On Tuesday, the U.S. Court of Appeals for the Third Circuit affirmed the dismissal, with prejudice, of the Alpharma securities class action. See In re Alpharma, Inc. Sec. Litig., 2004 WL 1326013 (3rd Cir. June 15, 2004). A few highlights from the opinion:
(1) Collective scienter – The court appeared to reject the idea that a corporate defendant’s scienter (i.e., fraudulent intent) can be properly alleged on the basis of the collective knowledge of all of the corporation’s officers and employees. The plaintiffs alleged that a sales manager in one of Alpharma’s divisions notified employees in the main office of accounting irregularities. The court held that “the mere fact that the information was sent to Alpharma’s headquarters and therefore was available for review by the individual defendants is insufficient to ‘giv[e] rise to a strong inference that [defendants] acted with the required state of mind.'”
(2) Insider stock sales – The court held that the insider stock sales were not unusual in their scope or timing and, therefore, could not support a strong inference of scienter. The allegation that the defendants had not sold any stock during the preceding fifteen months was deemed insufficient. The defendants asserted they were precluded from selling any stock by a blackout period. Although the court could not technically consider this assertion, it found that the “plaintiffs failed to allege the absence of a blackout period or other facts which would demonstrate that the fifteen month period of inactivity was in any way unusual.”
(3) Leave to amend – The court upheld the district court’s denial of leave to amend where the plaintiffs had failed to proffer any proposed amendment. The denial was “further supported by the fact that plaintiffs (1) had already filed previous complaints and (2) were given an extension of time to assemble the amended consolidated complaint currently at issue.”
Holding: Affirm grant of motion to dismiss with prejudice.