United States v. Schiff

PRECEDENTIAL

UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

Nos. 08-1903 & 08-1909

UNITED STATES OF AMERICA,
Appellant

v.

FREDERICK S. SCHIFF

Appeal from the United States District Court
for the District of New Jersey
(D.C. Criminal Action No. 2-06-cr-00406-001)
District Judge: Honorable Faith S. Hochberg

Argued May 11, 2009

Before: AMBRO, ROTH and ALARCÓN * , Circuit Judges

*
Honorable Arthur L. Alarcón, Senior United States Circuit
Judge for the Ninth Circuit Court of Appeals, sitting by
designation.
 (Opinion filed: April 7, 2010)

Paul J. Fishman
United States Attorney
Ralph J. Marra, Jr.
Acting United States Attorney
George S. Leone (Argued)
Chief, Appeals Division
Office of United States Attorney
970 Broad Street, Room 700
Newark, NJ 07102-0000

Counsel for Appellant

Steven R. Glaser, Esquire
Lawrence S. Spiegel, Esquire
David M. Zornow, Esquire (Argued)
Skadden, Arps, Slate, Meagher & Flom
Four Times Square
New York, NY 10036-0000

Counsel for Appellee

Roberto M. Braceras, Esquire
Goodwin Procter
53 State Street, Exchange Place
Boston, MA 02109-0000

Richard M. Strassberg, Esquire
Maria Amelia Calaf, Esquire
Goodwin Procter

2
620 Eighth Avenue
The New York Times Building
New York, NY 10018-1405

Counsel for Amicus Appellee

OPINION OF THE COURT

AMBRO, Circuit Judge

Frederick Schiff and Richard Lane were high-ranking
corporate executives at the pharmaceutical giant Bristol-Myers
Squibb (“Bristol”). They were criminally indicted for allegedly
orchestrating a massive securities fraud scheme related to
Bristol’s wholesale pharmaceutical distribution channels in the
early 2000s, in violation of, inter alia, 15 U.S.C. § 78j(b) and
Securities and Exchange Commission (“SEC”) Rule 10b-5. The
Government filed this interlocutory appeal in response to the
District Court’s March 19, 2008 opinion that addressed several
contested theories of liability as well as expert witness issues
under Daubert v. Merrell Dow Pharms., Inc., 509 U.S. 579
(1993).1 On appeal are two issues: (1) whether the District

1
The District Court had jurisdiction pursuant to 18 U.S.C.
§ 3231. This unusual pretrial interlocutory appeal, filed less
than one week before Schiff’s scheduled trial, was approved by

3
Court properly dismissed the Government’s theories of omission
liability under Rule 10b-5 that attempted to hold Schiff
accountable for omissions in quarterly SEC 10-Q filings based
on his and Lane’s alleged misstatements in Bristol’s quarterly
conference calls; and (2) whether the District Court abused its
discretion in excluding the Government’s expert, following a
Daubert hearing, who would have testified to Bristol’s stock
price drop as evidence of Rule 10b-5’s materiality element.
Because we agree that the Government’s omission liability
theories are not viable, we affirm the District Court’s dismissal
of these theories. As to the expert testimony, we conclude that
the District Court’s ruling excluding the Government’s
materiality expert was not an abuse of discretion.

I. Background

The criminal charges against the defendants stem from
the Government’s allegations that Schiff and Lane’s statements
to the investing public, in, among other things, public analyst
conference calls and alleged omissions in SEC filings were
misleading. Bristol is a public corporation and leading
manufacturer of pharmaceuticals and health care products.
Schiff was promoted to Bristol’s Chief Financial Officer
(“CFO”) from Controller in April 2001. He left the company in
mid-April 2002. As CFO, he had primary responsibility for

the Acting Solicitor General, and we exercise appellate
jurisdiction pursuant to 18 U.S.C. § 3731 and 28 U.S.C. § 1291.

4
Bristol’s SEC filings (and signed those filings). Lane was
President of Bristol’s Worldwide Medicines Group, and left the
company in early-April 2002. Both Schiff and Lane represented
Bristol on quarterly public conference calls with Wall Street
analysts.

Bristol’s primary sales and distribution channel for its
pharmaceutical products is through wholesalers, who, in turn,
supply pharmacies, hospitals, and other health care providers.
The wholesalers buy and maintain an inventory, typically based
on projected “prescription demand” (i.e., customers’ demand for
the products). They generally try to target their purchases to this
demand projection, and not in excess of it, because more
inventory results in higher carrying costs. If wholesalers
purchase in excess of demand, it also affects Bristol by reducing
the company’s later sales while its wholesalers “work down”
excess inventory to normal demand levels before purchasing
more product.

From 2000 through 2001, Bristol implemented a sales
strategy that underlays this case. The Company gave its
wholesalers financial incentives, amounting to tens of millions
of dollars each quarter, purportedly to spur them to buy its
products in excess of prescription demand projections. For
example, in August 2001 Schiff and Lane approved $47 million
in sales incentives for the third quarter, and in November 2001
Lane approved $85 million in sales incentives for the fourth
quarter. These incentives allegedly covered the wholesalers’

5
carrying costs and guaranteed return on their investment until
they sold the products. The Government characterizes this as a
deceptive strategy to increase sales and earnings in the short
term to meet Bristol’s aggressive sales and earnings targets,2
and, in turn, artificially inflate the stock price.3

To conceal these practices from Bristol’s shareholders
and potential investors, Schiff and Lane allegedly “made
materially false and misleading statements and omissions of
material fact in analyst conference calls, press releases, and
meetings with investors.” 4 (Gov’t Br. at 6.) The analyst calls

2
According to the indictment, Bristol’s sales targets were to
double its 1994 sales by the end of 2000, and double its 2000
sales by the end of 2005.
3
Defendants contend to the contrary that this practice was a
business strategy for “selling ahead of demand,” which is
common in the pharmaceutical industry. (See Lane Br. at 7
(stating that “wholesalers purchased large amounts of drugs and
increased their inventory as part of their own independent
business strategy [to buy ahead of anticipated price increases]
and not, as the Government alleges, because [Bristol] ‘forced’
them to take on the additional product”).)
4
In the indictment, the Government estimates that, based on
drop in price per share times the number of outstanding shares,
the securities fraud resulted in a market capitalization loss of
$10.7 billion of stock. Defendants dispute this number.

6
are pertinent to the Government’s omission liability theories that
are a part of this appeal. The first analyst call Schiff
participated in was on April 25, 2001, after he was promoted to
CFO (whereas Lane was involved in analyst calls dating back to
2000). A sampling of the actionable statements made by Schiff
and Lane in analyst calls include:

4/25/01 Schiff – “We look at, very closely,
the w holesaler stocking
inventories . . . . [T]here are no
unusual items that we see in the
inventory levels.” (App. 73 (first
quarter – Schiff and Lane on call));

7/25/01 Schiff – “we don’t see anything
unusual” in the “wholesaler
inventories” (App. 73 (second
quarter – Schiff and Lane on call))

Lane – when asked whether there
w e re in v e n to ry is s u e s, h e
responded “no” (App. 500–02);

10/23/01 Schiff – inventory was “up a couple
of weeks” and expected “to be
lower in the fourth quarter” (App.
74–75 (third quarter – Schiff and
Lane on call)); and

7
 12/13/01 Schiff – “We don’t see any
significant changes” in the prior
call’s statements that “inventory
levels are slightly higher” and
“would be reduced by the end of
the year” (App. 75 (outside of
quarterly call cycle, Schiff and
Lane on call)).

On April 1, 2002, Bristol issued its 10-K for the 2001
fiscal year. The report discussed, among other things, excess
inventory levels held by wholesalers:

[T]he Company believes average wholesaler
inventories of products in the U.S. increased
during 2001 by approximately four weeks of
additional sales. The Company believes current
inventories of its products held by wholesalers in
the U.S. significantly exceed levels the Company
considers desirable on a going-forward basis. The
Company is in the process of developing a plan to
reduce these wholesaler inventory levels. The
Company expects this reduction in wholesaler
inventories to lower levels will negatively impact
its financial results in future periods. The
Company will make further disclosure later in
April 2002 about the plans it is developing to
reduce wholesaler inventory levels and the

8
 Company’s expectations with respect to the likely
impact on its financial results.

(App. 200–01.) On the next trading day, the stock price dropped
5.3%, from $40.40 to $38.24.

On April 3, 2002, at the close of the trading day, Bristol
made an additional announcement in an analyst call5 (outside of
the quarterly cycle) and a press release. Bristol’s CEO Peter
Dolan announced:

Rick Lane will be leaving the Company.[ 6 ] . . .

....

We’ve estimated that current wholesaler
inventory levels significantly exceed the level that
we consider desirable. As a result of my review,
we’re moving as aggressively as possible to

5
The Bristol executives that participated in the call included:
Schiff; Peter Dolan, Chairman and CEO; and Don Hayden,
another senior executive.
6
Bristol’s April 3, 2002 press release indicated that Lane was
leaving the company because “management changes are clearly
necessary in light of the company’s recent financial
performance,” and “[o]ne aspect of this performance” was
“inventory management.” (App. 307.)

9
reduce shipments to wholesalers, so that
wholesaler inventory levels will be more
consistent with demand. We estimate that this
action will reduce earnings per share by
approximately 35 to 40 cents over the full time
period of the reduction process.

