Appendix — Oxford Asset Management, Ltd. v. Jaharis

APPENDIX

PAGE(S)

Appendix A—Eleventh Circui ae App. 1-27

Appendix B—District Court Decisions

May 19, 1999 Order Granting

POE OD EP og os ccc wcccvccscoves App.28-60

January 31, 2000 Order Granting

Motions for Sanctions ................ App. 61-73

May 22, 2000 Order On Motion

For Pees and Coste... . cc ccccccccccncs App. 74-76

Appendix C—March 25, 2003 Order

nying Motion for Rehearing ............ App. 77-78

Appendix D—T f Stat d

Rules Involv

Section 11 of Securities Act of 1933,

Es Ld, reer rT Tres App. 79-84

Section 12(a)(2) of Securities Act of 1933,

Tok a ere rrr es App. 85-86

Section 15 of Securities Act of 1933,

BD Us BED 6 vec ccen cece cetvecesceesens App. 87

Private Securities Litigation Reform Act,

OB Bis Soe | S eee App. 88-98

Private Securities Litigation Reform Act,

§101(b), 15 U.S.C. §78u-4 ............ App. 99-118

Fed. R. Civ. P. 8(aX2) .. 2.2... eee eee eee eee

Pod. R. Civ. F. GER) .cccccccvcecescceceses App. 120

. §& 3) 8S) error rr rr App. 121-123

ee ee

App. 1

APPENDIX A

United States Court of Appeals,

Eleventh Circuit.

OXFORD ASSET MANAGEMENT, LTD,

Plaintiff-Appellant,

Lowey Dannenberg & Knapp, P.C. Profit Sharing Plan &

Trust, a.k.a. L»wey Dannenberg, Bemporad & Selinger P.C.

Profit Sharing Plan,

Plaintiff,

v.

Michael JAHARIS, Daniel M. Bell, et al.,

Defendants-Appellees.

Oxford Asset Management, Ltd,

Plaintiff-Appellant,

Lowey Dannenberg & Knapp, P.C. Profit Sharing Plan &

Trust, a.k.a. Lowey Dannenberg, Bemporad & Selinger P.C.

Profit Sharing Plan,

Plaintiff,

Michael Jaharis, Daniel M. Bell, Duncan Cocroft, Juan F.

Rodriguez, Robert E. Baldini, et al.,

Defendants-Appellees.

ts net

App. 2

Nos. 99-11690, 00-13220.

July 16, 2002.

Before EDMONDSON, Chief Judge, and FAY and

GARWOOD, * Circuit Judges.

GARWOOD, Circuit Judge:

In this securities action (our No. 99-11690), plaintiff-

appellant Oxford Asset Management, Ltd. (Oxford) appeals

the dismissal of its 1933 Act claims.’ We Affirm.

Oxford also appeals (in our No. 00-13220) the district

court’s award of $520,091.82 in legal fees to the Kos and

Underwriter defendants. We affirm in part, reverse in part,

and vacate and remand. ;

Facts and Proceedings Below

1. Appeal of the dismissal (No. 99-11690)

Kos Pharmaceuticals, Inc. (Kos) is a pharmaceutical com-

pany that develops and markets prescription drugs. Kos

completed an initial public offering of its common stock on

* Honorable William L. Garwood, U.S. Court of Appeals for the

Fifth Circuit, sitting by designation.

’ The motions to dismiss were made by defendants-appellees Kos

Pharmaceuticals, Inc., Michael Jaharis, Daniel M. Bell, Duncan

H. Cocroft, Juan F. Rodriguez, Robert E. Baldini, John Brademas,

Steven Jaharis, Louis Lasagna, Mark Novitch, Frederick B.

Whittemore (collectively, Kos Defendants) and Cowen & Com-

pany, Donaldson Lufkin & Jenrette, Salomon Smith Barney

Holdings, Inc., SBC Warburg Dillon Read, Inc. (collectively,

Underwriter Defendants).

App. 3

March 12, 1997, selling 4,772,500 shares at $15 per share.

From October 21, 1997, to October 24, 1997, Kos completed

a secondary offering of its common stock. On October 21,

1997, Kos filed the prospectus and registration statement

for the secondary offering with the Securities and Exchange

Commission. The offering price was $42.75. A total of

3,625,000 shares were sold in the secondary offering. Kos

sold 1,085,000 shares. Michael Jaharis, Kos’s founder,

majority shareholder and chairman, sold 2,390,000 shares.

Daniel Bell, Kos’s president and chief executive officer, sold

150,000 shares.

*1186 Kos’s only prescription drug product that was

publicly available at the time of the secondary offering was

an extended release niacin preparation called Niaspan.

Niaspan was approved by the Food and Drug Administra-

tion in July 1997. Kos began shipping Niaspan to wholesal-

ers in August 1997, and its sales force began detailing

physicians in September 1997. On November 12, 1997, a

Salomon Brothers analyst, Robert Uhl, released a report

in which he slashed Kos’s projected revenue for 1998 by

half, from $92 million to $46 million, and changed the

rating of Kos’s stock from buy to hold. The next day, the

price of Kos’s stock plummeted from $30-15/16 to $16 9/16

per share. Uhl’s report was premised on estimates’ of the

numbers of new and refill prescriptions for Niaspan during

the first eight weeks that Kos’s sales force marketed

Niaspan. Uhl’s conclusions were based on the assumption

(that he and many other pharmaceutical analysts appar-

ently share) that the number of new prescriptions filled

during the eighth week of a new prescription drug product’s

initial marketing is particularly predictive of the market

success the product will enjoy. The eighth week of

Niaspan’s marketing ended on October 31, 1997. Uhl stated

? These estimates were provided by IMS America.

App. 4

that to achieve the original $92 million revenue projection,

5,000 new prescriptions of Niaspan during the eighth week

were needed. IMS America estimated that only 708 new

prescriptions for Niaspan were filled during the eighth

week. Uhl explained that, considering the small size of

Kos’s sales force and their program of providing sample

packs (which contain a three-week supply of Niaspan) to

physicians, he would have been satisfied with 4,000 new

prescriptions during week eight. Uhl concluded by noting

that due to the sampling program and the anti-niacin bias

of many physicians, Niaspan could be the first drug for

which the “initial weekly prescriptions are not indicative of

the product’s ultimate success.”

Kos’s fifty-two page prospectus, filed October 21, 1997,

explained the many risks of investing in Kos, among them:

1) “The Company’s ability to successfully commercialize

Niaspan will depend significantly on the acceptance of

Niaspan by physicians and their patients"; 2) Niaspan has

been designed to minimize the severity of the side effect of

flushing, but most patients taking Niaspan will experience

flushing and “there can be no assurance .. . that patients

using Niaspan will not suffer episodes of flushing that they

consider intolerable.”; 3) Kos’s clinical trials indicate that

less than one per cent of patients taking Niaspan experi-

ence clinically significant elevations in liver enzymes, but

physicians have historically been reluctant to prescribe

niacin preparations because of such risk and it is possible

that the actual incidence of hepatotoxicity will exceed one

per cent; 4) Kos has fewer marketing resources than its

competitors, a smaller sales force, and “limited” marketing

experience, which could prevent Niaspan from achieving

“market acceptance”; 5) “during the initial months following

the launch of Niaspan, many physicians may start only a

limited number of selected patients on Niaspan”; 6) physi-

cians’ anti-niacin bias combined with the distribution of

three-week starter packs (which are dispensed without

ar

App. 5

prescription) may result in only a modest increase in

Niaspan prescriptions for the first three to six months of its

marketing; and 7) since its inception, Kos had lost about

$80 million and there can be no assurance that Kos will

ever achieve profitability.

On August 10, 1998, Oxford and Lowey, Dannenberg &

Knapp, P.C. (Lowey) filed this suit in the northern district

of Illinois. On December 7, 1998, the action was *1187

transferred to the southern district of Florida. Plaintiffs

brought this action as a proposed class action. * Oxford

proposed to represent plaintiffs that purchased Kos stock in

the secondary offering. Lowey proposed to represent

plaintiffs that purchased Kos stock on the open market

between July 29, 1997, and November 13, 1997. The

complaint alleged violations of sections 11(a), 12(a)(2) and

15 of the 1933 Act, 15 U.S.C. § § 77k(a), 771(a)(2) and 770,

sections 10(b) and 20(a) of the 1934 Act, 15 U.S.C. § § 78}(b)

and 78t(a), and Rule 10(b)(5), 17 C.F.R. § 240.10b-5. The

complaint also alleges common law fraud, negligent

misrepresentation and breach of fiduciary duty. All of the

causes of action in plaintiffs’ original complaint are based

on defendants’ alleged material misrepresentations and

omissions (in press releases, the prospectus, the registra-

tion statement, and other SEC filings) concerning the

safety, efficacy, tolerability and sales volume of Niaspan.

On January 7, 1999, the Kos defendants moved to dismiss

the complaint pursuant to Fed.R.Civ.P. 12(b\6). The

Underwriter defendants so moved on February 8, 1999. At

the dismissal hearing, the plaintiffs advanced a new basis

for recovery, namely that the prospectus should have

disclosed the first six weeks of IMS America’s estimates of

Niaspan’s prescription volume. In the interests cf justice,

3 The district court’s dismissal of the complaint mooted the class

certification issue. Thus, that issue was not resolved.

App. 6

the district court considered this as an amended claim. On

May 19, 1999, the district court granted the motions to

dismiss, holding that the omission of the prescription

volume data was immaterial as a matter of law and that

plaintiffs’ allegations as to the safety, efficacy, tolerability

and sales volume of Niaspan were mere legal conclusions

masquerading as facts. On August 3, 1999, the district

court dismissed the complaint with prejudice.

Oxford appeals the dismissal of its 1933 Act and the

common law claims of fraud and negligent misrepresenta-

tion, but admits that dismissal of the common law claims

was proper if dismissal of the federal claims was proper. —

Oxford does not appeal the dismissal of its 1934 Act claims.

Lowey, which was not named as a plaintiff in the 1933 Act

counts, does not appeal to this Court.

2. Appeal of the attorneys’ fees award (No. 00-13220)

On July 6, 1999, the Kos defendants moved for sanctions

pursuant to the Private Securities Litigation and Reform

Act (PSLRA) and Rule 11. On July 16, 1999, the Under-

writer defendants so moved. On January 31, 2000, the dis-

trict court granted the motions for sanctions, finding that

the plaintiffs were deliberately indifferent to the lack of

factual support for the allegations in the complaint and

that, therefore, the complaint was objectively frivolous. On

May 22; 2000, the district court awarded $502,576.82 in

attorney's fees to the defendants. On June 7, 2000, the

district court clarified its earlier order and increased the

award to $520,091.82. Oxford appeals the district court’s

grant of defendants’ motions for sanctions and its award of

attorney’s fees to defendants.

App. 7

3. Consolidation E

This Court subsequently granted Oxford’s motion to

consolidate the appeals for oral argument.

Discussion

I. Standard of Review

This court reviews de novo the dismissal of a complaint

pursuant to Rule 12(b)(6). *1188 Harris v. Ivax Corp., 182

F.3d 799, 802 (11th Cir.1999). The plaintiffs factual

allegations are accepted as true. South Florida Water -

Management Dist. v. Montalvo, 84 F.3d 402, 406 (11th

Cir.1996). Dismissal is not appropriate unless it is plain

that the plaintiff can prove no set of facts that would

support the claims in the complaint. Jd. However,

conclusory allegations, unwarranted deductions of facts or

legal conclusions masquerading as facts will not prevent

dismissal. Id.; Fernandez-Montes v. Allied Pilots Ass’n, 987

F.2d 278, 284 (5th Cir.1993).

II. District Court’s Consideration of Documents Attached

to the Kos Defendants’ Motion to Dismiss

In resolving the defendants’ motions for dismissal, the

district court considered the prospectus, which was at-

tached to the complaint; Kos’s 10-Q for the period ending

September 30, 1997, which was required to be and was

actually filed by Kos with the SEC; the Uhl report, quoted

in the complaint; a July 29, 1997, press release, quoted in

the complaint; a November 12, 1997, press release, quoted

in the complaint; a 1996 article about Niaspan, quoted in

the complaint; and the Niaspan package insert. All of these

documents were attached to the Kos defendants’ motion to

dismiss. Oxford contends that consideration of such

“matters outside of the pleadings” was improper on a

App. 8

motion to dismiss, and that the district court should have

converted the motion to dismiss into one for summary

judgment. We disagree. In a motion to dismiss a securities

action, a court may consider the contents of public disclo-

sure documents which are required to be filed with the SEC

and are actually so filed. Bryant v. Avado Brands, Inc., 187

F.3d 1271, 1277-78 (11th Cir.1999). The documents may

only be considered to show their contents, not to prove the

truth of matters asserted therein. Neither do we find error

in the district court’s use of the Uhl report, the press

releases or the 1996 article. See Harris v. Ivax Corp., 182

F.3d 799, 802 n. 2 (11th Cir.1999). The package insert for

Niaspan was not referred to in the complaint, but the

district court reasoned that its contents could be judicially

noticed because “it is a matter of public record (part of the

FDA public file), is included in every package of Niaspan,

and also listed in the Physician’s Desk Reference.” The

district court specifically stated it was not accepting the

facts asserted in the insert as true, and appears only to

have used it to show the bare existence of a clinical study

which stated that Niaspan could increase HDL cholesterol

by 32%. We find no error in this.

III. Section 11 Claims

Section 11(a) of the 1933 Act, 15 U.S.C. § 77k, provides a

cause of action to purchasers of securities where: “any part

of the registration statement, when such part became

effective, contained an untrue statement of a material fact

or omitted to state a material fact required to be stated

therein or necessary to make the statements therein not

misleading. . ..” Section 11 extends liability to every person

who signed the registration statement, the issuer’s direc-

tors, and every underwriter. Section 12(a)(2) of the 1933

Act, 15 U.S.C. § 771, imposes liability upon one who sells a

security “by means of e prospectus or oral communication,

App. 9

which includes an untrue statement of a material fact or

omits to state a material fact necessary in order to make

the statements, in the light of the circumstances under

which they were made, not misleading. . ..” Section 15 of

the 1933 Act, 15 U.S.C. § 770, extends Section 11 and 12

liability to persons who control entities liable under those

sections. Thus, to state a claim under any of these sections,

Oxford must properly allege a *1189 material misrepresen-

tation or a material omission.

A. Omission of Prescription Volume Data

To avoid dismissal of a section 11 omission claim,

plaintiffs must properly allege: 1) the prospectus contained

an omission; 2) the omission was material; 3) defendants

were under a duty to disclose the omitted material informa-

tion; and 4) that such information existed at the time the

prospectus became effective. Cooperman v. Individual, Inc.,

171 F.3d 43, 47 (1st Cir.1999). The complaint (as amended

at oral argument before the district court) alleges that: 1)

Kos possessed the first seven weeks of Niaspan’s prescrip-

tion volume history; 2) this information was material; 3)

issuers have a duty to disclose all material information in

the prospectus; and 4) the absence of the prescription

volume information rendered the prospectus misleading.

1. Materiality

The district court assumed that Kos was in possession of

“several weeks” of information, but held that, because Uhl

based his conclusions almost entirely on the number of new

prescriptions for Niaspan filled during the eighth week

(which occurred after the close of the offering), the partial,

preliminary information Kos possessed was not material.

The district court also noted the prospectus’s mention of

several obstacles to the market acceptance of Niaspan,

App. 10

including a specific warning that Niaspan’s sales may grow

slowly during the first three to six months of its marketing.

The test of materiality is well known. “[T]o fulfill the

materiality requirement ‘there must be a substantial

likelihood that the disclosure of the omitted fact would have

been viewed by the reasonable investor as having signifi-

cantly altered the “total mix” of information made avail-

able.’ ” Basic Incorporated v. Levinson, 485 U.S. 224, 108

S.Ct. 978, 983, 99 L.Ed.2d 194 (1988) (quoting TSC Indus-

tries, Inc. v. Northway, Inc., 426 U.S. 438, 96 S.Ct. 2126,

2132, 48 L.Ed.2d 757 (1976)). The trier of fact usually

decides the issue of materiality. Cooperman, 171 F.3d at

48-49. Only if the lack of importance of the omission is so

plain that reasonable minds cannot differ thereabout is it

proper for the court to pronounce the omission immaterial

as a matter of law. Ganino v. Citizens Utilities Co., 228 F.3d

154, 161-64 (2nd Cir.2000); Cooperman, 171 F.3d at 49.

We are willing to assume, at the dismissal stage, that Kos

possessed whatever prescription volume information

existed. We do not know how quickly the IMS America

estimates became available, but some delay or lag time

seems inevitable. The prospectus was filed October 21,

1997. Oxford purchased its stock on October 24, 1997, the

last day of the seventh week of Niaspan’s marketing. Thus,

Oxford’s assertion that Kos possessed seven weeks of data

is literally unbelievable. Even though Kos probably did not

possess even six weeks of information, for dismissal pur-

poses we will assume that it did.

Realizing that no argument could be made that Kos

possessed the critical eighth week of information, Oxford

characterizes the partial data as a material trend. During

the sixth week, there were 498 new prescriptions for

Niaspan. Oxford’s point appears to be that, considering the

first six weeks of data, it was very unlikely that Niaspan

App. 11

would achieve the Uhl goal of 4,000 to 5,000 new prescrip-

tions per week, and therefore a reasonable investor would

consider the total mix of information significantly altered

by the data’s inclusion. The district court correctly observed

that the prospectus explains the several reasons *1190 why

Niaspan may start more slowly than other drugs. However, ©

the immateriality of the six weeks of prescription informa-

tion is arguably not so plain that reasonable minds could

not differ about it. Accordingly, we will assume for purposes

of the motion to dismiss that the six weeks of prescription

volume information was material.

