Monday, February 9, 2009

Manson Rejoinder Filed: CaféPharma's "Scrawls on a Mens' Room Wall". . . .

Recall that Schering's lawyers -- in a December 2008 sworn-federal court filing -- denigrated some of the matter offered for a potential future admission into evidence, by the plaintiffs' lawyers in Manson v. Schering-Plough, et al. (Case No. 08-397), the ENHANCE Securities Fraud Putative Class Action. Oddly, Lowenstein Sandler did so, by suggesting that CaféPharma amounts to nothing more than a collection of profane scrawls on a virtual mens room wall.

Well, that didn't sit too well with the plaintiffs, and at the end of last week, they made a sworn-filing of their own. It seems that, once again, by making such an overly-inclusive generalization about the putative CaféPharma evidence, Schering's lawyers have "opened the door" to any early, and greatly expansive, counter-argument before Judge Cavanaugh -- about the "uncanny prescience" of these same CaféPharma postings. In laymens' terms, that would mean "pretty darn reliable".

Lowenstein's approach may prove to be yet a[nother] blunder, in my opinion. Once again, they've pressed marginal arguments well-beyond what the known factual material will possibly sustain, and may have to pay for it -- in credibility, before a very able federal trial judge. Let's read along -- some highlights now (but for the morbidly-curious, here is the entire 32 page PDF filing):

. . . .Among the facts alleged in the Complaint collectively giving rise to a strong inference of scienter are allegations that: (1) Schering failed to disclose the negative ENHANCE results until 2008, even though a January 2007 report by independent consultant Dr. Michiel L. Bots (the “Bots Report”) concluded that the ENHANCE data was “fine,” finding no reasons to justify delaying disclosure of the ENHANCE results based on purported data problems; (2) Schering CEO Hassan made statements in April 2007 suspiciously downplaying the importance of ENHANCE; (3) ENHANCE’s Principal Investigator Dr. John Kastelein expressed shock to Schering personnel in July 2007 (when the Company advised him it would not be releasing the ENHANCE results in November 2007, as it had previously planned), and advised Schering that there was no good reason to delay publishing the results; and (4) in November 2007, Schering suspiciously attempted to change ENHANCE’s primary endpoint to manipulate its results and publicly misrepresented that a panel of outside experts had recommended the proposed change when they did not.

In addition to these and other facts collectively demonstrating a strong inference of scienter, the Complaint alleges that: (1) anonymous individuals posted detailed and what now are known to be remarkably accurate entries about the ENHANCE results on CaféPharma, a pharmaceutical industry website, beginning in March 2007, which strongly suggests that ENHANCE results were known within Schering long before they were made public; and (2) six former Schering employees confidentially provided additional corroborating facts, that: (a) by the Summer of 2006 (the start of the Class Period), it was clear to Schering insiders based on a quality control assessment of ENHANCE that it was unlikely that Schering would obtain any positive results from ENHANCE; (b) the delayed release of ENHANCE results was not justified by any data quality issues; and (c) Schering employees and senior managers were familiar with and regularly visited the CaféPharma site.

The Exchange Act Defendants, who have moved separately to dismiss the Complaint, move under Federal Rule of Civil Procedure 12(f) to strike the CaféPharma posts and confidential witness statements from the Complaint, contending that they are “scandalous, immaterial, and impertinent.” But whatever “scandal” has been introduced in this case comes from Defendants’ filing, which soils the record with offensive and repulsive materials that have nothing to do with the CaféPharma posts cited in the Complaint (the “Cited Posts”) let alone with this securities case. The Exchange Act Defendants’ motion is utterly without basis. None of the material that Defendants inflict on the Court with their filing was cited in the Complaint.

Unlike the posts cited by Defendants, the eight CaféPharma posts quoted in the Complaint, which appeared between March and November of 2007, have ample indicia of reliability. The Cited Posts – none of which is remotely scandalous – evince a level of access consistent with knowledgeable persons because, among other things, they include specific details that were not public at the time, but which were subsequently confirmed when the ENHANCE results were finally made public in 2008. The now confirmed and detailed nature of these posts includes, for example, reported “higher liver problems” and “arguing back and forth” between Schering and the Principal Investigator for ENHANCE “about how/when to release the info” – which, as public investors later learned in 2008, was actually occurring at the time of the posts. Indeed, one telling indication of the materiality and pertinence of the Cited Posts is that Congress considered them highly relevant to its investigation of Schering and noted the “obvious[]” significance of the CaféPharma posts to “the question of whether anyone within Merck or Schering-Plough knew the results of the ENHANCE trial prior to the official release of data.” Letter to Fred Hassan and Richard Clark from U.S. Representatives Dingell and Stupak (Feb. 11, 2008). . . . Nor is there any requirement that the person or persons responsible for the CaféPharma posts be identified and testify at trial for the Court to consider them at the pleading stage.

Defendants are also off-base regarding the facts provided by former Schering employees who agreed to discuss on a confidential basis what they had witnessed inside the Company. The vast majority of courts have allowed securities plaintiffs to rely on confidential witness statements at the pleading stage to support a strong inference of scienter. The Cited Posts and confidential witness statements should not be stricken because they properly support a strong inference at the pleading stage, collectively with all of the other facts alleged, that Defendants were aware of the ENHANCE results more than a year before the results were publicly released. Accordingly, Defendants’ motion to strike should be denied. . . .

The plaintiffs have requested oral argument in open court on these issues in March; perhaps I'll pop into Newark, and live-blog the to and 'fro. Perhaps. It will certainly be entertaining.

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