Giving Definition to Stoneridge

In Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 128 S. Ct. 761 (2008), the Supreme Court defined the contours of primary liability under Section 10(b) by rejecting a theory of scheme liability as discussed here. In an opinion which in some ways is reminiscent of the tort theory of proximate cause, forseeability and remoteness, the Court concluded that fraudulent conduct between vendors and a public company was simply too remote from the fraud perpetrated on the issuer’s shareholders, although the company used the results of the transaction with its vendors to falsify its financial statements. Central to this analysis is the question of reliance by the shareholders on the fraudulent conduct.

In In re: Bristol Myers Squibb Co. Sec. Litig., 07 Civ. 5867 (S.D.N.Y.), the court rejected a request for dismissal by a corporate officer based on Stoneridge. The officer claimed that because he did not make any public statements or disclosures on which the shareholders directly relied, his conduct was too remote.

Bristol Myers is a class securities class action based on the claimed false disclosures by the company regarding its settlement of patent litigation with a generic drug maker over a key product of the company. Specifically, plaintiffs claimed that Bristol Myers negotiated the settlement of a key lawsuit and, in announcing that settlement, failed to disclose that it had agreed to relinquish certain material rights in side agreements.

One of the principle negotiators of the settlement was defendant Andrew Bodnar, a medical doctor and attorney and a Senior Vice President for Strategy and Medical and External Affairs, as well as a member of the executive committee. According to the complaint, Mr. Bodnar and others negotiated key side agreements which were not disclosed in press releases to the public about the lawsuit and which were concealed from the Federal Trade Commission during an antitrust review. Eventually, the company pled guilty to making false statements to the government as a result of its incomplete disclosures to the FTC and Mr. Bodnar was dismissed.

In an opinion dated August 19, 2008, Judge Paul Crotty rejected Mr. Bodnar’s claims that he was entitled to dismissal because he did not make any public statement about the settlement, obviating any possibility that shareholders relied on a statement by him. According to the court “Bodnar’s behavior is at the heart of Bristol-Myer’s false and misleading document. It is neither implausible, nor too remote to find that the investing public relied on the announcement of the Apotex litigation settlement in deciding whether or not to invest in Bristol-Myers stock, and Bodnar was directly responsible for the settlement. Bodnar made no public statements himself, but investors relied on his good faith in negotiating the Apotex settlement agreement and committing the Company to its terms.” The court went on to hold that Mr. Bodnar’s deceptive acts were communicated to the public through the incomplete disclosures. This, the court, held is sufficient under Stoneridge.