UNITED STATES DISTRICT COURTFOR THE DISTRICT OF NEW JERSEY

IN RE ALPHARMA, INC. •SECURITIES LITIGATION • No. 00-5452

ORDER

Before the Court is Defendants Alpharma, Inc.'s Einar Sissener's, Ingrid Wiik's, Jeffrey

E. Smith's, and Bruce Andrews' motion to dismiss under Rule 12(6)(6) of the Federal Rules of

Civil Procedure Plaintiffs' Consolidated Amended Class Action Complaint pleading violations

of the Exchange Act. For the reasons expressed in the accompanying written opinion,

IT IS cm this j-61(. ' day of P4'-'‘,/ f

, 2002

ORDERED that Defendants' motion to dismiss the Consolidated Amended Class Action

Complaint is GRANTED; and it is further

ORDERED that the Consolidated Amended Class Action Complaint is dismissed WITH

PREJUDICE.

Date JOEL A. PI - I, U.S.D.J.

Original: Clerkcc: All parties

Magistrate ArleoFile

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E MAY 2 2 20P

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NOT FOR PUBLICATION

UNITED STATES DISTRICT COURTFOR THE DISTRICT OF NEW JERSEY

-IN RE ALPHARMA, INC.SECURITIES LITIGATION, : No. 00-cv-5452(JAP)

- OPINION x

APPEARANCES:,...,

William J. Mullis, Esq. . ....,.Kaplan, Kilsheimer & Fox LLP237 South St. FtLED )Morristown, NJ 07962Local Counsel for Plaintiffs

MAY 2 2 2002

David Kessler, Esq. ..AT 6:30 -.)

Stuart Berman, Esq. WilliAM f WALSH

Marc Willner, Esq. CLERK,

Schiffrin & Barroway LLPThree Bala Plaza East, Suite 400Bala Cynwyd, PA 19004Lead Counsel for Plaintiffs

William H. Pratt, Esq.Frank Holozubiec, Esq.Wendy E. Long, Esq.Kirkland & Ellis153 East 53 rd St.New York, NY 10022 and

Anthony J. Marchetta, Esq.John P. Scordo, Esq.Pitney, Hardin, Kipp & Szuch LLPP.O. Box 1945Morristown, NJ 07962Attorneys for Defendants Alpharma, Inc., Einar Sissener, Ingrid Wilk, Jeffrey E. Smith,and Bruce Andrews

PISANO, District Judge:

This case is a securities regulation, class action lawsuit. Shareholders of Defendant

Alpharma Corporation ("Alpharma") who purchased common stock between April 28, 1999 and

October 30, 2000 (the "class period") have filed this action against the corporation and four of its

executives (the "Individual Defendants"). (Consol. Compl. at 1.) The focus of this litigation

concerns allegedly improper sales activities that occurred within the Brazil office of Alphanna's

Animal Health Division ("AH Division"), which is one of five business segments within

Alpharma's human and animal pharmaceutical industries and maintains sales offices in nine

locations worldwide. (Consol. Compl. at 191 26, 41.) Essentially, Plaintiffs allege that Alpharma

and the Individual Defendants either knowingly or recklessly disregarded false sales invoices

generated by employees in the Brazil office, and that their actions and/or omissions ultimately

caused them to make materially false and misleading statements concerning the company's

financial status.

Before the Court is Defendants' motion to dismiss Plaintiffs' Consolidated Amended

Class Action Complaint ("consolidated complaint") under Rule 12(b)(6) of the Federal Rules of

Civil Procedure. On their motion, Defendants argue that Plaintiffs have failed to plead facts that

support alleged violations of sections 10(b) and 20(a) of the Securities Exchange Act of 1934

(the "Exchange Act"). The Court heard oral argument on this motion on February 25, 2002, and

has jurisdiction to consider this matter under 28 U.S.C. § 1331 and 15 U.S.C. § 78aa. For the

reasons set forth below, Defendants' motion to dismiss is granted.

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I. Facts

For the limited purpose of this motion to dismiss under Rule 12(6)(6), the Court, as it

must, accepts as true the facts alleged in the consolidated complaint and all reasonable inferences

drawn from those facts. See Hayes v. Gross, 982 F.2d 104, 106 (3d Cir. 1992); see also infra III.

Rule 12(b)(6) Standard. Accordingly, the facts recited below are taken from Plaintiffs'

consolidated complaint, and do not represent this Court's factual findings.

A. The Parties

Lead Plaintiff Maverick Capital, LTD, a purchaser of Alpharma common stock during the

class period (Consol. Compl. at 22.), brings this action on behalf of a proposed class of persons

who purchased this common stock on the open market between April 28, 1999 and October 30,

2000 (Consol. Compl. at tj 1, 164-65.) Additional Plaintiffs include Burton J. Applebaum,

George W. Butts, Steven Kollander, Robert Lindemann, Emanuel Schmalz, and Michael F.

Vogel, all of whom purchased Alpharma common stock during the class period. (Consol.

Compl. at (i[ 23.) Alpharma, which maintains its American corporate headquarters in Fort Lee,

New Jersey, (Consol. Compl. at 9125) is a multinational, pharmaceutical company that develops,

manufacturers, and markets pharmaceuticals products for use in humans and animals (Consol.

Compl. at 26.) I The AH Division also maintains its headquarters at the same Fort Lee address.

(Consol. Compl. at 125.)

Lead Plaintiff has joined in this action four, "top executives" at Alpharma as defendants.

The Company was originally organized as A.L. Laboratories, a wholly ownedsubsidiary of Apothekernes Laboratorium A.S., a Norwegian healthcare company (now known asA.L. Industrier). In 1994, when the Company acquired the complementary humanpharmaceutical and animal health business of its parent company, it changed its name toAlpharma, Inc., and then operated worldwide as one corporate entity. (Consol. Compl. at (11 26.)

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(the "Individual Defendants") (Consol. Compl. at 9[ I.) Defendant Einar Sissener ("Sissener") is

Chairman of the Board of the Company and a controlling stockholder of A.L. Industrier. (Consol.

Am. Compl. at 9[ 28.) Additionally, Sissener served as Alpharma's Chief Executive Officer

("CEO") from June 1994 to June 1999 and Chairman of the Office of the Chief Executive from

June 1999 to December 1999. Also relevant to this suit, Sissener signed the Company's 1999

Form 10-K annual report filed March 29, 2000 ("1999 10-K"). (Consol. Compl. at9128.)

Defendant Ingrid Wiik ("Wiik") has been Alpharma's president and CEO since January

10, 2000, and a director since February 2000. (Consol. Compl. at 9[ 29.) Before she held these

positions, Wiik was President of the Company's International Pharmaceutical Division ("IPD")

since 1994. (Consol. Compl. at 9129.) She signed the 1999 10-K. (Consol. Compl. at 9[ 29.)

Defendant Jeffrey E. Smith ("Smith") has been Vice-President and Chief Financial

Officer of Alpharma since May 1994. (Consol. Compl. at 9[ 30.) He signed the 1999 10-K and

each of Alpharma's Form 10-Q quarterly reports filed during the class period. (Consol. Compl. at

130.)

Defendant Bruce Andrews ("Andrews") has been President of the AU Division since

May 1997. (Consol. Comp!. at (1 31.)

The consolidated complaint alleges that each of these persons, "by virtue of his or her

executive and managerial positions," "directly participated in the daily management of the

Company, was directly involved in the day-to-day operations of the Company at the highest

level, and was privy to confidential proprietary information concerning the Company and its

business and operations, and revenue recognition policies." (Consol. Compl. at 9[ 33.) It further

alleges that the "Individual Defendants were involved or participated in drafting, producing,

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reviewing, and/or disseminating the false and misleading statements alleged." (Consol. Compl. at

9133.)

B. Procedural History

Initially, various parties filed a total of six class actions against Alpharma and a number

of its officers, directors, and employees. (Defs.' mem. of law at 5.) In those actions, the

plaintiffs alleged, in general, that Alpharma knowingly made false statements regarding its

revenues by incorporating false sales reports from Brazil into corporate financial reports. (Defs.'

mem. of law at 5.) Inflated sales results allegedly induced plaintiffs to purchase shares of

Alpharma common stock during the class period, and thus plaintiffs allegedly suffered damages

once Alpharma disclosed the Brazilian problems and, correspondingly, released financial

restatements. (Defs.' mem. of law at 5.)

