UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF MICHIGAN

SOUTHERN DIVISION

IN RE CARACO PHARMACEUTICAL ) Case No. 2:09-cv-12830-AJT-DAS

LABORATORIES, LTD., SECURITIES )

LITIGATION ) CLASS ACTION

__________________________________________)

PLAINTIFFS' OPPOSITION TO DEFENDANTS' MOTION TO DISMISS THE

CONSOLIDATED AMENDED CLASS ACTION COMPLAINT FOR VIOLATIONS OF

THE FEDERAL SECURITIES LAWS

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TABLE OF CONTENTS

I. INTRODUCTION........................................................ 1

II. STATEMENT OF ISSUES PRESENTED. .................................... 2

III. CONTROLLING OR MOST APPROPRIATE AUTHORITY.. . . . . . . . . . . . . . . . . . . . . 3

IV. STATEMENT OF FACTS. ................................................ 4

A. Caraco’s “Recurring Product Variability Issues”.. . . . . . . . . . . . . . . . . . . . . . . . . . 4

B. Caraco’s Grossly Non-Compliant Manufacturing Operations . . . . . . . . . . . . . . . . 6

C. The FDA Warning Letter............................................. 7

D. Caraco Claims to Have Addressed the Issues Appropriately . . . . . . . . . . . . . . . . . 8

E. Caraco Recalls Certain Products. ...................................... 8

F. The Day of Reckoning. ............................................. 10

V. PLAINTIFFS HAVE ADEQUATELY ALLEGED VIOLATIONS OF THE

SECURITIES LAWS..................................................... 11

A. Standard of Review. ............................................... 11

B. Plaintiffs Sufficiently Allege That Defendants Made Materially False and

Misleading Statements.............................................. 12

1. Plaintiffs Adequately Allege Defendants’ False and Misleading Statements

and the Reasons Why Such Statements Were False and Misleading.. . . . 12

2. Defendants’ Statements Were Material and the Court Cannot Decide

Materiality As a Matter of Law at the Pleading Stage. . . . . . . . . . . . . . . . 20

C. The PSLRA’s Safe Harbor Provision Does Not Protect Defendants’ False and

Misleading Statements.............................................. 26

D. Plaintiffs Allege Strong Evidence of Defendants’ Knowledge and 

Recklessness. .................................................... 29

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1. The Divergence Between Negative Internal Reporting and Defendants’

Positive Statements to the Market and Defendants’ Disregard of the Most

Current Factual Information Before Making Statements Support a Strong

Inference of Scienter. ........................................ 31

2. The Confidential Witnesses Add to the Strong Inference of Scienter

Alleged.................................................... 33

3. The Proximity of Defendants’ Positive Statements to the Revelation of the

Truth Supports a Strong Inference of Scienter.. . . . . . . . . . . . . . . . . . . . . 34

4. Because the Facts Allege Relate to the Company’s Core Operations, They

Support a Strong Inference of Scienter. . . . . . . . . . . . . . . . . . . . . . . . . . . 36

5. The Resignation of the Company’s Key Executives Near the Time of the

Company’s Revelation of the Truth Supports a Strong Inference of

Scienter. .................................................. 37

6. Defendants’ Self Motivation in Saving Their Salaries and Bonuses

Supports a Strong Inference of Scienter.. . . . . . . . . . . . . . . . . . . . . . . . . . 38

7. The Company’s Signed Certifications to the Securities and Exchange

Commission Add to the Strong Inference of Scienter Alleged. . . . . . . . . 40

E. Plaintiffs Adequately Allege Control Person Liability. . . . . . . . . . . . . . . . . . . . . 41

VI. CONCLUSION. ........................................................ 43

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TABLE OF AUTHORITIES 

Cases

ACA Financial Guaranty Corp. v. Advest, Inc., 

512 F.3d 46 (1st Cir. 2008) ........................................................................................... 23, 41 

Anderson v. Abbot Labs., 

140 F. Supp. 2d 894 (N.D. Ill. 2001) .................................................................................. 24 

Ashcroft v. Iqbal, 

129 S. Ct. 1937 (2009) ........................................................................................................ 11 

Asher v. Baxter Int'l Inc., 

377 F.3d 727 (7th Cir. 2004) ............................................................................ 25, 27, 28, 29 

Backe v. Novatel Wireless, Inc., 

607 F. Supp. 2d 1145 (S.D. Cal. 2009) ............................................................................... 40 

Ballan v. Upjohn Co., 

814 F. Supp. 1375 (W.D. Mich. 1992) ................................................................................ 25 

Basic, Inc. v. Levinson, 

485 U.S. 224 (1988) ..................................................................................................... 21, 24 

Bell Atl. Corp. v. Twombly, 

550 U.S. 544 (2007) ........................................................................................................... 11 

Berson v. Applied Signal Technology, Inc., 

527 F.3d 982 (9th Cir. 2008) .............................................................................................. 12 

Casella v. Webb, 

883 F.2d 805 (9th Cir. 1989) .............................................................................................. 23 

City of Brockton Retire Sys. v. Shaw Group, Inc., 

540 F. Supp. 2d 464 (S.D.N.Y. 2008) ................................................................................. 24 

City of Monroe Employees Retire. Sys. v. Bridgestone Corp., 

399 F.3d 651 (6th Cir. 2005) ....................................................................................... passim 

Case 2:09-cv-12830-AJT-DAS Document 32 Filed 05/27/10 Page 4 of 58
iv 

Cornwell v. Credit Suisse Group, 

No. 08 Civ. 3758(VM), 2010 WL 537593 (S.D.N.Y. Feb. 11, 2010) ................................. 33 

Craftmatic Sec. Litig. v. Kraftsow, 

890 F.2d 628 (3d Cir. 1989) ............................................................................................... 32 

Croker v. Carrier Access Corp., 

Civil Case No. 05-cv-01011-LTB-OES, 2006 WL 2038011 (D. Colo. July 18, 2006) ....... 40 

D.E. & J Ltd. Partnership v. Conaway, 

284 F. Supp. 2d 719 (E.D. Mich. 2003) .............................................................................. 43 

Dura Pharms., Inc. v. Broudo, 

544 U.S. 336 (2005) ........................................................................................................... 11 

EP MedSystems, Inc. v. EchoCath, Inc., 

235 F.3d 865 (3d Cir. 2000) ............................................................................................... 29 

Ernst & Ernst v. Hochfelder, 

425 U.S. 185 (1976) ........................................................................................................... 29 

Ezra Charitable Trust v. Tyco Intern., Ltd., 

466 F.3d 1 (1st Cir. 2006) ................................................................................................... 35 

Florida State Bd. of Admin v. Green Tree Fin. Corp., 

270 F.3d 645 (8th Cir. 2001) .............................................................................................. 39 

Frank v. Dana Corp., 

547 F.3d 564 (6th Cir. 2008) .............................................................................................. 30 

Ganino v. Citizens Utils. Co., 

228 F.3d 154 (2d Cir. 2000) ............................................................................................... 24 

Havenick v. Network Exp., Inc., 

981 F.Supp. 480 (E.D. Mich.1997) ..................................................................................... 13 

Helwig v. Vencor, Inc., 

251 F.3d 540 (6th Cir. 2001) ....................................................................................... passim 

Higginbotham v. Baxter Int'l, Inc., 

495 F.3d 753 (7th Cir. 2007) .............................................................................................. 34 

Case 2:09-cv-12830-AJT-DAS Document 32 Filed 05/27/10 Page 5 of 58
v 

Holmes v. Baker, 

166 F. Supp. 2d 1362 (S.D. Fla. 2001) ............................................................................... 39 

Howard v. Everex Sys., 

228 F.3d 1057 (9th Cir. 2000) ............................................................................................ 37 

Huddleston v. Herman & MacLean, 

640 F.2d 534 (5th Cir. 1981), ............................................................................................. 28 

In re 21st Century Holding Co. Sec. Litig., 

No. 07-61057-CIV, 2008 WL 5749572 (S.D. Fla. Nov. 7, 2008) ....................................... 28 

In re Able Lab. Sec. Litig., 

Civ. Action No. 05-2681 (JAG), 2008 WL 1967509 (D.N.J. Mar. 24, 2008) ..................... 21 

In re Adaptive Broadband Sec. Litig., 

No. C 01-1092 SC, 2002 WL 989478 (N.D. Cal. Apr. 2, 2002) ......................................... 38 

In re Alstom SA, 

454 F. Supp. 2d 187 (S.D.N.Y. 2006) ................................................................................. 37 

In re Amgen,Inc. Sec. Litig., 

544 F. Supp. 2d 1009 (C.D. Cal. 2008) ............................................................................... 25 

In re Ashanti Goldfields Sec. Litig., 

No. CV 00-0717 (DGT), 2004 WL 626810 (E.D.N.Y. Mar. 30, 2004) ................................. 3 

In re Cabletron Sys., 

311 F.3d 11 (1st Cir. 2002) ............................................................................... 32, 33, 34, 37 

In re Copley Pharm., Inc.Sec. Litig., 

Civ. A. No. 94-11897-WGY, 1995 WL 169215 (D. Mass. Mar. 16, 1995) ........................ 22 

In re Countrywide Financial Corp. Derivative Litig., 

554 F. Supp. 2d 1044 (C.D. Cal. 2008) ............................................................................... 33 

In re Daou Sys., Inc., 

411 F.3d 1006 (9th Cir. 2005) ............................................................................................ 33 

In re Discovery Lab. Sec. Litig., 

No. 06-1820, 2006 WL 3227767 (E.D. Pa. Nov. 1, 2006) .................................................. 22 

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In re Dura Pharms., Inc. Sec. Litig., 

548 F. Supp. 2d 1126 (S.D. Cal. 2008) ............................................................................... 25 

In re Guidant Corp. Sec. Litig., 

536 F. Supp. 2d 913 (S.D. Ind. 2008) ................................................................................. 24 

In re Huffy Corp. Sec. Litig., 

577 F. Supp. 2d 968 (S.D. Ohio 2008) ......................................................................... passim 

In re Immune Response Sec. Litig., 

375 F. Supp. 2d 983 (S.D. Cal. 2005) ........................................................................... 18, 25 

In re Impax Laboratories, Inc. Sec. Litig., 

2007 WL 7022753 (N.D. Cal. July 18, 2007) ..................................................................... 38 

In re Indep. Energy Holdings, 

154 F. Supp. 2d 741 (S.D.N.Y. 2001) ........................................................................... 22, 24 

In re Initial Pub. Offering Sec. Litig., 

241 F. Supp. 2d 281 (S.D.N.Y. 2003) ................................................................................. 43 

In re K-Tel Int'l, Inc. Sec. Litig., 

300 F.3d 881 (8th Cir. 2002) .............................................................................................. 12 

In re Lattice Semiconductor Corp. Sec. Litig., 

No. CV04-1255-AA, 2006 WL 538756 (D. Or. Jan. 3, 2006) ............................................ 40 

In re Lockheed Martin Corp. Sec. Litig., 

272 F. Supp. 2d 928 (C.D. Cal. 2002) ................................................................................. 25 

In re Marsh & McLennan Co. Inc. Sec. Litig., 

No. 04 CV 8144, 2006 WL 2057194 (S.D.N.Y. July 20, 2006) .......................................... 37 

In re McKesson HBOC Sec. Litig., 

126 F. Supp. 2d 1248 (N.D. Cal. 2000) .............................................................................. 38 

In re Nash Finch Co., 

502 F. Supp. 2d 861 (D. Minn. 2007) ........................................................................... 28, 38 

In re Nat.'l Century Fin. Enterprises, Inc. Inv. Litig., 

541 F. Supp. 2d 986 (S.D. Ohio 2007) ................................................................................ 25 

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In re Nextcard, Inc. Sec. Litig., 

2006 WL 708663 (N.D. Cal. Mar. 20, 2006) ...................................................................... 44 

In re NPS Pharmaceuticals, Inc. Sec. Litig., 

2007 WL 1976589 (D. Utah July 3, 2007) .......................................................................... 42 

In re OCA, Inc. Sec. and Derivative Litig., 

No. 05-2165, 2006 WL 3747560 (E.D. La. Dec. 14, 2006) ................................................ 48 

In re Par Phar., Inc. Sec. Litig., 

733 F. Supp. 668 (S.D.N.Y. 1990) ............................................................................... passim 

In re Parmalat Sec. Litig., 

497 F. Supp. 2d 526 (S.D.N.Y. 2007) ................................................................................. 51 

In re ProQuest Sec. Litig., 

527 F. Supp. 2d 728 ..................................................................................................... passim 

In re PXRE Group, Ltd. Sec. Litig., 

600 F. Supp. 2d 510 (S.D.N.Y. 2009) ................................................................................. 42 

In re Scholastic Corp. Sec. Litig., 

252 F.3d 63 (2d Cir. 2001) ................................................................................................. 41

In re Scottish Re Group Sec. Litig., 

524 F. Supp. 2d 370 (S.D.N.Y. 2007) ................................................................................. 46 

In re Secure Computing Corp. Sec. Litig., 

120 F. Supp. 2d 810 (N.D. Cal. 2000) ................................................................................ 49 

In re SeeBeyond Tech. Corp. Sec. Litig., 

266 F. Supp. 2d 1150 (C.D. Cal. 2003) ......................................................................... 44, 47 

In re Sofamor Danek Group, Inc., 

123 F.3d 394 (6th Cir. 1997). ............................................................................................. 34 

In re Stone & Webster, Inc. Sec. Litig., 

414 F.3d 187 (1st Cir. 2005) ............................................................................................... 34

In re Syncor Intern. Corp. Sec. Litig., 

327 F. Supp. 2d 1149 (C.D. Cal. 2004), .............................................................................. 41 

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In re Telxon Corp. Sec. Litig., 

133 F. Supp. 2d 1010 (N.D. Ohio 2000) ............................................................................. 47 

In re The Goodyear Tire & Rubber Co. Sec. Litig., 

436 F.Supp.2d 873 (N.D.Ohio 2006) .................................................................................. 21 

In re Thornburg Mortg., Inc. Sec. Litig., 

No. CIV 07-0815 JB/WDS, 2010 WL 378300 (D.N.M. Jan. 27, 2010) .............................. 47 

In re UTStarcom, Inc. Sec. Litig., 

617 F. Supp. 2d 964 (N.D. Cal. 2009) ................................................................................ 46 

In re Washington Mut., Inc. Sec., Derivative & ERISA Litig., 

2009 WL 3517630 (W.D. Wash. Oct. 27, 2009) ................................................................. 31 

In re Westinghouse Sec. Litig., 

90 F.3d 696 (3d Cir. 1996) ........................................................................................... 36, 37 

In re Williams Sec. Litig., 

339 F. Supp. 2d 1242 (N.D. Okla. 2003) ............................................................................ 49 

In re WorldCom, Inc. Sec. Litig., 

294 F. Supp. 2d 392 (S.D.N.Y. 2003) ................................................................................. 51 

In re Zenith Lab. Sec. Litig., 

Civ. No. 86-3241A, 1993 WL 260683 (D. N.J. Feb. 11, 1993) .......................................... 29 

Instituational Investors Group v. Avaya, Inc., 

564 F.3d 242 (3d Cir. 2009) ............................................................................................... 44 

Kaltman v. Key Energy Services, Inc., 

447 F. Supp. 2d 648 (W.D. Tex. 2006) ............................................................................... 46 

Lefkoe v. Jos. A. Bank Clothiers, 

Civil No. WMN-06-1892, 2008 WL 7275126 (D. Md. May 13, 2008)............................... 42 

In re National Century Financial Enterprises, Inc.,Litig., 

504 F. Supp. 2d 287 (S.D. Ohio 2007) ................................................................................ 51 

In re Mutual Funds Investement Litig., 

566 F.3d 111 (4th Cir. 2009) .............................................................................................. 50 

Case 2:09-cv-12830-AJT-DAS Document 32 Filed 05/27/10 Page 9 of 58
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Livid Holdings Ltd. v. Salomon Smith Barney, Inc., 

416 F.3d 940 (9th Cir. 2005) .............................................................................................. 37 