....

Now, let me move to the full year 2002.
Before the impact of reductions in wholesaler
inventories and any non-recurring items, we
estimate the full year 2002 earnings per share to
be down between 25 and 30%. We expect sales
to decline in the low single-digit range. That’s a
primary driver, as our previous guidance expected
sales to increase in the mid to upper single-digit
range.

. . . [W]e’ve identified several products in
U.S. primary care that will not meet our sales
estimates. Our original guidance to you for the
Glucophage franchise, for example, was 1.2 to 1.4
billion for the year. Our analysis post-generic
launch shows the franchise will not meet those
estimates. And in particular, sales for
Glucophage IR will decline more than 90% of
2001 sales.

10
 Additionally, based on our demand-based
modeling, sales for Avandia, Serzone, and Tequin
will not meet our original estimates and likely
decline in 2002 as compared to sales in 2001.

....

. . . [O]n timing of inventory, our intention
is to work it down as aggressively as we possibly
can over as rapid a timetable as feasible. As you
know, we don’t own that wholesaler inventory.

....

[Schiff (on excess inventory numbers):]
[T]hat’s around 800 million to $1 billion. . . . We
will work, as we say, as aggressively as possible
to reduce the inventory. And in order to do that,
we have to slow down our shipments to the
wholesalers.

....

[Schiff:] Glucophage[,] . . . Avandia,
Serzone, Tequin – are the key products that are
lower that really make up that revenue reduction.
That revenue that we’re seeing is causing the
result to get to [ ] 25 to 30% lower.

11
(App. 202–07.) Dolan also indicated that the “prior sales
estimates” were “dramatically off track.” (App. 203–06.) On
the next trading day, April 4, Bristol’s stock price dropped
14.7%, from $37.70 to $32.15.

On April 25, 2002 Bristol had its first quarter analyst call.
It discussed, among other things, the inventory issue and loss of
exclusivity on certain products from generic competition. On
April 26, the stock price dropped 1.9%, from $29.89 to $29.32.

B. Procedural History

The pretrial history in this case is long and complex, but
it is important to wade through it because of waiver issues raised
by Schiff on appeal.7 In June 2005, a grand jury returned a two-

7
We note that the criminal prosecutions of Schiff and Lane
do not stand alone. The SEC filed a civil enforcement action
against them, which has been administratively terminated
pending the outcome of their criminal cases. Bristol settled a
related SEC civil enforcement action and entered into a deferred
prosecution agreement, which effectively put the company on
probation for two years and required it to pay a fine.
Additionally, as is not uncommon in SEC enforcement actions,
a follow-on private civil suit was filed in the Southern District
of New York against Bristol, Lane, Schiff, and others, alleging,
among other things, accounting fraud through improper revenue
recognition. The case was dismissed by that Court on a Federal
Rule of Civil Procedure 12(b)(6) motion. In re Bristol-Myers

12
count indictment against Schiff and Lane, charging them with:
(1) conspiracy to commit securities fraud, in violation of 18
U.S.C. § 371, contrary to 15 U.S.C. § 78j(b) (“Section 10(b)” of
the Securities Exchange Act of 1934) & ff (penalties) and SEC
Rule 10b-5(a)–(c) (17 C.F.R. § 240.10b-5); and (2) securities
fraud, principally in violation of Rule 10b-5, and aiding and
abetting in violation of 18 U.S.C. § 2.

The first indictment was dismissed because of a grand
jury leak. A second indictment was returned in May 2006.
Thereafter, in April 2007 the current indictment, labeled Third
Superseding Indictment, was returned on the same two counts.
This indictment omitted all allegations concerning accounting
improprieties in Bristol’s SEC filings (e.g., the Government
removed references to alleged corporate reserve manipulations
and violations of Generally Accepted Accounting Principles in
SEC filings). In November 2007, the District Court severed
Schiff and Lane’s trials. Schiff agreed to be tried first, and is
the appellee before us.

Through multiple letters, briefs, amendments,
stipulations, hearings, and court opinions during pretrial
proceedings, the indictment and predicate legal theories were
narrowed and sharpened. See United States v. Schiff, 538 F.
Supp. 2d 818, 828–29 (D.N.J. 2008) (explaining that because of
the constraints in the Stipulation, the Government could not

Squibb Sec. Litig., 312 F. Supp. 2d 549 (S.D.N.Y. 2004).

13
premise omission liability on the “falsity of reported sales and
earnings,” “nor [could] it rest on the mere recitation of the SEC
filings’ numbers on the analyst calls, because that is essentially
the same as the SEC figures themselves”). For example, the
Government filed a Bill of Particulars on November 20, 2007
listing the statements it intended to identify as false and attribute
to Schiff and Lane. These were statements made in analyst
calls, and none was from SEC filings. The Bill of Particulars
expressly stated that the SEC filings “contain[ed] omissions of
material fact” and not affirmative misleading statements.
Additionally, in a January 2008 conference call with the Court
and the defendants, the Government confirmed that it was not
relying on a statutory duty as a theory of omission liability under
Rule 10b-5.

Schiff and Lane filed motions to dismiss portions of the
indictment.8 On February 26, 2008, the District Court held a
hearing on several pending motions, including the motions to
dismiss. At the hearing, the Court ruled that it was denying the
theory of fiduciary duty as a basis for omission liability.9 On
March 11, 2008, it conducted a Daubert hearing on expert

8
Schiff initially filed an evidentiary motion in limine, which
the Court correctly treated as a motion to dismiss.
9
In the District Court’s March 19, 2008 opinion, it reaffirmed
that it had dismissed the fiduciary theory as a basis for a duty to
disclose. Schiff, 538 F. Supp. 2d at 826 n.6.

14
issues.

The District Court’s March 19, 2008 opinion (the
“Opinion”) covered much ground. Schiff, 538 F. Supp. 2d 818.
Pertinent to this appeal, it dealt with the Government’s omission
theories of liability and the Daubert expert issue on the Rule
10b-5 element of materiality (which we will address separately
in the Daubert section below). The Court explained that,
despite its ruling dismissing several theories of liability, the case
“will still go forward on legal theories related to alleged
conspiracy, misstatements and omissions on analyst calls and
misstatements listed under the heading ‘Other’ in the Bill of
Particulars, scheme/business practice liability under Rule 10b-
5(a) and (c), and aiding and abetting violations of Section
10(b).” Id. at 831.

It examined whether Schiff had a duty to speak in the
SEC filings under Rule 10b-5(b). See id. (“Absent a duty to
speak, there is no ‘omission to speak’ liability.”). It dismissed
theories of omission liability10 and criticized the Government for

10
The District Court dismissed both a “theory of duty based
on ‘falsity of reported sales and earnings’ in the SEC filings,”
which the Government is not appealing, and a “revised theory,”
labeled “all of a piece” (discussed below), which it is appealing.
See Schiff, 538 F. Supp. 2d at 828–31; see also Gov’t Br. at 7,
13. The Court’s ruling did not “affect the theory of the case
based on numerous other alleged misstatements and omissions

15
shifting and adding to its theories of the charges—“the court
will permit no further ‘legal theory morphs’ in this case, which
has been awaiting trial for several years.” Id. at 826.

The Government’s last theory of omission liability for
Schiff’s own statements was raised for the first time at the
February 26, 2008 hearing, approximately one month before
Schiff’s trial was to begin. Id. Under this new theory, “Schiff’s
liability for omissions to state in the SEC filings stemmed from
prior misleading statements of both [Schiff and Lane] on analyst
calls, linking alleged misstatements on analyst calls to alleged
omissions to state in the SEC filings as ‘all of a piece.’” Id.
The Court reiterated that “the Government cannot premise
[omissions in] SEC filing[s] upon [any] misstatement[s] in [the]
SEC filing[s] because it has not alleged any misstatement[s]” in
those filings.11 Id. at 827 (emphasis in original). Thus, omission

to state in analyst calls.” Schiff, 538 F. Supp. 2d at 825 (noting
Schiff challenges those misstatements as “inactionable puffery”
or “forward looking,” and that the Court will deal with the
sufficiency issues at the charge conference).
11
To emphasize the point, the Court explained that “omission
liability cannot be premised on ‘falsity of reported sales and
earnings’ [in the SEC filings] without violating the [parties’]
Stipulation.” Id. at 829 (indicating that the “statement made”
under Rule 10b-5(b) cannot be “the sales and earnings figures”
because “those are accounting concepts,” “leaving an omission
unattached to a ‘statement made’”).

16
liability must be predicated on other prior statements. Id. In this
context, the Court also remarked that the Government was not
alleging a theory based on a “duty to correct.” Id. at 831 n.10.

II. Standard of Review

We exercise a plenary review standard over legal
questions, and review factual findings for clear error. United
States v. Scott, 223 F.3d 208, 210 (3d Cir. 2000); see also
United States v. DeLaurentis, 230 F.3d 659, 660 (3d Cir. 2000).
We review a district court’s decision to exclude expert
testimony under an abuse-of-discretion standard. Pineda v.
Ford Motor Co., 520 F.3d 237, 243 (3d Cir. 2008). “An abuse
of discretion arises when the District Court’s decision rests upon
a clearly erroneous finding of fact, an errant conclusion of law
or an improper application of law to fact,” but “to the extent that
the District Court’s decision involved a legal interpretation of
the Federal Rules of Evidence, our review is plenary.” Id.
(internal quotations and citation omitted).

