Case 1:09-cv-02255-TPG Document 22 Filed 07/31/2009 Page 1 ...securities.stanford.edu/filings-documents/1042/... · September 15, 2008, it was made plain to defendants that Perrigo's

Case 1:09-cv-02255-TPG Document 22 Filed 07/31/2009 Page 1 of 28

UNITED STATES DISTRICT COURTSOUTHERN DISTRICT OF NEW YORK

CLAL FINANCE BATUCHA )INVESTMENT MANAGEMENT, LTD., )) Case No.1:09-CV-02255-TPGTHE PHOENIX INSURANCE )COMPANY, LTD., EXCELLENCENESSUAH MUTUAL FUNDS )MANAGEMENT, LTD. andEXCELLENCE NESSUAH GEMEL & ) AMENDED FEDERAL SECURITIESPENSION, LTD., Individually and on ) CLASS ACTION COMPLAINT

Behalf of All Others Similarly Situated, )

Lead Plaintiffs, DEMAND FOR JURY TRIAL

VS. )

PERRIGO COMPANY, JOSEPH C. )PAPA, JUDY L. BROWN, LAURIEBRLAS, GARY K. KUNKLE, JR., and )BEN-ZION ZILBERFARB )

Defendants.

Lead Plaintiffs, individually and on behalf of all other persons similarly situated, by their

undersigned attorneys, for their Class Action Complaint against defendants, alleges upon

personal knowledge as to themselves and their own acts, and upon information and belief as to

all other matters, based on, inter alia, the investigation conducted by and through their attorneys,

which included, among other things, a review of the defendants' public documents, conference

calls and announcements made by defendants, Securities and Exchange Commission ("SEC")

filings, and press releases published by and regarding Perrigo Company ("Perrigo" or the

"Company"), securities analysts' reports and advisories about the Company, and information

readily obtainable on the Internet.


NATURE OF THE ACTION,

1. This is a securities class action complaint on behalf of all persons who purchased

° or otherwise acquired the common stock of Perrigo between November 6, 2008 and February 2,

2009, inclusive (the "Class Period"), against Perrigo and certain of its officers and/or directors for

violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 ("Exchange Act").

2. Defendants made material misstatements and omissions concerning the auction

rate securities ("ARS") held by Perrigo when, on November 6, 2008, they released Perrigo's

results for the first fiscal 2009 quarter ended September 27, 2008. Defendants knew or

recklessly ignored obvious and pervasive evidence that Perrigo's investments in ARS were

significantly impaired but failed to take adequate charges, which resulted in the Company

reporting inflated income and assets. Defendants also concealed highly material information

concerning the ARS.

3. By November 6, the ARS market had been illiquid for nine months — since the

much publicized freezing of this market in mid-February 2008, when the underwriters of these

securities en masse stopped supporting auctions which provided the liquidity for these securities

and the auction process came to a halt. The issuers of theses securities had no obligation to

redeem these long-term bonds before maturity because an auction failure was not a default event.

After mid-February, certain underwriters of these securities, under pressure from regulators,

provided limited liquidity by redeeming the securities, mostly from retail clients. But after

September 15, 2008, it was made plain to defendants that Perrigo's ARS portfolio had no chance

of being redeemed by an underwriter or there would be no thaw in the near future of the frozen

market for these securities. On that day, Lehman Brothers Holdings, Inc. ("LBH") filed for

bankruptcy ("Bankruptcy") and, four days later, the bankruptcy court ordered the liquidation of

its brokerage arm, Lehman Brothers Inc. ("Lehman"). Lehman was the underwriter/market-

2


maker of the ARS held by Perrigo, and had sold the securities to, and managed and valued them

for, the Company.

4. The Bankruptcy had a cataclysmic affect on the already devastated financial and

credit markets and particularly on the ARS and other securities underwritten, sold, or managed

by Lehman. In September and October 2008, there were numerous reports that purchasers of

ARS from the bankrupt Lehman were "especially vulnerable." On November 6, 2008, the first

day of the Class Period, the press was characterizing the Lehman underwritten ARS as "the most

toxic type of auction-rate securities."

5. In this context, several public companies took significant impairment charges on

ARS holdings with Lehman connections when they reported their quarterly results in early

November 2008.

6. Although the adverse impact on Perrigo's ARS holdings was evident for months,

Perrigo, however, did not take any impairment charges when reporting its quarterly results on

November 6, 2008. Instead, it used a stale fair value estimate by Lehman issued at least six

months before the Bankruptcy. Indeed, the Lehman fair value estimate that Perrigo used was

essentially unchanged from the Lehman estimate (80% of face value) that Perrigo had used in

reporting its results for the quarter ended March 29, 2008.

7. The challenged statements were additionally materially misleading because

during the Class Period (and previously), defendants concealed the critical fact that Lehman had

sold the ARS to Perrigo and had provided the stale fair value estimate that the Company was

using.

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8. Defendants' failure to recognize the significant impairment of Perrigo's ARS

holding, the concealment of the relationship to Lehman, and reliance on Lehman's stale

valuation constitute knowing or reckless deceptive conduct.

9. On February 3, 2009, in releasing the Company's results for the second quarter of

fiscal 2009, defendants finally disclosed that Lehman had sold and valued the ARS and also

announced that the Company was writing off most of the value of its ARS, wiping out over a

third of Perrigo's earnings in the quarter.

10. As a result of this disclosure, Perrigo's stock price plunged 21% that day from

previous day closing price of $28.95 to $22.83, causing massive losses to investors who had

purchased the Company's stock at prices inflated by defendants' challenged misstatements.

JURISDICTION AND VENUE

11. The claims here are asserted pursuant to Sections 10(b) and 20(a) of the Exchange

Act, 15 U.S.C. §§ 78j(b),and 78t(a), and Rules lOb-5 promulgated thereunder by the SEC, 17

C.F.R. §§ 240.1Ob-5 and 17 C.F.R. § 240.14a-1 to14a-9.

