1996 and was oversubscribed. Plaintiff Steinberg purchased 100 Dignity shares in the secondary market on February 22, 1996 at a price of $14.00 per share; plaintiff Feinman purchased 2000 Dignity shares in the secondary market on March 6, 1996 at a price of $14.00 per share; and plaintiff DeRosa purchased 10,000 Dignity shares in the secondary market on March 14, 1996 at a price of $13.25 per share. (SAC ¶¶ 20, 61.) Notwithstanding the fact that plaintiffs' personal claims are based on the Prospectus, before making their purchases, neither Steinberg nor DeRosa read any portion of the Prospectus. In fact, DeRosa admitted that he never even saw a copy of the Prospectus until his deposition in this case, and Steinberg admitted that he did not receive a copy of the Prospectus until sometime after he purchased his Dignity shares. (DeRosa Tr. at 53; Steinberg Tr. at 42-44.)11 Instead, DeRosa thinks he probably relied on the recommendation of his broker, and Steinberg claims to have read a newspaper article (probably in the Wall Street Journal) about Dignity and the viatical settlement business that made him think that Dignity would be a good investment. (DeRosa Tr. at 13, 27-28; Steinberg Tr. at 21-22.) Feinman could not recall whether he received or read a copy of the Prospectus before he purchased his Dignity shares. (Feinman Tr. at 42-45.) Like DeRosa, Feinman testified that he might have relied on the recommendation of his broker. (Id. at 27.)
On April 1, 1996, shortly after plaintiffs purchased their Dignity shares, Dignity filed its 1995 Form 10-K with the SEC. (SAC ¶¶ 20, 61; 1995 Form 10-K.) The 1995 Form 10-K updated the historical performance of Dignity's entire portfolio of policies to December 31, 1995, and identified the percentages, numbers and face values of policies that, as of that date, had been collected early and late, were open past expected collection date and were not yet due for collection. The 1995 Form 10-K thus fully disclosed the very information plaintiffs have sued defendants for not disclosing in the Prospectus -- Dignity's collection results for the 4th quarter of 1995. Additionally, the 1995 Form 10-K, like the Prospectus, fully advised of the reported potential effectiveness of AIDS treatments and the affect they could have on both Dignity's rate of return (yield) on its portfolio and its cash flow.12
After repeating what it said in the Prospectus about the tremendous importance of accurately estimating life expectancies (1995 Form 10-K at 8), in the "Portfolio Analysis" section of the 1995 Form 10-K, Dignity set forth the following table regarding the collection status by number of policies:
Collection Status by Number of Policies
Cumulative Number of Policies
December 31, 1993 December 31, 1994 December 31, 1995
Number Percent Number Percent Number Percent
Collected Early --
Estimated Collection Date Prior to 0 0.0% 29 4.4% 122 11.6%
Date Indicated
Collected Early --
Estimated Collection Date After 9 4.6 66 9.9 108 10.3
Date Indicated
Collected Late 0 0.0 23 3.5 73 6.9
Open Past Expected Collection Date 15 7.6 28 4.2 123 11.7
Open and Not Due For Collection 173 87.8 520 78.1 626 59.5
Total1 197 100.0% 666 100.0% 1,052 100.0%
1 Percent total may not add to 100.0% due to rounding.
(Id. at 15.)13 Thus, when read in conjunction with the Prospectus, the 1995 Form 10-K revealed that, during the 4th quarter of 1995 (September 30 to and including December 31), the percentage of policies, in terms of number of policies, that were collected late or open past expected collection date had increased from 15.9% to 18.6% (6.9% collected late + 11.7% open past expected collection date) of the total number of policies purchased from inception. (1995 Form 10-K at 15; Prospectus at 36-38.)14
The "Portfolio Analysis" section of the 1995 Form 10-K also set forth the following table regarding the collection status by face value of the policies:
Collection Status by Face Value of Policies
Cumulative Face Value of Policies
December 31, 1993 December 31, 1994 December 31, 1995
Face Value Percent Face Value Percent Face Value Percent
Collected Early --
Estimated Collection Date Prior $ 0 0.0% $ 1,718,973 3.4% $ 7,628,366 9.5%
to Dated Indicated
Collected Early --
Estimated Collection Date After 704,729 4.5 4,785,422 9.4 7,982,080 9.9
Dated Indicated
Collected Late 0 0.0 1,336,000 2.6 5,368,214 6.7
Open Past Expected Collection Date 770,000 5.0 2,475,690 4.8 10,916,428 13.5
Open and Not Due For Collection 14,015,242 90.5 40,729,079 79.8 48,828,036 64.4
Total1 $15,489,971 100.0% $51,045,164 100.0% $80,723,124 100.0%
1 Percent total may not add to 100.0% due to rounding.
(1995 Form 10-K at 15.) Thus, when read in conjunction with the Prospectus, the 1995 Form 10-K also disclosed that, during the 4th quarter of 1995, the percentage of policies, in terms of face value of policies, that were collected late or open past expected collection date had increased from 16.7% to 20.2% (6.7% collected late + 13.5% open past expected collection date) of the total face value of the policies purchased from inception. (Id.; Prospectus at 36.)15
As in the Prospectus, Dignity's disclosures did not stop there. Dignity reiterated that "to the extent that [it] collects on a policy later than expected, the actual annualized yield on such policy will be lower than the original estimated annual yield." (1995 Form 10-K at 16 (emphasis added).) When read in conjunction with the "Portfolio Analysis" section of the 1995 Form 10-K, that disclosure fully revealed that, as of December 31, 1995, 18.6% of the policies purchased since inception (which represented 20.2% of the total face value of policies) would have a lower actual percentage yield than Dignity had originally estimated.16
Although it had already done so in the Prospectus, in the 1995 Form 10-K, Dignity again fully disclosed that approximately 99% of the policies in its portfolio insured individuals with AIDS and, under the heading "Industry Overview," again warned that "[r]ecently announced studies by several drug manufacturers indicate that certain existing medications and medications currently under development may, when used in combination, eliminate or reduce a high percentage of the AIDS virus detectable in persons previously diagnosed with AIDS." (1995 Form 10-K at 5, 10 (emphasis added).) Additionally, Dignity reiterated the obvious -- that the development of any cures or significant medical treatments for AIDS could "materially reduce" Dignity's rate of return (yield) on its portfolio and "materially adversely affect" Dignity's cash flow, not to mention the market price of Dignity stock. (Id. at 10 (emphasis added).)
The filing of the 1995 Form 10-K on April 1, 1996, in which Dignity disclosed, among other things, its collection results for the 4th quarter of 1995, had no effect on the market price of Dignity stock. Dignity's stock closed at the following prices per share on the days immediately surrounding April 1:
3/26 - $11.125
3/27 - $11.75
3/28 - $12.00
3/29 - $11.75
4/01 - $11.50
4/02 - $11.75
4/03 - $11.375
4/04 - $11.125
4/08 - $11.00
4/09 - $11.50
4/10 - $11.25
4/11 - $11.50
(A copy of the stock price information for Dignity through the close of the class period is attached as Ex. E to Def. Dec..)17 By May 2, 1996, approximately one month after Dignity filed its 1995 Form 10-K, Dignity stock was trading at $13.75 per share. (Id.) That represented a price increase of approximately 20% from the closing price on April 1.
On June 26, 1996, Oppenheimer, issued a report reducing its prior earnings estimates for Dignity "to reflect higher policy processing costs." (See June 26 Oppenheimer report, attached as Ex. F to Def. Dec., at 1.) In the "Investment Conclusion" section of its report, Oppenheimer stated:
Dignity Partners should succeed in rapidly building up its viatical portfolio. This should create a favorable compounding effect on earnings by 1997. However, near-term earnings during the company's volume ramp-up stage are being penalized, primarily by higher than expected costs for the medical evaluations required to process the strong flow of applications, but also because of a declining closing-to-application ratio. As more policy transactions flow through the pipeline, the G&A burden rate per policy should start to fall. Based on our revised 1997 EPS estimate of $1.40 (previously $1.50), we have reduced our 12-month price target from $20 to $18.