By order entered March 27, 2001, Judge Nicholas H. Politan, U.S.D.J., consolidated all

pending actions into the single action that is now before the Court (Defs.' mem. of law at 5),

appointed Maverick Capital, Ltd. as the Lead Plaintiff, appointed lead counsel, and ordered lead

counsel to file a consolidated amended complaint within sixty days. By order entered May 29,

2001, Magistrate Judge Hedges entered an order extending Plaintiffs' time to file their amended

pleading to June 8, 2001.

On June 8, 2001, Lead Plaintiff filed the consolidated complaint that is the subject of the

12(b)(6) motion here.

IL The Nature of the Allegations

A. The Alleged Conduct That Precipitated Financial Restatement

Plaintiffs claim that Alpharma, at all relevant times, had knowledge that a number of AH

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Division employees in the Brazil office abused deficient internal controls by creating false

product sales invoices. Shareholders allegedly suffered damages from this invoice scheme when

the false sales were included in reported financial results for Alpharma. (Consol. Compl. at 91912-

17; Tr. at 48-49.) Plaintiffs further claim that the Individual Defendants knew or disregarded

improper accounting practices so as to enable the Company to diminish significant debt incurred

as a result of recent acquisitions. (Consol. Compl. at TR 5,6, 10.) According to the consolidated

complaint. Alpharma and the Individual Defendants were able to achieve "consensus-beating

results" based on their "fraudulent overstatement of Alpharma's revenue." (Consol. Compl. at 9I

3.) Consequently, Alpharma's alleged improper revenue recognition artificially inflated the share

value during the class period. (Consol. Compl. at 913.) Plaintiffs further allege that the

Individual Defendants, collectively, and other Alpharma insiders, collectively, sold a substantial

number of shares during a four day, consecutive period in August 2000, which is well within the

class period. (Consol. Compl. at 9[4.)

By allowing the Brazilian activities to proceed unchecked, Alpharma, by and through the

Individual Defendants, allegedly violated Generally Accepted Accounting Principles ("GAAP")

and its own publicly stated revenue recognition policy. In particular, Plaintiffs allege that

Alpharma prematurely recorded revenue or, put another way, recorded "pre-sales" from AH

Division transactions as many as six months before products were shipped to customers. (Consol.

Compl. at 916-9.) Plaintiffs characterize the Company's pre-sales as a common practice and

even a "part of the corporate culture" since 1997, when Bruce Andrews was hired as AH

Di vision President. (Consol. Compl. at 917-9.) Plaintiffs claim here that this pre-sales practice

was "an effort to boost the 1AII11Dlivision's results, which had the effect of inflating the

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Company's stock price." (Consol. Compl. at 91 7.) In other words, it was done "to meet or heat

Wall Street expectations and demonstrate that the Company had succeeded in generating an

adequate return on its debt-financed acquisitions. - (Consol. Compl. at (I( 10.) According to the

consolidated complaint, Defendants allegedly "knew or recklessly disregarded" that sales for

which revenue had been recorded pre-shipment would ultimately not materialize and thus "knew

or recklessly disregarded" the potential losses in future quarters (Consol. Compl. at 10) and

"loose sales practices" (Consol. Compl. ati 11). Plaintiffs claim that though former AH

Division employees in Brazil knew of the "loose sales practices" (Consol. Compl. at 9[ 12) and

"informed Defendants of this activity as early as the Fall of 1999," the Company failed to act.

(Consol. Compl. at 12.)

B. Full Disclosure and Financial Restatement

After the trading market closed on October 30, 2000, Alpharma issued a press release

revealing that it had overstated its revenue for 1999, for every quarter within 1999, and for the

first two quarters within 2000, and simultaneously disclosed its restatement (the "Restatement")

of previously reported numbers. (Consol. Compl. at 9113, 16.) Alpharma explained its error. It

indicated that it had recently learned of bogus sales attributable to a small number of employees

in the Brazil office. (Consol. Compl. at II 14.) In so learning, Alpharma had performed a full

investigation, seeking the assistance of counsel and independent auditors before determining that

the matter was isolated to AH Division operations in Brazil. (Consol. Compl. at (11 16.)

According to Plaintiffs, if Alpharma had followed its own policy to recognize revenue

upon product shipment, then "any bogus sales would have immediately come to light when the

product was shipped to the customer and the customer realized that it had not ordered the amount

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of product shipped by Alpharma, or had not ordered the product at all." (Consol. Compl. at (1 15.)

On October 31, 2000, the day after Alpharma's disclosure, the price of Alpharrna common stock

closed at $38.81, a $17.69 decrease from its value one day earlier. (Consol. Compl. at 9[ 17.)

III. Rule 12(b)(6) Standard

Federal Rule of Civil Procedure 12(b)(6) permits a court to dismiss a complaint that fails

"to state a claim upon which relief can be granted." In considering a Rule 12(b)(6) motion, a

court accepts as true all of the factual allegations within the complaint and any reasonable

inferences that may be drawn from them. Hayes v. Gross, 982 F.2d 104, 106 (3d Cir. 1992).

Claims should be dismissed under Rule I 2(b)(6) where "it appears beyond doubt that the plaintiff

can prove no set of facts in support of his claim which would entitle him to relief." Conley v.

Gibson, 355 U.S. 41, 45-46 (1957). Though a court must take as true all facts alleged, it may

not "assume that the [plaintiff] can prove any facts that it has not alleged." Associated Gen.

Contractors of Calif, Inc. v. California State Council of Carpenters, 459 U.S. 519, 526 (1983).

Further, on a 12(b)(6) motion, a court shall properly reject any "conclusory recitations of law"

pled within the complaint. Commonwealth of Pennsylvania v. PepsiCo, Inc., 836 F.2d 173, 179

(3d Cir. 1988); see Morse v. Lower Merion School Dist., 132 F.3d 902, 906 (3d Cir. 1997)

(noting that "a court need not credit a complaint's 'bald assertions' or legal conclusions' when

deciding a motion to dismiss").

Accordingly, a district court reviewing the sufficiency of a complaint has a limited role.

In performing that role, the court determines not "whether the plaintiffs will ultimately prevail,"

but "whether they are entitled to offer evidence to support their claims. Langford v. Atlantic City,

235 P.M 845, 847 (3d Cir. 2000); see also In re Burlington Coat Factory Sec. Litig.

8

("Burlington Coat"), 114 F.3d 1410, 1420 (3d Cir.1997); Syncsort Inc. v. Sequential Software,

Inc., 50 F. Supp. 2d 318, 325 (D.N.J. 1999); In re Mobile media Sec. Litig., 28 F. Supp. 2d 901,

922 (D.N.J. 1998). Generally, the court's task requires it to disregard any material beyond the

pleadings. Burlington Coat, 114 F.3d at 1426; Pension Benefit Guar. Corp. v. White Consol.

Indus., 998 F.2d 1192, 1196 (3d Cir. 1993).

A district court may, however, consider the factual allegations within other documents,

including those described or identified in the complaint and matters of public record, if the

plaintiff's claims are based upon those documents. Burlington Coat, 114 F.3d at 1426; In re

Westinghouse Sec. Litig. ("Westinghouse"), 90 F.3d 696, 707 (3d Cir. 1996); In re Donald Trump

Sec. Litig., 7 F.3d 357, 368 n.9 (3d Cir. 1993); Pension Benefit Guar. Corp., 998 F.2d at 1196.

In other words, the court may review those such documents that are "integral to or explicitly

relied upon in the complaint," Burlington Coat, 114 F.3d at 1426 (citation and quotations

omitted), so as to avoid

[title situation in which a plaintiff is able to maintain a claim of fraudby extracting an isolated statement from a document and placing it in thecomplaint, even though if the statement were examined in the full contextof the document, it would be clear that the statement was not fraudulent.

Id. Yet just because the court elects under these circumstances to examine documents outside of

the complaint does not mean that it need treat the motion as one for summary judgment.

Burlington Coat, 114 F.3d at 1426; Pension Benefit Guar. Corp., 998 F.2d at 1196-97.

