FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

JAMES SIRACUSANO, Individually 

and on behalf of all others

similarly situated,

No. 06-15677 Plaintiff-Appellant,

NECA-IBEW P D.C. Nos. ENSION FUND,

Claimant-Appellant,  CV 04-0886 MHM

CV 04-1012 MHM

v.

OPINION

MATRIXX INITIATIVES, INC.; CARL J.

JOHNSON; WILLIAM J. HEMELT,

Defendants-Appellees. 

Appeal from the United States District Court

for the District of Arizona

Mary H. Murguia, District Judge, Presiding

Argued and Submitted

June 9, 2009—San Francisco, California

Filed October 28, 2009

Before: Mary M. Schroeder, A. Wallace Tashima and

Carlos T. Bea, Circuit Judges.

Opinion by Judge Tashima

14507
COUNSEL

Joseph D. Daley, Coughlin Stoia Geller Rudman & Robbins

LLP, San Diego, California, for the plaintiff-appellant.

Michael G. Yoder, O’Melveny & Myers LLP, Newport

Beach, California, for the defendants-appellees.

14510 SIRACUSANO v. NECA-IBEW PENSION FUND
OPINION

TASHIMA, Circuit Judge:

Matrixx Initiatives, Inc. (“Matrixx”) is a pharmaceutical

company that sells cold products through its wholly-owned

subsidiary, Zicam, LLC. One of its main products is Zicam

Cold Remedy, which comes in several different forms.1

Plaintiffs-Appellants are lead plaintiff, NECA-IBEW Pension

Fund, and named plaintiff, James Siracusano, in a class action

brought against Matrixx and three Matrixx executives (collectively “Appellees”) under the Private Securities Litigation

Reform Act of 1995 (“PSLRA”). Appellants alleged that

Appellees violated the Securities Exchange Act of 1934 by

failing to disclose material information regarding Zicam Cold

Remedy — specifically, that Zicam causes a condition called

anosmia, which is a loss of the sense of smell, in its users. The

district court granted in part and denied in part Appellees’

motion to strike portions of the complaint and granted Appellees’ motion to dismiss the complaint and the action. We have

jurisdiction pursuant to 28 U.S.C. § 1291. We reverse and

remand for further proceedings.

BACKGROUND2

1On June 16, 2009, the Food and Drug Administration (“FDA”) issued

a warning letter to Matrixx, setting forth the FDA’s conclusion that several

Zicam Cold Remedy products “may pose a serious risk to consumers who

use them.” http://www.fda.gov/ICECI/EnforcementActions/Warning

Letters/ucm166909.htm (visited July 19, 2009; information moved to

http://www.fda.gov/ForConsumers/ConsumerUpdates/ucm166931.htm).

The FDA stated that it had received “more than 130 reports of anosmia,

(loss of sense of smell, which in some cases can be long-lasting or permanent), associated with use of these products.” Id.

2The following allegations are taken from the Consolidated Amended

Complaint (“CAC”). In reviewing the district court’s dismissal for failure

to state a claim, we accept the plaintiffs’ allegations as true and construe

them in the light most favorable to the plaintiffs. Zucco Partners, LLC v.

Digimarc Corp., 552 F.3d 981, 989 (9th Cir. 2009). As such, the allegations are hereafter stated as fact. 

SIRACUSANO v. NECA-IBEW PENSION FUND 14511
On April 27, 2004, Appellants filed a class action against

Matrixx and three individual defendants — Carl Johnson,

Matrixx’s Chief Executive Officer, President and a director;

William Hemelt, Matrixx’s Chief Financial Officer and Executive Vice President; and Timothy Clarot, Matrixx’s Vice

President and Director of Research and Development — on

behalf of investors who purchased Matrixx securities during

the class period, October 22, 2003, to February 6, 2004.

Zicam Cold Remedy accounted for approximately 70 percent

of Zicam’s sales during the class period. Zicam Cold Remedy’s active ingredient is zinc gluconate and can be applied as

a nasal spray or a gel. Appellants alleged that Appellees were

aware that numerous users of Zicam had developed anosmia,

but that they failed to disclose the risk and instead issued false

and misleading statements regarding Zicam.

I. Allegations of Adverse Information Regarding Zicam

In December 1999, Dr. Alan Hirsch, the Neurological

Director of the Smell & Taste Treatment and Research Foundation, Ltd., “called Matrixx’s customer service line to

inquire into the amount of zinc contained in Zicam nasal gel.”

CAC ¶ 25. Hirsch spoke with a Mr. Landau and explained

that at least one of Hirsch’s patients had developed anosmia

after using Zicam. Hirsch stated that other studies had indicated potential problems with “intranasal application of zinc,”

and offered to conduct a clinical study on the issue. Mr. Landau declined his offer.

In September 2002, Clarot, Vice President of Research and

Development, called Miriam Linschoten, Ph.D., of the University of Colorado Health Sciences Center. Clarot contacted

Linschoten because a patient Linschoten had treated for loss

of smell following use of Zicam also had complained to

Matrixx. Linschoten expressed concern that Zicam, an overthe-counter product, contained no warning that it could cause

a loss of smell. Clarot told Linschoten that Matrixx had

received similar complaints from other customers as early as

14512 SIRACUSANO v. NECA-IBEW PENSION FUND
1999. Linschoten asked whether Matrixx had performed any

studies, told Clarot about existing studies linking zinc sulfate

to the loss of smell, and offered to send Clarot information

regarding those studies. Clarot replied that Matrixx had not

done any studies but that “it had hired a consultant to review

the product.” CAC ¶ 26. 

On September 20, 2002, Linschoten sent an email to Clarot

including abstracts on the link between zinc sulfate and the

loss of smell. Clarot called Linschoten to ask if she would

participate in animal studies to be conducted by Matrixx, but

Linschoten declined because she focused on human, not animal, research.

