Tuesday, August 16, 2005

Judge Draws Roadmap For Plaintiffs

Investors in Bio-Technology General Corporation ("BTG") got their 1934 Act claims bounced by Judge Harold A. Ackerman (D. N.J.) last week. Yes, they went down to the canvas, but are they out cold you ask? Maybe not. You see, the shareholders alleged that "BTG and its management falsely attributed the source of a sharp increase in sales of its premier drug product, Oxandrin, to the successful penetration of a new therapeutic market, when in fact BTG's management knew that the spike in sales was the result of wholesalers stocking their inventories ahead of an expected Oxandrin price increase." The problem wasn’t with materiality, as the court said it "has little trouble concluding, in light of these allegations, that Plaintiff has adequately pled a materially false or misleading statement." But it was the scienter requirement that dropped Plaintiffs like a sack of spuds, as "the Complaint fails to explain how the Individual Defendants knew of or participated in the preparation and dissemination of false statements." "Furthermore, in the absence of any allegation of a specific corporate policy requiring the Individual Defendants to be involved in reviewing Oxandrin sales data, the Court is not prepared to impute detailed knowledge of BTG's monthly and quarterly Oxandrin sales data."

But Judge Ackerman gave the Plaintiffs a standing eight-count, during which he noted that "it would be a relatively simple matter for Plaintiff to plead circumstantial evidence of the Individual Defendants' knowledge of the Oxandrin sales data. For instance, Plaintiff could have pled circumstantial evidence of scienter by showing that BTG had a specific policy requiring the Individual Defendants to review Oxandrin sales reports in the periods in which they were provided to BTG's sales staff. Plaintiff might also have pled that the BTG had a policy whereby the sales staff would routinely summarize the Oxandrin sales data and deliver the summaries to the Individual Defendants for review." With 30 days to amend, let’s see if these investors can take the hint.

You can read In re Bio-Technology, issued August 10, 2005, at 2005 U.S. Dist. LEXIS 16603.

Nugget: "Simply asserting that Defendants improperly capitalized certain Oxandrin costs in financial statements representing that all research and development costs are treated as expenses does not establish a strong inference of scienter, even when those financial statements are later restated to expense the formerly capitalized costs."

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