Freidman v. Endo International PLC: Plaintiff’s Third Amended Complaint Dismissed for Failure to Plead Claims of Securities Fraud

In Friedman v. Endo International PLC, No. 16-CV-3912 (JMF), 2018 BL 13320 (S.D.N.Y. Jan. 16, 2018), Endo International PLC (“Endo”) and its executive officers, Rajiv De Silva, Suketu Upadhyay, and Paul Campanelli (collectively “Defendants”), moved to dismiss the Third Amended Complaint of Craig Friedman, individually and on behalf of others similarly situated (collectively “Plaintiffs”), alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 thereunder. The United States District Court for the Southern District of New York granted Defendants’ motion to dismiss. 

Endo develops, manufactures, and distributes branded and generic pharmaceutical products worldwide. Endo acquired Par Pharmaceuticals (“Par”) in 2015. Between May 2015 and May 2016, Defendants publically stated Endo was “making progress” toward strategic priorities resulting from the acquisition of Par. In January 2016, Endo announced $118.46 million in losses for the fourth quarter of 2015, stock prices fell 21 percent after the announcement. In March 2016 and May 2016, Endo revised its 2016 revenue expectations downward, stock prices fell 11 percent and 39 percent, respecivelly, after each revision. Additionally, in May 2016, Defendants released a series of statements indicating trouble with the integration of Par. Plaintiffs allege Defendants made material misrepresentations to investors when they intentionally misled investors with public comments about the company’s sales outlook and the integration of the Par acquisition. Plaintiffs, additionally allege Defendants attempted to defraud investors by unlawfully boosting sales when the company engaged in “improper and illegal sales practices” by offering deep discounts on two of its drugs to secure relationships with Pharmaceutical Benefit Managers. 

Section 10(b) and Rule 10b-5 of the Exchange Act prohibit any misstatements or omissions of material fact in connection with the sale or purchase of a security. Securities fraud claims are subject to the heightened pleading standards of the Private Securities Litigation Reform Act (“PSLRA”) which requires plaintiffs to plead with particularity facts establishing fraud and an inference of scienter. Plaintiffs must specify each statement alleged to be false, the reason the statement is misleading, and that defendants had both the intent and opportunity to commit fraud. Scienter can be established by alleging strong circumstantial evidence of conscious misbehavior or recklessness. Additionally, a plaintiff must establish he suffered a loss because of defendant’s actions. Finally, Section 20(a) holds control persons liable for the fraud of the entities they control.

The court determined Plaintiffs did not meet the heightened pleading standard under the PSLRA. The court noted Plaintiffs’ allegation that Defendants engaged in illegal sales practices was both conclusory and lacked substantial evidence to prove the practice was illegal. Further, the Plaintiffs’ argument rested solely on the fact that individual Defendants held executive positions at Endo, which, on its own, failed to give rise to a strong inference of scienter. Regarding the allegations of material misrepresentation, the court determined the statements made by Defendants were not actionable because they were expressions of opinion or expectation, rather than intentional misstatements or omissions. Finally, the court concluded Plaintiffs were unable to establish a primary violation under Section 10(b),  therefore, the Section 20(a) claim also failed. 

Accordingly, the court granted Defendant’s motion to dismiss without leave to amend. 

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