III. Omission Liability Theories Under Rule 10b-5

A district court may grant a pretrial motion to dismiss an
indictment, or a portion thereof, if the indictment’s allegations
do not suffice to charge an offense. United States v. Panarella,
277 F.3d 678, 685 (3d Cir. 2002). In this case, we treat the
dismissal of legal theories proffered by the Government, and the
District Court’s subsequent preclusion from presenting those

17
theories at trial, as dismissal of part of the indictment. Rule
10b-5(b) is the relevant legal grounding in this appeal. It states
in pertinent part: “It [is] unlawful . . . . (b) [t]o 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[.]”12

Throughout the pretrial proceedings, and even in this
appeal, the Government has engaged in a game of musical chairs
with their pursuit of changing legal theories under Rule 10b-5.
The District Court initially afforded the Government substantial
leeway in developing and settling on its legal theories of
liability. However, in the Court’s Opinion it put an end to these
shifting bases. It stated that it would permit “no further ‘legal
theory morphs’” by the Government. See Schiff, 538 F. Supp.

12
This Rule corresponds with § 10(b), 15 U.S.C. § 78j(b)
(“manipulative and deceptive devices”), charged in the
indictment:

It shall be unlawful for any person . . . . (b) [t]o
use or employ, in connection with the purchase or
sale of any security registered on a national
securities exchange or any security not so
registered, . . . any manipulative or deceptive
device or contrivance in contravention of such
rules [of the SEC] . . . in the public interest or for
the protection of investors.

18
2d at 826 (internal quotations omitted).

Early on, the Government amended the indictment and
entered into a Stipulation, eliminating all allegations related to
misstatements in Bristol’s SEC filings. Since then, its
introduction of new legal theories appears designed to find
creative ways to hold Schiff and Lane liable for those SEC
filings. Because the Government has stipulated that there are no
affirmative misstatements in the four corners of the SEC 10-Q
documents, it has attempted to bring these filings back into the
case against the defendants through theories of omission
liability. As noted below, we conclude that the omission
liability theories being appealed are either waived or not legally
viable as federal crimes.

Despite this, the Government is not flying blind into
Schiff’s trial. As the District Court stated, and the Government
acknowledged at oral argument, it can pursue directly the
alleged misstatements and omissions on analyst calls under Rule
10b-5, as well as conspiracy, scheme, and aiding and abetting
legal theories, against Schiff (and later Lane) at trial. See id. at
831.

A. Statements of Others

The first issue we address is the viability of the
Government’s legal theory that Schiff had a fiduciary duty to
rectify Lane’s allegedly material misstatements on analyst calls

19
in subsequent SEC filings.13 If such a duty exists, then the
resulting omissions in SEC filings would be actionable. At oral
argument, the Government characterized this as a “back-up
theory” if Schiff contends at trial that Lane did not have the
proper mens rea for aiding and abetting liability. The District
Court concluded that this is not a viable theory, and we agree.

Absent a duty to disclose, silence is not fraudulent or
“misleading under Rule 10b-5.” Basic Inc. v. Levinson, 485
U.S. 224, 239 n.17 (1988); see also In re Burlington Coat
Factory Sec. Litig., 114 F.3d 1410, 1432 (3d Cir. 1997)

13
Lane’s amicus brief argues that Schiff cannot be liable for
Lane’s statements because Lane’s statements were not
themselves actionable under the securities laws. (Lane Br. at
38.) Lane characterizes his statements as “historical” or
“forward-looking predictions conveying Mr. Lane’s optimism”
about product sales to Bristol’s wholesalers. (Id.) In the context
of Schiff’s statements (that mirrored Lane’s), the District Court
explicitly reserved the sufficiency question for further briefing
and discussion at the charging conference. See Schiff, 538 F.3d
at 825 n.5 (“Schiff challenges various statements as
‘inactionable puffery’ and mere[ly] ‘forward looking,’ . . . [but]
the Court here rules only on the alleged omissions in the SEC
filings and the statements on analyst calls that constitute mere
recitation of sales and earnings figures from the SEC filings.
The Court will reserve decision on the sufficiency of all other
alleged misstatements and omissions on analyst calls until the
charge conference.”).

20
(“Except for specific periodic reporting requirements[,] . . . there
is no general duty on the part of a company to provide the public
with all material information.”). When you speak, however, and
it is material, you are “bound to speak truthfully.” Shapiro v.
UJB Fin. Corp., 964 F.2d 272, 282 (3d Cir. 1992). We
explained in Oran v. Stafford 14 that a duty to disclose under Rule
10b-5 may arise in three circumstances: “when there is [1]
insider trading, [2] a statute requiring disclosure, or [3] an
inaccurate, incomplete or misleading prior disclosure.” 226
F.3d at 285–86 (citations omitted). To support this proposition,
the Oran Court cited to (i) a First Circuit Court of Appeals en
banc opinion, Backman v. Polaroid Corp., 910 F.2d 10, 12 (1st
Cir. 1990) (en banc), explaining that a duty to disclose arises in
the same three circumstances listed in Oran, (ii) a Second

14
Oran was a civil class action brought by investors against
a pharmaceutical company for alleged misrepresentations and
omissions regarding connection between the company’s weight
loss medications and information related to heart valve problems
of patients using those drugs. 226 F.3d 275, 285–86 (3d Cir.
2000). Among other things, the plaintiffs argued that the
company’s failure to disclose the dates on which it first learned
of adverse data and reports was a material omission because of
the light it would have cast on the company’s potential liability
exposure. Id. at 285. The Oran Court concluded that none of
the three circumstances to create a duty under Rule 10b-5 (i.e.,
insider trading, statutory requirement to disclose, or
misstatement) was present, and thus there was no duty to
disclose the information. Id. at 286.

21
Circuit Court of Appeals opinion, Glazer v. Formica Corp., 964
F.2d 149, 157 (2d Cir. 1992), noting that, absent the same three
circumstances, there is no duty to speak, and (iii) a District of
Delaware Court opinion, In re General Motors Class E Stock
Buyout Sec. Litig., 694 F. Supp. 1119, 1129 (D. Del. 1988).
Oran, 226 F.3d at 286.

The Government argues that Schiff’s duty to disclose in
the SEC filings derives from a general fiduciary obligation of
“high corporate executives” to the company’s shareholders,
which it concedes is not one of the three circumstances
described in Oran. It contends that Oran did not create an
exhaustive list of duties in the securities context, and that this
fiduciary duty qualifies as a fourth circumstance.

This argument reaches too far. It is not supported by the
language of § 10(b) and Rule 10b-5, and potentially has broad
implications that call into question whether the result the
Government advocates for advances the ball in this complicated
area.

Moreover, in Winer Family Trust v. Queen, we explained
that the list describing the derivation of a duty to disclose in
Oran is exclusive. 503 F.3d 319, 329 (3d Cir. 2007) (“an
affirmative duty arises only when [one of Oran’s three prongs]”
are triggered) (emphasis added); see also City of Monroe v.
Bridgestone Corp., 399 F.3d 651, 669 (6th Cir. 2005) (noting a
“duty to affirmatively disclose may arise” in these same three

22
circumstances) (internal quotations omitted). The Government
cites to the language in Winer directly preceding the list, which
states that, “[a]s a general matter, an affirmative duty arises only
when there is insider trading, a statute requiring disclosure, or an
inaccurate, incomplete, or misleading disclosure.” 503 F.3d at
329. This infers, its argument continues, that the Court did not
intend exclusivity. We disagree, as we do not interpret Winer’s
prefatory language to signal a lack of exclusivity, particularly
with the Court’s use of the word “only.” Rather, the Court used
the “general matter” phrase as an introduction to its discussion
of why the defendants had no disclosure duty under any of those
circumstances.

The Government’s legal support for its fiduciary duty
theory is also weak. It cites to a Fifth Circuit Court of Appeals
case, Barrie v. Intervoice-Brite, Inc., 409 F.3d 653 (5th Cir.
2005), modifying opinion on denial of rhr’g in 397 F.3d 249 (5th
Cir. 2005), and a district court case on which Barrie relied, In re
SmarTalk Teleservices, 124 F. Supp. 2d 527 (D. Ohio 2000).
The Barrie Court stated:

Where it is pled that one defendant knowingly
uttered a false statement and the other defendant
knowingly failed to correct it[,] . . . the fraud is
sufficiently pleaded as to each defendant[, which]
accords with common sense and the policy
considerations underlying the heightened pleading
requirements. . . . Accordingly, both [defendants]

23
 Hammond and Graham are on fair notice of the
claims against them.

409 F.3d at 656 (citing SmarTalk, 124 F. Supp. 2d at 543).
Barrie dealt only with the heightened notice pleading standard
for fraud in a civil case under the Private Securities Litigation
Reform Act (“PSLRA,” Pub. L. 104-67, 109 Stat. 737 (codified
in scattered sections of 15 U.S.C.)), concluding that sufficient
facts were pled with particularity in the complaint “to put the
alleged speakers on notice of the statements attributed to them.”
SmarTalk, 124 F. Supp. 2d at 543. It did not address or discuss
the actual viability of the legal theory. It never mentioned how
or when such a duty to disclose based on statements of another
arises, or whether Rule 10b-5 contemplates a duty to speak in
such a circumstance based on fiduciary obligations (and the
Government conceded as much at oral argument). The same is
true of SmarTalk, 124 F. Supp. 2d at 543. 15 In fact, we could