Linschoten, Dr. Bruce Jafek of the University of Colorado

School of Medicine, and another colleague planned to submit

their findings regarding ten patients who had developed anosmia following Zicam use in a presentation to the American

Rhinologic Society on September 20, 2003. On September 12,

2003, “Matrixx sent a letter to Jafek stating that he did not

have permission to use Matrixx’s name or the names of its

products” in the presentation. CAC ¶ 29. Jafek asked for permission to use the Zicam name, but Matrixx refused. The presentation to the American Rhinologic Society accordingly

was made without naming Zicam. “Jafek’s findings regarding

Zicam were ultimately disclosed to the public on February 6,

2004 on Good Morning America.” Id.

“As of April of 2004, Dr. Jafek had evaluated over 100

cases of anosmia following Zicam use.” CAC ¶ 30. Linschoten had treated approximately 65 such patients, all of whom

complained of “an ‘immediate, severe burning’ immediately

following use of Zicam nasal gel, followed by a loss of

smell.” None of the patients had fully recovered. Id. Jafek and

Hirsch “have observed that the Zicam nasal spray does reach

the upper area of the nasal cavity where smell reception

occurs.”

SIRACUSANO v. NECA-IBEW PENSION FUND 14513
II. Allegations of Misleading Statements

On October 22, 2003, Matrixx issued a press release

announcing that its net sales for the third quarter of 2003 had

increased by 163% over the third quarter of 2002. Johnson

was quoted in the press release as follows:

The Zicam brand is poised for growth in the upcoming cough and cold season with improved retail

exposure by virtue of three [new] unique oral delivery forms of our Zicam Cold Remedy product, the

resumption of our television advertising campaigns

in recent weeks and the momentum from last year’s

successful season. Additionally, our retail partners

have come to rely on the Zicam brand not only as an

efficacious product for their customers, but also for

the profitability that Zicam branded products produce for their respective bottom-lines.

Matrixx 10/22/2003 press release. Appellants alleged that

these statements were materially false and misleading because

they failed to disclose Appellees’ awareness of the material

health risk that Zicam posed to consumers.

On October 23, 2003, Appellees held an earnings conference call, at which Johnson expressed his “enthusiasm for the

most recently completed quarter” and his “optimis[m] about

the future.” 10/23/03 Tr. at 1. Johnson explained that

we have very strong momentum going into the

upcoming cough and cold season. In addition, what

lies behind these results is a unique product in the

Zicam product line, a product that offers a unique

benefit, the ability for consumers to actually reduce

the duration and severity of the common cold, not

just mask the symptoms, and tremendous support

that we are receiving from our retail customers.

14514 SIRACUSANO v. NECA-IBEW PENSION FUND
Id. at 2. Johnson further expressed the expectation for the year

that “our revenues will be up in excess of 50% and that earnings per share for the full year will be in the 25-30¢ range.”

Id. at 5. Hemelt stated that the growth “was driven by

increased sales of all 10 of our Zicam products,” explaining

that approximately one-third of the increase in sales was due

to “three new Zicam oral cold remedy products,” and that the

remainder of the increase “was due to increased sales of our

other seven Zicam products.” Id. at 4. Johnson and Hemelt

then answered questions.

At one point, they were asked to “make any comment on

the litigation MTXX or its officers are involved in, or whether

or not there is any SEC [Securities and Exchange Commission] investigation.” Id. at 17. They replied that “[t]he officers

of this company are not involved in any litigation,” and that

they were not aware of any SEC investigation.3Id. at 17-18.

Johnson concluded by reiterating “the optimism we have for

the future.” Id. at 32. There was no mention of the anosmia

issue.

On November 12, 2003, Matrixx filed its Form 10-Q report

for the third quarter of 2003 with the SEC. The section of the

Form 10-Q that Appellants alleged was false and misleading

was this paragraph from the section on Risk Factors:

We may incur significant costs resulting from product liability claims

We are subject to significant liability should use or

consumption of our products cause injury, illness or

death. Although we carry product liability insurance,

3A lawsuit was filed against Matrixx and Zicam on October 14, 2003,

in the United States District Court for the Western District of Michigan,

alleging that Zicam caused anosmia. Matrixx was served on October 23,

2003, the day of the earnings conference call. Christensen v. Matrixx Initiatives, Inc., No. 03-cv-0146, Docket No. 3. 

SIRACUSANO v. NECA-IBEW PENSION FUND 14515
there can be no assurance that our insurance will be

adequate to protect us against product liability

claims or that insurance coverage will continue to be

available on reasonable terms. A product liability

claim, even one without merit or for which we have

substantial coverage, could result in significant legal

defense costs, thereby increasing our expenses and

lowering our earnings. Such a claim, whether or not

proven to be valid, could have a material adverse

effect on our product branding and goodwill, resulting in reduced market acceptance of our products.

This in turn could materially adversely affect our

results of operations and financial condition.

CAC ¶ 35. Appellants alleged that these statements were

materially false and misleading because Appellees “failed to

disclose that a lawsuit alleging that Zicam caused anosmia

had already been filed and, given the findings of the researchers at the University of Colorado it was highly likely that

additional suits would be filed in the future.” Id.

Matrixx issued a press release on January 7, 2004, in which

it “upwardly revised its guidance for fiscal year 2003. The

Company expects total 2003 revenues to grow by greater than

80 percent compared to 2002 and fully diluted earnings per

share to be in the range of $0.33 to $0.38.” CAC ¶ 37.

Matrixx reported that “[t]he increase in the guidance for 2003

reflects a much greater incidence of colds than previously

anticipated.” Id.

On January 30, 2004, an article in the Dow Jones

Newswires reported that the FDA was “looking into complaints that an over-the-counter common-cold medicine manufactured by a unit of Matrixx Initiatives Inc. (MTXX) may

be causing some users to lose their sense of smell.” The article stated that “[t]he FDA’s interest follows at least three lawsuits filed by individuals against Matrixx and Zicam LLC, a

wholly-owned subsidiary, by users of Zicam Cold Remedy.”

