(Article from Securities Law Alert, January 2016)
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On January 6, 2016, the Southern District of New York dismissed a securities fraud action alleging that Sanofi and its former CEO had made misleading statements in connection with an alleged scheme to increase sales of Sanofi’s diabetes products. In re Sanofi Sec. Litig., 2016 WL 93866 (S.D.N.Y. 2016) (Castel, J.). The court held that Sanofi’s general statements concerning compliance and corporate integrity were inactionable puffery. The court further ruled that Sanofi’s failure to disclose the alleged illegal marketing scheme did not render its sales figures for diabetes products false or misleading. The court explained that “the allegation that a corporation properly reported income that is alleged to have been, in part, improperly obtained is insufficient to impose Section 10(b) liability.”
Background
Plaintiffs alleged that Sanofi and its former CEO, Christopher Viehbacher, had “engaged in an illegal marketing scheme to artificially boost the sales of its diabetes product line and hid those illegal practices from investors while touting the product line’s incredible sales growth and publicizing Sanofi’s commitment to corporate integrity.” According to plaintiffs, “the eventual abandonment of Sanofi’s illegal marketing scheme caused a slowing of diabetes sales, which in turn led to a significant decline in Sanofi’s share price.” Defendants moved to dismiss plaintiffs’ claims.
Court Finds Sanofi’s Compliance-Related Statements Too General to Be Actionable
The court found that “statements regarding Sanofi’s legal compliance and corporate integrity” were “not actionable under the securities laws” because the statements were “too general to cause a reasonable investor to rely on them.” The court determined that those statements were nothing more than corporate puffery.
In so holding, the court relied on the Second Circuit’s decision in ECA and Local 134 IBEW Joint Pension Trust of Chicago v. JP Morgan Chase, 553 F.3d 187 (2d Cir. 2009) (ECA). There, the Second Circuit held that JP Morgan Chase’s “statements about risk management and corporate integrity . . . could not be the basis for a securities violation” Sanofi, 2016 WL 93866 (discussing ECA, 553 F.3d 187). The Southern District of New York found that “[d]efendants’ statements about Sanofi’s compliance program and corporate integrity [were] analogous to the statements held not to be actionable in ECA.”
Court Holds That Sanofi’s Sales Figures for Its Diabetes Products Were Not Misleading Even Though Sanofi Did Not Disclose the Alleged Illegal Marketing Scheme
Plaintiffs alleged that Sanofi’s “SEC filings, press releases and conference calls reporting the growth in diabetes product sales . . . were misleading because they omitted material information” regarding the company’s alleged illegal marketing scheme for those products. According to plaintiffs, “Sanofi’s reported diabetes sales were inflated as a result of the alleged scheme.”
The court explained that “the securities laws do not impose a general duty to disclose corporate mismanagement or uncharged criminal conduct.” However, the court acknowledged that “a duty to disclose uncharged criminal conduct does arise if it is necessary to ensure that a corporation’s statements are not misleading.” The court found that the “critical consideration” is “whether the alleged omissions . . . are sufficiently connected to defendants’ existing disclosures to make those public statements misleading.”
Applying this standard to Sanofi’s statements, the court determined that defendants did not “plausibly attribute the growing sales of diabetes products to pharmacies implicated in the alleged illegal kickback scheme.” The court noted that “[n]one of the statements . . . offered any explanation as to why the products were selling more.” The court concluded that “the omission of the alleged illegal marketing [scheme was] not sufficiently connected to defendants’ existing disclosures to make those public statements misleading.”
The court also found that the statements at issue were “not actionable as a matter of law because they [were] simply accurate statements of past earnings and growth.” The court explained that “a violation of federal securities laws cannot be premised upon a company’s disclosure of accurate historical data.” The court underscored that “the allegation that a corporation properly reported income that is alleged to have been, in part, improperly obtained is insufficient to impose Section 10(b) liability.”
Here, “Sanofi’s [SEC] filings merely reported the financial health of the company and the percentage growth in diabetes product sales.” The court found these statements inactionable because there was no “allegation that Sanofi [had] reported income that it did not actually receive or sales growth that did not actually occur.” The court also found inactionable statements in “defendants’ 20-Fs, press releases, and conference calls” because “those statements were nothing more than accurate descriptions of the growth of diabetes products sales in a different form.” The court reasoned that “[i]f accurately reporting the percentage growth of diabetes products is itself not actionable under the securities laws, . . . [then] it cannot be the case that merely reporting that growth in more colorful words, without attributing the sales growth to a particular factor that is implicated in the alleged fraud, is actionable.”
Court Rejects Plaintiffs’ Contention That Sanofi’s CEO Must Have Known of the Alleged Scheme Based on His Position in the Company
Plaintiffs attempted to allege scienter as to Christopher Viehbacher, Sanofi’s former CEO, based largely on “his position within Sanofi.” Plaintiffs claimed that “Viehbacher must have received information detailing [Sanofi's] internal investigation [of the alleged illegal marketing scheme] and its findings because of the general operation of . . . corporate policies at Sanofi.” However, plaintiffs did not “reference any specific report or statement [concerning the alleged scheme] that was produced as a result of any of those policies.”
The court found plaintiffs’ allegations insufficient to plead Viehbacher’s scienter. The court explained that “[s]cienter . . . cannot be inferred solely from the fact that, due to the defendants’ . . . executive managerial position, they had access to the company’s internal documentation as well as any adverse information.”
The court also deemed unpersuasive “plaintiffs’ suggested inference that Viehbacher and Sanofi knew their statements [concerning diabetes product sales] were misleading because an internal investigation was ordered but then never disclosed.” The court found that any “inference of scienter based on the unreported findings of an unreported internal investigation [was] not as compelling as an alternative nonfraudulent inference: defendants did not have knowledge that their statements about Sanofi’s diabetes sales were misleading because whatever internal investigation took place – if any – did not uncover any unlawful activity of a material proportion.” The court reasoned that “[i]f Sanofi’s [b]oard committed the resources necessary to undertake an internal investigation, and that internal investigation uncovered unlawful behavior, why would the [b]oard of a publicly-traded company not disclose that information?” The court stated that “[t]o assume that Sanofi’s [b]oard was silently clutching the results of an investigation . . . directly contradict[ed] the rationale behind engaging in an internal investigation in the first place: the desire to uncover any improper conduct by Sanofi’s employees.”