(Id. (emphasis added).)
The price of Dignity stock dropped approximately 32% on June 26, 1996, from a closing price of $12.00 per share on June 25, 1996 to $8.125 per share. (SAC ¶ ¶4, 43.) Plaintiffs have admitted that Dignity's stock price decline on June 26 was attributable to the June 26 Oppenheimer report. (Id.)
The Vancouver AIDS Conference was held from July 7-12, 1996. At that conference, the results from studies involving clinical trials of protease inhibitors were released which demonstrated more so than ever before that, when protease inhibitors were used in combination with other AIDS medications, they greatly reduced or eliminated levels of the virus in the blood.
The Vancouver AIDS Conference was extolled in the media as a watershed event. (Copies of articles regarding the Vancouver AIDS Conference are attached as Ex. H to Def. Dec..)18 For example, Newsweek reported:
For most of the past 15 years, gloom has been the official mood of the International Conference on AIDS. But as 15,000 delegates gathered in Vancouver last week, the spirit was closer to elation. After years of bad news about AZT -- the first AIDS drug approved and until recently the only one -- scientists were reveling in dispatches from a new therapeutic era. Two research teams showed that when AZT and a related drug are combined with new agents called protease inhibitors, the effect on patients is breathtaking. The new regimes have plenty of downsides: they're toxic, complicated and very expensive. But they have optimists whispering a word that AIDS experts have long eschewed. The word is cure.
Geoffrey Cowley & Mary Hager, New AIDS Optimism, Newsweek, July 22, 1996, at 68. Reuters reported the closing comments from a Conference Co-Chairman:
Dr. Martin Schechter talked about the "defeat" of the AIDS epidemic, now in its 15th year. "Historians will look back and observe that 1996 marked a strategic turning point in the global effort against HIV and AIDS. Now is the time to 'rejuvenate' our efforts."
A Wrap-Up from Vancouver: Closing Comments from Conference Co-Chairmen, Reuters Health Information, July 12, 1996 (Def. Dec., H2).19
On July 16, 1996, four days after the conclusion of the Vancouver AIDS Conference, Dignity issued the following press release:
Dignity Partners, Inc. (DPNR) today announced that, in light of the data presented at the International AIDS Conference in Vancouver, British Columbia, the Board of Directors determined that the Company will temporarily cease processing new applications for viatical settlements for people afflicted with AIDS and HIV while it further analyzes the research results. The Company noted that in excess of 95% of its historical business involved policies insuring people with AIDS or HIV. The Company indicated that, although the medical developments announced at the AIDS conference are welcome news for many, if the treatments are effective in the long term, the Company's results will be adversely affected.
(A copy of Dignity's July 16 press release is attached as Ex. I to Def. Dec..) The next day, July 17, 1996, the market price of Dignity stock dropped approximately 77%, from a closing price of $6.166 per share on July 16 to $1.375 per share. (Dignity stock price information, Def. Dec., Ex. E.) This class action lawsuit followed shortly thereafter.
Summary judgment is appropriate when "there is no genuine issue as to any material fact and . . . the moving party is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c). The Court may grant summary judgment "upon all or any part" of the claims in a case. Fed. R. Civ. P. 56(a), (b). "Summary judgment procedure is properly regarded not as a disfavored procedural shortcut, but rather as an integral part of the Federal Rules as a whole, which are designed 'to secure the just, speedy and inexpensive determination of every action." Celotex Corp. v. Catrett, 477 U.S. 317, 327 (1986).
Although, in moving for summary judgment, defendants bear the initial burden of showing that one or more elements of the plaintiffs' claims cannot be established, they need not come forward with evidence of their own that negates an element of plaintiffs' case. Rather, defendants may sustain their burden simply by pointing to "an absence of evidence" to support an essential element or claim of plaintiffs' case. In re Brazier Forest Prod., Inc., 921 F.2d 221, 223 (9th Cir. 1990) (citation omitted). In the alternative, defendants may, but are not required to, offer evidence negating an essential element of plaintiffs' claims. Triton Energy Corp. v. Square D Co., 68 F.3d 1216, 1222 (9th Cir. 1995).
Once defendants have met their burden, the burden shifts to plaintiffs to show that a triable issue of one or more material facts exists as to that claim for relief. Triton Energy Corp., 68 F.3d at 1222. Defendants are entitled to summary judgment if, once the burden has shifted to plaintiffs, plaintiffs fail to come forward with sufficient evidence to create a triable issue of material fact. Id.
In order to avoid summary judgment, plaintiffs must put into evidence a dispute about an issue whose determination would affect the outcome of the case. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252 (1986). Only those disputes that are "genuine" -- that is, that "may reasonably be resolved in favor of either party" -- will preclude summary judgment. Anderson, 477 U.S. at 250. See also Aydin Corp. v. Loral Corp., 718 F.2d 897, 902 (9th Cir. 1983).20
To meet their burden, it is well settled that plaintiffs must go beyond their pleadings and that mere disagreement, opinion, conclusions or speculations cannot create a genuine factual dispute. Anderson, 477 U.S. at 251-52; Celotex, 477 U.S. at 324; British Airways Bd. v. Boeing Co., 585 F.2d 946, 952 (9th Cir. 1978), cert. denied, 440 U.S. 981 (1979). Nor is it enough for plaintiffs to introduce "some" evidence, "a scintilla" of evidence, merely "colorable" evidence or evidence which is not "significantly probative." Anderson, 477 U.S. at 247-52. See also Celotex, 477 U.S. 317 (1986). In the face of such evidence, summary judgment is required when the record taken as a whole could not lead a rational trier of fact to find for plaintiffs. Under these circumstances, there is no "genuine issue for trial." Matsushita Electric Industrial Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986), cert. denied, 481 U.S. 1029 (1987); accord Hanon v. Dataproducts Corp., 976 F.2d 497, 500 (9th Cir. 1992).
As demonstrated in detail below, defendants have met their burden of showing that plaintiffs cannot prove a fraud on the market claim. Because there is no evidence with which plaintiffs can come forward to create a triable issue of material fact, defendants are entitled to summary judgment.21
Rule 10b-5 "makes it unlawful '[t]o make any untrue statement of fact or to omit to state a material fact necessary to make the statements made, in light of all the circumstances in which they were made, not misleading.'" In re Apple Computer Sec. Litig., 886 F.2d 1109, 1113 (9th Cir. 1989), cert. denied, sub nom. Schneider v. Apple Computer, Inc., 496 U.S. 943 (1990). To recover under Rule 10b-5, plaintiffs must establish, among other things, that, in purchasing their shares, they reasonably relied on the documents containing the alleged misrepresentations or omissions. Id. See also Basic, Inc. v. Levinson, 485 U.S. 224, 243 (1988) ("reliance is an element of a Rule 10b-5 cause of action"). The reliance requirement ensures that there is a causal connection between defendants' fraud and plaintiffs' injury. Id.