14516 SIRACUSANO v. NECA-IBEW PENSION FUND
Appellants alleged that Matrixx’s stock declined after this

report, “falling from $13.55 per share on January 30, 2004 to

$11.97 per share on February 2, 2004.” CAC ¶ 41.

On February 2, 2004, Matrixx issued a press release, “respond[ing] to the Dow Jones ‘In The Money report: FDA

Looks Into Complaints About Zicam,’ by Carol S. Remond,

alleging that the FDA is investigating consumer complaints

regarding intranasal zinc gluconate-induced loss of smell.”

Matrixx 2/2/2004 press release. The press release stated:

Matrixx Initiatives, Inc., the manufacturer of

Zicam(R) Cold Remedy, is not aware of an FDA

inquiry into the safety of our intranasal zincgluconate products . . . . 

All Zicam products are manufactured and marketed

according to FDA guidelines for homeopathic medicine. Our primary concern is the health and safety of

our customers and the distribution of factual information about our products. Matrixx believes statements alleging that intranasal Zicam products cause

anosmia (loss of smell) are completely unfounded

and misleading.

In no clinical trial of intranasal zinc gluconate gel

products has there been a single report of lost or

diminished olfactory function (sense of smell).

Rather, the safety and efficacy of zinc gluconate for

the treatment of symptoms related to the common

cold have been well established in two double-blind,

placebo-controlled, randomized clinical trials. In

fact, in neither study were there any reports of anosmia related to the use of this compound. The overall

incidence of adverse events associated with zinc gluconate was extremely low, with no statistically significant difference between the adverse event rates

for the treated and placebo subsets.

SIRACUSANO v. NECA-IBEW PENSION FUND 14517
A multitude of environmental and biologic influences are known to affect the sense of smell. Chief

among them is the common cold. As a result, the

population most likely to use cold remedy products

is already at increased risk of developing anosmia.

Other common causes of olfactory dysfunction

include age, nasal and sinus infections, head trauma,

anatomical obstructions, and environmental irritants.

The circumstances surrounding the development of

Ms. Remond’s column are extremely suspect. The

article appeared online in public financial message

boards almost immediately following its availability

through the Dow Jones ‘In The Money’

subscription-only service. At least one of these message board postings was made by a registered username frequently used by Floyd Schneider, a

defendant currently being sued for defamation by

Matrixx Initiatives. From at least August 2001 to the

present, Schneider has posted false and defamatory

statements about Matrixx on various Internet message boards using a variety of anonymous aliases. It

has come to our attention that Schneider has also

attempted to interfere with Matrixx’ business by

contacting our retail customers.

Ms. Remond’s article appears on today’s Dow Jones

Newswire — the very day that Matrixx Initiatives is

deposing Schneider. We believe that the timing of

this article was manipulated by Schneider to interrupt the deposition process. We know that Ms.

Remond and Schneider were in close communication

during the development of Ms. Remond’s article and

even discussed the disclosure statement detailing the

basis for our suit against Schneider, which has not

yet been made public. Therefore, it is particularly

troubling that Ms. Remond neglected to mention the

defamation action or that Schneider was one of her

14518 SIRACUSANO v. NECA-IBEW PENSION FUND
chief sources of information. We consider her failure

to mention these facts to be a significant omission in

fair and balanced reporting.

Matrixx Initiatives would like to underscore that we

intend to vigorously pursue those individuals

involved in any effort to improperly discredit the

company and its products. Furthermore, we strongly

urge Dow Jones to open its own investigation to

determine whether Dow Jones’ credibility was

undermined by the use of copyrighted material in an

attempt to do further harm to the value and reputation of Matrixx Initiatives and its products.

Matrixx 2/2/2004 press release. Appellants alleged that

Matrixx’s “vigorous, but baseless, denials had their intended

effect: the stock price rose, closing at $13.40 per share on

February 3, 2004.” CAC ¶ 41.

On February 6, 2004, the television show Good Morning

America did a report on Matrixx’s zinc gluconate products

and anosmia. Reporter John Ferrugia reported that Jafek had

treated “ ‘more than a dozen patients’ ” and that four lawsuits

had been filed, and others were “ ‘being prepared.’ ” CAC

¶ 42. Appellants alleged that, “[i]n response to the Good

Morning America segment . . . , the price of Matrixx common

stock plummeted, falling from $13.05 per share on February

5, 2004, to close at $9.94 per share on February 6 — a oneday drop of 23.8% on unusually heavy trading volume.” CAC

¶ 43. 

On February 6, 2004, Matrixx issued another press release,

describing the reports linking anosmia with zinc gluconate

intranasal gels as “completely unfounded and misleading.”

Matrixx 2/6/2004 press release. Matrixx “assure[d] our consumers that Zicam Cold Remedy intranasal zinc gluconate

products are manufactured and marketed according to Food

SIRACUSANO v. NECA-IBEW PENSION FUND 14519
and Drug Administration guidelines for homeopathic medicine.” Id. Matrixx further asserted as follows:

In no clinical trial of intranasal zinc gluconate gel

products has there been a single report of lost or

diminished olfactory function (sense of smell).

Rather, the safety and efficacy of zinc gluconate for

the treatment of symptoms related to the common

cold have been well established in two double-blind,

placebo-controlled, randomized clinical trials. In

fact, in neither study were there any reports of anosmia related to the use of this compound. The overall

incidence of adverse events associated with zinc gluconate was extremely low, with no statistically significant difference between the adverse event rates

for the treated and placebo subsets.

A multitude of environmental and biologic influences are known to affect the sense of smell. Chief

among them is the common cold. As a result, the

population most likely to use cold remedy products

is already at increased risk of developing anosmia.

. . . 

A few researchers have attempted to link nasal products containing zinc to the onset of anosmia. However, this hypothesis is based on data from polio

studies conducted in the 1930s using a concentrated

zinc sulfate solution. Current nasal products, such as

Zicam Cold Remedy, contain zinc gluconate, which

is an entirely different compound.