15
We found only a few other non-published cases that relied
principally on either SmarTalk or Barrie to state the same,
including United States v. Causey, No. H-04-025-SS, 2005 WL
3560632, at *9 (S.D. Tex. Dec. 29, 2005), which the
Government also cites in its brief. See, e.g., McGuire v.
Dendreon Corp., No. 07-800, 2008 WL 5130042, at *8 (W.D.
Wash. Dec. 5, 2008) (permitting plaintiffs to amend their
complaint on this basis, but not discussing the viability of the
underlying theory); In re InfoSonics Corp. Sec. Litig., No. 06-
1231, 2007 WL 2301757, at *11 (S.D. Cal. Aug. 7, 2007) (citing
Barrie and SmarTalk, indicating in a sentence that these courts

24
find no case that discussed or validated the legal viability of
such a theory on fiduciary grounds.16

Moreover, such a generalized corporate fiduciary duty
has few logical boundaries. What would the limiting principle

allowed the issue to be pled, but not engaging in any substantive
discussion).
16
Of course, we should be concerned about too narrowly
tailoring the securities laws such that the offending corporate
executive can subvert the law by using subordinates to make
false statements. This concern, though, is alleviated
substantially in the criminal context by conspiracy, scheme, and
aiding and abetting liability. Furthermore, this particular
scenario has been contemplated for liability under § 10(b), based
on agency principles, where secondary liability (e.g., aiding and
abetting) is not covered by the statute. See Picard Chem. Inc.
Profit Sharing Plan v. Perrigo Co., 940 F. Supp. 1101, 1120
(W.D. Mich. 1996) (“When a defendant controls the content of
another actor’s statement, the actor is essentially operating as the
agent of the defendant, unlike the situation wherein a defendant
provides ‘substantial assistance’ in aiding the actor’s individual
course of conduct[; yet] [t]he key to determining primary
liability is that the plaintiff must allege that defendant was the
original and knowing source of the misrepresentation,” such that
the other was a “mere conduit.”); see also Copland v. Grumet,
88 F. Supp. 2d 326, 333 (D.N.J. 1999) (discussing theories of
liability under § 10(b), including Picard).

25
be if we imposed this duty on corporations and its employees? 17

17
In a hearing before the District Court on October 30, 2007,
the Court attempted to tease out such a limiting principle in its
colloquy with the Government. (App. 449–60.) For example:

[Court:] What if [Schiff] learned about [the
misstatements] the next day. What is his duty?

[Court:] I’m trying to figure out where the
dividing line is. Take my example of a panel
discussion to a group of investors. Are they
required in front of investors to have an argument
back and forth where they disagree with each
other and Schiff says to Lane, I don’t think that’s
right, or Lane said to Schiff, I don’t think that’s
right? [Government:] They’re required to correct
it in some way when they have the time.

[Court:] How do you decide that a vice president
for manufacture hasn’t breached his fiduciary
duty if he finds out the next day that Mr. Lane
said something that he thinks is wrong? Is he
supposed to call up the analyst? What’s he
supposed to do? Before people can be charged
with a crime, they have to know what they’re
supposed to do. . . . [W]ere they supposed to have
an argument with each other on the conference
call with the analyst? Were they supposed to
convene another conference call the next day?

26
The Government attempts to cabin this duty to an extent by
characterizing it as only requiring “high corporate officers” to
rectify misstatements.18 But what company employees qualify
as high corporate officers? Certainly there is a grey area
involving the corporate structures of individual companies.
Apparently this would require a court to engage in a fact-
intensive review on a case-by-case basis, but in the criminal

[Government:] Those are two ways of doing it.

[Court:] What about if they had different titles?
One was a subordinate to the superior making the
statement. . . . [H]ow do you apply it to one
corporate officer and not another?

[Court:] Instead of being on the same conference
call, Mr. Lane finds out the next day what Mr.
Schiff did. He knows. Does he have an
obligation to reconvene the call? [Government:]
He has an obligation[.]

[Court:] So this is a corporate spokesman
fiduciary duty? [Government:] I think it’s
corporate, senior corporate officer, corporate
spokesman fiduciary duty.
18
At oral argument, the Government further tried to limit this
duty to a joint presentation like the analyst calls, but this is a
case-specific limitation that glosses over the broader
ramifications.

27
context (and the potential exposure to civil liability) this
uncertainty about who would qualify as a high corporate officer
subject to this duty seems to undermine the requirement of fair
notice.

Even more troubling is the question of how broadly this
duty would apply. Schiff elaborates on this question in his brief:

[A] fiduciary presumably would owe shareholders
a duty “to rectify” public misstatements of others
whenever they are made (on a conference call or,
say, in a written report or on the internet),
whoever makes them (a fellow employee or, say,
a securities analyst), and however the fiduciary
learns about them (by hearing them on a joint call
or, say, by reading them in a newspaper).

(Schiff Br. at 53.) Moreover, for how long would this duty
attach such that rectification would be required for an officer to
absolve himself of this fiduciary liability? Would it be limited
to the same day, a week, a month, or even one year? Would this
duty potentially rope in all corporate officers based on a single
misstatement by another individual, such that a case could be
brought against all executives in a particular company under this
theory?

These questions put into focus the vagueness of when
such a duty would apply. Hence we are reticent to create this

28
type of fiduciary obligation to rectify statements of others when
to do so simply “gilds the lily.” There are other plausible
theories of liability that could make these individuals criminally
liable for their own statements and omissions and those of
others. If Congress wants to add another prosecutorial
enforcement tool by criminalizing the types of omissions the
Government argues for under this proposed theory and also set
the parameters for such violations, it can, but we will not do so
in this case.

Furthermore, importing this type of fiduciary obligation
into the federal securities laws also appears to encroach into
conduct traditionally left to state corporation law. See Santa Fe
Indus., Inc. v. Green, 430 U.S. 462, 472, 478–80 (1977) (Rule
10b-5 should not “bring within the Rule a wide variety of
corporate conduct traditionally left to state regulation,” and
“[a]bsent a clear indication of congressional intent, we are
reluctant to federalize the substantial portion of the law of
corporations that deals with transactions in securities,
particularly where established state policies of corporate
regulation would be overridden.” “There may well be a need for
uniform federal fiduciary standards to govern mergers such as
that challenged in this complaint. But those standards should
not be supplied by judicial extension of [section] 10(b) and Rule
10b-5 to ‘cover the corporate universe.’”) (citations omitted); cf.
Craftmatic Sec. Litig. v. Kraftsow, 890 F.2d 628, 638–39 (3d
Cir. 1989) (holding that “claims essentially grounded on
corporate mismanagement are not cognizable under federal

29
law”); Field v. Trump, 850 F.2d 938, 941 (2d Cir. 1988)
(affirming dismissal of Rule 10b-5 non-disclosure claims on the
ground that they were “attempts to bootstrap state-law fiduciary-
duty claims into a federal securities-law action”).

The Government cites to a Supreme Court case,
Chiarella v. United States, 445 U.S. 222, 232 (1980), to
demonstrate that fiduciary obligations can be federalized in the
securities law context. Chiarella involved insider trading
charges against a printing company hired by a corporation to
print corporate takeover bids. While the Court discussed
fiduciary obligations, it did so in the context of insider trading,
an entirely different situation than the one before us. See
Deutschman v. Beneficial Corp., 841 F.2d 502, 506 (3d Cir.
1988) (explaining that Chiarella “dealt not with injury caused by
affirmative misrepresentations which affected the market price
of securities, but with the analytically distinct problem of trading
on undisclosed information”). Insider trading raises a duty to
disclose under prong one of Oran. The Court explained that
corporate insiders must “abstain from trading in the shares of
[the] corporation until the disclosure of material information”
because of “the unfairness of allowing a corporate insider to
take advantage of that information by trading without
disclosure.” Chiarella, 445 U.S. at 227. The insider
relationship “gives rise to a duty to disclose because of the
‘necessity of preventing a corporate insider from . . . tak[ing]
unfair advantage of the uninformed minority stockholders.’” Id.
at 228 (citation omitted) (alteration in original) (discussing

30
insider trading when “corporate insiders used undisclosed
information for their own benefit”).

To the extent the Government argues an alternative
theory that this duty to disclose based on statements of another
rests not on fiduciary grounds, but instead based on prong three
of Oran (misstatements), waiver is an issue.19 During pretrial
proceedings, the Government premised its duty to rectify
statements of another theory solely on fiduciary duty, which is
outside Oran. And the Government acknowledged as much at
oral argument. For example,20 at a hearing on June 26, 2007, the
District Court pointedly asked the Government what the source
of the duty was for another’s misstatements other than aiding
and abetting. The Government responded: “The fiduciary duty
not to mislead the public on those calls.” (App. 266–68.) A

19
More generally, the Government contests the District Court
Opinion’s description of the case’s procedural posture,
specifically related to when and whether certain legal theories
were presented. On our own review of the pretrial record,
however, we conclude that the Court did not err in its
characterization of the record, of which it was intimately
familiar over years of pretrial litigation.
20
These examples concern the Government’s argument that
Lane had a duty to rectify Schiff’s misstatements. The
Government did not argue the opposite, that Schiff had a duty to
rectify Lane’s misstatements, on the same grounds, until the
February 26, 2008 hearing.