2. Duty to Disclose

Oxford asserts three bases for Kos’s duty to disclose the

prescription data in the prospectus: 1) a general duty to

disclose, in the prospectus, all information material to the

offering; 2) Item 303(a)(3)ii) of regulation S- K, 17 C.F.R.

§ 229.303(a)(3)ii); and 3) the omission of the prescription

data rendered the prospectus materially misleading. We

address each of these arguments in turn.

(a.) General Duty

Oxford first argues that issuers have a duty to disclose,

in the prospectus, all information material to the offering.

We disagree. Section 11(a) only makes actionable the

omission of a material fact required to be stated in the

prospectus or necessary to make the statements in the

prospectus not misleading. To hold that section 11(a)

imposes liability unless the prospectus includes all material

facts is simply to wholly ignore and render superfluous that

section’s qualifying language “required to be stated therein

or necessary to make the statements therein not mislead-

ing.” This we may not do. Moreover, considering that

materiality will usually be an issue for the trier of fact, to

App. 12

require all material information to appear in the prospectus

would, like setting the threshold for materiality too low,

result in registrants burying the “shareholders in an

avalanche of trivial information-a result that is hardly

conducive to informed decisionmaking.” Basic Inc. v.

Levinson, 485 U.S. 224, 108 S.Ct. 978, 983, 99 L.Ed.2d 194

(1988) (quoting TSC Industries, Inc. v. Northway, Inc., 426

U.S. 438, 96 S.Ct. 2126, 2132, 48 L.Ed.2d 757 (1976)). We

join with the First Circuit in recognizing that the “mere

possession of material nonpublic information does not

create a duty to disclose it” and that the duty question is

properly stated as “whether the defendants had a specific

obligation to disclose information of the type that the

plaintiffs complain was omitted from the registration

statement and prospectus.” Shaw v. Digital Equipment

Corp., 82 F.3d 1194, 1202 (1st Cir.1996). If the prospectus

contains all of the material information specifically re-

quired by the securities laws, does not contain an untrue

statement of a material fact and if the statements therein

are not materially misleading in any respect, there has

been no material misrepresentation or material omission.

(b.) Item 303(aX3)(ii)

_ In its reply brief, Oxford asserts, for the first time, that

disclosure of the prescription volume estimates was re-

quired by Item 303(a)(3)ii) of regulation S-K, 17 C.F.R. §

229.303(a)(3)(ii). While we need not consider this untimely

argument, even if we did consider it, it, too, would fail.

Other circuits have considered whether or in what circum-

stances Section 11 liability may be premised upon the

failure to disclose information required by Item 303. See

Oran v. Stafford, 226 F.3d 275, 288 (3d Cir.2000); Steckman

v. Hart Brewing Inc., 143 F.3d 1293, 1296 (9th Cir.1998).

However, we need not explore those questions because we

ee

App. 13

conclude that in any event [tem 303 did not require that

the prospectus disclose the first six weeks’ prescriptions.

Item 303(a\3)(ii) requires registrants to:

“Describe any known trends or uncertainties that have

had or that the registrant reasonably expects will have

a *1191 material favorable or unfavorable impact on

net sales or revenues or income from continuing opera-

tions. If the registrant knows of events that will cause

a material change in the relationship between costs and

revenues (such as known future increases in costs of

labor or materials or price increases or inventory

adjustments), the change in the relationship shall be

disclosed.”

Oxford argues that the prescription data constitutes a

known trend that Niaspan was “not selling or being pre-

scribed” and that, therefore, Item 303(a)(3)ii) requires its

disclosure. There are, at least, two independently sufficient

reasons why this contention cannot be sustained.

The first element of the Item 303 disclosure test set forth

in Securities Act Release 6835 requires management to

assess whether the “known trend, demand, commitment,

event or uncertainty [is] likely to come to fruition.” Securi-

ties Act Release No. 33-6835, 1989 WL 192885 at *6

(S.E.C.). As regards trends, we interpret this element to

require an assessment of whether an observed pattern

accurately reflects persistent conditions of the particular

registrant’s business environment. It may be that a particu-

lar pattern is, for example, of such short duration that it

will not support any conclusions about the registrant’s

business environment. Release 6835 states that manage-

ment’s assessment “must be objectively reasonable, viewed

as of the time the determination is made.” Jd. We interpret

this language as establishing a negligence standard.

Oxford’s complaint says nothing about Item 303. More-

over, it does not allege facts that, if true, would support a

App. 14

finding of negligence as to Kos management’s belief that

the prescription data did not reflect that the uncertainties

identified in the prospectus had been resolved against the

marketability of Niaspan. This deficiency is highlighted by

Uhl’s discussion of Kos management’s disagreement with

his new projection, in which he specifically notes the

experience and competence of Kos’s management team and

mentions several steps that could be taken to “help bolster

awareness of the product.” Uhl concludes with a significant

admission: “Niaspan could be the first product of which we

know where initial weekly prescriptions are not indicative

of the product’s ultimate success.” The complaint alleges

that management’s assessment was incorrect and repeat-

edly emphasizes that, as to the issuer, Section 11 imposes

strict liability for material omissions. However, in deter-

mining the existence of an omission based on Item 303’s

disclosure requirements, Release 6835 clearly established

a negligence standard. Oxford’s failure to allege facts from

which the objective unreasonableness of Kos management’s

decision net to include the prescription information in the

prospectus could be inferred forecloses reliance upon Item

303 as a source of a duty to disclose that information.

A second, even clearer, barrier to Oxford’s reliance upon

Item 303(aX3 ii) is that it is primarily concerned with

developments that render the registrant’s reported results

less indicative of the registrant’s future prospects, a

concern not implicated here. Instruction 3 to paragraph (a)

provides:

“3. The discussion and analysis shall focus specifically on

material events and uncertainties known to management

that would cause reported financial information not to be

necessarily indicative of future operating results or of

future financial condition. This would include descriptions

and amounts of (A) matters that would have an impact on

future operations and have not had an impact in the past,

and (B) matters that have had an impact on reported

App. 15

operations and are not expected to have an impact upon

future operations.”

*1192 Item 303(a)(3\ii) essentially says to a registrant:

If there has been an important change in your company’s

business or environment that significantly or materially

decreases the predictive value of your reported results,

explain this change in the prospectus. The obvious focus is

on preventing the latest reported results from misleading

potential investors, thereby promoting a more accurate

picture of the registrant’s future prospects.

Here, the prescription data was used by a market analyst

to make a projection. This projection disappointed the

market, which had been very optimistic about Kos because

of the market analyst’s prior, more favorable projection.

However, the market’s disappointment in the changed

revenue projection did not render Kos’s previously reported

results unreliable. See Glassman v. Computervision, 90 F.3d

617, 632 (1st Cir.1996). The prospectus stated that Kos had

lost almost $80 million since its inception and that there

could be no assurance that the company would ever be

profitable. If sooming Niaspan sales had carried Kos for the

previous several reported quarters but suddenly and

significantly declined, a potential investor could be mislead

by those reported results unless Kos disclosed the impor-

tance of Niaspan and discussed the downward trend in

Niaspan sales. That is the type of situation ltem

303(aX(3)ii) was designed to address. But that is not this

case. Because the prescription information did not render

Kos’s reported results any materially less indicative of the

company’s future prospects, Item 303(a)(3)(ii) does not

require its disclosure.‘

* We need not address whether Item 303(a\3)ii) required Kos to

discuss Niaspan’s market acceptance as an uncertainty. Kos

(continued...)

App. 16

(c.) Misleading Prospectus

Oxford also argues that Kos had a duty to include the

prescription data because the prospectus was materially

misleading without it. We conclude that the prospectus

thoroughly explained the risks involved in marketing

Niaspan, and specifically warned that Niaspan might have

a slow start. The Uhl report mentioned the possibility that

Niaspan’s first eight weeks may not be indicative of its

ultimate market success. In view of all of this, the six weeks

of prescription data, which represents only a very prelimi-

nary indication that Niaspan was staring slowly, did not

have to be included in the prospectus. Such indication did

not render materially misleading the prospectus’s treat-

ment of the market acceptance of Niaspan as an uncer-

tainty.

In sum, we hold that Kos had no duty to disclose the

referenced prescription data in the prospectus.

B. Misrepresentation of Niaspan’s Efficacy

The prospectus stated that Niaspan could increase HDL

cholesterol by 22% to 32%. Paragraph 47 of the complaint

alleges that Niaspan cannot increase HDL cholesterol by up

to 32%. The only facts pleaded in support of this bald

assertion were the results of two of the four clinical studies

* (...continued) |

clearly did so, and the thrust of Oxford’s complaint is that Kos’s

treatment of Niaspan’s future as an uncertainty was misleading.

We note, however, that Item 101 of Regulation S-K, 17 C.F.R.

§ 229.101, appears to require this kind of discussion. Item

101 requires a description of the registrant’s business, including

a discussion of the registrant’s products. Item 101(c\(1\ii) requires

a narrative description of the status of products being developed

and new products.

App. 17

relied upon by Kos in stating the 22% to 32% range. These

two studies showed that Niaspan could increase HDL by

23% and 26%. Kos claims that one of the four studies shows

Niaspan can increase HDL by 32%. A study noting such

*1193 results is referred to in N laspan’s package insert. At

oral argument before this Court, Oxford complained that it

had never seen this study and reiterated its view that the

32% claim was false.

The fatal flaw in Oxford’s position is the complaint’s

failure to-allege facts that support the conclusion that the

32% claim is false. As mentioned, the complaint only

references two studies, both of which are consistent with

the 22% to 32% range set forth in the prospectus. The

district court held that because both numbers from these

sources were in the range quoted in the prospectus, neither

was evidence that this range was false. We agree. No two

clinical trials will produce exactly the same results.

Cherry-picking two studies that show average HDL im-

provement of less than 32%, even significantly less, does

not tend to establish that the stated range is false.

C. Misrepresentation of Niaspan’s Safety

The prospectus stated that only about 1% of patients

taking Niaspan experienced clinically significant increases

in liver enzymes and that the threshold for clinical signifi-

cance was three times the normal level. ° Paragraph 51 of

the complaint alleges that “Niaspan use elevated liver

toxicity to an intolerable and unsafe level. By defining

clinically significant elevations in liver function tests as

* When liver cells are destroyed, certain enzymes that were

contained within those cells spill into the bloodstream. Elevation

of these enzymes indicates that liver cells are dying at an

accelerated rate.

App. 18

‘greater than three times the upper limit of normal,’ Kos

misrepresented the industry standard as to what consti-

tutes tolerable and safe levels of liver toxicity.”

The complaint does not plead the existence of facts that

would support its allegation that Niaspan elevates liver

enzymes to an intolerable level. The complaint fails to

articulate what the proper threshold for clinical significance

is, although, after the motions to dismiss were granted,

Oxford asserted, in its response to the defendants’ motions

for sanctions, that it is twice the normal level. No studies

are referred to, no specific facts are pleaded that indicate

any basis for Oxford’s bald assertions that Niaspan elevates

liver enzymes to an intolerable level or that Kos employed

the wrong standard in its clinical trials.

In its response to defendants’ motions to dismiss, Oxford

added an additional “safety” claim, which the district court,

in the interest of fairness, considered. This claim was that

the prospectus is misleading because it did not state that

88% of patients taking Niaspan would experience flushing.

As regards the flushing issue, the prospectus stated:

“Although most patients taking Niaspan will sometimes

flush, the formulation and dosing regimen for Niaspan have

been designed to maximize patient acceptance and mini-

mize the occurrence of flushing. There can be no assurance,

however, that patients using Niaspan will not suffer

episodes of flushing that they consider intolerable.” In view

of this and other candid statements about the side effect of

flushing that appear in the prospectus, we hold that the

prospectus was not misleading in this respect.

D. Misrepresentations of Niaspan’s Tolerability

Paragraph 63 of the complaint observes that subjects in

Kos’s clinical trials were given 2,000 mg of Niaspan per day

and alleges that “only a tiny fraction of the market could

yg eens cases

Ee eae

App. 19

tolerate such a high dose of Niaspan.” The complaint

alleges that the clinical studies were “rigged” because Kos

“only administered high doses of Niaspan to subjects who

were predetermined to *1194 have a high tolerance.” The

complaint does not even specify what side effect prevents

all but a tiny fraction of the market from taking Niaspan.

When, at oral argument, the district court asked for an

explanation of the charge that the clinical trials the FDA

based its approval on were “rigged”, Oxford’s response was

that there must be some reason “why physicians don’t

prescribe it.” We agree with the district court that the

complaint fails to plead any factual basis for the charges

found in paragraph 63.

E. Misrepresentation of $1.5 Million in September 1997

Sales

The prospectus estimated that Kos reaped $1.5 million in

revenue from the sale of Niaspan during the quarter ending

September 30, 1997. On November 12, 1997, Kos filed its

10Q for that quarter, which, consistent with the prospec-

tus’s estimate, stated that Kos had realized initial product

sales of Niaspan in the amount of $1.5 million. Paragraph

57 of the complaint alleges that the claim of $1.5 million in

sales of Niaspan was false. The complaint does not allege

any facts that support the conclusion that Kos had not sold

$1.5 million in Niaspan by September 30, 1997, or that the

$1.5 million figure was inaccurate in any respect. Para-

graph 58 of the complaint alleges that, even if $1.5 million

in sales did occur, such sales did not result from prescrip-

tions, but rather from pipeline filling sales to wholesalers.

The complaint alleges that Kos’s statement, in the prospec-

tus, that it “intends to market Niaspan directly to the

specialist physicians within the cardiovascular market”

somehow rendered the prospectus misleading without a

statement clarifying that the $1.5 million in sales was to

wholesalers.

App. 20

The prospectus stated that Kos’s sales force was provid-

ing “as a promotion item” three-week starter packs of

Niaspan to physicians, which “generally are dispensed

without a prescription", and that sales to warehouses

commenced before the sales force began to market Niaspan

to physicians. It is common knowledge in the pharmaceuti-

cal industry that “direct marketing” to physicians entails

promoting the drug product to physicians and encouraging

them to prescribe it for their patients. The prospectus

simply does not state or imply that the $1.5 million resulted

from prescriptions or direct sales of Niaspan to physicians.

The prospectus also plainly stated that Kos was selling

Niaspan to wholesalers. The complaint has failed to plead

facts that, if true, would constitute a misrepresentation of

sales revenue, and does nothing more than offer the legal

conclusion that the representation in the prospectus was

somehow misleading. .

We hold that the dismissal of Oxford’s federal claims, with

prejudice, was entirely proper.

IV. Attorneys’ Fee Award

15 U.S.C. § § 77z-1(c) and 78u-4(c) require the district

court, upon final adjudication of claims brought under the

1933 and 1934 Acts, respectively, to include specific

findings as to each party’s and each attorney’s compliance

with Fed.R.Civ.P. 11(b). These subsections also provide for

a presumption that the proper sanction for a Rule 11(b)

violation is an award, to the opposing party, of the reason-

able attorney’s fees and costs incurred as a direct result of

the violation.

The district court found that Oxford’s legal arguments

were not frivolous and that Oxford performed an adequate —

investigation before filing its complaint, but that after such

investigation a reasonable attorney would have realized

App. 21

that there was no evidentiary support for any of the

allegations in the complaint and that such support was

unlikely to be unearthed by further investigation or

discovery. The district court concluded that the plaintiffs

*1195 were deliberately indifferent to the lack of eviden-

tiary support for the conclusory allegations in the complaint

and that plaintiffs’ claims were objectively frivolous under

Fed.R.Civ.P. 11(b)(3). The district court awarded

$335,686.55 in fees and expenses to the Kos defendants and

$184,405.27 to the Underwriter defendants. The plaintiffs

and their counsel were each responsible for half of the

award, or $260,045.91.

“An appellate court reviews all aspects of the district

court’s Rule 11 determination for an abuse of discretion.”

Worldwide Primates, Inc. v. McGreal, 87 F.3d 1252, 1254

(11th Cir.1996).

The district court concluded that plaintiffs’ claim

regarding the omission of the prescription data was “not

well grounded in fact” because it was essentially an

amended claim that was advanced for the first time at the

dismissal hearing. In a footnote, the district court observed

that: “Just because, ‘in the interests of justice,’ the Court

decided to entertain this ‘essentially amended claim’ in

ruling upon the motions to dismiss, does not mean that the

Court has to read Plaintiffs’ presentation at oral argument

into the Complaint when judging whether Plaintiffs’ claims

were well grounded in fact.” It is true that the complaint’s

reference to the Uhl report is only in the context of showing

that the $1.5 million in Niaspan sales that occurred in

September 1997 did not result from prescriptions, and that

the plaintiffs did not allege that the prescription data

should have been included in the prospectus until the

dismissal hearing. The district court appears to have

concluded that it is proper to consider such a claim ina

motion to dismiss, but then fail to consider the factual

allegations advanced in support thereof when resolving a

App. 22

motion for sanctions. The district court certainly did not

have to consider the claim in resolving the motions to

dismiss. However, in finding that the thus amended claim

was without evidentiary support simply because it’was not

advanced until the dismissal hearing (and without consid-

ering the factual allegations advanced in support of the

claim at such hearing), the district court abused its discre-

tion. We conclude that this claim had factual support. The

claim fails because we reject Oxford’s legal argument as to

a registrant’s duty to disclose the prescription data under

Item 303(a)(3)ii). This argument, though ultimately

rejected, was not frivolous and was adequately supported

by the pleaded facts concerning the data and its predictive

value.