Matrixx 2/6/2004 press release.

On February 19, 2004, Appellees filed a Form 8-K with the

SEC, in which Matrixx stated that it had “convened a two-day

meeting of physicians and scientists to review current information on smell disorders.” CAC ¶ 45. The form stated that

14520 SIRACUSANO v. NECA-IBEW PENSION FUND
the meeting was in response to the September 20, 2003, presentation to the American Rhinologic Society. The form further stated that, “[i]n the opinion of the panel, there is

insufficient scientific evidence at this time to determine if

zinc gluconate, when used as recommended, affects a person’s ability to smell.”

On March 4, 2004, Ferrugia, the reporter on the Good

Morning America segment, reported on TheDenverChannel.com that Matrixx “now admit[ted] that they don’t know if

their nasal gel could cause loss of smell.” CAC ¶ 47. The article stated that “[t]he stunning information came after a

7NEWS investigation found that some consumers who have

used Zicam report the loss of smell.” Id. The article reported

that Matrixx initially “told us its studies showed the product

[was] safe,” but that it would begin studies to determine if the

product could cause the loss of smell. Id. (alteration in original). The article further provided as follows:

Doctors at the University of Colorado Taste and

Smell Clinic have an increasing number of patients

who say they lost their sense of smell after using

Zicam intranasal gel, which contains zinc gluconate.

Dr. Bruce Jafek has been documenting the cases

from around the country, and there have been several

lawsuits in at least five states. All along, Matrixx Initiatives, the maker of Zicam, said the product was

safe. But now it admits there are no studies dealing

with the issue. In a filing to the Securities and

Exchange Commission on issues affecting stockholders, Matrixx now discloses: “There is insufficient evidence at this time to determine if zinc

gluconate, when used as recommended, affects a

person’s ability to smell.” What’s more, after our initial investigation, dozens of consumers have filed

complaints with the Food and Drug Administration.

In response, the company formed a medical advisory

SIRACUSANO v. NECA-IBEW PENSION FUND 14521
panel in February. It says it will now conduct:

“. . . animal and human studies to further characterize these post-marketing complaints.” Study findings

are expected to be available in 12 months. “It seems

to me that those studies should have been done

before they put the product on the market,” said

Jafek.

Id.

On March 19, 2004, Matrixx filed its Form 10-K with the

SEC, stating that “numerous suits alleging that its Zicam product(s) caused anosmia had been filed.” CAC ¶ 48. “As of

December 31, 2003, suits involving three users of the Zicam®

Cold Remedy nasal gel products had been filed in various federal and state courts.” Id. Appellants stated that, “[a]ccording

to Matrixx’s own SEC filings, from late 2003 through October 2004 Matrixx has been sued by approximately 284 individuals in 19 different lawsuits alleging that Zicam caused

damage to their sense of smell,” and included in the complaint

a table detailing the lawsuits. CAC ¶ 49. The table included

suits filed on October 14, 2003, December 8, 2003, December

18, 2003, and January 23, 2004, as well as numerous suits following the close of the class period.

Appellants alleged that the financial information contained

in Matrixx’s Form 10-Q filed on November 12, 2003, was

false and misleading and violated SEC rules and the Generally Accepted Accounting Principles (“GAAP”) promulgated

by the Financial Accounting Standards Board (“FASB”).

Appellants asserted that, at the time Matrixx filed the Form

10-Q, 

Matrixx should have disclosed, if not provided a

reserve for, a potential contingency that had arisen

related to safety issues concerning its products. During the Class Period, Matrixx did not disclose that

several lawsuits had been filed against the Company,

14522 SIRACUSANO v. NECA-IBEW PENSION FUND
including one prior to the start of the Class Period,

alleging that the Company’s zinc gluconate-based

products had caused plaintiffs to suffer from anosmia and that anecdotal evidence had surfaced questioning the safety of the Company’s mainstay cold

medication. The failure to disclose these known contingencies violated GAAP.

CAC ¶ 55. Appellants listed the FASB rules violated by

Matrixx’s Form 10-Q and asserted that “the undisclosed

adverse information concealed by defendants during the Class

Period is the type of information which, because of SEC regulations, . . . is expected by investors . . . to be disclosed and

is known by corporate officials . . . to be the type of information which is expected to be and must be disclosed.” CAC

¶¶ 56-57.

Appellants alleged that, “[a]s a result of defendants’ materially false and misleading statements and failure to disclose

adverse information regarding Zicam, Matrixx securities

traded at artificially inflated prices during the Class Period.”

CAC ¶ 58. Appellants also alleged that, “[d]uring the Class

Period, defendants materially misled the investing public,

thereby inflating the price of Matrixx common stock, by publicly issuing false and misleading statements and omitting to

disclose material adverse facts regarding Zicam, necessary to

make defendants’ statements, as set forth herein not false and

misleading.” CAC ¶ 59.

In the section of the complaint entitled “Additional Scienter

Allegations,” Appellants alleged as follows:

[D]efendants acted with scienter in that defendants

knew that the public statements or documents issued

or disseminated in the name of the Company were

materially false and misleading; knew that such

statements or documents would be issued or disseminated to the investing public; and knowingly and

SIRACUSANO v. NECA-IBEW PENSION FUND 14523
substantially participated or acquiesced in the issuance or dissemination of such statements or documents as primary violations of the federal securities

laws. As set forth elsewhere herein in detail, defendants, by virtue of their receipt of information

reflecting the true facts regarding Matrixx, their control over, and/or receipt and/or modification of the

Company’s alleged materially misleading misstatements and/or their associations with the Company

which made them privy to confidential proprietary

information concerning Matrixx, participated in the

fraudulent scheme alleged herein.

