Opinion

In Re Cardinal Health Inc. Securities Litigations

426 F. Supp. 2d 688
2006 WL 932017

Court: District Court, S.D. Ohio
Filed: Apr 12, 2006
Status: Published
Author: Marbley
On the bench: Marbley
Cited by: 31 cases
Authority: More cited than 81.4%

noting that an “inference of knowledge or recklessness may be drawn from allegations of accounting violations that are so ‘simple, basic, and pervasive in nature, and so great in magnitude, that they should have been obvious to a defendant’”

How later courts described this case

noting that an “inference of knowledge or recklessness may be drawn from allegations of accounting violations that are so ‘simple, basic, and pervasive in nature, and so great in magnitude, that they should have been obvious to a defendant’”
rejecting plaintiff's allegations that the individual defendant's statement that he was "knowledgeable" of the company and "responsible" for its financial statements as too broad and conclusory to establish scienter
citing, inter alia, citing Shapiro v. UJB Fin. Corp., 964 F.2d 272, 281 n. 11 (3d Cir. 1992)
stating “[e]ssentially, a plaintiff needs to allege a drop in stock price; establish a causal connection; and connect the alleged fraud with the ultimate disclosure and loss”

Written by the judges who cited it.

The opinion

OPINION AND ORDER

MARBLEY, District Judge.

INDEX

I. INTRODUCTION AND SUMMARY.........................................697

II. BACKGROUND...........................................................698

A. Defendants................................. 698

B. Plaintiffs’ Allegations...................................................702

C. The Parties’ Dispute............................................’........709

III. STANDARD OF REVIEW .................................................711

IV. ANALYSIS ...............................................................711

I.Plaintiffs’ Motion to Strike Defendants’ Appendices & Any Arguments Arising

Therefrom.......................................................711

II. Cardinal Defendants ’ Motion to

Dismiss.....................................715

A. Section 10(b) and Rule 10b-5 Claims......................................715

1. Whether the Complaint Sufficiently Alleges Facts Establishing a “Strong Inference” of Scienter.........'............................717

a. Scienter Under the PSLRA........._.............................717

b. Applying the Scienter Standard..................................719

c. Conclusion.....................................................741

2. Particularity of Fraud Allegations....................................741

a.. Particularity of Fraud Allegations with Respect To Each Defendant...................................................742

b. Whether Plaintiffs Pled Cardinal’s Accounting Misstatements With Particularity............................................744

c. Cardinal’s Forward-Looking Statements..........................746

3. Whether the Complaint Fails to Plead Loss Causation as to Any of the “Improprieties” Enumerated in the Complaint....................758

4. Conclusion.........................................................761

B. Control Person Claims Under Section 20(a)................................762

III. Defendant E & Y’s Motion to

Dismiss.......................................763

A. Plaintiffs’ Section 10(b) and Rule 10b-5 Claims......................'.......763

1. Red Flags.........................................................765

2. Ignoring Audit Evidence Gathered from FY 2002 Through FY 2004.....766

a. Cardinal’s Classification of Operating Revenue.....................768

b. Premature Recognition of the Vitamin Litigation Settlement.........768

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c. Changes in Cardinal’s Revenue Recognition Policy For Its Pyxis Business in FY 2002 ..................................... .770

d. Balance Sheet Reserves and Accrual Adjustments............. .770

e. Recognition of Cash Discounts.............................. .771

f. Special Charges........................................... .772

g. Off-Balance Sheet Transactions............................. .774

h. October 2004 Restatement.................'................. .775

3. Alleged Non-Compliance with GAAS Principles................... .777

4. E & Y’s Motivation to Keep Cardinal’s Business................... .778

5. Other Fraud Claims Brought Against E&Y...................... .778

6. Conclusion.................................................... .779

Y. CONCLUSION 780

I. INTRODUCTION AND SUMMARY

Plaintiffs, investors in Cardinal Health, Inc. (“Cardinal” or “the Company”) bring securities fraud actions against Cardinal, Cardinal executives, Robert D. Walter, George L. Fotiades, Richard J. Miller, James F. Millar, Gary S. Jensen, and Mark Parrish (collectively, the “Individual Defendants”

), and Cardinal’s independent auditor, accounting firm Ernst & Young (“E & Y”). Plaintiffs allege that from 1998 through 2002, while Cardinal’s pharmaceutical distribution unit underwent a reorganization, the corporation engaged in an elaborate accounting scheme designed to artificially inflate its earnings and conceal debt. Further, Plaintiffs allege that E & Y, hired as the Company’s independent auditor in 2002, aided Cardinal in perpetuating its fraudulent accounting.

Cardinal and the Individual Defendants filed a joint motion to dismiss Plaintiffs’ Complaint under Federal Rules of Civil Procedure 12(b)(6) and 9(b) and the Private Securities Litigation Reform Act of 1995 (“PSLRA”), alleging that Plaintiffs failed to state a claim upon which relief can be granted. Defendants Miller, Mil-lar, and Jensen, and E&Y also filed separate motions dismiss Plaintiffs’ Complaint under Rules 12(b)(6) and 9(b) and the PSLRA. Plaintiffs filed a Motion to Strike Defendants’ Appendixes ## 58-60, 64-65, and 70, as well as any and all arguments relying on these Appendixes in Defendants’ various motions to dismiss.

This Court holds that: (1) Plaintiffs allegations of Defendants’ accounting fraud, insider trading, motive, and opportunity were sufficient to state a § 10(b) claim against the Corporation and all of the various Individual Defendants except Defendant Jensen, and Defendants failed to show they were entitled to the protection of the statutory safe harbor for certain allegedly fraudulent forward-looking statements upon which Plaintiffs relied; (2) Plaintiffs stated § 20(a) claims against the Corporation and all of the Individual Defendants- except Defendant Jensen; (3) Plaintiffs’ failed to state a § 10(b) claim against Defendant E&Y because their allegations that E&Y had intimate knowledge of Cardinal’s fraudulent activities and that E&Y had failed to adhere to GAAP and GAAS rules did not establish the necessary inference of scienter required under the law.

Defendants’ motions are GRANTED in part and DENIED in part. The following motions are GRANTED: (1) Cardinal Defendants’ Motion to Dismiss as to Defendant Jensen; (2) Defendant E & Y’s Mo

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tion to Dismiss. The following motions are DENIED: (1) Cardinal Defendants’ Motion to Dismiss as to Cardinal and Defendants Walter, Fotiades, Miller, Millar and Parrish; (2) Defendant Miller’s Motion to Dismiss; (3) Defendant Millar’s Motion to Dismiss. Plaintiffs’ Motion to Strike is GRANTED in part and DENIED in part.

II. BACKGROUND

This case involves a securities class action lawsuit brought on behalf of all persons and entities who purchased Cardinal’s publicly traded securities between October 24, 2000 and July 26, 2004, inclusive (the “Class Period”).

The Complaint alleges that all Defendants knowingly or recklessly disregarded errors in Cardinal’s methods of revenue recognition, and that, through their public misrepresentations about the Company’s Operating Revenue, Defendants fraudulently induced Plaintiffs to purchase Cardinal stock at artificially inflated prices in violation of Section 10(b) of the Exchange Act, 15 U.S.C. §§ 78j(b) and 78t(a), and the rules and regulations promulgated thereunder by the Securities Exchange Commission (“SEC”), including Rule 10b-5, 17 C.F.R. § 240 .10b-5. The Complaint further alleges that the Individual Defendants are liable as “controlling persons” of Cardinal, under Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a).

A. Defendants

The Complaint asserts causes of action against numerous defendants. The defendants have been grouped together based on their roles and the claims asserted against them. The first such group, which is collectively referred to as “the Cardinal Defendants,” includes Cardinal and the following six individuals who were either Cardinal directors or members of the Company’s senior management during the Class Period: Robert D. Walter, George L. Fo-tiades, Richard J. Miller, James F. Millar, Gary S. Jensen, and Mark Parrish.

The roles and responsibilities of each of these six individuals during the Class Period, as alleged in the Complaint, are described below.

1. Robert Walter

Defendant Robert D. Walter (‘Walter”) founded Cardinal, and served, at all relevant times, as the Chairman and Chief Executive Officer (“CEO”) of the Company. During the Class Period, Walter pre

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pared and signed the Company’s SEC filings, issued statements in press releases and led the Company’s conference calls with analysts and investors, representing himself as one of the primary persons with knowledge about Cardinal’s business, financial reports, and business practices. In conjunction with each of Cardinal’s public financial statements filed with the SEC beginning in the Company’s September 30, 2002, Form 10-K for FY 2002, Walter signed a certification pursuant to § 302 of the Sarbanes-Oxley Act, attesting that he had reviewed the contents of the filing to confirm that the “report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading.” During the Class Period, Walter received $136 million in total compensation, with bonuses and option awards totaling more than $132 million.

Further, during the Class Period, Walter sold 593,910 shares of his personal Cardinal stock for proceeds of $38.19 million.

2. George L. Fotiades

During the Class Period, Defendant George L. Fotiades (“Fotiades”) served as the President and CEO of Cardinal’s Life Science Products and Services division, overseeing Cardinal’s Pharmaceutical Technologies and Services segment. In February 2004, Fotiades was promoted to Executive Vice President and Chief Operating Officer (“COO”) of Cardinal. Further, throughout the Class Period, Fo-tiades was a member of the Executive Operating Committee (the “EOC”), a committee led by Walter, which met monthly to discuss Cardinal’s business, operations and finance. Fotiades participated in the preparation of the Company’s SEC filings and press releases, and took part in the Company’s conference calls with analysts and investors. During the Class Period, Fotiades received $48,984,750 in total compensation. Further, during the Class Period, Fotiades sold 65,960 shares of his personal Cardinal stock for proceeds of $4.68 million and obtained bonuses and option awards worth more than $46 million.

3. Richard J. Miller

Defendant Richard J. Miller (“Miller”) served as Cardinal’s Executive Vice President, Chief Financial Officer (“CFO”) and Principal Accounting Officer from March 1999 through July 2004. Prior to that time, Miller had served as Cardinal’s acting CFO since August 1998, and as a Controller and Vice President from August 1995 through March 1999. Before joining Cardinal, Miller had been a partner with Deloitte & Touche with over thirteen years of financial and accounting experience; he is a certified public accountant (“CPA”) and holds a bachelor’s degree in accounting from Ohio State University. Miller prepared and signed the Company’s SEC filings, issued statements in press releases and participated in the Company’s conference calls with analysts and investors. Like Walter, in conjunction with each of Cardinal’s public financial statements filed with the SEC beginning in the Company’s September 30, 2002, Form 10-K for FY 2002, Walter signed a certification pursuant to § 302 of the Sarbanes-Oxley Act. Defendant Miller left Cardinal in July 2004. Upon his resignation, Miller admitted that “[cjertain financial reporting practices and judgments that occurred during

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my tenure as CFO have come under scrutiny in the ongoing investigations.” During the Class Period, Miller received $16,659,563 in total compensation, $15.4 million of which were incentive-based bonuses and option awards.

4. James F. Millar

Defendant James F. Millar (“Millar”) served as the Executive Vice President and President and COO of Cardinal’s Pharmaceutical Distribution segment from the beginning of the Class Period through December 2002, at which time Millar was promoted to President and CEO of the Company’s Healthcare Products Segment. In February 2004, Millar was again promoted, this time to the position of Executive Director, Strategic Initiatives. Moreover, throughout the Class Period, Millar was a member of Cardinal’s EOC. Miller participated in the preparation of the Company’s SEC filings and press releases, and participated in the Company’s conference calls with analysts and investors, representing himself as one of the primary persons with knowledge about Cardinal’s pharmaceutical distribution business, financial reports and outlook and business practices. During the Class Period, Millar received $43,657,910 in total compensation. Further, during the Class Period, Millar sold 86,043 shares of his personal Cardinal stock for proceeds of $5.15 million and obtained incentive-based bonuses and option awards worth more than $41.76. million.

5. Gary S. Jensen

Defendant Gary S. Jensen served as the Senior Vice President of Audit and Financial Services, Corporate Controller and Principal Accounting Officer for fiscal years 2003 and 2004, throughout the Class Period, and until February 2005, at which point he was asked to resign following Cardinal’s internal review in connection with investigations of the Company’s accounting practices by both the SEC and the U.S. Attorney’s Office. Though Plaintiffs contend that a Cardinal spokesperson acknowledged that Jensen’s resignation was “tied to the audit over how the company classifies revenue from its pharmaceutical distribution business,” the Cardinal Defendants counter that Jensen’s resignation was, in fact, voluntary. During the Class Period, Jensen sold 10,357 shares of his personal Cardinal stock for proceeds of $743,984.

6.Mark Parrish

Defendant Mark Parrish (“Parrish”) was promoted to Chairman and CEO of Cardinal’s Pharmaceutical Distribution business in August 2004. Prior to that time, Parrish had served as the Executive Vice President and Group President of the Pharmaceutical Distribution businesses in which he was responsible for Cardinal’s pharmaceutical and specialty distribution businesses and reported directly to Defendant Millar. Further, in fiscal year 2003, Parrish became a member of Cardinal’s EOC. Parrish participated in the preparation of the Company’s SEC filings and press releases, and participated in the Company’s conference calls with analysts and investors. During the Class Period, Parrish sold 16,032 shares of his personal Cardinal stock for proceeds of $972,835.

7.Cardinal

Defendant Cardinal is generally recognized as one of the three largest distributors of pharmaceutical products in the United States. Headquartered in Dublin, Ohio, Cardinal employs more than 55,000 people on six continents and produces annual revenue of nearly $75 billion. Cardinal divides its business into four reporting units: (1) Pharmaceutical Distribution and Provider Services; (2) Medical Products and Services; (3) Pharmaceutical Technologies and Services; and (4) Clinical Tech

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nologies and Services (formerly known as Automation and Information Services). Plaintiffs’ allegations primarily involve Cardinal’s oldest and historically largest segment, Pharmaceutical Distribution and Provider Services, which moves pharmaceutical products from manufacturers to retailers and from which Cardinal derives approximately 85% of its revenues. Despite Cardinal’s reputation as a leader in the pharmaceutical industry, by July 27, 2005, the end of the Class Period, the Company’s stock price had dropped 41% to $44.00 per share.

8. Ernst & Young

Plaintiffs, however, do not place the blame solely on Cardinal and the Individual Defendants; they also allege that E & Y, serving as Cardinal’s independent auditor, assisted the Company “in orchestrating or profiting from [its alleged] fraud.” On May 8, 2002, E & Y received $2.31 million from Cardinal for pre-engagement services, and took on Cardinal’s multi-mil-lion dollar account after Arthur Anderson (“AA”), Cardinal’s previous long-term auditor, imploded under the weight of its involvement in massive alleged accounting frauds.

A large portion of E & Y’s services related to work that fell outside the scope of financial statements audits. In fact, in addition to auditing, during the Class Period, E & Y provided Cardinal with the following services: (1) due diligence services related to mergers and acquisitions, audit-related research and assistance and employee benefit plan audits; (2) tax advice and planning services; and (3) other services related to matters such as litigation assistance and internal audit services.

E & Y made no public statement relating to Cardinal until September 30, 2002 when Cardinal filed its 10-K for FY 2002, containing its audited financial statement. E & Y certified Cardinal’s FY 2002 financial results, previously audited by AA. The only other public statement E & Y made during the Class Period was its audit opinion with respect to Cardinal’s financial statements for FY 2003, which was published in Cardinal’s 2003 10-K filed on September 29, 2003.

Over the course of

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the Class Period, E & Y received a total of $27.1 million in fees from Cardinal, which was one of the largest clients of E & Y’s Columbus, Ohio office. E & Y’s fees were particularly important to the partners in E & Y’s Columbus, Ohio office whose incomes and bonuses depended on Cardinal’s continued business. Plaintiffs contend that, from the time it became Cardinal’s auditor, through the end of the Class Period, E & Y ignored obvious red flags and blindly certified Cardinal’s financial statements knowing that, in reality, Cardinal had intentionally misstated its financials to maintain an artificially inflated stock price.

B. Plaintiffs’ Allegations

1. Cardinal’s Operating Model-Shifting from B + H to FFS

The timing of the instant litigation is significant as the Class Period coincides with a monumental shift in the pharmaceutical distribution business’ operating model. As such, background information on this transition period is integral to the parties’ dispute.

At the start of the Class Period, Cardinal and its major pharmaceutical distribution competitors operated through a “buy- and-hold” (B + H) model. Under a B + H model, pharmaceutical distributors “buy” pharmaceuticals from manufacturers and “hold” those products for a period of time before re-selling them to retailers.