As to plaintiffs’ other claims, we cannot say that the

district court’s findings as to their lack of evidentiary

support represented an abuse of discretion. Therefore, the

district court’s finding that plaintiffs and their counsel

violated Rule 11(b)(3) in advancing these other claims is

affirmed.

As to the award itself, plaintiffs complain that: 1) the

total number of hours billed by the defendants-1900-was

not reasonable considering the claims were dismissed

before any discovery took place; 2) some of the defendants’

billing records are redacted, vague and do not specify

exactly what work the attorney was performing; and 3) the

defendants failed to provide hourly rates for a significant

portion of the time billed, instead submitting a chart of

their average hourly rates.

“(T]he starting point in any determination for an

objective estimate of the value of a lawyer’s services is to

multiply hours reasonably expended by a reasonable hourly

rate.” Norman v. Housing Authority of the City of Montgom-

ery, 836 F.2d 1292, 1299 (11th Cir.1988). Our precedent

places the burden of documenting the appropriate hours

App. 23

and hourly rates on the fee applicant. Id. Oxford does not

challenge the reasonableness of the hourly rates submitted

by the defendants. As to *1196 the number of hours

submitted, “fee counsel should have maintained records to

show the time spent on the different claimis, and the

general subject matter of the time expenditures ought to be

set out with sufficient particularity so that the district

court can assess the time claimed for each activity. A well

prepared fee petition also would include a summary,

grouping the time entries by the nature of the activity or

the stage of the case.” ° Jd. at 1303 (citation omitted).

Under this standard, both of the fee applications pre-

sented to the district court were likely inadequate. Both

contain several time entries that are so redacted that it is

impossible to tell (beyond “research”) what the attorney was

doing. Most of the entries contain some description of the

work performed, but there is very little information as to

which claim the work pertained to. Thus, the district court

could not have determined how many hours were spent

defending each claim or accomplishing any particular task.

Therefore, it could not have assessed whether any hours

should be excluded (as redundant or unnecessary) or the

hourly rate reduced (because the number of hours submit-

ted for a particular activity was excessive). Id. at 1301,

1305-06.

(14][15] Notwithstanding these difficulties, a district

court faced with an inadequate fee application must still

award a reasonable fee. Jd. at 1303. Because courts are

considered experts in this area, it is usually proper for the

district court to award reasonable fees without an eviden-

tiary hearing or additional pleadings. Jd. Although the

5 We view a summary as desirable, but not necessary. We read

“activity” as referring to a particular task, such as drafting a

motion to dismiss.

App. 24

district court enjoys wide discretion in determining a

reasonable fee, “[t]he court’s order on attorney’s fees must

allow meaningful review-the district court must articulate

the decisions it made, give principled reasons for those

decisions, and show its calculation.” Jd. at 1304.

Here, the district court found the total number of hours

submitted by the defendants to be reasonable. The only

explanation for this was that the “factual and legal com-

plexities of this case” rendered “unpersuasive” plaintiffs’

argument that the number of hours submitted was exces-

sive. It is true that “[s]worn testimony that, in fact, it took

the time claimed is evidence of considerable weight on the

issue of the time required in the usual case and therefore

[to justify a reduction of the hourly rate], it must appear

that the time claimed is obviously and convincingly exces-

sive under the circumstances.” Perkins v. Mobile Housing

Board, 847 F.2d 735, 738 (11th Cir.1988). However, in

American Civil Liberties Union of Georgia v. Barnes, 168

F.3d 423, 430 (11th Cir.1999), we clarified Perkins:

“[G]iving weight to sworn statements of fee applicants does

not mean accepting those statements as gospel. Courts

should not delegate their duty to examine and judge the

reasonableness of fee applications to the applicants.”

Among other things, this means that in order to satisfy

Norman’s “meaningful review” requirement, the district

court must respond to specific objections to a fee application

with more than conclusory statements of reasonableness.

Id. at 428.

We conclude that the district court did not abuse its

discretion in refusing to reduce the hourly rate. It is true

that the only explanation proffered by the district court-the

factual and legal complexity of the case-is less than compel-

ling. However, Oxford’s objection to the total number of

hours submitted was not specific. Barnes rested, in part, on

the principle that “[t]he more specific the objections to a

*1197 fee application are, the more specific the findings

ey a etree ee

App. 25

and reasons for rejecting those objections can be.” Jd. at

428-29. Oxford did not propose what number of hours would

have been reasonable, and therefore could not recommend

any particular adjustment to the hourly rate. Oxford simply

asserted, in the most general manner, that defense counsel

took too many hours getting the case dismissed. Such a

boilerplate objection merits no more of a boilerplate re-

sponse than that given.

Second, Oxford complains that the redacted time entries

made it impossible for it to determine whether any of the

work performed by defense counsel was redundant or

unnecessary. While some entries were severely redacted,

most were not. The district court concluded that surround-

ing time entries “demonstrate that the time claimed in

these entries was spent on this matter, either performing

legal research or discussing the case with unidentified

individuals.” This finding was not an abuse of discretion.

The district court did not address the issue of redundance,

but we think that where, as here, there is no indication that

fee counsel has failed to exercise billing judgment, the total

amount of time spent on “research” is reasonable, and the

number of entries that fail to contain details about what

research is being performed is relatively small, it is within

the district court’s discretion to include those hours in the

award. We caution, however, that where a significant

number of entries are severely redacted or it appears that

fee counsel has failed to use billing judgment, it may be an

abuse of discretion to award fees based on the redacted

entries.

Finally, Oxford complains that Kos’s counsel has only

submitted a chart of average hourly rates for a significant

part of the time billed. Oxford advanced this argument

before the district court. In response, Kos pointed out that

the actual hourly billing rates (along with an unredacted

version of most of the time entries) was contained in

Exhibit F of the record. That is indeed the case.

App. 26

Oxford’s other contentions regarding the award are so

devoid of merit that it was not an abuse of discretion for the

district court to fail to address them.

The only issue requiring remand is the proper appor-

tionment of the award. The district court recognized that

opposing parties are only entitled to attorney’s fees and

costs associated with defending frivolous claims. Simon

DeBartolo Group, L.P. v. Richard E. Jacobs Group, Inc., 186

F.3d 157, 166-67, 177 (2nd Cir.1999). Accordingly, Defense

counsel! are entitled to fees and expenses incurred in

defending against all claims except the claim that Kos

should have included the partial, preliminary prescription

sales data in the prospectus. We realize that because this

claim was not advanced until oral argument at the hearing

to dismiss, the amount of fees and expenses incurred in

defending against it is probably small. Nevertheless, the

law requires that the award not include such fees and

expenses. The district court has wide latituae in determin-

ing how to apportion the award, but it must explain its

decision such that it is capable of meaningful review.

Conclusion

For the reasons stated, the district court’s dismissal of

Oxford’s federal claims, with prejudice, is affirmed. It

follows that the district court’s dismissal of Oxford’s state

and common law claims must also be affirmed.

The district court’s finding that the plaintiffs and their

counsel violated Rule 11(b\3) by being deliberately indiffer-

ent to the lack of factual support for the claims asserted in

the complaint is affirmed, except as to the amended claim

concerning *1198 the omission of the preliminary prescrip-

tion sales data, which is reversed. The district court’s

award of fees and expenses is vacated and remanded so

that the district court can properly apportion the award, i.e.

App. 27

exclude fees and expenses incurred in defending against the

lone non-frivolous claim.

In No. 99-11690, the judgment is AFFIRMED; In No.

00-13220, the judgment is VACATED and the matter is

REMANDED for further proceedings consistent herewith.

App. 28

APPENDIX B: DISTRICT COURT DECISIONS

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF FLORIDA

MIAMI DIVISION

OXFORD ASSET )

MANAGEMENT, et al. )

) No. 98-2972

v. )

) [Filed May 19, 1999]

)

KOS PHARMACEUTICALS, )

et al., )

ORDER GRANTING MOTION TO DISMISS

THIS CAUSE comes before the Court on Motion by Kos

Defendants’ to Dismiss the Class Action Complaint ("Kos

Motion) (DE#5) and Memorandum of Law in Support of

Motion to Dismiss (DE#6), and Underwriter Defendants’

Motion to Dismiss the Complaint (DE#18). The Court has

reviewed the responsive papers ar@ the other pertinent

portions of the file and heard argument of counsel on these

Motions on May 4, 1999. For the reasons stated below, the

Defendants’ Motions to Dismiss are granted.

1 This Motion is filed on behalf of Defendants Kos Pha-

rmaceuticals, Inc., Michael Jaharis, Daniel M. Bell, Duncan H.

Cocroft, Juan F. Rodriguez, Robert E. Baldini, John Brademas,

Steven Jaharis, Louis Lasagna, Mark Novitch, and Frederick B.

Whittemore (collectively, the “Kos Defendants.”)

* This Motion is filed on behalf of Defendants Cowen & Company;

Donaldson Lufkin & Jenrette; Salomon Smith Barney Holdings,

Inc.; and SBC Warburg, Dillon Read, Inc. (collectively, the

“Underwriter Defendants”).

App. 29

I. Background

Plaintiffs bring a securities class action on behalf of

those individuals who purchased Kos stock between July

29, 1997 and November 13, 1997, including those individu-

als who purchased common stock in a secondary public

offering on October 24, 1997 ("the Offering”), as well as

those who purchased common stock on the open market

during the class period. J 27. Lead Plaintiffs in this action

are Oxford Asset Management, which bought shares

pursuant to the Secondary Public Offering,? 4 10; and

Lowey Dannenberg, which bought shares in the open

market. J 11. Named as Defendants are (1) Kos Pharma-

ceuticals, Inc.; (2) certain Kos Officers and Directors‘; and

(3) Underwriters of the Offering’.

* Although the Kos Defendants assert that Oxford did not buy

stock from an Underwriter in the Offering, in resolving this

Motion, the Court accepts Oxford’s claim that it purchased a

number of shares in the Offering, and thus has standing to sue

under § 11. Ex. C, Pl. Mem. in Oppos. to Mot. to Dismiss (DE#24).

The Underwriter Defendants do not dispute this point. Reply

(DE#32).

* Specifically, named as Defendants in various Counts are:

Michael Jaharis, chairman of Kos’ Board of Directors; Daniel Bell,

Kos’ president and chief executive officer; Duncan Cocroft, senior

vice president and chief administrative officer; Juan Rodriguez,

controller; Robert Baldini, vice chairman of the Board of Directors;

John Brademas, director of Kos; Steve Jaharis, director of Kos;

Louis Lasagna, director of Kos; Mark Novitch, director of Kos sand

Frederick Whittemore, director of Kos.

* Plaintiffs purport to bring this action against the four named

Underwriter Defendants (Cowen & Company; Donaldson,

Lufkin & Jenrette; Salomon Smith Barney Holdings, Inc.; SBC

Warburg Dillon Read, Inc.) individually and as representatives of

(continued...)

App. 30

The following background information provides the

context for evaluation of the claims presented.® Defendant

Kos Pharmaceutical Inc. ("Kos") is a specialty pharmaceuti-

cal company that develops and markets proprietary

prescription pharmaceutical products, primarily for the

treatment of cardiovascular and respiratory diseases. ] 38.

Kos developed and markets Niaspan, a pharmaceutical

containing niacin, to be used for the treatment of "mixed

lipid disorders." Niaspan was approved by the Food and

Drug Administration ("FDA") on July 28, 1997. Ex. A,

Compl. ("Kos Pharmaceuticals, Inc. October 21, 1997

Prospectus”) (hereinafter "Prospectus"). At the time of the

October 24, 1997 Offering, Niaspan was Kos’ lead product

and the sole product that was being marketed.’ { 39.

Prior to March 12, 1997, Kos was a private entity funded

by Kos Investments Inc., an entity controlled by Michael

Jaharis. On March 12, 1997, Kos completed an initial

public offering at $15 per share of common stock. 4 40. Kos

5 (...continued)

a class of underwriter Defendants. Plaintiffs request that the

Court “enter an Order appointing Cowen, DLJ, Salomon and SBC

Warburg as Underwriter Defendant Class representatives.”

4 116. Because we dismiss the claims brought against the

Underwriters, this request is rendered moot.

6 For the purposes of this Motion to Dismiss, the Court takes the

facts as alleged by Plaintiff in the Complaint. As discussed infra,

the Court will also consider the Prospectus and certain documents

specifically relied upon in the Complaint or closely related to the

allegations of the Complaint and capable of judicial notice.

Additional consideration of the allegations of the Complaint will

follow in the analysis of the sufficiency of the specific claims.

’ All other products had not completed the development stage at

the time of the Offering.

App. 31

undertook a secondary public offering on October 24, 1997.

This Offering was a "firm offering” (underwritten by the

Underwriter Defendants) based on the Prospectus and

Registration Statement filed with the Securities and

Exchange Commission on October 20,1997. 992,41. In

the time period between the initial public offering in March

and the secondary public offering in October the price of

common stock climbed substantially: specifically, on July

29, 1997, common stock was trading at $35 per share: on

October 20, 1997, at $43; at the time of the Offering,

October 24, 1997, at $42.75. 77 5,41. The Offering was

fully subscribed, and a portion of a reserved over-allotment

was sold also, with a total of 3,625,000 shares sold in the

Offering at $42.75 per share. Of that total, Kos sold

1,085,000 shares, totaling $46,383,750; Michael Jaharis

sold 2,390,000 shares totaling $102,172,500; and Dennis

Bell sold 150,000 shares, totaling $6,412,500. 44 3-4.

The 52-page Prospectus is a thorough document detail-

ing Kos' history, current operations, and future plan for

expansion and development. The Prospectus includes

significant and repeated cautionary language concerning

the risks or uncertainties associated with Kos, namely that:

Niaspan was Kos' sole product on the market; Niaspan had

entered the market only several weeks before the Offering;

Niaspan's success depended on as-yet-unknown physician

and patient acceptance; the market was extremely competi-

tive and subject to rapid technological change; Kos had a

smaller sales force and fewer resources than established

potential competitors; Kos did not have any prior successes

in marketing or development; and Kos had never made a

profit and had accrued a $80 million deficit to date.

Prospectus, pp. 6-13 (“Risk Factors”), pp. 18-20 ("Manage-

ment's Discussions and Analysis of Financial Condition and

App. 32

Results of Operations’”).°

On November 12, 1997, Robert Uhl of Salomon Smith

Barney published a report ("Uhl Report") that discussed the

prospects of Kos and Niaspan and downgraded the stock

from a rating of "buy" to "hold." 443. Ex. 4, Kos Mem.

(DE#6). The Uhl Report charted weekly prescription data®

for the first eight weeks that Niaspan had been available

and predicted future sales expectations based on the

prescription sales in the eighth week of availability, the

week ending October 31, 1997. Based on the 708 new

prescriptions in that week, the Report concluded that

previous sales estimates would have to be reduced by half,

and that annual revenue would approximate $1.186 million.

Given these revised estimates, the stock was downgraded

to a "hold" rating. Jd. On November 13, 1997, the stock

dropped to approximately $16 per share.”® { 5.

On August 10, 1998, Plaintiffs filed suit in United States

District Court for the Northern District of Illinois. Upon

Defendant's Motion, this case was subsequently transferred

to the Southern District of Florida on December 7, 1998.

The Complaint" alleges claims under the Sections 11,

8 Attached to the Prospectus are “Consolidated Financial State-

ments” for the time period from Kos’ “inception” in July 1988 up

to the fiscal year ending June 30, 1997, audited and certified by

Arthur Andersen LLP.

® The source of this data is IMS, America (an independent

company) and Salomon Brothers Inc. estimates. Ex. 4, Kos

Motion.

10 As stated by Plaintiffs counsel at argument, the stock has not

recovered and presently trades at an estimated $4 to $6 per share.

" Count I- Section 11 of the 1933 Act against all Defendants for

issuing a Prospectus with untrue statements of material fact or

material omissions; Count II—Section 12(aX2) of 1933 Act against

(continued...)

App. 33

12(a)(2), and 15 of the Securities Act of 1993 (related to the

Second Public Offering brought by Offering purchaser

Oxford); Section 10(b) and 20(a) of the Securities Act of

1934 and Rule 10b-5 promulgated thereunder (alleging

securities fraud related to the Offering and to open market

purchases); and common law. .

Plaintiffs”? allege that in press releases and SEC filings

including the Prospectus and Registration Statement, the

Defendants made material misrepresentations and omis-

sions regarding (in Plaintiffs’ terms) N iaspan's (1) efficacy,

(2) safety, (3) sales volume, and (4) commercial viability,

that are actionable under federal securities law and

" (...continued)

Kos, Jaharis, Bell and Underwriters for participating in issuance

of Prospectus and Registration Statement with untrue statements

or material omissions; Count I1]—Section 15 of 1933 Act against

Jaharis, Bell, Baldini, Brademas, S. Jaharis, Lasagna, Novitch,

and Whittemore as control persons in regard to Counts I and II;

Count IV—Section 10(b) of the 1934 Act and Rule 10b-5 promul-

gated thereunder for intentional or reckless material representa-

tions or omissions in connection with the sale of securities; Count

V — Section 20(a) of 1934 Act against Jaharis, Bell, Baldini,

Brademas, S. Jaharis, Lasagna, Novitch, and Whittemore as

control persons in regard to Count IV: Count VI—Common Law

Fraud against all Defendants; Count VII—N egligent Misrepresen-

tation against all Defendants; Count VIII—Breach of Fiduciary

Duty as Directors against Jaharis, Bell, Baldini, Brademas, S.

Jaharis, Lasagna, Novitch, and Whittemore.