Lormand v. US Unwired, Inc., 

565 F.3d 228 (5th Cir. 2009) .................................................................................. 35, 36, 37 

Makor Issues & Rights, Ltd. v. Tellabs Inc., 

513 F.3d 702 (7th Cir. 2008) ....................................................................................... passim 

Marksman Partners, L.P. v. Chantal Pharm. Corp., 

927 F. Supp. 1297 (C.D. Cal. 1996) ................................................................................... 44 

McGuire v. Dendreon Corp., 

No. C07-800MJP, 2008 WL 5130042 (W.D. Wash. Dec. 5, 2008) ............................. 29, 31 

Middlesex Ret. Sys. v. Quest Software, Inc., 

No. CV 06-6863 DOC (RNBx), 2008 WL 7084629 (C.D. Cal. July 10, 2008) .................. 46 

Middlesex Retirement Sys. v. Quest Software, 

527 F. Supp. 2d 1164 (C.D. Cal. 2007) ............................................................................... 48 

Mishkin v. Ageloff, 

No. 97 Civ. 2690, 1998 WL 651065 (S.D.N.Y. Sept. 23, 1998) ......................................... 51 

Miss. Pub. Employees Ret. Sys. v. Boston Sci. Corp., 

523 F.3d 75 (1st Cir. 2008) ................................................................................................. 45 

No. 84 Employer-Teamster Joint Council Pension Trust Fund v. Am. W. Holding Corp., 

320 F.3d 920 (9th Cir. 2003) .............................................................................................. 50 

P. Stolz Family P'ship L.P. v. Daum, 

355 F.3d 92 (2d Cir. 2004) ................................................................................................. 34

Pilarczyk v. Morrison Knudsen Corp., 

965 F.Supp. 311 (N.D.N.Y. 1997) ...................................................................................... 21 

Pirraglia v. Novell, Inc., 

339 F.3d 1182 (10th Cir. 2003) .................................................................................... 40, 47 

Plotkin v. IP Axess Inc., 

407 F.3d 690 (5th Cir. 2005) .............................................................................................. 43 

Case 2:09-cv-12830-AJT-DAS Document 32 Filed 05/27/10 Page 10 of 58
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PR Diamonds, Inc. v. Chandler, 

364 F.3d 671 (6th Cir. 2004) .................................................................................. 37, 47, 51 

Public Pension Fund Group v. KV Pharm. Co., 

No. 4:08-CV-1859 (CEJ), 2010 WL 681443 (E.D. Mo. Feb. 22, 2010) .............................. 30 

Robbins v. Moore Med. Corp., 

894 F.Supp. 661 (S.D.N.Y. 1995) ....................................................................................... 30 

Rombach v. Chang, 

355 F.3d 164 (2d Cir. 2004) ............................................................................................... 36 

Rosky ex rel. Wellcare Health Plans, Inc. v. Farha, 

No. 8:07-cv-1952-T-26MAP, 2009 WL 3853592 (M.D. Fla. Mar. 30, 2009) ..................... 48 

Schleicher v. Wendt, 

529 F. Supp. 2d 959 (S.D. Ind. 2007) ................................................................................. 42 

Shaw v. Digital Equip. Corp., 

82 F.3d 1194 (1st Cir. 1996) ................................................................................... 37, 43, 44 

Silverman v. Motorola, Inc., 

No. 07 C 4507, 2008 WL 4360648 (N.D. Ill. Sept. 23, 2008) ............................................. 42 

Siracusano v. Matrixx Initiatives, Inc., 

585 F.3d 1167 (9th Cir. 2009) ...................................................................................... 29, 47 

South Ferry LP, No. 2 v. Killinger,

542 F.3d 776 (9th Cir. 2008) .............................................................................................. 44 

Stocke v. Shuffle Master, Inc., 

615 F. Supp. 2d 1180 (D. Nev. 2009) ................................................................................. 48 

Stransky v. Cummins Engine Co., 

51 F.3d 1329 (7th Cir. 1995) .............................................................................................. 20 

Tellabs, Inc. v. Makor Issues & Rights, Ltd., 

551 U.S. 308, 127 S. Ct. 2499 (2007) .......................................................................... passim 

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The Pennsylvania Avenue Funds v. Inyx Inc., 

No. 08 Civ. 6857(PKC), 2010 WL 743562 (S.D.N.Y. Mar. 1, 2010) ................................. 49 

Trust v. Ivax Corp., 

920 F. Supp. 1260 (S.D. Fla. 1995) .................................................................................... 32 

TSC Industries, Inc. v. Northway, Inc., 

426 U.S. 438 (1976) ............................................................................................... 28, 29, 33 

Virginia Bankshares, Inc. v. Sandberg, 

501 U.S. 1083 (1991).......................................................................................................... 20 

Wieland v. Stone Energy Corp., 

No. 05-2088, 2007 WL 2903178 (W.D. La. Aug. 17, 2007) ............................................... 48 

Yanek v. Staar Surgical Co., 

388 F. Supp. 2d 1110 (C.D. Cal 2005) .................................................................... 29, 36, 40 

Statutes

15 U.S.C. §78u-4(b)(1)(B)...................................................................................................... 20 

15 U.S.C. §78u-5(c)(1)(A) ...................................................................................................... 34 

15 U.S.C. §78u-5(c)(1)(B) ...................................................................................................... 37 

15 USC §78u-4(b)(1) .............................................................................................................. 21 

Regulations

17 C.F.R. §240.10b-5 ............................................................................................................. 20 

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I. INTRODUCTION 

Defendants’ Motion to Dismiss the Consolidated Amended Class Action Complaint 

for Violations of the Federal Securities Laws (“Motion”), employs vitriol and a wholesale recharacterization of the consolidated amended complaint’s allegations to evade the fact that 

Lead Plaintiff Tushar Amin (“Lead Plaintiff”), Plaintiff Kevin Koziatek, and Plaintiff 

Jonathan Wilkof (collectively “Plaintiffs”), have sufficiently pled that defendants made 

knowing and/or reckless misrepresentations and omissions concerning, among others, 

Caraco’s compliance with the United States Food and Drug Administration’s (“FDA”) current 

Good Manufacturing Requirements (“cGMP”).1

June 25, 2009 (the last day of the Class Period), was the day of reckoning for Caraco 

and the culmination of defendants’ misrepresentations and material omissions concerning 

Caraco’s problems with, among other things, manufacturing generic pharmaceutical tablets of 

varying size and weight. At the request of the FDA, U.S. Marshals raided Caraco’s Michigan 

facilities – seizing drug products manufactured by Caraco in Farmington Hills and Wixom, as 

well as ingredients held at those facilities – citing “Caraco’s continued failure to meet the 

FDA’s [cGMP] requirements, which assure the quality of manufactured drugs” and indicated 

that through the seizure, “the FDA [was] seek[ing] to immediately stop the firm from further 

distributing drugs until there [was] an assurance that the firm complies with good 

manufacturing requirements.” ¶134. 2 Specifically, the FDA further noted that “[s]ince 

January 2009, Caraco has initiated voluntary recalls of drug products to protect the public 

from potentially defective medications” as the “recalls involved manufacturing defects, 

 

1 The Defendants include Caraco Pharmaceutical Laboratories, Ltd. (“Caraco” or the 

“Company”), its former Chief Executive Officer (“CEO”) and Director Daniel H. Movens 

(“Movens”), its Chairman of the Board of Directors Dilip Shanghvi (“Shangvi”) (along with 

Movens, the “Individual Defendants”), and its controlling shareholder Sun Pharmaceutical 

Industries, Ltd. (“Sun Pharma”) (collectively, “defendants”). 2 All “¶__” are references to the Consolidated Amended Class Action Complaint for 

Violations of the Federal Securities Laws (“Complaint”), which asserts claims under §§10(b) 

and 20(a) of the Securities Exchange Act of 1934 (“Exchange Act”) and Securities and 

Exchange Commission (“SEC”) Rule 10b-5 promulgated thereunder, on behalf of purchasers 

of Caraco’s securities from May 29, 2008 and June 25, 2009, inclusive (the “Class Period”). 

Case 2:09-cv-12830-AJT-DAS Document 32 Filed 05/27/10 Page 13 of 58
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including oversized tablets and possible formulation error.” Id. This news was, to say the 

least, disturbing. Consumers of the Company’s products and investors of the Company’s 

securities finally learned the full extent of rampant and systematic manufacturing and 

regulatory problems at the Company. 

Realizing the strength of plaintiffs’ allegations, defendants ignore the well-established 

principle that for purposes of a motion to dismiss, courts must accept the allegations as true. 

Instead, defendants repeatedly and improperly challenge the allegations by characterizing 

them as “simply untrue,” “incredulous[],” “simply not believable,” and “wholly unreliable.” 

A jury will have an opportunity to assess the weight of the evidence in this case at trial. 

Despite defendants’ arguments to the contrary, it is not the function of the Court to make such 

credibility determinations at the pleading stage. As set forth herein, the Complaint adequately 

pleads each element of the claims alleged. The Court should deny Defendants’ motion.

II. STATEMENT OF ISSUES PRESENTED 

A. Whether Plaintiffs Have Adequately Alleged That Defendants Made Materially 

False and Misleading Statements to Pursue a Claim Under Section 10(b) of the 

Exchange Act When Defendants Represented that the Company Was Compliant 

with Manufacturing Regulations and Minimized the Risks Associated with 

Regulatory Compliance; 

B. Whether Plaintiffs Have Adequately Alleged That Defendants Acted With 

Knowledge or Acted Recklessly in Making Materially False and Misleading 

Statements Pursuant to Section 10(b) of the Exchange Act Where Divergence 

Between Negative Internal Reporting and Defendants’ Positive Statements to the 

Market, Defendants’ Disregard of the Most Current Factual Information, the 

Statements of Confidential Witnesses Defendants’ Benefit from the Fraud, the 

Proximity of Defendants’ Positive Statements to Revelation of the Truth, the Core 

Operations Inference, the Resignations of Key Executives, Defendants’ Self 

Motivation in Saving Their Salaries and Bonuses, and Defendants’ False SarbanesOxley Certifications Collectively Raise a Strong Inference of Scienter; and 

C. Whether Plaintiffs Have Adequately Alleged That Certain Defendants Are Liable 

as Control Persons Pursuant to Section 20(a) of the Exchange Act When They 

Possessed Both the Power and the Authority to Exercise Control Over Defendants 

That Are Primarily Liable Under Section 10(b) or When They Controlled a 

Majority of the Shares of the Company. 

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III. CONTROLLING OR MOST APPROPRIATE AUTHORITY 

Cases 

Ashcroft v. Iqbal, 129 S. Ct. 1937 (2009) 

Basic, Inc. v. Levinson, 485 U.S. 224 (1988) 

Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) 

City of Monroe Employees Retire. Sys. v. Bridgestone Corp., 

 399 F.3d 651 (6th Cir. 2005) 

Dura Pharms., Inc. v. Broudo, 544 U.S. 336 (2005) 

Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976) 

Frank v. Dana Corp., 547 F.3d 564 (6th Cir. 2008) 

Helwig v. Vencor, Inc., 251 F.3d 540 (6th Cir. 2001) 

In re America Service Group, Inc., 

 No. 3:06-0323, 2009 WL 1348163 (M.D. Tenn. Mar. 31, 2009) 

In re Cabletron Sys., 311 F.3d 11 (1st Cir. 2002) 

In re Daou Sys., Inc., 411 F.3d 1006 (9th Cir. 2005) 

 In re Huffy Corp. Sec. Litig., 577 F. Supp. 2d 968 (S.D. Ohio 2008) 

In re Immune Response Sec. Litig., 375 F. Supp. 2d 983 (S.D. Cal. 2005) 

 In re Par Phar., Inc. Sec. Litig., 733 F. Supp. 668 (S.D.N.Y. 1990) 

In re ProQuest Sec. Litig., 527 F. Supp. 2d 728 

Lormand v. US Unwired, Inc., 565 F.3d 228 (5th Cir. 2009) 

Makor Issues & Rights, Ltd. v. Tellabs Inc., 513 F.3d 702 (7th Cir. 2008) 

No. 84 Employer-Teamster Joint Council Pension Trust Fund v. Am. W. Holding 

Corp., 320 F.3d 920 (9th Cir. 2003) 

PR Diamonds, Inc. v. Chandler, 364 F.3d 671 (6th Cir. 2004) 

Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 127 S. Ct. 2499 (2007) 

Statutes: 15 U.S.C. §78u-4(b)(1)(B); 15 U.S.C. §78u-5(c)(1)(A); 15 U.S.C. §78u5(c)(1)(B); 15 USC §78u-4(b)(1); Regulations: 17 C.F.R. §240.10b-5 

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IV. STATEMENT OF FACTS 

 Defendant Caraco primarily develops, manufactures, markets and distributes generic and 

private-label pharmaceuticals to wholesalers, distributors, warehousing and non-warehousing 

chain drugstores and managed care providers throughout the U.S and Puerto Rico. ¶2. 

Caraco’s 76% majority owner is Sun Pharma, an international pharmaceutical company 

headquartered in India. ¶3. With Sun Pharma’s backing, Caraco had begun to compete with 

much larger companies in the highly-competitive generic drug market. Id. 3 In fact, between 

fiscal 2007 (which ended March 31, 2007) and fiscal 2008, Caraco’s sales volume tripled, from 

$117 million to $350 million. Id.

A. Caraco’s “Recurring Product Variability Issues” 

After recalling seven lots of Mertformin HCL Tablets, USP, 1000mg, in January 2008 -- 

which according to the FDA, were recalled due to some tablets being undersized or oversized 

resulting in the patient not receiving the expected dose ¶59 – in a June 10, 2008, filing with 

the SEC Caraco assured investors that “[t]he product recall announced by the FDA was 

limited to a single compression machine malfunction, and affected two lots” but that Caraco 

“chose to recall seven lots that were produced on that particular machine as an additional 

safeguard.” ¶102. A “single” machine, however, was not to blame, as before and throughout 

the Class period Caraco actually had wide-scale systematic manufacturing problems that were 

yielding over and undersized tablets affecting far more than “two lots.” ¶103(a). Throughout 

the Class Period, the Company received numerous customer complaints regarding this 

problem for tablets that were produced during the Class Period. ¶¶168-69 (outlining specific 

 

3

 With Sun Pharma’s financial and research and development support, the latter including 

five-year technology transfer agreements in 1997 and 2002, Caraco has been able to submit 

several dozen applications to the FDA to be approved to manufacture and sell generic 

formulations for some of the most widely-purchased drugs on the market. ¶3. In addition, 

Caraco entered into agreements with Sun Pharma to act as a distributor of Sun Pharma’s 

products. Id.

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customer complaints). Quality inspectors frequently discovered tablets that were too 

thick/thin, as well as tablets that were broken and/or chipped. ¶97(a).4

Defendants, including Defendant Movens, were well aware of the severity of this problem. 

A December 22, 2008, letter from the FDA to Defendant Movens specifically reiterated to 

him that “there is a real problem regarding your processes that are yielding tablets of varying 

sizes” and “[t]he fact that...there are a number of customer complaints regarding tablet size for 

a variety of products is disconcerting. Validated processes should yield product of consistent 

quality. This issue needs to be resolved as it has been going on quite some time.” ¶76. 

Moreover, the Company never reported to investors that by November 2008, the Company 

had established a “variability study”5

 to address the problem, nor that by February 19, 2009, 

the problem was so bad that the Company had to essentially halt internal research and 

development (“R&D”) so the R&D team could help address the issue.6

 The “recurring product variability issue” later partially revealed itself on March 31, 

2009, when Caraco disclosed that it had to recall certain tablets manufactured by the Company 

because the tablets might have differed in size and therefore could have more or less of the 

active ingredient. ¶82. This news sent Caraco’s shares down $1.03 per share, more than 22%, 

to close on March 31, 2009, at $3.52 per share, on unusually heavy volume. ¶125. Caraco 

again recalled products on April 17, 2009, ¶127, and on June 8, 2009. ¶86. 

