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In re Merck & Co., Inc. Securities, Derivative & “Erisa” Litigation
1658 (SRC), 2007 WL 1100820, D.N.J., 04/12/2007
Holding
A securities fraud class action suit alleging that manufacturer committed misrepresentations or concealments about the safety of its drug was ordered dismissed upon motion by defendants on the ground that the investors’ claims were already barred by statute of limitations, and that for purposes of applying such statute, investors are deemed to have been duly informed as of the time when newspaper publications came out with statements disclosing the health risk of taking the drug.
Detailed Summary
This securities fraud class action involved alleged misrepresentations and concealments committed by defendants about the safety of taking its drug Vioxx. Plaintiffs, who purchased Merck securities, alleged that the share prices were artificially inflated due to this fraud, and that they sustained a loss when the truth was thereafter revealed. Under the Securities Exchange Act, a fraud action alleging such failure to disclose should be filed within one year after the discovery of the untrue statement or omission, or after such discovery should have been made by the exercise of reasonable diligence. However, under the Sarbanes-Oxley Act, which was the law applied to this case, the period of limitation was extended to two (2) years. The drug manufacturer issued registration statements and prospectus containing allegedly false representations about the safety of its drug. By the time of such issuance, a products liability action had been filed against the manufacturer, and for several months numerous articles in mainstream news publications had reported on drug’s possible risks. The Food and Drug Administration (FDA) would later publish a warning letter to the manufacturer on its website, accusing the manufacturer that it had engaged in deceptive and misleading conduct regarding the safety of its drug.
In answer to arguments that the suit was not timely filed, plaintiffs countered that such series of events or publications should not be construed as to put them on notice, pointing to the subsequent public assurances made by the company about the safety of the drug. The court, however, in ruling that the one-year period to file action has already lapsed, declared that an investor may not reasonably rely on words of comfort from management to delay triggering of limitations period for securities fraud claims when there are direct contradictions between managements’ representations and the other materials available to plaintiffs regarding the possibility of fraud. The court had the occasion to apply the principle of “storm warnings” which it defined as “any financial, legal or other data that would alert a reasonable person to the probability that misleading statements or significant omissions had been made.” Once storm warnings give rise to inquiry notice and trigger the limitations period, plaintiffs have an obligation to investigate the basis for their claims. The court must charge them with constructive knowledge of all information discoverable through diligent research during that period. Once it has been shown by defendants that such storm warnings did exist, the burden then shifts to the plaintiffs to show that they exercised reasonable due diligence but nevertheless were unable to discover their injuries. Plaintiffs failed to establish that they conducted a diligent investigation, giving rise to the conclusion that the complaint was untimely initiated.
Law Commentary
Read the related Law commentary: Merck: Difference Between Mutual Fund and Direct Investor Crucial in Resolving Motion to Dismiss, by Josh Lawler, Esq.
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