Opinion ID: 6971877
Heading Depth: 2
Heading Rank: 1

Heading: The Advertisements in Medical Journals

Text: The crux of this issue involves whether Carter-Wallace’s Felbatol advertisements may constitute statements made “in connection with” a securities transaction, as required by Section 10(b). Appellants’ precise allegation is that Carter-Wallaee’s false advertisements in Neurology and Archives of Neurology “had an impact on the market price of Carter-Wallace common stock.” We have broadly construed the phrase “in connection with,” holding that Congress, in using the phrase “intended only that the device employed, whatever it might be, be of a sort that would cause reasonable investors to rely thereon, and, in connection therewith, so relying, cause them to purchase or sell a corporation’s securities,” SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 860 (2d Cir.1968) (en banc) (“TGS”); see also In re Ames Dep’t Stores Inc. Stock Litig., 991 F.2d 953, 965 (2d Cir.1993). Moreover, when, as here, a claim is based on the fraud-on-the-market theory, a “straightforward cause and effect” test is applied, In re Ames, 991 F.2d at 967, under which it is sufficient that “statements which manipulate the market are connected to resultant stock trading.” Id. at 966. Under the “cause and effect” test, we cannot say that, as a matter of law, detailed drug advertisements using technical jargon and published in sophisticated medical journals can never constitute statements made “in connection with” a securities transaction. As the Supreme Court has noted, “market professionals generally consider most publicly announced material statements about companies, thereby affecting stock market prices.” Basic Inc. v. Levinson, 485 U.S. 224, 247 n. 24, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988). Technical advertisements in sophisticated medical journals detailing the attributes of a new drug could be highly relevant to analysts evaluating the stock of the company marketing the drug. See In re Time Warner, 9 F.3d at 265 (discussing analysts’ use of information). That the market can absorb technical medical information is neither novel nor surprising. See Wielgos v. Commonwealth Edison Co., 892 F.2d 509, 514-15 (7th Cir.1989) (finding generally that market absorbs complex scientific data). Technical information about the medical efficacy of new drugs, whether found in advertisements or elsewhere, has an obvious bearing on the financial future of a drug company. In an economy that produces highly sophisticated products, technical information is of enormous importance to financial analysts, whether such companies are producing drugs, as here, or nuclear power plants, as in Wielgos. The fact that such information is found in a specialized medical journal, as here, rather than in a statement addressed to participants in financial markets, as in TGS, seems to us irrelevant, so long as the journals are used by analysts studying the prospects of drug companies. In fact, an analyst might consider such an advertisement more informative than a non-technical but corresponding statement to financial market professionals. We are aware that Ross v. A.H. Robins Company, [1978 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 96,388 (S.D.N.Y. April 6, 1978), held that false product advertisements in medical journals are not actionable under Section 10(b). However, Ross pre-dated Basic Incorporated supra, and considered only the nexus between advertisements and individual investments; it did not consider the fraud-on-the-market theory, which provides a broader framework in which to analyze the “in connection with” requirement. See In re Ames, 991 F.2d at 967. We hold, therefore, that false advertisements in technical journals may be “in connection with” a securities transaction if the proof at trial establishes that the advertisements were used by market professionals in evaluating the stock of the company. We leave it to the district court on remand to decide whether the appellants’ complaint with respect to the advertisements sufficiently alleges the other elements of a Section 10(b) claim.