 

4

 Numerous other witnesses also detailed the wide-spread issues with over and undersized 

tablets during the Class Period. See e.g., ¶93(b) (noting that tablet variation was a serious 

problem and providing example where in one set of tests weighing over 900,000 tablets of 

Digoxin, a Class 2 drug that could be lethal at the wrong dosage, approximately 2% were 

found to be of the wrong size – an incredibly high ratio of defective product for 

pharmaceuticals). 

5 See ¶88 (June 19, 2009, letter to the FDA conceding existence of “reoccurring variability 

product issues” and that the Company had to establish a “variability study” in November 2008 

to address the issue, and noting that most reoccurring variability issues were occurring with 

the Company’s Metoprolol, Clonazepam, Digoxin, and Metformin products). 6 See ¶79 (February 19, 2009, letter from Defendant Movens to the FDA stating that Caraco 

had “stopped most of our internal research and development activities to allow the R&D team 

to act as additional support for tech services” and were “analyzing the trends for recurring 

product anomalies and are taking appropriate action as necessary to eliminate any remaining 

issues with product quality”). 

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 The Defendants’ Brief largely glosses over and/or ignores Caraco’s “recurring product 

variability issue” (i.e., Caraco’s inability to produce pills of a consistent size and weight). This 

noticeable absence is for good reason. As the FDA’s website explains: 

cGMP refers to the Current Good Manufacturing Practice regulations 

enforced by the US Food and Drug Administration (FDA). cGMPs provide 

for systems that assure proper design, monitoring, and control of 

manufacturing processes and facilities. Adherence to the cGMP regulations 

assures the identity, strength, quality, and purity of drug products by 

requiring that manufacturers of medications adequately control 

manufacturing operations. This includes establishing strong quality 

management systems, obtaining appropriate quality raw materials, 

establishing robust operating procedures, detecting and investigating product 

quality deviations, and maintaining reliable testing laboratories. This formal 

system of controls at a pharmaceutical company, if adequately put into 

practice, helps to prevent instances of contamination, mix-ups, deviations, 

failures, and errors. This assures that drug products meet their quality 

standards. 

(Emphasis added). 7 The mere existence of such a pervasive product variability issue, which 

was well-known to Defendants, essentially means that the Company was neither cGMP 

compliant nor could any defendant “believe” that Caraco was “substantially compliant.” 

B. Caraco’s Grossly Non-Compliant Manufacturing Operations 

In addition to the product variability issue, Caraco’s operations during the Class Period 

were rife with systematic manufacturing problems and severely non-compliant with cGMPs. 

See e.g., ¶103(b)-(c), 113, 121, 130. In July 2008, there were approximately 1,000 Standard 

Operating Procedures (“SOPs”) that one former employee indicated needed to be updated, and 

in some cases, SOPs which had not been updated in 12 to 14 years. ¶93(l). In 2008 alone, 

there were over 1,000 incidents of problems, for example weight variation, contaminants such 

as hair found in the product, or tablets that were too thick/thin. ¶93(a)-(l). 

In the face of rampant manufacturing problems and utter cGMP deficiencies, Caraco was 

recklessly driving production increases that directly belied defendants’ claims to be 

proactively growing the Company’s business “appropriately.” ¶103(c). Witnesses recall 

 

7 See FDA, 

http://www.fda.gov/Drugs/DevelopmentApprovalProcess/Manufacturing/ucm169105.htm

(last visited May 27, 2010) 

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production problems due to the intense pressure to make more drugs despite the lack of 

infrastructure to do so and that every time there was an issue, management wanted to bypass 

the issue so that they could get production. ¶¶92, 94(a). When a product did not meet the inhouse specifications, the manufacturing personnel would release the product anyway as 

management’s attitude was to “get the tablets out the door.” ¶93(d). Indeed, machines were 

not even allowed to be shut down when updating SOPs. Id.

8

 Moreover, it was readily 

apparent that the Company’s employees lacked the necessary training to perform their 

assigned functions and poor infrastructure made it almost impossible to properly train 

employees to use the “ERP” system to track raw materials. ¶101. 

After stating “we believe we remain substantially complaint” with cGMPs in a filing with 

the SEC on June 10, 2008, the very next day, on June 11, 2008, the FDA issued a Form FDA 

483 to Caraco, addressed to defendant Movens, listing fourteen observations regarding 

Caraco’s manufacturing practices, many of which concerned failures in fundamental operating 

procedures regarding the manufacture of drugs for human consumption. ¶60. Nevertheless, 

in filings with the SEC on July 25, 2008, and October 24, 2008, with regard to the Form FDA 

483, Caraco downplayed the event and reassured investors that “[t]he Company has responded 

accordingly and we believe we remain substantially compliant.” ¶¶106, 112. 

C. The FDA Warning Letter 

 On November 3, 2008, Caraco issued a press release announcing that it had received a 

warning letter from the FDA. ¶114. Caraco’s November 3, 2008, announcement that it had 

received the Warning Letter was a partial materialization of the undisclosed risks inherent in 

pushing rapid drug production at the expense of quality and regulatory compliance and 

revealed: that at the time its prior statements were made, Caraco had not been substantially 

cGMP compliant; that the Company had not responded to the FDA’s observations in the June 

2008 Form 483 accordingly; that the Company had not remedied previous observations from 

 

8

 Despite the existence of these problems, production and output were increased. One former 

employee indicated that Defendant Shanghvi and Sun Pharma excerted control over and set 

targeted production goals which were constantly increased. ¶98(b) 

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the FDA; and that as a result, the Company could face regulatory sanctions. ¶9. On this news, 

over the next three days, shares of Caraco declined by $2.26 per share, or 22.22%, to close on 

November 5, 2008, at $7.91 per share, on unusually heavy volume. ¶10. 

D. Caraco Claims to Have Addressed the Issues Appropriately

 By letter dated November 24, 2008, Defendant Movens, on behalf of Caraco, responded 

to the FDA’s Warning Letter, ¶74, and Caraco issued a press release announcing that the 

Company “believes it has addressed the concerns in the warning letter appropriately.” ¶118. 

Around this time, in December 2008, Sun Pharma installed two senior managers at Caraco: 

Sandeep Mehta as Director of Manufacturing and Sunil Ajmera as Vice President of 

Manufacturing, and both pushed for production “over anything else.” ¶93(h)-(k).9

 Despite receiving yet another FDA Form 483 on December 22, 2008, containing five 

observations, ¶75, on January 29, 2009, the Company issued a press release wherein Defendant 

Movens once again allayed concerns by stating that “we believe we remain substantially 

compliant” and that “the Company’s sales of current products continue in the normal course of 

business” and “[w]e continue to add products to our portfolio through Sun Pharma and its 

affiliates that we will launch into the US,” ¶120.10 In a February 3, 2009, filing with the SEC, 

the Company downplayed the December 22, 2008, Form FDA 483 and reassured investors that 

“[t]he Company believes it has responded appropriately to the FDA’s concerns, and corrective 

measures have been put into place.” ¶122. 

E. Caraco Recalls Certain Products 

 Caraco provided the FDA on February 11, 2009, with two Field Alert Notifications 

regarding its Metoprolol Tartrate Tablets for two different dosages, both of which indicated that 

“a market complaint” was received on “January 28, 2009 indicating that tablets of different 

 

9

 A witness explained that while both Mehta and Ajmera ostensibly reported directly to 

Movens it appeared that Mehta and Ajmera, as agents of Sun Pharma, were running Caraco. 

¶93(h)-(k). 

10 In reality, however, Caraco later admitted that “[w]ith deliberate efforts, since December 

15, 2008, we have slowed down new product development and technology transfer activities 

for continuous focus on cross-functional training and resolution of process and product related 

discrepancies.” ¶87. 

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sizes were found in” certain lots. ¶78. Approximately one week later, in a February 19, 2009 

letter to the FDA, Defendant Movens stated that Caraco had “stopped most of our internal 

research and development activities to allow the R&D team to act as additional support for tech 

services” and that they were “analyzing the trends for recurring product anomalies and are 

taking appropriate action as necessary to eliminate any remaining issues with product quality.” 

¶79. 

 Caraco further disclosed on March 31, 2009, that it had to recall certain tablets 

manufactured by the Company as the tablets might have differed in size and therefore could 

have more or less of the active ingredient. ¶82. This news sent Caraco’s shares down $1.03 per 

share, more than 22%, to close on March 31, 2009, at $3.52 per share, on unusually heavy 

volume. ¶125. On April 21, 2009, Caraco filed a report with the SEC further disclosing that 

“[o]n April 17, 2009, as a precautionary measure, Caraco ... voluntarily initiated a recall of 

certain product lots manufactured in its Detroit, MI facility.” ¶127. 

 The FDA again issued Caraco a Form FDA 483 on May 12, 2009, listing eighteen 

observations, including fundamental failures in operating procedures including a number of 

repeat observations from earlier inspections. ¶80. Yet on May 28, 2009, Caraco continued to 

downplay it problems in a press release that reassured investors that the Company had changed 

leadership in January 2009 and was taking steps to improve compliance. ¶129. In a filing with 

the SEC on June 15, 2009, Caraco claimed, among others, that “[w]e continue to gain effective 

support from Sun Pharma, in both quality systems and personnel, in the areas of quality and 

manufacturing,” “[w]e remain extremely pro-active in regards to growing our business 

appropriately,” and “[w]e remain confident that our implementation of corrective actions in 

compliance and quality will ultimately let us gain back our momentum of sales growth that we 

have enjoyed over the last several years.” ¶131. 

 Finally, in the June 15, 2009 filing with the SEC, signed by defendant Movens and 

Shanghvi, Caraco nevertheless reassured investors “we believe we are substantially compliant 

with cGMP.” ¶131. 

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F. The Day of Reckoning 

 On June 24, 2009, the United States Attorney for the Eastern District of Michigan filed a 

complaint for forfeiture of adulterated articles of drug (the “Forfeiture Complaint”) on behalf of 

the United States directed at all articles of drug located at Caraco’s Elijah McCoy, Farmington 

Hills or Wixom, Michigan facilities. ¶133. The Forfeiture Complaint alleged that the FDA had 

issued a Warning Letter to Caraco on October 31, 2008 identifying numerous significant GMP 

violations identified during a May 1-June 11, 2008 inspection but that Caraco, despite 

repeatedly representing it had corrected the deficiencies, was still in continuing and significant 

violation of cGMP as admitted in its June 19, 2009 letter to the FDA. Id.11 

 Finally, on June 25, 2009, investors learned the true extent of Caraco’s severe and 

systemic manufacturing problems. ¶¶17,134-135. That day, the FDA announced that U.S. 

Marshals had seized drug products manufactured by Caraco from the Company’s facilities. 

¶134. According to the FDA, this action followed Caraco’s continued failure to meet the 

FDA’s cGMP requirements, which assure the quality of manufactured drugs. Id. The FDA 

stated that through the seizure, it sought to immediately stop the company from further 

 

11 These violations included, inter alia: (1) failure to follow written procedures for the storage 

and handling of components resulting in, for example, the placement and use of raw materials 

without proper documentation resulting in the loss of toxic digoxin drug substance; (2) failure 

to follow written procedures for the execution of the production and process control functions 

for “charge-in” of components resulting in, for instance, the use of the wrong components in 

batch processing of drugs; (3) failure to maintain accurate inventory records of components 

resulting in, for example, 27 inventory discrepancies that could not be reconciled; (4) failure 

to have written procedures for production and process control, resulting in, for example, the 

manufacture of tablet drug products before adequately evaluating processing issues; (5) the 

failure to establish and follow written procedures describing in-process controls or tests, 

resulting in, for instance, reliance on visual inspection to remove defective tablets even 

though the company’s own investigations revealed that the visual culling process was not 

effective; (6) failure to use appropriate equipment, resulting in, for instance, the inability to 

assure consistent quality for Digoxin drug products; (7) failure to conduct thorough 

investigations of unexplained discrepancies in drug manufacture causing, for instance, the 

failure to timely investigate out of specification inventory reconciliation for nine different 

drugs and the failure to investigate the root cause of the discrepancies; (8) failure to establish 

and follow written procedures applicable to the quality control unit, resulting in, for instance, 

changes in material weighing and machinery that lead to subsequent problems in 

manufacturing; and (9) failure to conduct follow-up to investigations of complaints, resulting 

in, for example, the failure to evaluate the potential health hazard of thick or thin tablets as it 

regards under- or supra-potency. ¶133. 

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distributing drugs until there was assurance that the firm complied with good manufacturing 

requirements. Id.

On this news, shares of Caraco declined $1.79 per share, approximately 43%, to close 

on June 25, 2009, at $2.39 per share, on unusually heavy volume. ¶136.

V. PLAINTIFFS HAVE ADEQUATELY ALLEGED VIOLATIONS OF THE 

SECURITIES LAWS 

A. Standard of Review 

To survive a motion to dismiss, a plaintiff’s request for relief need only be “plausible.” 

Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). “A claim has facial plausibility when 

the plaintiff pleads factual content that allows the court to draw the reasonable inference that 

the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 

(2009). In assessing the sufficiency of a complaint, courts “must construe the complaint in a 

light most favorable to the plaintiff, and accept all of [the] factual allegations as true.” Helwig 

v. Vencor, Inc., 251 F.3d 540, 553 (6th Cir. 2001).12 Additionally, “[w]hen an allegation is 

capable of more than one inference, it must be construed in the plaintiff’s favor.” Id.

To state a claim for securities fraud under Section 10(b) of the Exchange Act, a 

plaintiff must allege: (1) “a material misrepresentation (or omission)”; (2) “scienter, i.e., a 

wrongful state of mind”; (3) “a connection with the purchase or sale of a security”; (4) 

“reliance”; (5) “economic loss”; and (6) “loss causation, i.e., a causal connection between the 

material misrepresentation and the loss.” Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 341-

42 (2005). Under the Private Securities Litigation Reform Act of 1995 (“PSLRA”), which is 

applicable to Section 10(b) claims, “a plaintiff must now state with particularity facts giving 

rise to a strong inference that the defendant acted with the required state of mind” which, in 

this circuit, is recklessness. Helwig, 251 F.3d at 548, 550. Defendants only challenge the 

sufficiency of the Complaint with respect to the first two elements; namely, falsity and 

scienter. 

 

12 Unless otherwise indicated, all internal quotations, citations, and emphasis are omitted. 

Case 2:09-cv-12830-AJT-DAS Document 32 Filed 05/27/10 Page 23 of 58
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B. Plaintiffs Sufficiently Allege That Defendants Made Materially False and 

Misleading Statements 

Under the PSLRA, a plaintiff adequately pleads falsity by “specify[ing] each statement 

alleged to have been misleading” and “the reason or reasons why the statement is misleading.” 

15 U.S.C. §78u-4(b)(1)(B). Plaintiffs satisfy this standard. 

1. Plaintiffs Adequately Allege Defendants’ False and Misleading 

Statements and the Reasons Why Such Statements Were False and 

Misleading 

As the Sixth Circuit has declared, “a company may choose silence or speech 

elaborated by the factual basis as then known – but it may not choose half-truths.” Helwig, 

251 F.3d at 561; City of Monroe Employees Ret. Sys. v. Bridgestone Corp., 399 F.3d 651, 673 

(6th Cir. 2005); see also Berson v. Applied Signal Technology, Inc., 527 F.3d 982, 987 (9th 

Cir. 2008) (holding that once defendants chose to speak regarding the Company’s operations, 

“they were bound to do so in a manner that wouldn’t mislead investors”); In re K-Tel Int’l, 

Inc. Sec. Litig., 300 F.3d 881, 898 (8th Cir. 2002) (“the law requires ‘an actor to provide 

complete and non-misleading information with respect to the subjects on which he undertakes 

to speak’”); Stransky v. Cummins Engine Co., 51 F.3d 1329, 1331 (7th Cir. 1995) (“If one 

speaks, he must speak the whole truth.”).13

Elaborating upon this principle, SEC Rule 10b-5(b) prohibits “mak[ing] any untrue 

statement of a material fact or ... omit[ting] to state a material fact necessary in order to 

make the statements made, in light of the circumstances under which they were made, not 

misleading.” 17 C.F.R. §240.10b-5 (emphasis added). “Under this provision, even though no 

duty to make a statement on a particular matter has arisen, once corporate officers undertake 

to make statements, they are obligated to speak truthfully and to make such additional 

disclosures as are necessary to avoid rendering the statements made misleading.” In re Par 

Phar., Inc. Sec. Litig., 733 F. Supp. 668, 675 (S.D.N.Y. 1990); see also Virginia Bankshares, 

 

13 Defendants contend that Caraco had no duty “to warn investors about an event that was not 

certain.” Motion at 14. The Sixth Circuit has declared, however, that “matters that are not 

material because they are not so probable or relevant as to be required to be disclosed in a 

particular context may be material if information about them is stated falsely or misleadingly 

in communications that are not otherwise required to be made.” Helwig, 251 F.3d at 555. 

