In Re Merck & Co., Inc. Securities Litigation

432 F.3d 261 (3rd Cir. 2005)

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Nature of the Case

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Facts

D planned an initial public offering of its wholly-owned subsidiary--Medco Health Solutions, Inc. D filed its first Form S-1 with the SEC. The SEC did not approve this S-1, and D kept trying, finally securing SEC approval with its fifth S-1, filed. Before the IPO was to occur, information about Medco's aggressive revenue-recognition policy was exposed by a Wall Street Journal article. After further disclosures and larger declines in D's stock price, the Medco IPO was canceled. Medco saves its clients (plan sponsors) money by negotiating discount rates with pharmacies and influencing doctors to prescribe cheaper, but still therapeutically appropriate, medicines. The customer makes a co-payment--usually between $ 5 and $ 15--which goes directly to the pharmacy, not to Medco. Medco, the sleaze balls that they were, did not handle these co-payments but interpreted the accounting standards to allow it to recognize the co-payments as revenue. To keep things on the up and up it did not disclose this revenue-recognition policy. D's 1999 SEC Form 10-K stated that Medco recognized revenue 'for the amount billed to the plan sponsor.' After D changed auditors, and before it began filings for the Medco IPO, it changed this language in its 2001 Form 10-K to state that revenues were 'recognized based on the prescription drug price negotiated with the plan sponsor.' D's April 17 Form S-1 disclosed for the first time that Medco had recognized as revenue the co-payments paid by consumers, but it did not disclose the total amount of co-payments recognized. The Wall Street Journal reported that Medco had been recognizing co-payments as revenue and estimated that in 2001 $4.6 billion in co-payments had been recognized. The actual number was 5.54 billion. D's stock lost $2.22. that day from the mid '50s. D's S-1 eventually showed that Medco had recognized over $12.4 billion dollars in co-payments as revenue, $2.838 billion in 1999, $4.036 billion in 2000, and $5.537 billion in 2001. D dropped the IPO. D stock got to $43.57 on July 10. P filed suit claiming that D and Medco committed securities fraud under section 10(b) and that D's officers made material misstatements or omissions in the registration statements in violation of section 11 of the Securities Act of 1933. The District Court dismissed all of these claims on a motion under Federal Rule of Civil Procedure 12(b)(6). This appeal resulted.