31
written submission by the Government on August 3, 2007,
regarding the legal basis for a duty to disclose based on
statements of another, discusses only a fiduciary basis. (Id. at
405–09.) At a hearing on October 30, 2007, the Court
summarized the Government’s argument as “the Oran list of
three factors is non-exclusive, and that Lane’s duty to disclose
arises from a fourth factor [beyond Oran], to wit, his fiduciary
duty to shareholders,” and the Government answered “yes.”
(Amicus Supp’l App. 46.) At that same hearing, the
Government stated “that the third prong of [Oran], in fact all the
prongs of [it,] deal with the duty to disclose, duties to disclose
regarding one’s own statements, and that is the basis on which
it was cited in our brief.” (App. 474 (emphasis added).) The
Court clarified that “in the section of the brief on [Lane’s] actual
statements, something he uttered, you cite [Oran].” (Id. at
474–75.) To which the Government responded: “That’s
correct.” (Id. at 475.) The Court continued, noting that “on the
section of the brief dealing with his omissions to state when Mr.
Schiff said something, there is only this fiduciary duty there.”
(Id. (emphasis added).) The Government again responded:
“That’s right.” (Id.)

Based on this record, we conclude that an argument
grounded in Oran was waived and precluded by the District
Court’s case management ruling in the Opinion.21 Cf. United

21
“[D]istrict courts have wide discretion in the management
of their cases.” United States v. Wecht, 484 F.3d 194, 217 (3d

32
States v. Dell’Aquilla, 150 F.3d 329, 335 (3d Cir. 1998)
(explaining that appellants contended that they raised specific
arguments before the district court, but the appeals panel could
find no support in the record for those assertions and determined
the issues were waived, noting that “absent exceptional
circumstances, an issue not raised in district court will not be
heard on appeal”).

Despite this waiver, the plain language of § 10(b) and
corresponding Rule 10b-5 do not contemplate the general failure
to rectify misstatements of others. See, e.g., SEC v. Tambone,
--- F.3d ----, 2010 WL 796996, at *9 (1st Cir. 2010) (en banc)
(“Reading ‘make’ to include the use of a false statement by one
other than the maker would extend primary liability beyond the
scope of conduct prohibited by the text of Rule 10b-5(b).”);
Wright v. Ernst & Young LLP, 152 F.3d 169, 175 (2d Cir. 1998)
(“[A] secondary actor cannot incur primary liability under
[§ 10(b)] for a statement not attributed to that actor at the time
of its dissemination.”); Shapiro, 123 F.3d at 720 (“[A] defendant
must actually make a false or misleading statement in order to
be held liable under Section 10(b). Anything short of such
conduct is merely aiding and abetting, and no matter how

Cir. 2007); see also Yakowicz v. Pennsylvania, 683 F.2d 778,
784 (3d Cir. 1982) (referring to the “broad powers with respect
to timing and other considerations that [the District Court] has
generally in the management of the cases before it as they
proceed through the various stages before and during trial”).

33
substantial that aid may be, it is not enough to trigger liability
under Section 10(b).”); see also In re Rent-Way Sec. Litig., 209
F. Supp. 2d 493, 504 (W.D. Pa. 2002) (relying on the text of
Rule 10b-5(b) to conclude that a defendant that “was not the
maker of the . . . statements . . . cannot be responsible for
omissions in statements that it itself did not make”); Wafra
Leasing Corp. v. Prime Capital Corp., 192 F. Supp. 2d 852, 867
(N.D. Ill. 2002) (explaining that 10b-5(b)’s text “demonstrates
that a defendant is liable only for those omissions that make his
own statements misleading”) (emphasis in original)). Moreover,
in Central Bank, the Supreme Court determined that the scope
of § 10(b) does not encompass aiding and abetting liability
because the statute “prohibits only the making of a material
misstatement (or omission) or the commission of a manipulative
act.” Central Bank of Denver, N.A. v. First Interstate Bank of
Denver, N.A., 511 U.S. 164, 177 (1994). Consequently,
incorporating into the statute an obligation to rectify others’
misstatements (though lacking even the aiding and abetting
mens rea requirement of the initial statement made) would be
illogical in light of the Supreme Court’s holding.

The Rule’s plain language presents two bases for
liability: (1) “[t]o make any untrue statement” or (2) “to omit to
state a material fact necessary in order to make the statements
made . . . not misleading.” 17 C.F.R. § 240.10b-5(b); see also
Burlington, 114 F.3d at 1431 (stating that “a Section 10(b)
plaintiff ordinarily is required to identify a specific statement
made by the company and then explain either (1) how the

34
statement was materially misleading or (2) how it omitted a fact
that made the statement materially misleading”); Goldwater v.
Alston & Bird, 116 F.R.D. 342, 348 (N.D. Ill. 1987) (indicating
two distinct bases for liability under Rule 10b-
5(b)—misrepresentations and misleading statements).

Schiff argues that the Government’s contention that he
“actually made the omissions” by not rectifying Lane’s
purported misstatements conflates the two independent grounds.
We agree. Schiff did not make those statements, Lane did (and
vice versa). The Government responds that we should interpret
the securities laws broadly. However, “generalized references
to the remedial purposes of the securities laws will not justify
reading a provision more broadly than its language and the
statutory scheme reasonably permit.” Aaron v. SEC, 446 U.S.
680, 695 (1980) (internal quotations and citations omitted).

B. Schiff’s Own Statements

Turning from Schiff’s liability for statements of another
to his own statements, we must address three of the
Government’s omission liability theories: (1) “all of a piece”;
(2) duty to update; and (3) duty to correct. Like the omission
theories premised on statements of another, these theories
similarly fail. Generally, the Government alleges that Schiff
made material misstatements in the quarterly analyst calls and
failed thereafter to update or correct these statements in the
Management Disclosure and Analysis section of Bristol’s SEC

35
10-Q filings (filed quarterly, approximately one month after
each call) or 10-K annual report. (Gov’t Br. at 7.) We note
preliminarily, however, that Schiff’s direct liability under Rule
10b-5(b) for his alleged misstatements and omissions on analyst
calls is not premised on an omission liability theory pinned to
the SEC filings, and thus remains in the case. This issue is not
contested on appeal and falls under prong three of Oran as “an
inaccurate, incomplete or misleading prior disclosure.” Oran,
226 F.3d at 285–86.

1. “All of a Piece”

The District Court dismissed the “all of a piece” theory
in its Opinion. It stated that the first time this theory was raised
was at the February 26, 2008 hearing. At that hearing, the
Government argued that the quarterly analyst calls and SEC 10-
Q filings were tied together as essentially one event, such that
the intentional misstatements on analyst calls created a duty of
disclosure in the SEC filings under Rule 10b-5(b) to “make the
statements in the prior analyst calls not misleading.” Schiff, 538
F. Supp. 2d at 827, 829 (noting that “[t]his theory attempts to fit
omission liability into Oran’s third prong”). However, because
the Government has stipulated that Schiff is not charged with
affirmative misstatements in the SEC filings, the alleged
omissions are not tied to any purported misleading statements in
those filings, as is required by Rule 10b-5(b). 17 C.F.R.
§ 240.10b-5(b) (“to omit to state a material fact necessary in
order to make the statements made, in light of the circumstances

36
under which they were made, not misleading”) (emphasis
added). Thus, we agree with and incorporate the District
Court’s well-reasoned analysis dismissing this theory. See
Schiff, 538 F. Supp. 2d at 829–31.

The Court characterized the issue as “the fair breadth of
context between a prior misleading statement in one context
(analyst conference call) and the alleged omission ‘necessary’ to
make that earlier ‘statement’ not misleading.” Id. at 829. It
indicated that it is not logical “to charge as a crime that an
utterance in an analyst conference call must have other words
written in a later SEC filing in order to make the utterance in the
prior phone call ‘not misleading’” because under Rule 10b-5 the
“duty to disclose . . . arises when each statement was made.” Id.
at 830. The “breadth of context between the alleged false
statement on an analyst [call] and alleged omission in the [SEC]
filings is too broad.” Id. (determining there was not a sufficient
nexus to tie the analyst calls and the SEC 10-Q filings together
under Rule 10b-5(b)’s language). Thus, there are no actionable
omissions in the SEC filings on which to base this theory.

2. Duties to Update & Correct

The threshold question here is whether the duty to update
and correct theories were waived or precluded by the District
Court’s case management ruling in the Opinion regarding new
legal theories. Id. at 826. The Court also explicitly stated in the
Opinion that the “Government is not alleging here a ‘duty to

37
correct’ . . . . That theory is inapposite here because the
Government has alleged that [Schiff’s] statements on the analyst
calls were misleading at the time made.” See id. at 831 n.10
(emphasis added). Moreover, based on our review of the record,
the Government’s only allegations against Schiff are for
intentional misstatements or omissions charged in the
indictment, alleged in the Government’s Bill of Particulars, and
maintained by the Government throughout the pretrial
proceedings.22 By attempting to shoehorn these new theories
into the case (which the Government characterizes as defensive
theories), it appears to be trying to amend constructively the
indictment at the eleventh hour. See United States v. Henry, 29

22
For example, at the February 26, 2008 hearing, the
Government maintained to the Court that “Schiff lied on analyst
calls in direct response to questions by analysts” regarding “the
amount of excess inventory,” and “on the analyst call again Mr.
Schiff lies . . . . Following [the] analyst call, again Mr. Schiff
lies.” (App. 826, 828.) The Court summarized that “[y]our
basic case has always been, and remains to this day, that Mr.
Schiff did not tell the truth on conference calls with analysts
about the effect of the excess inventory buildup.” The
Government agreed. (App. 1135.) Significantly, Schiff’s
counsel sent a letter to the Court on March 3, 2008 confirming
that “the [G]overnment has not based its theory on a ‘duty to
correct,’” which would have been “inapposite here because the
government has alleged that Mr. Schiff knew that the statements
on the analyst calls were misleading at the time they were
made.” (App. 874 n.5.)

