In re Bausch Lomb, Inc. Securities Litigation

Full title: IN RE BAUSCH LOMB, INC. SECURITIES LITIGATION, THIS DOCUMENT RELATES TO…

Court: United States District Court, W.D. New York

Date published: Mar 28, 2003

Master File No. 01-CV-6190 (CJS) (W.D.N.Y. Mar. 28, 2003)

Opinion

Master File No. 01-CV-6190 (CJS)

March 28, 2003

David A.P. Brower, Esq., Wolf Haldenstein Adler Freeman Herz, LLP, New York, NY, for the Plaintiffs

Carolyn G. Nussbaum, Esq., Nixon Peabody, LLP, Rochester, New York, for the Defendant

DECISION AND ORDER

CHARLES SIRAGUSA, District Judge

INTRODUCTION

This is a proposed class action alleging securities fraud in violation of section 10(b) of the Securities Exchange Act of 1934, as amended, 15 U.S.C. § 78j(b), Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.1 Ob-5, and section 20(a) of the Securities Exchange Act, 15 U.S.C. § 78t(a). Plaintiffs allege that during the proposed class period, January 27, 2000 through August 24, 2000, defendants made material misstatements and omissions regarding Bausch Lomb's ("BL") three business segments: the pharmaceutical segment, the surgical segment, and the vision care segment. Now before the Court is defendants' motion [#17] to dismiss the First Consolidated Class Action Complaint, pursuant to Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure, as well as the Private Securities Litigation Reform Act ("PSLRA"), 15 U.S.C. § 78u-4(b). Also before the Court is plaintiffs' cross motion [#29] to strike certain matters outside the pleadings, or in the alternative, to convert defendants' motion to a motion for summary judgment. For the reasons that follow, the cross motion to strike is granted, and the motion to dismiss is granted in part and denied in part.

STANDARDS OF LAW

Pursuant to Federal Rule of Civil Procedure 12(b)(6), a court may dismiss a complaint for "failure to state a claim upon which relief can be granted." It is well settled that in determining a motion under Fed.R.Civ.P. 12(b)(6), a district court must accept the allegations contained in the complaint as true and draw all reasonable inferences in favor of the nonmoving party. Burnette v. Carothers, 192 F.3d 52, 56 (1999). While the Court must accept as true a plaintiff's factual allegations, "[c]onclusory allegations of the legal status of the defendants' acts need not be accepted as true for the purposes of ruling on a motion to dismiss." Hirsch v. Arthur Andersen Co., 72 F.3d 1085, 1092 (2d Cir. 1995)( citing In re American Express Co. Shareholder Litig., 39 F.3d 395, 400-01 n. 3 (2d Cir. 1994)). The Court "may dismiss the complaint only if it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Id. (internal quotations omitted)( citing Conley v. Gibson, 355 U.S. 41, 45-46 (1957)). Moreover, "a Rule 12(b)(6) motion to dismiss need not be granted nor denied in toto but may be granted as to part of a complaint and denied as to the remainder." Decker v. Massey-Ferguson, Ltd., 681 F.2d 111, 115 (2d Cir. 1982) (citations omitted).¹

1 In Decker, the Second Circuit reiterated that, because securities fraud "strike suits" "permit plaintiffs with groundless claims to abuse liberal federal discovery provisions, with the right to do so representing `in terrorem' increments in the settlement values of the alleged claims," "it is important that the wheat in plaintiffs pleading be separated from the chaff." Id. at 114-15 (citations omitted).

Plaintiffs' first cause of action is against BL and the individual defendants, alleging securities fraud in violation of section 10(b) of the Securities Exchange Act and Rule 10b-5 promulgated thereunder. Complaint, ¶¶ 9, 162. Section 10(b) provides, in relevant part, that

[i]t shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange —. . .[t]o use or employ, in connection with the purchase or sale of any security registered on a national securities exchange . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.

15 U.S.C. § 78j(b). Rule 10b-5 states that,

[i]t shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange, (a) To employ any device, scheme, or artifice to defraud, (b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or (c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.

17 C.F.R. § 240.10b-5.² To state a claim under section 10(b) and Rule 10b-5, "plaintiffs must allege that in connection with the purchase or sale of securities: (1) defendants made a false material misrepresentation or omitted to disclose material information; (2) defendants acted with scienter; and (3) plaintiffs detrimentally relied upon defendants' fraudulent acts." In re Indep. Energy Holdings PLC Sec. Litig., 154 F. Supp.2d 741, 762 (S.D.N.Y. 2001 ( citing Ganino v. Citizens Util. Co., 228 F.3d 154, 161 (2d Cir. 2000)) (other citations omitted); Kalnit v. Eichler, 264 F.3d 131, 138 (2d Cir. 2001).

2 Plaintiffs contend that defendants violated all three subsections, that is, 17 C.F.R. § 240.10b-5(a),(b), and (c). Complaint, ¶ 168.

It is well settled that "[a]n omission is material if there is a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the `total mix' of information made available." Halperin v. Ebanker USA.COM, Inc., 295 F.3d 352, 357 (2d Cir. 2002) (citation and internal quotations omitted). Statements containing "simple economic projections, expressions of optimism, and other puffery are insufficient," however, "defendants may be liable for misrepresentations of existing facts." Novak v. Kasaks, 216 F.3d 300, 315 (2d Cir. 2000), cert. denied, 531 U.S. 1012 (2000).

Further, "[c]ertain alleged misrepresentations in a stock offering are immaterial as a matter of law because it cannot be said that any reasonable investor could consider them important in light of adequate cautionary language set out in the same offering." Halperin v. Ebanker USA.Com, Inc., 295 F.3d at 357. The Second Circuit has referred to this rule of law as the "bespeaks caution" doctrine. Id. "The touchstone of the inquiry is not whether isolated statements within a document were true, but whether defendants' representations or omissions, considered together in context, would affect the total mix of information and thereby mislead a reasonable investor regarding the nature of the securities offered." Id. To be effective, such cautionary language needs to "identify the allegedly undisclosed risk," and must not be such that it would mislead a reasonable investor "into thinking that the risk that materialized and resulted in his loss did not actually exist." Id. at 359.³

3 In addition to the judicially-created "bespeaks caution doctrine," Congress created a statutory "safe harbor" provision, which insulates defendants from liability for certain forward-looking statements, provided that they are accompanied by cautionary statements identifying factors that could cause actual results to differ. See, 15 U.S.C. § 78u-5(c)(1)(A)(i). However, defendants concede that they are not eligible for statutory "safe harbor" protection, since BL entered into an administrative consent order with the SEC in 1997, prohibiting future violations of the securities laws. See, 15 U.S.C. § 78u-5(b)(1)(A); see also, Defendants' reply brief, p. 15) (Defendants acknowledge that "the statutory safe harbor may not apply to defendants' statements."). Defendants may still avail themselves of the "bespeaks caution" doctrine, however, since Congress indicated that the safe harbor provision was not intended to replace the "bespeaks caution" doctrine: "The Conference Committee does not intend for the safe harbor provisions to replace the judicial "bespeaks caution" doctrine or to foreclose further development of that doctrine by the courts." H.R. Conf. rep. No. 104-369, 1995 U.S.C.C.A.N. 730, 745.

Claims under § 10(b) and Rule 10b-5 are subject to heightened pleading requirements. Rule 9(b) of the Federal Rules of Civil Procedure pertains to fraud actions generally, and requires that, [i]n all averments of fraud . . . the circumstances constituting fraud . . . shall be stated with particularity." Particularity requires that the complaint: "(1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent." Anatian v. Coutts Bank (Switzerland) Ltd., 193 F.3d 85, 88 (2d Cir. 1999), cert. denied 528 U.S. 1188 (2000). The Private Securities Litigation Reform Act⁴ ("PSLRA"), imposes additional pleading requirements in securities fraud actions. Expanding upon Rule 9(b), the PSLRA requires that,

4 Pub.L. No. 104-67, 109 Stat. 737 (1995) (codified as amended in scattered sections of 15 U.S.C.).

[i]n any private action arising under this chapter in which the plaintiff alleges that the defendant — (A) made an untrue statement of material fact; or (B) omitted to state a material fact necessary in order to make the statements made, in the light of the circumstances in which they were made, not misleading; the complaint shall specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed.

15 U.S.C. § 78u-4(b)(1).

Despite the foregoing pleading requirements, "there is nothing in the caselaw of this circuit that requires plaintiffs to reveal confidential sources at the pleading stage." Novak v. Kasaks, 216 F.3d at 313. In Novak, the Second Circuit held that 15 U.S.C. § 78u-4(b)(1)

does not require that plaintiffs plead with particularity every single fact upon which their beliefs concerning false or misleading statements are based. Rather, plaintiffs need only plead with particularity sufficient fads to support those beliefs. Accordingly, where plaintiffs rely on confidential personal sources but also on other facts, they need not name their sources as long as the latter facts provide an adequate basis for believing that the defendants' statements were false. Moreover, even if personal sources must be identified, there is no requirement that they be named, provided they are described in the complaint with sufficient particularity to support the probability that a person in the position occupied by the source would possess the information alleged.

Novak v. Kasaks, 216 F.3d at 314 (emphasis in original). Moreover, "[e]ven with the heightened pleading standard under Rule 9(b) and the Securites Reform Act [PSLRA] [courts] do not require the pleading of detailed evidentiary matter in securities litigation." In re Scholastic Corp. Sec. Litig., 252 F.3d 63, 72 (2d cir. 2001) (citation omitted).

The PSLRA also imposes a heightened pleading standard with regard to the element of scienter:

In any private action under this chapter in which the plaintiff may recover money damages only on proof that the defendant acted with a particular state of mind, the complaint shall, with respect to each act or omission alleged to violate this chapter, state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.

15 U.S.C. § 78u-4(b)(2).⁵ The requisite scienter in actions under § 10(b) and Rule 10b-5 is "an intent to deceive, manipulate or defraud." Kalnit v. Eichler, 264 F.3d at 138. (citations omitted). It is well settled that "[t]he requisite `strong inference' of fraud may be established either (a) by alleging facts to show that defendants had both motive and opportunity to commit fraud, or (b) by alleging facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness." Acito v. Imcera Group, Inc., 47 F.3d 47, 52 (2d Cir. 1995). To properly plead motive, the complaint must describe, with particularity,

5 Any securities fraud complaint which fails to comply with the PSLRA's pleading requirements shall, on the motion of any defendant, be dismissed. 15 U.S.C. § 78u-4(3)(A).

concrete benefits that could be realized by one or more of the false statements and wrongful nondisclosures alleged. Motives that are generally possessed by most corporate directors and officers do not suffice; instead, plaintiffs must assert a concrete and personal benefit to the individual defendants resulting from the fraud. Insufficient motives . . . can include (1) the desire for the corporation to appear profitable and (2) the desire to keep stock prices high to increase officer compensation. On the other hand,. . . motive [is] sufficiently pleaded where plaintiff allege[s] that defendants misrepresented corporate performance to inflate stock prices while they sold their own shares.