Although plaintiffs' personal claims in this action are based on the Prospectus, plaintiffs do not contend that they directly relied on that document in purchasing their Dignity shares. Nor could they -- DeRosa has admitted that he never even saw a copy of the Prospectus until his deposition; Steinberg has admitted that he did not receive a copy of the Prospectus until sometime after he purchased his Dignity shares; and Feinman cannot recall receiving or reading a copy of the Prospectus before he purchased his Dignity shares. (DeRosa Tr. at 53; Steinberg Tr. at 42-44; Feinman Tr. at 42-45.) Instead, plaintiffs seek to invoke the "fraud on the market" theory and its attendant presumption of reliance. (SAC ¶ 108; Pltfs.' Mem. in Support of Class Certification, the relevant portions of which are attached to Def. Dec. as Ex. J, at 15; Pltfs.' Mem. in Support of Motion to Quash, attached to Def. Dec. as Ex. K.)22
Under the "fraud on the market" theory, a plaintiff is entitled to a rebuttable presumption that he indirectly relied on the alleged misrepresentations or omissions by relying on the integrity of the stock price established by the market. In re Apple, 886 F.2d at 1113-114. The fraud on the market theory is premised on the following assumptions:
Id. See also Shaw v. Digital Equip. Corp., 82 F.3d 1194, 1218 (1st Cir. 1996) (in a fraud on the market case, "the statements identified by plaintiffs as actionably misleading are alleged to have caused injury, if at all, not through the plaintiffs' direct reliance on them, but by dint of the statements' inflating effect on the market price of the security purchased") (citing Basic, 485 U.S. at 241-47); In re LTV Sec. Litig., 88 F.R.D. 134, 143 (N.D. Tex. 1980) (the fraud on the market reliance presumption "can be considered as recognition of the market's role as a transmission belt linking the misrepresentation and the individual purchaser or seller") (emphasis added); In re Seagate Technology II Sec. Litig., 843 F. Supp. 1341, 1357 (N.D. Cal. 1994) ("[c]entral to the fraud on the market theory is the efficient capital market hypothesis, which posits that all misinformation introduced into an efficient market is transmitted via the pricing mechanism"). Accordingly, to recover on their fraud on the market claim, plaintiffs must prove, among other things, that the information allegedly omitted from the Prospectus was material. Basic, 485 U.S. at 231 (listing the requirements for pleading and proving a fraud on the market claim) (citing Levinson v. Basic, 786 F.2d 741, 750 (6th Cir. 1986)); see also In re Verifone Sec. Litig., 11 F.3d 865, 868 (9th Cir. 1993); Freeman v. Laventhol & Horwath, 915 F.2d 193, 197-98 (6th Cir. 1990).23
Generally, an omitted fact is material if there is a "substantial likelihood that the disclosure of [that] fact would have been viewed by a reasonable investor as having significantly altered the 'total mix' of information made available." TSC Indus. v. Northway, Inc., 426 U.S. 438, 444 (1976). The fraud on the market theory, however, "shifts the critical focus of the materiality inquiry." Shaw, 82 F.3d at 1218. In a fraud on the market case, "the hypothetical 'reasonable investor,' by reference to whom materiality is gauged, must be the market itself, because it is the market, not any single investor, that determines the price of a publicly traded security." Id.; see also In re Verifone Sec. Litig., 784 F. Supp. 1471, 1479 (N.D. Cal. 1992) ("[t]he fraud on the market theory thus shifts the inquiry from whether an individual investor was fooled to whether the market as a whole was fooled"), aff'd 11 F.3d 865 (9th Cir. 1993). To satisfy the materiality requirement in this case, therefore, plaintiffs must prove that there is a "substantial likelihood" that the information allegedly omitted from the Prospectus would have "significantly altered the total mix of information available" to the market at the time they purchased their Dignity shares. In re Apple Computer, 886 F.2d at 1115; In re Convergent Tech. Sec. Litig., 948 F.2d 507, 513 (9th Cir. 1991); In re Clearly Canadian Sec. Litig., 875 F. Supp. 1410, 1419 (N.D. Cal. 1995).
Plaintiffs simply cannot carry their burden. The undisputed facts in this case show that the market was fully aware of all relevant information about the research and development regarding AIDS treatments and did not react when Dignity's collection results for the 4th quarter of 1995 were disclosed in Dignity's 1995 Form 10-K.
Plaintiffs accuse defendants of failing to disclose in the Prospectus the alleged efficacy of AIDS treatments. According to plaintiffs, that was a material omission that defrauded the market because that information allegedly demonstrated that, contrary to Dignity's representations, Dignity could no longer accurately estimate the life expectancies of individuals afflicted with AIDS. (SAC ¶¶ 6, 12, 26-28, 32, 37, 42, 72-73, 91-101.)24
In the Prospectus, however, Dignity specifically cautioned, under the heading "Risk Factors," that "[r]ecently announced studies by several drug manufacturers indicate that certain existing medications and medications currently under development may, when used in combination, eliminate or reduce a high percentage of the AIDS virus detectable in persons previously diagnosed with AIDS." (Prospectus at 11, 30 (emphasis added).)25 In a futile attempt to overcome this complete and accurate disclosure, plaintiffs take issue with defendants' use of the word "may," claiming defendants knew at the time of Dignity's initial public offering that the new AIDS treatments "were already materially prolonging the lives of people with AIDS." (SAC ¶¶ 6, 12, 26-28, 32, 37, 42, 72-73, 91-101.) Even assuming for purposes of this motion, however, that, at the time of the initial public offering, any AIDS treatments already had proven to be as efficacious as plaintiffs claim and that defendants knew it, neither of which is true, the market was aware of all of the information upon which plaintiffs now base their conclusion. Additional disclosure by defendants of the facts regarding the research and development of AIDS treatments would have added no material information to the market.
Obviously, disclosure of information of which the market already is aware will not substantially alter the total mix of information available to the market. For this reason, the Ninth Circuit has upheld summary judgment for defendants in fraud on the market suits when the information withheld by defendants "has been made credibly available to the market by other sources." In re Apple, 886 F.2d at 1114-1115; Convergent, 948 F.2d at 513; see also In re Stac, 89 F.3d 1399, 1409 (9th Cir. 1996) (affirming the dismissal of a fraud on the market claim because the information defendants were alleged to have withheld from or misrepresented to the market entered the market through other channels); In re Syntex Corp. Sec. Litig., No. 92-20548-SW, 1993 U.S. Dist. LEXIS 20420, *12-*15 (N.D. Cal. Sept. 1, 1993) (dismissing securities fraud claim because the market was informed of the very matters plaintiffs' claimed were fraudulently omi ec. Litig., No. C-95-4353 MMC, 1997 U.S. Dist. LEXIS 14011, *37-*40 (N.D. Cal. April 28, 1997) (same).26 Under those circumstances, "the facts allegedly omitted by the defendants would already be reflected in the stock's price," and anyone relying on the integrity of that price would not be misled. In re Apple Computer, 886 F.2d at 1114; see also Padnes v. Scios Nova, Inc., No. C-95-1693 (MHP), 1996 WL 539711 at *7 (N.D. Cal. Sept. 18, 1996).
In In re Apple, the Ninth Circuit aptly illustrated the point by way of an example:
Assume that only two "facts" are relevant to Lisa's prospects, and assume that both facts are equally "true": (1) Apple's Chairman of the Board believes that Lisa [a computer] will be phenomenally successful, and (2) a number of potential customers have balked at Lisa's proposed $9,995 retail price. Where both facts are transmitted to the market with roughly equal intensity and credibility, the market will receive complete and accurate information. Informed investors will invest in light of an accurate appreciation of the relevant risks. Those investors who know only of the Chairman's optimism may overvalue Apple stock; those who know only of the problems with the suggested retail price may undervalue the stock. However, it is a basic assumption of the securities laws that the partially-informed investors will cancel each other out, and that Apple's stock price will accurately reflect all relevant information. Particular individuals who hear only one of the two facts may receive a distorted impression of Lisa, and thus may have an actionable claim. But the market, and any individual who relies only on the price established by the market, will not be misled.
In re Apple, 886 F.2d at 1114. Similarly, the market had complete and accurate information regarding the efficacy of AIDS treatments, which plaintiffs claim belied Dignity's representations regarding the accuracy of its life expectancy estimates. Under plaintiffs' theory of the case, therefore, neither the market, nor any investor who relied on the price of Dignity stock established by the market, was misled.
Notably, plaintiffs do not contend that defendants alone were aware of the alleged efficacy of the new AIDS treatments. To the contrary, plaintiffs contend that it "was well known in the medical community" at the time of Dignity's initial public offering. (SAC, ¶ 99 (emphasis added).)27 In this regard, this case is a long way away from the typical securities fraud case where defendants are accused of failing to disclose non-public, company-specific information. See, e.g., In re Glenfed, Inc. Sec. Litig., 42 F.3d 1541 (9th Cir. 1994).