* The Oxford Plaintiffs bring claims related to the Offering

Prospectus and Registration Statement; the Lowey Plaintiffs

allege additionally that throughout the class period (a period

encompassing three months before and three weeks after the

Offering), Defendants made fraudulent statements about the

medical concerns and sales volume and omitted disclosure of the

prescription sales figures.

App. 34

common law. Although the Complaint is vague, and at

times unfocused and repetitive, we find that at the heart of

the complaint in this matter are two sets of claims. The

first set of claims that will be characterized as the "medical

claims" assert material misrepresentations were made

about Niaspan’'s effectiveness at "moving lipids in the right

directions"; about the danger of liver toxicity associated

with Niaspan use; and about the plausibility of patients

taking certain dosages of Niaspan (that would be necessary

to get the desired results). The second set of claims that

will be characterized as the “sales claims” relate to

revenue and sales volume figures for September 1997 and

the portion of October 1997 prior to the Offering.’ Plain-

tiffs allege that Kos management reported fabricated

revenue figures of $1.5 million in the Prospectus, the Form

10-K, and the November 12, 1997 Press Release, in that

these figures were the product of "channel-stuffing"” to

wholesalers. In addition, in argument on the Motion,

Plaintiffs assert that a material omission from the Prospec-

tus and/or other publications resulted from not reporting

actual prescription sales figures from the six weeks preced-

ing the October 24 Offering.

Defendants have moved to dismiss all of the claims

presented on various grounds, including failure to state a

claim upon which relief can be granted under the respective

federal statutes and common law.

II. Standard of Review for Motion to Dismiss

A. Legal Standard

Defendants move for dismissal of the federal securities

law counts for failure to state a claim upon which relief can

3 Niaspan was on the market for only six weeks prior to the

Offering, September 7—October 18. { 53.

App. 35

be granted. For the purpose of the motion to dismiss, the

complaint is construed in the light most favorable to the

plaintiff, and all facts alleged by the plaintiff are accepted

as true. Hishon v. King & Spaulding, 467 U.S. 69, 73

(1984). It is well-settled that a "complaint should not be

dismissed for failure to state a claim unless it appears

beyond doubt that the plaintiff can prove no set of facts

which would entitle him to relief.” Conley v. Gibson, 355

U.S. 41, 45-46 (1957). The district court reviews the

complaint not to make a determination of who will ulti-

mately prevail, but rather to determine whether the

claimant is entitled to offer evidence to support the claims.

See Scheuer v. Rhodes, 416 U.S. 232, 236 (1974).

Under Fed. R. Civ. P. 8(a)(2), Plaintiffs are required only

to set forth in the complaint "a short and plain statement

of the claim showing that the pleader is entitled to relief.""

The purpose of such pleading is to "give the defendant fair

notice of what the plaintiff's claim is and the grounds upon

which it rests." Conley, 355 U.S. at 47. The Court, how-

ever, cannot rely on those allegations that contain no more

than opinions or legal conclusions. South Florida Water

Management Dist. v. Montalvo, 84 F.3d 402, 409 n.10 (11th

Cir. 1996); accord In re Stac Elecs. Sec. Litig., 89 F.3d 1399,

1403 (9th Cir. 1996) (citation omitted), cert. denied sub

nom, 520 U.S. 1103 (1997) ("Conclusory allegations of law

and unwarranted inferences are insufficient to defeat a

motion to dismiss for failure to state a claim.").

Although courts must liberally construe and accept as

true allegations of fact in the complaint and inferences

reasonably deductible therefrom, they need not accept

factual claims that are internally inconsistent or facts

‘* The heightened pleading standards for securities fraud actions

governed by the Private Securities Litigation Reform Act are

discussed infra.

App. 36

which run counter to facts of which the court can take

judicial notice. See Ellen S. v. Florida Bd. of Bar Examin-

ers, 859 F. Supp. 1489, 1492 (S.D. Fla. 1994). It is also

evident that a court is not bound to accept conclusory

allegations, unwarranted deductions, or mere legal conclu-

sions asserted by a party. See id.; Olpin v. Ideal Nat. Ins.

Co., 419 F.2d 1250, 1255 (10th Cir. 1969), cert. denied, 397

U.S. 1074 (1970). Moreover, the Court must not "assume

that plaintiffs can prove facts not alleged or that defen-

dants violated the [ ] laws in ways not alleged." Quality

Foods de Centro America, S.A. v. Latin American Agribusi-

ness Development Corp., S.A., 711 F.2d 989, 995 (11th Cir.

1983). As stated by the Eleventh Circuit, a plaintiff "must

plead sufficient facts so that each element of the alleged []

violation can be identified. Conclusory allegations ‘will not

survive a motion to dismiss if not supported by facts

constituting a legitimate claim for relief..." Municipal

Utilities Bd. of Albertville v. Alabama Power Co., 934 F.2d

1493, 1501 (11th Cir. 1991), cert. denied, 513 U.S. 1148

(1995). It is clear, however, that Plaintiff is not required to

lay out every fact with “exactitude, nor must recovery

appear imminent." Id.

Applying this standard to the review of securities class

actions under Section 11 on a Rule 12(b)(6) motion, the

First Circuit has explained:

[T]he demands on the pleader are minimal. Neverthe-

less, minimal requirements are not tantamount to

nonexistent requirements. To survive a motion to

dismiss, plaintiffs must set forth factual allegations,

either direct or inferential, respecting each material

element necessary to sustain recovery under some

actionable legal theory. This court has previously

plotted the dividing line between adequate "facts" and

inadequate "conclusions": it is only when .. . conclu-

sions are logically compelled, or at least supported, by

the stated facts, that is, when the suggested inference

App. 37

rises to what experience indicates is an acceptable

level of probability that "conclusions" become "facts"

for pleading purposes.”

Cooperman uv. Individual, Inc. 171 F.3d 43, 47-48 (1st

Cir. 1999) Torruella, C.J.)(internal citations and quotations

omitted).

Consistent with the foregoing, we shall review in turn

Plaintiffs’ allegations to determine if they support the

conclusions pled.

B. Defendants' Request for Judicial Notice of

Exhibits

On consideration of a Motion to Dismiss pursuant to

Rule 12(b)(6), the Court's task is to assess the facial

sufficiency of the plaintiff's claims for relief. The Court's

inquiry, therefore, is generally limited to the Complaint

and the attachments thereto. In certain circumstances,

however, "where the plaintiff refers to certain documents in

the complaint and those documents are central to the

plaintiffs claim, then the Court may consider the docu-

ments part of the pleadings for purposes of Rule 12(b)(6)

dismissal, and the defendant's attaching such documents to

the motion to dismiss will not require conversion of the

motion in to a motion for summary judgment.” Brooks v.

Blue Cross and Blue Shield of Florida, Inc., Case No.

95-405-CIV-SM (S.D. Fla. 1995)(Marcus, J.), aff'd on other

grounds, 116 F.3d 1364 (11th Cir. 1997); see also Watson v.

Bally Mfg. Corp., 844 F. Supp. 1533, 1535 n. 1(S.D. Fla.

1993), affd, 84 F 3d 438 (11th Cir. 1996), citing to, 5A

Charles A. Wright and Arthur R. Miller, Federal Practice

and Procedure § 1357, at 299 (1990) ("In determining

whether to grant a Rule 12(b\6) motion, the Court primar-

ily considers the allegations in the complaint, although

matters of public record, orders, items appearing in the

App. 38

record of the case, and exhibits attached to the complaint,

also may be taken into account.").

As applied in a securities fraud context, when deciding

a motion to dismiss, the court also "may consider the

contents of relevant public disclosure documents which (1)

are required to be field with the SEC, and (2) are actually

filed with the SEC.” Lovelace v. Software Spectrum Inc., 78

F.3d 1015, 1018 (5th Cir. 1996); accord Kramer v. Time

Warner Inc., 937 F.2d 767 (2nd Cir. 1991). Thus, the Court

shall consider the facts alleged in the complaint, those

documents attached to or incorporated into the complaint,

including certain documents that may be judicially noticed

such as SEC filings. See Malin v. IVAX Corp., 17 F. Supp.

2d 1345, 1352 (S.D. Fla. 1998) (stating that SEC filings

required to be filed and actually filed are appropriate for

judicial notice, therefore may be considered in evaluating a

motion to dismiss, and that); Bryant v. Apple South, 25 F.

Supp. 2d 1372, 1376 (N.D. Ga. 1998) (considering newspa-

per article quoted in complaint because "fairness requires

that the entire document be considered" while excluding

documents not quoted or mentioned in the complaint).

The Kos Defendants attach ten exhibits to their Motion

to Dismiss and request that they be judicially noticed. For

the purposes of this Motion to Dismiss, the Court will

consider the Complaint, the Prospectus (Ex. A, Compl.), and

several documents repeatedly referenced and relied upon

extensively in the Complaint: Form 10-Q for the period

ended September 30, 1998, that was required to be filed

with the SEC and was actually filed (Ex. 10, Kos Motion);

the Uhl Report, quoted in the Complaint (Ex. 4, Kos

Motion); July 29, 1997 Press Release, quoted in the Com-

plaint (Ex. 5, Kos Motion); November 12, 1997 Press

Release, quoted in the Complaint (Ex. 9, Kos Motion); and

the 1996 Article "Treatment Effect of Niaspan, a Controlled

Release Niacin, in patients with Hypocholesterolemia: a

App. 39

Placebo Controlled Trial,” quoted in the Complaint (Ex. 2,

Kos Motion). Lastly, we consider Exhibit 6, the Niaspan

package insert because it is a matter of public record (part

of the FDA public file), is included in every package of

Niaspan, and also listed in the Physician's Desk Reference.

Plaintiffs do not question the authenticity of exhibit as

attached to the Kos Motion. The Court does not accept the

facts therein as true, but rather considers it as a public

record, i.e., a document meeting certain criteria and

containing certain specific information about Niaspan. We

do not consider any of the additional documents filed by the

parties.'5

III. Analysis of Claims Alleging Violations of Section

11, Section 12(a)(2), and Section 15 of the Securi-

ties Act of 1933-Counts I, I, and III

The Oxford Plaintiffs'® allege various Defendants

violated three provisions of the Securities Act of 1933 in the

October 24, 1997 Offering: Count I (Section 11), Count II

(Section 12(a\2)), and Count III (Section 15). These

Sections provide the mechanisms for enforcing the disclo-

sure requirements imposed by the 1933 Act. Under Section

11, a purchaser of a security can bring a cause of action

based on any part of the registration statement, where:

'® Exhibit 1, the Prospectus, is duplicative. Exhibit 3 and Exhibit

8 are charts depicting stock prices; the Court relies on the stock

prices stated in the Complaint. Defendants have withdrawn

Exhibit 11. (Kos Reply at 2, n.2.) Affidavits submitted by Plain-

tiffs are not properly considered in ruling on a Motion to Dismiss.

'® Counts I, II, and II are brought solely by Oxford, as the plain-

tiff who purchased in the Offering; Counts IV, V, VI, VII, and VIII

are brought by Oxford (for Offering purchases) and Lowey

Dannenberg (open market purchases only); Count VIII is brought

solely by Lowey Dannenberg (open market purchases only).

——————L—

App. 40

when such part became effective, [it] contained an

untrue statement of a material fact or omitted to state

a material fact required to be stated therein or necessary

to make the statements therein not misleading. .. .

15 U.S.C. § 77k.

Section 11 action imposes liability on every person who

signed the registration statement, every person who was a

director in the issuer at the time of filing of the registration

statement, and every underwriter of the offering.’’ Id.

Section 12(a)(2) provides that any person who "offers or

sells a security ... by means of a prospectus or oral commu-

nication” that contains a materially false statement or that

“omits to state a material fact necessary in order to make

the statements, in light of the circumstances under which

they were made, not misleading” shall be liable to any

"person purchasing such security from him.” 15 U.S.C. §

77(1 a2). Thus, both statutes require a material mis-

statement or omission made by Defendants and will be

analyzed under the Section 11 discussion below.”

A. Section 11

To prevail on a Section 11 claim, plaintiff must show (1)

that the registration statement contained a misstatement

or omission, (2) that was material, and (3) was required to

be stated or was necessary to make other statements not

7 Also subject to suit, but not applicable on the facts presented,

is “every accountant, engineer, or appraiser, or any person whose

profession gives authority to a statement made by him, who has

with his consent been named as having prepared or certified” the

part in question. 15 U.S.C. § 77k(4).

'® Section 15 provides for “control person” liability of those

individual who control those liable under Section 11 or Section 12.

See U.S.C. § 770.

App. 41

misleading. See Shaw v. Digital Equipment Corp., 82 F.3d

1194, 1201 (1st Cir. 1996); In re Stac Elecs. Sec. Litig., 89

F.3d 1399, 1403-04 (9th Cir »996), cert. denied sub nom.,

520 U.S. 1103 (1997); Krim v. Banctexas Group, Inc., 989

F.2d 1435 (5th Cir. 1993). Plaintiffs are not required to

plead scienter to state aclaim. See In re Stac, 89 F.3d at

1404. Rather, liability under Section 11 may be predicated

on negligent, or even "innocent," misstatements. Herman

& Maclean v. Huddleston, 459 U.S. 375, 382 (1983).'® In

the context of alleged misrepresentations, plaintiffs must

allege that a statement included is materially false or

misleading.

When alleging material omissions, then, plaintiffs must

assert a failure to include a fact that is necessary to make

other statements not misleading. While federal securities

'°In addition, some courts have applied the particularized

requirements for pleading fraud under Federal Rule of Civil

Procedure 9b) where the Section 11 or Section 12 claims “sound

in fraud.” See, e.g., In re Stac, 89 F.3d at 1405; Melder v. Morris,

27 F.3d 1097 (5th Cir. 1994); Shapiro v. UJB Fin. Corp., 964 F.2d

272 (3rd Cir. 1992). But see In re Nationsmart Corp. Sec. Litig.,

130 F.3d 309, 315 (8th Cir. 1997) (noting that “Section 11 does not

require proof of fraud for recovery;” not applying Rule 9(b) where

complaint expressly disavows any claim of fraud in connection

with the Section 11 and Section 12 claims); Shaw v. Digital

Equipment Corp., 82 F.3d 1194 (1st Cir. 1996) (rejecting argument

that Rule 9b) must be applied where plaintiffs allege defendants

actually possessed the information that they failed to disclose). In

the instant case, Plaintiff specifically disclaims any reference to

fraud in the Counts of the Complaint based on Sections 1 1, 12 and

15 of the 1933 Act. 44 66, 77, 85 (“This Count is not based on, and

does not contain any averments of fraud .... If, through inadver-

tence or otherwise, any allegations or averments of or constituting

fraud are deemed contained or incorporated in this Count, they -

are hereby withdrawn from this Count.) We do not find it would

be appropriate to apply Rule 9b) to the case before us.

App. 42

law is clear that silence, absent a duty to disclose, cannot

be ‘actionably misleading,” it is equally clear that "the

obligations that attend the preparation of [offering] filings

embody nothing if not an affirmative duty to disclose a

broad range of material information.” See Shaw, 82 F.3d at

1202.

1. Alleged Misrepresentations Relating to Medical Claims

In regard to the medical claims, Plaintiffs assert the

following misrepresentations of "hard" or historical fact, not

forward-looking statements.”

a. Effectiveness

In regard to the effectiveness of Niaspan, Plaintiffs

allege that Kos misrepresented the extent to which Niaspan

could "move" lipid measures in the “right direction."

Plaintiff contrasts the information reported in the Prospec-

tus with a July 1997 press release and a 1996 article

discussing a trial of Niaspan that was sponsored by Kos.

q 46. The Prospectus states that Niaspan can decrease low

density lipoprotein ("LDL") cholesterol by 14% to 18%; the

1996 article states 14%. The Prospectus states that

Niaspan can increase high density lipoprotein ("HDL")

cholesterol, referred to as "good cholesterol,” by 22% to 32%;

the 1996 article states 23% and the July 1997 press release

states “up to 26." The Prospectus states that Niaspan can

decrease triglycerides from 24% to 35%; the 1996 article

» No specific omissions are alleged; Plaintiffs invoke the term

“omissions” to indicate that “true” statements should have been

included, as opposed to these false or misleading statements to

alert potential purchasers that the claims made about Niaspan or

the results quoted were inaccurate or untenable.

App. 43

states 29%. 7] 46, 47. The Prospectus states that Niaspan

can decrease lipoprotein (a) (“Ip(a)") from 24% te 36%: the

1996 article states 27%; the July 1997 press release states

"up to 24%." JJ 46-48.

These figures are included in the Prospectus in the

discussion of “Niaspan Product Development.” Prospectus,

pp. 24-25. That section explains that these figures are the

results of "the Company's three double-blinded, placebo-

controlled pivotal trials and the one open label long-term

safety study of Niaspan.” At 25. As stated in oral argu-

ment, Plaintiffs’ cited figures are from one of these very

studies (one of the three shorter-term studies used by Kos).

Defendants do not dispute the results of that study; in fact

it was utilized in the reported results, and indeed the

percentages quoted by Plaintiffs fall within the ranges

reported on page 25. Plaintiffs allege that they have not

seen these other studies (referred to in the Prospectus), so

they cannot be assured that they are not misleading.

Furthermore, at oral argument Plaintiffs’ counsel admitted

that it was "very possible” that Defendants are "right"

about these figures, but this could not be confirmed because

he had not reviewed the studies. This claim raises the

specter of the “fishing expeditions" that federal securities

law reform is struggling to curtail. If this argument were

to suffice, any statement in a Prospectus, however well

supported, could form the basis of a claim allowing Plain-

tiffs full discovery to see if they could find any bases for

support of the allegation of misstatement or falsity.