Case 2:09-cv-12830-AJT-DAS Document 32 Filed 05/27/10 Page 24 of 58
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Inc. v. Sandberg, 501 U.S. 1083, 1098 n.7 (1991) (when a company chooses to speak, “there 

can be no question that the statement [it] d[o][es] make carrie[s] with it no option to 

deceive”). “A statement is misleading if a reasonable investor, in the exercise of due care, 

would have received a false impression from the statement.” In re Par, 733 F. Supp. at 677. 

Defendants argue that their statements are not false or misleading as a matter of law 

because they purportedly had no duty to disclose the risks posed by the warnings that the 

Company received from the FDA. Motion at 13-16. Defendants, however, misled the 

investing public by electing to speak about issues related to the Company’s regulatory 

compliance but minimizing the significance of the FDA’s warnings and Caraco’s own 

noncompliance with FDA regulations. In fact, despite the Defendants’ reassurances to the 

contrary, the FDA’s warnings were significant not only because of the regulatory risk that 

they posed to Caraco, but also because of Caraco’s shocking cGMP deficiencies that would 

have posed a substantial risk to the company even if they were not the subject of FDA 483 

warnings. In fact, when the FDA eventually raided Caraco’s facility and the full extent of its 

failures came to light, the effect upon Caraco was significant – and the effect on the 

company’s shareholders was devastating. 

Defendants made materially false and misleading statements in several areas, which 

the Complaint spells out in great detail. 14 For instance, Defendants made misleading 

 

14 As set forth throughout this section, Plaintiffs have more than adequately alleged that 

Defendants made misleading statements. In light of this, Defendants’ attempt to elevate form 

over substance through 15 USC §78u-4(b)(1) fails utterly. Unlike the complaint in In re The 

Goodyear Tire & Rubber Co. Sec. Litig., 436 F.Supp.2d 873 (N.D.Ohio 2006), the Complaint 

carefully sets forth the “reason or reasons why each statement was misleading.” Id. at 904; see

¶¶101, 103, 105, 107, 109, 111, 113, 117, 119, 121, 123, 126, 128, 130, 132. The Complaint 

includes far more than “a long list of block quotes” lined up against “a conclusory list of 

omissions.” Havenick v. Network Exp., Inc. 981 F.Supp. 480, 526 (E.D. Mich.1997). Rather, 

it includes carefully-selected statements, providing both context and particular emphasized 

text, and a thorough explanation for why each statement was misleading, thus “explain[ing] in 

what respect the statements at issue were false.” Pilarczyk v. Morrison Knudsen Corp., 965 

F.Supp. 311, 321 (N.D.N.Y. 1997). Moreover, Defendants offer no support for their implied 

argument that 15 USC §78u-4(b)(1) requires that the identification of the misstatement, their 

explicit quotation, and the explanation of why it is wrong, must be contained within the same 

paragraph. Motion at 38. Thus, ¶123 is not the only paragraph to identify misleading 

sentences.

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statements regarding employee training. The May 29, 2008 press release boasted of enhanced 

training, quoting Defendant Movens’ assertion that, “Our training and succession planning is 

being enhanced to support our growth and predict future operational efficiencies. We are 

working with local universities and technical schools in order to provide the proper talented 

employees required to perform in a highly regulated business.” ¶100. Defendants reiterated 

their boasts of a well-trained workforce in an October 2008 press release. ¶¶110-113. These 

statements naturally created the impression that Caraco was training its employees to properly 

grow the company in a “highly regulated business.” However, Defendants knew, or were 

reckless in not knowing, several facts that contradicted their glib assertions. 

As revealed in the FDA Form 483 following the inspection that occurred from MayJune 2008, Caraco employees engaged in the manufacture and processing of a drug product 

actually lacked the training required to perform their assigned functions. ¶60. The letter 

indicated that cGMP training was not conducted by Caraco on a continuing basis and with 

sufficient frequency to assure that employees remained familiar with cGMP requirements 

applicable to them. Id. As an example, the Form 483 indicated that “review of training 

records of four employees in the Dispensing Department show incomplete documentation of 

minimum training requirements to enable a person to perform the assigned functions.” ¶101. 

The employee training was so deficient, in fact, that CW1, a manufacturing manager at 

Caraco, reported that Caraco’s poor infrastructure rendered it virtually incapable of properly 

training its employees to use the “ERP” system to track raw materials. ¶¶90(b), 101. 15

According to CW1, the ERP system was so difficult to use that it was nearly impossible to 

train employees to use it properly. Id. In fact, despite having a BS degree in Chemistry, CW1 

admitted that it was hard for him/her to figure out the ERP system. Id. Caraco’s inadequately 

trained employees thus were unable to use the ERP system to fully record movements of raw 

materials as they occurred in the dispensing area. Id. Senior employees were then forced to 

 

15 “ERP” was a material resource planning, or “MRP” system that was internally cobbled 

together by Sun Pharma. 

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make these entries into the system after they happened based on logs that operators were 

supposed to complete. ¶¶90(b), 101. Thus, contrary to defendants’ false and misleading 

statements that improved productivity and increased cGMP compliance would result because 

of the hiring and retention of experienced staff and talented personnel, the FDA determined 

that Caraco employees lacked the basic training necessary for them to adequately perform 

their assigned functions. 

Defendants also made misleading statements regarding the January 2008 recall. The 

June 10, 2008, Form 10-K for the 2008 fiscal fourth quarter and full year, signed by 

Defendants Movens and Shanghvi, minimized the then-recent recall. It claimed that “The 

product recall announced by the FDA was limited to a single compression machine 

malfunction, and affected two lots.... The Company has responded accordingly and we 

believe we remain substantially compliant. ... We continue to focus on improving the amount 

of support in both quality assurance and quality control in order to continually improve our 

performance in quality.... We have focused our attention for continual improvement of our 

Corrective And Preventative Actions and cGMP, while adding the appropriate level of 

personnel to support our growth during Fiscal 2008.... We remain extremely pro-active in 

regards to growing our business appropriately.” ¶102 (emphasis added). Defendants made 

similar assertions in a July 25, 2008 press release and Form 10-Q, ¶¶105-106. Then, in 

September 2008, merely weeks before the FDA issued its Warning Letter to Caraco, 

Defendant Shanghvi touted Caraco’s business and regulatory compliance in an article in the 

Business Standard. ¶108. 

The January 2008 recall had been as a result of customer complaints about “over and 

undersized pills.” Defendants identified the reason for the recall as limited to a “particular 

machine.” However, the over and undersized pills were actually part of a continuous problem 

with tablet variation before and during the Class Period and were not limited to one particular 

machine. According to CW4, CW5, CW6, CW7, CW8, and CW9, the Company had a 

rampant and pervasive problem producing tablets that were too thick or too thin. ¶103(a). 

Case 2:09-cv-12830-AJT-DAS Document 32 Filed 05/27/10 Page 27 of 58
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CW9 reported that, throughout his/her employment from March 2007 until June 2008, quality 

inspectors frequently discovered tablets that were too thick or thin, as well as tablets that were 

broken and/or chipped. ¶97(a). Likewise, CW8 corroborated this account and indicated that 

rampant problems with tablets being too thick or too thin were common knowledge within the 

Company. ¶96(a). Moreover, CW6 noted that the Sejong machines being used for large 

production were causing problems because these machines were designed to be used for 

making small lots of vitamins, not large quantities of pharmaceutical grade drug products. 

¶94(b). CW4 and CW5 also indicated that the “Sejong” tablet press machines Caraco was 

using were not proper for producing a pharmaceutical grade product. ¶93(c). CW5 indicated 

that the Company needed better compression machines in order to reduce tablet production 

problems, including the thick/thin problems. Id.; see also ¶ 103(a). In fact, the Company 

received numerous complaints from customers during the Class Period about pills 

manufactured by the Company that were either over or undersized. ¶¶168-69. 

Then, on March 31, 2009, Caraco announced a “voluntary” Digoxin recall. ¶82. 

However, Defendants failed to disclose that the cGMP problems went well beyond this single 

product. ¶126. Just weeks later, on April 17, 2009, Caraco initiated a recall of certain 

products because “some of the tablets being oversized or undersized.” ¶84. Although the 

Company claimed that the recall was voluntary, it was actually initiated by the FDA. ¶128. 

According to FDA documentation the products were manufactured from “3/30/2008 to 

12/08/2008” and were distributed from “04/24/2008 to 01/28/2009.” The products listed in 

the FDA recall documents were limited to 2,138 bottles containing 1,000 tablets of 

“Clonazepam Tablets, USP, 0.5 mg,” 80,055 bottles containing 1,000 tablets of “Metoprolol 

Tartrate Tablets, USP, 25 mg,” and 4,330 bottles containing 1000 tablets of “Metoprolol 

Tartrate Tablets, USP, 50 mg.” ¶84. Caraco and Defendant Movens later admitted that the 

Company was having “reoccurring variability product issues.” ¶88. Thus, in the Company’s 

June 19, 2009 letter to the FDA, the Company had established a “variability study” in 

November 2008 to address the issue, and conceded that the most significant reoccurring 

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variability issues were occurring with the Company’s Metoprolol, Clonazepam, Digoxin, and 

Metformin products. Id.; see also ¶103(a). 

The problem with the Company’s “reoccurring variability product issues” were so 

severe that later in the Class Period, as admitted by Defendant Movens and Caraco in a 

February 19, 2009, letter to the FDA, “We have stopped most of our internal research and 

development activities to allow the R&D team to act as additional support for tech services. 

They are analyzing the trends for recurring product anomalies and are taking appropriate 

action as necessary to eliminate any remaining issues with product quality.” ¶79. The 

subsequent seizure of all of Caraco’s manufactured drug products and ingredients was the 

result of these ongoing and pervasive manufacturing and compliance issues – issues that 

defendants falsely and misleadingly minimized in the Company’s public statements. ¶103(a). 

Defendants also made misleading statements that Caraco was “substantially 

compliant” with FDA requirements. Contrary to the Company’s assertions, Caraco had not 

“responded accordingly” to the Form 483s, and was not “substantially compliant” with cGMP 

requirements. Defendants lacked any reasonable basis to state a belief that Caraco was 

“substantially compliant,” for several reasons. 

The FDA Form 483 issued the very day after the June 10, 2008 statements listed at 

least 14 significant observations evidencing failures in fundamental operating procedures 

regarding the manufacture of drugs for human consumption. ¶60. These observations 

included: a lack of written procedures for production and process control designed to assure 

that the drug products have the identity, strength, quality, and purity they purport or are 

represented to possess; failure to thoroughly review any unexplained discrepancy and the 

failure of a batch or any of its components to meet any of its specifications whether or not the 

batch has been already distributed (such as the failure to fully investigate incidents of 

contaminated, adulterated or out-of-specification drugs or raw materials); written production 

and process control procedures not documented at the time of performance; and cGMP 

training not conducted on a continuing basis and with sufficient frequency to assure that 

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employees remain familiar with cGMP requirements applicable to them; and procedures for 

the cleaning and maintenance of equipment deficient regarding sufficient detail of the 

methods, equipment, and materials used in the cleaning and maintenance operation, and the 

methods of disassembly and reassembling equipment as necessary to assure proper cleaning 

and maintenance. Id.; see also ¶103(b). 

Witnesses were aware of these existing problems that demonstrated that Caraco was 

not substantially compliant with FDA regulations. CW5 stated that he/she was hired by 

Caraco to “fix everything.” For example, the standard operating procedures, or “SOPs,” were 

in disarray. Upon his/her arrival at Caraco in July 2008, CW5 immediately faced over 1,000 

SOPs that needed to be updated, and in some cases, the SOPs had not been updated in 12 to 

14 years. ¶93(l). CW2 indicated that there was an utter lack of proper manufacturing 

practices and quality assurance at Caraco. ¶91(a). For example, CW2 noted that the SOPs 

were changed every day. Id. Similarly, according to CW2, adverse drug experience, or 

“ADE,” reports were consistently delayed. ¶91(e). Complaints would come in through 

customer service from a pharmacy or a customer, concerning issues such as insufficient pills 

in the bottle, broken pills, or a bad reaction to the drug. However, complaints were written up 

and sent to Quality Assurance; Quality Assurance would review the problem with the 

originating department and, after a delay in which Caraco management would protect 

themselves, Caraco would finally file a report with the FDA. Id. According to CW1, ADE 

reports were filed with the FDA belatedly, as the two employees who filed the reports were 

occupied by their customer service duties, taking phone calls and emails from customers, 

pharmacies, and distributors. ¶90(d). “[A]llegations of specific problems undermining a 

defendant’s optimistic claims suffice to explain how the claims are false.” In re Immune 

Response Sec. Litig., 375 F. Supp. 2d 983, 1020 (S.D. Cal. 2005). 

CW4 also confirmed the rampant manufacturing problems at Caraco. ¶¶93(a)-(l). 

He/she stated that in 2008 alone, there were over 1,000 incidents of problems, including 

weight variation, contaminants such as hair found in the product, or tablets that were too 

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thick/thin. Id. Indeed, CW4 stated that he/she had seen more hair contamination problems in 

a week than he/she had seen in all of his/her combined 40 years in manufacturing. Id. CW5 

also confirmed that there were serious, rampant problems with tablet variation. Id. CW5 

noted that tablet variation was a serious problem, as Digoxin, for example, was a Class 2 drug 

that could be lethal at the wrong dosage. Id. CW5 noted that in one set of tests weighing over 

900,000 tablets, approximately 2% were found to be of the wrong size – an incredibly high 

ratio of defective product for pharmaceuticals. Id. Indeed, when CW5 first arrived, Caraco 

was “like the wild west.” Id. CW5 also described CEO Movens’s intimate knowledge of the 

rampant problems at Caraco. Id. CW5 attended meetings to discuss the manufacturing 

problems at the Company. Id. Defendant Movens was directly involved with, and keenly 

aware of, the quality issues at the Company that demonstrated the falsity of the Company’s 

public statements. Additionally, according to CW10, between 2006 and 2008, quality review 

board meetings and operations meetings were held. ¶98(b). CW10 stated that Defendant 

Movens instructed all senior management and managers in general in operations and quality 

that any issues regarding quality should be directed to him first. Id. As a result, CW10 

indicated that in some cases, Daniel Barone, the Director of Quality, would learn about 

quality issues only after Defendant Movens. Id.

Other allegations further demonstrate the falsity of defendants’ statements. CW3 

indicated that Caraco had “many infractions.” ¶92 For example, according to CW3, an 

employee would blend the ingredients, then test the mixture to make sure it was correct; but 

production would consistently start making tablets before the tests were complete. If a 

problem was found later, the machine operators were blamed. Id.; see also ¶103(c). Indeed, 

as soon as CW6 started at Caraco, he/she saw things that were “totally wrong.” ¶94(a). CW6 

was concerned about the quality of the product and noted that the set up in the compression 

stage of manufacturing was incorrect, resulting in metal shavings getting into the product. 

He/she tried to rectify the problem with management but the ethic was “more about pushing 

production than quality.” Id. According to CW6, every time there was an issue, management 

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wanted to bypass the issue so that they could maximize production. Id.; see also ¶103(c). 

CW4 and CW5 similarly recounted the Defendants entire focus was on growing production at 

the expense of compliance. CW4 stated that even if a product did not meet the in-house 

specifications, the manufacturing people would release it anyway. ¶93(d). According to 

CW4, the problem stemmed from the attitude of management to “get the tablets out the door.” 