More importantly, however, each of the alleged facts from which plaintiffs draw their conclusion that the new AIDS treatments "were already materially prolonging the lives of people with AIDS" (SAC, ¶¶ 93-97), even if known by defendants, was made extensively available to the market by the news media prior to Dignity's initial public offering. (Copies of these articles are attached to Def. Dec. as Ex. M.) Indeed, the development of new treatments for HIV and AIDS received intense and sustained news media focus prior to the offering. Newspapers such as the Wall Street Journal, the New York Times, the Washington Post, the Los Angeles Times, the San Francisco Examiner and the San Francisco Chronical, magazines such as Time and Newsweek, scientific journals such as the New England Journal of Medicine, and television news programs such as Cable Network News ("CNN") carefully followed and promptly reported every announcement about HIV and AIDS treatments and medications, including successful and unsuccessful studies, promising new drugs, and medical experts' reactions. The underlying information came mainly from the pharmaceutical drug manufacturers who were dedicating extraordinary time and resources to developing new AIDS treatments. The manufacturers were eager to present every positive result from their studies. They frequently announced specific, albeit preliminary, results from incomplete studies. Prior to Dignity's initial public offering, the reported reactions to the new AIDS drugs ranged from declarations of a cure to guarded optimism to outright skepticism. Whatever the reaction to whatever new AIDS drug, the market "could not have been made more aware" of it. Apple Computer, 886 F.2d at 1116; Convergent Technologies, 948 F.2d at 513.
Plaintiffs claim that, at the time of the public offering, defendants were aware of the alleged efficacy of the following non-protease inhibitor drugs:
Approval
Drug Date by FDA
Retrovir (AZT) March 1987
Videx (ddi) October 1991
Hivid (ddC) June 1992
Zerit (D4T) June 1994
Epivir (3TC) November 1995
(SAC ¶ 91.) Even if that were proven, the non-protease inhibitor drugs had received a tremendous amount of news media coverage prior to Dignity's initial public offering.
For example, On September 15, 1995, The Wall Street Journal reported:
Elyse Tanovye, Combining AZT, Other AIDS Drugs Appears Promising, Wall St. J., Sept. 15, 1995 at B3. (Def. Dec., Ex. M55.)
On November 6, 1995, the Associated Press reported:
Lauran Neergaard, Panel Recommends FDA Approve New Combination Therapy for AIDS, Associated Press, Nov. 6, 1995. (Def. Dec., Ex. M69.)
The next day, the San Francisco Chronicle reported:
FDA Advisors Urge Approval of New AIDS Drug, Associated Press, Nov. 7, 1995 at A2. (Def. Dec., Ex. M73.)
On November 9, 1995, the San Francisco Chronicle reported:
3rd AIDS Drug in 3 Days Gets FDA Panel's OK/Medicine For Patients Not Responding To AZT, Associated Press, Nov. 9, 1995 at C8. (Def. Dec., Ex. M83.)
On November 21, 1995, the Los Angeles Times reported:
Marlene Cimons, New AIDS Drug OKd For Use With AZT, Los Angeles Times, Nov. 21, 1995 at 5. (Def. Dec., Ex. M90.)
Plaintiffs allege that "[d]efendants also knew that in July 1995, Hoffman-La Roche Inc. reached an agreement with the FDA to distribute, free of charge and through a special lottery, its new protease inhibitor, Saquinavir (Invirase), to approximately 2,280 AIDS patients in the United States" and that "as of May-June 1995, data had been released from patient studies that showed this drug reduced viral levels in AIDS patients while boosting immune-system cells normally depleted by the AIDS virus." (SAC ¶ 92.) This specific information about Saquinavir, as well as much other information about the protease inhibitor drug, had been widely reported in the press prior to Dignity's initial public offering.
For example, on June 21, 1995, more than six months before Dignity's initial public offering, The Wall Street Journal reported:
Michael Waldholz, Unit of Roche Sets Up Lottery for AIDS Drug, Wall St. J., June 21, 1995 at A5. (Def. Dec., Ex. M20.) See also Lauran Neergaard, Lottery To Offer AIDS Patients First Shot at New Drug, AP Worldstream, June 21, 1995. (Def. Dec., Ex. M21.)
On November 4, 1995, the Associated Press reported:
Lauran Neergard, Kessler Declares AIDS Drugs Most Potent Yet; Real Test Comes This Week, Associated Press, Nov. 4, 1995. (Def. Dec., Ex. M66.)
On November 8, 1995, The Wall Street Journal reported:
Laurie McGinley and Anita Womack, An FDA Panel Urges Approval of AIDS Drug, Wall St. J., Nov. 8, 1995 at B13. (Def. Dec., Ex. M77.)
Also on November 8, 1995, the Los Angeles Times reported:
Marlene Cimons, New Anti-AIDS Drugs Win FDA Panel's Backing, Los Angeles Times, Nov. 8, 1995. (Def. Dec., Ex. M80.)
On December 8, 1995, the New York Times reported:
Philip J. Hilts, F.D.A. Backs a New Drug To Fight AIDS, N.Y. Times, Dec. 8, 1995 at A28. (Def. Dec., Ex. M107.)
Plaintiffs allege that "[d]efendants were also aware that, in early Dec. 1995, Abbott Labs began its own special free lottery for its protease inhibitor, Ritonavir, for about 2,000 people in the late stages of the AIDS disease and that Ritonavir was another new powerful drug which lowered the levels of the AIDS virus in the blood and boosted the immune system." (SAC ¶ 94.) This specific information about Ritonavir, as well as much other information about the protease inhibitor drug, had been widely reported in the press prior to Dignity's initial public offering.
For example, On February 1, 1995, the San Francisco Examiner reported:
Lisa M. Kriegler, New Drug Seen as Potent HIV Fighter 10 Times Stronger Than AZT, But Viral Resistance Perplexing, San Francisco Examiner, Feb. 1, 1995 at A1. (Def. Dec., Ex. M6.)
On December 6, 1995, Reuters North American Wire reported:
Drug may boost immune system in AIDS patients, Reuters North American Wire, Dec. 6, 1995. (Def. Dec., Ex. M98.)
The following day, The Wall Street Journal reported:
Thomas M. Burton, Abbott Drug Shows Promise in AIDS Studies, Wall St. J., Dec. 7, 1995. (Def. Dec., Ex. M102.) See also Thomas M. Burton, Study Finds Abbott Labs AIDS Drug Cut Fatalities Due To Disease in Half, Wall St. J., Feb. 1, 1996 at B5. (Def. Dec., Ex. M153.)
On that same day, the San Francisco Examiner reported:
Lisa M. Krieger, AIDS drug found to cut mortality rate in half; But can ritonavir sustain its strength?, San Francisco Examiner, Feb. 1, 1996 at A3. (Def. Dec., Ex. M157.)
Plaintiffs claim that defendants knew that "Indinavir (Crixivan), approved by the FDA in Mar. 1996, was used by over 1,500 AIDS patients in 1995, not including additional patients involved in clinical studies." (SAC ¶ 95.) This specific information about Indinavir, as well as much other information about the protease inhibitor drug, had been widely reported in the press prior to Dignity's initial public offering.
For example, On July 17, 1995, the Associated Press reported that "Merck announced it will give crixivan away by lottery to about 1,400 patients." Merck to Make Experimental Drug Available to Some AIDS Patients, Associated Press, July 17, 1995 (Def. Dec., M32); see also Michael Waldholz, Merck Joins Roche Unit in Offering Test Drug Free to Some AIDS Patients, Wall St. J., July 17, 1995 at B3 (Def. Dec., M31). On July 31, 1995, The Washington Post reported:
Justin Gillis, New AIDS Treatments Lift Hopes; Scientists On Way to Making Disease More Manageable Series, Washington Post, July 31, 1995 at A01. (Def. Dec., Ex. M40.)