IV. The Allegedly False and Misleading Statements and Practices

A. Background'

Again, for purposes of the 12(b)(6) motion, the Court assumes true the facts pled inPlaintiffs' consolidated complaint and all reasonable inferences drawn from those facts. See

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I. Nature of Alpharma's Business

Alpharma is the second largest, medicinal feed additives ("MFA") manufacturer in the

world. (Consol. Compl. at I 37.) Though one consulting firm projected a 2.2% annual industry

decline in the MFA business during 1998 - 2003, Alpharma management, however, anticipated

organic revenue growth of approximately 10 - 12% in MFA revenue, pointing to acquisitions as

its means of achieving such results. (Consol. Compl. at 1138.)

The home of the largest commercial herd of cattle in the world and the second largest

poultry industry, Brazil is a significant, growing market for the AH Division's products. (Consol.

Compl. at 139.) The former controller for the AH Division between 1989 and February 1999

("AH Division Controller") depicted Latin America as a "booming business" and one that was

"growing tremendously." (Consol. Compl. at 9[40.)

The AH Division sells products primarily to commercial animal feed manufacturers and

integrated swine and poultry producers. During the class period, AH Division sales

representatives reported to regional sales managers who, in turn, reported to Randy K. Maclin

("Maclin"), Vice-President, United States Sales and Marketing for the AH Division, and Loren

R. Williams, Vice-President, Latin America Sales and Marketing for the AH Division. (Consol.

Compl. at 142.)

2. Alpharma's Sales Protocol

According to former AH Division sales representatives and managers, when a

Hayes v. Gross, 982 F.2d 104, 106 (3d Cir. 1992); see also infra IV. Rule 12(b)(6) Standard.Accordingly, the substantive allegations recited here are taken from that complaint, and are notthis Court's factual findings.

10

representative made a sale, he contacted Alpharma's Customer Service Department to report the

particulars relating to the sale and, specifically, to identify whether the customer requested pick

up, shipment, or "customer hold." (Consol Compl. at 9[ 43.) The Customer Service Department

entered the sale into Alpharma's Business Planning and Control System ("BPCS") database, an

AS/400 software system, (Consol. Compl. at 43), which generated a sales invoice once

inventory had been allocated (Consul. Compl. at 9[ 44). At all relevant times, all Alpharma

divisions, including the AH Division, used BPCS to track inventory and sales. (Consol. Compl.

at 9145.) Alpharma also maintained shipping records in Excel spreadsheets. (Consol. Compl. at 9I

45.) At month end, warehouse staff conducted a physical inventory by lot number and

forwarded the inventory numbers to corporate headquarters in Fort Lee, New Jersey. (Consol.

Compl. at 1 44.)

The Brazil office of AH Division, however, did not use BPCS to record sales. (Consol.

Compl. atl 46,) Instead, the controller there sent copies of sales reports and financial statements

to New Jersey corporate headquarters, where the AH Division Controller was responsible for

entering sales report information into BPCS. (Consol. Compl. ati 46.)

3. Andrews' Influence as All Division President

Sissener hired Andrews in May 1997 to replace David Cohen ("Cohen"), who resigned as

President of the AH Division in April 1997. (Consol. Compl. at 1 48.) AH Division's Vice-

President of Finance, Michael Weaver ("Weaver"), who reported directly to Andrews, traveled to

Brazil on a monthly basis to review the Brazil office's sales records and conduct physical

inventory audits. (Consol. Compl. at 1 46.) Until 1999, Andrews fired and replaced most of the

AH Division sales managers and representatives with his former colleagues from American

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Cyanimid. (Consol. Compl. at 9150.) Andrews and his new management team altered the AH

Division's sales practices, particularly, sales reporting methods. (Consol. Compl. at 9149.) In

June or July 1997, Andrews allegedly announced to the AH Division staff his intent to raise the

stock price. (Consol. Compl. at 149.)

While Cohen was President, sales representatives estimated their customers' needs and

reported anticipated yearly sales to him. When Andrews became President, however, sales

representatives no longer determined year-end sales quotas and budgets; instead, Andrews

personally set the quarterly and year-end sales quotas. (Consol. Compl. at 9F 51.) Andrews

allegedly set aggressive sales goals, made his employees' bonuses contingent on their ability to

meet those goals, and instructed staff to offer customers special incentives. (Consol. Compl. at n

52, 53.) A number of clients, for example, were permitted to buy but not receive or pay for

product until subsequent quarters. (Consol. Compl. at II 54.) In fact, the All Division commonly

sold products to customers who were neither ready nor willing to receive the products for several

months. (Consol. Compl. at 157.) Indeed, in 1999, Alpharma had so much "customer hold"

product that Alpharma eventually leased additional warehouse space in Des Moines, Iowa to

store its "customer holds." (Consol. Compl. at 158.) Yet even if the product had not been paid

for or shipped, Andrews, unlike Cohen, directed that sales invoices shall immediately issue and

sales shall be simultaneously recorded as accounts receivable on Alpharma's books. (Consol.

Compl. at 1155.)

4. Growing Pressure Roth Within and Beyond the Sales Department of the All Division

Allegedly, the pressure to meet quarterly sales quotas within the AH Division intensified

when the use of bacitracin zinc, a feed antibiotic growth promoter manufactured by Alpharma

and a component of two of its principal animal health products, was banned by the EU and 5

non-EU countries, effective July 1, 1999. (Consol. Compl. at 59.) In light of the ban and the

general depression in livestock markets in 1998 and 1999, especially in Europe, depressed

revenue growth caused medicinal feed additive companies to review and restructure their

businesses. (Consol. Compl. at 9I 60.) The ban partly prompted Alpharma in May 2000 to

acquire Roche's MFA business in May 2000, and thus double its own MFA sales while

bolstering the Company's North American influence. (Consol. Compl. at 9160.) But sales

representatives in regions outside the EU confronted increased pressure to boost their numbers so

as to compensate for the sales volume lost elsewhere. (Consol. Compl. at 9[ 62.) As customer

holds then increased "dramatically," so did premature revenue recognition within the AH

Division. (Consol. Compl. at 9162.)

But, allegedly, premature recognition of revenue was not limited to the AH Division.

The AAH Division's President, Knut Moksnes ("Moksnes"), and the AAH Division's Senior

Controller, Lantz Valderhaug ("Valderhaug"), and his predecessor, Frank Iverson, had requested

employees to post unreceived cash to accounts receivable for products not yet shipped to

customers. (Consol. Compl. at9t 63.) In June 1999, when Moksnes and Valderhaug —wanted

second quarter results to look better, — they asked the AAH Division Controller to recognize cash

not yet received for merchandise not yet shipped. (Consol. Compl. at If 64.) Again, during the

third quarter of 1999, Moksnes asked AAH Division Controller to "do pre-sales." (Consol.

Compl. at 1164.)

5. Loren Williams' Knowledge

Plaintiffs suggest that Loren Williams, the AH Division's Vice-President of Sales and

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Marketing in Latin America from 1999 to October 2000, has knowledge of the "pre-sales" within

the Brazil office. When Williams left Alpharma, he signed a non-disclosure agreement providing

that, absent a subpoena, he may not comment on the Company's sales practices or the specific

reasons for his departure. (Consol. Compl. atl 67.) Plaintiffs identify him as the "fall guy" for

improper sales practices in Brazil that were actually widespread and accepted within the AH

Division under Andrews' control. (Consol. Compl. at 68.)

Against this backdrop, Plaintiffs claim that the following press releases, SEC filings, and

accounting practices were fraudulent and misleading under Exchange Act standards.

B. The Press Releases, SEC filings, and Accounting Practices

1. April 28, 1999 Press Release

In an April 28, 1999 press release, Alpharma issued a press release announcing the

Company's financial results for the first quarter ending March 31, 1999. In comparing the

Company's 1999 first quarter results to its 1998 first quarter results, that press release indicates,

among other things, that (i) revenues for the first quarter of 1999 increased 24% to $156,759,000

from $126,562,000; (ii) net income increased 38% to $7,436,000 from $5,402,000; and (iii)

earnings per share ("EPS") (diluted) grew 29% to $0.27 from $0.21.