Through successful B + H acquisitions, Cardinal expanded its regional markets and customer base. Cardinal took advantage of the rapidly rising drug prices in the 1990s, and, accordingly, from the early 1990s through the year 2002, Cardinal regularly reported annual growth exceeding 20%.

Nevertheless, Cardinal’s ability to continue such significant growth was sharply curtailed in FY 2001. By that time, the pharmaceutical distribution market was effectively divided between three major companies: Cardinal, McKesson Corporation, and AmerisourceBergen Corporation. In fact, when Cardinal made a $2.2 billion acquisition of Bindley Western Industries, Inc. in February 2001, and AmeriSource Health Corporation made a $2.4 billion merger with Bergen Brunswig Corporation in March 2001, the top three distributors effectively controlled 90% of the entire pharmaceutical distribution business. Investors realized that Cardinal’s distribution business would soon face increasing pressure on its profit margins as the top three distribution companies battled each other for the same market.

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Though the traditional B + H model had functioned well for many years, as the pharmaceutical business became increasingly complex, it became less efficient. On the one hand, pharmaceutical manufacturers could place their products into the retail market without significant line-item distribution expenses, and retailers, institutions, and other customers could receive those products with, at most, only minor markups. On the other hand, manufacturers were partially deprived of the advantage of their own price increases as B + H distributors would sell their existing inventory at the new, higher cost before buying more from the manufacturer. Over time, this latter dynamic led manufacturers to restrict the flow of pharmaceuticals to distributors like Cardinal — limiting the ability of these distributors to profit from B + H.

Cardinal was one of the first to recognize this changing dynamic, advising investors in February 2003 that the market was beginning to transition to Inventory Management Agreements (“IMAs”) under which wholesalers would be compensated not through investment in an inflationary product, but rather through negotiated fees for inventory management and distribution services — a “fee-for-service” (FFS) model.

Under the FFS model manufacturers pay a negotiated fee to Cardinal for the Company to distribute their products. Accordingly, manufacturers sell and ship their products to Cardinal and other pharmaceutical distributors only when there is a corresponding retail request. Thus, instead of making bulk shipments to the distributors without regard for demand, Cardinal began to make shipments only when they had an order to fill — “just-in-time” (JIT) shipments.

Though Cardinal was considered to be a “pioneer” in the B + H to FFS business-model migration,

analysts were skeptical about whether the Company would be able to continue to generate returns. Facing increasingly intense competition and mar

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gin pressure and losing the ability to profit from rising drug prices, investors turned their focus to whether Cardinal could continue to grow its revenues and earnings in the changing market. Cardinal began negotiations with several manufacturers, and in October 2003, eight months from its initial announcement of the possibility of a shift to IMAs, Cardinal disclosed that it had finalized its first largely FFS contract with drug manufacturing giant, Merck. Moreover, Cardinal revealed that it was “in active negotiations” on 47 other potential additional FFS contracts as of January 2004 and confirmed that the Company’s entire distribution process was “in transition.”

2. Corporate Acquisitions and Note Offerings

At the same time that Cardinal underwent a switch from a B + H to an FFS model, the Company also began to expand its other business segments through both acquisition efforts and internal growth, making pharmaceutical distribution a smaller part of Cardinal’s overall revenues and earnings. In fact, during the four years covered by the putative class period, Cardinal acquired twenty-four companies, and the percentage of Cardinal’s earnings that came from pharmaceutical distribution declined from 52% to 46%. Further, to finance these acquisitions, Cardinal exchanged over 36 million shares of Cardinal stock (valued at over $3.0 billion) and expended more than $656 million in cash.

During the Class Period, Cardinal also completed three separate note offerings, raising $1.3 billion. These note offerings “were necessary and used, in part, to repay Cardinal’s indebtedness (as of December 31, 2001, Cardinal had an outstanding debt of approximately $1.96 billion, and Cardinal’s subsidiaries had an outstanding debt of $611.20 million).” Plaintiffs allege that “Cardinal’s acquisition spree would not have been possible without the cash infusions” from the note offerings.

Cardinal’s ’ acquisitions and note offerings allowed the Company’s stock to continue to trade at high levels. As such, over the course of the Class Period, Cardinal achieved and maintained investment grade commercial ratings. By achieving investment grade ratings, Cardinal was eligible to gain access to commercial paper,

and Cardinal’s participation in the commercial paper program provided for issuance of up to $1.5 billion in credit facilities by June 30, 2001. That $1.5 billion was pursuant to unsecured bank facilities, $750 million of which were set to expire on March 27, 2003, and the other $750 million of which were set to expire on March 31, 2004. In FY 2003, because of Cardinal’s high stock value, the expiration dates were extended to March 26, 2004 and March 27, 2008. During a December 13, 2004 conference call, the Company’s then CFO, Mike Losh,

said,

We are definitely committed to maintaining investment grade ratings ... One, when you get to be noninvestment-grade, not only are there the costs of money costs, but we think there are certain hidden costs that you have to deal with that we do not think that is appropriate for us to ever put ourselves in that position. Also we want to regain access to the commercial paper market.

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So on a longer-term basis, we are targeting the return to an A-debt rating level.

Complaint ¶249. By FY 2004, however, Cardinal’s stock price dropped, and Cardinal’s debt and commercial paper ratings were downgraded far below the A-level.

3. Bulk Deliveries and Operating Revenue

The parties’ dispute centers on Plaintiffs’ allegations of Cardinal’s fraudulent or misstated accounting. Plaintiffs’ allege that over the four-year Class Period, Cardinal’s numerous accounting misstatements allowed the Company to overstate its revenues by approximately $26 billion.

See

Complaint ¶¶ 56-58, 63-66, 72-76, 80-85, 88-95, 97-105, 108-14, 118-28, 132-38, 141-46, 150-51, 153-59, 163-68, 171-78, 181-87, 191-95, 199-223. To provide the necessary background, a brief discussion of Cardinal’s basic accounting policies follows.

Cardinal’s Pharmaceutical and Distribution and Provider Services (“Pharmaceutical Distribution”) primarily sells pharmaceutical products to its customers through “direct store door” (“DSD”) sales.

Not all of Cardinal’s sales, however, are made in small shipments directly to retailers’ store doors. Customers who operate their own warehouses sometimes order products in bulk. On some occasions, Cardinal receives these bulk orders and fills them from the company’s own inventory. On other occasions, however, Cardinal receives bulk orders under terms that its customers have previously negotiated with manufacturers. For these orders, while Cardinal does not bear the risk of the transaction, Cardinal also has no significant opportunities to derive a profit from it. In 1998, to account for these non-DSD sales, Cardinal began to report its revenue in two separate categories: (1) “Operating Revenue”; and (2) “Bulk Deliveries to Customer Warehouses and Other” (“Bulk Deliveries”).

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Cardinal differentiated between “Operating Revenue” and “Bulk Deliveries” solely by considering how long the product was in the Company’s possession prior to its being shipped. If Cardinal possessed the product for more than 24 hours before its shipment, the proceeds were classified as “Operating Revenue”; however, if Cardinal possessed the product for less than 24 hours before its shipment, the Company considered those proceeds to be “Bulk Deliveries.”

The Individual Defendants touted Cardinal’s reported Operating Revenue as “the main driver” of the Company’s growth rate. Further, investors and analysts considered Operating Revenues to be crucial in ascertaining the success of Cardinal’s conversion to an FFS model. Over the course of the Class Period, in their SEC filings and press releases, Defendants highlighted their steady Operating Revenue as a strong indicator that Cardinal was successfully increasing its market, expanding its customer base, migrating sales from no margin Bulk Deliveries to profitable direct-store business, and, most importantly, adapting well to the shifting drug distribution market.

Unlike Operating Revenue, Cardinal’s Bulk Deliveries were unpredictable and provided little or no margin. Hence, most investment analysts did not consider them to be good indicators of Cardinal’s growth. Further, the market interpreted escalating Bulk Deliveries as a sign that Cardinal was not successfully converting pharmaceutical manufacturers from a B + H to an FFS model because, with most Bulk Deliveries, the large pharmaceutical retailers used Cardinal only as an intermediary, significantly limiting the Company’s earnings potential.

4. SEC Inquiries Begin

From FY 2000 through FY 2003, Cardinal’s press releases and SEC filings made it appear to be a thriving company. Considering its burgeoning Operating Revenue, which increased at least 10 percent each quarter, Cardinal seemed to be making an easy transition to an FFS model. In actuality, however, Cardinal was not as successful as its numbers suggested, and on October 9, 2003, Cardinal disclosed that the SEC had opened an informal inquiry into its accounting practices.

Primarily, the SEC sought information about the Company’s accounting treatment of $22 million that it had received in settling antitrust litigation with various vitamin manufacturers (the “Vitamin Litigation”).

5. Vitamin Litigation Settlement

The Vitamin Litigation began in May 2000, when Scherer, a company acquired by Cardinal in 1998, filed a civil antitrust lawsuit against a group of vitamin manufacturers alleging that certain of its raw material suppliers and others had unlawfully conspired to fix wholesale vitamin prices. During the Class Period, Scherer entered into a series of multi-tiered settlement agreements with the various vitamin manufacturers under which Cardinal re

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ceived settlement payments of $35.3 million by June 30, 2002. Cardinal recognized $22 million of these proceeds in two allotments disclosed specifically in its September 30, 2002 10-K filing.

In its 2002 10-K, the Company disclosed for the first time that, in the second quarter of fiscal 2002 (before E & Y became its outside accounting firm) it had booked $10 million and $12 million reductions, respectively, in the cost of goods sold, to reflect anticipated recoveries for claims it had asserted in the course of the Vitamin Litigation.

Six months later, critics began to question Cardinal’s accounting treatment of the first $22 million of the Vitamin Litigation settlement. On April 2, 2003,

The Wall Street Journal

published a “Heard on the Street” column challenging Cardinal’s decision to recognize those anticipated recoveries before an actual settlement agreement had been reached.

Though the article acknowledged that Cardinal had subsequently entered into binding settlement agreements and had received payments in the amount of $35.5 million by the end of FY 2002, the article suggested that Cardinal had recognized the $22 million prematurely to avoid falling short of analysts’ quarterly earnings estimates.

As established above, the SEC was also concerned that Cardinal may have prematurely recognized that $22 million in order to meet analyst estimates, in violation of Generally Accepted'Accounting Principles (“GAAP”).

The Audit Committee of

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Cardinal’s Board of Directors, assisted by independent counsel, began its own internal review of the Company’s accounting procedures in April 2004. On May 6, 2004, the SEC converted its informal inquiry of Cardinal’s accounting into a

formal

investigation, while Cardinal’s Audit Committee continued to work with independent counsel to review the Company’s financial reporting. Further, Cardinal disclosed that the SEC and Audit Committee investigations were no longer limited to the Company’s accounting treatment of the $22 million from the Vitamin Litigation settlement.

Nonetheless, Cardinal’s problems did not end with SEC and Audit Committee investigations. On June 21, 2004, as part of the SEC formal investigation, Cardinal received a subpoena, including a request for the production of documents relating to its revenue classification policies, and specifically those policies used in the Company’s pharmaceutical distribution segment.

Further, the State Attorney General of New York, Eliot Spitzer, commenced an inquiry allegedly relating to the Company’s revenue classification. On July 30, 2004, Cardinal announced both the subpoena and the Spitzer inquiry to the public.

6. The October 2004 Restatement

On September 13, 2004, due to its discussions with the SEC and the Spitzer investigation, Cardinal announced its plans to restate its financial statements for FY 2001 through FY 2003 and the first three quarters of FY 2004. The Company reversed its previous recognition of estimated recoveries from the Vitamin Litigation and recognized the income from such recoveries as a “special item” in the period it received the cash from the manufacturers. Moreover, Cardinal decided to delay its announcement of its FY 2004 financial re-suits until it had both completed its restatement and changed its accounting policies.

On October 26, 2004, more than three months after the end of the Class Period, Cardinal issued its delayed 4Q and FY 2004 results and filed a Form 10-K (the “Restatement”) in which the Company restated certain items to correct past errors and announced changes in other accounting policies on a prospective basis, without restating past results. In the Restatement, Cardinal announced its decision to change its accounting policies to abandon the distinction between “Operating Revenues” (which included bulk sales out of Cardinal’s inventory) and “Bulk Deliveries to Customer Warehouses.” From the fourth quarter of FY 2004 forward, Cardinal classified all sales of pharmaceutical products as “Operating Revenue.” For FY 2002 through FY 2004, Cardinal reclassified all of the revenues it had previously reported and consolidated them in a single revenue line. Cardinal stated, “[t]he re-classifications have no effect on previously reported total revenue, related cost of products sold, net earnings or earnings per share,” and assured analysts that the “only impact of the reclassification” was on “previously reported growth rates.”

Also on October 26, 2004, during a conference call with investors and analysts, Mike Losh, admitted that the Company had misclassified $23.5 billion over three years. He also revealed, among other things, that the Audit Committee had concluded that over the past few years, Cardinal had based its revenue classifications on its 24-hour rule, and that, at certain, specifically identified times, the Company had intentionally held Bulk Deliveries for more than 24 hours so as to label them high

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margin Operating Revenues instead. These transactions, Losh admitted, had caused the Company to overstate its Operating Revenues by $813 million in FY 2003 and to understate its Bulk Deliveries to Customer Warehouses by $414 million in FY 2002. Further, Losh conceded that Cardinal was feeling the pressure of the pharmaceutical distribution business model transition to an FFS model.

Moreover, Cardinal restated its FY 2001 and FY 2002 financials to shift its recognition of the Vitamin Litigation settlement into later quarters, in particular, adding $22 million to the cost of goods sold in the relevant quarters in 2001 and 2002 and recording the $22 million as an income item in its fourth quarter 2004 results.

C. The Parties’ Dispute

On April 22, 2005, Lead Plaintiff, PFG, filed a Consolidated Amended Complaint (the “Complaint”) alleging that, during the Class Period, Defendants engaged in a scheme to defraud Plaintiffs by knowingly or recklessly disregarding errors in revenue recognition, and, through their public misrepresentations about Cardinal’s Operating Revenue, fraudulently induced Plaintiffs to purchase Cardinal’s stock at artificially inflated prices.

In summary, Plaintiffs’ Complaint alleges the following: (1) Defendants materially misrepresented Cardinal’s revenues and earnings in violation of GAAP as evidenced by the Company’s press releases and SEC filings concerning revenues and earnings from FY 2000 through FY 2004, and Individual Defendants’ statements that routinely highlighted “increased revenues” over consecutive periods; (2) though Cardinal represented that its financial statements were prepared in compliance with GAAP, they were not: (a) Cardinal’s financial statements mis-characterized Operating Revenues and made inadequate disclosures regarding revenue classification procedures; (b) Cardinal improperly and prematurely recognized $22 million of expected lawsuit settlement proceeds prior to a settlement being reached in the Vitamin Litigation; (c) Cardinal used improper reserve accounting and improper accrual adjustments to overstate the Company’s net income by $64.2 million in violation of GAAP;

(d) Cardinal failed to disclose the Company’s recognition of cash discounts earned from suppliers for prompt payment;

(e) Cardinal improperly recog

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nize Bulk Deliveries as Operating Revenue by manipulating its use of the 24-hour rule; (f) Cardinal understated its regular expenses by making excessive “special charges”;

(g) Cardinal engaged in illegal off-balance sheet transactions, understating its receivables through securitization of Pyxis receivables;

(h) Cardinal violated SEC regulations due to its inadequate internal controls; (i) Cardinal had ineffective internal mechanisms to dissuade Defendant misconduct; and (3) Cardinal’s financial statements artificially inflated the net income and earnings of Cardinal and caused Plaintiffs to suffer significant financial losses.

The Plaintiffs’ Complaint identifies all of Cardinal Defendants’ allegedly false and misleading statements occurring over the course of the Class Period in 105 pages.

See

Complaint 55-238. The Plaintiffs allege that Cardinal Defendants made these misleading ■ statements in forward-looking statements, press releases, conference calls, and corporate documents, and they aver that analysts relied on these statements in their reports to the market. The Plaintiffs’ Complaint is meticulously detailed.

On August 22, 2005, the Individual Defendants, and Defendant Cardinal, jointly brought a Motion to Dismiss the Complaint under Federal Rule of Civil Procedure 12(b)(6), staying all discovery pursuant to 15 U.S.C. § 78u-4(b)(3)(B).

Also

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on August 22, 2005, Defendant E & Y brought its own Motion to Dismiss the Complaint. Defendants deny the existence of a scheme to defraud and maintain that Cardinal’s drop in stock value was primarily due to the Company’s transition from a B + H to an FFS model. Further, they assert that Plaintiffs fail to plead scienter and do not connect Defendants’ alleged fraud to any true market loss. The Court conducted oral argument on these motions on February 6, 2006.

