Securities Law Alert
In This Edition:• Eighth Circuit: Court Reverses Class Certification in Best Buy Action, Holding Defendants Successfully
Rebutted the Basic Presumption with “Overwhelming Evidence” That the Alleged Misstatements Had No
Price Impact• Second Circuit: (1) “Probability” Standard Only Applies to FAS 5’s Disclosure Requirement If There Was
No Manifestation of a Potential Claim, and (2) Item 303 of Regulation S-K Requires the Registrant’s
Actual Knowledge of a Trend or Uncertainty• Southern District of New York: Court Dismisses Securities Fraud Action Against Regional Managementfor Failure to Allege Material Misstatements or Omissions• Southern District of New York: (1) “Actual Knowledge” Standard Does Not Apply to Forward-Looking
Statements That Address Present Facts, and (2) PSLRA’s Safe Harbor Provision Does Not Protect Material
Omissions
April 2016

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Eighth Circuit: Court Reverses
Class Certification in Best Buy
Action, Holding Defendants
Successfully Rebutted
the Basic Presumption
with “Overwhelming
Evidence” That the Alleged
Misstatements Had No Price
ImpactIn Halliburton v. Erica P. John Fund, 134 S.
Ct. 2398 (2014), the Supreme Court held that
“defendants must be afforded an opportunity
before class certification to defeat the[fraud-on-the-market] presumption throughevidence that an alleged misrepresentation
did not actually affect the market price ofthe stock.”1

1. Please click here to read our prior discussion of the Halliburton
opinion.

Simpson Thacher & Bartlett LLPOn April 12, 2016, in the first circuit court
opinion to apply Halliburton in considering
defendants’ price impact evidence, the Eighth
Circuit reversed a district court decision
granting class certification in a securities
fraud action against Best Buy.2 IBEW Local
98 Pension Fund v. Best Buy Co., 2016 WL
1425807 (8th Cir. 2016) (Loken, J.). The
Eighth Circuit held that defendants had
successfully rebutted the fraud-on-the-market
presumption by presenting “overwhelming
evidence” that the alleged misstatements
had no impact on Best Buy’s share price. The
Eighth Circuit further held that the district
court had “misapplied the price impact
analysis mandated by” Halliburton and“abused its discretion” in certifying the class.

BackgroundAt 8 a.m. on September 14, 2010, Best Buy
issued a press release announcing that it wasincreasing its full-year earnings per share
2. Simpson Thacher represents Best Buy and several of its
executives in this action.
1(“EPS”) guidance by ten cents to $3.55-$3.70.
When the market opened an hour and ahalf later, Best Buy’s shares were trading at$37.25, a 7.5% increase over the prior day’s
close-of-market share price.
At 10 a.m. that same day, Best Buy’s CEO
and CFO held a conference call with analysts,
during which Best Buy’s CFO stated that(1) the company’s earnings were “essentiallyin line” with management’s “original
expectations for the year”; and (2) thecompany was “on track to deliver and exceed”
its EPS guidance.
Between September 14, 2010 and December
13, 2010, Best Buy’s share price rose (but not
in a straight line) to $41.70. On December
14, 2010, Best Buy issued a press releaseannouncing that it had reduced its EPS
guidance to $3.20-$3.40 in light of a decline
in third quarter sales. That day, Best Buy’s
shares closed at $35.52, a decline of 14.8%.
Plaintiffs subsequently brought the instantsecurities fraud action alleging that Best
Buy and three of its executives had mademisstatements in the September 14, 2010press release and during the analyst
conference call that same day. On August 5,
2013, the district court found the statementsin the press release to be inactionable
forward-looking statements protected under
the Private Securities Litigation Reform Act’s
Safe Harbor provision. The court permitted
plaintiffs to proceed with their claims
based on the statements made during theconference call.

District Court Grants Plaintiffs’
Motion for Class Certification
Despite Evidence That theConference Call Statements Did Not
Affect Best Buy’s Stock Price
Plaintiffs then moved for class certification,
invoking the fraud-on-the-market
presumption of reliance established in Basicv. Levinson, 485 U.S. 224 (1988). Plaintiffs
presented an expert event study concludingthat Best Buy’s “stock price increased inreaction to the three allegedly misleadingstatements on September 14.” Plaintiffs’
expert did not separate out the effects of
the 8 a.m. press release and the 10 a.m.
conference call.