Kalnit v. Eichler, 264 F.3d at 139 (citations omitted). Therefore, "[t]o allege a motive sufficient to support the inference of fraudulent intent, a plaintiff must do more than merely charge that executives aim to prolong the benefits of the positions they hold," since such allegations are "common to all corporate executives and, thus, too generalized to demonstrate scienter." Id. (citations and internal quotations omitted). Similarly, "incentive compensation can hardly be the basis on which an allegation of fraud is predicated." Id. at 140; see also, Ganino v. Citizens Util. Co., 228 F.3d at 170 ("General allegations that the defendants acted in their economic self-interest are not enough.") (citation omitted).

As indicated earlier, the second method of establishing scienter is to allege strong circumstantial evidence of conscious misbehavior or recklessness. However, where a plaintiff cannot demonstrate opportunity and motive, he must make a greater showing of conscious misbehavior or recklessness. Kalnit v. Eichler, 264 F.3d at 142 (citation omitted) ("Where motive is not apparent, it is still possible to plead scienter by identifying circumstances indicating conscious behavior by the defendant, though the strength of the circumstantial allegations must be correspondingly greater.") It is well settled that

[t]o survive dismissal under the "conscious misbehavior" theory, [plaintiffs must allege]. . . reckless conduct by the [defendants], which is at the least, conduct which is highly unreasonable and which represents an extreme departure from the standards of ordinary care to the extent that the danger was either known to the defendant or so obvious that the defendant must have been aware of it. Although this is a highly fact-based inquiry, generalities can be drawn. Securities fraud claims typically have sufficed to state a claim based on recklessness when they have specifically alleged defendants' knowledge of facts or access to information contradicting their public statements. Under such circumstances, defendants knew or, more importantly, should have known that they were misrepresenting material facts related to the corporation.

Kalnit v. Eichler, 264 F.3d at 142 (citations and internal quotations omitted). A company's alleged failure to disclose information in its financial statements, knowingly and in violation of its own accounting policies, is also sufficient to meet the standard for recklessness. Id. at 142-44 ("We conclude that plaintiffs' scienter allegation was adequate, emphasizing that plaintiffs alleged also that the defendants had, after discussion, made a conscious decision not to mark down inventory specifically because of the effect on [the corporation].") However, "allegations of GAAP [generally accepted accounting principles] violations or accounting irregularities, standing alone, are insufficient to state a securities fraud claim. Only where such allegations are coupled with evidence of corresponding fraudulent intent might they be sufficient." Novak v. Kasaks, 216 F.3d at 309 (citations and internal quotations omitted).

Clearly, "[c]orporate officials need not be clairvoyant; they are only responsible for revealing those material facts reasonably available to them. Novak v. Kasaks, 216 F.3d at 308 (citation omitted). However, "[w]here plaintiffs contend defendants had access to contrary facts, they must specifically identify the reports or statements containing this information." Id. at 309 (citation omitted) Mere "allegations that defendants should have anticipated future events and made certain disclosures earlier than they actually did do not suffice to make out a claim of securities fraud." Id. (citation omitted). Moreover,

[t]he fact that management's optimism about a prosperous future turned out to unwarranted is not circumstantial evidence of conscious fraudulent behavior or recklessness: People in charge of an enterprise are not required to take a gloomy, fearful or defeatist view of the future; subject to what current data indicates, they can be expected to be confident about their steward ship and the prospects of the business that they manage.

Rothman v. Gregor, 220 F.3d 81, 90 (2d Cir. 2000) (citation and internal quotations omitted).

All of the foregoing principles apply to plaintiffs' first cause of action, against BL and the individual defendants, pursuant to Section 10(b) and Rule 10b-5. Plaintiffs' second cause of action is brought only against the individual defendants pursuant to Section 20(a) of the Exchange Act, which imposes secondary liability on persons who "control" persons who commit securities fraud in violation of section 10(b) and Rule 10b-5. Suez Equity Investors v. Toronto-Dominion Bank, 250 F.3d 87, 101 (2d Cir. 2001)("`Controlling-person liability' under § 20 of the Securities Exchange Act is a separate inquiry from that of primary liability and provides an alternative basis of culpability.") (citation omitted). Specifically, § 20(a) provides that:

[e]very person who, directly or indirectly, controls any person liable under any provision of this chapter or of any rule or regulation thereunder shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable, unless the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action.

15 U.S.C. § 78t(a). It is well settled that,

[t]o make out a prima facie case under § 20(a) of the Exchange Act, a plaintiff must show a primary violation by the controlled person and control of the primary violator by the targeted defendant, and show that the controlling person was in some meaningful sense a culpable participant in the fraud perpetrated by the controlled person.

Ganino v. Citizens Util. Co., 228 F.3d at 170 (citation and internal quotations omitted).

BACKGROUND

Unless otherwise noted, the following facts are taken from plaintiffs' First Consolidated Class Action Complaint ("Complaint"), including documents incorporated by reference or upon which plaintiffs relied in drafting the complaint, as well as from public documents which BL filed with the Securities and Exchange Commission.⁶ Defendant Bausch Lomb ("BL") is a publicly traded company. At all relevant times, defendant William Carpenter ("Carpenter") was BL's Chairman and Chief Executive Officer, defendant Steven C. McCluski ("McCluski") was its Chief Financial Officer, and defendant Carl E. Sassano ("Sassano") was its President and Chief Operating Officer. This action revolves around BL's three business segments: the vision care segment, the pharmaceutical segment, and the surgical segment.

6 See, Chambers v. Time Warner, Inc., 282 F.3d 147, 152 (2d Cir. 2002); Rothman v. Gregor, 220 F.3d 81, 88 (2d Cir. 2000). As discussed further below, this includes the following statements by BL: 1) January 27, 2000 press release; 2) 1999 Annual Report; 3) April 13, 2000 press release; 4) April 13, 2000 conference call with investors; 5) Form 10-Q filed on May 4, 2000; 6) July 19, 2000 press release; 7) Form 10-Q filed on August 7, 2000; and Form 8-K filed on August 24, 2000.

A. Vision Care Segment

The vision care segment produced and sold both contact lenses and lens care products, such as cleaning solutions. The vision care segment reported $1.029 billion in revenue and $200.5 million in operating earnings in 1999. Prior to the proposed class period, BL had introduced its first disposable contact lens, SofLens, a daily-disposable lens. BL referred to disposable contact lenses as "planned replacement and disposable lenses" or "PRPs/PRDs" for short. In 1999 and 2000, BL introduced additional lines of planned replacement and disposable contact lenses, including Pure Vision, a lens designed to be worn continuously for one month, but approved in the United States to be worn continuously for only one week, and SofLens66 toric, a lens for persons with astigmatism. At that time, BL announced that the first phase of its North American marketing plan for Pure Vision was to market the lenses to eye-care professionals. In July 1999, the British medical journal Lancet published a 1996 study "showing a high risk of certain types of infections among people who wear contact lenses overnight." Complaint, ¶ 90. In response, BL issued a press release, indicating that the Lancet article was based on a three-year-old study, and that it was inapplicable to PureVision lenses, which were designed using new technology. BL reported increased sales of its new contact lenses throughout the proposed class period. However, as will be discussed further below, BL ultimately announced that growth in sales of the new contact lenses had been less than predicted.

B. Pharmaceutical Segment

The pharmaceutical segment produced a variety of proprietary and generic otic and opthalmic pharmaceuticals. The pharmaceutical segment reported $293.9 million in revenue and $66.1 million in operating earnings in 1999. Prior to the start of the class period, BL and another company, Schein Pharmaceuticals, Inc. ("Schein"), were the two leading producers of a type of generic otic or ear drops known as "Neomycin." BL had approximately 40% of the U.S. generic otic market, and Schein had the remainder. In September 1998, approximately 15 months prior to the start of the class period, Schein went out of business, and BL significantly increased its price for Neomycin. BL was able to capitalize on this lack of competition in the otic market for most of 1999, until new competitors entered the market and engaged BL in a price war, which lasted throughout the proposed class period. At the end of the class period, BL announced that these same competitors were waging a price war in generic opthalmic pharmaceuticals as well.

C. Surgical Segment

In 1997, BL purchased two surgical manufacturing companies, Chiron and Storz, and merged them to create a new surgical segment. The surgical segment produced products both for cataract-removal surgery and refractive vision-correction surgery. The surgical segment reported $432.7 million in revenue and $64.1 million in operating earnings for 1999. With regard to cataract surgery, BL manufactured and sold machines used to extract the cataracts, as well as the artificial intraocular lenses ("IOLs") used to replace the eye's natural lens. For purposes of this action, it is sufficient to note that there are basically two types of IOLs, rigid and foldable, and that BL produced both types. With regard to refractive vision-correction surgery, BL manufactured and sold products used in Lasik surgery, including microkeratome blades used to make incisions in the cornea, as well as excimer lasers used to perform photorefractive keratectomy ("PRK") surgery. BL's 1997 Annual Report stated, inter alia, that "[t]he integration of these [two] businesses is well along and should yield significant financial benefits to investors after 1998." Friedman Aff. [#19], Ex. B, p. 2. In its 1998 Annual Report, BL stated that the integration of Chiron and Storz "has progressed even faster than [the company] had anticipated," and that the two businesses were "successfully integrated." Id. at Ex. H, p. 5, 11.