III. STANDARD OF REVIEW

It is settled law that a court may not grant a defendant’s Rule 12(b)(6) motion to dismiss unless it appears beyond doubt that the claimant can prove no set of facts supporting its claim which would entitle it to relief.

See H.J. Inc. v. Northwestern Bell Tel. Co.,

492 U.S. 229, 249-50 , 109 S.Ct. 2893 , 106 L.Ed.2d 195 (1989);

Windsor v. The Tennessean,

719 F.2d 155, 158 (6th Cir.1983). The purpose of Rule 12(b)(6) is to allow a defendant to test whether, as a matter of law, the plaintiff is entitled to legal relief even if everything alleged in the complaint is true.

See Mayer v. Mylod,

988 F.2d 635, 638 (6th Cir.1993).

In considering a Rule 12(b)(6) motion to dismiss, the Court must assume as true all well-pleaded facts, and must draw all reasonable inferences in favor of the nonmovant.

Murphy v. Sofamor Danek Group, Inc.,

123 F.3d 394, 400 (6th Cir.1997). “In the securities context, Rule 12(b)(6) dismissals are difficult to obtain because the cause of action deals primarily with fact-specific inquiries such as materiality.”

See Grossman v. Novell, Inc.,

120 F.3d 1112, 1118 (10th Cir.1997) (internal quotations and citations omitted). Nevertheless, “courts do not hesitate to dismiss securities claims pursuant to Rule 12(b)(6) where the alleged misstatements or omissions are plainly immaterial, or where the plaintiff has failed to allege with particularity, circumstances that could justify an inference of fraud under Rule 9(b).”

Id.

(citations omitted). The issue in reviewing the sufficiency of a complaint is not whether the plaintiff will ultimately prevail, but whether the claimant is entitled to offer evidence to support its claim.

See Scheuer v. Rhodes,

416 U.S. 232 , 94 S.Ct. 1683 , 40 L.Ed.2d 90 (1974).

IV. ANALYSIS

I. Plaintiffs’ Motion to Strike Defendants’ Appendices and Any Arguments Arising Therefrom

The parties are not in agreement as to what materials outside the Complaint the Court may properly consider in ruling on Cardinal Defendants’ motion to dismiss. Cardinal Defendants have attached 70 appendices to their brief in support of their Motion to Dismiss. In response, Plaintiffs have filed a Motion to Strike certain of these documents arguing that they are not properly subject to judicial notice.

Because these matters relate to the general

*712

issue of what documents (if any) outside the pleadings the Court may consider in ruling upon Cardinal Defendants’ 12(b)(6) motion, the Court will address them first before proceeding to the substantive merits of the motions to dismiss.

A. Standard for Motion to Strike

Rule 12(f) permits the court to strike from a pleading “any insufficient defense or any redundant, immaterial, impertinent, or scandalous matter.” Fed. Civ. R. Proc. 12(f).

The Sixth Circuit has held that “because of the practical difficulty of deciding cases without a factual record it is well-established that the action of striking a pleading should be sparingly used by the courts. It is a drastic remedy to be resorted to only when required for the purposes of justice.”

Brown & Williamson Tobacco Corp. v. United States,

201 F.2d 819, 822 (6th Cir.1953) (citations omitted). Though many courts disfavor motions to strike for fear that they serve only to delay, they can also expedite cases by removing “unnecessary clutter.”

See Heller Fin., Inc. v. Midwhey Powder Co., Inc.,

883 F.2d 1286 , 1293 (7th Cir.1989).

1. Judicial Notice of Public Documents

When considering a motion to dismiss, courts should generally not consider matters outside the pleadings.

Weiner v. Klais & Co.,

108 F.3d 86, 88-89 (6th Cir.1997). In securities fraud cases, however, courts may consider the full text of SEC filings, prospectuses, and analysts’ reports regardless of whether they are attached to a plaintiffs complaint (in part or in whole) as long as they are

integral

to statements within the complaint.

See Albert Fadem Trust v. American Elec. Power Co.,

334 F.Supp.2d 985, 995 (S.D.Ohio 2004) (Marbley, J.);

see also, In re Royal Appliance Sec. Litig.,

1995 WL 490131, at *2 (6th Cir. Aug.15, 1995) (emphasis added);

see also, In re Keithley Instruments, Inc. Sec. Litig.,

268 F.Supp.2d 887 (N.D.Ohio 2002). Furthermore, a court may consider any matters of which a court may take judicial notice without converting a party’s motion to dismiss into a motion for summary judgment.

Id.

(referencing

Weiner,

108 F.3d at 89 );

(see also Jackson v. City of Columbus,

194 F.3d 737, 745 (6th Cir.1999)).

Whether a document is considered integral is within the court’s discretion and is guided by Federal Rule of Evidence 201.

In re Unumprovident Corp. Sec. Litig.,

2005 WL 2206727 (E.D.Tenn.

*713

Sept.12, 2005) (finding that a court may take judicial notice of a statement if the court finds that its reliability is “not subject to reasonable dispute”) (referencing

Bovee v. Coopers & Lybrand C.P.A.,

272 F.3d 356 , 360-61 (6th Cir.2001)). When considering public documents in the context of a motion to dismiss, however, the court may not accept a document to decide facts that are in dispute.

See In re Firstenergy Corp. Sec. Litig.,

316 F.Supp.2d 581, 592 (N.D.Ohio 2004) (citing

Hennessy v. Penril Datacomm Networks,

69 F.3d 1344, 1354-55 (7th Cir.1995) (holding district court properly refused to take judicial notice of Form 10-K to decide a fact in dispute)).

2. Appendices ## 58, 59, 60, 64, 65, 70

The Court agrees that Plaintiffs do not reference the contents of Cardinal Defendants’ Appendices ## 58, 59, 60, 64, 65, and 70 in the Complaint. Therefore, this Court may take judicial notice of these documents

only

if it finds: (1) that they are public documents integral to the parties’ dispute; and (2) that the documents do not ask the Court to adopt disputed facts as true.

See Keithley Instruments,

268 F.Supp.2d at 887 .

Appendixes ## 58, 59, and 60 consist of the annual reports and Form 10-K’s of AmerisourceBergen (“AmBerg”), and McKesson Corporation for certain years within the Class Period.

See supra

note 33. Appendixes ## 64, and 65 are certain Baird analysts’ reports on McKesson Corporation (“McKesson”).

See id.

Cardinal Defendants submit the Appendixes as evidence of widespread financial problems faced by the drug distribution business during the Class Period. AmBerg and McKesson are Cardinal’s two top competitors; therefore, Cardinal asserts that the companies’ financial situations, as presented in their annual reports and 10-K’s, provide support for Cardinal Defendants’ theory that a general market downturn, not fraudulent misstatements, caused Cardinal’s stock price to drop.

Courts may consider the full text of SEC filings, prospectuses, and analysts’ reports regardless of whether they are attached to a plaintiffs complaint (in part or in whole) as long as they are

integral

to statements within the complaint.

See Albert Fadem,

334 F.Supp.2d at 995 (emphasis added). Such documents are generally “capable of accurate and ready determination by resort to sources whose accuracy cannot reasonably be questioned.”

see

Fed. Rule Evid. 201(b). Because this Court finds Cardinal Defendants’ theory that Cardinal’s stock drop was due to a general downturn in the drug distribution market integral to the parties’ dispute, the Court DENIES Plaintiffs’ motion to strike Appendices ## 58, 59, 60, 64, and 65 and any arguments arising therefrom.

Appendix # 70 is a

Business Week Online

article from July 2, 2004. Among other things, the article cites the industry switch from a B + H model to a JIT model as being responsible for the drop in Cardinal’s stock price, as well as the downward trend of both AmBerg and McKesson’s stock prices. The article reads:

Beginning in late 2003, the [drug distribution] industry pushed to change the payment system for distributing medical products (drugs, devices, and other supplies) to customers (hospitals, doctors’ offices, etc.). Wholesalers essentially want “fee-for-service” deals with manufacturers that would create less volatility in profit margins. However, the switchover to such contracts could remain problematic. The dramatic hit to Cardinal suggests other wholesalers are pretty deep in the woods, ... Cardinal had expected many customers to have agreed to [the] new contracts by now.

*714

Instead, the majority are still in negotiations.

See

Amy Tsao, “A Common Cold for Drug Distributors? News of Cardinal Health’s poor earnings surprised the Street, which fears rivals McKesson and AmBerg may not be immune,”

Business Week Online,

July 2, 2004.

In the context of a motion to dismiss, a court may not accept an otherwise reliable public document to decide facts that are in dispute.

See Firstenergy Corp.,

316 F.Supp.2d at 592 . Cardinal Defendants rely on Tsao’s argument that the switch from a B + H business model to a FFS business model caused financial problems for

all

drug distribution companies, not just Cardinal. Plaintiffs, however, contend that Cardinal’s stock price dropped because of the Company’s fraud, not because of a general market downturn. As such, Cardinal Defendants urge the Court to accept the truth of the matters asserted in the article to decide factual disputes in their favor. Because this is an improper use of documents, the Court GRANTS Plaintiffs’ motion to strike Appendix # 70 and any arguments related thereto.

3. Appendices ## 61, 62, 66, 67

Appendices ## 61, 62, 66, and 67 are various analysts’ reports regarding the financial outlook of Cardinal.

See supra

note 33. In considering a motion to dismiss, a court may not “assume the truth of the statements cited by defendants [in Appendices], or accept the inferences asserted by defendants ... based on [those statements].”

See Firstenergy Corp.,

316 F.Supp.2d at 592 . Plaintiffs concede that they cite Appendices ## 61, 62, 66, and 67 in their Complaint. They contend, however, that the Court may examine these exhibits “for the sole purpose of determining whether particular statements were made,” and posit that Cardinal Defendants unlawfully ask the Court to assume the truth of the statements they cite in the Appendixes.

Plaintiffs argued that Cardinal’s fraud was the impetus for the Company’s significant drop in stock price. Cardinal Defendants cite the analysts’ reports to counter that “financial analysts long have lauded Cardinal’s management team and Cardinal’s strong market positions.” Plaintiffs aver that this statement directly contradicts Plaintiffs’ allegations that Cardinal Defendants’ malfeasance stunned investors and materially impacted the Company’s earnings. Nevertheless, because Plaintiffs cited to the Appendixes in their Complaint, and because the dispute over the effect of Cardinal’s fraud is certainly integral to the instant litigation, the Court DENIES Plaintiffs’ motion to strike these appendixes and any arguments related thereto.

4. Jensen Motion at 8-9

In addition to the Plaintiffs’ motion to strike the foregoing appendixes, Plaintiffs also ask the Court to strike Cardinal Defendants’ argument in Defendant Jensen’s Motion to Dismiss asserting that Defendant Jensen voluntarily resigned from Cardinal. In their Complaint, Plaintiffs allege that a source informed them that Jensen was

forced

to resign from Cardinal as a result of his involvement in the Company’s accounting fraud.

After Congress’ enactment of the PSLRA, in assessing whether a plaintiff has offered “facts giving rise to a

strong inference

” of defendants’

scienter,

“plaintiffs are entitled only to the most plausible of competing inferences.”

Id.; see Miller v. Champion Enter. Inc.,

346 F.3d 660 , 673 (6th Cir.2003) (citing

Helwig,

251 F.3d at 553). Both sides present plausible arguments as to the reasons Jensen left Cardinal. Therefore, to advance the purpose of the PSLRA, the Court should not adopt Plaintiffs’ view of the facts without also

*715

considering the merits of Cardinal Defendants’ assertions. Therefore, without adopting either side’s assessment of why Jensen left Cardinal, the Court DENIES Plaintiffs’ motion to strike the contents of Jensen Motion at 8-9, allowing both sides’ arguments to remain on the record.

II. Cardinal Defendants’ Motion to Dismiss

A. Section 10(b) and Rule 10b-5 Claims

Cardinal Defendants first contend that the Court must dismiss Plaintiffs’ claims pursuant to Section 10(b) of the Exchange Act on the following grounds: (1) Plaintiffs’ fail to plead that any Defendant possessed scienter, particularly in light of the heightened pleading standard mandated by the PSLRA, 15 U.S.C. § 78u-4 and controlling Sixth Circuit law; (2) the Complaint does not state a claim based upon any of Cardinal’s alleged accounting misstatements; (3) the Complaint fails to plead loss causation as to any of the seven “improprieties” they enumerate in the Complaint; and (4) the Complaint does not allege particularized facts sufficient to state a claim based upon Cardinal’s transition to a new business model.

Section 10(b)

of the Exchange Act and Rule 10b-5 promulgated thereunder prohibit “[fjraudulent, material misstatements or omissions in connection with the sale or purchase of a security.”

See PR Diamonds v. Chandler,

91 Fed.Appx. 418, 426 (6th Cir.2004) (citing

Morse v. McWhorter,

290 F.3d 795, 798 (6th Cir.2002)). In order to state a claim under Section 10(b)

of the Exchange Act and Rule 10b-5

pro

*716

mulgated thereunder, a plaintiff must allege: (1) that defendants made a false statement or omission of material fact; (2) in connection with a purchase or sale of securities; (3) scienter; (4) reliance; and (5) damages.

See In re Comshare, Inc. Secs. Litig.,

183 F.3d 542, 548 (6th Cir.1999).

Prior to the enactment of the PSLRA, the pleading requirements for stating a claim under Section 10(b) were governed by Federal Rule of Civil Procedure 9(b).

See In re Telxon Sec. Litig.,

133 F.Supp.2d 1010, 1025 (N.D.Ohio 2000) (citing

DiLeo v. Ernst & Young,

901 F.2d 624, 627 (7th Cir.1990)). Rule 9(b) provides: “[i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge and other condition of mind of a person may be averred generally.” Fed. R. Crv. Pro. 9(b).

Originally, the Rule 9(b) heightened pleading requirement (requiring a plaintiff to plead fraud with particularity) was meant to curb any possible vexatious litigation under Rule 10b-5.

See Comshare,

183 F.3d at 548 (citing

Blue Chip Stamps v. Manor Drug Stores,

421 U.S. 723, 739-44 , 95 S.Ct. 1917 , 44 L.Ed.2d 539 (1975)). In 1995, however, Congress concluded that Rule 9(b) had “not prevented the abuse of the securities laws by private litigants.”

Id.

(citing H.R. Conf. Rep. No. 104-369 (1995), reprinted in 1995 U.S.C.C.A.N. 730, 818)

“Indeed, Congress echoed the concerns expressed by the Supreme Court in

Blue Chip,

noting that frivolous securities fraud litigation ‘unnecessarily increased] the cost of raising capital and ehill[s] corporate disclosure [and is] often based on nothing more than a company’s announcement of bad news, not evidence of fraud.”

Id.

(citing S.Rep. No. 104-98 (1995), reprinted in 1995 U.S.C.C.A.N. 679, 690). Thus, on December 22, 1995, Congress passed the PSLRA,

which, amends the

*717

Exchange Act and applies to private class actions brought pursuant to the Federal Rules of Civil Procedure.

See

15 U.S.C. §§ 77k, 771, 77z-l, 77z-2, 78a, 785-1, 78t, 78u, 78u-4, 78u-5.

Adding to the Rule 9(b) requirement that plaintiffs state them fraud allegations with particularity, the PSLRA requires a plaintiffs to, “specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission, or made on information and belief, ... [to] state with particularity all facts on which that belief is formed.” 15 U.S.C. § 78u-4(b)(l).

1. Whether the Complaint Sufficiently Alleges Facts Establishing a “Strong Inference” of Scienter

Courts consider scienter the most difficult element of a 10(b) and 10b-5 claim for plaintiffs to plead under the PSLRA; therefore, should the Court find that Plaintiffs’ Complaint does not adequately plead the scienter element of their Section 10(b) and Rule 10b-5 claims, it must grant Cardinal Defendants’ motion to dismiss.

See PR Diamonds,

91 Fed.Appx. at 426 . The parties’ dispute centers on whether the Plaintiffs’ Complaint adequately pleads scienter. As such, before getting to the merits of Plaintiffs’ allegations, the Court will first examine the meaning of “scienter” in the securities fraud setting. If the Court finds that the Plaintiffs have established scienter, then it may consider whether Plaintiffs have adequately pled the other elements of their prima facie case.

a. “Scienter” under the PSLRA

The Supreme Court has defined “scienter” as “a mental state embracing intent to deceive, manipulate, or defraud.”