Defendants submitted price impact rebuttal
evidence through an expert event study
showing that the price increase on September
14, 2010 “occurred after the press release but
before the call.” Defendants’ expert opinedthat “the ‘on track’ and ‘in line’ conference callstatements ‘had no discernible impact on Best
Buy’s stock price.’”
Plaintiffs’ expert then submitted a reply
report agreeing that “the conference callstatements did not immediately increase[Best Buy’s] stock price because ‘the economic
substance’ was disclosed in the press release,and thus ‘by the time the . . . conference callstarted, the economic substance of the alleged
misrepresentations was largely reflected inBest Buy’s stock price.’” In the reply report,
plaintiffs’ expert contended for the first timethat the December 14, 2010 price decline
somehow demonstrated that the “in line” and“on track” statements artificially propped up
Best Buy’s stock price on September 14 andthroughout a three-month class period.
On August 6, 2014, the district court granted
plaintiffs’ motion for class certification. The
court concluded that defendants had notpresented adequate evidence to rebut the
fraud-on-the-market presumption. IBEW
Local 98 Pension Fund v. Best Buy Co., 2014
WL 4746195 (D. Minn. 2014). The court
reasoned that “[e]ven though [Best Buy’s]
stock price may have been inflated prior
to the earnings phone conference, . . . thealleged misrepresentations could have further
inflated the price, prolonged the inflation of
the price, or slowed the rate of fall.” The court
determined that “price impact can be shownby a decrease in price following a revelationof the fraud,” and found that defendants had“not offered evidence to show that Best Buy’s
stock price did not decrease when the truth
was revealed.” Defendants appealed.

Eighth Circuit Reverses, Finding
the District Court Misapplied thePrice Impact Analysis Mandated
by Halliburton
At the outset of its discussion, the Eighth
Circuit agreed with the district court’s holdingthat “when plaintiffs presented a prima faciecase that the Basic presumption applie[d]to their claims, defendants had the burden
to come forward with evidence showing alack of price impact.” However, the Eighth
Circuit held that the district court erred by2

“ignor[ing]” defendants’ “strong evidence
on this issue – the opinion of plaintiffs’
own expert.”
The Eighth Circuit underscored that plaintiffs’“event study showed that the forward-looking
EPS guidance in the press release had an
immediate impact on the [Best Buy] market
price, whereas the confirming statementsin the conference call two hours later had
no additional price impact.” The Eighth
Circuit held that “this was direct evidence
that investors did not rely on the executives’confirming statements” in the conference
call. The court explained that the lack ofprice impact was “consistent with common
sense” because “[e]arnings projections arestatements of what a company is ‘on track’
to do” and “thus, the Best Buy executives’conference call statements added nothing towhat was already public.”
The Eighth Circuit rejected plaintiffs’
assertion that “the conference call statements
effected a gradual increase in stock pricebetween September and December.” Thecourt held that plaintiffs’ argument was“contrary to the efficient market hypothesison which the Basic presumption of reliance isbased.” The Eighth Circuit similarly rejected
plaintiffs’ contention that Best Buy’s “pricedrop after the December 14 ‘corrective
disclosure’ was evidence of the requisite
price impact–maintaining an inflated stock
price.” The court held that plaintiffs’ pricemaintenance “theory provided no evidence
that refuted defendants’ overwhelming
evidence of no price impact.”
The Eighth Circuit concluded that
“defendants [had] rebutted the Basicpresumption by submitting direct evidence(the opinions of both parties’ experts)
that severed any link between the alleged
conference call misrepresentations and thestock price at which plaintiffs purchased.”
Finding that plaintiffs had “presented nocontrary evidence of price impact,” theEighth Circuit held that “the district court[had] abused its discretion by certifying
the class.” The Eighth Circuit reversed the
district court’s decision and remanded theaction for proceedings “not inconsistent with[its] opinion.”
In a dissenting opinion, Judge Murphy
contended that the majority failed to addressplaintiffs’ “theory that the conference callstatements prevented [Best Buy’s] stock pricefrom declining[.]”Second Circuit:(1) “Probability” Standard
Only Applies to FAS 5’s
Disclosure Requirement If
There Was No Manifestationof a Potential Claim, and(2) Item 303 of Regulation
S-K Requires the Registrant’s
Actual Knowledge of a Trendor Uncertainty
On March 29, 2016, the Second Circuit
held that a “probability” standard applies
to claims alleging a failure to disclose a loss
contingency for unasserted claims pursuant
to Financial Accounting Standard 5 (“FAS 5”)
only if there has been “no manifestation bya potential claimant of an awareness of a
possible claim or assessment.” Indiana Pub.
Ret. Sys. v. SAIC, 2016 WL 1211858 (2d Cir.
2016) (Lohier, J.) (SAIC IV). In cases where apotential claimant has manifested awarenessof a possible claim, the court held that FAS
5’s disclosure requirements apply if a loss inconnection with that claim is a “reasonable
possibility.”
The Second Circuit further held that Item
303 of Regulation S-K, which mandates
the disclosure of certain “known trends or
uncertainties” in a public company’s Form
10-Ks and other SEC filings,3 “requires theregistrant’s actual knowledge of the relevant
trend or uncertainty” (emphasis added).