D. Defendants' Public Statements

1. The January 27, 2000 Press Release

On January 27, 2000, in a press release, BL announced its results for the fourth quarter of 1999. Friedman Aff. [#19], Ex. J. The report indicated that "sales of contact lenses were up 11%, driven by strong double-digit growth of planned replacement and disposable lenses, including the company's newest offerings." In the report, BL's chairman and CEO, defendant William Carpenter, noted, "this past year, the vision care business successfully executed a number of new product and new market launches, and began the process of reducing the overhead associated with our older, slower-growing or declining product lines." Id. at 2. Carpenter indicated that he was "very pleased with the solid results reported," and that the vision care segment was positioned to "deliver solid growth in the future with even stronger profitability." With regard to the pharmaceutical segment, Carpenter stated that the company had benefitted from "strong U.S. sales of proprietary opthalmic pharmaceuticals and non-opthalmic multi-source products." As for the surgical segment, Carpenter stated that it "delivered robust growth . . . and dramatically higher profits," and he noted that BL was "uniquely positioned in the opthalmic surgery market to benefit from the continued strong growth in worldwide demand for refractive surgery procedures." Id. Carpenter concluded by stating, "we expect to continue to post solid revenue gains in the coming year and to leverage those gains at the bottom line." The press release also contained a boilerplate cautionary statement, indicating that forward-looking statements were subject to risks and uncertainties, including "product development and introduction," and "successful execution of marketing strategies."⁷ Following that announcement, BL's stock price per share rose from $56.25 to $60.50.

7 The entire cautionary statement was as follows: "This press release contains, among other things, certain statements of a forward-looking nature relating to future events or the future business performance of Bausch Lomb. Such statements involve a number of risks and uncertainties, including those concerning economic conditions, currency exchange rates, product development and introduction, the financial well-being of key customers, the successful execution of marketing strategies, the continued successful implementation of the restructuring effort in reducing costs and expenses of manufacturing processes and administrative functions, as well as the risk factors listed from time to time in the company's SEC filings, including but not limited to the Report on Form 10-Q for the quarter ended September 25, 1999."

2. The 1999 Annual Report

On or about April 4, 2000, BL issued its 1999 Annual Report.⁸ In it, BL indicated that pharmaceutical revenue for the year had increased 37% due to a competitor's exit from the market in late 1998. However, it stated that, "[a]s the company anticipated, new competition in the generic otic market is resulting in prices for these products trending down to their pre-1999 levels. Consequently, 2000 sales comparisons will be off a larger-than-normal base." Friedman Aff., Ex. L, p. 16. The report also contained a statement from Carpenter about the vision care segment, in which he referred to the "successful expansion" of the new contact lens lines, and stated that "we expect these factors to allow us to accelerate revenue growth, increase market share and improve the profitability of our vision care business in 2000 and beyond." In a section entitled "Vision Care Segment Results," the report indicated

8 The report is signed by defendants Carpenter and McCluski.

[c]ontact lens revenue grew 8%, driven by double-digit growth in planned replacement and disposable lenses (collectively, PRD), including SofLens one day, SofLens66 toric and PureVision. Outside the U.S., contact lens sales grew by 14%, driven by strong gains in sales of SofLens one day in Europe, as well as increased sales of Medalist in Japan. Contact lens sales were flat in the U.S., with modest growth in the company's PRD lenses offset by an expected decline in sales of traditional lenses.

Friedman Aff., Ex. L, p. 11 (emphasis added). In a section entitled "Outlook," the report further indicated that revenue growth in the vision care segment was expected to be

in the upper single digits with lens care growing slightly and contact lenses growing in the low double digits. The contact lens business should benefit from higher sales from new and innovative products including SofLens . . . SofLens66 toric . . . Pure Vision . . . and a new two-week conventional disposable lens which the company plans to introduce during the first half of 2000.

Id. at 15-16. The report noted that "[t]he combination of increased sales of higher margin new products and cost reduction initiatives are expected to yield improved operating margins in this [vision care] business." Id. at 16.

As for the surgical segment, the report predicted revenue growth in the "low double digits," "driven primarily by continued strong growth in demand for products used in refractive surgery. Id. The report further stated that "[o]perating margins in this segment are expected to expand to nearly 20% over the next two years, driven by the continued integration of the two surgical businesses acquired in 1998, and a sales mix shift toward higher margin products." Id. The report included a cautionary statement regarding forward-looking statements, noting that the words "anticipate," "should," "expect," "estimate," "project," and "similar expressions" were intended to identify forward-looking statements. Id. at 17.

3. The April 13, 2000 Press Release

On April 13, 2000, BL announced its results for the first quarter, ended March 25, 2000. Friedman Aff. [#19], Ex. M. The press release showed revenues up 4% from the previous year. With regard to the Vision Care segment, the release stated:

Revenues were flat . . . compared to the first quarter of 1999. Excluding the impact of foreign currency exchange rates, revenues increased 1%. Contact lens revenues were up 8%, driven by strong double-digit growth in sales of the company's lines of planned replacement and disposable lenses. Within this product category, results were led by growth of the company's premium contact lens offerings, SofLens66 toric and PureVision, and by continued strong growth of SofLens one day. Combined lens care and vision accessories revenues were down 6%, driven by market dynamics in the U.S. and certain markets in Europe, where the company's retail customers have reduced inventory carrying requirements for lens care products and began to re-balance their inventory positions during the quarter, [sic]

Friedman Aff., Ex. M, p. 1. In the pharmaceutical segment, sales were up 4%, with the company noting, "[a]s we anticipated, growth in the pharmaceutical segment has moderated from last year, when sales benefitted from short-term pricing opportunities we had for generic otic products." Id. at 2. As for the Surgical segment, the report stated that revenues were up 14% from the prior years, "driven by continued strong double-digit growth in sales of products used in refractive surgery, including very positive response in the U.S. to the company's Technolas 217 excimer laser following its February marketing approval from the Food and Drug Administration." Id. Continuing, the report stated, "[i]n our surgical segment, customer response to the U.S. launch of our Technolas 217 laser has exceeded our expectations, and we now anticipate revenue growth in that segment to be a couple of percentage points higher than we had originally forecasted for 2000, and significantly higher for 2001." Id. The report also contained essentially the same cautionary statement that appeared in the January 27th press release.

4. The April 13, 2000 Conference Call

Following the release of the first quarter results, Carpenter held a conference call with investors and securities analysts, in which he stated:

As we look ahead for the rest of 2000, sales in the vision care segment should accelerate in the second half of the year, driven by the continued strong performance of our new planned replacement and disposable contact lens products, including our new two-week disposable lens, which is on target for launch this quarter. . . .[W]e expect to see a return to modest growth in lens care revenues in the second half.

As for pharmaceuticals, Carpenter noted that sales had "moderated from last year, when sales benefitted from short-term pricing opportunities." With regard to surgical, Carpenter said that "customer response to the U.S. launch of our Technolas(r) 217 laser has exceeded our expectations, and we now anticipate revenue growth in that segment to be a couple of percentage points higher than we had originally forecasted for 2000, and significantly higher for 2001."

5. The Form 10-Q Filed on May 4, 2000

On May 4, 2000, BL filed with the SEC a Form 10-Q for the first quarter of 2000. Friedman Aff., Ex. N. The report noted, in relevant part, that contact lens revenues increased 8%, "driven by strong double-digit growth in sales of the company's new lines of planned replacement and disposable lenses which more than offset declines in the older traditional lens portfolio." Id. at 8. The report also stated:

In the vision care segment, revenues are expected to grow modestly in the second quarter and to accelerate in the third and fourth quarters. These trends will result from an expected rebalancing of lense care product inventories in the U.S. retail market and a return of lens care revenues to modest growth in the second half of the year. They will also be driven by the continued success of new products in the contact lens business, including the second quarter launch of the company's newest offering, Bausch Lomb Two Week, a single vision spherical contact lens to be marketed for two-week replacement. Depending on the full year impact of currency changes, the segment should end the year with revenue growth in the range of 6-8%.

Id. at 10. As for pharmaceuticals, the report stated:

[T]he U.S. business is expected to generate modest growth for the full year from the continued success of the company's proprietary products, such as Lotemax and Alrex, as well as newer generic products. The company's non-U.S. pharmaceuticals business is concentrated primarily in Europe, where the first-quarter decline in the euro had a significant negative impact on reported results. Should foreign currency rates remain at their present levels or decline further, non-U.S. results could more than offset the growth in the U.S. business.

Id.

6. The July 19, 2000 Press Release

On July 19, 2000, in a press release, BL announced its results for the second quarter, ending June 24, 2000. As for the vision care segment, the report stated:

Second-quarter 2000 revenues from the company's vision care business decreased 2% from 1999. Sales of contact lenses grew 2%, with strong sales of the company's newer product offerings — SofLens66 toric, SofLens one day, PureVision, and Bausch Lomb Two Week — largely offset by declines in older product offerings, particularly in certain markets in Asia. Combined lens care and vision accessories revenues were down 6%, driven by ongoing market dynamics in the U.S., where the company's retail customers continue to reduce their inventory positions.

Friedman Aff., Ex. O, p. 2. As for pharmaceuticals, the company stated that revenues were down 12% from the same period in 1999. The report further noted:

Sales in local currency were up 11% for the company's Dr. Mann Pharma subsidiary in Germany, and in the U.S., revenues from Lotemax and Alrex, the company's proprietary opthalmic anti-inflammatory drops, were up sharply during the quarter. These gains were more than offset by results for the company's line of generic ear drops in the U.S., where prior year results were significantly augmented by price increases taken after a major competitor's exit from the market. Revenues from these products in the second quarter of 2000 were significantly lower than a year ago, reflecting pricing activity by new competitors that was more aggressive than the company had anticipated.

Id. As for the surgical segment, the release stated that revenues were up 13% from the prior year, "driven by continued strong double-digit growth in sales of products used in refractive surgery, including the continuing U.S. rollout of the Technolas 217 excimer laser." Id. Commenting on these figures, Carpenter stated:

On balance, we are satisfied with the results for the second quarter. Products associated with the key initiatives we have identified for long-term growth — new contact lenses, refractive surgery and proprietary [as opposed to generic] pharmaceuticals — continued to perform well. Our revenues, however, were negatively affected by short-term market issues in our U.S. lens care and pharmaceuticals businesses. Despite these challenges, we achieved our overall financial goals this quarter as a result of significant improvements in the profitability of our vision care and surgical businesses. . . . While we expect the U.S. market issues to impact our revenues for the balance of this year, we are equally confident that our earnings will continue to benefit from the higher margins associated with our new products, as well as from the savings generated by the cost reduction initiatives we announced last year. As a result, we remain comfortable with our previous earnings guidance for our current businesses for the second half of this year.

Id. The press release also contained a cautionary statement essentially identical to the ones contained in the January 27th and April 13^th press releases. On news of the decline in revenues, BL's stock price dropped from $78.125 per share on July 18, 2000, to $61.75 per share on July 19, 2000.