Ernst & Ernst,

425 U.S. at 193 n. 12, 96 S.Ct. 1375 . In securities fraud claims based on statements of present or historical fact — such as the claims Plaintiffs bring in this case — scienter consists of

knowledge

recklessness. PR Diamonds,

91 Fed.Appx. at 426 (citing

Helwig v. Vencor, Inc.,

251 F.3d 540, 552 (6th Cir.2001) (en banc)). The Sixth Circuit defines “recklessness” as “highly unreasonable conduct which is an extreme departure from the standards of ordinary care. While the danger need not be known, it must be at least so obvious that any reasonable man would have known of it.”

See id.

(citing

Mansbach v. Prescott, Ball & Turben,

598 F.2d 1017, 1025 (6th Cir.1979)). Recklessness is “a mental state apart from negligence and akin to conscious disregard.”

Id.

(citing

Comshare,

183 F.3d at 550 ).

Next, the Court must examine the special requirements for pleading scienter in federal securities fraud claims such as this. As with all fraud claims, Federal Rule of Civil Procedure 9(b) applies to pleading a defendant’s state of mind, allowing that “[m]alice, intent, knowledge, and other condition of mind of a person may be averred generally.”

PR Diamonds,

91 Fed.Appx. at 426 . Through the passage of the PSLRA, however, Congress heightened the standard of pleading scienter in a securities fraud case.

See supra

Part

IV. II.A.l.a.

The PSLRA provides that if a plaintiff fails to meet its requirements, a court may, on any defendant’s motion, dis

*718

miss the complaint.

See

15 U.S.C. § 78u-4(b)(3);

PR Diamonds,

91 Fed.Appx. at 427 . As courts have noted, “the PSLRA did not change the scienter that a plaintiff must prove to prevail in a securities fraud case but instead changed what a plaintiff must

plead

in his complaint in order to survive a motion to dismiss.”

See Comshare,

183 F.3d at 548-49 .

As the foregoing authorities make clear, a plaintiff may survive a motion to dismiss by pleading with particularity facts giving rise to a strong inference that the defendant acted with knowledge or recklessness.

See PR Diamonds,

91 Fed.Appx. at 427 . In other words, not only must the complaint make particular factual allegations but the inference of scienter which those allegations generate must be strong.

Id.; see Comshare,

183 F.3d at 550 (citing

Mansbach v. Prescott, Ball & Turben,

598 F.2d 1017, 1024 (6th Cir.1979) (emphasis added)). In

Helwig ,

the Sixth Circuit provided a definitive explanation of the meaning of a “strong inference,” instructing:

Inferences must be reasonable and strong but not irrefutable. “Strong inferences” nonetheless involve deductive reasoning; their strength depends on how closely a conclusion of misconduct follows from a plaintiffs proposition of fact. Plaintiffs need not foreclose all other characterizations of fact, as the task of weighing contrary accounts is reserved for the fact finder. Rather, the “strong inference” requirement means that plaintiffs are entitled only to the

most plausible

of competing inferences.

251 F.3d at 553 (emphasis added). The PSLRA does not change the Rule 12(b)(6) maxim that when an allegation is capable of more than one inference, it must be construed in the plaintiffs favor.

Id.

(“Our willingness to draw inferences in favor of the plaintiff remains unchanged by the PSLRA.”). The “strong inference” requirement, however, means that a plaintiff is entitled to only the most plausible of competing inferences.

Id.

Moreover, the

Helwig

Court enumerated factors which, though not exhaustive, may be probative of scienter in securities fraud actions:

(1) insider trading at a suspicious time or in an unusual amount;

(2) divergence between internal reports and external statements on the same subject;

(3) closeness in time of an allegedly fraudulent statement or omission and the later disclosure of inconsistent information;

(4) evidence of bribery by a top company official;

(5) existence of an ancillary lawsuit charging fraud by a company and the company’s quick settlement of that suit;

(6) disregard of the most current factual information before making statements;

(7) disclosure of accounting information in such a way that its negative implications could only be understood by someone with a high degree of sophistication;

(8) the personal interest of certain directors in not informing disinterested directors of an impending sale of stock; and

(9) the self-interested motivation of defendants in the form of saving their salaries or jobs.

251 F.3d at 552 (citing

Greebel v. FTP Software, Inc.,

194 F.3d 185, 196 (1st Cir.1999)).

*719

b. Applying the Scienter Standard

The Sixth Circuit employs a “totality of the circumstances analysis” whereby the facts argued

collectively

must give rise to a strong inference of at least recklessness.

See PR Diamonds,

91 Fed.Appx. at 427 (citing

Telxon,

133 F.Supp.2d at 1026 (“Thus, the Sixth Circuit employs a form of ‘totality of the circumstances’ analysis; this Court, accordingly, declines to examine plaintiffs’ allegations in piecemeal fashion, and will instead assess them collectively to determine what inferences may be drawn therefrom.”)).

Plaintiffs maintain that the Complaint in its entirety, establishes a strong inference that, throughout the Class Period, the Cardinal Defendants either knew or were at least reckless in disregarding serious accounting improprieties at Cardinal and the effect that such improprieties had on the Company’s financial condition. Specifically, Plaintiffs argue that, when considering the following factors in their totality, a strong inference of the Defendants’ scien-ter arises: (1) the nature and magnitude of the accounting improprieties at Cardinal; (2) the Individual Defendants’ access to Cardinal’s financial information by virtue of their positions at the Company; (3) the fact that the accounting improprieties occurred in “key areas of focus”; (4) the Individual Defendants’ motives and opportunities to commit fraud; and (5) other red flags potentially signaling Cardinal’s accounting errors.

Accordingly, in the following discussion, this Court examines each of Plaintiffs’ scienter allegations.

See PR Diamonds,

91 Fed.Appx. at 429 . As the Sixth Circuit has noted, “recklessness in securities fraud is an untidy case-by-case concept, [which] necessarily involves a sifting of allegations in the complaint.”

Id.

(citing

Helwig,

251 F.3d at 551 (citing

Mansbach,

598 F.2d at 1025 )). Accordingly, this Court “sifts” Plaintiffs’ allegations individually, and then aggregates the “nuggets of inference” they generate, concluding in the end that a strong inference of scienter arises and finding that Plaintiffs have pled facts that create a strong inference of scienter.

i. Accounting Improprieties

Plaintiffs contend that their allegations of Cardinal’s improper accounting practices and internal control deficiencies comprise circumstantial evidence supporting a strong inference of the Defendants’ scien-ter. The alleged accounting improprieties include: (1) the mis-classification of bulk deliveries as operating revenue in FY 2001 through FY 2003; (2) the premature recognition of $22 million gained from the Vitamin Litigation settlement in FY 2002; (3) the decision to change Cardinal’s revenue recognition policy for its Pyxis business in FY 2002; (4) balance sheet reserve and accrual adjustments in the Company’s 2004 10-K; (5) as announced in the 2004 10-K, the Company’s decision to change its method of accounting for cash discounts received from vendors for prompt payment; (6) the mis-classification of an unidentified amount of expenses as “special charges” related to mergers and acquisitions; and (7) improper off-balance sheet transactions.

Comshare,

the Sixth Circuit held that GAAP violations are, by themselves, insufficient to establish scienter for a securities fraud claim. 183 F.3d at 553 . Nonetheless, in later cases, the Sixth Circuit recognized that an inference of knowledge or recklessness may be drawn from allegations of accounting violations that are so

*720

“simple, basic, and pervasive in nature, and so great in magnitude, that they should have been obvious to a defendant.”

See PR Diamonds,

91 Fed.Appx. at 430 (finding that plaintiffs’ allegations as to defendants’ GAAP violations were of “such a great magnitude” that they rose to create a strong inference of defendants’ scien-ter);

Firstenergy Corp.,

316 F.Supp.2d at 598 (the fact that defendants’ accounting practices resulted in such enormous overstatements of revenue for several years further supported an inference of scien-ter). In addition, in

PR Diamonds ,

the court acknowledged that many other courts consider GAAP violations relevant to establishing scienter when those violations were significant.

See In re Smar-Talk Teleserv., Inc. Sec. Litig.,

124 F.Supp.2d 527, 539 (S.D.Ohio 2000) (finding that when viewed in light of the magnitude of the overstatements, the nature of the accounting principles violated, and the importance of the contracts to which these principles were applied, plaintiffs’ allegations of GAAP violations rose to create a strong inference of scienter);

Telxon,

133 F.Supp.2d at 1031 (the nature and number of defendants’ accounting manipulations, when coupled with the magnitude of the difference between the originally reported financial disclosures and their restatements, convinced the court that the plaintiffs .had adequately alleged scienter);

In re MicroStrategy, Inc. Sec. Litig.,

115 F.Supp.2d 620, 644 (E.D.Va.2000) (“But this is not to say that a misapplication of accounting principles or a restatement of financials can never take on significant inferential weight in the scienter calculus; to the contrary, when the number, size, timing, nature, frequency, and context of the misapplication or restatement are taken into account, the balance of the inferences to be drawn from such allegations may shift significantly in favor of scienter.”);

see In re Oxford Health Plans, Inc. Sec. Litig.,

51 F.Supp.2d 290, 294 (S.D.N.Y.1999) (“[P]laintiffs allege ‘in your face facts,’ that cry out, ‘how could [defendants] not have known that the financial statements were false.’ ”);

Rehm v. Eagle Fin. Corp.,

954 F.Supp. 1246, 1256 (N.D.Ill.1997) (finding that plaintiffs’ allegations about defendants’ GAAP violations were of great enough magnitude that, when combined with the other available circumstantial evidence, they raised a strong inference of defendants’ scienter).

First, Cardinal Defendants contend that despite the trend signaled by

PR Diamonds, Telxon,

and its progeny, GAAP violations alone do not constitute scienter. Nevertheless, Cardinal Defendants argue that should this Court consider the Cardinal Defendants’ GAAP violations in its scienter analysis, many of Plaintiffs’ allegations do not even amount to actual GAAP errors, altogether negating any inference of scienter.

Plaintiffs, counter, however, that Cardinal’s GAAP misstatements were

egregious in terms of “number, size, timing, frequency and context,” that they are more than sufficient to create a strong inference of scienter.

Although

Comshare

sets forth the prevailing view in this Circuit that GAAP violations do not ipso facto establish scien-ter, as it is factually inapposite,

Comshare

does not control here.

See id.

at 542.

Comshare

was a consolidated securities fraud action arising from the company’s restatement of certain financial statements after it had acknowledged that its original financial statements had contained a num

*721

ber of recognition errors.

See id.

The errors were based on a British subsidiary’s violation of company policy and GAAP principles that proscribed the inclusion in financial statements of revenue from sales that were not assured.

See

id,

The subsidiary had been recognizing revenues from sales that were conditioned by side letter agreements allowing the buyer to back out of the sale under certain circumstances.

See id.

When Comshare discovered the undisclosed agreements, it was forced to announced that it had overstated its recognized revenue causing the market value of its stock to drop significantly.

See id.

The plaintiff-shareholders brought claims of securities fraud under 10(b) based on Comshare’s accountings errors in addition to bare allegations demonstrating the company’s motive and opportunity to commit fraud.

See id.

The district court, however, granted the defendants’ motion to dismiss, finding that the plaintiff-shareholders had failed to plead facts establishing that the subsidiary’s GAAP violations constituted “knowing misrepresentation” by the defendants.

Id.

at 554. The court of appeals affirmed the district court’s ruling, holding, “[plaintiffs have failed to plead facts that show that the revenue recognition errors at Comshare’s UK subsidiary should have been obvious to Coms-hare or that Comshare consciously disregarded ‘red flags’ that would have revealed the errors prior to their inclusion in public statements.”

Id.

In this case, Plaintiffs’ allegations arise from Cardinal’s own GAAP violations, as opposed to a recently acquired subsidiary’s violations, like those alleged in

Comshare.

183 F.3d at 554 . Though it is conceivable that Comshare was unaware of the details of agreements entered into by a foreign subsidiary, it is less likely that Cardinal was unaware that it had consistently manipulated its 24-hour rule to overstate its Operating Revenue consistently for

four years

to create inflated Operating Revenues of approximately

$26 billion.

Further, in

Comshare,

aside from their claims based on the subsidiary’s accounting violations, plaintiff-shareholders’ only other allegations were based on Comshare’s “motive” and “opportunity” to commit fraud, which in isolation,

cannot

establish a strong inference of recklessness.

See id.

at 549 (“... we conclude that plaintiffs may plead scienter in § 10b and 10b-5 cases by alleging facts giving rise to a strong inference of recklessness, but

not

by alleging facts merely establishing that a defendant had the motive and opportunity to commit securities fraud.”) (emphasis added). In the case sub judice, however, Plaintiffs have alleged 200 pages of circumstantial evidence in addition to allegations of motive and opportunity, making their case stronger than that of the Coms-hare plaintiffs.

*722

Further, in addition to being distinguishable from

Comshare,

the facts of the instant litigation resemble more closely those of cases in which courts found that, when combined with plaintiffs’ other allegations, GAAP violations provided the strong inference of recklessness required to establish scienter.

MicroStrategy,

115 F.Supp.2d at 620

(finding allegations that defendants had overstated the company’s revenues by $66 million over

three

years were egregious enough to support an inference of scienter);

Telxon,

133 F.Supp.2d at 1029 (finding overstatement of revenues by over $20 million in a single quarter and the fact that company reported profits when it should have reported losses to provide a strong inference of scienter);

Rehm,

954 F.Supp. at 1246 ;

SmarTalk,

124 F.Supp.2d at 539 .

The Plaintiffs’ allegations are parallel to those of plaintiffs in

SmarTalk.

124 F.Supp.2d at 527 . In

SmarTalk,

plaintiff-shareholders sued defendant SmarTalk alleging that, over the course of two years, the company’s officers and directors had overly-inflated SmarTalk’s stock price by presenting a false picture of the company through its SEC filings, press releases, and conference calls with analysts and investors.

See id.

at 531 . The plaintiffs alleged a number of accounting violations, which they listed in their complaint.

Id.

at 532 . Further, plaintiffs alleged that the SmarTalk defendants engaged in insider trading of 2.7 million shares of stock to raise $63 million in profits for themselves. Finally, during the relevant time period, SmarTalk acquired at least two companies and raised $180 million in capital through a “convertible notes offering and an equity offering.”

See id.

at 533 .

The court held that the plaintiffs “adequately alleged widespread and varied accounting errors that led to a drastic overstatement of SmarTalk’s financial success,” supporting an inference of scienter.

Id.

at 540 ;

see, e.g. Rehm,

954 F.Supp. at 1255-56 (“the more serious the error, the less believable are [corporate] defendants’ protests that they were completely unaware of [the corporation’s] true financial status and the stronger is

*723

the inference that defendants must have known about the discrepancy”). Moreover, the court held that “irrespective of whether the [defendants’] accounting errors violated GAAP, the substance of the alleged errors smacks of fraud, and strengthens the inference of scienter.”

Id.

at 540.

As in

SmarTalk,

Plaintiffs here make a number of detailed violations based on Cardinal’s accounting misstatements.

Moreover, like the

SmarTalk

plaintiffs, Plaintiffs in this case do not end their allegations with GAAP violations; they also allege that, when considered together, the Individual Defendants’ insider trading, the presence of red flags evidencing overinflated revenues, and the sheer magnitude of the actual fraud point to a strong inference of scienter.

See id.

Hence, this Court finds Plaintiffs’ allegations to be at least as “widespread and varied” as those of the

SmarTalk

plaintiffs.

See id.

Further, though Cardinal Defendants counter that Plaintiffs’ allegations are not even

actual

GAAP violations, just as in

SmarTalk,

the substance of the errors strengthens the inference of scien-ter, and accounting errors of the type here have been held to be sufficient to establish scienter.

See id.

at 540;

see also Maldonado v. Dominguez,

137 F.3d 1, 9-10 (1st Cir.1998). Courts should not “infer fraudulent intent from the mere fact that some officers sold stock ... Instead, [plaintiffs must allege that the trades were made at times and in quantities that were suspicious enough to support the necessary strong inference of scienter.”

In re Burlington Coat Factory Sec. Litig.,

114 F.3d 1410, 1424 (3d Cir.1997) (stock sales did not permit an infer

*728

ence of scienter because only three of the five defendants sold stock, plaintiffs provided information on the total stock holdings of only one defendant, who had traded only 0.5% of his holdings, and plaintiffs failed to plead facts indicating whether such trades were “normal and routine” for the defendants, and whether the trading profits were substantial in comparison to their overall compensation);

see, e.g., Gree-bel,

194 F.3d at 197 (“Unusual trading or trading at suspicious times or in suspicious amounts by corporate insiders has long been recognized as probative of scienter.”);

In re Advanta Corp. Sec. Litig.,

180 F.3d 525, 540 (3d Cir.1999) (stock sales did not permit an inference of scienter where three of the five individual defendants sold no stock during the class period and those who did trade, sold only small percentages of their stock);

Shaw v. Digital Equip. Corp.,

82 F.3d 1194, 1224 (1st Cir.1996) (“[T]he mere fact that insider stock sales occurred does not suffice to establish scienter.”);

MicroStrategy,

115 F.Supp.2d at 644 .

Nevertheless, if the executive officers’ stock sales were “unusual in scope or timing,” they may support an inference of scienter.