12. This Court has jurisdiction over the subject matter of this action pursuant to 28

U.S.C. §§ 1331 and § 27 of the Exchange Act, 15 U.S.C. § 78aa.

13. Venue is proper in this District pursuant to Section 27 of the Exchange Act.

Perrigo conducts substantial business in this District and many of the acts and practices

complained of herein occurred in substantial part in this District.

14. In connection with the acts alleged in this Complaint, defendants directly or

indirectly used the means and instrumentalities of interstate commerce, including, but not limited

to, the United States mails, interstate telephone communications and the facilities of the national

securities markets.

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PARTIES

Lead Plaintiffs

15. Lead Plaintiffs CLAL Finance Batucha Investment Management, Ltd. ("CLAL"),

The Phoenix Insurance Company, Ltd. ("Phoenix"), Excellence Nessuah Mutual Funds

Management, Ltd. and Excellence Nessuah Gemel & Pension, Ltd. ("Excellence") purchased

Perrigo common stock during the Class Period at prices inflated by defendants' material

misrepresentations and omissions, and were damaged when the inflation dropped off the shares

upon disclosure of Perrigo's true state of affairs. Lead Plaintiffs have already filed certifications

with the Court about their transactions in Perrigo securities. Lead Plaintiff Phoenix attaches

herewith an Amended Certification, which does not alter the Class Period transactions it

represented in its initial certification.

The Company Defendant

16. Defendant Perrigo is a global supplier that develops, manufactures and distributes

over-the-counter pharmaceuticals, including pain relievers and cold remedies, generic

prescription drugs, nutritional products, active pharmaceutical ingredients ("API") and consumer

products. Its three segments are Consumer Healthcare, Pharmaceuticals and API. The Company

has two additional operating segments: Israel Consumer Products and Israel Pharmaceutical and

Diagnostic Products. Perrigo is headquartered in Allegan, Michigan. Perrigo's stock actively

trades, and during the Class period actively traded, on NASDAQ.

The Officer Defendants

17. Defendant Joseph C. Papa ("Papa") is, and at all relevant times was, President and

Chief Executive Officer ("CEO") and Chairman of the Board of Perrigo.

18. Defendant Judy L. Brown (`Brown") is, and at all relevant times was, Chief Financial

Officer ("CFO") and Executive Vice President of Perrigo.

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The Audit Committee Defendants

19. Laurie Brlas (`Brlas") has been a director of Perrigo since August 2003 and has

served as Chair of the Company's Audit Committee since October 2004. Since March 2008,

Brlas has served as Executive Vice President and Chief Financial Officer of Cleveland-Cliffs,

Inc., after previously holding the positions of Senior Vice President, Chief Financial Officer and

Treasurer. In her current role at Cleveland-Cliffs, Inc., Brlas responsibilities include finance,

financial reporting, accounting, financial planning, investor relations and treasury functions.

Prior to Cleveland-Cliffs, Inc., Brlas was the Senior Vice President and Chief Financial Officer

of STERIS Corporation from April 2000 through November 2006.

20, Gary K. Kunkle, Jr. ("Kunkle") has been a director of Perrigo since October 2002

and a member of the Company's Audit Committee since the 2008 fiscal year, which began on

July 2, 2007. Kunkle served as the Company's Lead Independent Director from August 2007 to

August 2008. Kunkle was the Chairman and Chief Executive Officer of DENTSPLY

International Inc., from January 2004 through December 2006, and was that company's

President and Chief Operating Officer from January 1997 to December 2003.

21. Ben-Zion Zilberfarb ("Zilberfarb") has been a director and a member of the Audit

Committee of Perrigo since February 2007. Since 1978, he has served as a consultant and

director of private and public companies in the areas of banking, insurance and private capital.

He also has served as a Professor of Economics at Bar-Ilan University and the Edmond de

Rothschild Professor of Global Asset Management at Netanya Academic College since 1988 and

2004, respectively. From 1998 to 1999, he was Director General of Israel's Ministry of Finance.

He is a Board member and Chairman of the Audit Committee for Delek Group and the Israel

6


Discount Bank. He was a member of the Board and Audit Committee of FundTech, Ltd. from

2002 to 2007, and of Partner Communication from 2000 till 2006.

22. Defendants Brlas, Kunkle and Zilberfarb are sometimes referred to as the "AC

Defendants".

23. According to Perrigo's proxy statement dated October 1, 2008:

The Audit Committee monitors our accounting andfinancial reporting principles and policies and our internal controlsand procedures. ... It is also responsible for overseeing the workof our internal audit function. .. .

The Board of Directors has determined that each memberof the Audit Committee (1) meets the independence requirementsof the NASDAQ listing standards. The Board has also determinedthat Laurie Brlas has the requisite attributes of an "audit committeefinancial expert" under the SEC's rules and that such attributeswere acquired through relevant education and work experience.

24. The Officer Defendants and the AC Defendants are collectively referred to herein

as the "Individual Defendants."

BACKGROUND

A. Auction Rate Securities

25. ARS are usually bonds with maturities of 30 years. These bonds were issued by

municipalities, student loan finance authorities and other tax exempt entities, as well as entities

that had bundled mortgage backed securities and other debt obligations. The long term bonds

were effectively turned into short term instruments because the interest rates on the bonds were

reset frequently through Dutch auctions held every 7, 14, 28 or 35 days. At the auctions,

purchasers paid par value for the securities, i.e., $1 for $1 in face value, but bid against one

another for the interest rate they were willing to accept. If there were enough bids to purchase all

the ARS for sale at an auction, then the interest rate was set at the lowest rate among all the bids

that could purchase all the offered ARS. If there were not enough bidders to purchase all the

7


ARS, the auction failed and holders of ARS wanting to sell their ARS in the auction for cash had

to wait until the next auction to do so. Furthermore, in the event of an auction failure, (which is

not a default event) the terms of the ARS provided that the interest rate converted to a specified

rate, usually called the maximum rate. The issuer had to pay the maximum rate, until the next

successful auction, if any, but had no obligation to redeem the securities before maturity.

