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US District Court : SECURITIES | CIVIL PROCEEDURE - amended complaint fails Private Securities Litigation Reform Act pleading standards

Little Gem Life Sciences LLC,
individually and on behalf of a
class of persons similarly situated,
v. Civil No. 06-1377 ADM/AJB
Orphan Medical, Inc., John H.
Bullion, and Timothy G. McGrath,
Joel C. Feffer, Esq., Harwood Feffer LLP, New York, NY, and Gregg M. Fishbein, Esq.,
Lockridge Grindal Nauen P.L.L.P., Minneapolis, MN, on behalf of Plaintiff.
Peter W. Carter, Esq., Dorsey & Whitney LLP, Minneapolis, MN, on behalf of John H. Bullion
and Timothy G. McGrath, and Richard G. Wilson, Esq., Maslon Edelman Borman & Brand LLP,
Minneapolis, MN, on behalf of Orphan Medical, Inc.
On June 8, 2006, the undersigned United States District Judge heard oral argument on
Defendants Orphan Medical, Inc. (Orphan Medical), John H. Bullion (Bullion), and
Timothy G. McGraths (McGrath) (collectively Defendants) Motion to Dismiss [Docket No.
35] Plaintiff Little Gem Life Sciences LLCs Amended Complaint (Little Gem) [Docket No.
33]. In its Amended Complaint, Little Gem alleges that Defendants violated federal securities
laws by negligently making a false statement and omitting certain information from a proxy
statement issued in connection with a merger transaction. For the reasons set forth herein,
Defendants Motion to Dismiss is granted.
1 In considering a motion to dismiss, the pleadings are construed in the light most
favorable to the nonmoving party, and the facts alleged in the complaint must be taken as true.
Hamm v. Groose, 15 F.3d 110, 112 (8th Cir. 1994).
2 The following documents provided by Defendants in the Leventhal Declaration are
considered as central to the Amended Complaint: Exhibits A (Orphan Medicals May 20, 2005,
Proxy Statement) and E (a transcript of an April 26, 2005, conference call). See Stahl v. Dept
of Agric., 327 F.3d 697, 700-01 (8th Cir. 2003) (discussing documents a court may consider on a
motion to dismiss). Exhibit B (the March 16, 2005, 10-K) is not central to the Amended
Complaint, but provides useful dates and details. The Court refers to Exhibit B only to establish
context regarding the Xyrem clinical trial.
On February 16, 2007, this Court issued an Order [Docket No. 32] dismissing without
prejudice Little Gems initial Complaint [Docket No. 1] for failure to plead an omission with the
particularity required by the Private Securities Litigation Reform Act of 1995 (PSLRA), 109
Stat. 737. The facts alleged in Little Gems Amended Complaint largely repeat the allegations of
the initial Complaint, which were discussed in the February 2007 Order. Therefore, only a brief
summary of the previously discussed facts is necessary here.
Orphan Medical is a specialty pharmaceutical company whose focus is on sleep
disorders, pain, and other central nervous system disorders. Am. Compl. 9. Bullion was
Orphan Medicals Chief Executive Officer and served on its Board of Directors. Id. 10.
McGrath was Orphan Medicals Chief Financial Officer, Principal Accounting Officer, and a
Vice President. Id. 11.
Orphan Medicals lead product is Xyrem, an oral solution for the treatment of cataplexy
associated with narcolepsy. Id. 25; Leventhal Decl. [Docket No. 19] Ex. B at 2.2 In June 2004,
Orphan Medical initiated a clinical trial to assess Xyrem for the treatment of fibromyalgia.
Leventhal Decl. Ex. B at 2. Orphan Medicals March 16, 2005, Form 10-K states that Orphan
Medical expected to announce the results of the fibromyalgia trial in the second half of 2005. Id.
On April 18, 2005, Orphan Medicals board of directors approved a merger agreement
whereby almost all of Orphan Medicals publicly owned stock would be purchased and Orphan
Medical would become a subsidiary of Jazz Pharmaceuticals, Inc. (Jazz). Leventhal Decl. Ex.
A at 16. On May 20, 2005, Orphan Medical filed a Proxy Statement announcing a June 22,
2005, shareholder meeting to vote on the proposed merger. Id. Ex. A. Under the merger
agreement, each Orphan Medical stockholder would receive .75 per share of common stock.