7. The Form 10-Q filed on August 7, 2000

On August 7, 2000, BL filed a form 10-Q with the SEC, regarding the company's second quarter results. With regard to the vision care segment, the report stated, in relevant part:

Outside the U.S., lens care revenues increased 1%. These gains were more than offset by U.S. market dynamics, where the company's retail customers' continued reduction in their inventory positions has resulted in short-term disruption to revenue growth. Year to date, vision care revenues decreased 1% in actual and constant dollars, reflecting the decreased sales for both lens care and vision accessories products offset by the strong performance of the company's new contact lens products.

Friedman Aff., Ex. P, p. 8 (emphasis added). The report also discussed the ratio of costs of products sold to sales, and noted the

impact of lower pricing of generic otic products in the pharmaceutical business as well as the shift in product sales mix in the vision care business away from higher margin solution products [i.e., lens care products]. These trends were partially offset by improved margins in the surgical business and cost savings in the contact lens business that were realized as a result of the company's restructuring efforts.

Id. at 9 (emphasis added) In a section entitled "Outlook," the company stated:

As a result of the short-term operational factors discussed elsewhere in this financial review, the company has revised its revenue projections for the remainder of 2000. . . . In the vision care segment, the impact of U.S. retail customers' rebalancing of lens care inventory positions is expected to continue into the second half of the year, whereas the sales growth for contact lens products is expected to accelerate, driven by the company's newest PRO offerings [the company had just released Bausch Lomb Two Week]. . . . In the pharmaceuticals segment, the combined negative impact of currency exchange rate changes and the accelerated return to historic pricing levels in the otics line of generic pharmaceuticals are likely to more than offset continued growth in the remainder of the company's pharmaceuticals business. . . . In the surgical segment, the company continues to expect revenue growth in the mid-teens for the balance of this year, driven by the continued success of products used in refractive surgery procedures.

Id. at 11 (emphasis added)

8. The Form 8-K filed on August 24, 2000

On August 24, 2000, BL filed a Form 8-K with the SEC, announcing downward revisions to sales and earnings estimates for 2000 and 2001. Friedman Aff., Ex. Q. The report consisted of two parts, a press release and a transcript of remarks Carpenter made to investors during a conference call. The press release indicated that the company had decided to issue the revision "[f]ollowing an intensive midyear global review of its businesses," which revealed "market trends and business issues that will impact financial results over the next 12 to 18 months." Id. at 2. The company identified four factors leading to the revision: 1) slower growth in the vision care segment than previously projected; 2) accelerated price pressures on U.S. multi-source (generic) pharmaceutical products; 3) product supply constraints in the surgical intraocular lens (IOL) business; and 4) continued weakening of the Euro. Id. With regard to vision care, the release stated, on the positive side, that "[n]ew contact lens products are yielding market share gains and significant improvements in profitability." Id. at 3. The release further stated:

[BL] had previously reported a slowing in market demand for contact lens care products in the U.S., impacting the amount of inventory carried by retail customers and company revenues to date. While Nielsen research data indicated modestly reduced consumer demand for all lens care products in the first half of 2000, data for the most recent few weeks — as well as customer orders-suggest that consumer demand is softening even further. Markets outside the U.S. appear to be following the same trend. [BL] also noted other factors complicating the outlook for the vision care segment. New products, such as PureVision continuous wear lenses, one-day lenses, and disposable specialty lenses such as SofLens66 toric have, so far, drawn more of their wearers from existing products rather than bringing new patients into the market, thus hastening the erosion of older categories without contributing new growth. In addition, with slower growth in the overall category, competitors are reducing prices to gain market share, resulting in lower revenue growth.

Id. at 3. During the aforementioned conference call, the transcript of which was contained in the Form 8-K, Carpenter elaborated, noting that the "shortfall [was] primarily in lens care," not contact lenses. Id. at 6. With regard to contact lenses, Carpenter stated that the new products were "growing robustly," and

driving a turn-around in our lens business in the Important U.S. market. The U.S. used to be our problem area for lenses. Now, all the signs are that our business there is in resurgence, our share is growing, and we are continuing the momentum with the launch of Baush Lomb two-week.

Id. However, Carpenter stated that BL

had anticipated that product innovation would have a greater impact in growing the global vision care market than has proven to be the case. Innovations such as continuous wear lenses, one-day lenses and disposable toric and bi-focal lenses, we believed, would attract new wearers into the market and drive stronger category growth. But the acceptance of continuous wear lenses, for example, requires practitioners to change long-held assumptions about safety, and that's proven to be a formidable challenge. While our revenues from PureVision will about double from last year, which is terrific, the acceptance of this very new technology is ramping up more slowly than we had expected. And overall, new technologies have drawn more of their wearers from existing products (which is ultimately hastening the erosion of older categories), rather than bringing new patients into the fold.

Id. (emphasis added).

With regard to the pharmaceutical segment, the press release cited "[a]ccelerated price pressures on U.S. multi-source pharmaceutical products and weakening of the Euro." Id. at 3. More specifically, the release stated:

During the second quarter, [BL] reported a decline in revenue growth due to the significant impact of aggressive pricing competition in generic otic (ear) products in the U.S. While the company had expected the entry of competition to lead to a gradual pricing decline in this product line, the extent and speed of the price reductions were unprecedented. More recently, prices have been similarly eroding in the company's other multi-source products in the U.S.

Id. (emphasis added). Carpenter stated that "[i]n pharmaceuticals, the significant competitive pricing pressures experienced in our otics (or ear drop) line earlier this year has expanded to other multi-source products in the portfolio." Id. at 5 (emphasis added). Carpenter continued, saying:

As you'll recall, in the second quarter, we reported that our revenues had been significantly impacted by aggressive price competition for generic otics. . . . As we had been discussing for some time, we anticipated that, typical of multi-source [generic] pharmaceuticals in general, the return of competition would gradually erode otic pricing throughout this year. But the very aggressive promotions by a competitor in the second quarter resulted in prices bottoming out about two quarters earlier than we originally had projected. And, based on these circumstances, we moderated our guidance for the remainder of the year in this business during our second quarter earnings release call. Recently, however, we have begun to see similar rapid erosion in pricing for our other multi-source products in the U.S. In the past, our ability to hold pricing in multi-source has been based on our ability to offer trade customers a unique bundle of both opthalmic and other products. And up until now our ability to hold prices in the face of stiffening competition has been aided by our ability to differentiate ourselves with the otics line. However, as we look at our experience to date in the third quarter and project out for the remainder of the quarter and full year, we now anticipate revenues from these products will trend below our original expectations, and these dynamics will impact us into next year.

Id. at 7. The release also noted that BL's Dr. Mann Pharma subsidiary in Germany, which represented about 40% of the total pharmaceutical segment, was further impacted by the continued weakening of the Euro against the dollar. Id. at 3.

As for the surgical segment, Carpenter announced, for the first time, that BL was unable to meet demand for the "high margin" intraocular lenses (IOLs) used in cataract surgery, which, despite the popularity of the Technolas laser and other refractive surgery products, still provided the major share of revenues and operating earnings for the surgical segment. Id. at 7. Carpenter further stated:

There are basically two types of IOLs: PMMA (or non-foldable) and foldable. Surgeons prefer the foldable lens technologies, and there has been a rapid shift away from the PMMA business and towards foldables. Our portfolio consists of both types of lenses, and we have been impacted by the erosion in demand for the PMMA variety. On the other hand, demand for our silicone [foldable] lenses is exceeding our expectations. Unfortunately, it is also exceeding our ability to supply. When we acquired Chiron and Storz to form our surgical business in 1998, a key element of our plan was an aggressive consolidation of multiple IOL manufacturing sites in the U.S. and Europe. While that consolidation was successful on the whole, the rapid integration of manufacturing processes and product lines into our facility in Clearwater, Florida has limited our ability to quickly shift manufacturing resources to ramp-up production of silicone lenses as fast as necessary to meet the stronger demand. As a result, we have seen disruptions in service levels to our existing customers and pulled back on expanding distribution of the products to new accounts as we work to increase capacity and production volumes.

Id. at 7-8. Carpenter also noted that, while the company had sold more Technolas refractive surgery lasers than it had anticipated, the number of procedures being performed using those lasers was lower than the company had expected. That shortage of procedures negatively affected the surgical segment, since the company apparently expected to realize significant "per procedure fees" from doctors using the laser equipment. Id. at 8. Following this announcement, BL's stock price fell from $78.8125 per share to $35.875. Plaintiff's Brief p. 2.

E. The Alleged Misrepresentations

Plaintiffs subsequently commenced this action, alleging that defendants had made material misrepresentations about all three business segments.

1. Vision Care

Plaintiffs contend that defendants' statements regarding the vision care segment were false, because defendants failed to disclose that the new contact lenses were merely drawing customers away from its older products, and that the new extended-wear lenses were not selling as well as the company had hoped, partly because of a lack of support from doctors. Plaintiffs contend that the problems in vision care were not "short term," but were due to a long-term of fundamental problem of failing to attract new customers.

2. Pharmaceutical

Similarly, plaintiffs contend that the statements about the pharmaceutical segment were fraudulent, because defendants hid the fact that BL was engaged in a price war for generic ear drops. For example, plaintiffs contend that the statement in the Annual Report, that "new competition in the generic otic market is resulting in prices for these products trending down to their pre-1999 levels," was false because the prices had already dropped, or "bottomed out," at the time of that announcement. Second, plaintiffs maintain that defendants hid this fact by secretly giving rebates to customers, which were not reported until the end of the class period. Specifically, plaintiffs contend that BL's vice president of marketing for pharmaceuticals intentionally understated, by $6 million, the amount of these rebates given on generic otics for the last quarter of 1999 and the first two quarters of 2000.

3. Surgical

Finally, plaintiffs maintain that the statements regarding the surgical segment were misleading, since they failed to disclose the problems with integrating the Chiron and Storz companies and the resulting inability to meet demand for foldable IOLs, as well as the problems with the computer system. Plaintiffs contend that defendants hid all of these problems, while still managing to show increased revenues for the surgical segment overall, based upon the sale of a small number of expensive Technolas lasers. According to plaintiffs, BL had a duty to disclose this "product shift" and the "fundamental change in the constituency of its earnings." Plaintiffs contend that defendants further misled investors by overstating the value of certain useless inventory, and by falsely inflating sales projections in order to meet securities analyst's expectations.

ANALYSIS

A. The Motion to Strike

As a preliminary matter, plaintiffs have moved to strike matters submitted by defendants which are outside the pleadings, or in the alternative, to convert the subject motion to one for summary judgment. Specifically, plaintiffs ask the Court to strike two matters: (1) a reference to a dictionary of marketing terms, defining the term "price protection;" and (2) a transcript of a conference call.