BackgroundThe case before the Second Circuit concerned
allegations that SAIC and several of its
executives made “material misstatements andomissions in SAIC’s public filings regarding
its exposure to liability for employee fraud inconnection with SAIC’s contract work for New
York City’s CityTime project,” an automatedtimekeeping program for government
employees.
3. Item 303 of Regulation S-K requires a registrant to “[d]escribe
any known trends or uncertainties that have had or that theregistrant reasonably expects will have a material favorable orunfavorable impact on net sales or revenues or income fromcontinuing operations.”3

In 2002, SAIC hired Gerard Denault to run
the CityTime project. Denault soon initiated“an elaborate kickback scheme” which
increased the costs of the CityTime project byhundreds of millions of dollars.
In late 2010, SAIC placed Denault on
administrative leave and commenced
an internal investigation. On March 9,
2011, SAIC’s audit team reported thatits investigation uncovered “improper
timekeeping practices” by Denault. Aroundthe same time period, then-Mayor Michael
Bloomberg announced he was consideringseeking recovery of the City’s payments to
SAIC in connection with the CityTime project.
A criminal investigation into the CityTime
project was also underway.
On March 25, 2011, SAIC filed its Form
10-K. The company did not disclose any
potential liability related to the CityTime
project but instead “touted its commitment
to high standards of ‘ethical performanceand integrity.’” It was not until SAIC filed its
Form 8-K on June 2, 2011, that the company
disclosed its exposure to potential criminal
liability and the possible reimbursement of
payments made by the City for the CityTime
project. Ultimately, SAIC terminatedDenault’s employment and entered into adeferred prosecution agreement, “pursuant
to which SAIC agreed to reimburse the City
approximately $500.4 million and to forfeit$40 million in unpaid receivables.”Among other claims, plaintiffs alleged that
SAIC’s March 2011 Form 10-K failed todisclose (1) loss contingencies as required
under FAS 5 of the Generally Accepted
Accounting Principles (“GAAP”), and (2)“known trends or uncertainties” that could
have a material impact on SAIC’s income,as required under Item 303 of Regulation
S-K. On January 30, 2014, the district
court dismissed plaintiffs’ FAS 5 and Item

303 claims. In re SAIC Sec. Litig., 2014
WL 407050 (S.D.N.Y. Jan 30, 2014) (SAIC
II). Plaintiffs sought leave to amend theircomplaint to include additional allegations in
support of their FAS 5 and Item 303 claims.
On September 30, 2014, the district court
denied plaintiffs’ motion to file an amended
complaint, finding that any such amendment
would be futile. In re SAIC Sec. Litig., 2014
WL 4953614 (S.D.N.Y. Sept. 30, 2014) (SAIC
III). Plaintiffs appealed.