See Burlington Coat Factory,

114 F.3d at 1424 . Courts generally consider the following factors in analyzing allegations of insider trading: (1) whether the alleged trades were “normal or routine” for the insider; (2) whether profits reaped “were substantial enough in relation to the compensation levels for any of the individual defendants so as to produce a suspicion that they might have had an incentive to commit fraud”; and (3) whether, in light of the insider’s total stock holdings, the sales are unusual or suspicious.

MicroStrategy,

115 F.Supp.2d at 644 (citing

Burlington Coat Factory,

114 F.3d at 1423 ).

There is no bright line test, however, as to the amount or percentage of stock that must be sold to constitute a “suspicious amount” — nor should there be, for, in the end, the determination of whether insider sales were “suspicious” is highly context-specific and depends on the other allegations offered in the Complaint.

Courts have classified stock sales as unusual or suspicious based on a variety of factors, which include “the amount of profit from sales,” “the portion of stockholdings sold,” “the change in volume of insider sales,” “and the number of insiders selling.”

See Rothman v. Gregor,

220 F.3d 81, 94 (2d Cir.2000) (citing

Oxford Health Plans,

187 F.R.D. 133, 140 (S.D.N.Y.1999)) ($78 million profit from sale of 1.2 million shares during the class period is “massive by any measure”);

Stevelman v. Alias Research Inc.,

174 F.3d 79, 85 (2d Cir.1999) (president and CEO of company sold 40 percent of his stock holdings in a company while making optimistic statements about company’s financial position);

In re Quintet Entm’t Inc. Sec. Litig.,

72 F.Supp.2d 283 ,

*729

296 (S.D.N.Y.1999) (sales by corporate insiders represented 156 percent increase over total insider sales for fourteen months prior to start of the class period);

San Leandro,

75 F.3d at 814 (company officer’s $2 million profit from company stock sales did not suffice to prove motive, because no other company executives sold their shares during the relevant period). Hence, the Court will consider Plaintiffs’ allegations against each Individual Defendant separately to determine whether it appears unusual or suspicious against the backdrop of the foregoing three-factor analysis.

I) Defendant Walter

Plaintiffs allege that Defendant Walter personally sold 539,910 shares of Cardinal stock for insider trader proceeds of $38.19 million during the Class Period. Walter’s reported insider trading during the Class Period is detailed below.

Transaction Date Shares Sold Price Proceeds

12/13/2000_ 22,500 $63.42 $ 1,426,949

03/01/2001_ 32.100 $67.33 $ 2,161,292

03/01/2001_ 7.500 $65.88 $ 494,100

03/01/2001 7.500 $67.66 $ 507,450

03/01/2001_ 7.500 $67.83 $ 508,725

03/01/2001_ 3,750 $67.43 $ 252,863

03/01/2001_ 9,150 $66.72 $ 610,488

03/02/2001_ 7.500 $66.68 $ 500,100

03/02/2001_ 15.000 $67.53 $ 1,012,949

03/09/2001_ 03/13/2001_ 7.500 7.500 $66.23 $66.66 $ 496,725 $ 499,950

03/13/2001 34,900 $66.50 $ 2,320,850

05/08/2001 22.100 $66.70 $ 1,474,070

05/08/2001_ 9,800 $66.80 $ 654,640

05/08/2001_ 5.000 $66.90 $ 334,500

05/08/2001_ 1,600 $66.55 $ 106,480

05/08/2001_ _900. $66.52 $ 59,868

05/08/2001 _400. $66.53 $ 26,612

05/08/2001_ _200 $66.84 $ 13,368

05/08/2001_ 100 $66.75 $ 6,675

05/08/2001 30.000 $66.57 $ 1,997,100

01/28/2002_ 10.000 $65.07 $ 650,700

01/30/2002 10,000 $65.81 $ 658,100

01/31/2002_ 7,720 $65.71 $ 507,281

01/31/2002 _500 $65.91 $ 32,955

03/07/2002_ 50.000 $65.95 $ 3,297,500

03/07/2002 18,700 $65.45 $ 1,223,915

03/07/2002 15.000 $66.00 $ 990,000

03/07/2002 10.000 $65.97 $ 659,700

03/07/2002_ 5.000 $65.20 $ 326,000

03/07/2002_ 1,300 $65.30 $ 84,890

09/12/2002_ 100,000 $65.80 $ 6,580,000

01/29/2003 133,190 $57.90 $ 7,711,701

593,910 $38,188,496 Total

*730

First, Cardinal Defendants posit that, for Defendant Waiter, as well as for each of the other Individual Defendants, Plaintiffs mistakenly lumped the Defendants’ “stock options” sales together with his other trading. Cardinal Defendants contend that Plaintiffs’ calculations are erroneous because courts do not view executives’ decisions to exercise imminently expiring stock options to be “suspicious.” In other words, Cardinal Defendants insist that Plaintiffs incorrectly argue that “exercising options and selling stock out of personal holdings” is a “distinction without a difference” when in fact, courts recognize that options are part of many executives’ standard compensation package and that there is nothing “suspicious” in exercising an option before it expires.

See, e.g. Ad-vanta Corp.,

180 F.3d at 540 ;

Burlington Coat Factory,

114 F.3d at 1424 ;

Friedman v. Rayovac Corp.,

291 F.Supp.2d 845, 855 (D.Wis.2003);

In re Century Bus. Serv. Secs. Litig.,

2002 WL 32254513 , at *7 n. 17 (N.D.Ohio June 27, 2002). Cardinal Defendants also aver that because Plaintiffs fail to show that compensation at Cardinal was higher than that of its corporate peers, they incorrectly label Individual Defendants’ exercise of options “relevant,” “unusual,” and “suspicious.”

This Court agrees that most courts do not view an executive’s decision to exercise bas stock options before they expire as evidence of fraudulent insider trading.

Nonetheless, in their Motion to Dismiss, Cardinal Defendants confirm that Walter made approximately 31% of his sales during the Class Period through exercising stock options set to expire in 2002 and 2004. That leaves 69% of his other sales activity to be unrelated to exercising his stock options, and all 69% of these sales, if inconsistent with Walter’s past trading activity, could be considered suspicious.

Moreover, Cardinal Defendants argue that Plaintiffs’ chart fails to account for Walter’s stock

purchases

during the Class Period. They contend that any “fair analysis” would more properly measure the net proceeds from trading activity during the relevant period, accounting for the significant portion of the sale proceeds that were offset by the amounts Walter paid during the same period for acquired shares, including open-market purchases, “option exercises and relevant payroll taxes associated with his option purchases.” Def.’s Motion to Dismiss at 46. Cardinal Defendants, however, cite no authority for this technical dispute.

Further, Cardinal Defendants argue that the fact that Walter actually

purchased

40,000 shares during the Class Period, augurs against an inference of scien-

*731

ter, “as no rational person would acquire stock whose price was misleadingly-propped up.”

See

Def.’s Motion to Dismiss at 51;

see Century Bus.,

2002 WL 32254513 at *8 (finding it improbable that defendant would seek to increase his wealth by purchasing stock at inflated prices);

Schuster v. Symmetricon, Inc.,

2000 WL 33115909 , at *8 (N.D.Cal. Aug.1, 2000) (purchase of stock at allegedly inflated prices undermined a finding of scien-ter);

Morse,

200 F.Supp.2d at 853 (company’s decision to reinvest in its own stock undermined scienter, since it would make no sense to knowingly purchase at inflated prices);

Mathews v. Centex Telemgmt., Inc.,

1994 WL 269734 , at *8 (N.D.Cal. June 8, 1994) (“It would have made no sense to purchase that stock if defendants knew the prices to be inflated.”). Cardinal Defendants also argue that the fact that Defendant Walter did not sell stock in the last 18 months of the Class Period points against scienter. Cardinal Defendants rely on a number of cases, particularly from the Ninth Circuit, for the proposition that, “[i]f Walter intended to inflate the price of Cardinal shares in order to cash in, his trading pattern certainly did not reflect this.”

See

Def.’s Motion to Dismiss at 44; Def.’s Reply at 24;

see In re Vantive Corp. Sec. Litig.,

283 F.3d 1079, 1093-94 (9th Cir.2002) (rejecting insider trading allegation where most of the sales occurred more than a year before the press release announcing the damaging news);

In re Party City Sec. Litig.,

147 F.Supp.2d 282, 313 (D.N.J.2001) (“a broad temporal distance between stock sales and a disclosure of bad news defeats any inference of scienter”).

The Court agrees with the Ninth Circuit that, in some cases, a broad temporal distance between stock sales and a disclosure of bad news defeats any inference of scien-ter; however, the Court does not believe the principle applies to the case sub judice.

See Vantive Corp.,

283 F.3d at 1093-94 . The magnitude of the Individual Defendants’ sales must be viewed along a continuum where maximum profits and total loss of control are at one end, and minimum profits and maximum retention of control are at the other.

See MicroStrategy,

115 Fed. Supp.2d at 646. In

MicroStrategy,

however, “the fact that the point on this continuum that the Individual Defendants chose to draw did not entail near-total divestment of their total holdings in Mi-croStrategy [stock did] not preclude an inference of an intent on the Individual Defendants’ part to profit from fraud

and

maintain control of the Company.”

Id.

Similarly, in this case, Cardinal Defendants mistakenly assume that the only motive probative of scienter is the Individual Defendants’ motive to “cash out” fully by divesting themselves of their stake in the Company. To this end, Cardinal Defendants highlight the fact that, in addition to his sales, Defendant Walter

purchased

40,-000 shares during the Class Period. This Court is persuaded, however, that “the calculus is clearly more complicated [because] ‘an insider may not always trade all his shares in the company for which he possesses the inside information; the trader may hold on to a portion of his shares to hedge against the unforeseen or to obscure the insider trading from the SEC.’ ”

Id.

at 647 (citing

In re Worlds of Wonder Sec. Litig.,

35 F.3d 1407, 1427 (9th Cir.1994)). Thus, the Court does not agree with Cardinal Defendants that Walter’s purchase of 40,000 shares — a trifling amount when compared with the 593,910 he sold — cuts against any unusual or suspicious trading.

Finally, Cardinal Defendants argue that, irrespective of whether the Court accepts Cardinal Defendants’ arguments concerning stock options and stock purchases, Walter’s trading activity is still not unusual or suspicious because Walter’s “sales

*732

during his Class Period followed his pre-established tendency to dispose of a small percentage of his Cardinal holdings within a day or a few days’ time when the opportunity presented itself, and then not to sell again for months.”

See

Def.’s Motion to Dismiss at 44. Further, they argue that Walter’s trading history is “necessarily lumpy” because “his ability to sell stock in any given period has been subject to frequent ‘closed windows’ based on the company’s internal policies relating to trades by officers, acquisitions, and other company business activity.”

See id.

at 43;

see In re Tyco Int’l, Inc. Sec. Litig.,

185 F Supp.2d 102, 112 n. 6 (D.N.H.2002) (“Most publicly traded companies have adopted policies which prevent insiders from trading except during narrow windows that are open for only brief periods following the release of accounting information.... Given this reality, evidence of insider trading following the release of accounting information is of limited value in determining whether the released information is misleading in most cases because it is equally likely that the information is accurate and that the timing of the trades is dictated by the company’s insider trading policy.”).

Cardinal Defendants also declare that Plaintiffs’ incorrectly compare Walter’s four years of Class Period trading to his trading in his two years of pre-Class Period trading, and that, in fact, Plaintiffs should have looked at

four

years of pre-Class Period trading.

They argue that “Plaintiffs compound their error by comparing, without adjustment, sales during the 45-month Class Period with sales during the preceding 24-month period,” and that “the numbers Plaintiffs derive from comparisons drawn between these two dissimilar periods are meaningless.” Defs Motion to Dismiss at 43. To the contrary, the Court considers it compelling that Walter’s proceeds during the Class Period exceeded his pre-Class Period sales proceeds by more than 600 percent. In

Quintel Entertainment,

the court drew an inference of scienter when sales by corporate insiders were 156 percent greater than insider sales in the 14 month pre-Class Period.

See

72 F.Supp.2d at 296 . Accordingly, regardless of whether Walter’s sales are considered against two or four years of pre-Class Period sales, 600 percent is clearly a significant enough jump in trading to suggest that Walter’s Class Period trading was unusual and suspicious.

ii) Defendant Fotiades

Plaintiffs allege that Defendant Fotiades personally sold 67,814 shares of Cardinal stock for insider trader proceeds of $4,678,158 during the Class Period. Fotiades’ reported insider trading during the Class Period is detailed below.

*733

Transaction Date Shares Sold Price Proceeds

12/13/2000 5,561 $63.45 352,909

05/30/2001 17,300 $71.10 $1,247,330

05/30/2001 808 $72.38 58,483

04/29/2002 4,144 $68.59 284,237

04/30/2002 40,000 $68.38 $2,735,200

Total 67,814 $4,678,159

Cardinal Defendants contend that Fo-tiades’ trading is neither unusual nor suspicious because, like Walter, he did not sell stock in the last 27 months of the Class Period. Nonetheless, just as such claims failed to negate an inference of scienter as to Defendant Walter, so too do they fail to negate such an inference as to Defendant Fotiades.

Next, Cardinal Defendants argue that because the only shares Fotiades sold in the Class Period were made while he was with Cardinal’s Life Sciences segment,

before

he became Cardinal’s COO, they do not infer scienter. This Court disagrees; a sale by a high-level officer is still a sale, regardless of whether that officer had not yet risen to the highest echelons of the company.

Finally, Cardinal Defendants argue that Fotiades sold more than twice the number of shares he sold during the Class Period on November 10, 2004, four months after the end of the Class Period, and “after every alleged ‘misrepresentation’ Plaintiffs alleged had already been disclosed.”

See

Def.’s Motion to Dismiss at 48. They aver that, “[i]f Fotiades really were participating in an artificial inflation of Cardinal’s price, one would imagine, he would sell his shares while the inflation was effect.”

Id.

Plaintiffs counter that Cardinal Defendants’ failure to cite any authority for their proposition that post-Class Period sales negate scienter nullifies their argument. The Court finds that if such sales negated scienter, a defendant in an insider trading case could simply re-sell the options he had acquired cheaply as a means to evade liability.

Hi) Defendant Jensen

Plaintiffs allege that Defendant Jensen personally sold 10,357 shares of Cardinal stock for insider trader proceeds of $743,984 during the Class Period. Jensen’s reported insider trading during the Class Period is detailed below.

Transaction Date_ Shares Sold__Price_Proceeds

03/08/2004_2j638_$67.45_ $177,933

03/08/2004_1¿00_$67.42_ $ 74,162

03/08/2004_600_ $67.44_$ 40,464

05/03/2004_6j019_$75.00_$451,425

Total_._10,357_$743,984

Plaintiffs state that during the Class

*734

Period, Jensen sold 95.7% of his Cardinal stock holdings.

See

Complaint ¶ 259. Cardinal Defendants, however, counter that Defendant Jensen “had a 10b5-l trading plan during the Class Period, and sold stock during the Period on only two dates.”

See

Def.’s Motion to Dismiss at 49. Plaintiffs point out that Jensen “fails to mention that the purported trading plan” was “not actually formed until March 5, 2004, and was not filed with the SEC until March 10, 2004,

after

he had dumped over 4,300 shares of Cardinal stock and immediately before he dumped another 6,000 shares.”

See

Pl.’s Opposition at 70 n. 26. Regardless of whether Jensen’s plan was formed

before

after

the end of the Class Period, Plaintiffs also argue that “a 10b5-l trading plan is typically considered an affirmative defense used to determine when a person’s purchase or sale is not ‘on the basis of material nonpublic information.”

See

17 C.F.R. § 240 .10b5-l. As it is typically premature to raise affirmative defenses in a motion to dismiss, this Court will not consider the impact of Jensen’s purported 10b5-l trading plan at this stage of the pleadings. Because Cardinal Defendants do not contest Plaintiffs’ allegations as to Jensen, other than asserting the 10b5-l affirmative defense, the Court finds that Plaintiffs’ allegations as to Jensen’s trading activities establish an inference of scienter.

iv) Defendant Parrish

Plaintiffs allege that Defendant Parrish personally sold 16,032 shares of Cardinal stock for insider trader proceeds of $972,835 during the Class Period. Parrish’s reported insider trading during the Class Period is detailed below.