On September 19, 1995, the Philadelphia Inquirer reported:
Collins, Huntly, New AIDS Drug Shows Promise, Merck Says, Philadelphia Inquirer, Sept. 19, 1995 at A3. (Def. Dec., Ex. M58.)
On October 4, 1995, the San Francisco Examiner reported:
Lisa M. Krieger, Poll reveals AIDS No. 1 worry in state, San Francisco Examiner, Oct. 4, 1995 at A2. (Def. Dec., Ex. M64.)
Plaintiffs claim that "[d]efendants knew that under the FDA's accelerated approval regulations to implement its priority to review new AIDS drugs on the fastest possible track, [protease inhibitors] were expected by the medical community to be quickly approved." (SAC ¶ 95.) That the protease inhibitor drugs were expected to receive quick FDA approval also was widely reported in the press prior to Dignity's initial public offering.
For example, on December 7, 1995, the FDA announced on its website:
Arthur Whitmore, FDA Approves First Protease Inhibitor Drug For Treatment of HIV, U.S. Food and Drug Administration, Dec. 7, 1995. (Def. Dec., Ex. M99).28
On the next day, December 8, 1995, the Los Angeles Times reported:
Marlene Cimons, FDA Oks First of New Batch of AIDS Drugs, Los Angeles Times, Dec. 8, 1995 at A19. (Def. Dec., Ex. M109.)
Plaintiffs claim that "[d]efendants also knew that in Jan. 1996, AIDS researchers had discovered a 'triple-punch' combination of an experimental new AIDS drug and two others already on the market, which was by far the most potent treatment yet developed for AIDS viators." and that "Dr. Roy Gulick from New York University gave the combination to 26 patients and after six months, could find no measurable trace of the AIDS virus in 24 of them." (SAC ¶ 96.) This information too had been widely reported in the press prior to Dignity's initial public offering.
For example, on January 29, 1996, the Associated Press reported:
Daniel Q. Haney, Three-Drug Combination is Powerful New Weapon Against AIDS, Associated Press, Jan. 29, 1996. (Def. Dec., Ex. M128.) See also Daniel Q. Haney, International News, AP Worldstream, Jan. 29, 1996. (Def. Dec., Ex. M127.)
On January 30, 1996, The New York Times reported:
Lawrence K. Altman, 3-Drug Therapy Shows Promise Against AIDS, N.Y. Times, Jan. 30, 1996 at C5. (Def. Dec., Ex. M132.)
On that same day The Wall Street Journal reported:
Michael Waldholz, Medicine: Three-Drug Therapy May Suppress HIV, Wall St. J., Jan. 30, 1996 at B1. (Def. Dec., Ex. M134.)
Finally, plaintiffs claim that "[d]efendants also knew that in late Jan. 1996 at a Conference on Retroviruses and Opportunistic Infections in Washington, D.C., researchers who were conducting clinical trials of HIV protease inhibitors made presentations showing that the most potent of these compounds could significantly delay the onset of AIDS and prolong survival." (SAC ¶ 97; see also id. ¶ 100.) As with all the other information about AIDS treatments allegedly known to defendants, the study results announced at the Washington, D.C. AIDS Conference were widely reported in the press prior to Dignity's initial public offering.
For example, on January 31, 1996, the San Francisco Examiner reported:
Lisa M. Krieger, New Multiple Treatment Holds Promise, San Francisco Examiner, Jan. 31, 1996 at A-2. (Def. Dec., Ex. M147.)
On February 4, 1996, The New York Times reported:
Lawrence K. Altman, On The AIDS Front Line, N.Y. Times, Feb. 4, 1996 at 4-2. (Def. Dec., Ex. M168.)
On February 6, 1996, The Washington Post reported:
David Brown, AIDS Conference Offers Reasons for Hope; Studies Confirm Usefulness of Drug Therapy and Gauging 'Viral Load' in Blood, Washington Post, Feb. 6, 1996 at Z07. (Def. Dec., Ex. M169.)
On February 12, 1996, U.S. News & World Report reported:
Traci Watson, Where did the virus go?, U.S. News & World Report, Feb. 12, 1996 at 66. (Def. Dec., Ex. M177.)
These articles do not even constitute the tip of the proverbial iceberg. For the Court's convenience, defendants have attached hereto as Exhibit M, to Def. Dec. approximately 150 additional news reports about the development of HIV and AIDS treatments which appeared in newspapers, magazines and journals of national circulation as well as on CNN from January 1995 through February 12, 1996. What is clear from these articles is that, at the time of Dignity's initial public offering, the market was fully aware of all information about the development of new AIDS treatments.29 In light of the news media's "intense, sustained focus" on the development of AIDS treatments, no "rational jury" could find a "substantial likelihood" that additional disclosure by defendants would have "significantly altered the 'total mix' of information made available" to the market. In re Apple Computer, 886 F.2d at 1114; see also Convergent, 948 F.2d at 513.
Likewise, plaintiffs cannot establish the materiality of the omission from the Prospectus of the collection results for the 4th quarter of 1995. According to plaintiffs, that omission was material because the 4th quarter collection results allegedly revealed a "serious, indeed fatal, deterioration" in Dignity's collection experience as a consequence of AIDS treatments and thereby further demonstrated that Dignity could no longer accurately estimate life expectancies of individuals afflicted with AIDS. (SAC ¶ 46; see also id. ¶¶ 25, 32(e), 49, 63, 90.) In so arguing, plaintiffs have blatantly mischaracterized Dignity's collection experience.
Plaintiffs completely ignore the fact that, as of December 31, 1995, 21.9% of the total number of policies Dignity purchased since inception had been collected early, whereas only 18.6% had been collected late or were open past expected collection date.30 Thus, as of the end of the 4th quarter of 1995, approximately 17% more of the total number of policies purchased since inception were collected early than were collected late or open past collection date, combined.
Instead of considering the totality of Dignity's collection experience, plaintiffs focus on the percentage rate of increase in the total face value of the policies collected late and open past collection date. (SAC ¶¶ 63, 65, 90.) Even that isolated aspect of Dignity's collection experience, taken completely out of context, however, does not reveal a significant "deterioration" in the 4th quarter of 1995. (SAC ¶¶ 46, 49, 63.) To the contrary, during the first three quarters of 1995, the percentage rate of increase in the face value of policies collected late and open past expected collection date was 224% (from $3,811,690 to $12,333,650), or an average rate of increase of 74.6% a quarter, whereas during the 4th quarter of 1995, the percentage rate of increase in the total face value of policies collected late and open past expected collection date was only 32% (from $12,333,650 to $16,284,642). (Prospectus at 37; 1995 Form 10-K at 15.) Thus, during the 4th quarter of 1995, the percentage rate of increase in the total face value of policies collected late and open past collection date was actually 57% less than the average percentage rate of increase during the previous three quarters.
In light of these undisputed facts, Dignity's 4th quarter collection results so obviously fail to pose any "substantial likelihood" of having been viewed by the market as "significantly alter[ing] the 'total mix' of information available," that their omission from the Prospectus is properly deemed immaterial as a matter of law. In re Apple, 886 F.2d at 1115; Convergent, 948 F.2d at 513. The Court need not accept defendants' word for it, however. The market itself made that determination when the 4th quarter collection results were disclosed in Dignity's 1995 Form 10-K.