Plaintiffs’ repeated invocation of the "burden" of the stay on

discovery under the PSLRA obfuscates the issue presented;

in any cause of action, where Plaintiff has merely a suspi-

cion (or less) that it may have a basis for a claim, it is

Plaintiffs obligation to investigate prior to bringing a

claim, so that it can meet the requirements of Rule 8 and

survive a Rule 12(bX6) motion.

App. 44

b. Safety

The Prospectus states that Niaspan is "patient-friendly”

and that "[o]f all patients treated with Niaspan in the

pivotal and long-term safety trials, only four patients with

norma! liver function tests at baseline showed clinically

significant elevations in liver function tests (defined as

elevations greater than three times the upper limit of

normal) during treatment with Niaspan.” 4] 49,50. This

claim relates to the following section of the Prospectus that

includes a discussion of the adverse side effects associated

with niacin, primarily “flushing” and liver toxicity. It

further states that Niaspan's unique "controlled-release

nature” and nighttime-only dosing regimen "reduces the

intolerable side effects and frequent safety problems

characteristic of currently available niacin formulations."

At 24. It states:

No clinically significant serious adverse safety trends arose

during the clinical trials of Niaspan. Of all patients treated

with Niaspan in the pivotal and long-term safety trials,

only four patients with normal liver function tests at

baseline showed clinically significant elevations in liver

function tests (defined as elevations greater than three

times the upper limit of normal) during treatment with

Niaspan and only two patients treated with Niaspan

discontinued the drug because of elevations in liver func-

tion tests. Niaspan is generally well tolerated. Flushing

occurred, on average, less than two times per patient per

month, and such episodes subsided over time. The Com-

pany believes that such flushing episodes will be acceptable

to most patients when they do occur due to the combination

of Niaspan’s formulation, Niaspan'’s Once-A-Night™ dosing

regimen, and proper dose titration.

At 25.

Again, Plaintiff, without citation to facts or explanation,

baldly asserts that Kos misrepresented the industry

standard and that Niaspan elevated liver toxicity to an

App. 45

intolerable and unsafe level. 951. In addition to failing to

provide any support or authority for these assertions,

Plaintiff does not even state what the industry standard is

or what a "clinically significant" level would be. The

insufficiency of this claim was reflected in Plaintiffs

argument on this claim, in which they added nothing to

flesh out the cursory treatment given to this claim in the

Complaint; Plaintiffs stated only that they "charge" this

level was "too high" and that Defendants committed a

material omission by not telling investors that it was.

In addition, Plaintiffs put forth an argument that the

alleged misrepresentations of the safety of Niaspan relate

to “flushing” episodes, a side effect of niacin treatment

described as characterized primarily by facial redness and

tingling, often accompanied by rash. These allegations

were not included in the Complaint; in the interests of

fairness, the Court will consider these as an attempt to

amend the claim of misrepresentation to add a claim that

material misrepresentations were made about “flushing”

and tolerability of Niaspan. For the same reasons that the

liver toxicity claim is a wholly unsupported, unexplained

and conclusory allegation that is legally insufficient when

viewed in the context of the entirety of the Prospectus, the

claim relating to flushing does not state a claim under

Section 11.

c. Dosage Tolerability

Plaintiffs state that "[clontrary to defendants’ represen-

tation, there never was any market for Niaspan and

defendants knew that Niaspan was not a commercially

viable product." 461. Although not specifically cited in

the Complaint, the relevant section of the Prospectus

states:

Niaspan is the first once-a-day formulation of niacin

approved by the FDA for the treatment of mixed lipid

App. 46

disorders... In addition, Niaspan is the only

patient-friendly lipid-altering product that moves all

of the major lipid components in the proper direction.

Niaspan had been approved for the following indica-

tions: (i) to reduce elevated total cholesterol,

low-density lipoprotein ("LDL") cholesterol, and

apoliprotein B; (ii) to reduce elevated total and LDL

cholestero! when used in combination with a bile-acid

binding resin; (iii) to reduce elevated serum triglycer-

ides; (iv) to reduce the risk of recurrent nonfatal

myocardial infarction; (v) to promote the regression

or slow the progression of atherosclerosis when used

in combination with a bile-acid binding resin.

At 3.

More specifically the Prospectus states that percentage

changes from baseline, quoted above in the discussion of

ability to "move lipids in the right directions,” are based on

"intent-to-treat population at 2,000 mg Once-A-NightTM."

At 25. In explaining the three-week starter packs, the

Prospectus explains that the sample packs will consist of

increasing tablet dosage strengths for the first three weeks

of titration therapy; at the end of the three-week phase, the

initial prescription will consist of a 1000 mg dose for the

next four weeks; then based on physicians’ recommenda-

tions, patients are expected to titrate to higher dosages of

up to 2000 mg per day based on therapeutic response and

tolerability. At 26.

Plaintiffs assert that even assuming that the claimed

medical effectiveness was in any way true, the 2000 mg per

day dose upon which the results are based could be toler-

ated by only a “tiny fraction" of the market and that the

studies using a 2000 mg dose were "rigged" to include only

those individuals who had an unusually high tolerance.

4 63. Further, Plaintiffs state that at a lower dose of 1000

mg daily, Niaspan is virtually ineffective, reducing total

cholesterol only 4%. { 64.

App. 47

While we agree with Plaintiffs that FDA approval does

not preclude a plaintiff from bringing a claim, cf. Goodlin v.

Medtronic, Inc., No. 97-5801, 1999 WL 77205 (11th Cir.

Feb. 18, 1999), conclusory allegations alone will not survive

a motion to dismiss. See Glassman v. Computervision

Corp., 90 F.3d 617, 629 (1st Cir. 1996) (noting it is "plain-

tiffs responsibility to plead factual allegations, not

hypotheticals" that are sufficient to reasonably allow the

inference of actions violative of federal securities law).

Plaintiffs do not dispute that Niaspan is approved by the

FDA for the treatment of mixed lipid disorders. Compl.,

{ 39. They offer no specific reasons why the language of the

Prospectus that sets forth the regulatory approval process

that includes extensive clinical trials and investigation

should be discounted. Nor do they present any reasons why

the clinical results included in the FDA-approved, pub-

licly-available package insert are questionable. No basis or

explanation for these claims is stated in the Complaint; at

argument, Plaintiffs’ only explanation offered was that

there has to be some reason that "why physicians don't

prescribe it." Plaintiffs ask the Court to infer from facts not

presented that individuals cannot tolerate the dosage that

was approved for use in the trials, that the Prospectus and

the underlying studies openly relied on a dosage that

cannot in actuality be tolerated by patients, and that the

studies were "rigged" to include only people with a prede-

termined unusually high tolerance for Niaspan. We find

that this is not legally permissible or sufficient.

2. Sales Claims

a. Misrepresentations

Plaintiffs claim that the Prospectus affirmatively misre-

presented sales volume figures by quoting revenue figures

of $1.5 million for the quarter ending September 30, 1997

that (1) were simply false, or (2) were accurate as to the

App. 48

amount of Niaspan "sold" but based on channel-filling, and

therefore was a material misrepresentation. The Prospec-

tus states that the Company began shipping to wholesalers

in mid-August 1997 and began detailing to physicians in

September 1997. As to Niaspan sales, it states that "[b]ased

on preliminary, unaudited financial information, the

Company estimates that during its fiscal quarter ended

September 30, 1997, it had revenues of approximately $1.5

million and it incurred a net loss that was significantly

higher than in previous quarters primarily due to increased

expenses in connection with the launch of Niaspan.” At 18.

On November 12, 1997, Kos filed a Form 10Q for the

quarter ending September 30, 1997, stating "the Company

recorded its initial product sales of $1.5 million” and issued

a press release that stated the same. 7 55, 56.

Plaintiffs allege that as of the date the Prospectus was

issued, actual Niaspan sales were "well below" $1.5 million

because these reported sales were sales resulting from

initial stocking (not from specific prescriptions filled) thus

were materially misleading, based on "direct marketing"

language in the Prospectus; for example, Plaintiffs cite to

the section entitled "Marketing Strategy,” which states that

"(t]he Company intends to market Niaspan directly to the

specialist physicians within the cardiovascular market."

q 58. In essence, Plaintiffs seem to argue that language in

the Prospectus led investors to believe that sales would be

reported only when prescriptions were filled. This section

also states that physicians will be given three-week sample

starter packs at no cost, and these will not be recognized as

prescriptions. At 26. Plaintiff relies on figures from the

Uhl Report stating that as of October 3, 1997, Kos had

filled only 562 prescriptions with $30 of revenue per

prescriptions and at that rate, "Niaspan would generate

approximately $1.186 million of annual revenue.” { 59.

Plaintiffs do not provide any support for the assertions that

the $1.5 million figure is an inaccurate reporting of sales to

App. 49

wholesalers. Kos’ financial statements and filings were

certified by Arthur Anderson LLP as in accordance with

generally accepted accounting principles (GAAP). At no

time have Kos' financials for the quarter ending September

31, 1997, or for any other time period, been restated.

b. Omissions

At oral argument, Plaintiffs further refined the sales

claim to now state a specific material omission claim.”!

Plaintiffs allege that at the time the Prospectus was

published and the Offering was held, Defendants knew the

early data on the low volume of prescription sales; when

this information was reported in the Uhl Report, the "truth"

about the commercial non-viability of Niaspan was dis-

closed. Therefore, Plaintiffs allege that there was a

material omission of information regarding actual prescrip-

tion sales of Niaspan in its first six weeks on the market

(the six weeks preceding the Offering) that Defendants

were required to include in the Prospectus to make the

reported preliminary revenue figures not misleading, but

did not include. We find that this claim is insufficient as a

matter of law because Plaintiffs have not stated a material

omission.

Information is "material" if there is a "substantial

likelihood that the disclosure of the omitted fact would have

been viewed as having significantly altered the ‘total mix’

of information made available." Basic v. Levinson, 485 U.S.

"1 The Complaint contains a boilerplate material omissions

language, but that was only at argument that Plaintiffs clearly

stated that not including prescription sales information in the

portions of the Prospectus that discussed sales volume amounted

to a material omission. In the interests of justice, the Court will

review the sufficiency of this essentially amended claim.

App. 50

224, 231-32 (1988) (citations omitted). In the securities law

context, "the mere fact that an investor might find informa-

tion interesting or desirable is not sufficient to satisfy the

materiality requirement." Cooperman v. Individual, Inc.,

171 F.3d at 49 (citing Milton v. Van Dorn Co., 961 F.2d 965,

969 (1st Cir. 1992)). The question of the "materiality" of an

omission is usually fact-specific and particularly appropri-

ate for jury determination. See In re Stac, 89 F.3d at 1405.

However, where "the adequacy of the disclosure or the

materiality of the statement is so obvious that reasonable

minds could not differ,” it is appropriate for the Court to

resolve these issues as a matter of law. See Fecht v. Price

Co., 70 F.3d 1078, 1080-81 (9th Cir. 1995), cert. denied, 517

U.S. 1136 (1996). Moreover, "where the relationship

between the nonpublic information that plaintiffs claim

should have been disclosed and the actual results or events

that the undisclosed information supposedly would have

been presaged will be so attenuated that the undisclosed

information may be deemed immaterial as a matter of law."

Shaw, 82 F.3d at 1211. Information is not by definition

material because it later is considered relevant to events

that negatively affect the company. Cf. Serabian uv.

Amoskeag Bank Shares, 24 F.3d 357, 367 (1st Cir. 1994)

(finding statements in securities fraud case non-actionable

under Rule 9(b) where claim was based on "the assumption

that the defendants must have known of the severity of

their problems earlier because conditions became so bad

later."). Lastly, although there is a strong affirmative duty

of disclosure in the context of public offerings, "it is clear

that an issuer of securities owes no absolute duty to

disclose all material information." Cooperman, 171 F.3d at

50-51 (further citing Backman v. Polaroid, 910 F.2d 10, 16

(1st Cir. 1999), for the proposition that although voluntary,

material disclosures must be "complete and accurate," that

"does not mean that by revealing one fact about a product,

one must reveal all others that, too, would be interesting

market-wise.").

App. 51

Considering the totality of the circumstances, Plaintiffs

have not sufficiently alleged a material omission in the

Complaint before us. We find that the materiality of this

information is highly questionable, if not absent, given the

context and preliminary nature of this data. First, it is

necessary to consider the Prospectus itself. Plaintiffs

cannot dispute that the Prospectus is replete with state-

ments about Niaspan's uncertainty of market acceptance

(by either physicians or patients), large number of competi-

tors and rapid pace of technological change and develop-

ment, as well as Kos' limited sales and market experience,

limited number of sales persons (fewer than competitors),

and limited resources necessary to promote Niaspan.

Prospectus at 6-12. The specific prescription sales figures

that may have been available at the time of the Offering

are not reported in the Prospectus. Defendants point out

that reporting such incomplete and potentially inaccurate

information is neither required nor prudent under Section

11.

Second, we note that the Report states that the revised

revenue estimates are based on projections from the eighth

week of prescription sales, the week ending October 31,

1997, which took place after the Offering. Ex. 4 at 2, Kos

Mem. ("According to IMS data, 708 new prescriptions

(NRx's) and 760 total prescriptions (TRx's) were filled for

Niaspan in the week ending October 31, the eighth week

data is available. At this rate of 760 TRx's per week,

Niaspan would generate approximately $1.186 million of

annual income."). As of the date of the Offering, only

six-and-a-half weeks of sales had transpired. Thus, the

relevant week for the analyst considered it reasonable to

rely on in making a projection had not even occurred when

the Prospectus was filed and the Offering held.

Third, if we were to assume that data from previous

weeks, though not relied on specifically in the Uhl Report,

also would have been material, the Uh! Report relies on

App. 52

data received from an independent source that monitors

such prescription sales. Plaintiffs have not indicated the

type of preliminary sales information that Defendants had,

but assuming for the purposes of this Motion that Defen-

dants had the IMS America data that Plaintiffs cite, it was

possible for Defendants to have data from only a limited

number of weeks. Given that the Report analyzing this

data was published November 12, 1997, eleven days after

the close of Week 8, it appears that however the informa-

tion would be received, there would be some delay as well

between the close of a sales week and the availability of

sales information that means less than six-and-a-half

weeks of data would have been available as of the Offering.

Plaintiffs argue that Defendants should have recognized

the trend of low prescription sales in earlier weeks and

immediately alerted investors by including preliminary

prescription sales information as soon as it was available to

Kos. Assuming for the purposes of this Motion that

Plaintiffs could adduce adequate evidence that the Defen-

dants were actually in possession of several weeks of

prescription information at the time of the Offering, such

conclusory allegations of materiality and duty to disclose

are not sufficient to state a claim. Compare Shaw, 82 F.3d

at 1194 (denying motion to dismiss where "the issuer is in

possession of nonpublic irformation indicating that the

quarter in progress at the time of the public offering will be

an extreme departure from the range of results which could

be anticipated based on currently available information and

past quarter performances). Defendants inclusion of

preliminary, unaudited September revenue figures in the

Prospectus does not necessarily create an obligation to

report all information that an investor might consider

relevant to considering those figures. See Cooperman, 171

F.3d at 51. To require Defendants to disclose the initial

prescription sales information simply because later pre-

scription sales information led to a revised rating, which

led to a stock drop, is to impose a materiality requirement

App. 53

and a duty to disclose, therefore liability, based on hind-

sight. Cf. Serabian v. Amoskeag Bank Shares, 24 F.3d at

367 (in securities fraud action, rejecting claim that because

eventual results were so negative, defendants must have

known of the serious nature of their problems early on).

We emphasize that the context of this Offering and this

company, as thoroughly explained in the Prospectus, is

crucial - this is a company advancing out of a develop-

ment-only stage into a marketing and sales stage for the

first time in September 1997; the company has never made

a profit and has amassed large deficits; the company admits

to having a small sales force and limited resources;

Niaspan, the sole product, is an unproven treatment, the

success of which hinges on patient and physician accep-

tance; initial product use will be based on three-week

samples that will not be recorded as prescriptions. Consid-

ering the entirety of the circumstances, we find that the

allegedly undisclosed information is sufficiently remote in

causation and in time from the ultimate events that

supposedly revealed the "truth" that as a matter of law

Plaintiffs do not state a claim.

B. Section 12(a)(2)

Plaintiffs claims under Section 11 (registration state-

ment) and Section 12(a)(2) (prospectus or oral communica-

tion) rely on the statements included in the Prospectus

indicated above. Because we have found that Plaintiffs has

not sufficiently alleged material misrepresentations or

omissions, under Section 12(a)(2), the claim must fail.2”

22 Because we dismiss this claim in its entirety, we do not need to

address the question of whether a claim can be stated against all

of the named Defendants as “sellers” under Section 12(a\2). See

Pinter v. Dahl, 486 U.S. 622 (1988).

App. 54

C. Section 15

Because the claims under Section 11 and Section 12(a)(2)

are dismissed, there is no basis for asserting a primary

violation under the 1933 Act. Therefore, the Section 15

claim based on "control person" liability is dismissed as

well.

IV. Analysis of Claims Alleging Violations of Section

10(b) and 20(a) of the Securities Exchange Act of

1934, and Rule 10b-5 - Counts IV and V

Based on same allegations underlying the 1933 Act

claims, Plaintiffs argue that Defendants violated Section

10(b) of the Securities Exchange Act, 15 U.S.C. § 78j(b)

{hereinafter "Section 10(b)"], and 17 C.F.R. § 240.10b-5

{hereinafter "Rule 10(b)-5"), by failing to disclose material

facts and making false statements in the medical claims

and sales claims made regarding Niaspan.