Generally, on a motion to dismiss pursuant to Rule 12(b)(6), the Court must consider only the complaint, which is deemed to include "any written instrument attached to it as an exhibit or any statements or documents incorporated in it by reference." Chambers v. Time Warner, Inc., 282 F.3d 147, 152 (2d Cir. 2002) (citations and internal quotations omitted). Moreover, "[e]ven where a document is not incorporated by reference, the court may nevertheless consider it where the complaint relies heavily upon its terms and effect, which renders the document integral to the complaint." Id. at 153. However, the Second Circuit has cautioned that, "a plaintiff's reliance on the terms and effect of a document in drafting the complaint is a necessary prerequisite to the court's consideration of the document on a dismissal motion; mere notice or possession is not enough." Id. (emphasis in original, citation omitted).⁹ Additionally, a court may consider "public disclosure documents required by law to be, and that have been, filed with the [Securities Exchange Commisison]." Rothman v. Gregor, 220 F.3d 81, 88 (2d Cir. 2000). "If a district court wishes to consider additional material, Rule 12(b) requires it to treat the motion as one for summary judgment under Rule 56, giving the party opposing the motion notice and an opportunity to conduct necessary discovery and to submit pertinent material." Kramer v. Time Warner, Inc., 937 F.2d 767, 773 (2d Cir. 1991); see also, FED. R. Civ. P. 12(b).

9 In this regard, plaintiffs indicate that the allegations in the First Consolidated Class Action Complaint are based upon, inter alia, "review and analysis of filings made by BL with the Securities and Exchange Commission," "BL's press releases," and "securities analyst and press reports on BL." (First Consolidated Class Action Complaint, ¶ 1).

1. Dictionary Definition

The first item that plaintiffs seek to have stricken is a dictionary definition of the term "price protection." In the complaint, plaintiffs allege defendants used the term "price protection" to describe BL's practice of secretly paying rebates to customers, to mask decreasing prices. Complaint ¶ 59. Defendants, in support of the motion to dismiss, argue that the term "price protection" does not, as plaintiffs contend, suggest an intent to defraud, but is a common and acceptable practice among companies. See, Defendant's Reply Memo of Law [#27], p. 11 ("The use of rebates is widespread in American companies and `price protection' is a common marketing practice that entails the use of rebates to match a competitor's lower price.") As proof, defendants have submitted photocopied pages from a dictionary which defines the terms "price protection" and "price guaranty"¹⁰ as follows: "[A] seller's agreement to make a proportionate refund to a customer on all items in the buyer's inventory at the time of a price reduction. It usually has a time limit following a purchase." JERRY M. ROSENBERG, DICTIONARY OF MARKETING AND ADVERTISING 256-57 (John Wiley 1995)") (the "Rosenberg dictionary.").

10 The Rosenberg dictionary indicates that the two terms are synonymous.

Plaintiffs contend that the Court may not consider the Rosenberg dictionary definition in connection with this motion to dismiss, because it "is not a proper subject for judicial notice. It attempts to define an industry term-of-art, but it does not supply and undisputed definition of the term `price protection' as BL personnel used the term." (Plaintiffs' Memo of Law in Support of Motion to Strike [#30], p. 1) (emphasis in original). As plaintiffs note, Federal Rule of Evidence 201 states that "[a] judicially noticed fact must be one not subject to reasonable dispute in that it is either (1) generally known within the territorial jurisdiction of the trial court or (2) capable of accurate and ready determination by resort to sources whose accuracy cannot reasonably be questioned." To show that the Rosenberg dictionary's definition is not generally accepted, plaintiffs have submitted pages from a different dictionary of marketing terms, which defines "price guarantee" somewhat differently. See, DICTIONARY OF MARKETING TERMS 215 (Peter D. Bennett ed., 1995)("The practice of vendors offering their customers guarantees against price declines.").

The Court finds that the Rosenberg dictionary definition may not properly be considered in resolving the motion to dismiss. The complaint does not refer to the Rosenberg dictionary, and there is no indication that plaintiffs relied on the Rosenberg dictionary in drafting the Complaint. The Court also declines to take judicial notice of the Rosenberg definition, since defendant has not demonstrated that the dictionary meets the requirements of Federal Rule of Evidence 201(b).

2. Transcript of the January 27, 2000 Conference Call

The second item which plaintiffs want stricken is a transcript of a conference call, held on January 27, 2000, referred to as the "Fourth Quarter 1999 Results and Outlook Conference Call," in which Carpenter and McCluski discussed BL's 1999 fourth quarter results and future outlook. Supp. Aff. of Israel Friedman [#28], Exhibit 2. Plaintiffs contend that the transcript should be stricken, because "the conference call it purports to recount is not referenced anywhere within Plaintiffs' Complaint," and "[t]he transcript is submitted without any information about its preparation which would permit the Court to determine its validity or reliability." Plaintiffs' Memo in Support of Motion to Strike [#30], p. 2.

Clearly, the transcript is not attached to the complaint or incorporated by reference, nor is it a publicly-filed disclosure document or a matter of which the Court may take judicial notice. Therefore, it may only be considered if the Court finds that plaintiffs both possessed and relied upon it in preparing the Complaint. Chambers v. Time Warner, Inc., 282 F.3d at 152-53. During oral argument, plaintiffs' counsel admitted that plaintiffs had a tape recording of the conference call at the time they prepared the Complaint. However, as defendants acknowledge, the Complaint does not refer to the conference call. Defs. Reply Memo [#27], p. 10 n.*("Plaintiffs conveniently omitted any reference to this call from their Consolidated Complaint although it was featured prominently in their earlier Complaint."). While the Complaint does refer to January 27, 2000 as the date BL announced its fourth quarter and fiscal year-end 1999 financial results (Complaint [#15], ¶¶ 1. 95), the alleged misstatements made on January 27, 2000 referred to in the complaint are taken from the January 27th press release, not the conference call. Id., ¶¶ 95-99; Aff. of Israel Friedman [#19], Exhibit J. Moreover, and significantly, plaintiffs are not alleging that defendants made any false or misleading statements during the January 27, 2000 conference call. Plaintiff's Reply Memo in Support of Motion to Strike [#36], p. 3. Based upon the foregoing, the Court finds that while plaintiffs may have possessed a recording of the conference call, they did not "rely" upon it in preparing the Complaint. In this regard, the Court is again mindful of the Second Circuit's holding that the term "rely," in this context, means that "the complaint relies heavily upon [the document's] terms and effect, which renders the document integral to the complaint." Chambers v. Time Warner, Inc., 282 F.3d at 153.^{11 12} The Court does not believe that the conference call is integral to the Complaint.

11 The cases upon which plaintiffs rely are factually inapposite. For example, California Public Employees' Retirement System v. Chubb Corp., Civ. No. 00-4285, pp. 9-10, 22-23 (GEB) (D.N.J. Jun. 26, 2002) involved a situation where the complaint expressly relied upon oral statements made during a conference call. Similarly, in In re Ashanti Goldfields Sec. Litig., 184 F. Supp.2d 247, 263 n. 15 (E.D.N.Y. 2002), "both parties rel[ied] on statements made during the conference call." Here, by contrast, plaintiffs are not relying on anything that was said during the January 27th conference call.

12 Plaintiffs also argue that the Court should consider the transcript, since, prior to consolidation of this action, one of the plaintiffs referred to the conference call in his complaint. (Aff. of Israel Friedman [#35], Ex. B). However, the Court interprets Chambers to hold that, to be considered by the Court on a 12(b)(6) motion, the document must been relied on by the plaintiff in preparing the operative complaint. Cf. Tho Dinh Tran v. Alphonse Hotel Corp., 281 F.3d 23, 32 (2d Cir. 2002)("A statement in a withdrawn complaint that is superseded by an amended complaint without the statement is no longer a conclusive judicial admission.")

The Court also rejects defendants suggestion¹³ that, on a motion to dismiss, the Court is required to consider the transcript of the conference call pursuant to 15 U.S.C. § 78u-5(e), which states: "On any motion to dismiss based upon [the act's `safe harbor' provision for forward-looking statements] the court shall consider any statement cited in the complaint and any cautionary statement accompanying the forward-looking statement, which are not subject to material dispute, cited by the defendant." (emphasis added). In this regard, defendants want the Court to consider the transcript of the conference call, because it allegedly contained a warning to investors about the Neomycin price war. Defs. memo in opposition to motion to strike, pp. 5-6. However, as the Court indicated in footnote 3, defendants concede they are not able to rely on the statutory safe harbor provision in this action. In any event, the Court does not read § 78u-5(e) as requiring the Court to consider cautionary statements which were not part of the same documents relied upon by the plaintiffs in the Complaint. Therefore, since the Complaint does not quote or otherwise rely upon the January 27, 2000 conference call, the Court is not required to consider any cautionary language contained therein in connection with a 12(b)(6) motion. For all of the foregoing reasons, the motion to strike the conference call transcript is granted.¹⁴

13 See, Defendants' Memorandum in Opposition to Motion to Strike [#34], p. 6.

14 During oral argument of the motion to strike, the Court indicated that it was going to deny the motion, since plaintiffs acknowledged possessing a tape of the transcript at the time they prepared the complaint. It is now clear to the Court, however, that plaintiffs did not rely upon that transcript in preparing the complaint, and that pursuant to Chambers, mere possession by the plaintiffs is not enough to warrant consideration of the transcript on a 12(b)(6) motion.

B. The Motion to Dismiss

Defendants contend that the Complaint fails to state a claim, and should be dismissed pursuant to Rule 12(b)(6), because the "vast majority" of alleged misstatements are not material, as a matter of law. Defendant's memo, p. 13. In that regard, defendants claim that: 1) the alleged misstatements are merely "puffery" or "statements of opinion, tinged with caution;" and 2) the context in which the statements were made renders then non-actionable under the "bespeaks caution" doctrine.¹⁵ According to defendants, the statements are either "garden-variety proclamations of optimism about Bausch Lomb's prospects," or "so conditioned with cautionary language that no reasonable investor would rely upon or be misled by them." Defendants also contend that the Complaint must be dismissed pursuant to Federal Rule 9(b) and 15 U.S.C. § 78u-4(b)(1), since the complaint does not allege fraud with sufficient particularity. Finally, defendants maintain that the Complaint must be dismissed, pursuant to 15 U.S.C. § 78u-4(b)(2), because it does not sufficiently plead scienter. The Court will now consider these arguments as they relate to each of BL's three business segments.