Transaction Date_Shares Sold_Price_Proceeds

05/12/2003_18,000_$67.14_ $475,571

01/26/2004_4,097_$63.80_$261,389

01/26/2004_3^700_$63,75_$235,875

Total_16,032_$972,835

Plaintiffs allege that based on Defendant Parrish’s Forms 4 filed with the SEC, as of Parrish’s final Class Period trade, he had sold 90.9% of his Cardinal stock holdings.

Even so, Plaintiffs fail to set forth any facts showing that Parrish’s pre-Class

*735

Period sales were different from his sales during the Class Period. Consequently, Plaintiffs’ allegations that Parrish’s sales were “unusual” or “suspiciously” timed, are merely conclusory allegations. Thus, Plaintiffs have not established scienter as to Parrish’s trading activity.

v) Defendant Millar

Plaintiffs allege that Defendant Millar personally sold 86,043 shares of Cardinal stock for insider trader proceeds of $5,152,292 during the Class Period. Millar’s reported insider trading during the Class Period is detailed below.

Transaction Date Shares Sold Price Proceeds

03/01/2001_ 18,000 $67.14 $1,208,519

05/16/2001_ 7,900 $69.05 $ 545,495

05/16/2001_ _297 $69.25 $ 20,567

02/11/2002_ 15.200 $65.60 $ 997,120

02/11/2002 _411 $65.61 $ 26,966

04/28/2003_ 31.200 $53.20 $1,659,840

04/28/2003_ 7,700 $53.21 $ 409,717

04/28/2003_ 5,035 $53.25 $ 268,114

04/28/2003_ _300 $53.18 $ 15,954

Total 86,043 $5,152,292

Plaintiffs argue that, during the Class Period, Millar sold 43.9% of his Cardinal stock trading, none of which was part of any general or specific pre-planned pattern of stock sales. They assert that, when compared to Defendant Millar’s two years of pre-Class trading, in which he sold-17% of his stock shares, the approximately 27% jump in sales should be viewed as suspicious.. Cardinal Defendants counter that, in fact, Defendant Millar’s sales during the Class Period were derived almost entirely from exercising options due to expire in 2002, 2003, and 2004. Further, they contend that when Defendant Millar exercised his options in April 2003, he actually retained 31,000 shares rather than selling them, making him a net acquirer of shares at the end of the Class Period

Other courts have held that a defendant’s retention of his stock holdings significantly undermines plaintiffs’ assertion of scienter.

See Wilson v. Bemstock,

195 F.Supp.2d 619, 638 (D.N.J.2002);

see also In re Sun Healthcare Group, Inc. Sec. Litig.,

181 F.Supp.2d 1283, 1296 (D.N.M.2002) (insider trading allegations insufficient to plead scienter where insiders collectively purchased more shares than they sold during the class period);

In re First Union Corp. Sec. Litig.,

128 F.Supp.2d 871, 898-99 (W.D.N.C.2001) (holding that increase in holdings of two insiders during the class period demonstrated the absence of scienter). Considering these other cases persuasive, the Court agrees that the fact that Millar was a net acquirer of shares by the end of the Class Period, points against, though does not wholly negate, a strong inference of Millar’s scien-ter.

vi) Defendant Miller

Though Plaintiffs and Cardinal Defendants agree that Defendant Miller sold

no shares

of stock during the Class Period, they are in dispute as to whether Miller’s failure to sell a single share of

*736

Cardinal stock, in itself, points strongly away from a finding of wrongful intent. Cardinal Defendants rely on a number of cases, including

PR Diamonds ,

to support their proposition that, though it may not be dispositive proof against Miller’s scien-ter, his “failure to sell when Plaintiffs allege he had incentive to do so certainly points against scienter.” See 91 Fed.Appx. at 436 . The Cardinal Defendants’ reliance on PR

Diamonds,

however, is misplaced. In that case, the court was persuaded that the absence of stock sales by the Individual Defendants “works against, but does not conclusively defeat an inference of scien-ter.”

See id.

at 436 (while the “absence of inside sales dulls allegations of fraudulent motive ... we have never held that the absence of insider trading

defeats

an inference of scienter”) (emphasis added). The

PR Diamonds

court based its finding, in part, on the fact that Plaintiffs’ motive allegations in that case suggested that the individual defendants had bought the stock to infuse cash to the company, not to enrich themselves personally.

See id.

In this ease, however, though Plaintiffs’ allege that the Individual Defendants were struggling to keep up the appearance of Cardinal’s growth during a difficult transition period, they also claim that, beyond making the Company appear successful, Cardinal Defendants also wanted to reap profits for themselves.

In the end, without considering the impact of the technical disputes between the parties regarding the timing, amounts, and other minute details of the Individual Defendants’ trading activities, the Court finds that, Plaintiffs’ allegations against Defendants Walter, Fotiades, Jensen, and Miller, raise a strong inference of scienter and, therefore, survive Cardinal Defendants’ Motion to Dismiss. Though the insider trading allegations Plaintiffs raise against Defendants Parrish and Millar do not raise a strong inference of scienter, the Plaintiffs’ allegations do not rest on insider trading alone. Thus, before the Court can dismiss Plaintiffs’ claims against Parrish and Millar as too weak to establish the strong inference of scienter required by the PSLRA, it must first consider the strength of Plaintiffs’ other allegations.

2) Executive Compensation

Pursuant to Cardinal’s FY 2000 Proxy dated September 18, 2000, the Board of Directors established fixed guidelines relating to executive compensation, and among the guiding principles was that executives would receive “pay-for-performance” and be rewarded for positive “corporate business unit, and individual performance.” Plaintiffs allege that Cardinal Defendants were motivated to recklessly over-inflate Cardinal’s stock price because the terms of their employment agreements tied them compensation directly to Cardinal’s reported financial results and the performance of the Company’s stock. Plaintiffs allege that based on the reported performance of Cardinal during the Class Period, the Individual Defendants each received the maximum possible incentive compensation through salary, cash bonuses, and options.

Plaintiffs argue that because, in total, Defendants Walter, Miller, Fotiades, and Millar collected more than $245 million in incentive-based executive compensation while perpetrating their fraud on the investing public, their compensation package points to their scienter.

*737

Cardinal Defendants contend that Plaintiffs’ allegations fail as a legal matter because, according to

Diamonds,

“a plaintiff may not establish an inference of ■wrongful intent merely by showing that an executive had motive and opportunity (e.g., an executive position and a compensation package) to commit fraud.” 91 Fed.Appx. at 435 . Defendants argue that, to make these types of allegations, a plaintiff “must allege that the executive was driven by something more than a personal profit motive or producing a higher share price for the benefit of investors,” because precedent has clearly established that, “[a]ll corporate managers share a desire for their companies to appear successful. That desire does not comprise a motive for fraud ... Neither does an executive’s desire to protect his position within a company or increase his compensation.”

See id.

Cardinal Defendants also aver that the Sixth Circuit has been definitive “motive and opportunity” to commit fraud cannot establish the necessary strong inference of scienter, and that Plaintiffs’ arguments fall squarely into the category of “motive.”

See

id,

A careful reading of

PR Diamonds

reveals that Cardinal Defendants’ interpretation is inaccurate. The

PR Diamonds

court actually held that

“bare allegations

of motive and opportunity, without more, are insufficient to establish scienter.”

See

91 Fed.Appx. at 435 . By presenting specific facts tying the Individual Defendants’ compensation to company performance, Plaintiffs do more than just present “bare allegations.” Further, Plaintiffs rely upon a number of cases in which- other courts have held that the magnitude of a defendant’s compensation package, together with other factors, may provide a heightened showing of motive to commit fraud.

See Florida State Bd. of Admin. v. Green Tree Fin. Corp.,

270 F.3d 645 , 661 (8th Cir.2001);

Am. West,

320 F.3d at 944 (strong inference of scienter because defendants’ eligibility for stock options and executive bonuses were based principally

*738

on the company’s financial performance);

In re Metawave Communications Corp. Sec. Litig.,

298 F.Supp.2d 1056, 1071 (W.D.Wash.2003) (“Scienter can be established even if there were no sales of stock by officers during the class period, if there were other motives for fraud, such as receiving benefits tied to the company’s financial performance.”);

In re Wellcare Mgmt. Group Sec. Litig.,

964 F.Supp. 632, 639 (N.D.N.Y.1997) (“[T]he Court will not disregard, as irrelevant, allegations that incentive compensation was affected by the alleged fraudulent conduct.”). In their reply, Defendants merely repeat their arguments about the insufficiency of Plaintiffs’ allegations; however, they do not dispute the foregoing precedent. As such, the Court is persuaded that though it does not amount to a

strong

inference of scienter, in this case, the Court may consider Plaintiffs’ motivation to keep Cardinal’s stock price high in order to profit from their executive compensation packages in analyzing scienter.

3) Meeting Analysts’ Expectations

Finally, Plaintiffs also allege that Cardinal was motivated to engage in fraud to meet analysts’ expectations as to its performance, particularly during its transition from a B + H model to an FFS model. Courts have found that this type of “general allegation, though relevant, adds little by itself to the scienter calculus, because these are motives ‘possessed, to a certain degree’, by every corporate officer.”

See MicroStrategy,

115 Fed. Supp.2d at 648;

see also, In re Stratosphere Corp. Sec. Litig.,

1 F.Supp.2d 1096, 1116 (D.Nev.1998). Similarly, in this case, Plaintiffs’ allegations that Cardinal Defendants wanted to maintain a high credit rating and prove its ability to transition in a shifting market, are not probative of scienter.

v. Red Flags

Finally, Plaintiffs contend that the Cardinal Defendants knowingly or recklessly disregarded numerous red flags indicating Cardinal’s improper accounting practices, GAAP violations, and internal control deficiencies. “Specific factual allegations that a defendant ignored red flags, or warning signs that would have revealed the accounting errors prior to their inclusion in public statements may support a strong inference of scienter.”

See Comshare,

183 F.3d at 553-54 ;

see also, Miller v. Material Sciences Corp.,

9 F.Supp.2d 925, 928-29 (N.D.Ill.1998) (“Deliberately ignoring ‘red flags’... can constitute the sort of recklessness necessary to support § 10(b) liability.”). On the other hand, “ignoring red flags may indicate that a defendant was merely negligent, not reckless. Courts typically look for multiple, obvious red flags before drawing an inference that a defendant acted intentionally or recklessly.”

See PR Diamonds,

91 Fed.Appx. at 431 .

Red flags in this case would be “circumstances that would have put the [defendants on notice that [Cardinal’s] financial statements and press releases contained material misstatements or omissions, or at

*739

least would have given them reasons to question the veracity of the statements.”

See PR Diamonds,

91 Fed.Appx. at 432 (citing

Comshare,

183 F.3d at 553 ). The

Helwig

factors, while not exhaustive, are red flags probative of scienter in securities fraud actions:

(1) insider trading at a suspicious time or in an unusual amount;

(2) divergence between internal reports and external statements on the same subject;

(3) closeness in time of an allegedly fraudulent statement or omission and the later disclosure of inconsistent information;

(4) evidence of bribery by a top company official;

(5) existence of an ancillary lawsuit charging fraud by a company and the company’s quick settlement of that suit;

(6) disregard of the most current factual information before making statements;

(7) disclosure of accounting information in such a way that its negative implications could only be understood by someone with a high degree of sophistication;

(8) the personal interest of certain directors in not informing disinterested directors of an impending sale of stock; and

(9) the self-interested motivation of defendants in the form of saving their salaries or jobs.

251 F.3d at 552 (citing

Greebel,

194 F.3d at 196 ).

Cardinal Defendants argue that Plaintiffs suggestion that “the Court brush aside the absence of a

Helwig

factor is ... nonsense.”

See

Def.’s Reply to Motion to Dismiss at 19; see

Helwig,

251 F.3d at 552 (citing

PR Diamonds,

91 Fed.Appx. at 427 ) (going through

Helwig

factors one by one, and affirming dismissal on scienter grounds immediately after recognizing “[f]ew of these factors emerge”);

Miller,

346 F.3d at 672-73 (affirming dismissal where three

Helwig

factors at issue were too weak to support an inference of scien-ter);

Albert Fadem,

334 F.Supp.2d at 1008 n. 24 (noting that plaintiffs’ failure even to mention the

Helwig

factors was “telling” that none of the “usual indicia” of securities fraud was present in the case).

Four of the nine

Helwig

factors are altogether inapplicable to this case: (1) Plaintiffs concede that there was no bribery of top Cardinal officials; (2) Plaintiffs do not allege the “overly-sophisticated disclosure of information”; (3) Plaintiff do not point to the quick settlement of ancillary lawsuits; and (4) Plaintiffs identify no conflicts of interest among directors. Cardinal Defendants ask the Court to regard the absence of these factors as pointing

against

an inference of scienter. 251 F.3d at 552 . Before concluding that the absence of one of the list of factors defeats an inference of scienter, the Court will closely examine each of the

Helwig

factors that

present to determine whether they combine to create a strong inference of scienter.

1) Insider Trading

Plaintiffs allege that each of the Individual Defendants engaged in suspicious or unusual trading activity over the course of the Class Period and that their trading, considered in its totality, establishes an inference of scienter except with respect to Defendants Parrish and Millar.

See supra

Part IV.II.A.l.b.iv.1). Thus, the Court must also consider the Individual Defendant’s alleged insider trading in its analysis of whether the

Helwig

factors imply scienter.

2) Divergence Between Internal Reports and External Statements on the Same Subject

Plaintiffs attempt to satisfy the second

Helwig

factor by suggesting that the Indi

*740

vidual Defendants were either “aware” or “should have been aware” of the alleged fraudulent nature of various financial statements when they were issued because of the Individual Defendants’ high-ranking positions, coupled with their certifications that each defendant was closely involved in Cardinal’s business affairs, accounting and financial reporting. As further support, Plaintiffs cite all of Cardinal Defendants’ monthly committee meetings and personal calls and statements made to industry analysts over the course of the Class Period. Plaintiffs conclude that because “allegations errors and improprieties that are significant in nature and magnitude” support an inference of reckless or knowing misconduct,” their allegations clearly establish the existence of this second

Helwig

factor.

See Firstenergy Corp.,

316 F.Supp.2d at 598 .

Cardinal Defendants argue, and this Court agrees, that the Plaintiffs may not rest on such conclusory allegations to establish a “divergence” between external reports and internal statements. In total, Plaintiffs allege a $26 billion difference between Cardinal’s reported financials and their

actual

financials.

Though it has yet to be proven whether or not this figure is in fact

accurate,

the Court need not decide this issue on a motion to dismiss. This Court, therefore, finds that the alleged divergence between the Company’s reported and actual financials resulting from the misstatements implies scienter.

3)Closeness in Time of the Allegedly Fraudulent Statement or Omission and the Later Disclosure of Inconsistent Information

Plaintiffs allege that Cardinal Defendants disregarded current information before issuing their allegedly fraudulent statements. Cardinal Defendants, however, argue that Plaintiffs’ Complaint pleads the issue in a “conclusory fashion without providing supporting numbers or identifying specific items of information supposedly disregarded.” Def.’s Motion to Dismiss at 53. In

Comshare,

Plaintiffs alleged that Cardinal Defendants “were aware of, or were recklessly indifferent to” the revenue recognition errors.

See

183 F.3d at 553 . Nonetheless, the court found that where plaintiffs had alleged no facts to show that Cardinal Defendants

knew

could have known

of the errors, or that their regular procedures should have alerted them to the errors sooner, Plaintiffs’ allegations did not imply scienter.

See id.

Similarly, in this case, the Court finds that as Plaintiffs’ allegations do not provide specific indications that Defendants should have known about the errors, Plaintiffs may not rest on their conclusory allegations that the existence of errors implies

recklessness.

4)Disregarding Current Factual Information Before Making Statements

Plaintiffs aver that Cardinal Defendants disregarded current information before issuing their allegedly fraudulent statements. Again, the Cardinal Defendants counter, and the Court agrees, that Plaintiffs’ allegations are merely conclusory, accompanied by no factual support.

5)Defendants’ Self-Interested Motivation to Save Their Salaries or Jobs

As established above, the Court finds that Plaintiffs sufficiently alleged that Cardinal Defendants had a motive to artificially inflate the purchase price of Cardinal’s stock, in part, because of their ineen-

*741

tive-based compensation, and ostensibly, their self-interest in saving their jobs.