Machines were not allowed to be shut down even when updating SOPs. Id. CW5 

corroborated this account, stating that Kaushik Gandhi ordered continued production without 

interruption – even during SOP revisions. Id.; see also ¶ 103(c). Despite Defendants’ boasts 

that the Company brought aboard new production leadership to ensure substantial cGMP 

compliance, the new personnel, Ajmera and Mehta, were if anything more willing to sacrifice 

compliance for production. ¶¶122-23.16 Defendants continued to minimize the extent of their 

non-compliance even as the truth began to emerge. ¶¶130, 132. Thus, Caraco failed to 

remedy deficiencies identified by the FDA in previous observations, demonstrating that the 

Company was not substantially compliant with FDA requirements as defendants falsely and 

misleadingly represented. ¶¶103(b), 113, 117, 119, 121, 126, 130, 132. 

2. Defendants’ Statements Were Material and the Court Cannot 

Decide Materiality As a Matter of Law at the Pleading Stage 

Defendants do not dispute that they made the misrepresentations alleged in the 

Complaint. Instead, they argue that they should be immune from responsibility for their 

misstatements because they were not “material” – in other words, “there [is not] a substantial 

likelihood that the disclosure of the omitted fact[s] would have been viewed by the reasonable 

investor as having significantly altered the ‘total mix’ of information made available.” TSC 

Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976). However, such an argument is 

inappropriate for a motion to dismiss. At the motion to dismiss stage, omissions are material 

unless the omitted information was so “obviously unimportant to a reasonable investor that 

 

16 Thus, contrary to Defendants’ response to ¶¶122-123, Motion at 39, as those paragraphs 

explain, although new leadership had been installed, Defendants knew, or were reckless in not 

knowing, that the new leadership was not intended to effect the purported goals. 

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reasonable minds could not differ on the question of their unimportance.” Bridgestone, 399 

F.3d at 681. Thus, “[d]etermining materially in securities fraud cases should ordinarily be left 

to the trier of fact.” Siracusano v. Matrixx Initiatives, Inc., 585 F.3d 1167, 1178 (9th Cir. 

2009); Basic, Inc. v. Levinson, 485 U.S. 224, 231-32, 240 (1988); TSC, 426 U.S. at 450. 

Although Plaintiffs are not required to establish materiality at this stage, Basic, 485 

U.S. at 231-32, the misrepresentations alleged are clearly material. Defendants induced 

investors to provide the money for an operation that depended upon regulatory compliance; 

reassured the investors that whatever regulatory issues it had were minor and controllable; and 

meanwhile ran the operation with minimal-if-any regard for compliance. See, e.g., ¶¶7, 89-

98. Courts have found similar statements to be material. See McGuire v. Dendreon Corp., 

No. C07-800MJP, 2008 WL 5130042 at *5, *6 n.4 (W.D. Wash. Dec. 5, 2008) (contents of 

Form 483 are material, and defendant’s statement that “we hosted a good [FDA] inspection, I 

think” is actionable); In re Zenith Lab. Sec. Litig., Civ. No. 86-3241A, 1993 WL 260683 at 

*2-*4,*8-*9 (D. N.J. Feb. 11, 1993) (denying summary judgment where generic drug 

manufacturer’s officers projected optimism to investors in face of negative Form 483s). In 

fact, the importance of FDA action is amplified where, as here, the corporate strategy depends 

on attaining the market advantage of winning the initial ANDA approval. See ¶ 42; see also 

Yanek v. Staar Surgical Co., 388 F. Supp. 2d 1110, 1129-30 (C.D. Cal 2005) (“The facts 

related to the issuance of the Form 483 and the problems described therein were ‘material’... 

[a]ny facts bearing on possible delays in FDA approval” are material when corporate strategy 

depends on timely approvals) (emphasis added). For instance, in In re Able Lab. Sec. Litig., 

Civ. Action No. 05-2681 (JAG), 2008 WL 1967509 (D.N.J. Mar. 24, 2008), a case with 

factual allegations virtually identical to those here, the court characterized the following facts 

as material in denying defendants’ motion to dismiss: 

The Complaint alleges several instances in which Defendants provided 

material misstatements or omissions in violation of the Securities Exchange 

Act of 1934. On March 20, 2002, Able “‘hired individuals who were 

knowledgeable and committed to [the FDA’s current Good Manufacturing 

Practices (“cGMP”)] compliance, and instituted operational procedures that 

enforce cGMP compliance.’”. . . On March 25, 2003, Able filed SEC Form 

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10-K, which contained their annual report for 2002 and “represented that Able 

was in compliance with all FDA manufacturing regulations.” On March 15, 

2004, Able filed SEC Form 10-K, containing its annual report for 2003, which 

stated “‘we believe we are currently in compliance with all applicable FDA 

requirements’ and ‘[w]e do not expect the [Generic Drug Enforcement Act of 

1992] to have a material impact on the review or approval of our AND As.’” . . 

. On May 7, 2004, Able filed SEC Form 10-Q. . . .This Form also disclosed that 

the FDA had initiated an inspection of the South Plainfield Facility in January 

of 2004 and had issued a warning letter to [CEO] Wadekar. Regarding the 

warning letter, Able said, in the Form 10-Q, “‘we believe that the warning 

letter may not materially affect our operations.’”. . . The Company further 

stated “‘[w]e expect to be able to address the FDA’s observations in a timely 

and effective manner, and we believe the warning letter may not materially 

affect our operations.’” . . . . On April 5, 2005, Able initiated a nationwide 

recall of approximately 29,000 packages of an anti-nausea medication due to 

“impurity failures.” Able also initiated a Florida and Ohio recall of 3,034 

packages of a beta blocker due to instability. . . . . Defendant Wadekar 

responded that the impact “was fairly contained and the recall” would have no 

impact on the second quarter. . . .On May 10, 2005, Able filed SEC Form 10-Q 

which stated . . .[W]e have initiated a thorough internal evaluation of our 

operating practices with the knowledge of the FDA. . . . We have also 

retained the services of a highly reputable outside consulting firm to assist us 

in this initiative.’” 

Id. at *3-*8. Thus, false claims that a “Company believes it is in material compliance with 

cGMP standards” are actionable under Section 10(b) and Rule 10b-5. See In re Copley 

Pharm., Inc.Sec. Litig., Civ. A. No. 94-11897-WGY, 1995 WL 169215 (D. Mass. Mar. 16, 

1995).17

Defendants also claim that they are immune from liability because, they argue, their 

misrepresentations constituted “soft information,” such as opinions or predictions, for which 

 

17 The cases Defendants cite are distinguishable. Robbins v. Moore Med. Corp., 894 F.Supp. 

661 (S.D.N.Y. 1995), a summary disposition opinion, involved “routine” inspections by the 

FDA, and, unlike here, defendant reasonably believed itself to be in material compliance. Id.

at 674; see also In re Indep. Energy Holdings PLC Sec. Litig., 154 F. Supp. 2d 741, 760 

(S.D.N.Y. 2001) (overruled on other grounds) (distinguishing Robbins and finding that 

“[w]hile... securities laws may not require disclosure of possible future sanctions, they 

certainly require disclosure of information that would permit an investor to appreciate the risk 

that the future sanction may arise.”). In re Discovery Lab. Sec. Litig., No. 06-1820, 2006 WL 

3227767 (E.D. Pa. Nov. 1, 2006), concerned statements about a different company’s product

in a different time period; the Court strongly implied that it would find misstatements about a 

company’s own production, such as here, to be material. Id. at *11 (“categorical difference in 

materiality to ... investors between problems in the manufacture of [company]’s flagship 

product and problems in the manufacture of another company’s product in the same facility 

seven years earlier.”) (emphasis in original). Finally, in Public Pension Fund Group v. KV 

Pharm. Co., No. 4:08-CV-1859 (CEJ), 2010 WL 681443 (E.D. Mo. Feb. 22, 2010), the 

complaint alleged the findings of the Form 483s, but, unlike here, did not provide independent 

corroboration that the company actually violated cGMPs. Id. at *10. 

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they cannot be held responsible. Motion at 14-16. This contention is also incorrect. As the 

Sixth Circuit has declared, “the protections for soft information end where speech begins.” 

Helwig, 251 F.3d at 560. As the court in Helwig explained: 

If – as defendants contend – the protection for soft information remains intact 

even after a company speaks on an emerging issue, the speaker could choose 

which contingencies to expose and which to conceal. On any subject falling 

short of reasonable certainty, then, a company could offer a patchwork of 

honesty and omission. This proposition is untenable, however, both as a matter 

of policy and precedent. 

Id. at 560-61; see also ACA Financial Guaranty Corp. v. Advest, Inc., 512 F.3d 46, 62 

n.11 (1st Cir. 2008) (“Depending on circumstances, some statements of opinions or estimates 

may qualify as false or misleading statements of fact.”). Thus, “opinions may be deemed 

false or misleading under the securities laws.” Bridgestone, 399 F.3d at 670, 674 (an “opinion 

or puffery ... in particular contexts when it is both factual and material ... may be actionable) 

(emphasis in original); see also McGuire, 2008 WL 5130042 at *5. 

Defendants’ statements are actionable because they were based upon, and an integral 

part of, verifiable factual statements that were material to investors. The “opinion” concerned 

compliance with objective criteria such as the cGMP regulations. See Bridgestone, 399 F.3d 

at 672 (claim that conclusion is supported by “objective data” can be misrepresentation); 

Casella v. Webb, 883 F.2d 805, 808 (9th Cir. 1989) (“What might be innocuous ‘puffery’ or 

mere statement of opinion standing alone may be actionable as an integral part of a 

representation of material fact when used to emphasize and induce reliance upon such a 

representation.”); In re Washington Mut., Inc. Sec., Derivative & ERISA Litig., 2009 WL 

3517630, at *22 (W.D. Wash. Oct. 27, 2009) (holding that a statement of opinion is 

actionable when it is based upon a material, verifiable statement of fact). Whether or not the 

Company was, in fact, compliant with cGMP regulations was an issue that was subject to 

objective verification. Thus, Defendants’ so called “opinions” that the company was in 

substantial compliance with cGMP regulations could not have been offered in good faith, as 

they were aware of (or reckless for not being aware of) the pervasive problems undermining 

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their false and misleading statements. Defendants’ argument, moreover, raises an issue of fact 

that is inappropriate for resolution at the pleading stage. See In re ProQuest Sec. Litig., 527 

F. Supp. 2d 728, 744 (holding that arguments that statements are puffery “really go to 

challenging the substance of the statements” and that complaints are “not subject to dismissal 

on these grounds”); Harvey M. Jasper Ret. Trust v. Ivax Corp., 920 F. Supp. 1260, 1268 (S.D. 

Fla. 1995) (“Defendants’ assertion that its [sic] statements were mere puffing raises an issue 

of fact.”). 

Defendants did not merely fail to foresee the FDA’s future actions. Rather, they knew, 

or were reckless in not, knowing that the FDA’s warnings were correct, and that their facility 

was plagued by pervasive cGMP problems, and they spoke about such warnings without fully 

disclosing such risks.18 See, e.g., ¶7. Moreover, Defendants were required to “permit an 

investor to appreciate the risk” of such sanctions. In re Indep. Energy Holdings, 154 F. Supp. 

2d at 760. By minimizing the risks posed by the cGMP problems, Defendants deprived 

investors of the ability to assess such information in making their investment decisions and 

significantly altered the “total mix” of information available. Basic, 485 U.S. at 231-32.19

Defendants’ assertion that they are immune from liability because the FDA Form 483s 

were publicly available (Motion at 10-13) is without merit. Defendants are attempting to 

invoke a truth-on-the-market defense, but courts have routinely declared that “[t]he truth-onthe-market defense is intensely fact-specific and is rarely an appropriate basis for dismissing a 

§10(b) complaint for failure to plead materiality.” Ganino v. Citizens Utils. Co., 228 F.3d 

 

18 Therefore, Anderson v. Abbot Labs., 140 F. Supp. 2d 894 (N.D. Ill. 2001) is distinguishable; 

in Anderson, the Court relied on the fact that “Plaintiffs have not alleged any facts suggesting 

that defendants did not have a good faith basis for disputing the allegations.” Id. at 907. 

Here, Plaintiffs have alleged actual cGMP problems so severe and pervasive that Defendants 

had no good faith basis upon which to dispute the FDA’s assessment. See, e.g., ¶¶7, 101, 103. 19 This is not a case such as In re Sofamor Danek Group, Inc., 123 F.3d 394 (6th Cir. 1997), 

where the FDA ultimately did not initiate action against the company. Id. at 402. Here, the 

substantial risk that the Defendants hid from investors materialized. Moreover, unlike in In re 

Guidant Corp. Sec. Litig., 536 F. Supp. 2d 913 (S.D. Ind. 2008), the Defendants did not fail to 

adequately describe the nature of a product defect; rather, they essentially engaged in a cover 

up of their known (or recklessly unknown) cGMP violations by downplaying FDA 

assessments that they knew or should have known to be, if anything, not alarming enough. 

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154, 167 (2d Cir. 2000); see also Asher v. Baxter Int’l Inc., 377 F.3d 727, 735 (7th Cir. 2004) 

(“A ‘truth-on-the-market’ defense is available in principle ... but not at the pleading stage.”).20 

Moreover, the Form 483s only revealed a small part of the problems known to Defendants. 

The true nature of the pervasive cGMP problems and defendants’ unwillingness to adequately 

confront them were not revealed until the end of the Class Period. If the undisclosed 

information was truly digested by the market, then Caraco’s stock price would have reflected 

the incorporation of such information. The fact that the Company’s stock price dropped 

42.82% when Caraco disclosed adverse information on June 25, 2009 is indicative the market 

was not aware of the full extent of the negative information. ¶¶135-36, 157; Bridgestone, 399 

F.3d at 675-76. “At the motion-to-dismiss phrase, the Court declines to find that the allegedly 

concealed information was already disclosed to the market ‘with a degree of intensity and 

credibility sufficient to effectively counterbalance any misleading impression created by 

insider’s one-sided representations.’” In re Dura Pharms., Inc. Sec. Litig., 548 F. Supp. 2d 

1126, 1144 n.15 (S.D. Cal. 2008). Thus, plaintiffs have adequately alleged falsity.21

Even where public information is available, the information provided by a company 

itself is especially significant. Ballan v. Upjohn Co., 814 F. Supp. 1375, 1382 (W.D. Mich. 

1992) (citing TSC Industries, 426 US at 449). While the Form 483s may have been publiclyavailable, they only “scratched the surface” of the true nature of Caraco’s “wild west” 

 

20 See Immune, 375 F. Supp. 2d at 1036-37 (“the Court cannot conclude as a matter of law that 

the market had sufficient credible information indicating that Defendants’ optimism about 

REMUNE was unwarranted”); In re Lockheed Martin Corp. Sec. Litig., 272 F. Supp. 2d 928, 

938 n.11 (C.D. Cal. 2002) (“‘The truth on the market defense presented by the defendants 

necessarily involves a fact-intensive inquiry which is ill-suited to a motion to dismiss.’”). 

21 Defendants also contend, without citing any authority, that a claim for securities fraud 

cannot be based upon statements that are literally true. Motion at 39. However, “[s]ome 

statements, although literally accurate, can become, through their context and manner of 

presentation, devices which mislead investors. For that reason, the disclosure required by the 

securities laws is measured not by literal truth, but by the ability of the material to accurately 

inform rather than mislead prospective buyers.” In re Amgen Inc. Sec. Litig., 544 F. Supp. 2d 

1009, 1034 (C.D. Cal. 2008); Immune, 375 F. Supp. 2d at 1021. “Courts have long held that 

general disclaimers of accuracy do not shield sellers who knowingly make false statements.” 

In re Nat.’l Century Fin. Enterprises, Inc. Inv. Litig., 541 F. Supp. 2d 986, 1005 (S.D. Ohio 

2007). 

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operation. ¶7. Unlike in Sofamor Danek, the investors could not independently appraise the 

FDA’s assessment, because Defendants had hidden the true nature and extent of the 

violations. Sofamor Danek, 123 F.3d. at 402 (“any analyst could easily obtain a copy of the 

letter and could make an independent judgment of its significance”). 