Defendants were aware since at least September of

2003, that numerous users of their Zicam product

had experienced a rare condition known as anosmia

or loss of smell. Findings of post treatment anosmia

were reported by Dr. Bruce Jafek, Miriam R. Linschoten and Bruce W. Morrow of the University of

Colorado School of Medicine, Department of Otolaryngology at a medical conference in September of

2003. At the time, Dr. Jafek had reported 10 cases of

anosmia after Zicam use. As of April of 2004, Dr.

Jafek had evaluated over 100 such cases. On September 12, 2003, over one month before the start of

the Class Period, Matrixx informed Dr. Jafek that “as

a legal matter” he did “not have their permission to

use their company name or product trademarks” in

the poster reporting Dr. Jafek’s research. In order to

avoid threatened legal action from the Company, Dr.

Jafek deleted any reference to Zicam or Matrixx

from the poster which he used to present his research

at a medical conference.4

4We do not disturb the district court’s order granting, in part, Appellees’

motion to strike portions of the CAC related to research published after the

close of the class period. 

14524 SIRACUSANO v. NECA-IBEW PENSION FUND
CAC ¶¶ 63-64.

Appellees filed a motion to strike any allegations that concerned user complaints and lawsuits that occurred after the

close of the class period. The district court denied the motion

in part and granted it in part. The court reasoned that the relevant inquiry was not whether there was a link between Zicam

and anosmia, but whether Appellees knew that their statements were false at the time they were made. The court therefore denied the motion to strike as to the complaints and

lawsuits that were filed because those allegations were relevant to Appellees’ knowledge of user complaints. However,

the court granted the motion to strike as to Jafek’s ultimate

conclusions, which were published after the close of the class

period.

The district court then dismissed the complaint without

prejudice, reasoning, that the allegations of user complaints

were not material because they were not statistically significant. The court also found that Appellants had failed sufficiently to allege scienter.

The court further stated that any amendment would be

futile “[a]bsent allegations Defendants knew there was a

definitive and statistically significant link between Zicam and

anosmia during the Class Period that was ‘sufficiently serious

and frequent to affect future earnings.’ ” The court therefore

granted the motion to dismiss and dismissed the complaint

without prejudice. The court then entered judgment, dismissing the complaint and the action without prejudice.5

 Appellants timely appealed.

5Although the judgment dismisses the action without prejudice, it is

“final for purposes of [28 U.S.C.] § 1291 [because] it (1) is a full adjudication of the issues, and (2) clearly evidences the judge’s intention that it be

the court’s final act in the matter.” Elliott v. White Mountain Apache

Tribal Court, 566 F.3d 845, 846 (9th Cir. 2009). 

SIRACUSANO v. NECA-IBEW PENSION FUND 14525
STANDARD OF REVIEW

The district court’s dismissal for failure to state a claim is

reviewed de novo. Zucco Partners, LLC v. Digimarc Corp.,

552 F.3d 981, 989 (9th Cir. 2009). We accept the plaintiffs’

allegations as true and construe them in the light most favorable to the plaintiffs. Id. Dismissal is “inappropriate unless the

plaintiffs’ complaint fails to ‘state a claim to relief that is

plausible on its face.’ ” Id. (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)).

DISCUSSION

[1] “Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b),

in combination with SEC Rule 10b-5, prohibits ‘any act, practice, or course of business which operates or would operate as

a fraud or deceit upon any person, in connection with the purchase or sale of any security.’ ” Rubke v. Capitol Bancorp

Ltd., 551 F.3d 1156, 1164 (9th Cir. 2009) (quoting 17 C.F.R.

§ 240.10b-5(c)). In order adequately to allege a violation of

Rule 10b-5, “a plaintiff must [allege] ‘(1) a material misrepresentation or omission of fact, (2) scienter, (3) a connection

with the purchase or sale of a security, (4) transaction and loss

causation, and (5) economic loss.’ ” Id. (quoting In re Daou

Sys., Inc., 411 F.3d 1006, 1014 (9th Cir. 2005)). The district

court dismissed the complaint on the grounds that Appellants

failed adequately to allege the first two elements; therefore,

we address only those two elements. 

I. Materiality

[2] Appellants contend that Appellees’ failure to disclose

information regarding the possible link between Zicam and

anosmia constituted the omission of a material fact. “An omitted fact is material if there is a substantial likelihood that a

reasonable shareholder would consider it important in deciding how to vote.” TSC Indus., Inc. v. Northway, Inc., 426 U.S.

438, 449 (1976). 

14526 SIRACUSANO v. NECA-IBEW PENSION FUND
[3] “ ‘Questions of materiality . . . involv[e] assessments

peculiarly within the province of the trier of fact.’ ” SEC v.

Talbot, 530 F.3d 1085, 1097 (9th Cir. 2008) (quoting Arrington v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 651 F.2d

615, 619 (9th Cir. 1981)) (alterations in original). Thus, “the

ultimate issue of materiality [is] appropriately resolved ‘as a

matter of law’ ” only where the omissions are “ ‘so obviously

important to an investor, that reasonable minds cannot differ

on the question of materiality.’ ” TSC, 426 U.S. at 450 (quoting Johns Hopkins Univ. v. Hutton, 422 F.2d 1124, 1129 (4th

Cir. 1970)). 

The district court summarized the “allegations of links

between Zicam and anosmia for which Defendants had

knowledge” as follows: “a phone conversation between a

Matrixx vice-president and University of Colorado researcher

discussing one anosmia complaint, a 1999 study recognizing

a possible link, and a University of Colorado study citing 11

cases of anosmia in Zicam users.”

6

 District Ct. Order at 11.

The court then found that Appellants had failed adequately to

allege materiality because the number of complaints of which

Appellees were aware was not “statistically significant.” The

court relied on the statistical significance standard used by the

Second Circuit in In re Carter-Wallace, Inc. Securities

6The district court also reasoned that “Matrixx conducted a double-blind

study regarding Zicam and not a single case of anosmia was reported.”

This was presumably a reference to Matrixx’s February 2, 2004, press

release, which states that “the safety and efficacy of zinc gluconate for the

treatment of symptoms related to the common cold have been well established in two double-blind, placebo-controlled, randomized clinical trials.”