As previously stated, the fraud on the market theory is predicated on the assumption that, in an open, efficient and developed market, where the price of a company's stock is determined by, and adjusts immediately to, the disclosure of material information regarding the company and its business, the dissemination of material misrepresentations or the withholding of material information will alter the market price of the company's stock. Basic, 485 U.S. at 241. In a fraud on the market case, therefore, "the concept of materiality translates into information that alters the price of the firm's stock." In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1425 (3d Cir. 1997); see also Shaw, 82 F.3d at 1218 (statements that do not have an "inflating effect on the price of the security purchased" are immaterial); Raab v. General Physics Corp., 4 F.3d 286, 289 (4th Cir. 1993) (statements that do not inflate the market price of a stock are immaterial); In re LTV, 88 F.R.D. at 142 (in a fraud on the market case, a misrepresentation or omission is material if it affected the price of stock traded on the open market). Accordingly, the lack of change in the market price of a security following disclosure of previously omitted information (demonstrating as it does that no stock price inflation occurred as a consequence of the omission) is determinative by itself of the immateriality of the omitted information. In re Burlington, 114 F.3d at 1425 (where a disclosure had no effect on the stock price, "it follows that the information disclosed . . . was immaterial as a matter of law"); In re Seagate Tech. II Sec. Litig., 802 F. Supp. 271, 274 (N.D. Cal. 1992) (if there is no difference between the market price before and after disclosure of the omitted information, that information cannot be material). In re Verifone Sec. Litig., 784 F. Supp. at 1479 (same); Beecher v. Able, 435 F. Supp. 397, 407 (S.D.N.Y. 1975) (when the market does not react to the exposure of previously omitted information, it cannot be claimed that investors were influenced by its omission).
Here, Dignity's 4th quarter collection results were disclosed in Dignity's 1995 Form 10-K, which was filed with the SEC on April 1, 1996. (SAC ¶ 63; see also 1995 Form 10-K at 15.) If the omission of that information from the Prospectus truly was material -- meaning it actually had artificially inflated the market price of Dignity stock as plaintiffs allege (SAC ¶¶ 32(e), 64, 69) -- the disclosure of that information necessarily would have deflated Dignity's stock price. It did not. To the contrary, Dignity's stock price actually closed $.25 higher on April 2, 1996 ($11.75/share) than it did on April 1, 1996 ($11.5/share) and fluctuated only ever so slightly (both up and down) in the following weeks, eventually increasing by approximately 20% over the next month. (Dignity stock price, Def. Dec., Ex. E.)31 Under these circumstances, the omission of 4th quarter collection results from the Prospectus was immaterial to the market as a matter of law. See In re Seagate Tech. II Sec. Litig., 802 F. Supp. at 274; Becker, 435 F. Supp. at 407; In re Burlington, 114 F.3d at 1425; see also Raab, 4 F.3d at 289; Shaw, 82 F.3d at 1218; In re LTV Sec. Litig., 88 F.R.D. at 142.32
In sum, plaintiffs cannot establish, as they must, the materiality of either of the alleged omissions at issue in this case. Consequently, plaintiffs cannot avail themselves of the fraud on the market theory and its attendant presumption of reliance. Without the benefit of a presumption of reliance, plaintiffs cannot satisfy the reliance requirement of Rule 10b-5, and summary judgment should issue in defendants' favor.33
In addition to proving reliance, to recover under Rule 10b-5, a plaintiff must also prove that the alleged misrepresentations or omissions are causally related to plaintiffs' injury. In re 3Com Sec. Litig., 761 F. Supp. 1411, 1418 (N.D. Cal. 1990); In re Fortune Systems Sec. Litig., 680 F. Supp. 1360, 1365 (N.D. Cal. 1987); Rogal v. Costello, 1992 U.S. Dist. LEXIS 22179, at * 6-8 (N.D. Cal. Oct. 8, 1992); see also 15 U.S.C. § 78u-4(b)(4) (1995 Reform Act requires plaintiff to establish that "the act or omission of the defendant alleged to violate this title . . . caused the loss for which the plaintiff seeks to recover damages"). A plaintiff "must prove both transaction causation, that the violations in question caused the plaintiff to engage in the transaction, and loss causation, that the misrepresentations or omissions caused the harm (i.e., the decline in the price of the stock)." Hatrock v. Edward D. Jones & Co., 750 F.2d 767, 773 (9th Cir. 1984); In re Fortune, 680 F. Supp. at 1365. The loss causation requirement imposes on plaintiffs the burden of showing "that if the facts had been as represented by the defendants the value of the [investment] would not have declined." Bastian v. Petren Resources Corp., 892 F.2d 680, 685 (7th Cir.), cert. denied, 496 U.S. 906 (1990). Accordingly, when stock investments decline "not because of the personal shortcomings that the defendants concealed but because of [other] phenomena . . . then the plaintiffs, given their demonstrated desire to invest in such ventures, lost nothing by reason of the defendants' fraud and have no claim to damages." Id. at 685; In re Fortune, 680 F. Supp. at 1365 ("[w]hen a portion of the plaintiff's loss is due to an independent intervening cause such as a fluctuation in the stock market, . . . the claim of causation has been broken, and the defendant cannot be held liable for that portion of the plaintiff's loss") (citation omitted).
Plaintiffs admit that Dignity's June 26, 1996 stock price decline was attributable to the Oppenheimer report of that same date in which Oppenheimer lowered its 1996 and 1997 earnings estimates for Dignity. (SAC ¶¶ 13, 43.) Oppenheimer's downward revision of its earnings estimates, however, had absolutely nothing to do with any alleged concerns about the new AIDS treatments, the collection results for the 4th quarter of 1995, Dignity's ability to accurately estimate life expectancies, any of Dignity's accounting practices or any of its financial statements. Rather, Oppenheimer expressly stated it was adjusting its earnings estimates for Dignity downward "primarily [because of] higher than expected costs for the medical evaluations required to process the strong flow of applications, but also because of a declining closing-to-application ratio." (Def. Dec., Ex. F.) Because Dignity's June 26 stock price decline was thus clearly not the result of any of the alleged omissions or misrepresentations about which plaintiffs complain, it is not chargeable to defendants. See, e.g., Ackerman v. Oryx, 810 F.2d 336, 342 (2d Cir. 1987) ("[t]he price decline before disclosure of the alleged fraud may not be charged to defendants"); McMahan & Co. v. Wherehouse Entertainment, Inc., 65 F.3d 1044, 1049 (2d Cir. 1995) (same); Nielsen v. Greenwood, No. 91 C 6537, 1996 U.S. Dist. LEXIS 14441, *41 (N.D. Ill. Oct. 1, 1996) (same); In re Fortune, 680 F. Supp. at 1367-69 (granting partial summary judgment for defendants with respect to price declines that occurred prior to the date on which the alleged "truth-revealing" disclosure was first made); Beecher, 435 F. Supp. at 407 (defendants not liable for a drop in market price unrelated to and preceding an announcement concerning falsities in the prospectus); Feit v. Leasco Data Processing Equip. Corp., 332 F. Supp. 544, 586 (E.D.N.Y. 1971) (diminution in market price not caused by omissions in the registration statement could not be charged to defendant); Fox v. Glickman Corp., 253 F. Supp. 1005, 1010 (S.D.N.Y. 1966) (same).
Nor can plaintiffs establish that Dignity's alleged accounting improprieties or allegedly inflated financial statements caused Dignity's stock price decline on July 17, 1996. The July 17 stock price decline was attributable to Dignity's announcement that it was ceasing processing new applications for viatical settlements for individuals afflicted with AIDS while it further analyzed the results announced at the Vancouver AIDS Conference. (See supra at 17-18; see also SAC ¶¶ 4, 13, 44.) That announcement plainly had nothing to do with Dignity's accounting methodology or financial statements. Consequently, plaintiffs cannot establish loss causation as to the alleged accounting improprieties or allegedly inflated financial statements. In re Fortune, 680 F. Supp. at 1368 (granting summary judgment where the price decline was not caused by the alleged omissions). Summary judgment should be entered on these issues also.
For all the foregoing reasons, defendants respectfully request that the Court enter summary judgment in their favor on the entirety of plaintiffs' claims.
|
Dated: March 12, 1999 |
Respectfully submitted,
/s/ By_______________________________ Attorneys for Defendants |
1 A viatical settlement is the payment of cash in return for an ownership interest in, and the right to receive the death benefit from, another's life insurance policy. Viatical settlements help relieve the financial burdens of terminally ill individuals, who are often faced with economic stress resulting from loss of employment and extraordinary medical expenses.