15 Defendants also argue that they may not be held liable for any misstatements made by securites analysts. In this Circuit, "plaintiffs may state a claim against corporate officials for false and misleading information disseminated through analysts' reports by alleging that the officials either: (1) intentionally fostered a mistaken belief concerning a material fact that was incorporated into reports; or (2) adopted or placed their `imprimatur' on the reports." Novak v. Kasaks, 216 F.3d at 314 (citation and internal quotations omitted). However, the Court will not address defendants' argument, since, in their responsive brief, plaintiffs clarified that they were not seeking to hold defendants liable for any statements made by third-party analysts. See, Plaintiff's brief in response to the motion to dismiss [#25], p. 19, n. 30 ("None of the analyst statements Defendants challenge are alleged to be actionable false statements by Defendants.").

1. Vision Care

The Court agrees with defendants that, as to the vision care segment, the Complaint fails to state a claim and fails to satisfy the necessary pleading requirements. Simply put, plaintiffs contend that defendants made misleading statements regarding "the strength of the new contact lens products," specifically, SofLens, SofLens66, SofLens66 toric, and PureVision. Complaint, ¶ 2 The Complaint charges that,

BL represented that disposable and extended wear contact lens products would drive growth in 2000 and 2001. Defendants, however, knew or recklessly disregarded the fact that these products were in actuality not attracting new customers, but were stealing business away from existing BL products, thereby creating a false impression of growth.

Complaint, ¶ 3(f). However, as shown above, BL repeatedly indicated, both prior to and during the proposed class period, that the newer contact lenses were drawing customers away from its older lines. Thus, plaintiffs' claim that BL hid this fact in order to "creat[e] a false impression of growth" is baseless. Complaint ¶ 13(f). Moreover, the fact that users of the old lenses were switching to the new lenses was desirable in any event, since the newer lenses had a much higher profit margin. See, e.g., Friedman Aff., Ex. H, p. 34 (Referring to "higher margins on most newer [contact lens] products."); see also, Id., Ex. Q, p. 5 (Referring to new contact lens products yielding "significant improvements in profitability.") Therefore, plaintiffs' pejorative references to the new lenses "stealing" away old customers and "cannibalizing existing customers," implying there was no net gain for the company, make little sense. Complaint, ¶ 139. The problem, rather, was that the new lenses were not attracting as many new customers as BL had anticipated. However, the Court finds that any predictions BL made in that regard are non-actionable puffery and/or statements falling within the bespeaks caution doctrine. As discussed above, BL repeatedly warned that its forward-looking statements were subject to risks, such as "successful execution of marketing strategies." Plaintiffs have not sufficiently pleaded facts showing that defendants had any contrary actual knowledge when they made those predictions. Instead, plaintiffs have merely made conclusory allegations to that effect. For example, the Complaint states that, "[d]uring the Class Period when BL claimed that PureVision and SofLens were experiencing double-digit growth, these claims were contradicted by the data produced by the first-line management of Contact Lens Sales." Complaint ¶ 91. This conclusory statement fails to identify the alleged data to which it refers, fails to describe what that data allegedly showed, and fails to identify with particularity the "first-line management of Contact Lens Sales." Similarly, in an attempt to show that the newer contact lenses were not selling well, plaintiffs allege that unidentified "workers" saw large amounts of SofLens inventory and "openly discussed the failure of the line to meet expectations." Complaint ¶ 93. These allegations fail to state a claim and are not pled with particularity.

Similarly, although plaintiffs refer to a lack of physician support for the newer contact lenses, they have pleaded no facts in support of that charge. Plaintiffs' bald assertion that "[i]t was well known at BL that physicians were skeptical about the ability to safely use PureVision for more than seven days" is entirely conclusory.¹⁶ Complaint ¶ 85. Plaintiffs also have not alleged facts showing that the Lancet medical journal article, the results of which were three years old, had any effect on sales. Nor can plaintiffs point to any misleading statement by defendants regarding the level of physician support; BL merely indicated that it intended to market its new lenses to practitioners first, and then directly to the public at a later time.

16 The complaint does not allege whether these unidentified "physicians" were located within the United States. To the extent that they were allegedly within the U.S., plaintiffs' accusation makes no sense, since the PureVision lenses had only been approved for seven-days' wear by the FDA.

Finally, to the extent that plaintiffs claim that defendants misled investors into believing that slow growth in contact lens sales was a "short term" problem, the Court disagrees. In general, plaintiffs do not contend that the August 24, 2000 announcement was affirmatively false or misleading.¹⁷ Rather, plaintiffs contend that on August 24, 2000, defendants finally admitted truths which they had been concealing since January. See, Complaint, ¶ 5. This is also evident from the fact that the alleged class period ends on August 24, 2000. In fact, plaintiffs' allegations are largely based upon their interpretation of what BL said on August 24, 2000, i.e., "the truth," versus what the company said earlier in the proposed class period. See, e.g., Complaint ¶ 5. However, many of plaintiff's characterizations of the August 24th announcement have no factual basis. For example, the Complaint implies that BL's revised estimates for the vision care segment was attributable only to poor sales of the new contact lens lines. This characterization, however, ignores the fact, as set forth in BL's public statements, that the vision care segment also included high-margin lens care products, such as cleaning solutions. It further ignores the fact that the August 24th announcement largely involved problems with sales of lens care products, with less-than-expected growth in contact lenses being mentioned only secondarily. Moreover, the Court finds that, when the July and August announcements are read together, it is clear that the company's reference to "short term" problems was describing problems with lens care products. See, Friedman Aff., Ex. O (July 19, 2000 announcement), p. 2 (Noting that " lens care and vision accessories revenues were down 6%, driven by ongoing market dynamics in the U.S., where the company's retail customers continue to reduce their inventory positions," and that revenues "were negatively affected by short-term market issues in our U.S. lens care" business.) (emphasis added). The July 19th announcement does not indicate that there were any "short-term" problems with contact lens sales. For all of the foregoing reasons, the Court finds that, as to the vision care segment, the Complaint fails to state a claim and fails to satisfy the pleading requirements of Fed.R.Civ.P. 9(b) and 15 U.S.C. § 78u-4(b)(1).

17 Plaintiffs allege that the August 24th announcement was affirmatively misleading in only one respect, which is that it claimed that the price war for otic drugs occurred "suddenly" in 2000, when in fact, it had begun in 1999. Complaint, ¶ 145 (The complaint mistakenly refers to an "increase in the pricing of otic drugs" instead of a decrease.) The August 24th announcement also did not discuss all of the problems which plaintiffs are alleging, such as problems with the BAAN computer and the alleged failure to write-down worthless inventory.

Further, the Court finds that, as to the vision care segment, the Complaint does not satisfy the scienter pleading requirement of 15 U.S.C. § 78u-4(b)(2). As discussed earlier, a plaintiff may satisfy this requirement by pleading with particularity facts demonstrating a "strong inference" of scienter, either by alleging motive and opportunity to commit fraud, or by making a correspondingly greater showing of strong circumstantial evidence of conscious misbehavior or recklessness. Here, plaintiffs have attempted to use both methods. For the same reasons stated above in the discussion of Rule 9(b) and § 78u-4(b)(1),¹⁸ the Court finds that the Complaint does not adequately plead conscious misbehavior or recklessness as to the vision care segment.

18 See pp. 32-35.

As for the other method, motive, defendants correctly note that "the Complaint does not allege any extraordinary corporate transaction, proposed securities offering, proxy contest, sales by insiders of Company stock, or other unusual benefit or profit that defendants brought about or derived by . . . misstating their expectations for the business during the first half of 2000." Def. Memo of Law in Support of Motion to Dismiss [#18], p. 2. Instead, plaintiffs allege defendants were motivated to misrepresent BL's problems by what they describe as the company's "highly unusual bonus system." Complaint ¶ 146. Under BL's bonus system, executives did not receive their full bonuses in the year in which they were calculated. Instead, a portion of the bonuses was held back, and could be reduced based upon poor performance in subsequent years. Bonuses for Carpenter and McCluski were based entirely on overall company performance, while bonuses for other executives were calculated base on factors including overall company performance, specific business or product performance, and individual objectives. Id. at ¶ 150. According to the Complaint, for the year 2000, Carpenter, McCluski and three other unidentified BL executives forfeited a total of $470,000 in bonuses from previous years. Complaint, ¶ 150. Plaintiffs contend that Carpenter and the other individual defendants had a motive to delay disclosing poor financial results for as long as possible, in order to prevent their previous year's bonuses from being reduced.

The Court, however, finds that these allegations fail to raise a strong inference of scienter. In this regard, the complaint indicates that bonuses were based upon the company's performance for an entire year, and plaintiffs have not alleged facts showing that the individual defendants reaped any concrete benefit from falsely inflating the stock price for only seven months. Moreover, despite plaintiffs' claim that the bonus system was "highly unusual," the complaint indicates that bonuses were essentially incentive compensation based on company performance. As discussed earlier, motive based on "the desire to keep stock prices high to increase officer compensation" is insufficient as a matter of law, since it is "common to all corporate executives and, thus, too generalized to demonstrate scienter." Kalnit v. Eichler, 264 F.3d at 139 (citations omitted). This analysis of motive also applies to the later portions of this decision and order dealing with the pharmaceutical and surgical segments.

2. Pharmaceutical Segment

The Complaint essentially alleges two types of fraud concerning the pharmaceutical segment. First, it alleges that, throughout the proposed class period, defendants misrepresented the extent of competition it was facing in the generic otic market. That is, plaintiffs contend that defendants made it appear that BL was still reaping some of the benefits of the higher prices imposed after Schein left the market, when in fact, from November 1999 onward, prices had already dropped down to pre-1999 levels. See, Complaint ¶ 3(a) ("The Company . . . concealed and affirmatively misled investors as to the severity and adverse material impact of price competition it was confronting from generic drug companies.") Second, plaintiffs contend that defendants fraudulently understated the amount of rebates it was granting to its generic otic customers, in order to pad the company's financial results. See, Id. ("BL . . . materially overstated its earnings in each of the quarters in the [proposed] Class Period . . . by failing to record rebates and/or discounts given to BL's largest Pharmaceuticals customers as part of a price war a with competing pharmaceutical company over Neomycin ear drops and other drugs.") The Court will examine each of these charges separately.

