Nature of the Case
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Facts
D develops, manufactures, and markets over-the-counter pharmaceutical products. Its core brand of products is called Zicam. One of these products was Zicam Cold Remedy. In 1999, Dr. Alan Hirsch, neurological director of the Smell & Taste Treatment and Research Foundation, Ltd., called D's customer service line after discovering a possible link between Zicam nasal gel and a loss of smell “in a cluster of his patients.” Dr. Hirsch told D that “previous studies had demonstrated that intranasal application of zinc could be problematic.” He told D at least one of his patients had developed anosmia after using Zicam. The reports of anosmia began to a steady trickle into D. D hired a consultant. The American Rhinologic Society wanted to make a presentation entitled “Zicam Induced Anosmia.” D called and warned the Doctor involved he did not have permission to use D's name or the names of its products. Shortly thereafter, two plaintiffs commenced a product liability lawsuit against D alleging that Zicam had damaged their sense of smell. By February 6, 2004, nine plaintiffs had filed four lawsuits. During this time, Ps alleged that D made a series of public statements that were misleading in light of the foregoing information. D stated that Zicam was “ 'poised for growth in the upcoming cough and cold season' ” and that the company had “ 'very strong momentum.' ” D stated that revenues would “ 'be up in excess of 50% and that earnings, per share for the full year [would] be in the 25 to 30 cent range.' ”In January 2004, D raised its revenue guidance, predicting an increase in revenues of 80 percent and earnings per share in the 33 to 38 cent range. In its Form 10-Q fin November 2003, D warned of the potential “ 'material adverse effect' ” that could result from product liability claims, “ 'whether or not proven to be valid.' ” It stated that product liability actions could materially affect D’s “ 'product branding and goodwill,' ” leading to reduced customer acceptance. D did not disclose, that two plaintiffs had already sued D for allegedly causing them to lose their sense of smell. On January 30, 2004, Dow Jones Newswires spilled the beans. D's stock fell from $13.55 to $11.97 per share. D issued a press release that stated: ...D believes statements alleging that intranasal Zicam products cause anosmia (loss of smell) are completely unfounded and misleading. D included statements about the results of its clinical trials and shoved blame over to the common cold. The day after D issued the press release, its stock price bounced back to $13.40 per share. On February 6, 2004, Good Morning America highlighted actual findings from a Doctor that discovered more than a dozen patients suffering from anosmia after using Zicam. It also noted that four lawsuits had been filed against D. D's stock plummeted to $9.94 per share that same day. Zicam again issued a press release largely repeating its prior release. On February 19, 2004, D filed a Form 8-K. D 'convened a two-day meeting of physicians and scientists to review current information on smell disorders' and in the opinion of the panel, there was insufficient scientific evidence at this time to determine if zinc gluconate, when used as recommended, affects a person's ability to smell. Ps claimed that D violated § 10(b) and 10b-5 by making untrue statements of fact and failing to disclose material facts necessary to make the statements not misleading. D moved to dismiss. The motion was granted. The court held that Ps had not alleged a “statistically significant correlation between the use of Zicam and anosmia so as to make failure to publicly disclose complaints. The Court of Appeals reversed. It held that the District Court had erred in requiring an allegation of statistical significance to establish materiality. The Court of Appeals concluded that “withholding reports of adverse effects of and lawsuits concerning the product responsible for the company's remarkable sales increase is 'an extreme departure from the standards of ordinary care,' ” giving rise to a strong inference of scienter. The Supreme Court granted certiorari.
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