2 Additionally, from their conclusion that Dignity could no longer accurately estimate life expectancies, plaintiffs also argue that certain other representations contained in Dignity's filings with the SEC, various of its press releases and certain reports issued by one of the analysts following Dignity stock, Oppenheimer ¶amp; Co., Inc. ("Oppenheimer"), were false and misleading. (Id. ¶¶ 12, 29-30, 32-33, 35, 37, 39, 42, 60-61, 70-73.) None of plaintiffs' Dignity share purchases at issue in this case, however, followed any of these disclosures.
3 Dignity further explained that it accrued the unearned discount over the Accrual Period using the "level yield" interest method. Under that method, Dignity would accrue dollar earnings over the Accrual Period in a manner which would produce an expected level rate of return during that period:
The unearned discount is accrued over the Accrual Period using the "level yield" interest method. Under the "level yield" method, the yield is constant such that when the yield is applied to the carrying value of the policy on a compounded basis over the course of the Accrual Period, the unearned discount will be fully accrued as earned discount by the end of the Accrual Period. Such yield may differ from the actual yield on a policy depending on whether the policy is collected earlier or later than expected.
(Id. at 22.)
4 Plaintiffs do not dispute that Dignity accurately set forth its collection experience in the Prospectus. Indeed, plaintiffs rely on that data as reported as alleged support for a variety of their allegations. (SAC ¶¶ 28(c), 65, 66.)
5 As of September 30, 1995, however, 20% of the total number of policies purchased from inception had been collected early (9.8% + 10.2%). (Id.)
6 As of September 30, 1995, however, 18.8% of the total face value of the policies purchased from inception had been collected early. (Id.) Thus, approximately 12% more of the total face value of the policies purchased from inception was collected early than was collected late or open past collection date.
7 Contrarily, 20% of the total number of policies purchased from inception (which represented 18.8% of the total face value of policies) had produced a higher percentage yield than Dignity originally estimated. (Id. at 36.)
8 Dignity further stated that "[g]iven the preliminary nature of the studies and the ability of the AIDS virus in the past to develop resistance to new medications, it was unable to determine the impact of such forms of treatment on [its] business or results of operations." (Id.)
9 In addition, the Prospectus included an unaudited consolidated balance sheet of Dignity as of September 30, 1995 and the related statements of operations, stockholders' equity, and cash flows for the nine month periods ended September 30, 1994 and September 30, 1995. (Id. at F-19- F-23.)
10 Interestingly, KPMG is not now, and has never been a defendant in this action. Nor do plaintiffs contend that KPMG conspired in any way with defendants or that defendants withheld any material information from KPMG that if disclosed would have caused KPMG to change its opinion in any way.
11 Copies of the relevant portions of the transcripts of the depositions of DeRosa, Steinberg and Feinman are attached as Exs. D1, D2, and D3, respectively, to Def. Dec..
12 As it had done in the Prospectus, Dignity also fully disclosed its accrual accounting methodology. (1995 Form 10-K at 13.) Moreover, the 1995 Form 10-K included consolidated balance sheets of Dignity as of December 31, 1994 and 1995, and the statements of operations, stockholders' equity, and cash flows for the period January 2, 1993 (the date of inception of Dignity's business) to December 31, 1993, and for the years ended December 31, 1994 and 1995. (Id. at 33-49.) These financial statements, like the ones in the Prospectus, were audited by KPMG in accordance with generally accepted auditing standards. (Id. at 32.) Based on its audit, KPMG opined in its "Independent Auditor's Report" that the financial statements "present fairly, in all material respects, the financial position of Dignity [as of the various balance sheet dates] and the results of its operations and its cash flows for the [various periods] in conformity with generally accepted accounting principles." (Id. (emphasis added).)
13 Plaintiffs do not dispute that the 1995 Form 10-K accurately set forth Dignity's collection experience. Indeed, as with the collection experience data in the Prospectus, plaintiffs rely on it as reported as alleged support for a variety of their allegations. (SAC ¶¶ 65-66.)
14 During the same time period, however, the percentage number of policies that were collected early increased from 20% to 21.9% (11.6% + 10.3%) of the total number of policies purchased from inception. (Prospectus at 36; 1995 10-K at 15.) Thus, despite the increase in the percentage number of policies collected late and open past expected collection date, as of December 31, 1995, the percentage number of policies collected early was still greater. Indeed, of the total number of policies purchased since inception, approximately 17% more were collected early than were collected late and open past expected collection date, combined.
15 During the same time period, the percentage of policies, in terms of face value of policies, that were collected early increased from 18.8% to 19.4% (9.5% + 9.9%) of the total face value of the policies purchased from inception. (Prospectus at 36; 1995 Form 10-K at 15.)
16 Contrarily, 21.9% of the total number of policies purchased since inception (which represented 19.4% of the total face value of policies) had produced a higher percentage yield than Dignity originally estimated. (1995 Form 10-K at 15.)
17 The Court may take judicial notice of Dignity's stock prices in deciding this motion. Pleasant Overseas Corp. v. Hajjar, No. C-93-20197 RMW (EIA), 1993 U.S. Dist. LEXIS 19154, at *4 (N.D. Cal. Nov. 17, 1993) (it is appropriate to take judicial notice of a corporation's stock prices because they "are a matter of general public record, are not subject to reasonable dispute, and are capable of accurate and ready determination") (copies of all unpublished opinions are attached as Ex. G to Def. Dec.). See also LaSalle v. Medco Research Inc., No. 93-C-5381, 1994 U.S. Dist. LEXIS 13949, at *14 n.6 (N.D. Ill. Sept. 28, 1994) (same), rev'd on other grounds, 54 F.3d 443 (7th Cir. 1994).
18 The Court can consider these and the other newspaper, magazine and scientific journal articles referred to herein or submitted herewith as they are self-authenticating and can be judicially noticed. Ritter v. Hughes Aircraft Co., 58 F.3d 454, 458 (9th Cir. 1995) (court took judicial notice of newspaper articles); Orloff v. Cleland, 708 F.2d 372, 378 (9th Cir. 1983) ("newspaper articles are self-authenticating"). Additionally, defendants do not submit any of the articles for the truth of the matters asserted therein but merely to establish that those matters were publicly reported. Soules v. Kauaians for Nukolii Campaign Comm., 849 F.2d 1176, 1181 (9th Cir. 1988) (article is not hearsay when it is not offered for the truth of the matter asserted); Michaels v. Internet Entertainment Group, Inc., Case No. CV98-0583 DDP, 1998 U.S. Dist. LEXIS 20786, *27 (C.D. Cal. Sept. 14, 1988) (same).
19 See also Thomas H. Maugh II, Studies of Combined HIV Drugs Promising, L.A. Times, July 12, 1996, at A1 ("We've opened a new chapter in AIDS research") (Def. Dec., H5); David Perlman, Hopeful End to AIDS Conference, San Francisco Chron., July 12, 1996, at A1 ("No previous AIDS meeting has had such encouraging news") (Def. Dec., H4); Michael Waldholz, AIDS Conferees Debate How Early to Offer New Drugs, Wall St. J., July 12, 1996, at B1 ("Many of the people crowded into scientific sessions and lingering in hallways at the 11th International Conference on AIDS have spent much of the past few days debating a question that was too far-fetched to consider just eight months ago: When should a combination of drugs including the new protease inhibitors be used to try to eradicate the AIDS virus from patients' blood") (Def. Dec., H3); Thomas H. Maugh II, New AIDS Therapy Offers Hope at Forum, L.A. Times, July 8, 1996, at A1 ("Kicking off what promises to be the most optimistic gathering of experts in the history of the AIDS pandemic, researchers provided details Sunday of studies showing that combinations of new and old drugs not only can reduce virus levels in AIDS patients but also can save lives") (Def. Dec., H1).