Commenting on these first quarter results in a report dated April 30, 1999, Bear. Stearns

& Co. Inc. ("Bear Stearns") analysts noted that Alpharma's announced EPS of $0.27 exceeded

consensus analyst expectations by $0.02. Those analysts further noted that Idlespite a soft farm

economy in the US, [All Division's] international sales are growing especially in Latin America

and Southeast Asia." Based on this statement, Plaintiffs allege that Alpharma and the Individual

Defendants were aware that the market had attributed Alpharma's apparent success to its

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international operations, specifically those in Latin America. (Consol. Compl. at 911 71-72.)

2. May 12, 1999 Form 10-Q

In its Form 10-Q filed with the SEC on May 12, 1999, Alpharma reported its numbers for

the first quarter ending March 31, 1999. That Emu 10-Q, which Smith signed, reported the

same financial results described in the April 28, 1999 press release. The accompanying notes

section of that Form 10-Q provides that: "The accompanying consolidated condensed financial

statements include all adjustments (consisting only of normal recurring accruals) which are, in

the opinion of management, considered necessary for a fair presentation of the results for the

periods presented.

As revealed in Alpharma's October 30, 2000 restatement, the reported results were false.

The restatement makes evident that:

a. Alpharma's reported revenue for the 1999 first quarterof $156,759,000, was overstated by $810,000, as true revenuefor the quarter was $155,949,000.

b. Alpharma's reported net income of $7,436,000, was overstatedby $238,000, as true net income was $7,198,000 for the quarter.

c. Alpharma's reported EPS (diluted) of $0.27 was overstated by$0.01, as restated EPS (diluted) was $0.26 for the quarter.

(Consol. Compl. at In 73-75.)

3. July 28, 1999 Press Release

In a press release dated July 28, 1999, Alpharma announced its financial results for the

second quarter endin g June 30, 1999. In that press release, Alpharma compared its 1999 second

quarter results to its 1998 second quarter results and represented, among other things, that (i)

revenues for the 1999 second quarter increased 17% to $163,839,000 from $139,513,000; (ii) net

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income increased to $7,772,000 from $5,435,000 (excluding one time charges stemming from

the May 1998 acquisition of Cox Pharmaceuticals); and (iii) BPS (diluted) grew to $0.28 from

$0.21 (excluding one time charges stemming from the May 1998 acquisition of Cox

Pharmaceuticals). Commenting on these second quarter results in a report dated July 29, 1999,

Bear Steams analysts noted that Alpharma's announced BPS of $0.28 exceeded for the tenth

consecutive quarter consensus analyst expectations by $0.01.(Consol. Compl. at 9[9[ 76-77.)

Following the July 28, 1999 announcement of Alpharma's 1999 second quarter earnings,

the price of Alpharrna Class A common stock closed at $37.13 on July 30, 1999, up from its

closing price of $33.06 on July 27, 2000. (Consol. Compl. at 9[ 78.)

4. August 9, 1999 Form 10-Q

In its August 9, 1999 Form 10-Q, which Smith signed, Alpharma reported those same

results for the second quarter. Again, the accompanying notes section of this Form 10-Q provides

in pertinent part: "The accompanying consolidated condensed financial statements include all

adjustments (consisting only of normal recuiTing accruals) which are, in the opinion of

management, considered necessary for a fair presentation of the results for the periods

presented."

Plaintiffs allege that the financial results contained in the July 28, 1999 press release and

the 1999 Second Quarter 10-Q were materially false and misleading, as evidenced by the

Company's initial restatement of these results on October 30, 2000 and its formal restatement on

December 4, 2000. Alpharma's reported revenue for the 1999 was overstated by $1,622,000, its

reported net income was overstated by $404,000, as true net income was $7,368,000 for the

quarter, and its reported BPS (diluted) was overstated by $0.02. (Consol. Compl. at 919I 79-81.)

16

Plaintiffs allege that if BPS (diluted) had not been artificially inflated, then Alpharma

would not have beat consensus earnings estimates for the tenth consecutive quarter. In fact,

Alpharma's true results fell short of the consensus earnings estimates of $0.27 per share by

$0.01. (Consol. Compl. 82.)

5. October 25, 1999 Press Release

On October 25, 1999, Alphanna issued a press release announcing its "record" financial

results for the third quarter ended September 30, 1999. (Consol. Compl. at $ 83.) In this press

release, Alpharma compared its 1999 third quarter results to its 1998 third quarter results and

represented, among other things, that (i) revenues for the 1999 third quarter increased 23.6% to

$203,131,000 from $164,337,000, — the first time that the Company's revenue exceeded two

hundred million for a quarter"; and (ii) net income increased 49.2% to $11,263,000 from

$7,551,000; and (iii) BPS (diluted) grew to a "record" $0.38 from $0.28, an increase of 35.7%.

(Consol. Compl. at 83.) Commenting on these results in an October 26, 1999 report, Bear

Stearns analysts noted that Alpharma's announced BPS of $0.38 exceeded for the eleventh

consecutive quarter consensus analyst expectations, this time by $0.02. (Consol. Compl. at $

84.) Following the October 25, 1999 announcement of third quarter earnings, the price of

Alpharma Class A common stock closed at $33.06 on October 27, 1999, up 13% from its close

of $29.13 on October 22, 1999 and October 25, 1999. (Consol. Compl. at J[ 85.)

6. November 2, 1999 Form 10-Q

On November 2, 1999, Alpharma filed, and Smith signed, its Form 10-Q for the third

quarter ending September 30, 1999, reporting the same results described in the October 25, 1999

press release. (Copse'. Compl. at 9186.) The accompanying notes section of that Form 10-Q

17

indicates that "Whe accompanying consolidated condensed financial statements include all

adjustments (consisting only of normal recurring accruals) which are, in the opinion of

management, considered necessary for a fair presentation of the results for the periods

presented." (Consol. Compl. at 1 87.) Plaintiffs allege that this statement and the financial results

reported within the October 25, 1999 press release and the1999 third quarter Form 10-Q were

materially false and misleading based on Alpharma's subsequent restatement of results, which

revealed that reported revenue was overstated by $3,302,000, that reported net income was

overstated by $890,000, and that reported BPS (diluted) was overstated by $0.03. (Consol.

Compl. at 9[88.)

Absent the artificial inflation of BPS (diluted) by $0.03 in the 1999 third quarter,

Plaintiffs allege that Alpharma would not have beat consensus earnings estimates for the eleventh

consecutive quarter. (Consol. Compl. at 91 89.) Alpharma would have, again, fallen short of

consensus earnings estimates of $0.36 per share by $0.01. In addition, without inflating

Alpharnia's revenues by over $3.3 million in the 1999 third quarter, Defendants would not have

been able to boast that the Company had achieved for the first time over $200 million in

quarterly revenue. (Consol. Compl. at1 89.)

7. February 23, 2000 Press Release

In its February 23, 2000 press release, Alpharma announced its"record" financial results

for the full year and fourth quarter ending December 31, 1999. In this press release, Alpharma

compared its 1999 fourth quarter results to its 1998 fourth quarter results and represented, among

other things, that (i) revenues for the 1999 fourth quarter increased 25% to $218.4 million from

$174.2 million; (ii) net income increase d 46% to $13.1 million from $9 million; and (hi) PPS

18

(diluted) grew 28% to a "quarterly record" $0.41 from $0.32. (Consol. Compl. at (fi 90.) Within

the same press release, Alpharma compared its full year 1999 results to its full year 1998 results

and represented, among other things, that (i) revenues increased 23% to $742.2 million from

$604.6 million; (ii) net income increased 45% to $39.6 million from $27.3 million (excluding

one time charges stemming from the May 1998 acquisition of Cox Pharmaceuticals); and (iii)

BPS (diluted) grew 29% to a "record" $1.34 from $1.04 (excluding one time charges stemming

from the May 1998 acquisition of Cox Pharmaceuticals). (Consol. Compl. at In 90-91.)

Commenting on the fourth quarter and full year results, Sissener stated in the February

23, 2000 press release:

Alpharma has now achieved 12 consecutive quarters of growthabove the goals we have set. I am pleased with these exceptionalresults, which I believe reflect the success of the focused growthstrategies we have established and of the efforts of our employeesall around the world. These record results are particularly gratifying

because they were achieved as we continued to make andsuccessfully absorb significant strategic acquisitions that arean integral part of our long-term growth strategy.