See supra

Part

W.II.A.l.b.iv.2).

Because Plaintiffs have successfully alleged Cardinal Defendants’ executive compensation as a possible motive for fraud, this Court will also view it as a suggestive red flag,

c. Conclusion

As Plaintiffs stated during oral argument, the scienter analysis in these types of securities fraud cases is akin to looking at a painting. Though one or two brush strokes may be more powerful up close, to fully appreciate the painting, the viewer must step back to take in the “big picture.” Applying this analogy to the facts in this case, the Complaint viewed

in toto

the conclusion that Plaintiffs have met their burden under the PSLRA, pleading sufficient facts to raise a strong inference that the Cardinal Defendants acted with the requisite scienter. Specifically, the Complaint’s allegations as to: (1) Cardinal’s GAAP violations; (2) the Individual Defendants’ various motives to commit fraud, in particular, their insider trading, and incentive-based executive compensation packages; (3) Plaintiffs’ allegations highlighting Operating Revenues as an area of focus for Cardinal which Cardinal Defendants had overstated by approximately $26 billion; and (4) Plaintiffs’ sufficient allegations of a number of

Helwig

factors cumulatively raise a strong inference that the Cardinal Defendants acted intentionally, consciously, or, at the very least, recklessly, in violation of the securities laws.

Because the Court finds that the Plaintiffs have alleged scienter, the Court must now analyze whether Plaintiffs have established the other elements of a prima facie case of securities fraud.

See Comshare,

183 F.3d at 548 . Cardinal Defendants do not dispute that Plaintiffs’ Complaint establishes both reliance and damages.

See

PL’s Reply at 82.

Accordingly, to make out a prima facie case, Plaintiffs must successfully plead the following: (1) that Defendants made a false statement or omission of material fact; (2) in connection with a purchase or sale of securities.

See Comshare,

183 F.3d at 548 .

2. Particularity of Fraud Allegations

Cardinal Defendants argue that Plaintiffs’ Complaint must be dismissed under Rule 12(b)(6) for failing to allege false or misleading statements or material omissions made by Defendants with the particularity required by both Rule 9(b) and the PSLRA. Def.’s Motion to Dismiss at 28. The Plaintiffs must plead fraud with particularity under Rule 9(b) while also establishing facts demonstrating each

*742

statement’s falsity, each statement’s speaker, and why each statement was false when made.

See

15 U.S.C. § 78u — 4(b)(1);

Century Bus.,

2002 WL 32254513 at *12;

Helwig,

251 F.3d at 550 ;

Gupta v. Terra Nitrogen Corp.,

10 F.Supp.2d 879, 885 (N.D.Ohio 1998). Under the PSLRA, a plaintiff pleading on information and belief also must allege all facts on which that belief is based.

See

15 U.S.C. § 78u-4(b)(1);

Century Bus.,

2002 WL 32254513 at *12;

Telxon,

133 F.Supp.2d at 1025 . This requirement may be satisfied in two ways: (1) a plaintiff can plead “the who, what, when, where and how: the first paragraph of any newspaper story”; or (2) a plaintiff can satisfy the requirement through “alternative means of injecting precision and some measure of substantiation into their allegations of fraud.”

See Telxon,

133 F.Supp.2d at 1025 (quoting

DiLeo,

901 F.2d at 627 );

S.E.C. v. Lucent Tech., Inc.,

363 F.Supp.2d 708, 715 (D.N.J.2005) (citing

Lum,

361 F.3d at 233-24;

Seville Indus. Machinery,

742 F.2d at 791) (holding that a plaintiff satisfied Rule 9(b) by pleading which machines were the subject of alleged fraudulent transactions and the nature and subject of the alleged misrepresentations). “Plaintiffs also must allege who made a misrepresentation to whom and the general content of the misrepresentation.”

Id.

Thus, to plead adequately the falsity of Cardinal’s financial results reported in statements to the market via press releases and during analyst conference calls, and included in SEC filings, the Complaint need only identify the exact statements or the content Plaintiffs allege were false and misleading, the identity of the speakers, the date on which the statements were made, and the reasons the statements were false.

See SmarTalk,

124 F.Supp.2d at 538 .

Plaintiffs’ Complaint devotes 105 pages,

to presenting a detailed description of Cardinal Defendants’ allegedly false statements or omissions of material fact. In their Motion to Dismiss, Cardinal Defendants argue the following: (1) Plaintiffs’ Complaint has not sufficiently pled fraud allegations with respect to each Individual Defendant; (2) Plaintiffs’ Complaint does not state a claim based upon any of Cardinal’s alleged accounting misstatements; and (3) Plaintiffs’ Complaint does not allege particularized facts sufficient to state a claim based on Cardinal’s transition from a B + H to an FFS business model.

a. Particularity of Fraud Allegations with Respect to Each Defendant

Cardinal Defendants argue that Plaintiffs’ allegations fail as a matter of law because Plaintiffs do not specify their allegations with respect to each Individual Defendant. They contend that a plaintiff “is required to meet the Rule 9(b) and PSLRA standards as to

each

defendant against whom securities fraud is alleged” and that the Fifth Circuit has “explained the PSLRA’s prohibition on clumping in some detail.”

See

Def.’s Motion to Dismiss at 61;

see Southland Sec. Corp. v. Inspire Ins. Solutions, Inc.,

365 F.3d at 353, 364-65 (5th Cir.2004) (“These PSLRA references to ‘the defendant’ may only reasonably be understood to mean ‘each defendant’ in multiple defendant cases as it is inconceivable that Congress intended liability of any defendant to depend on whether they were all sued in a single action or were each sued alone in several separate action.”).

The Plaintiffs, however, contend that they have adequately pled fraud

*743

as to each Individual Defendant under the auspices of the “group-published information doctrine” (the “Doctrine”). The Doctrine is a presumption, applied in some circuits, which allows plaintiffs to hold a corporation’s officers and directors liable for false statements found in collectively published documents.

See Century Bus.,

2002 WL 32254513 at *13. The Doctrine reasons that, “[i]n cases of corporate fraud where the false and misleading information is conveyed in prospectuses, registration statements, annual reports, press releases, or other ‘group-published information,’ it is reasonable to presume that these are the collective actions of the corporate officers ...”

See id.

(citing

Wool v. Tandem Computers, Inc.,

818 F.2d 1433, 1440 (9th Cir.1987) (citations omitted)). Under the Doctrine, a plaintiff fulfills the particularity requirement “by pleading the misrepresentations with particularity and[,] where possible^] the roles of the individual defendants ...”

See City of Monroe Employees Retirement Sys. v. Bridgestone Corp.,

399 F.3d 651, 689 (6th Cir.2005) (citing

Wool,

818 F.2d at 1440 (finding that the Doctrine is premised on the presumption that “[i]n cases of corporate fraud where the false or misleading information is conveyed in prospectuses, registration statements, annual reports, press releases, or other ‘group-published information,’ it is reasonable to presume that these are the collective actions of the officers”)).

Cardinal Defendants argue that a plaintiffs vague allegations

must

fail if the plaintiff fails to attribute them to specific directors, grouping directors together as “Defendants” instead.

See Mills v. Polar Molecular Corp.,

12 F.3d 1170 , 1175 (2d Cir.1993);

Rich v. Maidstone Fin. Inc.,

2001 WL 286757 , *7 (S.D.N.Y. Mar.23, 2001). Further, Defendants argue, based on

Southland Sec. Corp. v. Inspire Ins. Solutions, Inc.,

that the Doctrine could not have survived Congress’ passage of the PSLRA because pleading in such a manner “cannot withstand the PSLRA’s specific requirement that the untrue statements or omissions be set forth with particularity as to ‘the defendant’ and that scienter be pleaded with regard to ‘each act or omission’ sufficient to give ‘rise to a strong inference that the defendant acted with the required state of mind.’ ”

See

365 F.3d at 364-65.

Though Defendants’ prudential argument may have appeal, it has been specifically rejected by courts within the Sixth Circuit.

See Century Bus.,

2002 WL 32254513 at *12-13 (though “[defendants argue that the Sixth Circuit has not adopted the [Doctrine] at any point after the Reform Act and that, without [the Doctrine], the plaintiffs have failed to allege particularized facts demonstrating false statements by each defendant,” the court found “that the [Doctrine] survived the passage of the PSLRA and has continuing viability in the Sixth Circuit”). The

Century Bus.

court was guided by a number of cases from both inside of and outside of the Sixth Circuit, all of which recognized the continued validity of the Doctrine.

See id.

*744

This Court finds that the group-published doctrine does not eviscerate the specificity required by the PSLRA. When high level executives with access to information who signed the corporate documents being questioned for their validity at trial, Plaintiffs should be allowed to attribute those documents to the signors.

See Century Bus.,

2002 WL 32254513 at *14 (citing

Benedict,

23 F.Supp.2d at 762-63) (holding that conclusory allegations were sufficient as to inside directors with involvement in the day-to-day affairs of the corporation). The standards for applying the Doctrine are relatively lenient.

Id.

Thus, in this case, the Court finds that, under the relatively lenient group-pleading standards, Plaintiffs are entitled to the group-published information presumption to all Individual Defendants except Defendant Jensen.

Defendants Walter, Fotiades, Miller, Millar, and Parrish were all high-level executives, responsible for day-to-day operations and issues relating to Cardinal’s financial performance.

See supra

PartJLA. They also signed off on Cardinal’s corporate disclosure statements or participated in conference calls with analysts and investors.

Id.

Though Plaintiffs have alleged facts showing that Defendant Jensen was a high-level executive, they have not shown that he had any involvement in certifying corporate documents to the extent of the other Individual Defendants. Also, Plaintiffs have not pled facts showing that Jensen ever participated in conference calls with analysts and investors. Moreover, at oral argument, counsel for Defendant Jensen further convinced the Court that there were not enough facts alleged to link Jensen to Cardinal’s corporate misstatements to the extent of his co-Defendants. And although the Court still finds that Plaintiffs’ allegations about Defendant Jensen’s insider trading provide some indications of scienter, in their totality, Plaintiffs’ Complaint fails to establish that Defendant Jensen should be found responsible for Cardinal’s alleged misstatements or omissions. Accordingly, the Court GRANTS Defendant Jensen’s Motion to Dismiss.

b. Whether Plaintiffs Pled Cardinal’s Accounting Misstatements with Particularity

Cardinal Defendants emphasize that Plaintiffs have failed to allege GAAP violations because they have not indicated any true “misstatements” or “omissions” by Cardinal Defendants.

See

Def.’s Motion to Dismiss 58-87. Cardinal Defendants’ arguments fall short, in part, however, because this Court has already found

*745

that the Plaintiffs adequately pled scienter as to Cardinal Defendants’ GAAP violations.

See supra

Part

IV.II.

A.l.c.

Montalvo v. Tripos, Inc.,

plaintiffs, purchasers of stock in a corporation, sued defendants — the corporation, certain corporate officials, and the corporation’s outside auditor' — alleging that defendants had made false and misleading financial misstatements which, when discovered, led to a significant drop in the company’s stock value.

See

2005 WL 2453964 , **7-8, 2005 U.S. Dist. LEXIS 22752 , *23-24 (E.D.Mo. Sept. 30, 2005). Certain defendants moved to dismiss plaintiffs’ complaint.

See id.

The plaintiffs’ complaint set forth “numerous public statements made by the defendants during the class period that the plaintiffs investors believe [gave] rise to a strong inference of scienter because the defendants knew facts or had access to information that suggested that their public statements were not accurate and/or deliberately engaged in making false and misleading statements in order to defraud the investors as to the true financial condition of defendant Tripos.”

See id.

at 2005 WL 2453964 , *4, 2005 U.S. Dist. LEXIS 22752 , *15. The plaintiffs declared that, despite the defendants’ knowledge of negative events and accounting irregularities, defendants had continued to forecast extremely positive corporate revenues.

Id.

Defendants argued that the purchasers failed to allege securities fraud with the particularity required by the PSLRA.

Id.

The

Montalvo

court held that the purchasers had sufficiently alleged that defendants acted with the requisite scienter, properly identified misleading statements and the circumstances under which the statements were made, and adequately pled fraud in connection with defendants’ accounting irregularities.

Id.

The court reasoned that where plaintiffs had alleged both far-reaching GAAP violations as well as facts showing the evidence of defendants’ fraudulent intent, they had met the PSLRA’s standards of pleading with particularity.

Id.

The

Montalvo

court concluded:

Here the plaintiffs have alleged not only egregious GAAP violations, but also “evidence of corresponding fraudulent intent.” They have set out with particularity the material misstatements in the public statements which omitted, among other things, the on-going problems with the software consulting business, and have set forth GAAP violations which defendants do not deny as evidenced by their restatements. Essentially, the amended complaint alleges that defendants knew that certain company assets were impaired and that losses were certain, but that recognizing these losses (during the Class Period) would have lowered the company’s stock price and threatened the ability to market and sell its products ... It is [also] alleged that the “strategic non-disclosures” kept [the defendant company’s] stock artificially high, attracting more investors, until the restatements were issued, causing a drastic stock price fall. The plaintiffs have identified specific documents and statements within those documents attributable to the defendants that allegedly artificially inflated [the defendant company’s] earnings and net tangible assets by deliberately hiding specific losses that were also identified.

See id.

at 2005 WL 2453964 , *9, 2005 U.S. Dist. LEXIS 22752 , *23-25.

Just as the

Montalvo

plaintiffs’ complaint identified a number of examples of allegedly inaccurate statements meant to defraud investors, so too does Plaintiffs’ Complaint detail 105 pages of detailed errors. Thus, the Court finds that while the Cardinal Defendants spend considerable time and effort explaining how and why

*746

each

of Cardinal’s accounting statements was in fact both legal and proper, at this stage of the litigation, these arguments do not undermine the Plaintiffs’ allegations,

c. Cardinal’s Forward-Looking Statements

Cardinal Defendants also argue that Plaintiffs’ allegations fail to satisfy the standards of the PSLRA because they are protected by the statutory safe-harbor as “immaterial” forward-looking statements. During the Class Period, Plaintiffs allege that Defendant Cardinal made numerous statements concerning the Company’s shift from the B + H to the FFS distribution market, and its effect on Cardinal’s business. Cardinal Defendants aver that its statements concerning the Company’s changing distribution model constitute in-actionable “forward-looking statements” protected by the PSLRA’s safe-harbor provision. Def.’s Motion to Dismiss at 83-85;

see

15 U.S.C. §§ 78u-5(c)(l)(A), 77z-2(c)(1)(A), 78u-5(c)(l)(A);

see Southland,

365 F.3d at 371. They argue that Plaintiffs’ arguments mistakenly rely on the following inactionable forward-looking statements: (1) Cardinal’s January 23, 2003 conference call with analysts and investors; (2) Cardinal’s May 2003 Investor; (3) Cardinal’s July 31, 2003 conference call with analysts and investors; (4) Cardinal’s January 22, 2004 conference call with analysts and investors; (5) Cardinal’s February 19, 2004 conference call with analysts and-investors; (6) Cardinal’s April 22, 2004 conference call with analysts and investors.

See

Complaint ¶¶ 142, 156, 164, 182, 187, 192;

see

Def.’s Reply at 61-76. This Court must examine each of Cardinal Defendants’ arguments in turn.

A “forward-looking statement,” which can be either written or oral, is defined as:

(A)a statement containing a projection of revenues, income (including income loss), earnings (including earnings loss) per share, capital expenditures, dividends, capital structure or other financial items;

(B) a statement of the plans and objectives of management for future operations, including plans or objectives relating to the products or services of the issuer;

(C) a statement of future economic performance, including any statement contained in a discussion and analysts of financial condition by the management or in the results of operations included pursuant to the rules and regulations of the Commission....

15 U.S.C. § 77z-2(i)(l);

see Southland,

365 F.3d at 371. To avoid the safe harbor, a plaintiff must plead facts demonstrating that the statement was made with actual knowledge of its falsity. 15 U.S.C. § 78u-5(c)(1)(B);

Southland,

365 F.3d at 371.

The safe harbor has two independent prongs: one focusing on the defendant’s cautionary statements, and the other on the defendant’s state of mind. 15 U.S.C. §§ 77z-2(c)(l)(A), 78u-5(c)(l)(A) (1996); 15 U.S.C. §§ 77z-2(e)(l)(B), 77u-5(c)(l)(B) (1996);

Southland,

365 F.3d at 371. Under the first prong, there is no liability if, and to the extent that, the forward-looking statement is either: (1) identified as forward-looking and accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statement, or (2) immaterial. 15 U.S.C. §§ 77z-2(c)(l)(A), 78u-5(c)(l)(A);

Southland,

365 F.3d at 372. Under the second prong, there is no liability if the plaintiff fails to prove that the statement: (1) if made by a natural person, was made with actual knowledge that the statement was false or misleading, or (2) if made by a business entity, was made by or with the approval of an executive officer of that entity with actual

*747

knowledge by that officer that the statement was false or misleading. 15 U.S.C. §§ 77z — 2(c)(1)(B), 78u-5(c)(l)(B).