The Proxy Statement refers to an opinion prepared by Banc of America Securities LLC
(Banc of America), the financial advisor to Orphan Medicals board of directors, that the
proposed merger was financially fair to holders of Orphan Medicals common stock. Id. at 3-4,
16-24. Banc of Americas two-page fairness opinion, reproduced in full as Appendix C to the
Proxy Statement, states that Banc of America reviewed financial forecasts prepared by Orphan
Medicals management as of April 18, 2005. Id. at C-2.
The merger was approved by a majority of Orphan Medicals shareholders at the June 22,
2005, shareholder meeting. Little Gem, an Orphan Medical shareholder at the time of the
merger, filed its initial Complaint on April 10, 2006, on behalf of itself and a class of holders of
Orphan Medical common stock as of May 23, 2005. The initial Complaint asserted claims
against Defendants under sections 14(a) and 20(a) of the Securities Exchange Act of 1934 (the
Exchange Act), alleging that [t]he Proxy Statements repeated references to the Financial
Advisors opinion are materially false and misleading because the Proxy Statement omits to
disclose that the financial advisor failed to consider the full impact of likely significant
expansions of the prospective patient base for Xyrem. Compl. 26. This Courts February
2007 Order found that the initial Complaint failed to satisfy the PSLRAs heightened pleading
requirements. Little Gems Amended Complaint attempts to remedy the deficiencies of the
original Complaint.
A. Motion to Dismiss and Pleading Standards
Rule 12 of the Federal Rules of Civil Procedure provides that a party may move to
dismiss a complaint for failure to state a claim upon which relief can be granted. Fed. R. Civ. P.
12(b)(6). In considering a motion to dismiss, the pleadings are construed in the light most
favorable to the nonmoving party, and the facts alleged in the complaint must be taken as true.
Hamm v. Groose, 15 F.3d at 112; Ossman v. Diana Corp., 825 F. Supp. 870, 879-80 (D. Minn.
1993). Any ambiguities concerning the sufficiency of the claims must be resolved in favor of the
nonmoving party. Ossman, 825 F. Supp. at 880. A motion to dismiss should be granted as a
practical matter . . . only in the unusual case in which the plaintiff includes allegations that show
on the face of the complaint that there is some insuperable bar to relief. Frey v. City of
Herculaneum, 44 F.3d 667, 671 (8th Cir. 1995).
Under Rule 8(a) of the Federal Rules of Civil Procedure, pleadings shall contain a short
and plain statement of the claim showing that the pleader is entitled to relief. A pleading must
contain enough facts to state a claim to relief that is plausible on its face. Bell Atl. Corp. v.
Twombly, 127 S. Ct. 1955, 1974 (2007).
3 Little Gem argues that Defendants improperly rely on matters outside the Amended
Complaint and therefore Defendants Motion to Dismiss should be considered a motion for
summary judgment. See Fed. R. Civ. P. 12(b) (If . . . matters outside the pleading are presented
to and not excluded by the court, the motion shall be treated as one for summary judgment . . .
and all parties shall be given reasonable opportunity to present all material made pertinent to
such a motion by Rule 56.). Defendants have made factual assertions that go beyond the
allegations of the Amended Complaint. However, the Court has not considered those assertions
in deciding the instant Motion to Dismiss.
B. Defendants Motion to Dismiss3
1. Claims under Section 14(a) of the Exchange Act
Section 14(a) of the Exchange Act aims to prevent management or others from
obtaining authorization for corporate action by means of deceptive or inadequate disclosure in
proxy solicitation. J. I. Case Co. v. Borak, 377 U.S. 426, 431 (1964). Section 14(a) prohibits
proxy solicitations that violate rules promulgated by the SEC. 15 U.S.C. 78n(a). SEC Rule
14a-9 prohibits a proxy solicitation by means of a proxy statement that contain[s] any statement
which, at the time and in the light of the circumstances under which it is made, is false or
misleading with respect to any material fact, or which omits to state any material fact necessary
in order to make the statements therein not false or misleading. 17 C.F.R. 240.14a-9.
Plaintiffs establish a violation of 14(a) and Rule 14a-9 by showing: (1) the proxy statement
contains a material omission; (2) the defendants negligently drafted the proxy statement; and (3)
the proxy caused an injury to plaintiffs. In re BankAmerica Corp. Sec. Litig., 78 F. Supp. 2d
976, 988-89 (E.D. Mo. 1999).