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

1. Applicable Legal Standards

Section 10(b) makes it unlawful for any person "[t]o use

or employ, in connection with the purchase or sale of any

security... any manipulative or deceptive devices or contriv-

ance in contravention of such rules and regulations as the

[SEC] may prescribe." 15 U.S.C. § 78j(b). Rule 10b-5

prohibits the making of any untrue statement of material

fact or the omission of a material fact that would render

statements made misleading in connection with the pur-

chase or sale of any security. See 17 C.F.R. § 240.10b-5. To

successfully state a securities fraud claim under Rule 10b-5,

a plaintiff must show the following: (1) a misstatement or

omission; (2) of a material fact; (3) made with scienter; (4)

on which the plaintiff relied; (5) that proximately caused

App. 55

his injury. See Ross v. Bank South, N.A., 885 F.2d 7 23, 728

(11th Cir. 1989) (en banc), cert. denied, 495 U.S. 905 (1990).

In order to survive a motion to dismiss, Plaintiffs’ claim

of fraud under Rule 10b-5 must also satisfy the require-

representation; the time and place of the statements or

omissions; who made the statements; the content of the

statement and the manner in which they misled the

plaintiffs; and what the defendant "obtained as a conse-

quence of the fraud." Brooks v. Blue Cross and Blue Shield

of Florida, Inc., Case No. 95-405-CIV-SM (S.D. Fla. 1995),

affd on other grounds, 116 F.3d 1364, 1369 (11th Cir.

1997).

Furthermore, the Private Securities Litigation Reform

Act of i995, Pub. L. No. 194-67, 109 Stat. 743, codified at

15 U.S.C. § 78u-4(b) (hereinafter "Reform Act"], estab-

lishes heightened pleadings requirements for certain

private securities actions. If these additional requirements

are not met, the Court shall dismiss the action. 15 U.S.C.

§ 78u-4(b)(3). Section 78u-4(b) imposes two requirements.

First, the plaintiff must specify each statement alleged

to have been misleading and the specific reason or reasons

why such statement is misleading. 15 U.S.C. § 78u-4(b)(1).23

*8 Section 78u-4(bX 1) states:

In any private action arising under this title in which the

plaintiff alleges that the defendant —

(A) made an untrue statement of a material fact; or

(B) omitted to state a material fact in order to make the

(continued...)

-

App. 56

This provision requires pleading with particularity all facts

upon which the plaintiff is basing the fraud allegation, thus

is even more specific than the Rule 9(b) standard. Malin,17

F. Supp. 2d at 1361. Second, the would-be plaintiff, for

each alleged misrepresentation, must indicate those specific

facts that give rise to a “strong inference” that Defendant

acted with scienter.

2. Analysis of Allegations on Section 10(b) and Rule 10(b)-5

Claims

Plaintiffs claim that Defendants made false and materi-

ally misleading statements and omissions in violation

Section 10(b) and Rule 10(b)-5.% In accordance with the

requirements for bringing a claim under Rule 10(b)-5,

Plaintiffs have alleged that Defendants made misstate-

ments and/or omissions of material fact, with scienter, in

connection with the purchase of securities, upon which

Plaintiff relied, and that --liance proximately caused

Plaintiff's injury. Plaintiff also maintain that they have

3 (continued)

statements made, in the light of the circumstances in

which they were made, not misleading;

the complaint shall 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 is made on information and belief, the complaint

shall state with particularity all facts on which that belief is

formed.

4 The statutory safe harbor for “soft” projections is not applicable

here because Plaintiffs’ allegations concern defendants’ liability

for “statements that misrepresent historical/hard or current

facts.” Gross v. Medaphis Corp., 977 F. Supp. 1463 (N.D. Ga.

1997).

App. 57

stated with particularity the circumstances constituting

fraud as required by Fed. R. Civ. P. 9(b). In short, Defen-

dants argue that this case should be dismissed for failure

to state a claim upon which relief can be granted on

numerous grounds including lack of misstatement or

omission, lack of facts giving rise to strong inference of

scienter, lack of facts on loss causation and reliance, lack of

particularity of fraudulent conduct. Because Plaintiffs’

claims failed based on the two grounds discussed below, we

do not find it necessary, and therefore decline, to address

the additional arguments.

In regard to the Section 11 claims, we held that Plain-

tiffs have not met the standard of stating a claim of mate-

rial misrepresentations where no element of scienter is

required to be pled. Accordingly, upon consideration of the

additional allegations regarding press releases and SEC

filings, it remains clear that the 1934 Act claims must fai]

because they do not state an actionable misstatement or

omission. Furthermore, the heightened pleading require-

ments of pleading with particularity facts giving rise to a

strong inference of scienter simply are not met on these

facts. Specifically, Defendants argue that the statements

made in the Prospectus, the July 29, 1997 press release,

and the SEC Form 10Q filing, are good faith representa-

tions of the knowledge Defendants possessed at the time

the statements were made. They further maintain that

they were not material misrepresentations, and remain

uncontradicted to this date. We find that Plaintiffs have

not pled sufficient facts giving rise to a strong inference of

recklessness or knowing misconduct in making the state-

ments that were made regarding either the medical claims

or the sales claims.

B. Section 20(a) Controlling Persons Liability

Section 20(a) of the Exchange Act provides that “every

person who, directly or indirectly, controls any person liable

App. 58

under any provision of this chapter or any rule or regula-

tion thereunder shall be liable jointly and severally with

and to the same extent as such controlled person.” Because

Plaintiffs’ Section 10(b) and Rule 10b-5 claims fail and the

substantive securities fraud claims are dismissed, the

motion to dismiss the Section 20(a) claims must be granted.

V. Pendent State Law Claims - Counts VI, VII, and

VIII

In light of the fact that no federal claims survive the

Motion to Dismiss, the Court declines to exercise jurisdic-

tion over the remaining Counts pled under state law.

VI. Dismissal of the Action with Prejudice

In dismissing this action in its entirety, we have found

that Plaintiffs claim is inadequate as a matter of law and

that, as pled, Plaintiffs can prove no set of facts in support

of their claims which would entitle them to relief. See

Conley v. Gibson, 355 U.S. 41, 45-46 (1957). Leave to

amend shall be granted, however, "when it appears that a

more carefully drafted complaint might state a claim upon

which relief could be granted." Friedlander v. Nims, 755

F.2d 810, 813 (11th Cir. 1985) (citing Conley, 355 U.S. 41).

The case shall be dismissed with prejudice, however, where

"the court determines that the allegation of other facts

consistent with the challenged pleading could not possibly

cure the deficiency." Plevy v. Haggerty, No. CV 97-9200,

1998 WL 951694 (C.D. Cal. Aug. 21, 1998) (dismissing

securities fraud sui. with prejudice); Glassman uv.

Computervision Corp., 90 F.3d 617, 623 (1st Cir. 1996)

(holding that where no amendment would state a claim,

dismissal may be granted with prejudice); Rhodes v. Omega

Research, Inc., No. 98-0174-CIV-LENARD, 1999 WL

115488, *9 (S.D. Fla. Mar. 1, 999) (dismissing with preju-

Le ee ne ee

App. 59

dice claims that are "futile" and could not be repled to state

a cause of action under Section 11 or 12).

In this case, we find that the deficiencies in Plaintiffs’

claims cannot be cured. As to the medical claims, Plaintiffs

presented only conclusory allegations of misrepresenta-

tions, did not challenge or contradict any of the

FDA-approved studies or cited results, and indicated that

they would not be able to provide any more specific allega-

tions without the Court lifting the discovery stay to provide

access to Defendants documents and files. In pleading and

arguing the sales claims, Plaintiffs do not refute the

quarterly revenues reported in the Prospectus, the press

releases, and in public SEC filings that provided the basis

of the misrepresentation claim. In bringing the claim that

the prescription sales information was a materia] omission,

Plaintiffs argue only that this interim interna] information

was necessary to understand the above revenue figures that

have never been restated. As stated above, we find that no

reasonable investor could have been misled based on these

alleged misrepresentations and omissions, and thus the

claims must be dismissed. In light of the facts that Plain-

tiffs initially filed this action in August 1998; that Plaintiffs -

have had notice of the possibility of dismissal of this action

since the motions to dismiss were filed in January 1999;

and that Plaintiffs counsel has indicated that there is no

further information that could be gathered to further

specify the allegations of this Complaint, the Complaint is

hereby dismissed with prejudice.

VII. Conclusion

For the reasons stated above, it is hereby ORDERED

AND ADJUDGED that the Kos Defendants’ Motion to

Dismiss (DE#5) and the Underwriter's Motion to Dismiss

(DE#18) are GRANTED. This Case is DISMISSED WITH

PREJUDICE.

App. 60

It is further ORDERED AND ADJUDGED that this

Case is CLOSED and all pending Motions are DENIED AS

MOOT.

DONE AND ORDERED in Chambers at Miami, Florida

this 19th day of May, 1999.

/s/

DONALD M. MIDDLEBROOKS

UNITED STATES DISTRICT JUDGE

Copies Provided:

Arthur Sussman, Esq.

Atlee Wampler, Esq.

Tracy Nichols, Esq.

Robert Kriss, Esq.

- Gerald Houlihan, Esq.

|

App. 61

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF FLORIDA

MIAMI DIVISION

OXFORD ASSET )

MANAGEMENT, et al. )

)

) No. 98-2972

v. )

) [Filed Jan 31, 1999]

)

KOS PHARMACEUTICALS, _ )

et al., )

E ION TIONS

This Cause came before the Court_upon the Kos Defen-

dants' Motion for Entry of Final J udgment, for Mandatory

Review under the Reform Act and for the Imposition of

Sanctions, filed July 6, 1999 (DE#51), and the Underwriter

Defendants’ Motion for Mandatory Review Under the

Reform Act and for the Imposition of Sanctions, filed J uly

16, 1999 (DE#54). In this Order, the Court addresses

Defendants request that the Court review the record, as

mandated by the Private Securities Litigation Reform Act

(“the PSLRA"), 15 U.S.C. § 77z-1(c)\(1) (the Securities Act of

1993) and 15 U.S.C. § 78u-4(c)(1) (the Securities Exchange

Act of 1934)’, to determine whether Plaintiffs are subject to

' The PSLRA places significant limitations and requirements on

private actions brought under the Securities Act of 1933 and the

Securities Exchange Act of 1934. See Martha L. Cochran, Over-

view and Summary of the Private Securities Litigation Reform Act,

PRAC. L. INST., Feb.-Mar. 1996, at 11. The Court cites provisions

(continued...)

App. 62

sanctions under Federal Rule of Civil Procedure 11(b). In

ruling upon this Motion the Court has reviewed the file,

including the following pleadings, and is otherwise fully

informed in the premises: Plaintiffs’ Complaint, trans-

ferred from the Northern District of Illinois; Defendants’

above-referenced motions for review and for sanctions

under the PSLRA; Plaintiffs’ Response to Motions for

Sanctions (DE#6)); the Kos Defendants’ Reply (DE#65); and

the Underwriter Defendants’ Reply (DE#66).

I. Background

Plaintiffs brought a securities class action on behalf of

those individuals who purchase Kos stock between July 29,

1997 and November 13, 1997, including those individuals

who purchased common stock in a secondary public offering

on October 24, 1997, as well as those who purchased

common stock on the open market during the class period.

Plaintiffs stated claims under §§ 11, 12(a)(2), and 15 of the

Securities Act of 1993, 15 U.S.C.§§ 77k, 771(a)(2), and 770,

and §§ 10(b) and 20(a) of the Exchange Act of 1934, 15

U.S.C. §§ 78} and 78t(a) and Rule 10b-5 promulgated

thereunder, 17 C.F.R. § 240-10b-5, as well as common law

fraud and negligent misrepresentation. As Defendants,

Plaintiffs named Kos, its individual officers and directors at

the time of the secondary offering, and the investment

banking firms that underwrote the secondary offer.

The parties break Plaintiffs’ claims down into two catego-

ries: claims arising from omissions and/or misstatements

1 (...continued)

of both Acts in recognition that Plaintiffs raised claims under

both Acts

ee

App. 63

related to the sales volume of N iaspan’ ("sales claims"); and

claims arising from misstatements and/or omissions related

to Niaspan's safety and efficacy ("medical claims").

In support of their sales claims, Plaintiffs contended that

at the time of the secondary offering, Defendants knew that

Niaspan's sales in the first seven weeks after its introduc-

tion were dismal and far below the sales expectations that

supported the secondary offering price, yet omitted this

_information from the prospectus ("the Prospectus") and

registration statement it filed with the Securities and

Exchange Commission, thereby misleading the investing

public.* Plaintiffs also maintained that Kos misrepresented

the sales volume for N iaspan in the Prospectus by reporting

sales of $1.5 million worth of N iaspan in the fiscal quarter

ended September 30, 1997. The $1.5 million was the value

of Niaspan that Kos shipped to wholesalers. According to

Plaintiffs, the most natural reading of the Prospectus would

lead one to conclude that the $1.5 million figure repre-

sented sales directly to physicians, which only generated

$16,860 of revenue for the quarter ended September 30,

1997.

Plaintiffs’ medical claims contended that Niaspan was not

as safe or effective as Defendants represented in the

Prospectus. Specifically, Plaintiffs alleged that Niaspan

could not increase high density lipoprotein cholesterol by

the amounts claimed in the Prospectus and that when

? Niaspan is an FDA-approved drug for the treatment of “mixed

lipid disorders” and the only product Kos had on the market

during the relevant period.

* As the Court pointed out in the order dismissing this case,

Plaintiffs did not clearly raise this theory until oral argument.

Nonetheless, we considered the theory as an “essentially amended

claim” in examining the sufficiency of the Complaint. Order at 21

n.21.

App. 64

taken in the dosage required for it to be effective, Niaspan

was “intolerable.” Plaintiffs also claimed that Kos "skewed"

its clinical trials by selecting a population that was prede-

termined to have an unrepresentatively high tolerance to

Niaspan.

By order entitled Order Granting Motion to Dismiss ("the

Order"), dated May 19, 1999, the Court granted Defendants’

Motions to Dismiss Plaintiffs’ Complaint (DE#44). The

instant motions for sanctions followed.

II. Rule 11 sanctions under the PSLRA

Congress enacted the PSLRA to curtail abusive securities

litigation, whereby plaintiffs bring meritless claims, hoping

to initiate discovery that might uncover evidence that was

not alleged in the complaint. See Smith v. Smith, 184

F.R.D. 420, 422 (S.D. Fla. 1998). To that end, the PSLRA

has stringent pleading requirements, requiring particular-

ized facts to substantiate allegations, and imposes an

automatic stay of discovery while courts determine the

legal sufficiency of complaints. See 15 U.S.C. § 78u-4(b)(1),;

15 U.S.C § 78u-4(bX(3)(B), 15 U.S.C. § 77z-1(b)(1).

In addition, as a further check on meritless securities

claims, upon final adjudication of any action arising under

federal securities law, the PSLRA mandates that "the court

shall include in the record specific findings regarding

compliance by each party and each attorney representing

any party with each requirement of Rule 11(b) of the

Federal Rules of Civil Procedure as to any complaint,

responsive pleading, or dispositive motion." 15 U.S.C. §

77z-1(c(1); 15 U.S.C. § 78u-4(c)(1). Should a court find a

violation of Rule 11(b) pursuant to paragraph (1), "the court

shall impose sanctions on such party or attorney in accor-

dance with Rule 11 of the Federal Rules of Civil Procedure."

15 U.S.C. § 77z-1(cX(2); 15 U.S.C. § 78u-4(c)(2). "[FJor sub-

stantial failure of any complaint to comply with any

App. 65

requirement of Rule 11(b) of the Federal Rules of Civil

Procedure" the court shal] adopt a presumption that the

appropriaic sanction "is an award to the opposing party

of the reasonable attorneys’ fees and other expenses in-

curred in the action.” 15 U.S.C. § 77z-1(c3)ii); 15 U.S.C.

§ 78u-4(c)(3)(ii).

Rule 11 sanctions are proper "(1) when a party files a

pleading that has no reasonable factual basis; (2) when the

party files a pleading that is based on a legal theory that

has no reasonable chance of success and that cannot be

advanced as a reasonable argument to change existing law;

or (3) when the party files a pleading in bad faith for an

improper purpose."* Worldwide Primates, Inc. McGreal, 87

* Rule 11(b) of the Federal Rules of Civil Procedure provides, in

- pertinent part, as follows

By presenting to the court (whether by signing, filing,

submitting, or later advocating) a pleading, written motion,

or other paper, an attorney or unrepresented party is certify-

ing that to the best of the person’s knowledge, information,

and belief, formed after an inquiry reasonable under the

circumstances,—

(1) it is not being presented for any improper purpose,

such as to harass or to cause unnecessary delay or

needless increase in the cost of litigation;

(2) the claims, defenses, and other legal contentions

therein are warranted by existing law or by a

nonfrivolous argument for the extension, modification, or

reversal of existing law or the establishment of new law;

(3) the allegations and other factual contentions have

evidentiary support or, if specifically so identified, are

likely to have evidentiary support after a reasonable

opportunity for further investigation or discovery ....

If a court determined that subdivision (b) has been violated, the

court may, subject to the conditions stated below, impose an

appropriate sanction upon the attorneys, law firms, or parties that

(continued...)

EE ee

App. 66

F.3d 1252, 1254 (11th Cir. 1996) (quoting Jones v. Interna-

tional Riding Helmets, Ltd., 49 F.3d 692, 694 (11th Cir.

1995)). Under Eleventh Circuit law, a court confronted

with a Rule 11 motion for sanctions "first determines

whether the non-movant's claims are objectively frivolous

- in view of the facts or law - and then, if they are, whether

the person who signed the pleadings should have been

aware that they were frivolous; that is, whether he would

have been aware had he made a reasonable inquiry."