Cardinal Defendants are liable only if the statements were “material” and Cardinal Defendants had “actual knowledge” that they were false or misleading, or if the statements were not identified as “forward-looking” and/or lacked meaningful cautionary language.

See

15 U.S.C. § 78u-5(c)(l). The Court will now analyze whether any of the following statements are protected by statutory safe harbor.

I. Materiality

First, Cardinal Defendants would dismiss their optimistic projections and internal estimates as “soft, puffing statements” that are immaterial as a matter of law. Def.’s Motion to Dismiss at 83-85;

see San Leandro,

75 F.3d at 811 (rejecting plaintiffs’ contention that general announcement by Phillip Morris that it was “optimistic” about its earnings and “expected” Marlboro to perform well required the company to disclose the possibility of adopting an alternative marketing strategy that would hurt short-term earnings);

TSC Indus., Inc. v. Northway, Inc., 426

U.S. 438, 449, 96 S.Ct. 2126 , 48 L.Ed.2d 757 (1976) (finding that mere puffery cannot mislead a reasonable investor to believe that a company had irrevocably committed itself to one particular strategy and cannot constitute actionable statements under the securities laws). “ ‘Soft,’ ‘puffing’ statements ... generally lack materiality because the market price of the share is not inflated by vague statements ... No reasonable investor would rely on these statements, and they are certainly not specific enough to perpetrate a fraud on the market.”

In re Royal Appliance Sec. Litig.,

1995 WL 490131, *3 (6th Cir. Aug.15,1995) (quoting

Raab v. Gen. Physics Corp.,

4 F.3d 286, 289 (4th Cir.1993)).

Under the federal securities laws, a statement is

material

if there is a “substantial likelihood that [it] would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.”

See TSC Indus., Inc.,

426 U.S. at 449 , 96 S.Ct. 2126 (emphasis added). “[Mjateriality depends on the significance the reasonable investor would place on the information.”

See Basic, Inc. v. Levinson,

485 U.S. 224, 240 , 108 S.Ct. 978 , 99 L.Ed.2d 194 (1988). A court may rule on questions of materiality as a matter of law “if the alleged misrepresentations or omissions are so obviously unimportant to an investor that reasonable minds cannot differ on the question of materiality....”

Century Bus.,

2002 WL 32254513 (citing

Shapiro v. UJB Fin. Corp.,

964 F.2d 272 , 281 n. 11 (3d Cir.1992)).

The Supreme Court endorses a fact-intensive test of materiality in securities fraud cases.

Helwig,

251 F.3d at 555 (citing

Basic Inc. v. Levinson,

485 U.S. 224, 240 , 108 S.Ct. 978 , 99 L.Ed.2d 194 (1988)).

Specifically, “materiality de

*748

pends on the significance the reasonable investor would place on the withheld or misrepresented information.”

Id.

Though

Basic

did not address earnings forecasts or projections, the

Helwig

court found Basic’s “articulation of the basic policies underlying securities regulation applicable here as well.”

See Helwig,

251 F.3d at 556 . These policies are that “[t]here cannot be honest markets without honest publicity. Manipulation and dishonest practices of the market place thrive upon mystery and secrecy.”

Id.

(citing

Basic,

485 U.S. at 230 , 108 S.Ct. 978 ). Further, the Court added that it “repeatedly has described the fundamental purpose of the Act as implementing a philosophy of full disclosure.”

Id.

(citing

Basic,

485 U.S. at 230 , 108 S.Ct. 978 ) (citation and internal quotations omitted).

Helwig ,

Defendants also argued that because their economic projections amounted to puffery, they were not actionable under the securities laws.

See

251 F.3d at 554-55 . The court disagreed, finding that although “plaintiffs had alleged facts to produce a strong inference that defendants knew that the Budget Act could adversely affect their operations ... [they] simply rested on their disavowals of knowledge while continuing to make favorable earnings predictions.”

See id.

at 556 . Moreover, the court concluded that there was a “substantial likelihood that the disclosure of the omitted fact[s] would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.”

Id.

at 556 (citing

Basic,

485 U.S. at 231-32 , 108 S.Ct. 978 ). The court reasoned,

[I]t cannot be said that Vencor’s preliminary appraisals and internal assessments of the Balanced Budget Act were material solely by virtue of their omission ... [P]laintiffs have alleged facts to produce a strong inference that defendants knew that the Budge Act could adversely affect their operations. Yet defendants simply rested on their disavowals of knowledge while continuing to make favorable earnings predictions. We concluded that there is a “substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.”

Id.

There are also instances in which courts have found that a defendant’s omissions or misstatements were inactionable because they were “too general.”

See In re Ford Motor Company Sec. Litig.,

184 F.Supp.2d 626 . In

In re Ford,

plaintiffs sued Ford and its executives under Section 10(b) and Rule 10b-5 alleging that the company made misleading statements about the quality and safety of its “Ford Explorer” sport utility vehicles.

Id.

at 628 .

Plaintiffs’ theory of liability is premised on Ford’s omission of material information which allegedly transformed seemingly innocuous and accurate statements into misleading statements ... By omitting information about this contingent liability, plaintiffs argue, Ford’s accurate statements about sales of Explorers and its bolstering statements regarding corporate responsibility became misleading to investors.

Id.

at 630 . The court found that plaintiffs had failed to state a claim under Section 10(b) and Rule 10b-5 because “Ford’s statements were

general, ...

[and] did not

*749

give rise to a duty to disclose information about a specific problem that may occur in the future,” and because “unlike in

Helwig ,

where the company’s public statement were [sic] directly related to the withheld adverse information, Ford’s public statement[s][sic] do not relate.”

Id.

at 633 (emphasis added).

Moreover, relying on

In re Ford,

this Court determined in

Albert Fadem

that plaintiffs’ allegations were, similarly, too general to substantiate plaintiffs’ claims.

See

334 F.Supp.2d at 1023 . In

Albert Fa-dem,

plaintiffs, investors, sued defendant AEP, a company engaged in energy trading, claiming securities fraud based on defendants’ allegedly inaccurate financial reporting, among other things.

Id.

at 993— 94. This Court held that plaintiffs’ allegations that defendants’ statements in the “Risks Related to Our Energy Trading and Wholesale Business” section were too general, and did not give rise to a duty on the part of defendant AEP to disclose anything about the specific subject of reporting to the Trade Press, especially where plaintiffs had not alleged a way in which investors had access to those price indices or used them in their investment decisions.

Id.

at 1023 .

This Court finds the instant case more similar to

Hehvig

than to

In re Ford

and

Albert Fadem.

Just as plaintiffs in

Hel-wig

pled detailed facts that could not be considered puffery, in this case, Plaintiffs have alleged 105 pages of specific facts, each of which implies that although Defendants knew that Cardinal’s attempted business model transition could adversely affect the Company’s financial standing, they recklessly reported accounting misstatements in their SEC filings, their statements to the market, and their statements during conference calls with analysts and investors.

See

Complaint ¶¶ 56-58, 63-66, 72-76, 80-85, 88-95, 97-105, 108-14, 118-28, 132-38, 141-46, 150-51, 153-59, 163-68, 171-78, 181-87, 191-95, 199-223. As such, the Court finds that Cardinal Defendants’ statements regarding the Company’s transition from a B + H to an FFS distribution model were

not

immaterial puffery.

ii. Meaningful Cautionary Language

Though the Court has determined that Cardinal’s statements about its shifting distribution model were not puffery, they may still be protected by the safe harbor if they constitute forward-looking statements accompanied by “meaningful cautionary language.” Cardinal Defendants argue that each of their alleged “misstatements” related to the future of the Company in the face of the distribution shift and were forward-looking. The issue, then, is whether the statements were “accompanied by meaningful cautionary language.”

The requirement for “meaningful cautionary language” calls for “substantive” company specific warnings based on a realistic description of the risks applicable to the particular circumstances, not merely a boilerplate litany of generally applicable risk factors.

Southland,

365

*750

F.3d at 372 (citing H.R. Conf. Rep. No. 369, 104th Cong., 1st Sess. 31, 44 (1995));

see also Donald J. Trump Casino Sec. Litig.,

7 F.3d 357, 371-72 (3d Cir.1993) (“To suffice, the cautionary statements must be substantive and tailored to the specific future projections, estimates or opinions ... which the plaintiffs challenge.”).

Firstenergy,

the court found that, though some of defendants’ forward-looking statements were protected by cautionary statements, the cautionary language was “insufficient to bring them within the safe harbor provision.”

See

316 F.Supp.2d at 596 . The court cited what it termed “typical example” of defendants’ cautionary language, noting:

This News Release includes forward-looking statements based on information currently available to management. Such statements are subject to certain risks and uncertainties. These statements typically contain, but are not limited to, the terms ‘anticipate,’ ‘expect,’ ‘believe,’ ‘estimate,’ and similar words. Actual results may differ materially due to a number of factors including, but not limited to, the speed and nature of regulatory approvals.

Id.

n. 9. The court reasoned that, considering the facts of the plaintiffs’ complaint suggesting that defendants had “actual knowledge” of the problems at the defendant Company, the above “vague and insipid cautionary language is insufficient to afford the statements protection under [the] PSLRA’s safe harbor provision.”

Id.

(citing

In re Prudential Sec. Litig.,

930 F.Supp. 68, 72 (S.D.N.Y.1996) (noting that the safe harbor provision provides “no protection to someone who warns his hiking companions to walk slowly because there might be a ditch ahead when he knows with near certainty that the Grand Canyon lies one foot away”)). Such vague language is in sharp contrast to that found sufficiently meaningful in

In re Kindred Healthcare, Inc. Sec. Litig.,

in which the court found that defendants’ cautionary warnings specifically admonishing investors about the “actual risks” the defendant company faced brought statements within the protection of the safe harbor.

See

299 F.Supp.2d 724, 739 (W.D.Ky.2004). Accordingly, should this Court determine that Cardinal’s alleged warnings failed to intimate that the Company’s statements

could be

inaccurate because of the Company’s problems transitioning from aB + H to an FFS distribution model, they will be considered “too vague” to be “meaningful cautionary language.”

See Firstenergy Corp.,

316 F.Supp.2d at 596 . The Court’s analysis of Cardinal’s statements follows.

1) Cardinal’s January 23, 2003 Conference Call

Plaintiffs cite Defendant Walter’s statement in Cardinal’s January 2003 conference call as being a fraudulent misstatement about whether Cardinal was successfully shifting from a B + H to an FFS distribution model.

[D]uring the call, Defendant Walter stated:

I’m happy to report to you another strong quarter for Cardinal overall where we met our goals and market expectations. We positioned ourselves for a second half of fiscal 2003 that will allow us to deliver on a commitment of 20% earnings per share growth with the solid improvement and return on sales and capital and strong cash flow and— cash flow in excess of $1 billion____

I was very pleased with the quarter. Revenue and earnings were in line with expectations but cash flow in return and committed capital was substantially better than I expected. I will explain what is driving that in each of our seg

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ments....

The pharmaceutical distribution and provider service segment continued with above-industry revenue growth driven predominantly by a favorable mix towards change, up 17%, and alternate site up 20%. ...

I already mentioned that fiscal 2004 revenues will be strong. Earnings in the second half for the segment will grow a little slower than the first half, but with favorable revenue and expense trends, earning growth rates for FY04 will pick up over the second half of FY03. Return on sales, capital and cash flow will be very strong. Now, let me shift to the medical products and service area. I really like what I see happening here. Ron [Labrum] and his team have really stepped up the momentum, and you will see it in our second half. First, there is a new leadership in the distribution business segment and a strong determination to grow our distribution volume. And we are winning in the marketplace with some very important new contract

The fact is our models are changing a bit, frankly for the better and we want you to understand it ...

Cardinal continued to enter into inventory management agreements with manufacturers, whereby we are compensated on incentive basis to help manufacturers better match their shipments with market demand.

See

Complaint ¶ 142.

Cardinal Defendants argue that Walter’s statements are not actionable because he accompanied them with meaningful cautionary language that protected them under the statutory safe harbor.

See

Def.’s Reply at 62-65. They contend that, Plaintiffs conceded as such by remaining silent on the issue their Opposition Motion.

See

Def.’s Reply at 64. Further, Cardinal Defendants contend that Plaintiffs have strategically crafted their Complaint, misquoting Walter’s statements to give the impression that he had knowingly “misrepresented” the number of customers who had signed new IMA contracts and the actual success of Cardinal’s transition.

See

Def.’s Reply at 62; Pl.’s Opposition at 50. Cardinal Defendants argue that such manipulative pleadings make Plaintiffs’ allegations immaterial.

See Royal Appliance,

1995 WL

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490131, at *3-4 (affirming dismissal of plaintiffs’ 10(b) claim where alleged misstatements and omissions were immaterial as a matter of law when the entire text of the document was considered);

Kaufman v. Trump’s Castle Funding,

7 F.3d 357 , 369-77 (3d Cir.1993) (same);

Field v. Trump,

850 F.2d 938, 949 (2d Cir.1988) (dismissing plaintiffs’ 10(b) claim because the omission of stock price paid to directors was immaterial as a matter of law when it could be readily determined by reading the entire proxy statement);

Fudge v. Penthouse Int’l Ltd.,

840 F.2d 1012, 1015-20 (1st Cir.1988) (dismissing libel and false pretenses claims because, when the entire article was read the plaintiff could not state a claim as a matter of law).

This Court does not agree that this situation is akin to

Royal Appliance, Kaufman, Field

Fudge. See

1995 WL 490131, at *1 , 7 F.3d at 357 , 850 F.2d at 938 , 840 F.2d at 1012 . Plaintiffs’ selective pleading of Walter’s statements is sufficient to make their allegations “immaterial as a matter of law.”

See supra

note 72. Considering the effects of the “missing” language Defendants added in their Reply motion, the Court does not agree that the Defendants have adequately protected their statements with meaningful paution-ary language intimating the “actual risks” faced by the Company.

See Firstenergy Corp.,

316 F.Supp.2d at 596 . As such, Walter’s above statements do not fall under the protection of the statutory safe harbor.

2) Cardinal’s May 2003

Investor

The Plaintiffs cite the May 2003 issue of

The Cardinal Health Investor

as including a number of actionable misstatements.

This issue of the

Investor

identified several “Hot Topics,” one of which was the Company’s [IMAs] with manufacturers, writing:

IMAs — Our critical role

We’ve been getting questions about our relationships with' pharmaceutical manufacturers lately, particularly in light of “channel stuffing” activities being repotted. Manufacturers are looking to better align productivity with health care providers’ product demand and, because of this, are offering less inventory for sale into the channel, which you all are aware has had an impact on our trading company business this year.

[IMAs] ... are an attempt to balance manufacturing production with actual prescription demand by retailers and consumers. IMAs, which often contain provisions limiting the distributor’s inventory investment, are an important part of doing business as a pharmaceutical distributor. The channel can operate more efficiently, and costs to eventual patients can be contained.

We look to structure IMAs to achieve similar levels of profitability and improve our return on capital by reducing

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the capital that is needed for investment in inventory. That frees up capital for reinvestment either in this business or in other areas of the company. With the diversity of our businesses and attractive investment alternatives, we will deploy the capital returned from these agreements into new opportunities.

Evolution occurring in the marketplace over the past several years can be a positive development for the industry, but also one in which we have to remain diligent in understanding how the structure of these agreements will impart our profit over the next several years. We will continue to utilize our experience and competitive expertise to negotiate individually with manufacturers, but we will always weight the economic value of every product we carry to ensure it is consistent with our profit targets and the value we bring to manufacturers.

We are confident that we can work with manufacturers to meet them needs and also preserve our profit consistent with the influential role we play in the pharmaceutical channel.

See

Complaint ¶ 156.

Again, Cardinal Defendants argue that Plaintiffs’ silence as to whether the above statement is accompanied by meaningful cautionary language makes it inactionable.

See

Def.’s Reply at 65. Further, Cardinal Defendants argue that the above statement merely “confirms that the market is in ‘[e]volution’ and that Cardinal recognizes the need to ‘remain diligent’ in the face of new challenges.”

See id.

Nevertheless, the Court finds that this brief sentence of cautionary language is not specific enough to allow the

entire

statement the protection of the statutory safe-harbor.

3) Cardinal’s July 31, 2003 Conference Cal

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