C. The PSLRA’s Safe Harbor Provision Does Not Protect Defendants’ False 

and Misleading Statements 

Defendants also contend that their false and misleading statements are protected by the 

PSLRA’s safe harbor provision. Motion at 40-41. Defendants’ argument fails for several 

reasons. First, most of the statements alleged are statements of historical or present fact that 

are not entitled to protection. The PSLRA’s safe harbor provision only applies to statements 

“identified” as “forward-looking” and “accompanied by meaningful cautionary” language 

“identifying important factors that could cause actual results to differ materially from those in 

the forward-looking statement.” 15 U.S.C. §78u-5(c)(1)(A). Accordingly, the safe harbor 

provision and its bespeaks caution antecedent do not apply to defendants’ statements of 

current or historical fact. Makor Issues & Rights, Ltd. v. Tellabs Inc., 513 F.3d 702, 705 (7th 

Cir. 2008) (“Tellabs II”). The “misrepresentation of present or historical facts cannot be 

cured by cautionary language.” P. Stolz Family P’ship L.P. v. Daum, 355 F.3d 92, 96-97 (2d 

Cir. 2004). Moreover, “a mixed present/future statement is not entitled to the safe harbor with 

respect to the part of the statement that refers to the present.” Tellabs II, 513 F.3d at 705; see 

also In re Stone & Webster, Inc. Sec. Litig., 414 F.3d 187, 213 (1st Cir. 2005) (“The mere fact 

that a statement contains some reference to a projection of future events cannot sensibly bring 

the statement within the safe harbor if the allegation of falsehood relates to non-forwardlooking aspects of the statement.”). 

Contrary to defendants’ assertion that all the alleged statements were forward-looking 

(Motion at 40-41), many of defendants’ statements were assertions of historical or current 

facts to which the safe harbor provision does not apply. For example, defendants represented: 

“[o]ur training and succession planning is being enhanced to support our growth and predict 

future operational efficiencies” (¶100); “[w]e are working with local universities and 

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technical schools in order to provide the proper talented employees required to perform in a 

highly regulated business (¶100); “[t]he product recall announced by the FDA was limited to a 

single compression machine malfunction, and affected two lots (¶102); “[w]e have focused

our attention for continual improvement of our Corrective And Preventative Actions and 

cGMP, while adding the appropriate level of personnel to support our growth during Fiscal 

2008 (¶102); “[s]ignificant resources have also been spent to improve overall lab operations 

(¶106); “[o]ur manufacturing personnel are going through more rigorous training at the time 

of hire, and thereafter, in order to maintain our compliance and quality (¶106); “[t]he 

Company had responded to all the observations made in the Form 483 within thirty days 

thereof, and corrective actions were taken and substantially completed (¶114); “Caraco 

believes it has addressed the concerns in the warning letter appropriately (¶118); “[w]e have 

corrective actions in place and continue to work to improve our quality system (¶120); “[i]n 

January 2009 we changed our leadership in both manufacturing and quality control in order to 

better align these areas with our corporate goals and have taken other steps to improve cGMP 

compliance and quality system (¶129); and “[t]he personnel that we have added have 

improved the competency level which should improve the performance of our manufacturing 

and quality areas (¶131) (emphasis added). Because these are statements of present or 

historical fact, they are not forward-looking and are not protected by the safe harbor 

provision. 

Second, defendants’ disclaimers do not constitute meaningful cautionary language. As 

the Sixth Circuit has recognized, “boilerplate warnings will not suffice ... [t]he cautionary 

statements must convey substantive information about factors that realistically could cause 

results to differ materially from those projected in the forward-looking statements, such as, for 

example, information about the issuer’s business.” Helwig, 251 F.3d at 558-59; see also 

Lormand v. US Unwired, Inc., 565 F.3d 228, 244-45 (5th Cir. 2009); Asher 377 F.3d at 732. 

In their Motion, defendants only point to the following language which they claim constitutes 

meaningful cautionary language: (1) the forward-looking statements “are not guarantees of 

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future performance and are subject to risks and uncertainties that cannot be predicted or 

quantified;” (2) the Company will “continue to focus and improve on FDA compliance” and 

will “increase cGMP training to accommodate growing staff and compliance;” and (3) one 

risk or uncertainty of investing with Caraco was the “lack of success in attaining full 

compliance with regard to regulatory and cGMP comlplaince.” Motion at 41. Each of these 

statements, however, fails to constitute meaningfully cautionary language. The first statement 

is classic boilerplate because such changes constitute “factors that are so broad that they apply 

to any business that sells products to consumers” and therefore does not convey substantive 

information about the Company. Yanek, 388 F. Supp. 2d at 1123; Helwig, 251 F.3d at 558-

59; In re Westinghouse Sec. Litig., 90 F.3d 696, 708-10 (3d Cir. 1996). The second statement 

is actually not a warning at all; the statement does not inform investors of any factors that 

could cause actual results to differ materially from those in the forward-looking statements. 

Lormand, 565 F.3d at 244-45. The final statement also too vague to be meaningful because it 

fails to fully apprise investors of the risks associated with the Company’s failure to attain 

regulatory compliance. Lormand, 565 F.3d at 244-48; Asher, 377 F.3d at 732. 

Third, defendants’ disclaimers were also inadequate because the risks posed by 

Caraco’s failure to comply with manufacturing regulations had already materialized and were 

greater in magnitude than represented. “To warn that the untoward may occur when the event 

is contingent is prudent; to caution that it is only possible for the unfavorable events to happen 

when they have already occurred is deceit.” Huddleston v. Herman & MacLean, 640 F.2d 

534, 544 (5th Cir. 1981), aff’d, 459 U.S. 375 (1983); Lormand, 565 F.3d at 246-48; Rombach 

v. Chang, 355 F.3d 164, 173 (2d Cir. 2004). As discussed herein, defendants were fully 

aware of manufacturing problems at the Company that demonstrated that the risks of noncompliance had already materialized. “Cautionary language can never be ‘meaningful’ if it 

warns of risks that have already materialized.” In re 21st Century Holding Co. Sec. Litig., No. 

07-61057-CIV, 2008 WL 5749572, at *13 (S.D. Fla. Nov. 7, 2008); In re Nash Finch Co., 502 

F. Supp. 2d 861, 873 (D. Minn. 2007). 

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Fourth, with respect to defendants’ forward-looking statements, defendants had actual 

knowledge of the falsity of such statements. The safe harbor provision is inapplicable where, 

as demonstrated herein, a plaintiff adequately alleges that defendants actually knew that their 

statements were false and misleading. 15 U.S.C. §78u-5(c)(1)(B); Tellabs II, 513 F.3d at 705. 

Finally, dismissal on the pleadings under the safe harbor defense “requires a stringent 

showing” by defendants. Livid Holdings Ltd. v. Salomon Smith Barney, Inc., 416 F.3d 940, 

947 (9th Cir. 2005). “There must be sufficient ‘cautionary language or risk disclosure [such] 

that reasonable minds could not disagree that the challenged statements were not 

misleading.’” Id. at 947; Lormand, 565 F.3d at 248; Westinghouse, 90 F.3d at 708-10; Shaw 

v. Digital Equip. Corp., 82 F.3d 1194, 1214 (1st Cir. 1996). Courts generally cannot 

determine meaningfulness at the pleading stage because “any issuer could list its lines of 

business, say ‘we could have problems in any of these,’ and avoid liability for statements 

implying that no such problems were on the horizon even if a precipice was in sight.” Asher, 

377 F.3d at 733. Here, application of the PSLRA’s safe harbor provision “is not so obvious as 

to be decided as a matter of law.” EP MedSystems, Inc. v. EchoCath, Inc., 235 F.3d 865, 877 

(3d Cir. 2000). 

D. Plaintiffs Allege Strong Evidence of Defendants’ Knowledge and 

Recklessness 

 For purposes of a securities fraud claim, “scienter” means the intent to deceive, 

manipulate, or defraud. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12 (1976). 

Importantly, “courts must consider the complaint in its entirety.... The inquiry... is whether 

all of the facts alleged, taken collectively, give rise to a strong inference of scienter, not 

whether any individual allegation, scrutinized in isolation, meets that standard.” Tellabs, 551 

U.S. at 322-23 (emphasis in original). A strong inference of scienter arises if, “[w]hen the 

allegations are accepted as true and taken collectively,” a reasonable person would “deem the 

inference of scienter at least as strong as any opposing inference[.]” Id. at 325; PR Diamonds, 

Inc. v. Chandler, 364 F.3d 671, 683 (6th Cir. 2004). 

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 In the Sixth Circuit, courts recognize that defendants’ recklessness satisfies the 

scienter requirement. Helwig, 251 F.3d at 550. Additionally, the Sixth Circuit recently 

affirmed the “at least as compelling” standard set forth in Tellabs in Frank v. Dana Corp., 547 

F.3d 564 (6th Cir. 2008). “[T]he Supreme Court expressly held that a complaint will survive a 

motion to dismiss so long as ‘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 571 (citation omitted, emphasis in original). In doing so, the Sixth Circuit instructed 

Courts in this Circuit to: 

conduct a ‘comparative inquiry’ and assess the possible competing inferences 

that could be drawn from the allegations, including ‘plausible nonculpable 

explanations for the defendant’s conduct, as well as inferences favoring the 

plaintiff.’ 

Id. (citation omitted). The Sixth Circuit directed that in conducting this “comparative 

inquiry” the inference be drawn in favor of plaintiffs. Id.; Tellabs, 551 U.S. at 324. 

In considering whether plaintiffs’ complaint, as a whole, raises an inference of 

scienter, the Sixth Circuit has set forth some non-exhaustive guideposts to consider in 

evaluating scienter. Helwig, 251 F.3d at 552 (“cases will allege different facts with possibly 

different results”). The Helwig factors include: (1) insider trading; (2) divergence between 

internal reports and external statements; (3) proximity of fraudulent statements and later 

disclosure of inconsistent information; (4) bribery; (5) existence of an ancillary lawsuit 

charging fraud and quick settlement of that lawsuit; (6) disregard of the most current factual 

information before making statements; (7) disclosure of accounting information in such a way 

that its negative implications could only be understood by someone with a high degree of 

sophistication; (8) the personal interest of certain directors in not informing disinterested 

directors of an impending sale of stock; and (9) the self interested motivation of defendants in 

the form of saving their salaries or jobs. Helwig, 251 F.3d at 552; In re Huffy Corp. Sec. 

Litig., 577 F. Supp. 2d at 968. Allegations comporting with any of these nine factors – or 

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with other factors not enumerated relevant to the particular facts of the case – contribute to a 

strong inference of scienter.22

1. The Divergence Between Negative Internal Reporting and 

Defendants’ Positive Statements to the Market and Defendants’ 

Disregard of the Most Current Factual Information Before Making 

Statements Support a Strong Inference of Scienter 

Two of the “fixed constellations of facts” probative of fraud are the “divergence 

between negative internal reporting and defendants’ positive statements to the market” and 

defendants’ “disregard of the most current factual information” while making such statements. 

Helwig, 251 F.3d at 552; Bridgestone, 399 F.3d at 683. Here, defendants consistently had the 

most current information about Caraco before making statements and there was a divergence 

between defendants’ internal reports and their external statements on particular subjects. 

Defendant Daniel Movens had intimate knowledge of the rampant problems at the Company 

through twice daily reports involving the rampant quality defects. ¶91(e), ¶103(b)(iv). 

Additionally, between 2006 and 2008 there were two separate meetings involving the quality 

review board and operations meetings. ¶103(b)(v). Defendant Movens gave instructions to 

all senior management and managers that any issues involving quality should be directed to 

Movens first. ¶103(b)(v). Together, the reports alerted defendants and other Caraco 

executives that there were severe problems with the quality of the pharmaceuticals produced 

by Caraco. ¶160-69. This information contrasted with the Company’s public statements that 

the production issues were isolated incidents, not material and that the Company was 

substantially compliant with FDA rules. ¶¶54, 101-03, 106, 112-13, 120-21, 160. 

Additionally, though Defendant Movens stated that Caraco was training its employees to 

properly grow the Company in a highly regulated business, he received reports that employees 

did not even have the minimum training requirements necessary for the job. ¶¶100(a), 163-

 

22 The Helwig court acknowledged that “[b]ecause Congress did not endorse or prohibit a 

particular manner of pleading, we cannot disregard any set of facts as insufficient as a matter 

of law.” Id. at 551-52. Indeed, a plaintiff does not need to plead facts for each factor to 

properly plead scienter. Bridgestone, 399 F.3d at 687 (adequate scienter allegations despite 

finding that four of the nine Helwig factors “admittedly are not probative of scienter”). 

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64. Courts, moreover, have held that defendants’ receipt of Form 483s and FDA warning 

letters and their public statements contradicting the information contained in such notices can 

support a finding of recklessness: 

The Form 483 and the warning letter provided notice to the defendants that 

serious problems existed in the manufacturing process at Able, and even 

informed the defendants that they were responsible for following upon on, and 

further investigating, the problems. Failing to investigate the FDA warning is 

an “extreme departure from the standards of ordinary care” and 

demonstrates that the defendants were reckless for not knowing their 

statements about Abie’s [sic] compliance with FDA standards and other 

quality control issues were false. 

Able, 2008 WL 1967509, at *16. 

Defendants claim that because Caraco purportedly had no duty to “warn investors 

about an event that was not certain,” that “Caraco could not predict the future” and did not 

know “that the FDA was going to initiate a seizure action” plaintiffs cannot state a claim. 

Motion at 13-16. Courts, however, have rejected this argument: 

Defendants claim that Plaintiffs must show Defendants “knew that the FDA 

would find STAAR’s September 29, 2003 written response inadequate, knew 

that the FDA would ultimately issue a Warning Letter, and knew that the 

Warning Letter would state that the FDA would not approve any new STAAR 

devices until STAAR’s ‘quality system’ deficiencies were corrected.” 

However, Defendants attempt to raise the standard for scienter far beyond 

what is required by the PSLRA, ... [T]he PSLRA does not require that 

Plaintiffs show that Defendants were capable of predicting the future.

Yanek, 388 F. Supp. 2d at 1130 (emphasis added). Thus, plaintiffs’ allegations that 

defendants “received regular information” concerning “problems which they should have 

realized contradicted the company’s public statements” give rise to a strong inference of 

scienter. In re Cabletron Sys., 311 F.3d 11, 39 (1st Cir. 2002).23

 

23 Defendants’ demand for more specific details of the contents of the report is unrealistic at 

this stage of litigation as the physical reports remain in defendants’ possession. See, e.g.,

Pirraglia v. Novell, Inc., 339 F.3d 1182, 1193 n.14 (10th Cir. 2003) (a requirement that 

plaintiffs allege the specifics of internal paperwork “is asking too much of the plaintiffs, who 

cannot be expected, at the pleading stage, to describe in detail documents and paperwork that 

would presumably be kept, if at all, in Novell’s private files”); Craftmatic Sec. Litig. v. 

Kraftsow, 890 F.2d 628, 645 (3d Cir. 1990) (“Particularly in cases of corporate fraud, 

plaintiffs cannot be expected to have personal knowledge of the details of corporate internal 

affairs.”). Such specific evidence – direct evidence – has not been required at the motion-todismiss stage. Pirraglia, 339 F.3d at 1193 n.14; accord Cabletron Sys., 311 F.3d at 33 

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2. The Confidential Witnesses Add to the Strong Inference of Scienter 

Alleged 

Numerous courts have recognized that statements from confidential witnesses can 

support a strong inference of scienter. See, e.g., In re Daou Sys., Inc., 411 F.3d 1006, 1015-

16 (9th Cir. 2005); Tellabs II, 513 F.3d at 712; In re Cabletron Sys. Inc., 311 F.3d at 28-31; In 

re Am. Serrv. Group, Inc., 2009 WL 1348163, at *58 (M.D.Tenn. March 31, 2009). 

