In re Sanofi Sec. Litig.: Pharmaceutical Company’s Motion to Dismiss Granted In Federal Securities Fraud Claims

In In re Sanofi Sec. Litig., 2016 BL 3051 (S.D.N.Y. Jan. 06, 2016), the United States District Court for the Southern District of New York granted corporate defendant Sanofi and individual defendant Christopher Viehbacher’s (collectively, “Defendants”) motion to dismiss Meitav DS Provident Funds and Pension Ltd., and Joel Mofenson’s (collectively, “Plaintiffs”) putative class action asserting federal securities fraud claims. 

According to the complaint, Sanofi, a global pharmaceutical company, engaged in an illegal marketing scheme (“Scheme”) to artificially boost the sales of its diabetes product line (“Drug”). Plaintiffs alleged the Scheme consisted of funneling millions of dollars in payments disguised as contracts to Accenture and Deloitte, acting as middlemen, in an attempt to induce pharmaceutical retailers and hospitals to favor the Drug. Plaintiffs further alleged that Viehbacher, as CEO and a member of the board of directors, was in a position to have knowledge of the Scheme but failed to stop it. When two whistleblowers revealed the Scheme, an internal investigation ensued and the Scheme was abandoned, which caused the Drug’s sales to slow and the share value to decline significantly. Plaintiffs brought a putative class action on behalf of all persons who purchased shares of Sanofi between February 7, 2013 and October 29, 2014 (the “Class Period”), alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act.

To state a Section 10(b) securities fraud claim, a plaintiff must plead the defendant: (1) made misstatements or omissions of material fact, (2) with scienter, (3) in connection with the purchase or sale of securities, (4) upon which plaintiffs relied, and (5) the reliance was a proximate cause of their injury. Defendants moved to dismiss the complaint pursuant to Rule 9(b) and 12(b)(6) on the grounds that the Plaintiffs failed to adequately allege: (1) any actionable false statements or omissions of material fact, (2) a strong inference of scienter, and (3) loss causation.

A complaint alleging securities fraud based on misstatements must, among other factors, explain why certain defendant misstatements were fraudulent. The court organized the alleged misstatements and omissions into three categories: (1) statements on compliance and corporate integrity; (2) Viehbacher’s Sarbanes-Oxley (“SOX”) certification; and (3) SEC filings, press releases, and conference calls stating the growth of the Drug.

The court found Defendants’ statements on compliance and corporate integrity were not actionable under the securities laws because they were examples of corporate “puffery” and could not mislead a reasonable investor. Similarly, the court determined Defendants’ statements made in SEC filings, press releases, and conference calls were not actionable because they did nothing more than characterize, “albeit it with more fanfare,” the accurate historical data: that the Drug’s sales were growing during the Class Period. Finally, the court held that, since Viehbacher’s SOX certification was a statement of opinion, Plaintiffs were required to plead facts demonstrating Viehbacher did not actually believe what he said. Here, the court found nothing alluding to Viehbacher’s subjective knowledge in the complaint.

Next, one way a plaintiff can establish scienter is through “strong circumstantial evidence of conscious misbehavior or recklessness.” Plaintiffs argued such evidence derived from Defendants’ access to the whistleblower reports and internal investigation. The court disagreed and found the Plaintiffs’ complaint relied on “unsubstantiated conclusions” and did not reference or identify specific facts, reports, or documents that could establish circumstantial evidence of scienter. Thus, the court held Plaintiffs failed to plead a strong inference of scienter.

Finally, to prove loss causation, a plaintiff may show: (1) cause-in-fact proof, or (2) the loss suffered was foreseeable and caused by the materialization of the risk concealed by the fraudulent statements. Plaintiffs theorized that after Defendants abandoned the Scheme, the Drug faced less advantageous pricing in the market, which caused the Drug to sell less, adversely affecting the value of shares. The court agreed Plaintiffs theory could establish loss causation, but found no evidence Defendants’ Scheme actually materially inflated the Drug sales. Here, the court concluded loss causation could not be proven without evidence of a casual relationship between the Scheme being abandoned and the share price declining.

Accordingly, the court dismissed Plaintiffs’ putative class action asserting federal securities fraud claims.

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