(Consol. Compl. atl 92.) Also commenting, Wiik stated, "Clearly, Alpharma's established

strategies for growth are working. By continuing to execute, we look for this profitable growth to

continue in 2000 and beyond." (Consol. Compl. at 92.) Reviewing these announced fourth

quarter and full year results in a February 24, 2000 report, Bear Stearns analysts noted that

Alpharma's announced BPS of $0.41 for the fourth quarter exceeded consensus expectations for

the twelfth consecutive quarter by $0.01. (Consol. Compl. at9 93.)

8. March 29, 2000 Form 10-K

In its March 29, 2000 Form 10-K for the fourth quarter and year ending December 31,

19

1999, which Sissener, Wiik, and Smith signed, Alpharma reported the same financial results

described in the February 23, 2000 press release. (Consol. Compl. at 1(fl 94-95.) These results

were allegedly false and misleading based on Alpharma's October 30, 2000 initial restatement of

these results and its November 15, 2000 formal restatement, which revealed reported revenue for

the 1999 fourth quarter was overstated by $3,999,000, reported fourth quarter net income was

overstated by $1,047,000, reported EPS (diluted) was overstated by $0.03, reported full year

1999 revenue was overstated by $9,733,000, reported full year 1999 net income was overstated

by $2,579,000, and reported full year 1999 EPS (diluted) was overstated by $0.09. (Consol.

Compl. at IT 95.) Plaintiffs thus claim that, without the artificial inflation of BPS (diluted) by

$0.03 in the 1999 fourth quarter, Alpharma would not have beat consensus earnings estimates for

the twelfth consecutive quarter. (Consol. Compl. at 1 96.) Plaintiffs contend that the statements

regarding All Division's 1999 revenue and operating income were materially false and

misleading when made, pointing out that the AH Division had 1999 revenue of only $159.5

million, $9.7 million less than originally reported and $6.8 million less than 1998 revenue, and

had operating income of approximately $38.1 million, $4.2 million less than originally reported

and only $0.3 million over 1998 operating income. (Consol. Compl. at II 97-98.)

In Alpharma's 1999 10-KJA, filed before the Restatement, Defendants also represented

that AH Division's Brazil operations reported revenues of approximately $1.8 million, $6.0

million, and $13.7 million for the years 1997, 1998, and 1999, respectively. (Consol. Compl. at1

99.) These numbers were incorrect. (Consol. Compl. at 1 99.) In the 1999 10-K, in the section

entitled "Summary of Significant Accounting Policies," Alpharma represented that "revenue is

recognized upon shipment of products to customers." The same revenue recognition policy

20

appeared in Alpharma's1998 Form 10-K. (Consol. Compl. at 91100.) Plaintiffs allege that this

statement regarding Alpharma' s revenue recognition policy was false and misleading.

According to Plaintiffs, during the Class Period, the Individual Defendants caused Alpharrna to

recognize revenue for products months in advance of their shipment to customers. Alpharma

booked revenue for products placed on "customer hold" in Alpharma' s warehouses or in their

leased warehouses. (Consol. Compl. at 91 101.)

9. April 26, 2000 Press Release

In an April 26, 2000 press release, Alpharma announced its "record" financial results for

the first quarter ending March 31, 2000. (Consol. Compl. at 102.) In this press release,

Defendants compared the Company's 2000 first quarter results to its 1999 first quarter results

and represented, among other things, that (i) revenues for the 2000 first quarter increased 20% to

$188.3 million from $156.8 million, "attributable to organic sales growth and several 1999

acquisitions"; (ii) net income increased 50% to $11.1 million from $7.4 million; and (iii) BPS

(diluted) grew to $0.35 from $0.27. (Consol. Compl. at I 102.) Commenting on these results,

Wiik stated, "These record first quarter results reflect the continued successful implementation of

our growth strategies to build the global Alpharma enterprise. We are experiencing strong top

line growth due to both new product introductions and complimentary acquisitions.. . . we

expect continued strong revenue growth throughout 2000. Analysts from Warburg Dillon Read

noted that Alpharma's announced BPS of $0.35 exceeded for the thirteenth consecutive quarter

consensus analyst expectations by $0.02. (Consol. Compl. at (11104.)

Following the announcement of 2000 first quarter earnings, the price of Alpharma Class

A common stock closed at $41,19 on May 1, 2000, up 9% from its close of $37,88 on April 25,

21

2000. (Consol. Compl. at (11 105.)

10. May 8, 2000 Form 10-Q

In its May 8, 2000 Form 10-Q for the first quarter ending March 31, 2000, which

Defendant Smith signed, (Consol. Compl. at 106), Alpharma reported the same financial results

described in the April 26, 2000 press release. The accompanying notes section of the 2000 First

Quarter 10-Q reveal: "The accompanying consolidated condensed financial statements include all

adjustments (consisting only of normal recurring accruals) which are, in the opinion of

management, considered necessary for a fair presentation of the results for the periods

presented." (Consol. Compl. at 11107.) Plaintiffs allege that this statement and the reported

results were materially false and misleading based on Alpharma's November 15, 2000

restatement of these results. (Consol. Compl. at 91108.) As revealed by the Restatement,

Alpharma's reported revenue for the 2000 first quarter was overstated by $2,202,000,

Alpharma's reported net income was overstated by $749,000, and its reported EPS (diluted) was

overstated by $0.02. (Consol. Compl. at 9[108.) Without the artificial inflation of EPS (diluted)

by $0.02 in the 2000 first quarter, Alpharma would not have been able to beat for the thirteenth

consecutive quarter consensus earnings estimates. (Consol. Compl. at 91109.)

11. July 31, 2000 Press Release

In a July 31, 2000 press release announcing Alpharma's financial results for the second

quarter ending June 30, 2000, Alpharma compared its 2000 second quarter results with its 1999

second quarter results. (Consol. Compl. at11110.) In doing so, it represented that (i) revenues

for the 2000 second quarter increased 34% to $219.5 million from $163.8 million, "substantially

aided by the effect of several acquisitions including the Roche iVIFA acquisition"; (ii) net income,

22

excluding the one-time charges associated with the Roche MFA acquisition, grew 53% to $11.9

million from $7.8 million; and (iii) BPS (diluted) rose 21% to $0.34 (or $0.24, including the

Roche MFA acquisition charges) from $0.28. (Consol. Compl. at (1 110.)

Following the July 31, 2000 announcement of 2000 second quarter earnings, the price of

Alpharma Class A common stock closed at its Class Period high of $71.94 on August 1, 2000, up

closing price of $ 65.50 on July 31, 2000. (Consol. Comp!. at 111.) At this point, three of the

four Individual Defendants sold collectively almost 83,000 shares, which generated earnings of

approximately $3.7 million. Other Alpharma insiders also then sold collectively approximately

147,000 shares for proceeds in excess of $6 million. (Consol. Compl. at cf 111.)

12. The Restatement Announcement

After the market closed on October 30, 2000, Alpharma announced that its previously

issued financial statements for 1999, every quarter during 1999, and the first two quarters of

2000, were false when issued, and financials would be restated. (Consol. Compl. at 112.)

Aside from the second quarter of 2000, Alpharma had overstated its revenue, net income, and

EPS for all quarters. (Consol. Compl. atl 112.) In linking its overstatements to a small number

of employees in Brazil, Alpharma indicated that these employees "'collaborated to circumvent

established company policies and controls to create [sales] invoices that were either not

supported by underlying transactions or for which the recorded sales were inconsistent with the

underlying transactions. — (Consol. Compl. at$112.) Alpharma released restated financial results

for all six quarters. (Consol. Compl. at9 113.)

Commenting on the announcements in the October 30, 2000 press release, Wiik stated:

23

We are extremely disappointed by the actions of these employeeswho breached our established policies and controls and who violatedthe trust we placed in them. We have removed the individuals involvedand appointed new management to run our Animal Health operations inBrazil. While we do not consider the net financial impact of this mattermaterial to the period affected. we will restate our financial results because itis the right thing to do.

(Consol. Compl. at (11 114.) The Company, again, disclosed the incorrect financial reporting in its

1999 10-K/A filed November 15, 2000. (Consol. Compl. at 91 121.)

