Stoneridge and the Search for Reliance: In re Bristol Myers

Stoneridge involved vendors but the Supreme Court did not limit the analysis to those participants in the transaction.  The case, therefore, arguably left open the need to establish actual reliance on others who participated in the disclosure process but did not actually make the false statement.  Employees within the company amounted to a possible category.

The issue came up in In re Bristol Myers Squibb Co. Sec. Litig., 2008 U.S. Dist. LEXIS 63567  (SD NY Aug. 19, 2008) and largely swatted down.  Bristol Myers was accused of not fully disclosing the terms of a settlement of a patent lawsuit.  The court concluded that the plaintiff had adequately shown that the omissions were material and had established the other elements of a fraud violation against the company.   One of the individual defendants, Andrew Bodnar, a medical doctor, attorney, and  Bristol-Myers's Senior Vice President for Strategy and Medical and External Affairs, sought dismissal on the grounds that, under Stoneridge, there was no reliance on his acts. 

There were no accusations that Bodnar made the false statements.  Instead, he was alleged to have "(1) secretly negotiated a settlement with illegal oral side agreements; (2) knowingly withheld information about the negotiations, the terms of the settlement, and the oral side agreements from shareholders, the Board of Directors, and the federal monitor; and (3) failed to correct Dolan and the Company's material misstatements despite his duties as a senior executive."  In other words, he knew about the false disclosure and did nothing to correct it.  The actions were, the court concluded, sufficient to establish "'the commission of manipulative acts' sufficient to satisfy the Supreme Court's 10(b) pleading standards."

But Stoneridge required more.  There also had to be reliance.  On that issue, the court had this to say:

• In Stoneridge, the Court found that allegations regarding complicit participation by outside suppliers in a cable company's fraudulent scheme were too remote from the investing public to satisfy the reliance element of the 10(b) standard, and therefore insufficient to allege scheme liability under 10(b). Here, however, Bodnar's behavior is at the heart of Bristol-Myers's false and misleading conduct. It is neither implausible, nor too remote to find that the investing public relied on the announcement of the Apotex litigation settlement in deciding whether or not to invest in Bristol-Myers stock, and Bodnar was directly responsible for the settlement agreements. Bodnar made no public statements himself, but investors relied on his good faith in negotiating the Apotex settlement agreement and committing the Company to its terms. Furthermore, unlike in Stoneridge where the defendants' "deceptive acts were not communicated to the public," Bodnar's misconduct and deceptive acts were communicated to the public here through the disclosure of the regulatory rejection of the settlement, the disclosure of the amended settlement's terms, and the revelation of the secret oral side agreements. Bodnar's actions are directly tied to the Apotex settlement, the Justice Department investigation, and the alleged misstatements and omissions. These allegations are more than adequate to satisfy 10(b) and the requirements of the Stoneridge decision.
  

Note that the court did so despite the absence of any statements by Bodnar.  It was enough that Bodnar was directly responsible for the settlement negotiations. 

The case shows the ease to which the courts will find reliance when the behavior is bad enough.  In other words, because the majority in Stoneridge used reliance to achieve a result oriented decision, the element was woefully unexplained, providing the lower courts will little guidance.  As a result, the lower courts have the lattitude largely to find reliance where ever they want, as the facts in Bristol Myers shows.