20 Facts not put into issue by the elements of the claim for relief are not material and disputes regarding such issues, however genuine, are insufficient to avoid summary judgment. Material facts are those facts that, under the applicable substantive law, are germane to the outcome of the case. Anderson, 477 U.S. at 248; Mutual Fund Investors, Inc. v. Putnam Management Co., 553 F.2d 620, 624 (9th Cir. 1977). "Factual disputes that are irrelevant or unnecessary will not be counted." Anderson, 477 U.S. at 248.
21 In addition, defendants are entitled to summary judgment that Dignity's stock price decline on June 26, 1996 is not causally related to the alleged fraud in this case and thus not chargeable to them. Finally, defendants are entitled to summary judgment that neither the alleged accounting improprieties nor the allegedly inflated financial statements caused plaintiffs' loss.
See Transcript of Hearing on Nov. 6, 1998, 1998, a copy of which is attached to Def. Dec. as Ex. L, at 6-7; see also Basic 485 U.S. at 242 ("proof of individualized reliance from each member of the proposed class effectively would have prevented [plaintiffs] from proceeding with a class action, since individual issues then would have overwhelmed the common ones").)
23 Although defendants address only plaintiffs' inability to satisfy the materiality requirement in this motion, they do not thereby concede that plaintiffs have satisfied all other elements necessary to invoking the fraud on the market theory. To the contrary, it is defendants' position that plaintiffs cannot demonstrate that any misrepresentations or omissions were made or that plaintiffs relied on the integrity of the market price of Dignity stock in purchasing their Dignity shares. See Basic, 485 U.S. at 248-49. Nor can plaintiffs satisfy the scienter and loss causation requirements of Rule 10b-5.
24 From their conclusion that Dignity could no longer accurately estimate life expectancies, plaintiffs argue that Dignity's use of the accrual accounting methodology was improper and that, consequently, Dignity's financial statements were false and misleading and violated GAAP. (SAC ¶¶ 46, 49, 51, 54, 58-61, 63-68.)
25 Dignity also fully disclosed that the development of any significant medical treatments or cures for AIDS could "materially adversely affect" its business operations. (Id. at 11.)
26 The only limitation the Ninth Circuit has imposed is that the information defendants failed to disclose "must be transmitted to the public with a degree of intensity and credibility sufficient to effectively counter-balance any misleading impression created by the insiders' one-sided representations." In re Apple, 886 F.2d at 1116. As demonstrated above, that standard is easily met in this case.
27 According to plaintiffs, defendants allegedly "had access to and were in constant contact with medical experts on AIDS, including [defendant] Volberding (the director of the AIDS program at San Francisco General Hospital and a preeminent AIDS expert)." (Id. ¶ 98.) Defendant Volberding, however, was not a member of Dignity's board of directors at the time of the initial public offering. He was merely a director designee. (Prospectus at 42, 52; SAC ¶ 22(g).)
28 See also John Schwartz, FDA Sees Promise in New Anti-AIDS Drugs; Commissioner Indicates Agency Will Move Swiftly to Approve Protease Inhibitors' For Market, The Washington Post, Nov. 6, 1995 at A04 (reporting that "[s]uch a positive statement [about protease inhibitors] by the usually cautious [FDA Commissioner] Kessler -- who rarely comments on a drug before an advisory board considers it -- is a clear signal that the FDA expects to move expeditiously on getting protease inhibitors to market") (Def. Dec., M68); Anita Womack, FDA Panel Backs Glaxo-Wellcome Drug That Helps AZT Fight the AIDS Virus, Wall St. J., Nov. 7, 1995 at B7 (reporting that "[t]he [FDA's] Antiviral Drugs Advisory Committee recommended accelerated approval of Glaxo Wellcome's Epivir to be used in conjunction with the company's AZT") (Def. Dec., Ex. M70).
29 Plaintiffs themselves effectively have conceded that the very information regarding AIDS treatments they accuse defendants of failing to disclose in the Prospectus was known to the market. In response to defendants' requests that plaintiffs produce all documents supporting their various allegations as to defendants' supposed knowledge regarding AIDS treatments (see Defts.' First Set of Document Requests, a copy of which is attached to Def. Dec. as Ex. N), the only documents plaintiffs produced in addition to Dignity's public filings and announcements were newspaper articles and other public reports. (Copies of relevant articles produced by plaintiffs are included in Ex. M to Def. Dec. and bear the Bates number designation "PLTF"; see also SAC ¶ 99 (citing Feb. 2, 1996 Los Angeles Times article reporting that "[r]esearchers grew gloomy again until late 1994, when preliminary evidence of a new generation of compounds, called protease inhibitors, showed a startling impact on the first small number of patients who had taken them") (emphasis in original).) Obviously, if those articles and public reports are demonstrative of defendants' knowledge at various points in time, they are equally demonstrative of the market's knowledge at those same points in time.
30 In terms of the total face value of the policies purchased since inception, 19.4% had been collected early and 20.2% had been collected late or were open past expected collection date. (1995 Form 10-K at 15.) This collection experience was entirely consistent with reasonable expectations. Dignity began purchasing insurance policies in 1993. (Prospectus at 8.) On average, the Accrual Period assigned to policies was about 24 months. (Id. at 20-21.) Accordingly, in the early months of Dignity's business, when Dignity's portfolio consisted only of recently-purchased policies, there should have been virtually no late collections because few, if any, of the estimated collection dates would have been reached. Only with the passage of time, as more and more of the estimated collection dates were reached, should Dignity have started to experience any "late collections." As the portfolio matured into 1995 and more policies reached their estimated collection dates, Dignity's portfolio should have experienced a steady increase in the number of late collections until the number and face value of policies collected late and open past expected collection date roughly equaled the number and face value of policies collected early. This is, in fact, the precise collection pattern Dignity experienced.
31 The market reacted in that fashion notwithstanding the fact that it knew, because Dignity disclosed it in both the Prospectus and 1995 Form 10-K, that (i) Dignity's ability to estimate accurately life expectancies was key to the success of its business, and (ii) the actual annualized yields on policies collected late would be less than the original estimated annual yields. (Prospectus at 10, 37; 1995 Form 10-K at 8-9, 16.) Moreover, as demonstrated above, the market also was fully aware of all relevant information regarding the efficacy of AIDS treatments. (See Def. Dec., Ex. M.) Indeed, by April 1, 1996, even more articles about AIDS treatments had appeared in the press. (Copies of articles regarding AIDS treatments that appeared in the press between February 14, 1996 and April 1, 1996 are attached as Ex. O to Def. Dec.) The market's non-reaction in the face of all of this of course points to the fact that plaintiffs have mischaracterized the collection results for the 4th quarter of 1995.
32 Even if the Court were to find that a question of fact exists as to the materiality of the omission of the 4th quarter collection results from the Prospectus, those class members who purchased Dignity shares after the disclosure of those results on April 1, 1996 still have no fraud on the market claim. Regardless of whether or not the omission of the 4th quarter collection results is material, once those results were publicly disclosed in Dignity's 1995 Form 10-K, neither the market, nor anyone relying on the market, could have been misled by the omission of that information from the Prospectus. See, e.g., In re Syntex, 1993 U.S. Dist. LEXIS 20420 at **12-15 (dismissing Section 10(b) claim because the same documents upon which plaintiffs relied in framing their complaint "revealed that the market was informed of the very matters that plaintiffs' claimed were fraudulently omitted.") At the very least, therefore, defendants are entitled to summary judgment against those class members who purchased Dignity shares after April 1, 1996.
33 Because plaintiffs' Section 10(b) claims fail, so too must plaintiffs' derivative claim for "controlling person" liability against Dignity's officers and inside directors under Section 20 of the 1934 Act. See In re Stac. Elec. Sec. Litig., Civ. No. 92-1120-R, 1994 WL 525256, *12, *21 (S.D. Cal. June 29, 1994), aff'd, 89 F.3d 1399 (9th Cir. 1996) (Section 20 liability is predicated on a violation of Rule 10b-5).
Source: Diskette file and paper copy from Jones Day Reavis & Pogue