38
F.3d 112, 114 (3d Cir. 1994) (indicating “theories [that] were
not advanced in the indictment [] cannot save it on appeal”); see
also United States v. Alkaabi, 223 F. Supp. 2d 583, 588–89
(D.N.J. 2002) (rejecting the government’s attempt to “usurp the
role of the grand jury by advancing new, unalleged
theories . . . in its briefs in an effort to save the Indictments”;
“[t]he Government did not include its three alternative property
theories in the Indictments presented to the Grand Jury, and it
cannot do so now”).

The Government counters by pointing to an August 3,
2007 letter brief to the District Court that briefly referenced the
duty to correct concerning Lane (though it did not refer to
omissions in SEC filings), and argues that it adopted the
arguments for Schiff. But we do not see confirmation of this in
the record.23 Moreover, “the [D]istrict [C]ourt was in the best
position to determine whether or not the issue . . . was raised.”
Farfaras v. Citizens Bank & Trust of Chicago, 433 F.3d 558,
568 (7th Cir. 2006). Thus, we agree with Schiff that these

23
In fact, the Government’s other record cites support its “all
of a piece theory,” and not the duties to update or correct. To
reiterate, this theory goes that Schiff intentionally “lies” (makes
false or misleading statements, including omissions) on analyst
calls, but could nevertheless potentially be vindicated in whole
or part by correcting those misstatements in subsequent SEC
filings. (App. 827–29 (Government’s statements at February 26,
2008 hearing).)

39
theories were waived or precluded by the District Court’s case
management ruling in the Opinion.

In Burlington, 114 F.3d at 1430–34, we discussed the
duties to update and correct. In the civil context, which applies
here to understand when these duties arise, we stated that “the
duties to update and correct are two other avenues of finding a
duty to disclose that have been kicked around by courts, litigants
and academics alike.” Id. at 1430 (internal quotations and
citations omitted). See generally Robert H. Rosenblum, An
Issuer’s Duty Under Rule 10b-5 to Correct and Update
Materially Misleading Statements, 40 Cath. U. L. Rev. 289
(1991). These disclosure duties fit within prong three of Oran.
Oran, 226 F.3d at 286.

Even if the duty to update were not waived by the
Government, this new theory would not survive a motion to
dismiss in this case. A duty to update arises when “statements
that, although reasonable at the time made, become misleading
when viewed in the context of subsequent events.” Burlington,
114 F.3d at 1431 (citing Greenfield v. Heublein, Inc., 742 F.2d
751, 758 (3d Cir. 1984) (explaining that updating might be
required if a prior disclosure “[had] become materially
misleading in light of subsequent events”)). The initial
statement that was “reasonable at the time made” must contain
“an implicit factual representation that remained ‘alive’ in the
minds of investors as a continuing representation.” Id. at 1432
(citations omitted). This is a narrow duty because of the

40
potential to create a sweeping continuing obligation for
corporations when they disclose information. Id. at 1433–34
(explaining the benefits of encouraging voluntary “maximal
disclosure” of corporate “information useful to investors,” such
as internal company forecasts, and disincentivizing corporations
from remaining silent and releasing less information in the hope
of avoiding the attachment of a continuing obligation to monitor
and update all released information). Importantly, the
Burlington Court noted that the duty has only been plausible in
cases where the initial statement concerns “fundamental[]
change[s]” in the nature of the company—such as a merger,
liquidation, or takeover attempt—and when subsequent events
produce an “extreme” or “radical change” in the continuing
validity of that initial statement. Id. at 1433–34 & n.20
(refusing to find a duty to update an earnings forecast that,
although reasonable when made, may turn out to have been
wrong in hindsight, and “reemphasiz[ing] that the . . . two cases
in which we recognized that a duty to update might exist[] were
vastly different” and the update claims eventually were
rejected); id. at 1434 n.20 (comparing Eisenstadt v. Centel
Corp., 113 F.3d 738, 745 (7th Cir. 1997) (suggesting that even
such a narrow duty might not exist)). The circumstances in this
case, concerning Bristol’s ongoing sales volume of
pharmaceutical products to wholesalers in its distribution chain,
do not come close to fitting within the narrow range of this duty.

The duty to correct is similarly unsuccessful, but it is at
least less far afield than the duty to update. The duty to correct

41
arises when “a company makes a historical statement that, at the
time made, the company believed to be true, but as revealed by
subsequently discovered information actually was not.”
Burlington, 114 F.3d at 1431 (internal citations and quotations
omitted) (noting that the duty “can also apply to a certain narrow
set of forward-looking statements”). The key for this duty to
exist is a triggering factual event after the statement is made.
We ask what the event would be that gives rise to the duty to
correct. Here, nearly three years have passed since the
Government presented the current indictment to the grand jury,
and it has failed to make any allegation or suggestion (including
in its appellate arguments) as to what the subsequent event
would be to trigger this duty. See id. at 1432. We also cannot
imagine what that event would be.24 The defendants need to
have some notice of this fundamental factual predicate to be
able to prepare an adequate defense to the criminal charges.

24
Additionally, we question why the correction must be made
in the SEC 10-Q filings, as the Government argues. Scholars
have commented that if a duty to correct or update is triggered,
it should be corrected in a timely fashion and preferably by
using the same medium through which the initial error was
disseminated, which in this case would have been a follow-up
analyst call. See, e.g., Alan R. Bromberg & Lewis D.
Lowenfels, Bromberg and Lowenfels on Securities Fraud &
Commodities Fraud § 5:328, at 5-542 (2d ed. 2007) (“[A] press
release will normally be corrected by a press release. . . . An ad
in a major newspaper would normally be corrected by an ad or
announcement in that same paper.”) (collecting cases).

42
III. Daubert Materiality Ruling

At Schiff’s trial, the Government must prove materiality
as an element of a Rule 10b-5(b) violation.25 Basic v. Levinson,
485 U.S. 224, 238 (1988). “Material information is ‘information
that would be important to a reasonable investor in making his
or her investment decision.’” Oran, 226 F.3d at 282 (quoting
Burlington, 114 F.3d at 1425). This “is a mixed question of law
and fact, and the delicate assessments of the inferences a
reasonable shareholder would draw from a given set of facts are
peculiarly for the trier of fact.” Shapiro v. UJB Fin. Corp., 964
F.2d 272, 281 n.11 (3d Cir. 1992) (citing TSC Indus., Inc. v.
Northway, Inc., 426 U.S. 438, 450 (1976)).

The Government sought to introduce the drop in Bristol’s
stock price in the days following the company’s three pertinent
announcements on April 1, 3, and 25 (corresponding with the
company’s stock drops on April 2, 4, and 26, respectively) as
evidence of materiality of the alleged misstatements and
omissions involving the concealment of wholesaler inventory
levels. Though this is not the only method of proving

25
Criminal and civil securities fraud pursuant to Rule 10b-
5(b) requires that the defendant “made a materially false or
misleading statement or omitted to state a material fact
necessary to make a statement not misleading.” 17 C.F.R.
§ 240.10b-5(b) (emphasis added); see Burlington, 114 F.3d at
1417.

43
materiality,26 it is widely used as evidence if the market is
efficient (and there is no question here about whether the market
is efficient). See Oran, 226 F.3d at 282 (quoting Burlington,
114 F.3d at 1425) (explaining that an “efficient market”
“‘immediately incorporate[s]’” “‘information important to
reasonable investors’” and the Third Circuit is committed to the
efficient market hypothesis). We have explained that the
“creation of the stock-price rule was explicitly to determine
whether information was material.” In re Merck & Co. Sec.
Litig., 432 F.3d 261, 275 (3d Cir. 2005) (citing Burlington, 114
F.3d at 1425). To use stock price drops as evidence of
materiality, the Government “must demonstrate that public
disclosure of the misstatements charged in the indictment had an
‘appreciable negative effect’ on the stock price.” Schiff, 538 F.
Supp. 2d at 835 (quoting Oran, 226 F.3d at 282–83 (noting that

26
While stock drop evidence is generally accepted, other
evidentiary methods could be effective before a jury as well,
particularly if additional factors unrelated to the charged fraud
muddy the stock drop evidence. For example, the actionable
statements pertinent to this appeal occurred in analyst calls with
Wall Street investment bankers. The Government has other fact
witnesses for materiality, including Wall Street analysts and
Bristol employees. (Gov’t Br. at 59.) Presumably, those
witnesses would testify that a pharmaceutical company’s sales
and the level of wholesaler inventory are material to their
investment decisions and forecasts, and were so in this case.
Moreover, analyst and company reports discussing inventory
levels are themselves probative of this issue.

44
“the materiality of disclosed information may be measured post
hoc by looking to the movement, in the period immediately
following disclose, of the price of the firm’s stock”)).

