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Mar172018

Southern District of New York Dismisses Securities Fraud Claims Against Horizon Pharma

In Schaffer, et al. v. Horizon Pharma PLC, et al., No. 16-CV-1763 (JMF), 2018 BL 16225 (S.D.N.Y. Jan. 18, 2018), the Southern District of New York dismissed the claims brought by a class of plaintiffs (“Plaintiffs”) against Horizon Pharma PLC (“Horizon”), a number of Horizon’s executives (“Individual Defendants”), and various underwriters (Horizon, Individual Defendants and the underwriters, collectively “Defendants”). The complaint alleged Horizon and Individual Defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (“Exchange Act”) and Rule 10b-5 thereunder, and Defendants violated Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, as amended (“Securities Act”). The court held Plaintiffs’ complaint only gave conclusory statements and insufficient facts to establish securities fraud or scienter and dismissed the complaint.

The complaint alleged the Defendants made material misrepresentations and omissions that misled investors about the sustainability of Horizon’s “Prescription-Made-Easy” (“PME”) business plan, in addition to misstatements concealing improper business practices. The complaint also alleged the Individual Defendants had motive and the opportunity to deceive investors and inflate Horizon’s stock price, and they acted with conscious misbehavior and recklessness to the detriment of Horizon’s shareholders. Most notably, Plaintiffs’ claims center around Horizon’s alleged controlling relationship over PME pharmacies and the misrepresentation of this relationship to shareholders, along with alleged misrepresentation of sales results and company risk factors.

Section 10(b) and Rule 10b-5 of the Exchange Act requires plaintiffs to allege both a material misrepresentation or omission and the requisite scienter. The Private Securities Litigation Reform Act (“PSLRA”) requires plaintiffs to allege particular facts to support fraud and scienter. Under PSLRA, optimistic forward-looking statements, when accompanied by cautionary language, and absent false or misleading information, are not sufficient to establish fraud. To establish scienter, a plaintiff may allege facts (1) showing the defendant had motive and opportunity to commit fraud, or (2) constituting strong circumstantial evidence of conscious misbehavior or recklessness. Section 11 of the Securities Act prohibits material misrepresentations or omissions in registration statements, and Section 12(a)(2) prohibits the same in the sale of securities. The Securities Act claims do not require a showing of scienter. Finally, Section 20(a) of the Exchange Act and Section 15 of the Securities Act hold control persons liable for the fraud of the entities they control.

The court determined Plaintiffs did not allege particular facts to make their claim plausible, rather than conceivable. While the complaint alleged some relevant facts of a material misrepresentation or omission, Plaintiffs improperly relied on non-specific statements from PME pharmacy employees and facts regarding Horizon’s relationship with PME pharmacies. The court ruled the statements from pharmacy employees did not implicate Horizon because they were not directly related to Horizon’s business practices, only the operations of the individual pharmacies. Furthermore, the court stated the relationship between Horizon and the PME pharmacies was nothing more than a normal relationship between a supplier and vendor. Similarly, the court dismissed Plaintiffs’ argument that statements made by Individual Defendants were false or misleading. During earnings calls, Individual Defendants touted their “unique commercial business model” and potential for sales growth, while using opinionated or cautionary language about future profitability. The court ruled these statements were corporate puffery protected by the PSLRA. Further, the court held Plaintiffs failed to establish scienter because they did not allege Defendants received a concrete and personal benefit from the alleged misrepresentations, omissions, or improper business practices. Additionally, Plaintiffs failed to establish independently sufficient facts that would constitute strong circumstantial evidence of conscious misbehavior or recklessness. Finally, because Plaintiffs did not sufficiently allege underlying claims of the Exchange Act or Securities Act, the claims relating to control person liability also failed.

For the reasons stated above, the court dismissed Plaintiffs’ complaint for failure to state a claim.

The primary materials for this case may be found on the DU Corporate Governance website.

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