26. The issuers of ARS selected one or more broker-dealers to underwrite the offering

and manage the subsequent auctions, for which the broker-dealers, such as Lehman, were paid

handsome fees. Investors were only allowed to purchase the ARS through the selected broker-

dealers.

27. The liquidity of the ARS were directly tied to success of the auctions.

28. Brokerage houses provided their clients with fair value estimates for their ARS

holdings. Fair value is defined by Accounting Statement Financial Accounting Standards

("FAS") 157, and is referred to as "mark to market accounting." FAS 157 requires that

companies price certain balance sheet items at their current value, even if they do not intend to

sell them or the market lacks liquidity.

29. Lehman was a major player in the ARS market, underwriting ARS and

remarketing the securities at auctions. Indeed, ARS were "invented by a former Lehman

Brothers investment banker, Ronald Gallatin, in 1984." Beth Healy, $135b Still Frozen By An

Early `08 Debacle, The Boston Globe, Dec. 31, 2008. Lehman also provided valuations of the

ARS to its customers.

30. The attractiveness of ARS began to wane after mid-2007, when the credit crisis

deepened. As the mortgage securitization market was affected by the problems in the mortgage

markets, investors became cautious about investing in securities at risk of any downgrades,

8


including municipal bonds insured by monoline insurers. Investors began to stay away from

ARS auctions. Initially, there were relatively few auction failures because the investment banks

which had underwritten the ARS and managed the auctions supported the auctions by making

purchases for themselves. However, by mid-February 2008, the investment banks, reeling from

massive credit losses and mortgage related writedowns, en masse stopped supporting the

auctions, resulting in wholesale auction failures:

The $330 billion auction-rate securities market collapsed on Feb.13 after every Wall Street firm stopped trading the bonds, sayingdemand for them had dried up. With credit short in numerous debtmarkets, the banks were not willing to prop up the auctions bypurchasing the bonds themselves. That left thousands of investors -individuals, nonprofits, and businesses - trapped, unable to engagein the one basic thing US markets always promise: the orderlytrading of securities.

The Boston Globe, supra; see also, Amir Efrati, The Financial Crisis: U.S. Auction-Rate

Investigation Picks Up Steam -- Prosecutors in Brooklyn and Washington Look at Lehman and

UBS Ex-Executive, The Wall Street Journal ("WSJ") Oct. 2, 2008.

31. Indeed, Lehman had started the chain reaction. On or about January 23, 2008,

Lehman "chose not to place a support bid" in an ARS auction, causing that auction to fail. In re

Oppenheimer & Co., Inc., et al. Docket No. 2008-0080 (Sec. Div. Mass. Nov. 18, 2008).

32. The collapse of auctions resulted in industry wide freezing of client accounts,

including Perrigo's.

33. Under the terms of the securities, the issuers were under no obligation to redeem

the ARS before maturity, but only were required to continue paying interest. With almost no

secondary market and virtually no liquidity, the value of ARS plummeted.

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B. Perriv's Pre-Class Period Disclosures About Its ARS Portfolio

34. After the ARS market froze, Perrigo made its first disclosure of its ARS holdings

in its May 6, 2008 Form 10-Q filing for the third quarter of fiscal 2008, ended March 29, 2008,

acknowledging that it was holding the ARS at 80% of face value based on an estimate provided

"by the firm managing these investments," and that it was changing the classification of the ARS

from current assets to other non-current assets. Lehman was not identified as the manager. This

document was signed by defendants Papa and Brown.

35. More specifically, in this Form 10-Q, Perrigo stated, in relevant part:

The Company maintains a portfolio of auction rate securitiestotaling approximately $18,000[,000] in par value. ... Auctionrate securities have recently failed to settle at auction resulting inan illiquid market for these types of securities. Although theCompany continues to earn interest on these investments at themaximum contractual rate, the estimated fair value of auction ratesecurities can no longer be determined by the auction process untilliquidity is restored to these markets.

At March 29, 2008, the Company continued to record thesesecurities as available-for-sale, at a fair value of approximately$14,600[,000], based on estimates provided by the firm managingthese investments, and recorded an unrealized loss ofapproximately $3,400[,000] in other comprehensive income. TheCompany also reclassified the securities from current assets toother non-current assets due to the unpredictable nature of theilliquidity of the market for the securities.

As of March 29, 2008, the Company concluded that no other-than-temporary impairment loss has occurred. The Company has theability and intent to hold these securities for a period of timesufficient to allow for a recovery of market value. In addition, thecompanies underwriting these securities continue to maintain theirAAA counter party credit rating and pay the maximum interestcontractually required. .. .

36. In its 10-K for the fiscal year ended June 28, 2008, filed with the SEC on August

18, 2008, Perrigo made identical statements about the ARS, except for lowering the fair value by

10


another $100,000 (to $14.4 million from $14.5 million) and deleting any reference to any

specific credit rating of the issuers. This document was signed by all defendants.

37. At the time, purchasers of ARS apparently assumed that underwriters or sellers of

ARS would eventually redeem the securities. The Attorneys General for the State of New York

and Commonwealth of Massachusetts, as well as the SEC and various U.S. Attorneys had

initiated investigations and/or proceedings against numerous underwriters of ARS. These law

enforcement entities alleged, inter-alia, that the banks misled investors about the liquidity of

ARS, often calling them equivalent to money markets or cash. As a result, many brokerage

houses began to redeem the ARS from retail clients. For example, on August 7, 2008, Citigroup

and Merrill Lynch agreed to buy back ARS from certain clients. On August 9, 2008, UBS

Securities LLC and UBS Financial Services did the same.