Defendants argue that Little Gems Amended Complaint must be dismissed because it
fails to plead a false statement or an omission with the particularity required by the PSLRA. In
response, Little Gem contends that the heightened pleading requirements of the PSLRA do not
apply to claims under 14(a) of the Exchange Act. In the alternative, Little Gem argues that it
has pled a false statement and an omission with the requisite particularity.
a. Whether the PSLRAs Heightened Pleading Requirements Apply to
Claims Under Section 14(a) of the Exchange Act
The February 2007 Order held that Little Gems initial Complaint failed to plead an
omission with the particularity required by the PSLRA. In support of its argument that the
Amended Complaint survives Defendants Motion to Dismiss, Little Gem seeks to revisit the
issue of whether the PSLRA applies to claims under 14(a) of the Exchange Act. However,
under the law of the case doctrine, when a court decides upon a rule of law, that decision should
continue to govern the same issues in subsequent stages in the same case. First Union Natl
Bank v. Pictet Overseas Trust Corp., 477 F.3d 616, 620 (8th Cir. 2007) (quotation marks and
citation omitted). Although it is unnecessary to revisit the issue, Little Gems arguments will be
briefly addressed.
The PSLRAs heightened pleading provision, 15 U.S.C. 78u-4(b)(1), specifies that:
In any private action arising under this chapter in which the plaintiff alleges that the
(A) made an untrue statement of a material fact; or
(B) omitted to state a material fact necessary in order to make the 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.
Little Gems claim is premised on a violation of 14(a) of the Exchange Act, which is codified
at 15 U.S.C. 78n(a). The PSLRAs heightened pleading provision and 14(a) of the Exchange
Act are both codified in Chapter 2B of Title 15 of the United States Code, and Little Gem has
alleged that Defendants made false statements of material fact and omitted material information
4 Most courts to address the issue have reached the same conclusion. See Knollenberg v.
Harmonic, Inc., 152 Fed. Appx. 674, 682-83 (9th Cir. Nov. 8, 2005) (stating that the PSLRA
pleading requirements apply to claims brought under Section 14(a) and Rule 14a-9); In re U.S.
West, Inc. Sec. Litig., 65 Fed Appx. 856, 860 (3d Cir. May 30, 2003); Fisher v. Kanas, 467 F.
Supp. 2d 275, 281 (E.D.N.Y. 2006); Bond Opportunity Fund v. Unilab Corp., 2003 WL
21058251, *3 (S.D.N.Y. May 9, 2003). But see Blau v. Harrison, 2006 WL 850959, *6 (N.D.
Ill. March 24, 2006) (concluding that 14(a) claims based on negligence are not subject to
PSLRAs heightened pleading requirements). Little Gems reliance on Kennedy v. Venrock
Associates, 348 F.3d 584 (7th Cir. 2003) for the proposition that the PSLRAs heightened
pleading requirements do not apply to 14(a) claims is misplaced because Kennedy does not
address the PSLRA.
that made the inclusion of Banc of Americas fairness opinion misleading. Therefore, the
PSLRAs heightened pleading provision applies to Little Gems allegations.
Arguing against this result, Little Gem refers to the heading of 15 U.S.C. 78u-4(b),
which is Requirements for securities fraud actions. Little Gem argues that its 14(a) claim is
based on negligence as opposed to fraud, and therefore only the short and plain statement
pleading requirement of Federal Rule of Civil Procedure 8 applies. However, it is a well-settled
rule of statutory construction that the title of a statute and the heading of a section cannot limit
the plain meaning of the text. Bhd. of R.R. Trainmen v. Baltimore & Ohio R.R., 331 U.S. 519,
528-29 (1947). Section and subchapter titles . . . can only assist in clarifying ambiguity.
Owner-Operated Indep. Drivers Assn v. New Prime, Inc., 192 F.3d 778, 784 (8th Cir. 1999)
(quotation marks and citation omitted). There is no ambiguity in 15 U.S.C. 78u-4(b); therefore
heightened pleading requirements apply in this case.4
b. Whether Little Gems Allegations Satisfy the PSLRA
Little Gems Amended Complaint alleges that the May 20, 2005, Proxy Statements
claim that Orphan Medical is currently conducting a proof-of-principle clinical trial to assess
Xyrem as a treatment for the symptoms of fibromyalgia syndrome is materially false and
misleading because:
By mid-January 2005, patient enrollment in the trial was completed. The trial itself was
to last three months, consisting of a one-month washout period, during which enrolled
patients were to be drug-free, followed by an eight-week treatment period. Accordingly,
the fibromyalgia clinical trial was completed, and the data available, on or about April
15, 2005, more than a month before Orphan Medical disseminated the Proxy Statement.
