Opinion ID: 6971877
Heading Depth: 2
Heading Rank: 2

Heading: Carter-Wallace’s Financial Statements

Text: Appellants also argue that the district court’s dismissal of their remaining claims was improper. In particular, appellants maintain that Carter-Wallace had a duty to disclose before August 1, 1994 the Felbatol-related deaths having reported in its Form 10-K an increase in sales attributable to Felbatol, significant royalties from licensing the drug, and the expectation of increased Felbatol sales in the future. We disagree that Carter-Wallace had a duty under Section 10(b) to disclose the Fel-batol-related deaths prior to August 1, 1994. The statements in Carter-Wallace’s Form 10-K and its “Report to Shareholders” did not become materially misleading until Carter-Wallace had information that Felbatol had caused a statistically significant number of aplastic-anemia deaths and therefore had reason to believe that the commercial viability of Felbatol was threatened. Cf. San Leandro Emergency Med. Group Profit Sharing Plan v. Philip Morris Cos., 75 F.3d 801, 811 (2d Cir.1996). Drug companies need not disclose isolated reports of illnesses suffered by users of their drugs until those reports provide statistically significant evidence that the ill effects may be caused by — rather than randomly associated with — use of the drugs and are sufficiently serious and frequent to affect future earnings. In the present case, four of the ten reported deaths occurred in July — the disclosure was on August 1 — and the earlier reports are not by themselves sufficient to support inferences of either actual knowledge or recklessness. See Chill v. General Elec. Co., 101 F.3d 263, 269 (2d Cir.1996) (stating that reckless conduct is “conduct which is highly unreasonable and which represents an extreme departure from the standards of ordinary care”). We therefore affirm the district court’s dismissal of the appellants’ claims based on these statements. Finally, appellants allege that Carter-Wallace’s financial statements violated GAAP by overstating the value of Carter-Wallace’s inventory. Specifically, appellants allege that Carter-Wallace should have discounted the value of its Felbatol inventory “given its obviously impaired value.” However, one cannot state a claim for securities fraud merely by alleging a GAAP violation; the allegation must be accompanied by a statement of fraudulent intent. See Chill, 101 F.3d at 270. In this case, no such intent can be inferred because, for the reasons stated above, Carter-Wallace had no sound reason to doubt the commercial viability of Fel-batol or the value of its inventory until the reports of Felbatol-associated deaths became statistically significant.