The press release, however, does not state that any tests established that

the application of zinc gluconate to the nose is safe. In fact, as reported

by Ferrugia on March 4, 2004, Matrixx allegedly subsequently admitted

that “ ‘they don’t know if their nasal gel could cause loss of smell,’ ” and

that they would “begin . . . testing to determine whether its zinc compound

could be harmful when sprayed in the nose.” Moreover, the complaint

alleged that Clarot told Linschoten in September 2002 that Matrixx had

not conducted any studies and asked her to participate in studies. 

SIRACUSANO v. NECA-IBEW PENSION FUND 14527
Litigation, 150 F.3d 153, 157 (2d Cir. 1998), and In re

Carter-Wallace, Inc. Securities Litigation, 220 F.3d 36 (2d

Cir. 2000). We conclude, however, that the district court erred

in relying on the statistical significance standard to conclude

that Appellants failed adequately to allege materiality.

[4] The Supreme Court has rejected the adoption of a

bright-line rule to determine materiality because “ ‘[t]he

determination [of materiality] requires delicate assessments of

the inferences a “reasonable shareholder” would draw from a

given set of facts and the significance of those inferences to

him.’ ” Basic Inc. v. Levinson, 485 U.S. 224, 236 (1988)

(quoting TSC, 426 U.S. at 450) (second alteration in original).

Instead, courts should engage in a “fact-specific inquiry” in

assessing materiality. Id. at 240. Thus, “[d]etermining materiality in securities fraud cases ‘should ordinarily be left to the

trier of fact.’ ” SEC v. Phan, 500 F.3d 895, (9th Cir. 2007)

(quoting In re Apple Computer Sec. Litig., 886 F.2d 1109,

1113 (9th Cir. 1989)); see also No. 84 Employer-Teamster

Joint Council Pension Trust Fund v. Am. W. Holding Corp.,

320 F.3d 920, 934-35 (9th Cir. 2003) (declining to adopt a

bright-line rule to determine materiality, engaging in the factspecific inquiry required by Basic, and finding that the plaintiffs had sufficiently pleaded materiality).

[5] In relying on the statistical significance standard to

determine materiality, the district court made a decision that

should have been left to the trier of fact. Instead, we agree

with the approach of the court in In re Pfizer Inc. Securities

Litigation, 584 F. Supp. 2d 621 (S.D.N.Y. 2008), where the

United States District Court for the Southern District of New

York rejected the defendant pharmaceutical company’s argument that the plaintiffs failed to plead materiality, which was

based on the contention that three studies revealing adverse

effects of the company’s drug were not statistically significant. The court reasoned that it “cannot determine as a matter

of law whether such links were statistically insignificant

14528 SIRACUSANO v. NECA-IBEW PENSION FUND
because statistical significance is a question of fact.” Id. at

635-36. 

[6] Thus, we are to engage in the fact-specific inquiry

required by Basic. In doing so, we must take the allegations

in the complaint as true and construe them in the light most

favorable to Appellants and determine whether the complaint

“fails to state a claim to relief that is plausible on its face.”

Zucco, 552 F.3d at 989 (internal quotation marks omitted).

The following allegations in the CAC go to the question of

whether the information regarding the possible link between

Zicam and anosmia was information that a reasonable investor would have considered significant:

• In December 1999, Hirsch called Matrixx’s customer service line and reported one patient who had developed

anosmia after Zicam use and mentioned studies regarding

intranasal application of zinc.

• In September 2002, Clarot called Linschoten because one

of her patients had complained to Matrixx about Zicam

and anosmia. Clarot told Linschoten that Matrixx had

received similar complaints from other customers since

1999, and Linschoten told Clarot about studies linking

zinc sulfate to loss of smell.

• On September 20, 2002, Linschoten sent Clarot an email

with abstracts on the link between zinc sulfate and the loss

of smell.

• In September 2003, Jafek presented findings about ten or

eleven patients who suffered anosmia following Zicam

use. Matrixx, through Clarot, stopped Jafek from using

Matrixx’s and Zicam’s names in the presentation.

• On October 14, 2003, two plaintiffs filed suit against

Matrixx in the United States District Court for the Western

District of Michigan, alleging that Zicam caused anosmia.

SIRACUSANO v. NECA-IBEW PENSION FUND 14529
• On December 8, 2003, a plaintiff filed suit against Matrixx

in Los Angeles Superior Court regarding Zicam and anosmia.

• On December 18, 2003, another suit regarding Zicam and

anosmia was filed against Matrixx in Alabama state court

and removed to federal court.

• On January 23, 2004, five plaintiffs filed a consolidated

suit against Matrixx in the Superior Court of Maricopa

County, Arizona regarding Zicam and anosmia. An additional 261 plaintiffs later joined this action, after the close

of the class period. 

• By April 2004, Jafek “had evaluated over 100 cases of

anosmia following Zicam use,” and Linschoten had seen

65 cases, although the time period of these allegations is

not clear.

[7] We believe that the foregoing allegations are sufficient

to meet the pleading requirement under the PSLRA, which

requires that:

the complaint shall specify each statement alleged to

have been misleading, the reason or reasons why the

statement is misleading, and, if an allegation regarding the statement or omission is made on information

or belief, the complaint shall state with particularity

all facts on which that belief is formed.

15 U.S.C. § 78u-4(b)(1). The allegations in the CAC are sufficient to meet that standard and, as well, to “nudge[ ] [Appellants’] claims across the line from conceivable to plausible.”

Twombly, 550 U.S. at 570. Appellants have sufficiently

alleged materiality, and the district court’s finding to the contrary is reversed.