Second Circuit Holds the District
Court Erred in Applying a“Probability” Standard to Plaintiffs’
FAS 5 Claims
Under FAS 5 of GAAP, an issuer must
“disclose a loss contingency when a loss isa ‘reasonable possibility,’ meaning that it is‘more than remote but less than likely.’” SAIC
IV, 2016 WL 1211858 (quoting FAS Board,Statement of FAS 5).
The district court determined that under
FAS 5, disclosure of a loss contingency inconnection with a potential claim “is not
required . . . unless it is considered probablethat a claim will be asserted.” SAIC II, 2014
WL 407050 (emphasis added). The court heldthat plaintiffs had failed to state a claim for
failure to disclose a loss contingency under
FAS 5 because the allegations did “not suggest
that, by the time of the March 2011 filing, theinformation available left the company withthe belief that a claim or assessment against it
was probable.” SAIC II, 2014 WL 407050.
On appeal, the Second Circuit determinedthat the district court “appear[ed] to havemisunderstood the standard applicable toclaims under FAS 5.” SAIC IV, 2016 WL
1211858. The Second Circuit explainedthat “[t]he ‘probability’ standard applies inlieu of the ‘reasonable possibility’ standard
only if the loss contingency arises from ‘an4unasserted claim or assessment when there
has been no manifestation by a potential
claimant of an awareness of a possible
claim or assessment’” (quoting FAS Board,Statement of FAS 5). In the case before
it, however, the Second Circuit held “the‘reasonable possibility’ standard applie[d] inview of the [amended complaint’s] allegationthat by March 2011 the City had manifested
an awareness of a possible, sizeable claim
against SAIC.”The Second Circuit found the amended
complaint adequately alleged that by March
2011, “the CityTime criminal investigation
was as focused on SAIC as it was on SAIC’s
individual employees[.]” The complaintalso “alleged that by March 9, 2011, when
SAIC received the results of its internal
investigation about possible fraud, SAIC wasaware not only of Denault’s wrongdoing but
also its own potential liability to the City.” Inview of these allegations, the Second Circuit
held the amended complaint stated a claim
based on SAIC’s failure to disclose a loss
contingency under FAS 5.

Second Circuit Holds Item 303
of Regulation S-K Requires theRegistrant’s Actual Knowledge of
the Trend or Uncertainty At Issue
The Second Circuit noted that it has “neverdirectly addressed whether Item 303 requiresthat a company actually know or merely
should have known of the relevant trend,
event, or uncertainty in order to be liable
for failing to disclose it.” The Second Circuit
observed that in prior cases, it had “assumed,
without deciding, that Item 303 required anallegation or showing of actual knowledge
rather than a lesser standard of recklessness
or negligence.”
Considering the question squarely for the
first time, the Second Circuit held that “Item303 requires the registrant to disclose only
those trends, events, or uncertainties that it
actually knows of when it files the relevant
report with the SEC.” The court reasoned that“[t]he plain language of Item 303” supports
this interpretation. Specifically, “Item 303
demands that the registrant ‘[d]escribe any
known trends or uncertainties’ and also
requires disclosure where ‘the registrant
knows of events that will cause a materialchange in the relationship between costs
and revenues,’ such as a ‘known future

increase[ ] in costs of labor’” (quoting Item
303) (emphasis added by the court). The
Second Circuit also noted that “[t]he SEC’s
interpretation of Item 303 further confirms
this plain-language reading of Item 303,
insofar as it advises that the trends or
uncertainties must be ‘presently known
to management’” (quoting the SEC’s
Interpretive Release) (emphasis added by the
court). Significantly, the Second Circuit statedthat “[i]t is not enough” for purposes of Item
303 that the registrant “should have knownof the existing trend, event, or uncertainty”(emphasis added).

Second Circuit Determines
Plaintiffs Adequately Alleged a
Failure to Disclose a Known Trendor Uncertainty Under Item 303 ofRegulation S-K
Applying this standard to plaintiffs’
allegations, the Second Circuit held that theamended complaint “support[ed] a strong
inference that SAIC actually knew (1) about
the CityTime fraud before filing its Form
10-K on March 25, 2011, and (2) that it could
be implicated in the fraud and required
to repay the City the revenue generated
by the CityTime contract.” The court also
found the amended complaint alleged that“[e]xposure of the fraud also jeopardized
SAIC’s existing or future relationships withother governmental entities that accounted
for a significant amount of its revenue.” Given
these allegations, the Second Circuit held that
SAIC was required under Item 303 to disclose
how the CityTime issues “might reasonably
be expected to materially impact SAIC’s
future revenues.”
Notably, the Second Circuit rejected
defendants’ contention that “the loss of the
CityTime contract was ultimately not material
in view of the fact that it was a single contract
out of SAIC’s more than 10,000 ongoing
contracts and that it was worth a fraction of
SAIC’s yearly revenues[.]” The court foundthat SAIC’s materiality argument suggested
that it should “consider quantitative factors
only in the narrowest light in determining
the financial impact of losing the CityTime
project due to the fraud, and to otherwise
ignore qualitative factors.” The Second Circuit
explained that given “[t]he seriousness of the
CityTime fraud and the alleged importance of
the CityTime project to SAIC’s future presencein the City and its ability to sell similar
5

services to other municipalities around theUnited States,” it was “reluctant to conclude
at this stage that the alleged misstatements
were ‘so obviously unimportant’ either
quantitatively or qualitatively that they could
not be material.”