!'l Tl.,. A -j----- Ir-- - -4 -C 4L .. 71 ..-. 1.....-.4..^. ..^ tiA T1C7 7T-..7.._.x_._._4 — 0-1At... XJAC PiL&V%,I a%,AIIIF"%-L Vl L11G """MI UP Ll .j Vll l\IJ V11UG1 TV l 1LLUU, OVlu,

Managed or Valued by Lehman

38. Any hope by defendants that such redemptions would extend to Perrigo's ARS

holdings disappeared with the September 15, 2008 bankruptcy filing by LBH in the Southern

District of New York (`Bankruptcy"), and the September 19, 2008 order by the bankruptcy court

for Lehman's liquidation. Lehman had sold the ARS to Perrigo, and was the unnamed manager

which had provided the fair value estimates that Perrigo had used.

39. There followed highly publicized and widespread reports about the adverse

impact that the Bankruptcy was having on ARS and other derivatives underwritten, sold,

managed or valued by Lehman.

40. The day after LBH's bankruptcy filing, the press was characterizing investors

who had purchased ARS from Lehman as "[o]ne especially vulnerable set of investors" because

"[o]ther large investment banks have recently announced plans to buy back the securities issued

11


by them, but Lehman hadn't done so, leaving a question mark as to whether investors will get

their money back." Eleanor Laise and Shefali Anand, Weathering Wall Street's Storm, WSJ

Sept. 16, 2008.

41. The situation continued to deteriorate so much that on November 6, 2008, the first

day of the Class Period, the press was characterizing the Lehman underwritten ARS as "the most

toxic type of auction-rate securities" or the "'worst of the worst,"' which one entity was trying to

sell at fire sale prices. Kate Haywood, Toxic Auction-Rate Securities Available At Firesale

Price, Dow Jones Capital Markets Report, Nov. 6, 2008.

42. The Bankruptcy also had a cascading affect in the financial markets and

exponentially deepened the existing credit crisis. On the day of LBH's bankruptcy filing, known

as "Ugly Monday," the Dow Jones Industrial Average fell over 500 points. The same day, Bank

of America announced that it had an agreement to purchase Merrill Lynch at fire sale prices.

The next day, the federal government stepped in with a bail out plan for American International

Group. A week later, Goldman Sachs Group, Inc. and Morgan Stanley disclosed that the federal

government had given them permission to become holding companies. Year In Review, When It

Seemed Things Couldn't Get Worse ..., American Banker, Dec. 5, 2008. Then, "[a]larmed U.S.

officials rushed to unveil a more systemic solution to the crisis, leading to [September 20]

agreement with congressional leaders on a $700 billion financial-markets bailout plan."

Garrick Mollenkemp and Mark Whitehouse, et al., Lehman's Demise Triggered Cash Crunch

Around Globe, Decision to Let Firm Fail Marked a Turning Point in Crisis, WSJ, Sept. 29, 2008.

43. Furthermore, there were reports about wide-ranging investigations of Lehman by

U.S. Attorneys' Offices in Newark, Manhattan and Brooklyn for "its involvement with the

auction rate securities market" as well as other matters. See Lehman Brothers' Demise; Probe

12


Launched In Jersey, New Jersey Lawyer, Oct. 27, 2008; see also The Financial Crisis, WSJ, Oct.

2, 2008, supra; Grant McCool, Lifting the Lid-Wall Street Probes Target Complex Securities,

Reuters News, Oct. 8, 2008.

44. But for a knowing or reckless disregard of the truth, the Bankruptcy and the

resulting developments should have made it evident to defendants that Perrigo's ARS holdings

were significantly impaired and required substantial writedowns. Defendants, however,

knowingly or recklessly failed to cause Perrigo to write down the value of the securities by any

amount. Instead, the Company continued to use the same stale fair value estimate (80% of face

value) that it had first used for the quarter ended March 29, 2008. Incredibly, defendants also

remained completely silent about the Lehman connection, not even bothering to reveal that

Lehman had provided the fair value estimate.

45. In sharp contrast, many other public companies rushed to disclose Lehman/LBH

connections and either reduced fair value estimates and/or recognized permanent impairment

charges against income, as described below. See ¶¶ 52-57.

DEFENDANTS' MATERIALLY FALSE AND MISLEADINGSTATEMENTS ISSUED DURING THE CLASS PERIOD

46. On November 6, 2008, Perrigo issued a press release announcing its results for

the fiscal 2009 first quarter ended September 27, 2009 ("lQ09"), which stated in relevant part:

Perrigo Company today announced results for its fiscal year2009 first quarter that ended September 27, 2008.

Net sales for the first quarter of fiscal 2009 were $480.2million, an increase of 25 percent. Reported net income was $37.9million, or $0.40 per share, compared with $34.0 million, or $0.36per share, a year ago, an increase of 12 percent. Excluding a losson the exchange of property of the Company's UK vitamin

13


business, first quarter fiscal 2009 adjusted net income was $38.6million, or $0.41 per share.

Perrigo Chairman and CEO Joseph C. Papa stated, "Fiscal2009 is off to the strong start we had anticipated. In the firstquarter, we achieved both record sales and record earnings ....

47. On November 6, 2008, Perrigo filed a Form 8-K with the SEC, attaching a copy

of the above press release as an exhibit. Defendant Brown signed the Form 8-K as Executive

Vice President and Chief Financial Officer, as well as the Principal Accounting and Financial

Officer of the Company.

48. Also on November 6, 2008, the Company filed a Form 10-Q with the SEC setting

forth Perrigo's financial results for the 1 Q09, which were essentially the same as those contained in

Perrigo's press release issued the same date.