Plaintiffs claim that Defendants learned of the "purported rogue activity long before they

disclosed the Restatement to the investing public on October 30, 2000" and that their own

accounting expert can substantiate this claim. (Consol. Compl. at 119-120.) They further

claim that, based upon facts discovered from Dr. Paulo Andreoli, a technical sales manager at

Alpharma's Brazil Office, during 1999 and 2000, "Defendants had information regarding

improper sales activity taking place at the AH Division's office in Brazil as early as the Fall of

1999. - (Consol. Compl. atl 122, 9111122-24.) Plaintiffs claim that under Item 303 of Regulation

S-K, promulgated by the SEC under the Exchange Act, a duty to disclose exists in periodic

reports filed with the SEC "known trends or any known demands, commitments, events or

uncertainties" that are reasonably likely to have a material impact on a company's sales revenues,

income or liquidity, or cause previously reported financial information not to be indicative of

future operating results. 17 C.F.R. § 229.303(a)(1)-3(3) and Instruction 3. (Consol. Compl. at eg

126.)

On October 31, 2000, 11,694,400 shares of Alpharma common stock were traded.

(Consol. Comp. at 91 118.) The price of Alpharrna common stock closed at $38.81 on October

24

31, 2000, down $17.69 from its closing price of $56.50 on October 30, 2000. (Consol. Compl. at

118.)

C. Additional Scienter Allegations

After pleading their claims for 137 paragraphs, Plaintiffs make "Additional Scienter

Allegations" in paragraphs 138 through 147 of the consolidated complaint. Overall, these

allegations add nothing new. (Consol. Compl. at 138-47.) Plaintiffs assert, again, that

Alpharma and the Individual Defendants acted with scienter, parroting the legal standard by

alleging that each had "actual knowledge of the misrepresentations and omissions of material

facts set forth herein, or acted with reckless disregard for the truth in that they failed to ascertain

and to disclose such facts, even though such facts were available to them." (Consol. Compl. at 91

138.) They further claim that each of the Individual Defendants is -responsible for the accuracy

of the Company — group-published — statements." (Consol. Compl. at (I[ 139.) Plaintiffs contend

that Defendants "had a strong motive to artificially boost Alpharma's earnings . . . to create the

illusion that Alpharma was beating the published expectations of Wall Street analysts during the

Class Period," (Consol. Compl. atl 142) and that their "accounting improprieties," among other

wrongs committed, establish a "strong inference" of scienter (Consol. Compl. at (IE 147).

V. Section 10(b) Claim

Count I of the consolidated complaint alleges violations of Section 10(b) and Rule 10b-5.

(Consol. Compl. at 175-85.) Section 10(b) and Rule lOb-5 apply to "false or misleading

statements or omissions of material fact that affect trading on the secondary market." Burlington

Coat, 114 F.3d 1410, 1417 (3d Cir. 1997); see In re Campbell Soup Co. Sec. Litig., 145 F. Supp.

2d 574, 583 (D.N.J. 2001) ("Campbell Soup") (quoting Burlington for same proposition).

25

Section 10(b) bans the "use or employ[ment], in connection with the purchase or sale of any

security, ... [of] any manipulative or deceptive device or contrivance in contravention of such

rules and regulations as the Commission may prescribe." 15 U.S.C. § 78j(b). Applicable to

section 10(b), Rule 10b-5 makes it illegal "No 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 ... in connection with the purchase or

sale of any security." 17 C.F.R. § 240.10b-5(b); see Campbell Soup, 145 F. Supp. 2d at 583.

A plaintiff must plead five elements to demonstrate a claim under Section 10(b) and Rule

10b-5: (1) defendant made a representation or omission of material fact; (2) scienter motivated

defendant's representation or omission; (3) defendant made that representation or omission in

the context of a securities purchase or sale; (4) plaintiff relied on defendant's representation or

omission; and (5) plaintiffs reliance proximately caused damages. E.g., EP MedSystems, Inc. V.

EchoCath, Inc., 235 F.3d 865, 871 (3d Cir. 2000) (citing Weiner v. Quaker Oats Co., 129 F.3d

310, 315 (3d Cir.1997)); In re Advanta Corp. Sec. Litig. ("Advanta"), 180 F.3d 525, 537 (3d Cir.

1999) (citing Westinghouse, 90 F.3d 696, 710 (3d Cir. 1996)).

VI. Pleading Requirements - Rule 9(b) and the Private Securities Litigation Reform Act(the "Reform Act")

A. Rule 9(b)

Since Section 10(b) and Rule 10b-5 claims assert "fraud," a plaintiff alleging "false or

misleading statements or omissions of material fact" must meet the heightened pleading

requirements of both Rule 9(b) of the Federal Rules of Civil Procedure and the Private Securities

Liti gation Reform Act of 1995 ("PSLRA"). 15 U.S.C. § 78u-4 et seq.; Oran V. Stafford, 226

26

F.3d 275, 288 (3d Cir. 2000); Advanta, 180 F.3d at 530; Campbell Soup, 145 F. Supp. 2d at 584

(citations omitted). An exacting standard, Rule 9(b) prescribes that "Mn all averments of fraud

or mistake, the circumstances constituting the fraud or mistake shall be stated with particularity."

Fed. R. Civ. P. 9(b). This heightened pleading requirement gives "defendants notice of the claims

against them, provides an increased measure of protection for their reputations, and reduces the

number of frivolous suits brought solely to extract settlements." Burlington Coat, 114 F.3d at

1418; see Campbell Soup, 145 F. Supp. 2d at 584 (quoting Burlington Coat for this proposition).

So as to prevent defrauding parties from concealing fraudulent behavior, however, the

ordinarily strict particularity standard is less rigorous 'where the factual information is peculiarly

within the defendant's knowledge or control.' Campbell Soup, 145 F. Supp. 2d at 584

(quotations and citations omitted). Still, even when relaxed, the Rule 9(b) standard does not

tolerate mere boilerplate and conclusory allegations. A plaintiff must offer factual allegations

that plausibly support the asserted legal theories within the complaint. Id. (quoting Burlington

Coat, 114 F.3d at 1418 (citations omitted and italics omitted).

B. Private Securities Litigation Reform Act

Reacting to conflict among the circuits concerning the appropriate pleading standard and

to "an increasing number of frivolous 'strike suits' aimed at achieving quick settlements,"

Congress enacted the Reform Act in 1995 to add to the Rule 9(b) standard a "uniform and

stringent pleading requirement.' Campbell Soup, 145 F. Supp. 2d at 584-85 (quoting S.Rep. No.

104-98, at 15 (1995), reprinted in 1995 U.S.C.C.A.N. 679, 694). Under that Act, a complaint

alleging Section 10(b) violations is insufficient unless it — specif[ies] each statement alleged to

have been misleadin g , the reason or reasons why the statement is misleading and, if an allegation

27

regarding the statement or omission is made on information and belief, . . state[s] with

particularity all facts on which that belief is formed. — Campbell Soup, 145 F. Supp. 2d at 585

(quoting 15 U.S.C. § 78u-4(b)(1)); see Advanta, 180 F.3d at 530 (reciting this same standard).

Thus, a court must examine carefully all fraud allegations in the complaint, reviewing each

allegation separately. Westinghouse, 90 F.3d at 712; Campbell Soup, 145 F. Supp. 2d at 585

(citing Westinghouse for this proposition).

C. Scienter

On their motion to dismiss, Defendants argue that Plaintiffs have failed to plead scienter

under the PSLRA with respect to the Brazilian false invoice scheme (Defs.' mem. of law at 9-

17), that, alternatively, any misstatements relating to the Brazilian false invoicing are immaterial

as a matter of law (Defs.' mcm. of law at 18-20), and that, alternatively again, Alpharma violated

no legal duty in announcing its financial restatement when it did (Defs. mem. of law at 20-21.)3

Plaintiffs oppose these arguments, contending that they have properly plead scienter (Pl. mem. in

opp. at 22-25), that the consolidated complaint pleads facts raising a strong inference that

Defendants acted consciously or recklessly (Pl. mem. in opp. at 25-32), and that their pleading

raises facts demonstrating a strong inference that the Defendants had the motive and opportunity

to commit fraud (Pl. mem. in opp. at 33-38).

3 Additionally, Defendants assert in their moving brief a number of reasons why theCourt should dismiss Plaintiffs' 10b-5 claim regarding Alpharma's allegedly improper revenuerecognition. As Plaintiffs clarified at oral argument, however, the case does not "stand on itsown" if the Court rejects all claims involving the Brazilian false invoicing. (T. at 48-49.)Plaintiffs concede that the entire case must be dismissed if the Court finds that the claims relatedto the Brazilian invoicing problem are insufficient under securities laws. (T. at 48-49.) Thus, theCourt determines here only whether Plaintiffs' allegations related to the invoicing schemesurvive for purposes of Defendants' 12(b)(6) motion.