As for the claim that defendants affirmatively misrepresented the extent of competition, the Court again notes that plaintiffs have mischaracterized BL's July 19, 2000 and August 24, 2000 statements. For example, the complaint states:

[O]n August 24, 2000, the Company stated that the Pharmaceuticals division was adversely impacted by generic drug competition, particularly with respect to its otic (ear-related) drugs. (This announcement was particularly startling because BL, just one month before, had already disclosed the adverse impact of otic price competition as a `short term' problem.)

Complaint ¶ 6 (emphasis added). In fact, the August announcement did not reveal anything new regarding the generic otic market. Rather, it merely reiterated what the company had said at the end of the second quarter, which was that prices for generic otic drugs had "bottomed out," i.e., had returned to pre-1999 levels, during the second quarter. The stated purpose of the August announcement was to indicate that BL was then facing similar price competition in the non-otic generic market, and the references to the otic market was merely by way of explanation that what had previously happened with otics was then happening with respect to other generics:

Bausch Lomb has also revised expectations for its pharmaceuticals business both in the U.S. and Germany. During the second quarter, [BL] reported a decline in revenue growth due to the significant impact of aggressive pricing competition in generic otic (ear) products in the U.S. While the company had expected the entry of competition to lead to a gradual pricing decline in this product line, the extent and speed of the price reductions were unprecedented. More recently, prices have been similarly eroding in the company's other multi-source products in the U.S.

***

In pharmaceuticals, the significant competitive pricing pressures experienced in our otics (or ear drop) line earlier in the year has expanded to other multi-source products in the portfolio.

***

As you'll recall, in the second quarter, we reported that our revenues had been significantly impacted by aggressive price competition for generic otics. . . . As we had been discussing for some time, we anticipated that, typical of multi-source pharmaceuticals in general, the return of competition would gradually erode otic pricing throughout this year. But the very aggressive promotions by a competitor in the second quarter resulted in prices bottoming out about two quarters earlier than we originally had projected. And, based on these circumstances, we moderated our guidance for the remainder of the year in this business during our second quarter earnings release call.

Recently, however, we have begun to see similar rapid erosion in pricing for our other multi-source products in the U.S.

Friedman Aff., Ex. Q pp. 3, 5, 7 (emphasis added). As discussed earlier, the first quarter announcement stated that growth in pharmaceuticals "ha[d] moderated," because the previous year's "short-term pricing opportunities" had ended, Friedman Aff. Ex. M, p. 2, while the second quarter announcement reiterated that pharmaceutical revenues were "significantly lower" than the previous year, due to "pricing activity by new competitors that was more aggressive than the company had anticipated." Id. at Ex. O, p. 2. Neither of these announcements suggests that BL was still benefitting from the previous year's price advantage. Therefore, plaintiffs' contention that the August 2000 announcement revealed either the fact or the extent of the problems BL had been having with otic pricing has no factual basis.¹⁹ The Complaint also contains a fleeting reference to defendants having "failed to disclose that generic competition had adversely impacted pricing on numerous other pharmaceuticals" (Complaint ¶ 133(b)) (emphasis added), however, that allegation is entirely conclusory, and plaintiffs have alleged no facts showing that BL was aware that the aggressive price competition in generics had spread to other products prior to the August announcement.

19 The complaint also makes it appear that BL's August 2000 revisions, with regard to pharmaceuticals, was entirely due to price competition in generic drugs. However, this ignores the fact that a very large factor in the revision was the negative effect of the Euro on the company's Dr. Mann Pharma subsidiary in Germany, which accounted for 40 percent of the total pharmaceutical segment. See, Friedman Aff., Ex. Q, p. 3 ("[T]he company now expects to see the Euro impact total pharmaceuticals growth by about five percentage points in each of the next two quarters.")

The Court also finds that plaintiffs have misrepresented BL's statements regarding pharmaceuticals contained in the 1999 Annual Report. The complaint states that, "[i]n its 1999 Annual Report, BL informed the market of Schein's exit from the otic drug market, and warned that, although the Company would enjoy some benefit from the reduced competition, prices would be expected to trend down to their earlier levels. Complaint ¶ 56 (emphasis added). Plaintiffs allege that this purported statement by defendants, allegedly contained in the 1999 Annual Report, was false and misleading, because, in reality, BL's price advantage in the otic market ended entirely in November 1999. Plaintiffs base this allegation on information allegedly provided by an unidentified "former employee of BL." Complaint ¶ 57.²⁰ However, what the 1999 Annual Report actually stated is as follows:

20 That is the only description given for the source, apparently a sole individual, of information regarding the alleged drop in prices occurring in November 1999. As discussed further below, the complaint gives slightly more general information regarding "former employees of the pharmaceuticals division" who allegedly provided information regarding the related, but distinct, topic of BL's reporting of pharmaceutical rebates. See, Complaint, ¶ 3(a).

In the pharmaceuticals segment, revenues are expected to grow in the mid-single digits in 2000. As the company anticipated, new competition in the generic otic market is resulting in prices for these products trending down to their pre-1999 levels. Consequently, 2000 sales comparisons will be off a larger than normal base.

Friedman Aff., Ex. L, p. 16. Contrary to plaintiffs' characterization, the report does not state that the company was expected to continue to enjoy "some benefit from the reduced competition." Moreover, even if the company's use of the terms "trending down" could be seen as implying that prices were still somewhat elevated, as plaintiffs' contend, the Court finds that the allegation is not pleaded with particularity, since it does not adequately identify the source of the information. As discussed previously, while the complaint need not state the source's identity, it must at least provide enough information "to support the probability that a person in the position occupied by the source would possess the information alleged," Novak v. Kasaks, 216 F.3d at 314, a standard which these particular allegations fail to meet.

Plaintiffs further allege that, in the July 19, 2000 announcement, defendants misrepresented that the problems with otic pharmaceutical pricing were "short term." Complaint, ¶¶ 4-7, 127, 133(b). In the July 19, 2000, announcement, Carpenter did state that "revenues" were negatively affected by "short-term market issues in [BL's] U.S. lens care and pharmaceuticals businesses" generally. Friedman Aff., Ex. O, p. 2. Clearly, BL's "pharmaceutical business" involved more than just generic otic products. However, even assuming that BL had specifically opined that the price war in generic otics was a short-term problem, plaintiffs have not come forward with any facts to show that BL had reason to believe otherwise. Plaintiffs repeatedly state that BL was engaged in a "price war," which is "[a] period of sustained or repeated price-cutting in an industry (esp. among retailers), designed to undersell competitors or force them out of business." Black's Law Dictionary (7th ed. 1999). The complaint apparently assumes that an aggressive pricing battle between competitors is necessarily a long-term or even permanent event. However, a price war can be either short or long in duration, and presumably, the winner of a price war will raise prices again. Here, plaintiffs have not pleaded any facts showing that BL had any knowledge or access to information indicating that the generic price war would be anything other than a short-term problem, and BL's predictions or estimates in that regard are therefore not actionable as fraud.

For all of the foregoing reasons, the Court finds that none of the alleged affirmative misstatements regarding the pharmaceuticals segment are actionable.

Turning to the second group of pharmaceutical claims, plaintiffs contend that defendants thrice intentionally failed to report $6 million in rebates, during the last quarter of 1999 and the first two quarters of 2000, in order to "hide" the price war that was occurring in the generic otic market. Complaint ¶ 105 ("The company's reported results did not reflect this price war [in generic otic pharmaceuticals] because the Company gave retroactive and hidden rebates and then arbitrarily reduced the rebate provision, causing both revenues and earnings to be falsely reported.") The Complaint alleges that, in 1998, when Schein pharmaceuticals left the generic otic market, BL raised its price for the generic otic drug Neomycin from $3.00 to $13.43, but that when Falcon pharmaceuticals began competing with BL in November 1999, BL allegedly began giving its largest pharmaceutical customers rebates that reduced their cost down to between $3.00 and $4.25. Plaintiffs contend that, during the proposed class period, David Jarosz, who was the head of North American Pharmaceuticals, and Susan Benton, a member of Jarosz's staff, held weekly meetings, during which Jarosz would "approve" each rebate being granted. Plaintiffs further contend that Jarosz and Benton prepared the pharmaceutical segment's quarterly financial results, and that, despite having accurate figures, and over the objection of at least one employee, they chose to under-report rebates actually granted for each of the three quarters at issue here. Thus, according to the Complaint, BL overstated the pharmaceutical segment's net income by $18 million during the proposed class period. According to plaintiffs, Jarosz reported directly to Carpenter and Sassano. The Complaint states that "Sassano and Carpenter were aware of the rebates through Jarosz on, at least, a quarterly basis. Additionally, Carpenter and Sassano were aware of the material benefit that Neomycin's inflated pricing had to 1999 earnings."²¹ The complaint attributes all of the foregoing information to

21 The complaint does not indicate that Carpenter or Sassano was aware of such a material benefit to earnings in 2000.

[f]ormer employees of the Pharmaceuticals division, employed by the Company during the Class Period, serve as the sources for these allegations. These former employees had direct familiarity with discounts, rebates and returns issued to major customers during the Class Period and/or familiarity with the Company's financial reporting of such discounts, rebates and returns[.]

Complaint 13(a). As evidence of scienter, plaintiffs contend that these actions violated generally accepted accounting principles ("GAAP"), as well as the company's own revenue recognition policy contained in the company's 1999 10-K report and 1999 Annual Report, which states:

Revenue Recognition. Revenues are generally recognized when products are shipped to the customer. The company has established programs which, under specified conditions, enable customers to return product. The company establishes liabilities for estimated returns and allowances at the time of shipment. In addition, accruals for customer discounts and rebates are recorded when revenues are recognized.

(Friedman Aff. [#19], Ex. K, p. 8; Ex. L, p. 23).

In moving to dismiss, defendants contend that the Complaint does not adequately allege that the company failed to follow its revenue recognition policy:

[R]ebates were not necessarily recorded on the balance sheet when they were approved but, according to a disclosed accounting practice, the Company accrued `estimated returns and allowances at the time of shipment. The complaint is therefore making an inapt apples to oranges comparison when it attempts to equate the rebates recorded on the financial statements, which were based on `estimates at the time of shipment,' with the refunds that had merely been approved for particular customers, which could differ sharply from the figure estimated and recorded at the time of shipment.

Defendant's Memo, p. 37. The Court disagrees, however, based on its reading of the plain language of the foregoing revenue recognition policy. From that, it appears clear that "returns and allowances" are not synonymous with "discounts and rebates."²² Further, while the policy indicates that estimates will be used for returns and allowances, it states that rebates will be recorded when product is shipped. Therefore, contrary to defendants' assertion, the Court does not read the revenue recognition policy as providing for the use of estimates in reporting rebates. In any event, the Complaint alleges that BL intentionally failed to report rebates which had already been approved by Jarosz. Accordingly, the motion to dismiss the pharmaceutical rebate claims is denied as against BL.