49. In this 10-Q, the Company used almost the same language concerning its ARS

portfolio as it had used in the pre-Class Period statements detailed above. It was still using a

stale fair value estimate of about 80% of face value provided by an unnamed manager. The 10-Q

stated in relevant part:

[T]he estimated fair value of auction rate securities can no longerbe determined by the auction process until liquidity is restored tothese markets.

At September 27, 2008, the Company continued to recordthese securities as available-for-sale, at a fair value ofapproximately $14,500[,000], based on, among other things,estimates provided by the firm managing these investments, andrecorded an unrealized loss of approximately $2,550[,000], net oftax, in other comprehensive income (loss) in fiscal 2008.Beginning in the third quarter of fiscal 2008, the Companyreclassified the securities from current assets to other non-currentassets due to the unpredictable nature and the illiquidity of themarket for the securities.

14


As of September 27, 2008, the Company concluded that noother-than-temporary impairment loss has occurred.

50. The Form 10-Q was accompanied by certifications signed by defendants Papa and

Brown, affirming that, to their knowledge, the quarterly report did not contain any misleading

statements, and that the "financial statements, and other financial information included in this

report, fairly present in all material respects the financial condition, results of operations and

cash flows of the registrant as of, and for, the periods presented in this report." They also

affirmed that they had abided by their responsibilities "for establishing and maintaining

disclosure controls and procedures ... and internal control over financial reporting" and had

evaluated their effectiveness.

REASONS WHY THE CHALLENGEDSTATEMENTS WERE MATERIALLY MISLEADING

51. The foregoing statements issued during the Class Period were materially false and

misleading because defendants: (a) failed to write-down Perrigo's impaired ARS portfolio by at

least an additional 25% to 33 %, i.e., in the range of many peer companies; (b) reported

materially inflated income and assets for Perrigo; (c) failed to identify Lehman as the manager

responsible for the valuation of the ARS; and (d) failed to reveal that no updates of the

valuations had been sought from an independent third party and that the Company was relying

on stale valuations issued by Lehman.

52. In sharp contrast to Perrigo, numerous other companies holding ARS sold to

them, managed or valued by Lehman, sharply reduced the estimated value of such securities and

took temporary and/or permanent impairment charges, and also disclosed Lehman connections.

53. For example, an October 29, 2008 Bloomberg News article indicated that "Ormat

Industries Ltd., an Israeli maker of geothermal power plants, had written down at least $10.7

million in ARS losses," that the company had "invested in the securities through Lehman

15


Brothers," and noted that "[w]hile other companies that invested in ARS received compensation

from banks that marketed the securities, Ormat has no chance of receiving compensation, since

they purchased them through Lehman." See Alisa Odenheimer, Ormat Suffering Auction Rate

Securities Losses, Calcalist Says, Bloomberg News October 29, 2008.

54. On November 4, 2008, in reporting results for the quarter ended September 30,

2008, Northgate Minerals Corp. ("Northgate") announced a $16.9 million permanent charge on

Lehman related ARS, or 59.5% of pre-tax losses, after having already reduced the fair value of

these securities by $2.4 million in the prior quarter, and by $5.0 million in the quarter ended

March 29, 2008. (Northgate had valued these same securities at $67.4 million at December 31,

2007.) As Northgate explained on November 4, 2008:

As a consequence of the Lehman bankruptcy, theCorporation no longer receives regular valuation reports fromr 1____-__ -..T_.._1_.. r 1_'_1.1 -_ 1 - _1-_ _1,1 _ _ --O _lLC111I1ar1 Or D rclays LwI11CI1 IlaU pUICIlaSCU Lne aSSCLS Ul LUMIldn III

the liquidation proceedings] on the ARS that it holds. In order toestimate the fair value of its ARS holdings at September 30, 2008,the Corporation has retained the services of a professionalvaluation firm in the United States (the "Valuator") with expertisein the valuation of the type of ARS that the Corporation holds in itsportfolio.

The estimated fair value of the Corporation's ARS holdingsat September 30, 2008 was $46,799,000, which reflects a$15,188,000 decline from the June 30, 2008 estimated fair value of$61,987,000 (December 31, 2007 - $69,397,000). In estimating thefair value of its ARS, the Valuator considered several variables,including the probability of future defaults, the potential impact ofrecent events in the global financial markets, the relative seniorityof each ARS within the capital structure of the issuer, the creditcircumstances of financial guarantors, and the value of investmentsand reserves held by the issuers. While the Corporation continuesto earn interest on all its ARS investments, the estimated fair valueof the ARS in Derivative Product Companies (companies involvedin the issuance of credit default swaps) has fallen significantlybelow par value. Accordingly, the Corporation has recognized another than temporary impairment on its investments in thesesecurities of $16,912,000 into earnings for the three and ninemonths ended September 30, 2008. The conclusion for an other

16


than temporary impairment is based on a variety of factors,including the bankruptcy of Lehman Holdings and its affiliates, thevery substantial decline in the estimated fair value of individualinvestments for an extended period of time, recent downgrades incredit ratings for many issuers and adverse market conditions,particularly in the credit markets, which negatively impactedindividual securities.

Form 6-K filed Nov. 5, 2008 for the Period Ending Nov. 4, 2008.

55. Electro Scientific Industries, Inc. (`BSI") held ARS with a principal value of

$19.6 million. On November 6, 2008, in reporting results for the quarter ended September 27,

2008, this company took a $5.4 million permanent charge on these securities or 81.8% of

reported pre-tax losses, after having already taken a $5.1 million permanent impairment charge

in the immediately previous quarter or 113.3% of pretax losses, and a $3.9 million temporary

charge in the quarter ended March 29, 2008.

