United States District Court, D. Massachusetts
IN RE PSYCHEMEDICS CORP. SECURITIES LITIGATION
MEMORANDUM AND ORDER ON DEFENDANTS' MOTION TO
RICHARD G. STEARNS UNITED STATES DISTRICT JUDGE.
Psychemedics Corp. and Raymond Kubacki, Psychemedics'
Chief Executive Officer (CEO), move to dismiss this putative
securities fraud class action brought against them by
plaintiff Mary Kathleen Hermann on behalf of all other
similarly situated holders of Psychemedics stock during the
proposed class period for alleged violations of Sections
10(b) and 20(a) of the Securities Exchange Act of 1934, 15
U.S.C. §§ 78a et seq. The Complaint
alleges that Psychemedics misled investors by failing to
disclose that its independent distributor in Brazil,
Psychemedics Brasil, had become secretly entwined in a cartel
scheme with a competitor in violation of Brazilian law, the
eventual public disclosure of which precipitated a steep drop
in Psychemedics' stock price. Because the Complaint fails
to allege any facts that give rise to an inference that
Psychemedics had any inkling of the Brazilian scheme during
the time period it is accused of failing to bring its
existence to light, and because plaintiff's other efforts
to establish scienter are speculative and unconvincing, the
court will grant the motion to dismiss.
a Delaware corporation with its headquarters in Acton,
Massachusetts, provides clinical laboratory services for the
detection of illicit drugs, including hair testing.
Psychemedics maintains two laboratories in Culver City,
California, where hair samples are sent to be tested. The
company does business in a number of countries, including
Brazil, where a company named Psychemedics Brasil had the
exclusive right to distribute Psychemedics'
services. In 2013, the Brazilian government
announced its intention to require all professional motor
vehicle drivers to submit to a hair drug test when applying
to have their licenses renewed. This proposed new rule
presented Psychemedics with a golden opportunity, leading
company spokespersons to effuse over the potential for
expansion of future business in Brazil. These sanguine
statements to investors and shareholders form the basis of
December 3, 2013, the day that the Brazilian government
announced the anti-drug motorist initiative,  Psychemedics'
Corporate Vice-President of Sales and Marketing, Jim Dyke,
stated in a press release that Psychemedics Brasil was
“a very strong partner . . . who we have worked closely
with for over 15 years, ” and that both companies
“look[ed] forward to continuing to work together on
this new opportunity.” Compl. ¶ 6. The press
release also quoted Marcello Santos Rachlyn, the President of
Psychemedics Brasil, as saying, “[w]e have been
extremely pleased to work closely with Psychemedics
Corporation for the past 15 years.” Id. ¶
26. A February 10, 2014 press release issued by Psychemedics
quoted Kubacki as saying that Psychemedics was “very
excited about competing for the hair testing business in
Brazil.” Id. ¶ 42.
other press releases, as well as Psychemedics' Form 10-K
filings with the SEC, described Psychemedics' business in
rosy terms, noting that while the company “competes
with other hair testing laboratories, ” it
“distinguishes itself from hair testing competitors by
emphasizing the superior results the Company obtains through
use of its unique patented extraction method, ”
Id. ¶¶ 14, 65, 77. Subsequent press
releases emphasized to investors Psychemedics intent to
“compete” for a greater share of the Brazilian
hair testing market if and when the testing requirement was
imposed. Id. ¶¶ 53, 55, 82.
of these press releases also described investments in
equipment and facilities that Psychemedics had made in
anticipation of the increase in orders that would
(presumably) flow from the implementation of the drug testing
mandate. In addition to these public statements,
“confidential” witnesses cited in the Complaint
noted that Kubacki traveled to Brazil on various occasions
between mid-2014 and early 2015 “to assist Psychemedics
Brasil develop and expand its collection network.”
Id. ¶ 9. Finally, when the mandatory testing
regime launched in the first quarter of 2016, Psychemedics
informed investors on April 26, 2016, in a press release,
that the company was “already seeing a meaningful
pickup of testing volume, ” and referenced a statement
by Kubacki assuring shareholders that the company was
“aggressively competing” for new business in
Brazil. Id. ¶ 82.
difficulty with all these statements, according to the
plaintiff, is that they failed to disclose that Psychemedics
was reaping the benefits of an illicit arrangement between
Psychemedics Brasil and its ostensible rival, Omega Brasil.