Second Circuit Deems Inactionable
SAIC’s Statements Concerning Its
Commitment to Ethics and Integrity
On appeal, the Second Circuit also considered
plaintiffs’ contention that the district court
erred in dismissing claims based on allegedly“materially false statements about SAIC’s
commitment to ethics and integrity” in its
2011 Annual Report. The Second Circuit held“‘[p]laintiffs’ claim that these statements
were knowingly and verifiably false when
made does not cure their generality, which iswhat prevents them from rising to the levelof materiality required to form the basis forassessing a potential investment’” (quoting
City of Pontiac Policemen’s & Firemen’sRet. Sys. v. UBS AG, 752 F.3d 173 (2d Cir.
2014)). The court explained the statements
at issue here were indistinguishable fromthe “puffery” it had previously rejected in
ECA, Local 134 IBEW Joint Pension Trust ofChicago v. JP Morgan Chase, 553 F.3d 187(2d Cir. 2009). In ECA, the Second Circuit
held that statements concerning a company’scommitment to integrity are “typically ‘too
general to cause a reasonable investor torely upon them,’ in part because an investor‘would not depend on [the statements] as aguarantee that [the company] would nevertake a step that might adversely affect its
reputation’” (quoting ECA, 553 F.3d 187). The
court therefore affirmed dismissal of claims
based on those statements.
Notably, the Second Circuit clarified its
decision should not be read to mean “thatstatements about a company’s reputation
for integrity or ethical conduct can nevergive rise to a securities violation.” The court
explained that “[s]ome statements, in context,
may amount to more than ‘puffery’ and may
in some circumstances violate the securities
laws[.]” The Second Circuit offered as an
example of this exception “a company’s
specific statements that emphasize its
reputation for integrity or ethical conduct as
central to its financial condition or that areclearly designed to distinguish the company
from other specified companies in the same
industry.”Southern District of New York:
Court Dismisses Securities
Fraud Action Against Regional
Management for Failure toAllege Material Misstatements
or Omissions
On March 30, 2016, the Southern District of
New York dismissed in its entirety a securities
fraud action against Regional Management(“RM”), a consumer finance company
specializing in subprime lending.4 Waterford
Twp. Police & Fire Ret. Sys. v. Reg’l Mgmt.
Corp., 2016 WL 1261135 (S.D.N.Y. 2016)(Swain, J.). The court found that plaintiffs
failed to identify any “misstatements oromissions of material facts” and “rest[ed]solely on non-actionable opinion statements”
and allegations of fraud by hindsight.

Background
RM’s loan offerings include the mailingto prescreened customers of “livechecks,” which, when cashed, becomeloans. In the complaint, plaintiffs alleged
misrepresentations about the loan loss
reserves for and credit performance of RM’s
live check program. Plaintiffs also alleged that
RM’s underwriting practices were unsoundand that RM should have predicted anddisclosed in advance increased delinquencies
in live checks. Defendants moved to dismiss
plaintiffs’ complaint for “fail[ure] to allege
any actionable misstatement or omission ofmaterial fact.”
4. Simpson Thacher represents Regional Management, its current
and former directors and officers, and its former shareholders
Palladium Equity Partners and Parallel Equity Partners in thisaction.
6

Court Holds Plaintiffs Failed
to Allege Any Material
Misrepresentations or Omissions
The court granted defendants’ motion todismiss in its entirety, finding that plaintiffs
failed as a matter of law to allege any material
misrepresentation. As to plaintiffs’ principal
claims, which related to RM’s loan loss
reserves and credit performance statistics,
the court found that plaintiffs failed to allege
that any of those statistics were misstated inany way.
The court held that plaintiffs “failed to plead
facts demonstrating that RM’s earlier loss
reserve provisions were not the product ofsincere opinions regarding appropriate loss
reserves, notwithstanding the subsequent
substantial increase in those provisions
following the change of management.”
The court similarly held that plaintiffs’
claims that RM should have anticipatedand disclosed in advance that (i) live checkloan delinquencies might increase and (ii)
its staffing levels were inadequate were
inactionable claims of “fraud by hindsight.”
The court explained that under Second Circuit
precedent, “[p]laintiffs may not sustain causesof action” that “rely[ ] on ‘allegations that
defendants should have anticipated future
events and made certain disclosures earlier
than they actually did’” (quoting Novak v.
Kasaks, 216 F.3d 300 (2d Cir. 2000)).