56. On November 6, 2008, ESI explained:

Near the end of the second quarter of fiscal 2009 [Sept. 27, 2008],Lehman Brothers, the broker who had been providing investmentmanagement, custodial and valuation services for these securities,declared bankruptcy and ceased providing valuation services forthe Company. Consequently, the Company procured anindependent third-party valuation of these securities as of the endof the second quarter. As a result of the continued deterioration inthe credit markets along with further credit downgradesexperienced by insurers of the Company's ARS, the valuations ofthese securities have declined from the values estimated as of theend of the previous quarter. ... [T]he cost bases of these securitieswere written down to their estimated fair values at the end of thesecond quarter with an other-than-temporary impairment charge of$5.4 million recorded in the results of operations for the threemonths ended September 27, 2008.

Form 10-Q filed Nov. 6, 2008 for the Period Ending Sept. 27, 2008.

57. CallWave, Inc ("CallWave") initially held ARS with a value of $12 million. On

November 14, 2008, in reporting its results for the quarter ended September 30, 2008, the

Company took a temporary impairment charge of $3.2 million or 42.7% of the initial value of

17


these securities, after having already taken temporary impairment charges of $2.5 million and

$2.0 million in the previous two quarters. Form 10-Q filed Nov. 14, 2008 for Period Ending

Sept. 30, 2008.

58. On September 26, 2008, in explaining the reductions in the quarter ended June 30,

2008, CallWave had disclosed that it had recently obtained a valuation from an independent third

party, that Lehman had held the company's ARS investments, and that after the declaration of

Bankruptcy, the company had lost its hope that Lehman would reach an agreement with

regulators to redeem those ARS. Form 10-K filed Sept. 26, 2008 for the Period Ending June 30,

2008. On November 14, 2008, in explaining the further temporary impairment charges,

CallWave again referred to the fact that the "auction rate securities were held with a bank that

declared bankruptcy [i.e., Lehman]," and that it had undertaken the new valuation.

THE TRUTH BEGINS TO COME TO LIGHT

59. On February 3, 2009, Perrigo's true state of affairs began to be disclosed. Before

the market opened that day, Perrigo issued a press release about its results for the fiscal 2009

second quarter ended December 27, 2008, which reflected a significant decline in earnings due to

charges related to the ARS. Perrigo also belatedly revealed the Lehman connection. The press

release stated in relevant part:

Reported net income was $25.0 million, or $0.27 per share,compared with $34.3 million, or $0.36 per share, a year ago, adecrease of 27%. Excluding charges as outlined in Table II at theend of this release, second quarter fiscal 2009 adjusted net incomewas $42.7 million, or $0.46 per share.

The Company incurred a charge of $15.1 million, or $0.16per share, related to the write-down of auction rate securitiespurchased in Israel from Lehman Brothers. These assets werewritten down from a face value of $18.0 million and continue to beheld in non-current assets.

(Emphasis added.)

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60. Also on February 3, 2009, the Company filed a Form 10-Q with the SEC setting forth

Perrigo's financial results for the fiscal 2009 second quarter, which document stated in relevant

part:

The Company's investment securities include auction ratesecurities totaling $18,000[,000] in par value....

During the third quarter of fiscal 2008, the Company recorded anunrealized loss of $3,453[,000], net of tax, in other comprehensiveincome (loss). The amount of the write-down was based on, amongother things, estimates provided by Lehman Brothers, the firmmanaging these investments, which subsequently filed forbankruptcy... .

As of December 27, 2008 [ended March 29, 2008], the Companyhired an independent third party valuation firm to estimate the fairvalue of these securities using a discounted cash flow analysis andan assessment of secondary markets. Based on this estimation andother factors, the Company concluded that an other-than-temporaryimpairment loss had occurred. The primary driver of thisconclusion was the magnitude of the calculated impairment and thediminished credit ratings of the companies underwriting thesesecurities. Accordingly, the Company recorded an other-than-temporary impairment loss of $15,104[,000] within other expensein its condensed consolidated statement of income for the secondquarter of fiscal 2009,

61. The Form 10-Q contained certifications by Papa and Brown in the form

substantially similar to that described in ¶ 50.

62. In contrast to this huge $13.5 million write-off constituting 36.3% of reported

earnings for this quarter, or 75% below the face value of the ARS, other companies, which had

taken substantial charges previously, took more modest writedowns now: (a) ESIO — $2.0

million writedown, constituting 6.4% of reported losses; (b) Northgate — $3.4 million

writedown, constituting 7.4% of reported income; and (c) CallWave — $2.5 million writedown

or 20.8% of losses, all of which evidence defendants' knowing or reckless failure to recognize

Perrigo's ARS related losses at the outset of the Class Period.

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63. In a February 3, 2009 conference call that Perrigo top officials had with analysts

concerning the fiscal 2009 second quarter results, defendant Brown identified the ARS writeoff

as the "most material item" affecting those results:

Starting with the most material item this quarter weincurred a charge of $15 million or $0.16 per share related to thewrite-down of auction rate securities purchased in Israel fromLehman Brothers. These assets were written down from a facevalue of $18 million and continue to be held as noncurrent assets.

64. The writedown and disclosure of the Lehman connection substantially contributed to

a drop in Penigo's stock of more than $6 per share on February 3, 2009, a one-day decline of

21.1%. This dramatic drop is in stark contrast to two indices that Perrigo is a member of, which

actually had gains the same day. Specifically, S&P 400 Health Care Index and the Nasdaq

Biotech Index gained 0.5% and 1.8%, respectively on February 3, 2009.

65. As a result, Class members, who had purchased Perrigo stock during the Class

Period, when its price was inflated by defendants materially misleading statements, were

damaged.