Before the District Court there was a question of whether
the Government needed an expert to present the stock drop
evidence, and it was determined that the introduction of this
evidence would proceed through expert testimony.27 (See App.
600–05.) The District Court noted that “[c]ourts often turn to
economic experts to determine whether a particular
announcement had an appreciable effect on the stock price.”
Schiff, 538 F. Supp. 2d at 835 (citing Unger v. Amedisys Inc.,
401 F.3d 316, 325 (5th Cir. 2005) (“Demonstrating that market
reactions are caused by company press releases should not,
however, be an exercise in post hoc, propter hoc logic. Many
variables have the potential to and do affect a stock price—the
daily market average; national, local and industry-specific
economic news; competitors’ activities; and on and on. The
overall volatility of the stock price and the speed of its reaction
to company news may also be significant. To this end, expert
testimony may be helpful because of the utility of statistical
event analysis for this inquiry.”)); see also Dura Pharms., Inc.
v. Broudo, 544 U.S. 336, 343 (2005) (“[A] lower [share] price
may reflect, not . . . earlier misrepresentation[s], but changed

27
The Government is not appealing the requirement of an
expert to testify about the stock price drop evidence in the first
instance.

45
economic circumstances, changed investor expectations, new
industry-specific or firm-specific facts, conditions, or other
events, which taken separately or together account for some or
all of that lower price.”).

We evaluate a district court’s decision to exclude expert
testimony under Rule 702 of the Federal Rules of Evidence.28
We have explained that “Rule 702 has three major requirements:
(1) the proffered witness must be an expert, i.e., must be
qualified; (2) the expert must testify about matters requiring
scientific, technical or specialized knowledge [, i.e., reliability];
and (3) the expert’s testimony must assist the trier of fact [, i.e.,
fit].” Pineda, 520 F.3d at 244. “Under the Federal Rules of
Evidence, a trial judge acts as a gatekeeper to ensure that any

28
Federal Rule of Evidence 702, amended in 2000 in response
to Daubert, reads:

If scientific, technical, or other specialized
knowledge will assist the trier of fact to
understand the evidence or to determine a fact in
issue, a witness qualified as an expert by
knowledge, skill, experience, training, or
education, may testify thereto in the form of an
opinion or otherwise, if (1) the testimony is based
upon sufficient facts or data, (2) the testimony is
the product of reliable principles and methods,
and (3) the witness has applied the principles and
methods reliably to the facts of the case.

46
and all expert testimony or evidence is not only relevant, but
also reliable.” Id. at 243 (internal quotations and citations
omitted). Before the proposed testimony gets presented to the
jury, the trial judge evaluates its admissibility based on these
three requirements.

The third requirement is at issue here. It is typically
understood in terms of whether there is a sufficient “fit”
between the expert’s testimony and the facts that the jury is
being asked to consider. Daubert, 509 U.S. at 591. In assessing
whether an expert’s proposed testimony “fits,” we are asking
“‘whether [the] expert testimony proffered . . . is sufficiently
tied to the facts of the case that it will aid the jury in resolving
a factual dispute.’” Id. (quoting United States v. Downing, 753
F.2d 1224, 1242 (3d Cir. 1985)). Put another way, this is a
question of relevance, and “Rule 702, which governs the
admissibility of expert testimony, has a liberal policy of
admissibility” if it has the “potential for assisting the trier of
fact.” Kannankeril v. Terminix Int’l, Inc., 128 F.3d 802, 806 (3d
Cir. 1997) (citing Holbrook v. Lykes Bros. S.S. Co., 80 F.3d 777,
780 (3d Cir. 1996)); see also In re TMI Litig., 193 F.3d 613, 670
(3d Cir. 1999) (“expert evidence which does not relate to an
issue in the case is not helpful”). The “standard is not that
high,” but “is higher than bare relevance.” In re Paoli R.R. Yard
PCB Litig., 35 F.3d 717, 745 (3d Cir. 1994).

In its Opinion, the District Court preliminarily excluded
the Government’s stock drop materiality expert based on the

47
lack of fit. The Court left open, however, the possibility of
introducing this evidence at trial if the Government provided a
sufficient factual foundation that would remedy this gap in the
expert’s testimony. See Schiff, 538 F. Supp. 2d at 842 n.24. We
believe the Court did not abuse its discretion.

The procedural history and the Court’s discussion of this
expert issue in its Opinion are complex. The Court left no stone
unturned in its comprehensive discussion. Rather than present
a long recitation, we go directly to the heart of the issue.

The Government’s stock drop expert, Dr. Paul Wazzan,
presented a report that addressed Bristol’s three key April 2002
“curative announcements” and corresponding stock price drop
dates. At the beginning of the Daubert hearing, and before Dr.
Wazzan took the stand, the Government restricted his testimony
to only one date, April 4, which concerned Bristol’s April 3
announcements (press release and analyst call). Dr. Wazzan’s
report and his testimony made clear that, in conducting an event
study, he was only asked to deal with exogenous events beyond
the company’s announcement (i.e., events outside the company’s
control, such as market, industry, and economy-wide effects).29

29
An event study, such as the one Dr. Wazzan performed, “is
a statistical regression analysis that examines the effect of an
event on a depend[e]nt variable, such as a corporation’s stock
price.” In re Apollo Group Inc. Sec. Litig., 509 F. Supp. 2d 837,
844 (D. Ariz. 2007) (internal quotations and citation omitted)

48
The Government did not ask him to address the potentially
unrelated negative events disclosed in Bristol’s announcement
by statistically disaggregating the effects of those events.30

(noting that it is the tool “most often used by experts to isolate
the economic losses caused by the alleged fraud”).
30
Dr. Wazzan opined in his report that Bristol’s
announcements on April 1, 3, and 25 “caused statistically
significant changes to [Bristol’s] stock price,” Schiff, 538 F.
Supp. 2d at 837, though at the Daubert hearing the Government
limited this report to only April 3. The District Court explained
that

Dr. Wazzan performed an event study and also
examined the stock price drops after controlling
for exogenous market, industry, and economy-
wide effects. Thus, he concluded that the
announcements had material, measurable and
statistically significant impacts. He did not,
however, attempt to control for the multiple
simultaneous adverse [Bristol] news that included
both events charged in the indictment and events
not charged in the indictment.

Id. The April 3 disclosed events included the quantification of
workdown of the wholesalers’ excess inventory and short-term
demand, Lane’s termination, and other long-term demand
projections, including an analysis on the effect of generic drug
introduction on specific Bristol products (loss of exclusivity).

49
 At the end of the hearing, the Court engaged the
Government in a colloquy on this issue. The Court questioned
whether there was an analytical gap in the expert’s testimony,
such that it did not “fit” the issue of materiality. Its concerns
were two-fold (and were elaborated on in its Opinion, see Schiff,
538 F. Supp. 2d at 835–42).31 First, it addressed the apparent

31
Schiff’s stock drop materiality expert, Dr. R. Glen Hubbard,
addressed in his report both issues the Court raised as analytical
concerns in Dr. Wazzan’s report. For example, Dr. Hubbard
opined that “the observed stock price decline on April [4] could
be explained as a response to disappointing consumer demand
for prescriptions, management changes,
and/or . . . announcements concerning [Bristol’s] credit, rather
than a reaction to the wholesaler inventory workdown plan.”
(App. 763.)
Schiff argues that Dr. Wazzan’s report is unreliable
because it is based on a flawed methodology. According to Dr.
Hubbard, an event study “cannot reliably disentangle” unrelated
events and new news. (App. 761–65.) The Government’s
position, however, is that, in the April 3 announcements, all
disclosed events are related and the company disclosed new
information regarding wholesaler inventories. Moreover, “[a]
judge frequently should find an expert’s methodology helpful
even when the judge thinks that the expert’s technique has flaws
sufficient to render the conclusion inaccurate.” Paoli, 35 F.3d
at 744–45. Based on this, we do not view the event study as an
impermissible methodology under the reliability factors
mentioned in Daubert, 509 U.S. at 594–95, or United States v.
Mitchell, 365 F.3d 215, 235 (3d Cir. 2004) (setting forth an

50
confounding negative events within Bristol’s disclosures. If a
company event unrelated to the wholesaler inventory issue, but
simultaneously announced, triggered the stock drop, then the
expert’s testimony that viewed the announcement as a whole
would not be probative of materiality (i.e., it would fail to fit).
Dr. Wazzan testified that he could have statistically
disaggregated multiple confounding factors (i.e., simultaneously
disclosed unrelated negative events), but the Government did
not ask him to do so.

Second, because the Government confined the expert’s
report to one day, the Court raised a potential issue arising from
Merck, 432 F.3d at 269, that was not addressed in Dr. Wazzan’s
report. See Schiff, 538 F. Supp. 2d at 839 (explaining that “if
any portion of the April 3, 2002 disclosure is essentially a
redisclosure of the same information disclosed on April 1, such
redisclosure may not necessarily be the cause of any of the stock
price drop observed on April 4”). The Merck court explained
that, in an “efficient market[,]” “information important to
reasonable investors (in effect, the market) is immediately
incorporated into stock prices.” 432 F.3d at 269 & n.5 (internal
quotations and citation omitted) (stating that the stock price
effect “occurs in the period immediately following the
disclosure” (internal quotations and citation omitted)). Thus, if
similar information is disclosed to the market on multiple days,
and there is not appreciable movement in the stock price after

eight-part test for determining reliability).