14530 SIRACUSANO v. NECA-IBEW PENSION FUND
II. Scienter

[8] In order to plead scienter, the PSLRA requires the complaint to “state with particularity facts giving rise to a strong

inference that the defendant acted with the required state of

mind.” 15 U.S.C. § 78u-4(b)(2). The plaintiff “must allege

that . . . the defendant had an intention ‘to deceive, manipulate, or defraud.’ ” Metzler Inv. GMBH v. Corinthian Colls.,

Inc., 540 F.3d 1049, 1065-66 (9th Cir. 2008) (quoting Ernst

& Ernst v. Hochfelder, 425 U.S. 185, 193 (1976)). “[I]n determining whether the pleaded facts give rise to a ‘strong’ inference of scienter, the court must take into account plausible

opposing inferences.” Tellabs, Inc. v. Makor Issues & Rights,

Ltd., 551 U.S. 308, 310 (2007). The complaint will survive a

motion to dismiss “only if a reasonable person would deem

the inference of scienter cogent and at least as compelling as

any opposing inference one could draw from the facts

alleged.” Id. at 324. This does not mean that a plaintiff must

“plead more than she would be required to prove at trial.” Id.

at 311. Rather, “[a] plaintiff alleging fraud under § 10(b)

action . . . must plead facts rendering an inference of scienter

at least as likely as any plausible opposing inference.” Id.

[9] To establish scienter, “a complaint must ‘allege that the

defendants made false or misleading statements either intentionally or with deliberate recklessness.’ ” Zucco, 552 F.3d at

991 (quoting Daou, 411 F.3d at 1015). We must first “determine whether any of the plaintiff ’s allegations, standing

alone, are sufficient to create a strong inference of scienter.”

Id. at 992. If not, we are to “conduct a ‘holistic’ review of the

same allegations to determine whether the insufficient allegations combine to create a strong inference of intentional conduct or deliberate recklessness.” Id. Recklessness is defined as

a highly unreasonable omission, involving not

merely simple, or even inexcusable negligence, but

an extreme departure from the standards of ordinary

care, and which presents a danger of misleading buySIRACUSANO v. NECA-IBEW PENSION FUND 14531
ers or sellers that is either known to the defendant or

is so obvious that the actor must have been aware of

it.

In re Silicon Graphics Inc. Sec. Litig., 183 F.3d 970, 976 (9th

Cir. 1999) (quoting Hollinger v. Titan Capital Corp., 914

F.2d 1564, 1569 (9th Cir. 1990) (en banc)).

The district court here concluded that the CAC failed to

allege the requisite scienter because it “fails to allege any

motive or state of mind with relation to the alleged omissions.” In order adequately to allege scienter, Appellants rely

on their allegations that Appellees knew about the problems

with Zicam but chose not to reveal them. Appellants also

argue that the importance of Zicam to Matrixx’s business supports the inference that Appellees intentionally withheld

information of the link between Zicam and anosmia. Appellants also point to the revelations following the close of the

class period that, contrary to their statements during the class

period, Matrixx actually did not know if Zicam caused anosmia and decided to conduct studies after they had already

vouched for the safety of Zicam.

Matrixx’s first allegedly misleading statement was its October 22, 2003, press release, announcing the 163% net sales

increase, attributed to Zicam, and stating that the Zicam brand

was “poised for growth.” The second statement was the conference call on October 23, 2003, again attributing the company’s positive results to Zicam and projecting further growth.

By the time of the press release and the conference call,

Hirsch had called the customer service line regarding one

patient, Clarot had spoken with Linschoten regarding customer complaints, Jafek had presented his report of eleven

patients, and the first lawsuit against Matrixx had been filed.

Appellees accordingly were aware of at least fourteen complaints regarding Zicam and anosmia at the time they made

these statements. In addition, Appellants alleged that Clarot

told Linschoten in the September 2002 phone call that

14532 SIRACUSANO v. NECA-IBEW PENSION FUND
“Matrixx had received customer complaints of loss of smell

as early as 1999.” Appellants then alleged that the November

12, 2003, Form 10-Q was misleading because it spoke of the

risk of product liability actions against the company without

revealing that a lawsuit already had been filed.7

In Berson v. Applied Signal Tech., Inc., 527 F.3d 982 (9th

Cir. 2008), the defendants argued that a passage in the company’s SEC filings regarding backlogged work alerted reasonable investors to the risk that the company might not get paid

for work that had actually been stopped. We rejected the argument, stating that “[t]he passage . . . speaks entirely of as-yetunrealized risks and contingencies. Nothing alerts the reader

that some of these risks may already have come to fruition,

and that what the company refers to as backlog includes work

that is substantially delayed and at serious risk of being cancelled altogether.” Id. at 986. We therefore disagreed with the

district court’s finding that the statements were not misleading, reasoning that, “once defendants chose to tout the company’s backlog, they were bound to do so in a manner that

wouldn’t mislead investors as to what that backlog consisted

of.” Id. at 987; cf. In re Elan Corp. Sec. Litig., 543 F. Supp.

2d 187, 208 (S.D.N.Y. 2008) (“By choosing to speak about

the safety of [their drug], Defendants assumed a duty to disclose material information regarding adverse events.”). After

addressing scienter and loss causation, we reversed the district

court’s dismissal of the complaint. Berson, 527 F.3d at 987-

90.

[10] Similar to Berson, the passage in the Form 10-Q

speaks about the risks of product liability claims in the

abstract, with no indication that the risk “may already have

come to fruition.” Id. at 986. At the time that Appellees filed

the Form 10-Q, the CAC alleges facts sufficient for a jury to

7As Matrixx later admitted, up to and including the class period,

Matrixx had conducted no studies on the safety of Zicam regarding any

link to anosmia. 

SIRACUSANO v. NECA-IBEW PENSION FUND 14533
find that Clarot was aware of the potential anosmia problem.

Moreover, the inference that high-level executives such as

Johnson, Hemelt, and Clarot would know that the company

was being sued in a product liability action is sufficiently

strong to survive a motion to dismiss.

In response to the January 30, 2004, article in the Dow

Jones Newswires that the FDA was investigating complaints

of anosmia linked to Zicam, Matrixx issued a press release on

February 2, 2004. By the time of this press release, three more

lawsuits regarding anosmia had been filed against Matrixx.