66. The media extensively reported on the ARS writedown.

67. For example, as the Dow Jones News Service reported on February 3, 2009, in an

article entitled, Perrigo 2Q Net Dn 27% On Write-Down, Cuts 2009 EPS View:

Perrigo Co.'s (PRGO) fiscal second-quarter net income slid27%, hurt by a $15.1 million write-down of auction-rate securities,as well as the stronger dollar and weakness in its activepharmaceutical ingredients unit, leading the company to cut itsfiscal 2009 outlook. .. .

Its shares were down 12% at $25.60 in recent premarkettrading.

For the period ended Dec. 27, the drug and nutritional-supplement maker posted net income of $25 million, or 27 cents ashare, down from $34.3 million, or 36 cents a share, a year earlier.

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The latest results included a 16-cent a share write-down for theauction rate securities.

68. Similarly, as reported in the Week in Review, Kalamazoo Gazette, Business

(Michigan), February 8, 2009:

Perrigo Co., the Allegan-based maker of over-the counterdrugs and other products that carry the labels of major drug andsupermarket chains, said Tuesday it earned $25 million, or 27 centsper share, in the second quarter. That result was hurt because of a$15.1 million charge from auction-rate securities purchased fromLehman Bros. Setting aside the charge, Perrigo's earnings wouldhave increased 25 percent, company officials said.

LEAD PLAINTIFFS' CLASS ACTION ALLEGATIONS

69. Lead Plaintiffs bring this action as a class action pursuant to Federal Rule of Civil

Procedure 23(a) and (b) (3) on behalf of a Class of all persons or entities who purchased Perrigo

securities between November 6, 2008 and February 2, 2009, inclusive, and who were damaged

thereby. Excluded from the Class are defendants herein, the officers and directors of the

Company, at all relevant times, members of their immediate families and their legal

representatives, heirs, successors or assigns and any entity in which defendants have or had a

controlling interest.

70. The members of the Class are so numerous that joinder of all members is

impracticable. Throughout the Class Period, Perrigo securities were actively traded on

NASDAQ, an open and efficient market. Perrigo has over 92 million shares of stock

outstanding. While the exact number of Class members is unknown to Lead Plaintiffs at this

time and can be ascertained only through appropriate discovery, Lead Plaintiffs believe that there

are thousands of members in the proposed Class. Record owners and other members of the Class

may be identified from records maintained by Perrigo or its transfer agent and may be notified of

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the pendency of this action by mail, using the form of notice similar to that customarily used in

securities class actions.

71. Lead Plaintiffs' claims are typical of the claims of the members of the Class as all

members of the Class are similarly affected by defendants' wrongful conduct in violation of

federal law that is complained of herein.

72. Lead Plaintiffs will fairly and adequately protect the interests of the members of

the Class and have retained counsel competent and experienced in class and securities litigation.

Lead Plaintiffs have no interests antagonistic to or in conflict with those of the Class.

73. Common questions of law and fact exist as to all members of the Class and

predominate over any questions solely affecting individual members of the Class. Among the

questions of law and fact common to the Class are:

• whether the federal securities laws were violated by defendants' actsas alleged herein;

• whether statements made by defendants to the investing public duringthe Class Period misrepresented and/or omitted material facts aboutPerrigo's financial results and ARS investment;

0 whether the Officer Defendants caused Perrigo to issue false andmisleadine financial statements durinja the Class Period;

• whether defendants acted knowingly or recklessly in issuing false andmisleading financial statements;

0 whether the market prices of Perrigo during the Class Period wereartificially inflated because of the defendants' conduct complained ofherein; and

• whether the members of the Class have sustained damages and, if so,what is the proper measure of damages.

74. A class action is superior to all other available methods for the fair and efficient

adjudication of this controversy since joinder of all members is impracticable. Furthermore, as

the damages suffered by individual Class members may be relatively small, the expense and

22


burden of individual litigation make it impossible for members of the Class to individually

redress the wrongs done to them. There will be no difficulty in the management of this action as

a class action.

75. Lead Plaintiffs will rely upon the presumption of reliance established by the

fraud-on-the-market doctrine in that:

• defendants made public misrepresentations or failed to disclosematerial facts during the Class Period;

• the omissions and misrepresentations were material;

• the securities of the Company traded in an efficient market;

• the misrepresentations and omissions alleged would tend to induce areasonable investor to misjudge the value of the Company's securities;and

• Lead Plaintiffs and members of the Class purchased their Perrigosecurities between the time the defendants failed to disclose ormisrepresented material facts and the time the true facts weredisclosed, without knowledge of the omitted or misrepresented facts.

76. Based upon the foregoing, Lead Plaintiffs and the members of the Class are

entitled to a presumption of reliance upon the integrity of the market.

CLAIMS FOR RELIEF

COUNT

(Against Perrigo and the Officer Defendants for Violationsof Section 10(b) And Rule 10b-5 Promulgated Thereunder)

77. Lead Plaintiffs repeat and reallege each and every allegation contained above as if

fully set forth herein.

78. This Count is asserted against defendants Perrigo and the Officer Defendants

(Papa and Brown) for violations of Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and

Rule l Ob-5 promulgated thereunder by the SEC.

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79. During the Class Period, these defendants knowingly or recklessly made untrue

statements of material facts and omitted to state material facts necessary in order to make the

statements made, in light of the circumstances under which they were made, not misleading.

Defendants' knowing or reckless misconduct (i) deceived the investing public, including Lead

Plaintiffs and other Class members, as alleged herein; (ii) artificially inflated and maintained the

market price of Perrigo securities; and (iii) caused Lead Plaintiffs and other members of the

Class to purchase Perrigo securities at artificially inflated prices.

80. The Officer Defendants participated directly in the preparation, drafting, review

and/or issuance of the challenged Form 10-Q for the quarter ended September 27, 2008, dated

November 6, 2008, and the press release issued earlier the same day about the results for that

quarter, which were materially false and misleading for the reasons already detailed. The Officer

Defendants also signed the challenged quarterly report and certified that they had reviewed the

document and that the statements contained therein were accurate to the best of their knowledge.