In addition, the court held that “RM’scharacterizations of its underwriting practices
as ‘sound’ or ‘targeted,’” were “statementsin the nature of belief or opinion.” The court
dismissed such claims because there were no
allegations “demonstrating that RM or [itsexecutives] did not believe the statements
were true at the time they were made,” asrequired under the Second Circuit’s decisionin Fait v. Regions Fin. Corp., 655 F.3d 105(2d Cir. 2011).5 Plaintiffs alleged “no facts
demonstrating that RM’s management
believed that the [c]ompany’s underwriting
practices were unsound or inappropriate
for a program of that type, which involved
offering loans to large numbers of subprime
borrowers at high interest rates.” The court
further found that there were no allegations“demonstrating that RM knowingly failed
to follow the underwriting practices that it
actually disclosed, or that those practices were
objectively unsound in the context of the live
check program.”Southern District of New
York: (1) “Actual Knowledge”
Standard Does Not Apply to
Forward-Looking Statements
That Address Present Facts,and (2) PSLRA’s Safe Harbor
Provision Does Not Protect
Material Omissions
On April 22, 2016, the Southern Districtof New York denied defendants’ motion todismiss a securities fraud action brought
against Salix Pharmaceuticals and two of
its former officers alleging that defendants
had made false or misleading statements
concerning the inventory levels for certain
drugs. In re Salix Pharmaceuticals, 2016
WL 1629341 (S.D.N.Y. 2016) (Wood, J.).
The court held that the “actual knowledge”
requirement for forward-looking statements
under the safe harbor provision of thePrivate Securities Litigation Reform Act(“PSLRA”) does not apply to any statementthat “encompasses a representation ofpresent fact.” The court further held that
the PSLRA’s safe harbor “does not protect
material omissions.”
5. Please click here to read our prior discussion of the Fait
decision.
7

PSLRA’s “Actual Knowledge”
Requirement for ForwardLooking Statements Does Not
Apply to Statements That Discuss
Present Facts
The court explained that under the PSLRA’s
safe harbor provisions, plaintiffs asserting
securities fraud claims based on forwardlooking statements must show that the“statements were made with actual knowledgeof their falsity by the speaker.” The court
noted that “the scienter requirement forforward-looking statements is stricter thanfor statements of current fact.” A plaintiff may
establish scienter with respect to an alleged
misstatement of present facts with “a showingof either knowing falsity or recklessness[.]”As to forward-looking statements,
however, a plaintiff must provide “proof of
knowing falsity.”In the case before the court, defendants
contended that many of the statements at
issue were forward-looking because thestatements “predict[ed] future inventory
levels.” However, the court found thatthese “statements also encompass[ed]representations of present fact” and were
therefore “not subject to the PSLRA safe
harbor.” For example, the court pointed
to statements expressing defendants’
expectation that inventory levels of certain
pharmaceuticals “would return to ‘typical’levels by the end of the following quarter.”
The court determined that these statements
were “predicated upon representations
that current inventory levels” were not“typical.” The court held that “representations
concerning current inventory levels
constitute[d] actionable misstatements,
and, because they pertain[ed] to present
facts rather than future projections,[were] not subject to the heightened scienter
requirement of the PSLRA safe harbor.”

PSLRA’s Safe Harbor Provision for
Forward-Looking Statements Does
Not Apply to Material Omissions
The court further explained that the PSLRA’s
safe harbor provision “does not protect
material omissions.”
Here, the court held that defendants’statements concerning future inventory
levels were “misleading because of material
omissions” regarding the inventory levels

at the time. The court found that these“omission[s] led analysts to believe thatinventory levels were merely slightly outsideof the range that [d]efendants described as‘normal’ and could be returned to that levelwithin about three months” when “[i]n fact,
as [d]efendants later revealed, it would takeseveral years to return wholesaler inventory”
to a “normal” level. The court noted that while“a listener’s misunderstanding of what wassaid does not, on its own, make a statement
misleading, the allegation that several
different analysts understood [d]efendants as
describing current inventory levels provide[d]support for the [c]ourt’s conclusion that[d]efendants’ statements [were] reasonablyinterpreted as such.”
Because defendants’ statements concerning
future inventory levels included material
omissions, the court held that thesestatements were “not subject to the PSLRA
safe harbor for forward-looking statements.”