Plaintiffs’ allegations are corroborated by ten former employees – some of whom had handson responsibility for the reports’ contents, or attended the periodic meetings alleged.24 For 

example, CW 4 and CW 5 both communicated serious manufacturing problems to Movens 

directly. ¶¶93, 164. CW 5’s complaint that it was impossible to meet the increased 

production demands was met with Movens’ reply that his “hands were tied” due to 

SunPharma’s control over Caraco’s operations. Id. Movens held weekly, and eventually 

daily, meetings with Caraco employees to discuss quality problems, such as tablet variation, 

as corroborated by CW 4, CW 5, CW 6, and CW 8. ¶¶93-94, 96, 103, 164. “Corroboration 

from multiple sources also supports an inference of scienter.” In re Countrywide Fin. Corp. 

Derivative Litig., 554 F. Supp. 2d 1044, 1058 (C.D. Cal. 2008); Tellabs II, 513 F.3d at 712; 

Cabletron, 311 F.3d at 29-30.25 Plaintiffs describe the CWs in the complaint with sufficient 

 

(“Defendants’ argument that even more detail be required, before there is any discovery, here 

amounts to requiring plaintiffs to plead evidence.”). Nevertheless, plaintiffs have adequately 

alleged specifics concerning the reports defendants received or had access to, including their 

origins, contents, recipients, when the reports were generated and how this information was 

sent to defendants. ¶¶91(e), 97(b). 24 Defendants argue that the statements of confidential witnesses are irrelevant if they were 

not employed during the entire Class Period. Motion at 23. On the contrary, courts recognize 

that “both post-class-period data and pre-class data could be used to confirm what a defendant 

should have known during the class period because [a]ny information that sheds light on 

whether class period statements were false or materially misleading is relevant.” Institutional 

Investors Group v. Avaya, Inc., 564 F.3d 242, 249 n.13 (3d Cir. 2009); In re Scholastic Corp. 

Sec. Litig., 252 F.3d 63, 72 (2d Cir. 2001); Cornwell v. Credit Suisse Group, No. 08 Civ. 

3758(VM), 2010 WL 537593, at *7 (S.D.N.Y. Feb. 11, 2010); In re Syncor Int’l. Corp. Sec. 

Litig., 327 F. Supp. 2d 1149, 1160 (C.D. Cal. 2004), aff’d in part, rev’d in part and remanded 

on other grounds, 239 Fed. Appx. 318 (9th Cir. Jun. 12, 2007). 25 Defendants argue for dismissal by challenging the veracity of some the CWs and by 

characterizing the allegations based upon the CWs as “non-credible.” Motion at 3. For 

instance, defendants claim that “CW7’s statement is simply not believable.” Motion at 25. At 

this stage, however, all of plaintiffs’ factual allegations as pled must be taken as true. Tellabs, 

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particularity to support the probability that persons in the positions occupied by the sources 

would possess the information alleged. ¶¶90-98. Additionally, as described above, the 

statements attributed to the CWs are indicative of scienter. Id. Thus, the CWs “are numerous 

and consist of persons who from the description of their jobs were in a position to know at 

first hand the facts to which they are prepared to testify....” Tellabs II, 513 F.3d at 712;

Cabletron, 311 F.3d at 28-31. Thus, the allegations based upon the information from CWs 

adds to the strong inference of scienter alleged. Amgen, 544 F. Supp. 2d at 1033.26

3. The Proximity of Defendants’ Positive Statements to the Revelation 

of the Truth Supports a Strong Inference of Scienter 

Like numerous circuit courts around the country, the Sixth Circuit holds that the 

“temporal proximity” between defendants’ falsehoods and subsequent disclosures can help 

bolster a strong inference of scienter. Helwig, 251 F.3d at 552 (“closeness in time of an 

allegedly fraudulent statement or omission and the later disclosure of inconsistent 

 

127 U.S. at 326. Courts “will not entertain a challenge to the credibility of confidential 

witnesses.” In re NPS Pharms, Inc. Sec. Litig., 2007 WL 1976589, at *5 (D. Utah July 3, 

2007). 

26 Citing Higginbotham v. Baxter Int’l, Inc., 495 F.3d 753 (7th Cir. 2007), defendants 

claim that the Court must discount allegations based upon confidential witnesses. Motion at 

22. The Seventh Circuit, however, limited the scope of Higginbotham in Tellabs II. Tellabs 

II “apparently circumscribes Higginbotham’s broad pronouncement that confidential witness 

allegations will ‘usually’ be steeply discounted, clarifying that the weight accorded to 

anonymous sources will depend in large part on the level of detail with which they are 

described.” 564 F.3d at 262. Thus, numerous courts have rejected Defendants’ suggestion 

(Motion at 22) that CWs may have personal motives that may undermine credibility and have 

continued “to consider allegations based on information provided by confidential sources 

without discounting those allegations due solely to the anonymity of the information’s 

source.” In re PXRE Group, Ltd. Sec. Litig., 600 F. Supp. 2d 510, 526 n.18 (S.D.N.Y. 2009) 

(emphasis in original); City of Brockton Ret. Sys. v. Shaw Group, Inc., 540 F. Supp. 2d 464, 

474 (S.D.N.Y. 2008); Amgen, 544 F. Supp. 2d at 1032-33 (C.D. Cal. 2008); Huffy, 577 F. 

Supp. 2d at 991-93; Silverman v. Motorola, Inc., No. 07 C 4507, 2008 WL 4360648, at *14 

(N.D. Ill. Sept. 23, 2008); Lefkoe v. Jos. A. Bank Clothiers, Civil No. WMN-06-1892, 2008 

WL 7275126, at *6-*7 (D. Md. May 13, 2008); Schleicher v. Wendt, 529 F. Supp. 2d 959, 972 

(S.D. Ind. 2007). Additionally, defendants’ assertion that the Court should not accord much 

weight to the information provided by the CWs because it is “vague and conclusory” (Motion 

at 23, 25) is wrong for two reasons. First, the CWs provide extremely detailed information 

illustrating defendants’ scienter. ¶¶90-98. Second, “[v]ague or ambiguous allegations are 

now properly considered as a part of a holistic review when considering whether the 

complaint raises a strong inference of scienter.” South Ferry, 542 F.3d at 784. Defendants, 

moreover, cite no authority for their contention that the CWs statements should be disregarded 

because they purportedly did not report concerns to the FDA. Motion at 26-27. 

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information” is one of the “fixed constellations of facts that courts have found probative of 

securities fraud”); see also Ezra Charitable Trust v. Tyco Int’l., Ltd., 466 F.3d 1, 9 (1st Cir. 

2006) (“Plaintiffs are correct that a short time period between an alleged misstatement and a 

later disclosure of inconsistent information may be relevant to the question of scienter.”); 

Plotkin v. IP Axess Inc., 407 F.3d 690, 698 (5th Cir. 2005) (auditors’ resignations within 

“three to four months,” and company’s bankruptcy “a mere eight months” following 

misleading press releases, were both “so temporally connected” to the releases); Shaw,82 F.3d 

at 1224) (“we need not turn a blind eye to the obvious: the proximity of the date of the 

allegedly fraudulent statements and omissions to both the end of the quarter then in progress 

and the date on which disclosure was eventually made”). 

Here, the temporal proximity between defendants’ false and misleading statements and 

the disclosure of the truth also contributes to a strong inference of scienter. For example, 

Caraco’s FY 2008 marked the Company’s sixth consecutive year of exponential sales growth. 

¶50. Defendants highlighted sales increasing 199% to a record $350 million. Id. And yet, 

during this same time period, the FDA issued a Form FDA 483, cautioning the Company 

about defective tablets, as well as the lack of internal controls. ¶59. In fact, just weeks after 

the FDA issued one of its Warning Letter to Caraco, Defendant Shanghvi touted Caraco’s 

business and regulatory compliance. ¶108. Although the Company told shareholders it 

initiated a voluntary recall in April of 2009, FDA documents indicate the recall was “FDA 

Initiated” instead of “voluntary.” ¶128. On May 28, 2009, Defendant Movens stated “there 

were no deficiencies identified during the FDA inspection in the Quality Control Laboratory 

which supports and tests all of our products before they are released to the market.” ¶129. In 

fact, on June 15, 2009, the Company stated it believed it was “substantially cGMP 

compliant.” ¶161. Just days later, the United States Attorney for the Eastern District of 

Michigan filed a Forfeiture Complaint alleging that the Company was still in continuing and 

significant violation of cGMP. ¶161. On June 25, 2009, federal agents raided the Company’s 

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Michigan facilities to seize products manufactured by Caraco and ingredients used by the 

Company in manufacturing its products, sending its stock plummeting nearly 43%. ¶¶134-36. 

Defendants offer no explanation for Caraco’s sudden change of fortunes that would 

permit this Court to infer a more compelling innocent explanation for the inconsistency in 

defendants’ statements over such a brief period of time. Motion at 17-18; Avaya, 564 F.3d at 

272. No new, unexpected facts impacted Caraco. Thus, the closeness in time between these 

patently inconsistent disclosures with defendants’ earlier false statements bolsters a strong 

inference of scienter. Helwig, 251 F.3d at 552; Bridgestone, 399 F.3d at 684; Shaw, 82 F.3d 

at 1224. 27

4. Because the Facts Allege Relate to the Company’s Core Operations, 

They Support a Strong Inference of Scienter 

Because the facts alleged relate to the Company’s core operations, they support a 

strong inference of scienter. When coupled with other facts, “facts critical to a business’s 

core operations or an important transaction are so apparent that their knowledge may be 

attributed to the company and its key officers.” South Ferry LP, No. 2 v. Killinger, 542 F.3d 

776, 785-86; Avaya, 564 F.3d at 268-73. Indeed, “the more central a fact is to a company’s 

core operations the more likely its executive acted with scienter.” Huffy, 577 F. Supp. 2d at 

1000. This principle applies here. Movens, as the Company’s CEO, and Shanghvi, as its 

Chairman of the Board, are charged with knowledge of regular reports concerning Caraco’s 

cGMP. ¶¶91, 163-69. Both men spoke to the market, holding themselves out as the 

 

27 Defendants contend that the Company’s hiring of outside consultants to audit various areas 

of the Company negates any inference of scienter. Motion at 28. Courts, however, have 

rejected such arguments. See, e.g., Able, 2008 WL 1967509, at *8, *30 (finding a strong 

inference of scienter alleged despite the company’s hiring of an outside consultant to address 

FDA regulatory issues); In re Nextcard, Inc. Sec. Litig., 2006 WL 708663, at *5 (N.D. Cal. 

Mar. 20, 2006) (“The Court is not persuaded by Defendants’ argument that the certification of 

the company’s financials by its outside auditor ... negates or weakens the inference of 

scienter.”); In re SeeBeyond Tech. Corp. Sec. Litig., 266 F. Supp. 2d 1150, 1168-69 (C.D. Cal. 

2003) (rejecting defendants’ argument that “plaintiffs’ allegations negate an inference of 

scienter because E&Y certified the financial statements containing the [company’s] 

revenue.”); Marksman Partners, L.P. v. Chantal Pharm. Corp., 927 F. Supp. 1297, 1314 n.13 

(C.D. Cal. 1996) (“The fact that Chantal’s independent auditor may have approved the 

accounting methods will not shield Chantal from liability for deception such methods may 

have caused.”). 

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executives with intimate knowledge of Caraco’s business. ¶¶27-28, 170. Both Movens and 

Shanghvi reassured investors with specifics on the same discrete subjects that which they 

repeatedly discussed internally and which were critical to the Company’s viability. That both 

men were at the pinnacle of Caraco’s corporate structure and were focused upon these core 

issues for the Company bolsters the strong inference of their access and knowledge: 

And at the top of the corporate pyramid sat [the company’s] CEO.... Almost all 

the false statements that we quoted emanated directly from him. Is it 

conceivable that he was unaware of the problems of his company’s two major 

products and merely repeating lies fed to him by other executives of the 

company? It is conceivable, yes, but it is exceedingly unlikely. 

Tellabs II, 513 F.3d at 711; Miss. Pub. Employees Ret. Sys. v. Boston Sci. Corp., 523 F.3d 75, 

91-92 (1st Cir. 2008) (strong scienter inference arises, in part, from fact executive was “point 

person” on new product and “would presumably have been aware” of its status). 

Accordingly, because the facts alleged relate to the Company’s core operations, they support a 

strong inference of scienter. Huffy, 577 F. Supp. 2d at 1000.28

5. The Resignation of the Company’s Key Executives Near the Time of 

the Company’s Revelation of the Truth Supports a Strong 

Inference of Scienter 

The abrupt resignation of Caraco’s top executive, linked temporally to the FDA 

forfeiture that rocked Caraco’s investors, adds to an inference of scienter. As courts have 

recognized, “the timing of Defendants’ departures might suggest that the Company believed 

Defendants had been involved in wrongdoing with respect to corporate finances.” In re

 

28 Defendants’ contention that plaintiffs cannot assert a claim against Shanghvi as Chairman 

of the Board of Directors is incorrect. Plaintiffs do not assert that Shanghvi is liable merely 

because of his position, but because he actually made false statements while in possession of 

contradictory information. ¶¶28-29, 108-9. Courts have held that directors face liability 

under these circumstances. Cabletron, 311 F.3d at 41; Howard v. Everex Sys., 228 F.3d 1057, 

1061-62 (9th Cir. 2000). Additionally, while defendants attempt to distance defendant 

Shanghvi from the statement alleged (¶108) by arguing that the statement is unclear (Motion 

at 34), defendants ignore that “[w]hen an allegation is capable of more than one inference, it 

must be construed in the plaintiff’s favor.” Helwig, 251 F.3d at 553. Moreover, defendants 

ignore the statement’s reference to “USFDA” when, as set forth in the Complaint, Caraco was 

viewed as “Sun Pharma’s U.S. presence” and its “U.S. subsidiary.” ¶53. Contrary to 

defendants’ arguments, moreover, Sun Pharma faces liability under Section 10(b) based upon 

its reckless disregard of Caraco. In re Alstom SA, 454 F. Supp. 2d 187, 200 (S.D.N.Y. 2006); 

In re Marsh & McLennan Co. Inc. Sec. Litig., No. 04 CV 8144, 2006 WL 2057194, *24 

(S.D.N.Y. July 20, 2006). 

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UTStarcom, Inc. Sec. Litig., 617 F. Supp. 2d 964, 976 (N.D. Cal. 2009); ASG, 2009 WL 

1348163, at *58; In re Impax Laboratories, Inc. Sec. Litig., 2007 WL 7022753, at *9 (N.D. 

Cal. July 18, 2007)(rev’d on other grounds,2008 WL 1766943 (N.D.Cal. Apr. 17, 2008); In re 

Adaptive Broadband Sec. Litig., No. C 01-1092 SC, 2002 WL 989478, at *14 (N.D. Cal. Apr. 

2, 2002); In re McKesson HBOC Inc. Sec. Litig., 126 F. Supp. 2d 1248, 1274 (N.D. Cal. 

2000). Indeed, even where a resignation “was not accompanied by an extraordinary 

punishment” it can be “highly probative of scienter.” Middlesex Ret. Sys. v. Quest Software, 

Inc., No. CV 06-6863 DOC (RNBx), 2008 WL 7084629, at *9 (C.D. Cal. July 10, 2008).29

Movens was Caraco’s CEO, and primarily responsible for the day-to-day operations of 

the Company. ¶27. Moreover, on September 20, 2009, George Ugeux, an independent 

director of Caraco’s board resigned. Ugeux said that he resigned because of “management 

and the majority shareholder’s absolute refusal to permit a focused independent look at 

corporate governance matters to determine if they contributed to the events leading up to the 

FDA seizure.” ¶141. Given these case-specific facts, Movens and Ugeux’s departures add to 

the strong inference of scienter alleged. When departures are linked to financial shenanigans, 

or complement other additional facts, the sudden resignations add to the inference of scienter 

alleged. ASG, 2009 WL 1348163, at *58. 