Papa was also quoted in the challenged press release and portrayed as being intimately familiar

with the reporting of the financial results.

81. During the Class Period, defendants Papa and Brown were the senior officers of

Perrigo and Papa also served as Chairman of its Board. These defendants were responsible for

the accuracy of Perrigo's financial reporting and were privy to confidential and proprietary

information concerning Perrigo's investments, operating condition and financial results.

82. Perrigo and the Officer Defendants knew that the challenged statements were

materially false and misleading at the time of their issuance. In the alternative, these defendants

acted with reckless disregard for the truth in that they ignored pervasive, obvious, and in-your-

face evidence that Perrigo's ARS holding was significantly impaired and also, even after the

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Bankruptcy, they concealed the critical fact that Perrigo was using stale value fair value estimate

of the ARS that had been provided to the Company by Lehman before the Bankruptcy and that

Lehman had sold the ARS to Perrigo.

83. The Officer Defendants are liable both directly and indirectly for the wrongs

complained of herein. Because of their positions of control and authority, and responsibilities

and involvement concerning the reporting of Perrigo's financial results, the Officer Defendants

were able to and did, directly or indirectly, control the content of the challenged statements

herein. As top officers of a publicly-held company, the Officer Defendants had a duty to

disseminate timely, accurate, and truthful information with respect to Perrigo's businesses and

operations and to correct any previously issued statement both under Perrigo's policies and the

securities laws.

84. As a result of the dissemination of the aforementioned false and misleading report

and release, the market price of Perrigo securities was artificially inflated throughout the Class

Period.

85. In ignorance of the adverse facts concerning Perrigo's ARS holdings and its

reported financial results, which were concealed by the defendants listed in this Count, Lead

Plaintiffs and the other members of the Class purchased Perrigo securities at artificially inflated

prices and relied upon the price of the stock, the integrity of the market for the stock and/or upon

statements disseminated by defendants and were damaged thereby.

86. As a direct and proximate result of these defendants' wrongful conduct, Lead

Plaintiffs and the other members of the Class suffered damage when the inflation left the stock

upon disclosure of Perrigo's true state of affairs and the resulting drop in the price of its stock.

25


87. By reason of the conduct alleged herein, Perrigo and the Officer Defendants

knowingly or recklessly have violated Section 10(b) of the Exchange Act and Rule lOb-5

promulgated thereunder.

COUNT II

(Violations of Section 20(a) of theExchange Act Against All Defendants)

88. Lead Plaintiffs repeat and reallege each and every allegation contained in the

foregoing paragraphs as if fully set forth herein.

89. This count is asserted against the defendants for violations of § 20(a) of the

Exchange Act.

90. The Individual Defendants were "controlling persons" of Perrigo within the

meaning of Section 20(a). Throughout the Class Period, the Individual Defendants had the

power and authority and exercised the same to cause Perrigo to engage in the wrongful acts

complained of herein. By virtue of their positions as Chairman, President, CEO, CFO, members

of the Audit Committee, the Individual Defendants were able to, and did, control the contents of

the quarterly report and press release which Perrigo disseminated in the marketplace during the

Class Period concerning Perrigo's investments and financial results. Each of the Individual

Defendants exercised control over the general operations of Perrigo and/or its reporting of

financial results and possessed the power to control the specific activities which comprise the

primary violations about which Lead Plaintiffs and the other members of the Class complain.

91. Perrigo controlled the Individual Defendants and its employees.

92. By virtue of such conduct, the defendants are liable to § 20(a).

PRAYER FOR RELIEF

WHEREFORE, Lead Plaintiffs demand judgment against defendants as follows:

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A. Determining that the instant action may be maintained as a class action under

Rule 23 of the Federal Rules of Civil Procedure, and certifying Lead Plaintiffs as the Class

representatives and the undersigned Co-Lead Counsel as Class Counsel;

B. Requiring defendants to pay damages sustained by Lead Plaintiffs and the Class

by reason of the acts and transactions alleged herein;

C. Awarding Lead Plaintiffs and the other members of the Class prejudgment and

post judgment interest, as well as their reasonable attorneys' fees, expert fees and other costs;

and

D. Awarding such other and further relief as this Court may deem just and proper.

DEMAND FOR TRIAL BY JURY

Pursuant to Rule 38(b) of the Federal Rules of Civil Procedure, Lead Plaintiffs hereby

demand trial by jury of all issues that may be so tried.

Dated: July 31, 2009

POMERANTZ HAUDEK GROSSMAN& GROSS LLP

By: 1W Marc L Gross

Shaheen RushdJeremy A. Lieberman100 Park Avenue, 26th FloorNew York, New York 10017Telephone: (212) 661-1100Facsimile: (212) 661-8665

POMERANTZ HAUDEK GROSSMAN& GROSS LLP

Patrick V. DahlstromTen South LaSalle Street, Suite 3505Chicago, Illinois 60603Telephone: (312) 377-1181Facsimile: (312) 377-1184

27


GLANCY BINKOW &GOLDBERG LLP

Katherine Den Bleyker430 Broadway, Suite 1603New York, New York 10018Telephone: (212) 382-2221Facsimile: (212) 382-3944

GLANCY BINKOW &GOLDBERG LLP

Lionel Z. Glancy1801 Ave. of the Stars, Suite 311Los Angeles, California 90067Telephone: (310) 201-9150Facsimile: (310) 201-9160

Lead Counsel for Lead Plaintiffs

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Documents

Case 1:09-cv-02255-TPG Document 22 Filed 07/31/2009 Page 1 ...securities.stanford.edu/filings-documents/1042/... · September 15, 2008, it was made plain to defendants that Perrigo's