Moreover, because the clinical trials enrollment was less than 200 patients, lengthy
analysis of the data was not required and the positive results of the trial were available to
defendants, if not at the time the Proxy Statement was first disseminated on May 25,
2005, at least by the time of Orphan Medicals stockholders meeting on June 22, 2005.
Am. Compl. 27-28.
However, these allegations, which are based on information and belief, suffer from the
same deficiencies as the allegations in the initial Complaint. Little Gem has failed to adequately
allege (1) when the results from the trial were prepared, (2) who prepared the results, (3) whether
the results were in preliminary or final form, (4) when the results were reviewed by Orphan
Medicals officers; and (5) which Orphan Medical officers reviewed the results. See Cal. Pub.
Employees Ret. Sys. v. Chubb Corp., 394 F.3d 126, 154 (3d Cir. 2004) (finding conclusory
assertion that defendants had access to undisclosed information before merger vote was patently
To support its assertion that the positive Xyrem results were available by June 22, 2005,
Little Gem relies on allegations that:
Depomed, Inc., also a NASDAQ-listed company, conducted a similarly sized clinical
trial to evaluate one of its drugs. Enrollment was completed October 5, 2006, the last
person in the four-week study was treated on November 5, 2006, and the data was
analyzed and distributed in approximately one month and publicly released on December
12, 2006.
Am. Compl. 29. However, these meager allegations fail to show that the Depomed clinical
trial is relevant in determining how long Orphan Medical needed to analyze the Xyrem data.
The only obvious similarity between the two trials is that both involved approximately twohundred
patients. However, the Depomed clinical trial lasted one month, whereas Orphan
Medicals Xyrem clinical trial lasted three months. Further, there is no allegation that the
Depomed study and the Xyrem study were performed under similar conditions and required
analysis of similar volumes of data. Little Gems vague allegations using the Depomed analogy
provide no basis for a conclusion that the formal results of the Xyrem clinical trial for
fibromyalgia were available by April 15, 2005, May 20, 2005 (the date of the Proxy Statement),
or June 22, 2005 (the date of merger vote).
In the alternative, Little Gem alleges that [e]ven if the analysis of the fibromyalgia
clinical trial data was not formally available by June 22, 2005, Orphan Medicals management
could easily have known the results because Xyrem has a well-known dose dependent side effect
profile. Thus even without unblinding, professionals could reasonably be expected to determine
who was taking Xyrem and who was taking the placebo . . . . Id. 30. However, these
speculative allegations fail to describe any circumstances under which Orphan Medicals
management allegedly viewed raw trial data before the formal data analysis was complete.
Further, Little Gems assertion that professionals could reasonably be expected to determine
who was taking Xyrem would effectively amount to unblinding the study before it was
completed. Little Gem has provided no factual basis to support its conjecture that
professionals would disregard protocol by unblinding the study and prematurely disclosing the
unblinded information to Orphan Medicals senior management. See 21 C.F.R. 314.126(b)(5)
(An adequate and well-controlled study has the following characteristics: . . . Adequate
measures are taken to minimize bias on the part of the subjects, observers, and analysts of the
data. The protocol and report of the study should describe the procedures used to accomplish
this, such as blinding.).
Little Gem also suggests that because Bullion and McGrath were required to provide
Jazz with a certificate of compliance at the closing of the merger . . . it was incumbent upon both
of them to keep apprised of the developments in the fibromyalgia trial. Am. Compl. 30; see
Leventhal Decl. Ex. A at A-35. However, Little Gem has not explained how Bullion and
McGraths obligation to certify that Orphan Medical had performed its contractual obligations to
Jazz, and that Orphan Medicals representations and warranties to Jazz were still true, amounted
to a duty to violate the clinical trial protocol and view the blinded trial results before the merger
Little Gem also argues that the merger agreements Material Adverse Effect clause
provides support for the conclusion that Defendants knew the positive results of the Xyrem
clinical trial at the time of the merger. Am. Compl. 31. To reach this conclusion, Little Gem
first argues that under the merger agreement, Jazz, as a practical matter, had the ability to delay
the consummation of the merger until November 30, 2005. Id. Second, Little Gem relies on
language in the merger agreement imposing a condition precedent on the merger that [n]o
Material Adverse Effect shall have occurred and be continuing. Leventhal Decl. Ex. A at A-35.
Third, Little Gem construes the merger agreements definition of Material Adverse Effect as
including negative data relating solely to the efficacy of Xyrem in the treatment of fibromyalgia
in [Orphan Medicals] pending . . . proof of principle clinical trial. Am. Compl. 31.