This press release cites the two double-blind studies regarding

the “safety and efficacy of zinc gluconate for the treatment of

symptoms related to the common cold,” but, again, the press

release did not say whether Matrixx studied the intranasal use

of zinc gluconate for safety, as opposed to efficacy. The press

release also states that “statements alleging that intranasal

Zicam products cause anosmia . . . are completely unfounded

and misleading,” and then devotes three paragraphs to discrediting the author of the article and urging Dow Jones to

investigate the author.

[11] By the time of the February 2, 2004 press release, a

strong inference can be drawn that Appellees knew that the

statements alleging a link between Zicam and anosmia were

not “completely unfounded and misleading.” Appellees allegedly knew about the presentation by Jafek to the American

Rhinologic Society, Clarot’s conversation with Linschoten,

and several lawsuits alleging that Zicam caused anosmia. In

addition, Matrixx’s statements in the press release, that

Zicam’s safety was “well established” by their trials, conflict

with the allegations that Clarot told Linschoten in September

2002 that Matrixx had not conducted any studies and asked

her to participate in studies. The references in the press

release to clinical trials establishing Zicam’s safety also conflict with the March 4, 2004, news report that Matrixx did not

know if Zicam could cause anosmia and formed a medical

advisory panel to conduct studies.

14534 SIRACUSANO v. NECA-IBEW PENSION FUND
Matrixx’s February 6, 2004, press release, following the

Good Morning America segment regarding Jafek’s findings,

repeated the statements that the safety of zinc gluconate to

treat cold symptoms had been established in clinical trials,

stated that the common cold affects the sense of smell, and

stated that the studies linking zinc to anosmia were conducted

in the 1930s using a different zinc compound. Matrixx

2/6/2004 press release.

Appellants have not alleged that Appellees engaged in

unusual or suspicious stock sales at the same time that they

were attempting to downplay the reports of anosmia. See Silicon Graphics, 183 F.3d at 986 (stating that “unusual or suspicious stock sales by corporate insiders may constitute

circumstantial evidence of scienter”) (internal quotation

marks omitted). The Supreme Court has stated, however, that,

“[w]hile it is true that motive can be a relevant consideration,

and personal financial gain may weigh heavily in favor of a

scienter inference, we agree with the Seventh Circuit that the

absence of a motive allegation is not fatal.” Tellabs, 551 U.S.

at 324.

On a holistic review of the CAC, the following picture is

alleged. Matrixx received some customer complaints about

Zicam and anosmia from 1999 to 2002. In 2002, Clarot was

sufficiently concerned that he called Linschoten about one of

her patients who had complained and then called to ask if she

would participate in studies. In September 2003, Matrixx

knew that Jafek and his colleagues were presenting findings

about ten or eleven patients who developed anosmia after

Zicam use and did not allow Jafek to use Matrixx’s or

Zicam’s name in the presentation. In October 2003, Matrixx

touted the potential for growth and profitability of Zicam in

a press release and an earnings conference call. A lawsuit

alleging anosmia in one Zicam user was filed in October

2003. In November 2003, Matrixx filed a Form 10-Q, but did

not disclose the lawsuit in the section entitled “Risk Factors.”

SIRACUSANO v. NECA-IBEW PENSION FUND 14535
More lawsuits were filed in December 2003 and January

2004. 

On February 2, 2004, Matrixx issued a press release

responding to the January 30, 2004, Dow Jones report that the

FDA was investigating Zicam and anosmia. This press release

called the report “completely unfounded and misleading” and

asserted that clinical trials had established the safety of zinc

gluconate. On February 6, 2004, Good Morning America

reported on the possible link between Zicam and anosmia, and

Matrixx issued another press release asserting that zinc gluconate’s safety was well established in clinical trials, even

though it was subsequently reported that Matrixx had not conducted such studies. In a February 19, 2004, filing with the

SEC, Matrixx stated that it had convened a panel of physicians and scientists to review the information and asserted

that there was insufficient evidence to determine whether zinc

gluconate affected the sense of smell. On March 4, 2004, a

news article reported that Matrixx would begin studies to

determine if Zicam caused anosmia.8

[12] Viewing the CAC as a whole, the inference of scienter

is “cogent and at least as compelling” as any “plausible nonculpable explanation[ ]” for Appellees’ conduct. Tellabs, 551

U.S. at 324. Withholding reports of adverse effects of and

lawsuits concerning the product responsible for the company’s remarkable sales increase is “an extreme departure from

the standards of ordinary care” and “presents a danger of misleading buyers or sellers.” Silicon Graphics, 183 F.3d at 976.

We therefore conclude that the inference that Appellees withheld the information intentionally or with deliberate recklessness is at least as compelling as the inference that Appellees

withheld the information innocently.

8We do not address Appellants’ allegations that Appellees violated

GAAP and FASB principles in the November 12, 2003, Form 10-Q. “Violations of GAAP standards can . . . provide evidence of scienter,” but the

violations must be described with sufficient particularity. Daou, 411 F.3d

at 1016. 

14536 SIRACUSANO v. NECA-IBEW PENSION FUND
CONCLUSION

The district court’s reliance on the statistical significance

standard to conclude that Appellants failed to establish materiality is inconsistent with the Supreme Court’s rejection of

bright-line rules and its emphasis on having materiality determined by the trier of fact. Viewing the CAC in the light most

favorable to Appellants, we conclude that Appellants have

sufficiently pled materiality to survive dismissal. Similarly,

the inference that Appellees withheld the information regarding Zicam and anosmia intentionally or with deliberate recklessness is at least as compelling as any plausible nonculpable

explanation. For the foregoing reasons, the judgment of the

district court is REVERSED and the case REMANDED for

further proceedings consistent with this opinion.

REVERSED and REMANDED.

SIRACUSANO v. NECA-IBEW PENSION FUND 14537