In essence, Omega Brasil had been bribed to steer exclusive
contracts for drug collection points to Psychemedics at the
expense of Omega USA, for whom Omega Brasil served as an
in-country distributor. This corrupt arrangement had been
facilitated by family relationships among employees of the
two Brazilian companies, and had virtually eliminated market
competition for the supply of hair testing products and
services. In other words, plaintiffs argue that the ebullient
statements touting Psychemedics' prospects for capturing
a substantial share of the expected expansion of the
Brazilian market for hair testing services were misleading
because the Brazilian distributor was “cheating - not
competing - in order to expand Psychemedics' collection
network and win new business in Brazil.” Pl.'s
Opp'n at 6.
USA, disgruntled by the rumors that it had been betrayed by
its Brazilian distributor, undertook a confirmatory
investigation and pursued remedies in the Brazilian courts
against both Omega Brasil and Psychemedics Brasil, alleging
violations of Brazil's anti-competition
laws.Compl. ¶¶ 36-40. While the court
pleadings were publicly available in Portuguese, the
Complaint alleges that the legal proceedings in Brazil were a
camera obscura to investors in the United States
because of the language barrier and the lack of
English-language media coverage. Id. ¶¶
January 20, 2017, a Brazilian judge ruled in favor of Omega
USA, finding that Psychemedics Brasil and Omega Brasil had
conspired against Omega USA, effectively shutting it out of
the Brazilian hair-testing market. Id. ¶ 11.
The judge ordered Psychemedics Brasil and Omega Brasil to
indemnify Omega USA for a then-undetermined amount of lost
profits. On January 31, 2017, a Brazilian law firm
representing Omega USA issued a press release celebrating the
judgment that the firm had won. Id. ¶ 12. The
firm's announcement was picked up and published by
Bloomberg, which added that Psychemedics Brasil was facing
further investigation by Brazil's Administrative Council
for Economic Defense for engaging in “cartel
practices.” Id. ¶ 98.
Bloomberg report, disclosing the existence of the scheme and
the Brazilian court ruling - had an insalubrious effect on
Psychemedics' stock price, which dropped from an intraday
high of $25.87 per share on January 31, 2017, to a low of
$13.83 against a 5, 000% increase in trading volume from the
previous day. Id. ¶ 101. The stock closed out
the day at $18.87 per share, representing a loss of more than
25% of its opening price. Id. The plaintiff pounced
two days later, filing the original Complaint in this court
(the amended version of the Complaint was filed on June 2,
2017). The prospective class consists of all purchasers of
Psychemedics common stock between February 10, 2014, and
January 31, 2017. Psychemedics now moves to dismiss. The
court heard oral argument on October 19, 2017.
state a claim under section 10(b) and its corresponding rule,
a plaintiff must allege: “(1) a material
misrepresentation or omission; (2) scienter; (3) a connection
with the purchase or sale of a security; (4) reliance; (5)
economic loss; and (6) loss causation.” Miss. Pub.
Employees Retirement Sys. v. Boston Scientific
Corp., 523 F.3d 75, 85 (1st Cir. 2008). The Private
Securities Litigation Reform Act of 1995 (PSLRA) supplies the
pleading standards a court is to apply in securities fraud
cases. Under these standards, a plaintiff must specify each
statement or omission that is allegedly misleading, explain
why each statement or omission is deceitful or disingenuous,
and provide factual support for the allegations of fraud.
Greebel v. FTP Software, Inc., 194 F.3d 185, 193-194
(1st Cir. 1999).
is a “mental state embracing intent to deceive,
manipulate, or defraud.” Ernst & Ernst v.
Hochfelder, 425 U.S. 185, 193 n.12 (1976). A defendant
may also have the requisite mental state if it “acted
with a high degree of recklessness.” Aldridge v.
A.T. Cross Corp., 284 F.3d 72, 82 (1st Cir. 2002).
“Recklessness, as used in this context, ‘does not
include ordinary negligence, but is closer to being a lesser
form of intent.'” Fire & Police Ass'n
of Colo. v. Abiomed, Inc., 778 F.3d 228, 240 (1st Cir.
2015) (quoting Greebel, 194 F.3d at 188). Thus,
“a defendant can be held liable for ‘a highly
unreasonable omission, 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 ...