Therefore, Little Gem concludes that [t]he merger agreement, in effect, gave Jazz an option to
acquire Orphan Medical, contingent on the results of the fibromyalgia proof-of-principle clinical
trial, and Jazz would not have closed the merger on June 24, 2005, unless Defendants had
disclosed positive results regarding Xyrem. Id.
However, Little Gems argument finds no support in the language of the merger
agreement. The merger agreements definition of Material Adverse Effect provides in relevant
Notwithstanding any of the foregoing, (1) any change, event or occurrence (except with
respect to any data relating solely to the efficacy of Xyrem in the treatment of
fibromyalgia in the Companys pending SXB-26 proof of principle clinical trial) which,
individually or in the aggregate, would reasonably be expected to have a material adverse
effect on the results or prospects of Xyrem . . . shall . . . be deemed to be a Material
Adverse Effect.
Leventhal Decl. Ex. A at A-7. Under the plain language of this clause, data from the Xyrem
fibromyalgia proof of principle clinical trial was expressly carved out from the definition of a
Material Adverse Effect. Therefore, Little Gems argument that the Material Adverse Effect
Clause supports an inference that Defendants accessed and disclosed data from the fibromyalgia
trial to Jazz prior to the merger closing date is rejected.
Next, Little Gem alleges that just two days before Orphan Medicals stockholders voted
on the proposed merger, i.e. June 20, 2005, Jazz raised 0,000,000 in additional capital in
order to finance the development of Xyrem as a treatment for fibromyalgia. Am. Compl. 31.
Based on this allegation, Little Gem argues that a finder of fact could infer that Defendants
provided Jazz with the results of the clinical trial by June 22, 2005. However, Little Gems
Amended Complaint provides no basis for the speculative conclusion that Jazz raised the 0
million to finance the development of Xyrem as a treatment for fibromyalgia. Little Gem has
failed to plead with particularity facts that support its belief that Defendants were aware of
positive Xyrem trial data before the merger vote on June 22, 2005.
5 Every person who, directly or indirectly, controls any person liable under any
provision of this chapter or of any rule or regulation thereunder shall also be liable jointly and
severally with and to the same extent as such controlled person . . . unless the controlling person
acted in good faith and did not directly or indirectly induce the act or acts constituting the
violation or cause of action. 15 U.S.C. 78t(a).
Little Gem has also alleged that the Proxy Statements references to Banc of Americas
fairness opinion are materially false and misleading because the Proxy Statement omits to
disclose that [Banc of America] failed to consider the positive results from the fibromyalgia
clinical trial. Id. 34. However, this allegation cannot survive Defendants Motion to Dismiss
because Little Gem has not adequately pled with particularity that Defendants were aware of
positive results before the merger vote.
Finally, Little Gem alleges that during a conference call in April 2005, Bullion promised
that the fibromyalgia data would be released in the Proxy Statement. Id. 35; see Leventhal
Decl. Ex. E. However, the Court has previously determined that Bullions statements during the
conference call cannot be read as a promise that specific data regarding the fibromyalgia clinical
trial would be disclosed in the Proxy Statement. See February 16, 2007, Order at 9. Little
Gems Amended Complaint fails to plead the facts underlying a material false statement or a
material omission with the particularity required by the PSLRA. Therefore, Little Gems 14(a)
claims must be dismissed and it is unnecessary to address the remaining grounds for dismissal
raised by Defendants.
2. Claims under Section 20(a) of the Exchange Act
The Amended Complaint asserts that Bullion and McGrath are individually liable as
controlling persons within the meaning of 20(a) of the Exchange Act.5 Little Gem recognizes
that liability under 20(a) is premised upon liability under 14(a). Since Defendants Motion to
Dismiss is granted regarding the 14(a) claims, the 20(a) claims must also be dismissed.
3. Dismissal With Prejudice
Little Gem has now twice failed to plead a false statement or an omission with the
particularity required by the PSLRA. Under these circumstances, the Court finds that further
amendment would be futile. Therefore, Little Gems Amended Complaint is dismissed with
prejudice. See Knapp v. Hanson, 183 F.3d 786, 790 (8th Cir. 1999) (noting that futility
constitutes a valid reason for denial of a motion to amend).
Based upon the foregoing, and all the files, records, and proceedings herein, IT IS
1. Defendants Motion to Dismiss [Docket No. 35] is GRANTED: and
2. Plaintiffs Amended Complaint [Docket No. 33] is DISMISSED WITH
s/Ann D. Montgomery
Dated: September 13, 2007.


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