Worldwide Primates, 87 F.3d at 1254; see also Baker v.

Alderman, 158 F.2d 516, 524 (11th Cir. 1998). Where there

is no direct evidence available and ask, objectively, whether

an ordinary person standing in the party's or counsel's

shoes would have prosecuted the claim. See Pelletier v.

Zweifel, 921 F.2d 1465, 1515 (11th Cir. 1991). Rule 11

sanctions are reserved for only exceptional circumstances.

See Mary Ann Pensiero, Inc. v. Lingle, 847 F.2d 90, 99 (3rd

Cir. 1988).

The PSLRA does specifically require courts to conduct a

Rule 11 inquiry in the securities litigation context, but it

"does not in any way purport to alter the substantive

standards for finding a violation of Rule 11." Simon

DeBartolo Group, L.P. v. Richard E. Jacobs Group, Inc.,

186 F.2d 157, 167 (2d Cir. 1999). It functions “merely to

reduce courts’ discretion in choosing whether to conduct the

Rule 11 inquiry at all and whether and how to sanction a

party once a violation is found." Jd.

Ill. Analysis —

The Court agrees with Plaintiffs that they are not subject

to Rule 11 sanctions simply because their claims were

* (...continued)

have violated subdivision (b) or are responsible for the violation.

Fed. R. Civ. P. 11(c).

App. 67

dismissed. See, e.g., Brubaker v. City of Richmond, 943

F.2d 1363, 1367 (4th Cir. 1991). The Court also agrees with

Plaintiffs that sanctions are not warranted in this case on

the grounds that Plaintiffs proffered frivolous legal argu-

ments, unwarranted by existing law. See, e.g., Fecht v.

Price Co., 70 F.3d 1078, 1080 (9th Cir. 1995) (overturning

dismissal of securities claims that alleged material omis-

sion and misleading statements). Moreover, the Court is

satisfied that, for the most part, Plaintiffs conducted a

thorough investigation before filing their claims. Instead,

the Court finds that Plaintiffs are subject to Rule 11

sanctions because their allegations and other factual

contentions were without evidentiary support and because

evidentiary support was unlikely to be turned up by further

investigation or discovery. See Fed. R. Civ. P. 11(b)(3). In

short based on the evidence uncovered by their investiga-

tion, Plaintiffs should not have commenced this action.°®

Plaintiffs point out in their responsive pleading that Rule

11 sanctions are not warranted based on the fact that a

complaint was vague or conclusory. Plaintiffs’ Resp. to

Mots. for Sanctns., p. 16 (citing Simpson v. Welch, 900 F.2d

33, 35 (4th Cir. 1990). They also point out that Rule 11

sanctions are not appropriate where a plaintiffs evidence

is merely weak. Id. (citing Alderman, 158 F.3d at 524;

Davis v. Carl, 906 F.2d 533, 537 (11th Cir. 1990)). These

cases, however, stand for the limited proposition that

sanctions do not automatically follow where these short-

comings are apparent in the complaint. Sanctions are still

° That Plaintiffs consulted experts who supported Plaintiffs’

claims does not shield Plaintiffs from sanctions, for the Court is

not sanctioning Plaintiffs for relying on the conclusions of their

experts. Rather, the Court sanctions Plaintiffs for making the

legal determination that what evidence Plaintiffs gleaned from

the experts and other investigation provided a factually sufficient

basis for filing this lawsuit.

App. 68

appropriate where such complaints are not well grounded

in fact. See Welch, 900 F.2d at 36 ("Even a vague and

conclusory complaint may be ‘well grounded in fact and. .

. warranted by existing law or a good faith argument for the

extension, modification, or reversal of existing law.");

Alderman, 158 F.3d at 524 ("Although sanctions are

warranted when the claimant exhibits a ‘deliberate indiffer-

ence to obvious facts,’ they are not warranted when the

claimant's evidence is merely weak but appears sufficient,

after a reasonable inquiry, to support a claim under

existing law.") In bringing their claims, Plaintiffs demon-

strated a deliberate indifference to their lack of factual

support.

For the reasons set forth below, the Court finds that in

view of the facts presented in Plaintiffs’ Complaint and at

oral argument on Defendants’ motions to dismiss, Plaintiffs’

claims were objectively frivolous and counsel for Plaintiffs

should have been aware when signing off on the Complaint

that it was factually deficient.®

1. Medical claims

Plaintiffs alleged that Defendants made misrepresenta-

tions as to Niaspan's effectiveness, safety, and dosage

tolerability.

§ The Court reviews Plaintiffs’ claims separately in recognition

that under the PSLRA Defendants can only recover attorneys’ fees

and costs—the presumptive sanction under the PSLRA— incurred

litigating frivolous claims. If, for example, the Court only deems

one of the claims sanctionable, Defendant cannot recover the fees

and costs incurred litigating the entire action. See Simon

DeBartolo, 186 F.3d, at 178; Inter-County Resources, Inc. v.

Medical Resources, Inc., 49 F. Supp.2d 682, 683 (S.D.N.Y. 1999).

App. 69

a. Effectiveness

Plaintiffs allege that Kos misrepresented the extent to

which Niaspan could "move" lipid measures in the "right

direction" by contrasting the Prospectus with a July 1997

the PSLRA was designed to curtail.

b. Safety

times the upper limit of normal) during treatment with

Niaspan." Cmplt. at 1 50. Plaintiffs contended that the

above statement "misrepresented the industry standard as

to what constitutes tolerable and safe levels of liver toxic-

ity." Id. at 51. In contrast to Kos's claim in the Prospec-

tus, Plaintiffs alleged that "Niaspan use elevated liver

toxicity to an intolerable and unsafe level." Jd. As the

Court pointed out in dismissing this claim, Plaintiffs cited

App. 70

no facts and provided no explanation for this assertion.

Order at 17. "In addition to failing to provide any support

or authority for these assertions, Plaintiff does not even

state what the industry standard is or what a ‘clinica!ly

significant’ level would be." Jd.

Plaintiffs also claimed that Kos made misrepresentations

about “flushing episodes,” a side effect of niacin treatment.

The Court considered this claim in ruling on the motion to

dismiss even though the allegation was not part of the

Complaint, finding that it was "a wholly unsupported,

unexplained and conclusory allegation that is legally

insufficient when viewed in the entirety of the Prospectus."

Id. at p. 18.

As the above demonstrates, the safety claims were not

well grounded in fact.

c. Dosage intolerability

Plaintiffs claimed that the dosages at which Niaspan

would have to be ingested to be effective were intolerable to

most of the market and that studies in which such levels

were used were “rigged” to include only those individuals

who had an unusually high tolerance. Cmplt. at { 63.

In dismissing this claim, the Court found it to be a

conclusory allegation. it was also devoid of factual support,

as the Order points out:

Plaintiffs do not dispute that Niaspan is approved by the

FDA for the treatment of mixed lipid disorders. They

offer no specific reasons why the language of the Pro-

spectus that sets forth the regulatory approval process

that includes extensive clinical trials and investigation

should be discounted. Nor do they present any reasons

why the clinical results included in the FDA-approved,

publicly-available package insert are questionable. No

App. 71

basis or explanation for these claims is stated in the

Complaint; at (oral] argument [on the motion to dis-

miss], Plaintiffs’ only explanation offered was that there

has to be some reason that (sic) why physicians don't

prescribe it.

Order at 19. The Court refused to infer the sufficiency of

these claims "from facts not presented.” Jd.

2. Sales claims

a. Misrepresentations

opinion, the “direct market" language in the Prospectus

suggested the figure referred to direct sales to physicians.

Cmplt. at 4 58.

Plaintiffs provided no evidence that $1.5 million falsely

reflected wholesale sales. As concerns their claim that the

figure was misleading, Plaintiffs provided no evidence other

than to characterize the sales to wholesalers as “filling the

pipeline," which it claimed was contrary to the Prospectus's

representation that Kos intended to market Niaspan

directly to physicians. Jd. The very portion of the Prospec-

tus Plaintiffs quoted, however, demonstrates that this

claim, too, was not well grounded in fact: just a few lines

above where the Prospectus estimates sales for the quarter

ended September 30, 1997 at $1.5 million, it states that

"[t]he company began shipping Niaspan to wholesalers in

mid-August 1997, and it began detailing Niaspan to

physicians in September 1997." Id. at 754. As the "Mar-

keting Strategy for Niaspan" section of the Prospectus

indicates, Kos's "detailing effort” involved giving physicians

ee nner enan sec SUNT et Oe

App. 72

free samples of Niaspan in the form of three-week titration

starter packs. Prospectus at 25 - 26. Obviously, these

giveaways would not be represented in the company's sales

figures. Even if “detailing” more generally describes direct

sales to physicians, it would have been obvious upon

reasonable investigation that if the free samples covered

three weeks and if detailing did not begin until September

1997, there would not likely have been $1.5 million in direct

sales to physicians for the period ended September 30,

1997.

b. Omissions

As the Court pointed out in the Order, Plaintiffs’ claim

that Defendants violated the securities laws by omitting

from the Prospectus information regarding prescription

sales of Niaspan in its first six weeks on the market was

essentially an amended claim. Order at 21 n.21. The

Complaint merely contains "boilerplate material omissions

language." Id. Only at oral argument on Defendants’

motions to dismiss did Plaintiffs refer to the absence of

early prescription sales information. Accordingly, it is clear

to the Court that this claim, only subsequently flushed out,

was not well grounded in fact.’

7 Just because, “in the interests of justice,” the Court decided to

entertain this “essentially amended claim” in ruling upon the

motions to dismiss, does not mean that the Court has to read

Plaintiffs’ presentation at oral argument into the Complaint when

judging whether Plaintiffs’ claims were well grounded in fact.

Order at 21 n.21.

App. 73

IV. Conclusion

records.

DONE AND ORDERED in Chambers at Miami, Florida

this 31st day of January 2000.

/s/

DONALD M. MIDDLEBROOKS

UNITED STATES DISTRICT JUDGE

Copies provided to counsel of record

App. 74

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF FLORIDA

MIAMI DIVISION

OXFORD ASSET

MANAGEMENT, et al., ;

No. 98-2972

[Filed May 22, 2000]

KOS PHARMACEUTICALS,

et al.,

wee Oe ie ae ae ae SS lh”

ORDER ON MOTION FOR FEES AND COSTS

By order dated January 31, 2000, the Court granted

Defendants’ (“the Kos Defendants” and “the Underwriter

Defendants”) motions for attorneys’ fees and expenses

under the Private Securities Litigation Reform Act and

Fed.R.Civ.P. 11. DE#69. Finding insufficient documenta-

tion to award a specific amount at that time, the Court

directed Defendants to submit billing and expense records

and any other materials verifying the amounts claimed.

Presently before the Court are Defendants’ responsive

submissions, as well as Plaintiffs’ objections thereto and

Defendants’ replies. The Court has reviewed these materi-

als and is otherwise fully informed in the premises.

1. Attorneys’ fees

Courts determining attorney's fee awards begin by

determining the “lodestar”: the product of the number of

App. 75

hours reasonably expended on the litigation and a reason-

able hourly rate for the attorney’s services. See Hensley v.

Eckerhart, 461 U.S.424, 433 (1983); American Civil Liber-

ties Union of Georgia v. Barnes, 168 F.3d 423, 427 (11" Cir.

1999); Loranger v. Stierheim, 10 F.3d 776, 781 (11 Cir.

1994). This lodestar may then be adjusted for the results

obtained. See Eckerhart, 461 U.S. at 435 - 37; Barnes, 168

; Norman v. Hous.

Auth. for the City of Montgomery, 836 F.2d 1292, 1302 (11%

Upon careful review of Defendants’ submissions and

Plaintiffs’ objections, the Court finds the hours expended

and the rates charged to be reasonable and thus adopts

Defendant-’ lodestar figures. Moreover, finding that

Defendants obtained excellent results, the Court does not

disrupt these figures. pan

Plaintiffs attack Defendants’ fee requests on several

grounds. First, Plaintiffs argue that entries submitted by

both groups of Defendants containing redactions should be

deleted as failing to meet Defendants’ burden of supporting

their petitions. See Norman, 836 F.2d at 1302 (indicating

that burden on fee applicant to establish entitlement and

document hours and rates). Many, if not all, of these entries

contain enough information for the Court to determine that

the hours were reasonably expended. Surrounding entries

demonstrate that the time claimed in these entries was

spent on this matter, either performing legal research or

discussing the case with unidentified individuals. Second,

Plaintiffs generally maintain the fees sought are not

reasonable, considering that the case lasted only ten

months and was dismissed on a 12(b)(6) motion. In light of

the factual and legal complexities of this case, the Court

finds this argument unpersuasive. Also unpersuasive are

Plaintiffs’ assertions that Defendants attempt to recover for

unnecessary and duplicative work and failed to mitigate

App. 76

their fees and expenses. Plaintiffs fail to specify any hours

believed to be duplicative and their one example of unneces-

sary work was in response to Plaintiffs’ commencement of

this action. Plaintiffs’ mitigation argument is simply

without merit.

2. Expenses

Plaintiffs raise similar arguments in attacking Defen-

dants’ expenses. As above, this Court finds these argu-

ments unpersuasive and Defendants claimed expenses to be

reasonable.

3. Conclusion

For the foregoing reasons, the Court grants Defendants

the full relief sought: $335,686.55 in fees and expenses to

_ the Kos Defendants and $166,890.27 in fees and expenses

to the Underwriter Defendants. Finding commencement of

this action to constitute bad judgment on the part of both

Plaintiffs and their counsel, the sum of $502,576.82 shall

be split 50 - 50 between them, both incurring $251,288.41.

Having considered the Underwriter Defendants supplemen-

tal proof of fees and costs, their Motion to Permit Addi-

tional Proof of Fees and Costs (DE#79) is GRANTED.

DONE AND ORDERED in Chambers at Miami, Florida

this 22™ day of May 2000.

/s/

DONALD M. MIDDLEBROOKS

UNITED STATES DISTRICT JUDGE

Copies provided to counsel of record

App. 77

APPENDIX C: ELEVENTH CIRCUIT

REHEARING ORDER IN THE

UNITED STATES COURT

OF APPEALS FOR THE ELEVENTH CIRCUIT

No. 99-11690-FF

OXFORD ASSET MANAGEMENT, LTD,

é Plaintiff-Appellant,

Defendants-Appellees.

No. 00-13220-FF

~ OXFORD ASSET MANAGEMENT, LTD.,

LOWEY DANNENBERG & KNAPP, P.C.

PROFIT SHARING PLAN & TRUST

a.k.a. Lowey Dannenberg, Bemporad &

Selinger P.C. Profit Sharing Plan,

Plaintiffs-Appellants,

ARTHUR T. SUSMAN, CHARLES R. WATKINS,

ROBERT J. EMANUEL, SUSMAN & WATKINS,

Interested Parties —

Appellants,

v.

MICHAEL JAHARIS, DANIEL M. BELL,

DUNCAN COCROFT, JUAN F. RODRIGUEZ,

ROBERT E. BALDINI, et al.,

Defendants-Appellees.

App. 78

On Appeal from the United States District Court

for the Southern District of Florida

BEFORE: EDMONDSON, Chief Judge, FAY and

GARWOOD*, Circuit Judges.

PER CURIAM:

The Petition(s) for Rehearing are DENIED and no

Judge in regular active service on the Court having re-

quested that the Court be polled on rehearing en banc (Rule

35, Federal Rules of Appellate Procedure), the Petition(s)

for Rehearing En Banc are DENIED.

ENTERED FOR THE COURT:

/s/

CHIEF JUDGE

ORD-42

*Honorable William L. Garwood, U.S. Court of Appeals for

the Fifth Circuit, sitting by designation.

App. 79

APPENDIX D: TEXT OF RELEVANT STATUTES

AND RULES

UNITED STATES CODE ANNOTATED

TITLE 15. COMMERCE AND TRADE

Copr. © West Group 2003. No claim to Orig. U.S. Govt.

Works.

Current through P.L. 108-30, approved 05-29-03

77k. Civil liabilities on Cc f false registration

statement

(a) Persons possessing cause of action; persons liable

In case any part of the registration statement, when such

therein not misleading, any person acquiring such security

(unless it is proved that at the time of such acquisition he

knew of such untruth or omission) may, either at law or in

equity, in any court of competent jurisdiction, sue--

(1) every person who signed the registration statement;

(2) every person who was a director of (or person perform-

ing similar functions) or partner in the issuer at the time

of the filing of the part of the registration statement with

respect to which his liability is asserted;

(3) every person who, with his consent, is named in the

registration statement as being or about to become a

director, person performing similar functions, or partner;

(4) every accountant, engineer, or appraiser, or any person

whose profession gives authority to a statement made by

App. 80

him, who has with his consent been named as having

prepared or certified any part of the registration state-

ment, or as having prepared or certified any report or

valuation which is used in connection with the registration

statement, with respect to the statement in such registra-

tion statement, report, or valuation, which purports to

have been prepared or certified by him;

(5) every underwriter with respect to such security.

If such person acquired the security after the issuer has

made generally available to its security holders an earning

statement covering a period of at least twelve months

beginning after the effective date of the registration

statement, then the right of recovery under this subsection

shall be conditioned on proof that such person acquired

the security relying upon such untrue statement in the

registration statement or relying upon the registration

statement and not knowing of such omission, but such

reliance may be established without proof of the reading

of the registration statement by such person.