28

The Court agrees with Defendants that Plaintiffs have failed to meet their burden to

prove scienter. Section 10(b) allegations must meet the strict pleading requirements of Rule 9(b).

Advanta, 180 F.3d at 532. The requisite "strong inference" of fraud "may be established either

(a) by alleging facts to show that the defendant had both motive and opportunity to commit fraud,

or (b) by alleging facts that constitute strong circumstantial evidence of conscious misbehavior or

recklessness." Id. at 534. Supplementing Rule 9(b), the Reform Act requires a plaintiff, "with

respect to each act or omission alleged to violate this chapter, state with particularity facts giving

rise to a strong inference that. . . [each] defendant acted with the required state of mind." 15

U.S.C. § 78u-4(b)(2) (emphasis added). This requirement is not, to put it mildly, lightly regarded

in securities fraud cases. Oran, 226 F.3d at 288.

I. Motive and Opportunity

Though the consolidated complaint is lengthy and detailed, it fails nevertheless to

suggest that Alpharma and/or the Individual Defendants acted with scienter in connection with

the Brazil invoice scheme. Put another way, the consolidated complaint does not link

Alpharma's executives or any of the named Individual Defendants to the Brazil incidents.

Insufficiently, Plaintiffs rely on the Individual Defendants' corporate positions and nothing more

in an effort to tie them to their allegations. Paragraph 123 of the consolidated complaint, for

example, alleges in pertinent part that Alpharma's New Jersey headquarters was on notice of the

Brazil problem: "After repeated e-mails by [technical sales manager, Dr. Paulo] Andreoli to

Navarro, of which Andreoli has retained copies, Navarro told Andreoli, in approximately

November 1999, that all of the information provided by Andreoli regarding the fabrication of

sales taking place at Alpharma do Brasil had been forwarded to Alpharma's New Jersey

29

headquarters where it was reviewed or available for review by all Defendants, and in particular,

lDlefendant Andrews, president of the AH Division." (Consul. Compl. at 123.) Even if the

Court assumes that this information was available for review, it would be taking a significant

leap in concluding that any of the named Individual Defendants or any other high-ranking

employee responsible for reviewing financial statements relevant to Brazil operations perpetuated

the Brazil invoicing scheme or the misstatements resulting from that problem.

Reviewing similarly tenuous allegations, Advanta rejected the complaint there as

defective under the Reform Act's requirements for pleading scienter. Advanta, 180 F.3d at 539.

The plaintiffs, shareholders of Advanta Corporation, endeavored to plead scienter against the

company and a number of its officers by alleging that the Defendants acted "knowingly" and

must have been aware of the company's impending losses by virtue of their positions as

corporate officers. Id. (citing pls. am. compl. In 22, 42, 51, 19, 22, 23) The Advanta Court

observed that the law is "well established that a pleading of scienter 'may not rest on a bare

inference that a defendant must have had knowledge of the facts. — Id. at 539 (citations omitted).

Without hesitation, Advanta discarded plaintiffs' theories that the corporate officers must have

had specific knowledge based on their executive positions: "allegations that a securities-fraud

defendant, because of his position within the company, 'must have known' a statement was false

or misleading are 'precisely the types of inferences which courts, on numerous occasions, have

determined to be inadequate to withstand Rule 9(b) scrutiny. — Id. at 539 (quoting Maldonado v.

Dominguez, 137 F.3d 1, 10 (I' Cir. 1998)). Irrespective of a defendant's corporate position,

Igleneralized imputations of knowledge do not suffice." Id. at 539 (citing Rosenbloom v.

Adams, Scott & Conway, Inc., 552 F.2d 1336, 1338-39 (9` 11 Cir. 1977)); see Rosenbloom, 552

30

F.2d at 1338-39 ("A director, officer, or even the president of a corporation often has superior

knowledge and information, but neither the knowledge nor the information necessarily attaches

to those positions.")

Like the allegations at issue in Advanta, the allegations in the consolidated complaint

baldly impute knowledge of the Brazil invoicing scheme to Alpharma and the Individual

Defendants. Fatally, Plaintiffs make conclusory assertions that Alpharma and the Individual had

"actual knowledge" or acted with "reckless disregard" of the scheme and its ramifications,

(Consol. Compl. at 91 138, 141, 177, 180) and that the Individual Defendants, "because of their

positions with Alpharma," must have known of the Brazil problem. (Consol. Compl. at 991 139,

140). Since these allegations do not support an inference that Alpharma and/or the Individual

Defendants possessed the requisite scienter, they cannot survive a Reform Act inquiry.

Specifically, the allegations made in paragraph 123 amount to an unsuccessful attempt to

attribute scienter to the Individual Defendants. No other allegation within the consolidated

complaint, particularly those pled as "Additional Scienter Allegations," establishes that requisite

link between the Company and/or its Individual Defendants and a showing of scienter.

Moreover, though Plaintiffs specifically allege that Alpharma executive Loren Williams

(Consol. Compl. at TE 67-68, 122-23) knew of the Brazil invoice incidents, Williams is not a

defendant in this case. Cf In re Campbell Soup., 145 F. Supp. 2d at 598-99 (denying motion to

dismiss and finding that plaintiffs adequately pled scienter where two corporate executives were

named as defendants in the case and were the subject of specific allegations regarding their

knowledge of improper sales and shipping practices.) The consolidated complaint does not

allege that Williams is responsible for any of the conduct in Brazil or for the misstatements that

31

resulted from that conduct. That complaint also never alleges that Williams informed the named

Individual Defendants or any other key employee of the Brazil problem. The allegations

involving Williams, therefore, do not aid the Plaintiffs' efforts to plead scienter. In short,

Plaintiffs fail to plead in the consolidated complaint that Alpharma and/or the Individual

Defendants acted with either motive or opportunity.

Furthermore, the consolidated complaint alleges that three of the Individual Defendants

sold large quantities of their Alpharma stock before the Restatement issued. On July 31, 2000,

Wiik, Smith, and Andrews, collectively, sold during a four day, consecutive period in August

2000, well within the class period, almost 83,000 shares of Alpharma common stock, which

generated earnings of approximately $3.7 million. Other Alpharma insiders, also collectively,

sold approximately 147,000 shares for proceeds in excess of $6 million. (Consol. Compl. at T1[ 4,

111, 149, 152.)

The consolidated complaint sets forth the dates. numbers of shares, and sale proceeds.

Plaintiffs allege that these transactions suggest that the Individual Defendants knew that income

and revenue had been falsely reported due to the Brazil scheme, that the share price had been

thus artificially inflated, and that they had a scheme to sell and profit before the Company issued

its Restatement correcting its previous financial misstatements. The Court disagrees.

The Third Circuit has held that — [w]e will not infer fraudulent intent from the mere fact

that some officers sold stock. — Advanta, 180 F.3d at 540 (quoting Burlington Coat Factory, 114

F.3d at 1424 (citations omitted). "But if the stock sales were unusual in scope or timing, they

may support an inference of scienter." Id. (citations omitted). Stock sales are not unusual in

either scope or timing if, for example, some but not all defendants sold stock, a defendant traded

an insignificant number of shares, or no allegations suggest whether defendants' trades were

'normal and routine' for the defendants or whether their "trading profits were substantial in

comparison to their overall compensation." Id. (citing Burlington Coat Factory, 114 F.3d at

1423).

Significantly, Plaintiffs have failed to allege that Sissener, Alpharma's Chairman of the

Board and the single largest shareholder, sold any stock during the entire class period (T. 16),

thus undermining its own theory that stock sales were motivated by insiders' desire to profit from

artificially inflated stock prices before the Restatement was issued. See Advanta, 180 F.3d at 540

(finding that significant stock sales by four corporate individuals three months before a $20

million loss was publicly announced were not unusual partly because three of the individuals did

not sell any stock during the class period.) (citation omitted). If Plaintiffs' theory were true, then

Sissener would logically reap the largest reward from any alleged insider scheme to profit from

the sales. Additionally, the consolidated complaint is deficient in pleading what the previous

trading practices of Wiik, Smith, or Andrews are. Thus, no allegations even hint that their trades

were inconsistent with their past practices. The consolidated complaint further lacks any facts

regarding how much stock these three individuals received as part of their compensation.

