Replies to post #110204 on Biotech Values

[mouton29]

Entanglement. First articulated in Elkind v. Liggett, here is a more recent discussion

From In re Cabletron Systems, 311 F. 3d 11 ( (1st Cir. 2002)) Full decision at http://openjurist.org/311/f3d/11/in-re-cabletron-systems-inc

3. Third-Party Statements

84
The complaint catalogues many statements about Cabletron in reports published by market analysts. It also cites a few business news stories about Cabletron. Mesko alleges that the third parties who made these statements — market analysts or journalists — based them on statements that had been made to them by defendants or by other agents of Cabletron, so that the latter are responsible for their materially misleading content. Defendants respond that they have no liability for statements made by third parties.

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The district court appears to have utilized a two-prong test to analyze these statements, requiring that defendants either "controlled" the third party's statements or that they "adopted" the statements after they were made. The court then found that the complaint had not satisfied either of these conditions.13 We reject the district court's rule.

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A majority of courts has analyzed third-party statements by applying the "entanglement" test developed by the Second Circuit. Elkind, 635 F.2d at 163. See generally 2 H.S. Bloomenthal, Securities Law Handbook § 27.10(4) (2002 ed.) (collecting cases). District courts in this circuit have also employed this test, while recognizing that we have not yet embraced it. See, e.g., Carney v. Cambridge Tech. Partners, Inc., 135 F.Supp.2d 235, 248 & n. 7 (D.Mass.2001); No. Nine, 51 F.Supp.2d at 30-31; Schaffer v. Timberland Co., 924 F.Supp. 1298, 1310 (D.N.H.1996).

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We now hold that the entanglement test is the correct approach.14 This test requires the plaintiff to demonstrate the defendants' involvement with third-party statements:

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[L]iability may attach to an analyst's statements where the defendants have expressly or impliedly adopted the statements, placed their imprimatur on the statements, or have otherwise entangled themselves with the analysts to a significant degree.... [T]he court will determine whether the complaint contains allegations which, favorably construed and viewed in the context of the entire pleading, could establish a significant and specific, not merely a casual or speculative, entanglement between the defendants and the analysts with respect to the statements at issue.

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Schaffer, 924 F.Supp. at 1310. Entanglement also includes situations where company officials "intentionally foster a mistaken belief concerning a material fact." Elkind, 635 F.2d at 163-64. As this articulation of the test makes clear, the district court erred when it required that defendants "controlled" third-party statements. Nonetheless, an entanglement claim will be rejected if it merely suggests or assumes that company insiders provided the information on which analysts or other outsiders based their reports. See Suna, 107 F.3d at 73-74; No. Nine, 51 F.Supp.2d at 31.

90
Some of the third-party statements cited in the complaint do satisfy the entanglement test. To give examples of two such statements, without reaching the further question of whether they were misleading, the complaint alleges that an analyst report issued on March 25, 1997 stated, on the basis of information from Levine and other Cabletron executives, that the SmartSwitch 6000 would "ship in volume in the second week of April." Further, a May 13 analyst report, based on a presentation by a named Cabletron official responsible for investor relations, stated that the SmartSwitch products were "ramping according to plan," which by mid-May seems clearly not to have been so.

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The entanglement test separates mere salesmanship from fraudulent misrepresentation.15 A test that required "control" would give company officials too much leeway to commit fraud on the market by using analysts as their mouthpieces. Elkind and its progeny set a better boundary. On remand, the district court should evaluate each of the third-party statements under the correct test.

[oldberkeley]

IMO, I don't see how there could be such a mandate in the absence of some kind of actual contractual relationship establishing the analyst as an agent or representative of the company. If you can find some sort of reference, that would be interesting.

It's a complicated issue and I'm not an attorney, but it seems to me that if Teva was deliberately feeding incorrect information to an analyst, this could come into play.

Too long to post the whole thing:

Securities Issuer Liability for Third Party Misstatements: Refining the Entanglement Standard

http://www.allbusiness.com/legal/3604361-1.html