(b) Persons exempt from liability upon proof of issues

Notwithstanding the provisions of subsection (a) of this

section no person, other than the issuer, shall be liable as

provided therein who shall sustain the burden of proof--

(1) that before the effective date of the part of the registra-

tion statement with respect to which his liability is asserted

(A) he had resigned from or had taken such steps as are

permitted by law to resign from, or ceased or refused to act

in, every office, capacity, or relationship in which he was

described in the registration statement as acting or agree-

ing to act, and (B) he had advised the Commission and the

issuer in writing that he had taken such action and that he

would not be responsible for such part of the registration

statement; or ;

App. 81

(2) that if such part of the registration statement became

effective without his knowledge, upon becoming aware of

such fact he forthwith acted and advised the Commission,

in accordance with paragraph (1) of this subsection, and, in

addition, gave reasonable public notice that such part of the

registration statement had become effective without his

knowledge; or

report or valuation of an expert, and not purporting to be

made on the authority of a public official document or

statement, he had, after reasonable investigation, reason-

able ground to believe and did believe, at the time such part

of the registration statement became effective, that the

statements therein were true and that there was no

omission to state a material fact required to be stated

therein or necessary to make the statements therein not

misleading; and (B) as regards any part of the registration

statement purporting to be made upon his authority as an

expert or purporting to be a copy of or extract from a report

or valuation of himself as an expert, (i) he had, after

reasonable investigation, reasonable ground to believe and

did believe, at the time such part of the registration

statement became effective, that the statements therein

were true and that there was no omission to state a mate-

rial fact required to be stated therein or necessary to make

the statements therein not misleading, or (ii) such part of

the registration statement did not fairly represent his

statement as an expert or was not a fair copy of or extract

from his report or valuation as an expert; and (C) as

regards any part of the registration statement purporting

to be made on the authority of an expert (other than

himself) or purporting to be a copy of or extract from a

report or valuation of an expert (other than himself), he had

no reasonable ground to believe and did not believe, at the

App. 82

time such part of the registration statement became

effective, that the statements therein were untrue or that

there was an omission to state a material fact required to

be stated therein or necessary to make the statements

therein not misleading, or that such part of the registration

statement did not fairly represent the statement of the

expert or was not a fair copy of or extract from the report or

valuation of the expert; and (D) as regards any part of the

registration statement purporting to be a statement made

by an official person or purporting to be a copy of or extract

from a public official document, he had no reasonable

ground to believe and did not believe, at the time such part

of the registration statement became effective, that the

statements therein were untrue, or that there was an

omission to state a material fact required to be stated

therein or necessary to make the statements therein not

misleading, or that such part of the registration statement

did not fairly represent the statement made by the official

person or was not a fair copy of or extract from the public

official document.

(c) Standard of reasonableness

In determining, for the purpose of paragraph (3) of subsec-

tion (b) of this section, what constitutes reasonable investi-

gation and reasonable ground for belief, the standard of

reasonableness shall be that required of a prudent man in

the management of his own property.

(d) Effective date of registration statement with regard to

underwriters

If any person becomes an underwriter with respect to the

security after the part of the registration statement with

respect to which his liability is asserted has become

effective, then for the purposes of paragraph (3) of subsec-

tion (b) of this section such part of the registration state-

App. 83

ment shall be considered as having become effective with

respect to such person as of the time when he became an

underwriter.

(e) Measure of damages; undertaking for payment of costs

The suit authorized under subsection (a) of this section may

be to recover such damages as shall represent the differ-

security was offered to the public) and the value thereof as

(unless such underwriter shall have knowingly received

from the issuer for acting as an underwriter some benefit,

directly or indirectly, in which al] other underwriters

similarly situated did not share in proportion to their

respective interests in the underwriting) be liable in any

suit or as a consequence of suits authorized under subsec-

tion (a) of this section for damages in excess of the total

price at which the securities underwritten by him and

distributed to the public were offered to the public. In any

suit under this or any other section of this subchapter the

court may, in its discretion, require an undertaking for the

ALT Sy

5

¥

&

&

:

App. 84

payment of the costs of such suit, including reasonable

attorney’s fees, and if judgment shall be rendered against

a party litigant, upon the motion of the other party litigant,

such costs may be assessed in favor of such party litigant

(whether or not such undertaking has been required) if the

court believes the suit or the defense to have been without

merit, in an amount sufficient to reimburse him for the

reasonable expenses incurred by him, in connection with

such suit, such costs to be taxed in the manner usually

provided for taxing of costs in the court in which the suit

was heard.

(f) Joint and several liability; liability of outside director

(1) Except as provided in paragraph (2), all or any one or

more of the persons specified in subsection (a) of this

section shall be jointly and severally liable, and every

person who becomes liable to make any payment under

this section may recover contribution as in cases of

contract from any person who, if sued separately, would

have been liable to make the same payment, unless the

person who has become liable was, and the other was not,

guilty of fraudulent misrepresentation.

(2A) The liability of an outside director under subsec

tion (e) of this section shall be determined in accordance

with section 78u-4(f) of this title.

(B) For purposes of this paragraph, the term “outside

director” shall have the meaning given such term by rule

or regulation of the Commission.

(g) Offering price to public as maximum amount recover-

able

In no case shall the amount recoverable under this section

exceed the price at which the security was offered to the

public.

App. 85

UNITED STATES CODE ANNOTATED

TITLE 15. COMMERCE AND TRADE

CHAPTER 2A--SECURITIES AND TRUST

INDENTURES

SUBCHAPTER I--DOMESTIC SECURITIES

Copr. © West Group 2003. No claim to Orig. U.S. Govt.

Works.

Current through P.L. 108-30, approved 05-29-03

eS _arisir

(a) In general

i

Any person who--

(1) offers or sells a security in violation of section 77e of

this title, or

(2) offers or sells a security (whether or not exempted by

the provisions of section 77c of this title, other than

paragraphs (2) and (14) of subsection (a) of said section),

App. 86

upon the tender of such security, or for damages if he no

longer owns the security.

(b) Loss causation

In an action described in subsection (a)(2) of this section, if

the person who offered or sold such security proves that any

portion or all of the amount recoverable under subsection

(a)(2) of this section represents other than the depreciation

in value of the subject security resulting from such part of

the prospectus or oral communication, with respect to

which the liability of that person is asserted, not being true

or omitting to state a material fact required to be stated

therein or necessary to make the statement not misleading,

then such portion or amount, as the case may be, shall not

be recoverable.

App. 87

UNITED STATES CODE ANNOTATED

TITLE 15. COMMERCE AND TRADE

CHAPTER 2A--SECURITIES AND

TRUST INDENTURES

SUBCHAPTER I--DOMESTIC SECURITIES

Copr. © West Group 2003. No claim to Orig. U.S. Govt.

Works.

Current through P.L. 108-30, approved 05-29-03

§ 770. Liability of controlling persons

Every person who, by or through stock ownership, agency,

or otherwise, or who, pursuant to or in connection with an

agreement or understanding with one or more other

persons by or through stock ownership, agency, or other-

wise, controls any person liable under sections 77k or 77] of

this title, shall also be liable jointly and severally with and

to the same extent as such controlled person to any person

to whom such controlled person is liable, unless the control-

ling person had no knowledge of or reasonable ground to

believe in the existence of the facts by reason of which the

liability of the controlled person is alleged to exist.

App. 88

UNITED STATES CODE ANNOTATED

TITLE 15. COMMERCE AND TRADE

CHAPTER 2A--SECURITIES AND

TRUST INDENTURES

SUBCHAPTER I--DOMESTIC SECURITIES

Copr. © West Group 2003. No claim to Orig. U.S. Govt.

Works.

Current through P.L. 108-30, approved 05-29-03

77z-1. Priv ities litigation

(a) Private class actions

(1) In general

The provisions of this subsection shall apply to each

private action arising under this subchapter that is

brought as a plaintiff class action pursuant to the

Federal Rules of Civil Procedure.

(2) Certification filed with complaint

(A) In general

Each plaintiff seeking to serve as a representative

party on behalf of a class shall provide a sworn certifi-

cation, which shall be personally signed by such

plaintiff and filed with the complaint, that--

(i) states that the plaintiff has reviewed the com-

plaint and authorized its filing;

(ii) states that the plaintiff did not purchase the

security that is the subject of the complaint at the

direction of plaintiffs counsel or in order to partici-

pate in any private action arising under this

subchapter;

App. 89 nee =

(iii) states that the plaintiff is willing to serve as a

representative party on behalf of a class, including

providing testimony at deposition and trial, if neces-

Sary;

(iv) sets forth all of the transactions of the plaintiff in

the security that is the subject of the complaint

during the class period specified in the complaint;

(v) identifies any other action under this subchapter,

filed during the 3-year period preceding the date on

which the certification is signed by the plaintiff, in

which the plaintiff has sought to serve, or served, as

a representative party on behalf of a class; and

(vi) states that the plaintiff will not accept any

payment for serving as a representative party on

behalf of a class beyond the plaintiff's pro rata share

of any recovery, except as ordered or approved by the

court in accordance with paragraph (4).

(B) Nonwaiver of attorney-client privilege

The certification filed pursuant to subparagraph (A)

shall not be construed to be a waiver of the attor-

ney-client privilege.

(3) Appointment of lead plaintiff |

(A) Early notice to class members

(i) In general

Not later than 20 days after the date on which the

complaint is filed, the plaintiff or plaintiffs shall

cause to be published, in a widely circulated national

business-oriented publication or wire service, a

notice advising members of the purported plaintiff

class--

(I) of the pendency of the action, the claims as-

serted therein, and the purported class period; and

App. 90

(II) that, not later than 60 days after the date on

which the notice is published, any member of the

purported class may move the court to serve as

lead plaintiff of the purported class.

(ii) Multiple actions

If more than one action on behalf of a class asserting

substantially the same claim or claims arising under

this subchapter is filed, only the plaintiff or plaintiffs

in the first filed action shall be required to cause

notice to be published in accordance with clause (i).

(iii) Additional notices may be required under Fed-

eral Rules

Notice required under clause (i) shall be in addition

to any notice required pursuant to the Federal Rules

of Civil Procedure.

(B) Appointment of lead plaintiff

(i) In general

Not later than 90 days after the date on which a

notice is published under subparagraph (A)i), the

court shall consider any motion made by a purported

class member in response to the notice, including any

motion by a class member who is not individually

named as a plaintiff in the complaint or complaints,

and shall appoint as lead plaintiff the member or

members of the purported plaintiff class that the

court determines to be most capable of adequately

representing the interests of class members (hereaf-

ter in this paragraph referred to as the “most ade-

quate plaintiff”) in accordance with this subpara-

graph.

(ii) Consolidated actions

If more than one action on behalf of a class asserting

substantially the same claim or claims arising under

App. 91

dance with this subparagraph.

(iii) Rebuttable presumption

(I) In general

(aa) has either filed the complaint or made a

motion in response to a notice under subpara-

graph (A)i);

(bb) in the determination of the court, has the

largest financial interest in the relief sought by

the class; and

(cc) otherwise satisfies the requirements of Rule

23 of the Federal Rules of Civil Procedure.

(ID Rebuttal evidence

The presumption described in subclause (I) may be

rebutted only upon proof by a member of the

(aa) will not fairly and adequately protect the

interests of the class; or

App. 92

(bb) is subject to unique defenses that render

such plaintiff incapable of adequately represent-

ing the class.

(iv) Discovery

For purposes of this subparagraph, discovery relat-

ing to whether a member or members of the pur-

ported plaintiff class is the most adequate plaintiff

may be conducted by a plaintiff only if the plaintiff

first demonstrates a reasonable basis for a finding

- that the presumptively most adequate plaintiff is

incapable of adequately representing the class.

(v) Selection of lead counsel

The most adequate plaintiff shall, subject to the

approval of the court, select and retain counsel to

represent the class.

(vi) Restrictions on professional plaintiffs

Except as the court may otherwise permit, consistent

with the purposes of this section, a person may be a

lead plaintiff, or an officer, director, or fiduciary of a

lead plaintiff, in no more than 5 securities class

actions brought as plaintiff class actions pursuant to

the Federal Rules of Civil Procedure during any

3-year period.

(4) Recovery by plaintiffs

The share of any final judgment or of any settlement

that is awarded to a representative party serving on

behalf of a class shall be equal, on a per share basis, to

the portion of the final judgment or settlement awarded

to all other members of the class. Nothing in this para-

graph shall be construed to limit the award of reason-

able costs and expenses (including lost wages) directly

relating to the representation of the class to any repre-

sentative party serving on behalf of the class.

App. 93

(5) Restrictions on settlements under seal

The terms and provisions of any settlement agreement

of a class action shall not be filed under seal, except that

on motion of any party to the settlement, the court may

order filing under seal for those portions of a settlement

agreement as to which good cause is shown for such

filing under seal. For purposes of this paragraph, good

cause shall exist only if publication of a term or provi-

sion of a settlement agreement would cause direct and

substantial harm to any party. :

-(6) Restrictions on payment of attorneys’ fees and

expenses

Total attorneys’ fees and expenses awarded by the court

to counsel for the plaintiff class shall not exceed a

reasonable percentage of the amount of any damages

and prejudgment interest actually paid to the class.

(7) Disclosure of settlement terms to class members

Any proposed or final settlement agreement that is

published or otherwise disseminated to the class shall

include each of the following statements, along with a

cover page summarizing the information contained in

such statements:

(A) Statement of plaintiff recovery

The amount of the settlement proposed to be distrib-

uted to the parties to the action, determined in the

aggregate and on an average per share basis.

(B) Statement of potential outcome of case

(i) Agreement on amount of damages

If the settling parties agree on the average amount

of damages per share that would be recoverable if the

plaintiff prevailed on each claim alleged under this

App. 94

subchapter, a statement concerning the average

amount of such potential damages per share.

(ii) Disagreement on amount of damages

If the parties do not_agree on the average amount of

damages per share that would be recoverable if the

plaintiff prevailed on each claim alleged under this

subchapter, a statement from each settling party

concerning the issue or issues on which the parties

disagree.

(iii) Inadmissibility for certain purposes

A statement made in accordance with clause (i) or (ii)

concerning the amount of damages shall not be

admissible in any Federal or State judicial action or

administrative proceeding, other than an action or

proceeding arising out of such statement.

(C) Statement of attorneys’ fees or costs sought

If any of the settling parties or their counsel intend to

apply to the court for an award of attorneys’ fees or

costs from any fund established as part of the settle-

ment, a statement indicating which parties or counsel

intend to make such an application, the amount of fees

and costs that will be sought (including the amount of

such fees and costs determined on an average per

share basis), and a brief explanation supporting the

fees and costs sought.

(D) Identification of lawyers’ representatives

The name, telephone number, and address of one or

more representatives of counsel for the plaintiff class

who will be reasonably available to answer questions

from class members concerning any matter contained

in any notice of settlement published or otherwise

disseminated to the class.

App. 95

(E) Reasons for settlement

A brief statement explaining the reasons why the

parties are proposing the settlement.

(F) Other information

Such other information as may be required by the

court.

(8) Attorney conflict of interest

If a plaintiff class is represented by an attorney who

directly owns or otherwise has a beneficial interest in

the securities that are the subject of the litigation, the

court shall make a determination of whether such

ownership or other interest constitutes a conflict of

interest sufficient to disqualify the attorney from

~epresenting the plaintiff class.

(b) Stay of discovery; preservation of evidence

(1) In general |

In any private action arising under this subchapter, all

discovery and other proceedings shall be stayed during

the pendency of any motion to dismiss, unless the court

finds, upon the motion of any party, that particularized

discovery is necessary to preserve evidence or to prevent

undue prejudice to that party.

(2) Preservation of evidence

During the pendency of any stay of discovery pursuant

to this subsection, unless otherwise ordered by the court,

any party to the action with actual notice of the allega-

tions contained in the complaint shall treat all docu-

ments, data compilations (including electronically

recorded or stored data), and tangible objects that are in

the custody or control of such person and that are

App. 96

relevant to the allegations, as if they were the subject of

~ a continuing request for production of documents from

an opposing party under the Federal Rules of Civil

Procedure.

(3) Sanction for willful violation

A party aggrieved by the willful failure of an opposing

party to comply with paragraph (2) may apply to the

court for an order awarding appropriate sanctions.

(4) Circumvention of stay of discovery

Upon a proper showing, a court may stay discovery

proceedings in any private action in a State court as

necessary in aid of its jurisdiction, or to protect or

effectuate its judgments, in an action subject to a stay of

discovery pursuant to this subsection.

(c) Sanctions for abusive litigation

(1) Mandatory review by court

In any private action arising under this subchapter,

upon final adjudication of the action, the court shall

include in the record specific findings regarding compli-

ance by each party and each attorney representing any

party with each requirement of Rule 11(b) of the Federal

Rules of Civil Procedure as to any complaint, responsive

pleading, or dispositive motion.

(2) Mandatory sanctions

If the court makes a finding under paragraph (1) that a

party or attorney violated any requirement of Rule 11(b)

of the Federal Rules of Civil Procedure as to any com-

plaint, responsive pleading, or dispositive motion, the

court shall impose sanctions on such party or attorney in

accordance with Rule 11 of the Federal Rules of Civil

Procedure. Prior to making a finding that any party or

App. 97

attorney has violated Rule 11 of the Federal Rules of

Civil Procedure, the court shall give such party or

attorney notice and an opportunity to respond.

(3) Presumption in favor of attorneys’ fees and costs

(A) In general .

Subject to subparagraphs (B) and (C), for purposes of

paregraph (2), the court shall adopt a presumption

that the appropriate sanction--

(i) for failure of any responsive pleading or

dispositive motion to comply with any requirement of

Rule 11(b) of the Federal Rules of Civil Procedure is

an award to the opposing party of the reasonable

attorneys’ fees a

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