Commonly now, — a large number of today's corporate executives are compensated in terms of

stock and stock options. It follows then that these individuals will trade those securities in the

normal course of events. — Advanta, 180 F.3d at 541 (quoting Burlington Coat Factory, 114 F.3d

at 1424 (citation omitted)). Thus, the Court holds that the allegations concerning Defendants's

stock transactions do not allow the strong inference of scienter required under the Reform Act.

33

2. Recklessness

Even under a recklessness theory, Plaintiffs do not demonstrate scienter. See Advanta,

180 F.3d at 535 (reiterating that recklessness is a sufficient basis for finding scienter under the

PSLRA) (citing Burlington Coat Factory, 114 F.3d at 1418.) A reckless statement, as defined

for purposes of scienter in the context of Section 10(b) and Rulel0b-5, is one 'involving not

merely simple, or even inexcusable negligence, but an extreme departure from the standards of

ordinary care, and which presents a danger of misleading buyers or sellers that is either known to

the defendant or is so obvious that the actor must have been aware of it. — Advanta, 180 F.3d at

539 (quoting McLean v. Alexander, 599 F.2d 1190, (3d Cir. 1979), quoting Sundstrand Corp. v.

Sun Chem. Corp., 553 F.2d 1033, 1045 (7 `1 Cir. 1977)). Plaintiffs' allegations, even if true, do

not establish that Alpharma and/or the Individual Defendants took an "extreme departure" from

the standards of ordinary care. At most, the consolidated complaint demonstrates -inexcusable

negligence" in the Company's failure to more thoroughly and carefully monitor its employees'

conduct, particularly within the AH Division. It fails to allege that the named Individual

Defendant recklessly disregarded activities in Brazil. Cf. In re Campbell Soup., 145 F. Supp. 2d

at 598-99 (denying motion to dismiss where allegations directly pointed to corporate executive

defendants' explicit knowledge of improper sales and shipping practices.) While the facts in the

consolidated complaint conceivably suggest both negligence and mismanagement, they fail to

imply recklessness. See Advanta, 180 F.3d at 540 (noting that 'claims essentially grounded on

corporate mismanagement are not cognizable under federal law.') (quoting In re Craftmatic Sec.

Litig., 890 F.2d 628, 638-39 (3d Cir. 1989)). Accordingly, the allegations related to the

Defendants' disregard of the Brazilian scheme do not support a strong inference of recklessness.

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Because the consolidated complaint fails to meet the pleading requirements of the

Reform Act, the Court need not address whether it similarly fails to meet the requirements of

Rule 9(b) of the Federal Rules of Civil Procedure. Additionally, having found that the

consolidated complaint does not meet scienter requirements, the Court need not consider

Defendants' alternative arguments in support of their 12(b)(6) motion. Defendants' motion to

dismiss Count I of the consolidated complaint, the 10(b) claims, is thus granted.

VII. Absent a cognizable claim under 10b-5, Plaintiffs cannot succeed under section20(a) of the Exchange Act

Count II of the consolidated complaint alleges that each of the Individual Defendants

were "controlling persons of Alpharma" at all relevant times, and are thus secondarily liable

under section 20(a), which creates liability for "controlling persons" in a corporation, for

Alpharma's alleged securities fraud violations. 15 U.S.C. § 78t(a). (Consol. Compl. at 1191 186-

90.) Specifically, Plaintiffs allege that each acted as a "controlling person" for purposes of

Section 20(a) liability because they "had the power to cause Alpharma to engage in the unlawful

conduct" pled in the consolidated complaint and they "were knowing and culpable participants in

the misconduct alleged . . ." (Consol. Compl. at 'if 189.)

These allegations are entirely ineffective. Since the consolidated complaint fails to

establish any primary violation of the Exchange Act, secondary liability under section 20(a) does

not attach. See Milestone Scientific, 103 F. Supp. 2d at 474. While a section 20(a) claim requires

a party to plead more than just a primary violation, see Nice Sys., 135 F. Supp. 2d at 588

(articulating elements that plaintiff must satisfy under section 20(a)), the Court finds it futile to

probe further that analysis_ Defendants' motion to dismiss Count II of the consolidated

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complaint, the § 20(a) claims, is thus granted.

VIII. Amendment of the Consolidated Complaint

Without specifying how they would amend their pleading so as to survive a second

motion to dismiss under Rule 12(b)(6), Plaintiffs contends that the Court, alternatively, should

dismiss without prejudice the amended complaint and grant leave to amend the consolidated

complaint. (Pls.' oppos. mem. at 41 n.29.) Defendants oppose leave to amend as a futile

exercise, arguing primarily that Plaintiffs were granted "significant extensions of time" to file the

consolidated complaint and that any amended pleading filed will not set forth any new support

for their theories since they were already thoroughly investigated. (Defs.' mem. of law at 35-6.)

Defendants contend that Plaintiffs simply do not have, even after extensive investigation, facts

giving rise to an Exchange Act violation. (Defs.' mem. of law at 35-6.)

The Court agrees. Plaintiffs had ample opportunity to revise its complaint after this

Court consolidated this matter. Initially, six individual class actions were filed against Alpharma

and a number of its officers, directors, and employees. (Defs.' mem. of law at 5.) When the

Court consolidated the case, it gave Lead Plaintiff sixty days to file a consolidated amended

complaint. When Lead Plaintiff subsequently requested more time in which to prepare its

consolidated amended complaint, the Court granted that request.

Ever mindful that leave to amend is ordinarily granted, see Fed. R. Civ. P. 15(a), the

Court finds that any likely amendment will not cure the deficiencies plaguing the amended

complaint. See Foman v. Davis, 371 U.S. 178, 182 (1962) (explaining that it is within the court's

discretion to deny leave to amend for undue delay, bad faith, dilatory motive, repeated failure to

cure deficiencies, undue prejudice to non-moving party or futility of amendment); In re

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Champion Enter., Inc., Sec. Litig., 145 F. Supp. 2d 871, 872 (ED. Mich. 2001) (citing Foman for

same proposition). Plaintiffs have failed to proffer any proposed, substantive amendment that

would satisfy applicable pleading requirements: indeed, it does not suggest any amendment at all.

Plaintiffs had their opportunity to craft a sufficiently pled complaint when the Court consolidated

the pending cases into this single class action, and ordered the Lead Plaintiff to file a

consolidated amended class action complaint.

Moreover, the Court finds that leave to amend is improper because the Reform Act

restricts Rule 15 in securities cases. In re Champion Enter., 145 F. Supp. 2d at 872. Essentially,

the Reform Act would be "meaningless" if judges liberally granted leave to amend on a limitless

basis:

If the Reform Act is read to mean that when a complaint is filedunder the Reform Act, a judge must scrutinize the complaint andadvise the pleader where the complaint is deficient, and then givethe pleader an opportunity to amend the complaint, and when thatis done, the judge must again, perhaps like a law school professor,advise the pleader that he or she has not passed the test, and if not,give the pleader another opportunity to meet the heightened pleadingrequirements, and even after that, still another opportunity, ifthe pleader requests it, then the Reform Act is meaningless. If thisis the interpretation of the Act, then Rule 15 always trumps theplain requirements of the Act, and what Congress did when itpassed this act over a presidential veto, means nothing.

Id.; see In re: NAHC, Inc., 2001 WL 1241007 at *26 (ED. Pa. Oct. 17, 2001) (agreeing with in

re Champion Enter. that Congress deliberately set higher burdens on plaintiffs in pleading

securities fraud actions 'to provide a filter at the earliest stage (the pleading stage) to screen out

lawsuits that have no factual basis.' (quotations omitted)).

Thus, to prevent futile amendments and to preserve the integrity of the Reform Act, the

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Court denies Plaintiffs leave to amend its consolidated complaint.

IX. Conclusion

For all of the foregoing reasons, the Court dismisses with prejudice Plaintiffs'

consolidated amended class action complaint under Rule 12(b)(6) of the Federal Rules of Civil

Procedure. An appropriate order follows.

Maki au 6

Date JOEL A. ANO,

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