6. Defendants’ Self Motivation in Saving Their Salaries and Bonuses 

Supports a Strong Inference of Scienter 

As the Sixth Circuit has declared, “self-interested motivation of defendants in the form 

of saving their salaries” can support a strong inference of scienter. Helwig, 251 F.3d at 552; 

Bridgestone, 399 F.3d at 687. This motivation existed with Movens and Shanghvi. For 

example, in 2008, Daniel Movens made $875,718, which included a $150,478 bonus and a 

$427,596 salary. He also received a stock award valued at $119,250. Movens and Shanghvi 

also personally benefitted from their fraudulent conduct as they stood to gain millions of 

 

29 See also In re Scottish Re Group Sec. Litig., 524 F. Supp. 2d 370, 394 n.176 (S.D.N.Y. 

2007); In re Nash Finch Co., 502 F. Supp. 2d at 882; Kaltman v. Key Energy Services, Inc., 

447 F. Supp. 2d 648, 664 (W.D. Tex. 2006). 

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dollars in stock options or other compensation that was directly linked to Caraco’s reported 

net income. Defendants, moreover, need not reap concrete and personal benefits before any 

scienter inference arises. Indeed, one district court in the Sixth Circuit has rejected the 

“concrete and personal” contention due to the fact that it imposes a higher standard than 

necessary under Tellabs. See Huffy, 577 F. Supp. 2d at 991 (rejecting defendants’ concrete 

and personal benefit argument because inference of scienter only requires fraudulent acts be at 

least as compelling as non-fraudulent acts). 

Additionally, the fraud-linked benefits need not be realized; it is the expectation of 

that realization that helps raise a strong inference of scienter. PR Diamonds, 364 F.3d at 690; 

see also Tellabs II, 513 F.3d at 710 (defendants’ excuse that no one ultimately profited from 

the fraud “confuses expected with realized benefits”); Florida State Bd. Of Admin v. Green 

Tree Fin. Corp, 270 F.3d 645, 662 (8th Cir. 2001) (“The ultimate profitability of a course of 

conduct is not conclusive of intent.”). In sum, Caraco’s reaping of benefits, and Movens and 

Shanghvi’s expectation of reaping benefits, are among the facts adding to the strong inference 

of scienter. In re Telxon Corp. Sec. Litig., 133 F. Supp. 2d 1010, 1028 (N.D. Ohio 2000) 

(courts “must consider allegations of motive and opportunity in conjunction with the 

remainder of plaintiffs’ allegations to determine whether the allegations, on the whole, raise 

an inference of recklessness or knowing disregard”).30

 

30 Defendants contend that the lack of stock sales negates any inference of scienter. Motion at 

30-31. However, “the absence of a motive allegation is not fatal.” Tellabs, 551 U.S. at 325. 

Thus, “[s]cienter can be established even if the officers who made the misleading statements 

did not sell stock during the class period.” No. 84 Employer-Teamster Joint Council Pension 

Trust Fund v. America West Holding Corp., 320 F.3d 920, 944 (9th Cir. 2003); Siracusano, 

585 F.3d at 1182-83; PR Diamonds, 364 F.3d at 691; Pirraglia, 339 F.3d at 1191 n.12. 

Defendants also assert that Sun Pharma’s increase of beneficial ownership of Caraco during 

the Class Period negates any inference of scienter. Motion at 30-31. Courts, however, reject 

a general holding that an increase in stock ownership negates an inference of scienter. 

Holmes v. Baker, 166 F. Supp. 2d 1362, 1378 (S.D. Fla. 2001); see also In re Thornburg 

Mortg., Inc. Sec. Litig., No. CIV 07-0815 JB/WDS, 2010 WL 378300, at *22-*23 (D.N.M. 

Jan. 27, 2010) (rejecting defendants’ argument that their purchase of $25 million worth of 

company securities during the class period negates any inference of scienter); In re Ashanti 

Goldfields Sec. Litig., No. CV 00-0717 (DGT), 2004 WL 626810, at *5 (E.D.N.Y. Mar. 30, 

2004) (“net purchases of stock by defendants do not necessarily negate an inference of 

Case 2:09-cv-12830-AJT-DAS Document 32 Filed 05/27/10 Page 51 of 58
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7. The Company’s Signed Certifications to the Securities and 

Exchange Commission Add to the Strong Inference of Scienter 

Alleged 

The Company’s SOX certifications are yet another factor adding to the scienter 

inference. Combined with other scienter allegations, SOX certifications can support a strong 

inference of actual knowledge or deliberate recklessness. See, e.g., Proquest 527 F. Supp. 2d 

at 742-43 (“The SOX certifications give rise to an inference of [defendant’s] scienter”); Backe 

v. Novatel Wireless, Inc., 607 F. Supp. 2d 1145, 1163 (S.D. Cal. 2009) (holding that “false 

SOX certifications are relevant to scienter”); Rosky ex rel. Wellcare Health Plans, Inc. v. 

Farha, No. 8:07-cv-1952-T-26MAP, 2009 WL 3853592, at *6 (M.D. Fla. Mar. 30, 2009) 

(“Defendants’ false Sarbanes-Oxley certifications also support a strong inference of 

scienter.”). 31 SOX certification requirements were expressly designed to prevent top 

executives from adopting a “head in the sand” defense, as defendants have done here, to 

actions for securities fraud committed on their watch. The SEC recognized as much in 

implementing §302, by expressly warning corporate officers that “a false certification 

potentially could be subject to ... both Commission and private actions for violating Section 

10(b) of the Exchange Act and Exchange Act Rule 10b-5.” SEC Act Release No. 8124, Pt. 

II.B.6, 2002 WL 31720215, at *9 (Aug. 28, 2002) (also available at www.sec.gov/rules/ 

final/33-8124.htm).32

 

scienter”); SeeBeyond, 266 F. Supp. 2d at 1169 (rejecting defendants’ argument that 

“purchases of stock negate an inference of scienter”). 

31 See also ASG, 2009 WL 1348163, at *52-*53; Stocke v. Shuffle Master, Inc., 615 F. Supp. 

2d 1180, 1190-91 (D. Nev. 2009); Middlesex Ret. Sys. v. Quest Software, 527 F. Supp. 2d 

1164, 1189-90 (C.D. Cal. 2007); Wieland v. Stone Energy Corp., No. 05-2088, 2007 WL 

2903178, at *7 (W.D. La. Aug. 17, 2007); In re OCA, Inc. Sec. and Derivative Litig., No. 05-

2165, 2006 WL 3747560, at *22 (E.D. La. Dec. 14, 2006); Croker v. Carrier Access Corp., 

Civil Case No. 05-cv-01011-LTB-OES, 2006 WL 2038011, at *11 (D. Colo. July 18, 2006); 

In re Lattice Semiconductor Corp. Sec. Litig., No. CV04-1255-AA, 2006 WL 538756, at *17-

*18 (D. Or. Jan. 3, 2006). 

32 Plaintiffs are not alleging, as defendants suggest, that SOX certifications alone raise an 

inference of scienter. This is yet another attempt by defendants to get this Court to isolate 

individual allegations rather than consider the totality of the circumstances as required in this 

Circuit. See P.R. Diamonds, 364 F.3d at 683. As the Sixth Circuit has declared, “we cannot 

disregard any set of facts as insufficient as a matter of law.” Helwig, 251 F.3d at 551-52. 

Case 2:09-cv-12830-AJT-DAS Document 32 Filed 05/27/10 Page 52 of 58
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Through the SOX certifications, CEO Movens attested that adequate control 

procedures were in place. ¶¶27, 170. With these certifications, CEO Movens represented that 

he had personally reviewed the Company’s SEC filings and that, based on his personal 

knowledge, none of the information contained within them was false or misleading. Id. To 

further assure investors of the statements’ accuracy, Movens certified that his was personally 

responsible for establishing and maintaining Caraco’s disclosure controls and procedures. Id. 

Movens also attested that he had evaluated the effectiveness of Caraco’s disclosure controls 

and procedures. Each of these certifications was false and misleading and thus provide 

additional evidence bolstering a strong inference of scienter. Proquest, 527 F. Supp. 2d at 

742-43. 

Collectively considered, as required, plaintiffs’ allegations raise a strong inference of 

scienter. Defendants offer no more compelling inferences. As such, plaintiffs’ complaint 

should be permitted to move forward. See Frank, 547 F.3d at 571 (quoting ACA Fin., 512 

F.3d at 59 (“Tellabs now awards the draw to the plaintiff.”)).33

E. Plaintiffs Adequately Allege Control Person Liability 

Defendants assert that the Court must dismiss plaintiffs’ control person claim under 

Section 20(a) of the Exchange Act for three reasons: (1) plaintiffs purportedly have not pled a 

primary violation under Section 10(b); (2) plaintiffs purportedly have not pled sufficient facts 

 

33 Defendants contend that the group published pleading doctrine did not survive passage of 

the PSLRA Motion at 32. Although plaintiffs state facts with respect to defendants’ scienter 

individually, the vast majority of the courts that have considered the group published pleading 

doctrine after the passage of the PSLRA have held that the doctrine is indeed viable. See, 

e.g., In re Semgroup Energy Partners, L.P., No. 08-MD-1989-GKF-FHM, 2010 WL 1816434, 

at *13 (N.D. Okla. Apr. 30, 2010) (“district courts in the Tenth Circuit continue to hold that 

the doctrine remains viable”); The Pennsylvania Avenue Funds v. Inyx Inc., No. 08 Civ. 

6857(PKC), 2010 WL 743562, at *10 n.3 (S.D.N.Y. Mar. 1, 2010) (“The majority of judges 

in this district who have addressed the issue have concluded that the group pleading doctrine 

has survived the PSLRA.”); In re Williams Sec. Litig., 339 F. Supp. 2d 1242, 1260 (N.D. 

Okla. 2003) (“a majority of the district courts addressing the issue have found that the group 

pleading doctrine survives the PSLRA.”); In re Secure Computing Corp. Sec. Litig., 120 F. 

Supp. 2d 810, 821-22 (N.D. Cal. 2000) (“Moreover, the majority of the district courts in the 

Ninth Circuit that have addressed the issue have concluded that the group published 

information presumption survives the PSLRA.”). 

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demonstrating that defendants exercised control over a primary violator; and (3) plaintiffs 

purportedly have not demonstrated that defendants were culpable participants in the 

underlying violation. Motion at 41-44. Each of these reasons fails. 

First, as demonstrated above, plaintiffs have pled a primary violation by demonstrating 

that plaintiffs have adequately stated a claim of securities fraud under Section 10(b) of the 

Exchange Act. Second, plaintiffs have also adequately alleged that defendants Movens, 

Shanghvi, and Sun Pharma exercised control over the Company. Specifically, plaintiffs 

allege that defendants Movens and Shanghvi signed numerous SEC filings and made 

numerous statements on behalf of the Company and “possessed the power and authority to 

control the contents of Caraco’s reports to the SEC, press releases and presentations to 

securities analysts, money and portfolio managers and institutional investors, i.e., the market.” 

¶¶27-29, 188-190. Plaintiffs also allege that defendants Movens and Shanghvi “had the 

power to influence and control and did influence and control, directly or indirectly, the 

decision-making of the Company....” ¶188. Courts in this circuit have repeatedly held that 

such allegations are sufficient to state a claim under Section 20(a) against insiders. ASG, 

2009 WL 1348163, at *58-*61; Huffy, 577 F. Supp. 2d at 1020-22; Proquest, 527 F. Supp. 2d 

at 741-42, 744, 746. Additionally, plaintiffs allege that Sun Pharma owned 76% of Caraco 

during the Class Period and also had the power to influence and control the Company. ¶¶3, 

30, 188-190. Courts have also held that corporate entities are liable under Section 20(a) 

where they exercised such significant control over another entity. See In re Mutual Funds 

Invest. Litig., 566 F.3d 111, 129-31 (4th Cir. 2009) (“a corporation may be a controlling 

person when it owns the majority of the shares of another corporation”); America West, 320 

F.3d at 945-46 (holding that plaintiffs’ control person allegations were sufficient against a 

company that controlled 57% of the controlled entity). 

Finally, although defendants claim that plaintiffs have not adequately alleged culpable 

participation with respect to their control person claim, such allegations are not a requirement 

in this circuit. As one court held in rejecting this argument: “Defendants also argue that the 

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Plaintiffs have failed to alleged specific facts establishing culpable participation in the fraud 

perpetrated by the controlled person. However, when it listed the two essential elements of a 

claim under §20(a), in PR Diamonds, the Sixth Circuit did not recognize such as one of those 

elements. 364 F.3d at 696. Therefore, the asserted failure of the Plaintiff to allege such facts 

does not serve as the basis for dismissing this claim.” Huffy, 577 F. Supp. 2d at 1021 n.56; 

see also In re National Century Fin. Enterprises, Inc. Invest. Litig., 504 F. Supp. 2d 287, 300-

304 (S.D. Ohio 2007); Proquest, 527 F. Supp. 2d at 746 n.10.34

VI. CONCLUSION 

For the foregoing reasons, the Court should deny defendants’ Motion. If the Court 

grants any part of the Motion, plaintiffs respectfully request leave to amend the Complaint. 

Huffy, 577 F. Supp. 2d at 982 n.14. 

Dated: May 27, 2010 THE MILLER FIRM, P.C. 

By: __s/E. Powell Miller_____

 E. Powell Miller (P39487) 

 Marc L. Newman (P51393) 

 Courtney B. Ciullo (P71949) 

950 W. University Drive, Suite 300 

Rochester, Michigan 48307 

(248) 841-2200 

epm@millerlawpc.com

mln@millerlawpc.com 

cbc@millerlawpc.com 

- and - 

 

34 The cases defendants cite are distinguishable. D.E. & J Ltd. Partnership v. Conaway, 284 F. 

Supp. 2d 719 (E.D. Mich. 2003), was decided before the Sixth Circuit’s decision in PR 

Diamonds, which established that culpable participation is not a requirement under Section 

20(a) in this circuit. PR Diamonds, 364 F.3d at 696. Additionally, Mishkin v. Ageloff, No. 97 

Civ. 2690 LAP, 1998 WL 651065 (S.D.N.Y. Sept. 23, 1998), is a district court case from the 

Second Circuit, not the Sixth Circuit. There is a split of authority in the Second Circuit on the 

issue, with many courts holding after Mishkin that claims under Section 20(a) do not require 

allegations of culpable participation. In re Parmalat Sec. Litig., 497 F. Supp. 2d 526, 532 

n.42 (S.D.N.Y. 2007); In re WorldCom, Inc. Sec. Litig., 294 F. Supp. 2d 392, 415 (S.D.N.Y. 

2003); In re Initial Pub. Offering Sec. Litig., 241 F. Supp. 2d 281, 396 (S.D.N.Y. 2003). 

Case 2:09-cv-12830-AJT-DAS Document 32 Filed 05/27/10 Page 55 of 58
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GLANCY BINKOW & GOLDBERG LLP 

By: Lionel Z. Glancy, Esq. 

 Peter A. Binkow, Esq. 

1801 Avenue of the Stars, Suite 311 

Los Angeles, California 90067 

(310) 201-9150 

lglancy@glancylaw.com

pbinkow@glancylaw.com 

Attorneys for Plaintiffs and the Class 

Case 2:09-cv-12830-AJT-DAS Document 32 Filed 05/27/10 Page 56 of 58
CERTIFICATE OF SERVICE

 I, E. Powell Miller, hereby certify that on May 27, 2010, I electronically filed the 

foregoing PLAINTIFFS’ OPPOSITION TO DEFENDANTS’ MOTION TO DISMISS THE 

CONSOLIDATED AMENDED CLASS ACTION COMPLAINT FOR VIOLATIONS OF 

THE FEDERAL SECURITIES LAWS with the Clerk of the Court using the ECF System 

which will send notification of such filing to the following: 

See Attached Service List. 

There are no non-ECF participants in this action. 

THE MILLER FIRM, P.C. 

/s/ E. Powell Miller 

E. Powell Miller 

950 W. University Drive, Suite 300 

Rochester, MI 48307 

(248) 841-2200 

epm@millerlawpc.com

Case 2:09-cv-12830-AJT-DAS Document 32 Filed 05/27/10 Page 57 of 58
Mailing Information for a Case 2:09-cv-12830-AJT-DAS

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