51
the initial disclosure, then a stock price drop following the
secondary disclosure would not be attributable to that event, but
some other factor. Id. at 269 (indicating that “Merck’s stock did
not drop after the first disclosure, and that is generally when we
measure the materiality of the disclosure, not [the subsequent
disclosure]”).

By restricting Dr. Wazzan’s report and testimony to only
the April 3 announcements and April 4 stock drop, he did not
consider what inventory information announced on April 3 was
new and what was already disclosed (and thereby already
incorporated into the market price of Bristol’s stock).32 And if

32
To elaborate on the District Court’s Merck concerns, we
note that Bristol’s issuance of its 10-K on April 1, which was
initially a part of Dr. Wazzan’s report but excluded by the
Government at the Daubert hearing, appears to have included
not only negative disclosures related to the inventory issue, but
also other unrelated events, such as the adverse outcome of a
patent case that cost the company millions of dollars. Like the
analysis of the April 3 announcements and the subsequent April
4 stock price drop, it is not clear that the inventory issue
disclosed on April 1 had an appreciable effect on the April 2
stock price drop. Dr. Wazzan’s testimony concerning only April
3 and 4 does not shed light on this issue.
Moreover, part of Schiff’s materiality stock drop defense
relies on Merck—that the alleged misstatements concerning
inventory issues were not material because that information was
already available to the market in the period before all the April

52
there were a prior disclosure, his restricted testimony did not
look back and opine on the materiality of that initial disclosure.
If no new information related to the inventory issue were
disclosed on April 3, then the stock drop on April 4 might not be
attributable to that issue, but instead to the company’s other
disclosed negative events.

The Government maintained, however, that all the
negative company events disclosed in Bristol’s April 3
announcements were new and related to the inventory issue;
thus statistical disaggregation of those events by the expert was
unnecessary. It responded to the Court’s concern regarding fit
by stating that at trial it intended to present fact witnesses to
testify to relatedness and lay the foundation for Dr. Wazzan’s
report and testimony, which only viewed the announcements as
a whole. Those witnesses would substantiate that all the events
in the announcement related to the inventory issue.

The Court noted that the Government’s mention of fact
witnesses at the conclusion of the Daubert hearing was the first
time it raised that these types of witnesses would be presented

2002 disclosures, and made no statistically significant change to
the stock price. Thus the drops in April must have been due to
other unrelated events.

53
in conjunction with the expert testimony.33 It also pointed out
that Dr. Wazzan did not include in his report that he was relying
on the assumption that all the events disclosed in the
announcements were related.34 The Court characterized this as
a “theory shift” for case management purposes, and
preliminarily excluded the expert testimony and stock drop
evidence. See Schiff, 538 F. Supp. 2d at 840 & n.20. At such a
late date, it was concerned with fair notice and Schiff’s inability
to evaluate this skeletal factual proffer. Id. at 841. It was also

33
The Court pointed out that the parties produced extensive
briefing in the eight months leading up to the Daubert hearing
and that the Government’s position was that it “d[id] not intend
to prove that Defendant Schiff’s conduct, when announced,
caused the stock price drop.” Schiff, 538 F. Supp. 2d at 838
(citing the Government’s brief heading: “The Cause of
[Bristol’s] Stock Decline Is Not At Issue”). Prior to the hearing
and the factual proffer, the Government “consistently argued the
exact opposite[,] . . . that unrelated events do not matter in
proving materiality.” Id. at 840 n.20 (emphasis in original).
The Court noted that “[t]his argument fundamentally misses the
most basic logic for stock price drop evidence to be relevant in
the first place.” Id. at 838.
34
The District Court determined that the Government’s late
presentation also violated Rule 16(a)(1)(G) of the Federal Rules
of Criminal Procedure, which mandates written notice of “any
testimony that the government intends to use under [Federal
Rules of Evidence] 702, 703, or 705.” Schiff, 538 F. Supp. 2d
at 841 (internal quotations and citation omitted).

54
skeptical that the fact testimony offered by the Government was
not more appropriate for an expert, but did not have the
opportunity to evaluate the issue. Id. Moreover, it suggested
that, at least facially, some of the disclosed negative events in
the announcement appeared significant and unrelated to the
inventory issue (and hence unrelated to actionable statements in
the indictment).35 Id. at 840 (noting that it is “certainly not clear
from the face of the April 3 press release and conference call,
which clearly separated short term excess inventory work down
from a long term drop in demand for certain drugs,” that those
events were related).

Nonetheless, in crafting its ruling in the Opinion the
Court left the Government with a substantial opening for the
introduction of the stock price drop evidence. It stated:

If, during the trial, the Government believes that
it has adduced sufficient factual support for its
argument that all of the disclosures on April 3,
2002 are attributable to Defendant Schiff's

35
The Government argues that the District Court abused its
discretion by improperly finding facts, rather than leave the
questions of relatedness and new news to the jury. That is not
a proper characterization. The Court dealt with the issue of fit
in discussing the Government’s factual proffer. By letting the
Government introduce its fact witnesses at trial, the Court left
the fact finding to the jury.

55
 charged conduct, the Government may make an
application at that time to admit stock price drop
evidence related only to the April 3, 2002
disclosure. In such a factual setting, the Court
and Defendant Schiff will have heard the factual
evidence to determine if indeed there are not
confounding factors that require an expert.

Id. at 842 n.24. If the Government’s reapplication at trial to
admit the stock drop evidence is unsuccessful, then Dr.
Wazzan’s testimony would be “admissible only to refute an
argument, if one is made, that the market for [Bristol’s] stock is
not efficient or that extrinsic market factors account for the
observed stock price drop.” Id. at 839.

We give a district court broad discretion in its rulings
concerning case management both before and during trial. See
Yakowicz, 683 F.2d at 784; Wecht, 484 F.3d at 217; Titus v.
Mercedes Benz of North Am., 695 F.2d 746, 751 (3d Cir. 1982).
Here, the Court was concerned with the Government’s late
factual proffer (the Court issued a case management ruling that
the expert reports were “final” with no opportunity to amend
(App. 616, 680–81)), and that Schiff had no notice or
opportunity to test such a proffer in conjunction with the
admissibility of the expert’s testimony. See Schiff, 538 F. Supp.
2d at 840–41 (“There is just no excuse for waiting until the eve
of trial (and the end of the Daubert hearing) to launch a new
theory (especially one that requires a new factual proffer),” and

56
the “Government’s new theory has never been briefed.”). The
Government also appears to acknowledge that the Daubert “fit”
requirement is contingent on the presentation of its fact
witnesses to lay the foundation that the simultaneously disclosed
negative events in the April 3 announcement were related to the
inventory issue and thus connected to alleged statements in the
indictment. (See, e.g., Gov’t Br. at 72.)

Accordingly, we believe the Court’s thoroughly
explained ruling that allows the Government to present its fact
witnesses at trial, and then petition the Court for introduction of
Dr. Wazzan’s stock price drop testimony, was a pragmatic
solution and not an abuse of discretion. See United States v.
Ford, 481 F.3d 215, 220 n.6 (3d Cir. 2007) (agreeing with the
proposition that expert testimony needs to “speak[] clearly and
directly to an issue in dispute in the case, and . . . not mislead the
jury,” so that “district courts should tread carefully when
evaluating proffered expert testimony, paying special attention
to the relevance prong of Daubert” (internal quotations and
citation omitted)). The Court explained that Dr. Wazzan’s
testimony, as it stands, only allows him “to opine [ ] that
something in the April 3, 2002 disclosure is material,” Schiff,
538 F. Supp. 2d at 839 (emphasis in original), allowing the jury
only to “speculate” as to the causes of the stock price drop, id.
at 836 n.16.

If the witnesses fail to provide the proper evidentiary
foundation—and the Court could not evaluate that prior to or at

57
the Daubert hearing because the Government only offered a
bare-bones proffer, as it did not identify the witnesses or
describe their testimony (and perhaps the Government’s
proposed witnesses will not appear at trial or will fail to confirm
relatedness)—then the expert’s testimony was properly excluded
based on fit. See Gen. Elec. Co. v. Joiner, 522 U.S. 136, 146–47
(1997) (stating that a district “court may conclude that there is
simply too great an analytical gap between the data and the
opinion proffered”).

If the Government lays this foundation (which it claims
it will), at that time it can make a renewed application to the
Court to present the stock price drop on April 4 through Dr.
Wazzan as evidence of materiality. And given the generous
view of the Federal Rules of Evidence toward admissibility, it
may not be inappropriate at that stage to grant the Government’s
request. Schiff will likewise have an opportunity to present his
own stock price drop expert, and cross-examine both the
Government’s foundation witnesses and Dr. Wazzan on these
issues (including the concerns regarding related events and the
question of disclosure of new news). See Daubert, 509 U.S. at
596 (“[v]igorous cross-examination, presentation of contrary
evidence, and careful instruction on the burden of proof are the
traditional and appropriate means of attacking shaky but
admissible evidence”).

* * * * *

58
 In this context, we affirm the District Court’s dismissal
of the Government’s omission liability theories—including
fiduciary duty, all of a piece, and the duties to update and
correct—and its ruling concerning the introduction of the
Government’s materiality expert on stock price drop evidence.

59