Cautionary Language Must
Specifically Address the Allegedly
Undisclosed Risk
Finally, the court determined that defendants’cautionary language “was inadequate to warnof the specific risk” of inventory build-up atissue here.
The court explained that in order “[t]o avail
themselves of the safe harbor protection
under the meaningful cautionary language
prong, defendants must demonstrate that
their cautionary language was not boilerplateand conveyed substantive information.”
The court underscored that “the relevant
cautionary language must be prominent andspecific, and must directly address exactly therisk that plaintiffs claim was not disclosed.”
Here, the court found that defendants’ “brief
and generic” disclaimers were insufficient
to satisfy the PSLRA’s cautionary language
requirement. The court noted that “[i]n morethan twelve pages of cautionary statements,‘inventory’ [was] mentioned only once asa possible factor that could impact future
revenue predictions[.]” The court held that
this “limited reference fail[ed] to alert thereasonable investor either to (1) the muchbroader risk of inventory build-up at issue
here, or (2) the lack of management review
of inventory levels to monitor the risk.” Thecourt further found defendants’ “failure to8

update [the] cautionary language over time
to reflect new information and new risks
support[ed] the conclusion” that defendants’warnings were “merely boilerplate.”

Court Holds Plaintiffs Adequately
Alleged Scienter Under the Actual
Knowledge or Recklessness
Standard Applicable to Statementsof Present Fact
Because the court found that the statements
at issue were not forward-looking, the court
held that plaintiffs could establish scienterby showing that defendants either “knewor were reckless in failing to learn Salix’s

true inventory levels.” The court found thatplaintiffs had “raise[d] a strong inference of
scienter” by alleging that “potential acquirers
were able to determine Salix’s true wholeinventory levels” with ease and also by
pointing to “specific reports and statements
showing that [d]efendants were aware of or
could access Salix’s true wholesale inventory
levels.” The court further determined that“[t]he magnitude of [d]efendants’ alleged
fraud and the fact that it involved thecore operations of Salix’s business also
support[ed] a strong inference of scienter.”
The court therefore denied defendants’
motion to dismiss in its entirety.

The Securities Law Alertis edited by Paul C. Gluckow
pgluckow@stblaw.com /+1-212-455-2653, Peter E. Kazanoffpkazanoff@stblaw.com /+1-212-4553525 and Jonathan K. Youngwood
jyoungwood@stblaw.com /+1-212-455-3539).

9

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Alan C. Turner+1-212-455-2472
aturner@stblaw.com

Paul C. Gluckow+1-212-455-2653
pgluckow@stblaw.com

Craig S. Waldman+1-212-455-2881
cwaldman@stblaw.com

Nicholas S. Goldin+1-212-455-3685
ngoldin@stblaw.com

George S. Wang
+1-212-455-2228
gwang@stblaw.com

Peter E. Kazanoff+1-212-455-3525
pkazanoff@stblaw.com

David J. Woll
+1-212-455-3136
dwoll@stblaw.com

Joshua A. Levine+1-212-455-7694
jlevine@stblaw.com

Jonathan K. Youngwood+1-212-455-3539
jyoungwood@stblaw.com

Joseph M. McLaughlin+1-212-455-3242
jmclaughlin@stblaw.com

Alexis S. Coll-Very+1-650-251-5201
acoll-very@stblaw.com
James G. Kreissman+1-650-251-5080
jkreissman@stblaw.com

Washington, D.C.
Peter H. Bresnan+1-202-636-5569
pbresnan@stblaw.com
Jeffrey H. Knox
+1-202-636-5532
jeffrey.knox@stblaw.com
Cheryl J. Scarboro+1-202-636-5529
cscarboro@stblaw.com
Peter C. Thomas+1-202-636-5535
pthomas@stblaw.com

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lawyers who authored it are rendering legal or other professional advice or opinions on specific facts
or matters, nor does the distribution of this publication to any person constitute the establishment of an
attorney-client relationship. Simpson Thacher & Bartlett LLP assumes no liability in connection withthe use of this publication. Please contact your relationship partner if we can be of assistance regardingthese important developments. The names and office locations of all of our partners, as well as ourrecent memoranda, can be obtained from our website, www.simpsonthacher.com.
10SimpsonThacherWorldwide

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Minato-Ku, Tokyo 106-0032
Japan+81-3-5562-6200
11