22 Defendants imply that "returns and allowances" are the same as "discounts and rebates." Defendants' Memo, pp. 36-37. Although, as discussed above, the Court finds that the revenue recognition policy treats these terms differently, plaintiffs have added to the confusion by themselves conflating the two categories. See, Complaint, ¶ 115 (Referring to rebates as "returns and allowances"); ¶ 126(a) (Referring to "discounts, rebates and/or returns"). Nonetheless, the Court finds that the revenue recognition policy required that rebates be recorded at the time of shipment, and plaintiffs have clearly alleged that BL did not do so.

As for the individual defendants, the complaint does not indicate that McCluski was aware of the hidden rebates. As for Carpenter and Sassano, although the complaint does not expressly say so, it appears clear that the allegation that Jarosz made them aware of the hidden rebates was made on information and belief. Apart from stating, in vague and conclusory fashion, that Jarosz made them "aware of the rebates" on "at least a quarterly basis," it does not allege what specific information was conveyed to them, or how and when Jarosz communicated with them. It also does not expressly state that Jarosz told Carpenter and Sassano that certain rebates were not being reported. Nor does the complaint indicate how the individual defendants were have learned of the hidden rebates, other than from Jarosz. Accordingly, the Court finds that these allegations do not comply with the pleading requirement of 15 U.S.C. § 78u-4(b)(1), and must be dismissed as against the individual defendants.

3. Surgical Segment

The Complaint alleges that essentially all of defendants' statements regarding the surgical segment, made during the proposed class period, were misleading because they failed to disclose serious problems which the company had a duty to disclose. The most significant problem was the segment's inability to produce enough foldable IOLs to meet demand. As the company acknowledged in its August 24, 2000 announcement, "[t]he major share of . . . surgical revenues and operating earnings [were] derived from sales of high margin intraocular lenses (or IOL's) and other disposables for cataract procedures." Friedman Aff., Ex. Q, p. 7. Thus, according to plaintiffs, the surgical segment hid the fact that it could not supply its customers with its most important and profitable products. In this regard, plaintiffs also contend that BL misled investors by indicating that the integration of Storz and Chiron had been a success, when in fact, the IOL shortage resulted from BL's failure to merge the two companies' manufacturing operations. Although BL maintains that it only became aware of the IOL production problem after the year 2000 second quarter results were announced, plaintiffs contend that the problem existed throughout the class period. Plaintiffs base this allegation on information provided by a "former management level employee of the Surgical division," who stated that foldable IOLs were "on back order" "from the beginning of the merger [1998] until November 2000." Complaint ¶ 73.

Plaintiffs further allege that the surgical segment hid the fact that its computer system was so flawed that it could not properly set prices, process orders, or send invoices. The complaint states that the computer problems "made it impossible to conduct normal business functions effectively on a day-to-day basis," and resulted in lost sales. Complaint ¶ 72. This claim is based upon information provided by a "former management level employee who worked in the materials department of the Surgical division," and a "corporate account specialist for the Surgical division." Complaint ¶¶ 72(a)-(c).

As for the required element of scienter, The complaint alleges that

[o]ne revenue accounting supervisor for Surgical recounted how she would . . . prepare daily sales reports which indicated actual sales versus forecasted sales and would e-mail them daily to defendant Carpenter, as well as to Paul Lopez, Vice President of Commercial Operations for the Americas and Asia Pacific region and to Hakan Edstrom, Corporate Vice President and President of the Surgical division. These daily sales reports uniformly showed that the Surgical division was not doing as well as previously forecasted.

Complaint ¶ 82. Plaintiffs also contend, based upon information provided by a "former Surgical division internal accountant," that during the second quarter of 2000, "the Surgical division's sales and marketing group, with the help of BL's internal accounting personnel," prepared revenue projections and a financial forecast for the rest of 2000, indicating that "Surgical would not hit sales and profit targets for the year," which were sent to Lopez, Edstrom, and to defendant Carl Sassano, who was then BL's President and Chief Operating Officer. Id. at ¶ 83. According to the Complaint, the surgical segment was nonetheless instructed to revise its projections "to forecast that BL would meet its previous projections." Id. Plaintiffs also point to alleged violations of generally accepted accounting principles ("GAAP")²³ as providing a strong inference that BL sought to hide the problems occurring within the surgical segment. For example, plaintiffs contend that the surgical segment carried approximately $4.7 million in worthless inventory at cost value throughout the class period. According to the Complaint, this violated Accounting Research Bulletin ("ARE") No. 43,²⁴ which requires, inter alia, that "[w]here there is evidence that the utility of goods . . . will be less than cost, whether due to physical deterioration, obsolescence, changes in price levels, or other causes, the difference should be recognized as a loss of the current period." Complaint ¶ 78. Plaintiffs have specifically identified the inventory, have described the value at which they were being carried on BL's books, and have indicated that the inventory was essentially worthless because it was defective surgical equipment. Moreover, plaintiffs have described the source of this information as a "former management employee in BL's surgical division." Complaint ¶ 77. Plaintiffs also contend that BL used increased sales of its new Technolas laser to make the segment appear profitable as a whole, without disclosing the fact that there had been a material shift in sales away from the segment's mainstay product, the IOL lens.

23 "Generally Accepted Accounting Principles ("GAAP") are the official standards adopted by the American Institute of Certified Public Accountants (the "AICPA"), a private professional association, through three successor groups it established: the Committee on Accounting Procedure, the Accounting Principles Board (the "APB"), and the Financial Accounting Standards Board (the "FASB")." Ganino v. Citzens Util. Co., 228 F.3d 154, 159, n. 4 (2d Cir. 2000) (citations omitted).

24 Plaintiffs apparently are referring to Committee on Auditing Procedure of the American Institute of Certified Public Accountants, Accounting Research Bulletin No. 43 (1953). See, Straus v. Holiday Inns, Inc., 460 F. Supp. 729, 736 (S.D.N.Y. 1978).

Defendants contend that the foregoing allegations are insufficient for a variety of reasons. First, they maintain that the company's statements were not misleading. For example, defendants note that the company's 1997 Annual Report stated that the success of the acquisition of Chiron and Storz would "depend in large part on the company's ability to integrate . . . the combined businesses." Friedman Aff. [#19], Ex. B, p. 36. They further note that the company's 1999 Annual Report stated: "Operating margins in [the surgical segment] are expected to expand to nearly 20% over the next two years, driven by the continued integration of the two surgical businesses." Friedman Aff. [#19], Ex. L, p. 16(emphasis added). They claim that, by referring to the integration as "continued," investors had notice that the integration was not complete. Defendants also deny they hid the fact that most of the surgical segment's revenue was coming from sales of Technolas lasers. For example, they point to the company's Form 10-Q filed with the SEC on May 4, 2000, which stated: "The U.S. surgical business grew modestly with significant gains in sales of products for refractive surgery, including the recently approved Technolas 217 excimer laser, offset in part by lower sales in the cataract surgery products business." (Friedman Aff. [#19], Ex. N, p. 8). And, with regard to the upward revision of the segment's financial estimates, defendants contend that the revision was warranted, because the company was anticipating increased revenues from the sales of the Technolas lasers, which had just received FDA approval in February 2000. The Court finds, however, that there is an issue of fact as to whether or not the foregoing statements were misleading, in light of the undisclosed serious manufacturing and computer-related problems the surgical segment allegedly was experiencing. At this point, however, plaintiffs have merely made unproven accusations; it will be for a jury to decide whether or not BL's statements were fraudulent.

Defendants also contend that the fraud and scienter allegations are not pleaded with sufficient particularity. For example, as to the back-ordered IOLs, defendants contend that the Complaint does not indicate the size of the IOL back order, whether or not it was material, or whether the individual defendants knew about it. And, with regard to the alleged adjustments to the surgical segment's projections, defendants contend that the complaint doesn't indicate who at company "headquarters" ordered the changes to be made, does not indicate the size of those adjustments, and does not indicate whether or not they were material. The Court disagrees, because, as discussed earlier, although plaintiffs are required to plead with particularity, they are not required to plead evidence. In this case, the Court finds that it is reasonable to infer that the segment's inability to produce its mainstay product was material. Similarly, the Court believes that the revision to the segment's financial outlook was not clearly immaterial, inasmuch as it allegedly enabled the company to meet analysts' predictions. Finally, the Court does not believe that plaintiffs need to identify the specific person who directed the estimate revision, since they have alleged that Carpenter and Sassano knew or should have known that the revised projection was inaccurate. In this regard, the Court finds that the complaint states a claim against Carpenter and Sassano in their individual capacities, with regard to the surgical segment allegations, but not McCluski.

2. The § 20(a) Claim

As discussed earlier, § 20(a) of the Exchange Act, 15 U.S.C. § 78t(a), imposes secondary liability on persons ("controlling persons") who control a person or entity ("controlled person") who commits securities fraud. In the instant case, plaintiffs allege that Carpenter, Sassano, and McCluski, as controlling persons, are secondarily liable for the primary violations of section 10(b) and Rule 10b-5 allegedly committed by BL, the controlled person. In moving to dismiss this claim, defendants do not argue that Carpenter, McCluski, and Sassano were not able to exercise control over the company. Rather, they argued that it should be dismissed because plaintiffs have not adequately pleaded a primary violation under § 10(b) and Rule 10b-5. Since the Court has found that some of plaintiffs' primary violation claims may go forward, the § 20(a) claims pertaining to those violations may also go forward against Carpenter, McCluski and Sassano.

CONCLUSION

For all of the foregoing reasons, plaintiffs' motion to strike [#29] is granted in its entirety. Defendants' motion to dismiss [#17] is granted in part and denied in part. The § 10(b) and Rule 10b-5 claims pertaining to the vision care segment are dismissed in their entirety. The § 10(b) and Rule 10b-5 claims pertaining to the pharmaceutical segment are dismissed insofar as they allege that defendants made affirmative misstatements regarding the alleged price war; the claim pertaining to hidden rebates may go forward as against BL, but is dismissed against the individual defendants. The surgical segment § 10(b)and Rule 10b-5 claims may go forward as against BL, Carpenter, and Sassano, but are dismissed as to McCluski. The § 20(a) claims may go forward against Carpenter, Sassano, and McCluski as to the surviving § 10(b) and Rule 10b-5 claims.

SO ORDERED.