In re Bos. Sci. Corp. Sec. Litig., Civil Action 20-12225-DPW

• Court: United States District Courts. 1st Circuit. United States District Courts. 1st Circuit. District of Massachusetts
• Writing for the Court: DOUGLAS P. WOODLOCK, UNITED STATES DISTRICT JUDGE
• Parties: In re BOSTON SCIENTIFIC CORPORATION SECURITIES LITIGATION
• Docket Number: Civil Action 20-12225-DPW
• Decision Date: 20 December 2022

In re BOSTON SCIENTIFIC CORPORATION SECURITIES LITIGATION

Civil Action No. 20-12225-DPW

United States District Court, D. Massachusetts

December 20, 2022

MEMORANDUM AND ORDER

DOUGLAS P. WOODLOCK, UNITED STATES DISTRICT JUDGE

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TABLE OF CONTENTS

I. BACKGROUND.................................................. 5

A. The Parties ............................................. 5

B. Factual Background ...................................... 7

1. The Early Lotus Valve Recalls and Delays ............... 9

2. Launch in the United States ........................... 11

3. The Launch as Reported by Boston Scientific ........... 11

4. Boston Scientific Terminates the Lotus Valve Platform . 13

5. Failures of the Lotus Launch Revealed after the Class Period .................................................... 15

6. Allegations of Executive Defendant False Statements ... 19

a. Mr. Mahoney's Alleged Misstatements ................. 19

b. Mr. Ballinger's Alleged Misstatements ............... 21

c. Ms. Lisa's Alleged Misstatements .................... 21

d. Mr. Fitzgerald's Alleged Misstatements .............. 22

e. Mr. Brennan's Alleged Misstatements ................. 23

f. Mr. McCarthy's Alleged Misstatements ................ 24

g. Dr. Meredith's Alleged Misstatements ................ 24

7. Allegations of Executive Defendant Scienter ........... 25

a. Executive Defendant Knowledge throughout the Class Period................................................... 25

b. Boston Scientific's Need to Raise Funds to Keep Up with Its Debts................................................ 27

c. Executive Defendant Conduct throughout the Class Period 28

C. Development of Challenged Amended Complaint by Plaintiff 31

II. STANDARD OF REVIEW........................................ 31

III. COUNT I - VIOLATION OF SECTION 10(b) AND RULE 10b-5...... 33

A. Applicable Legal Standard .............................. 33

B. Material Misstatements and Omissions ................... 34

1. Statements Regarding Lotus Edge Accounts and Orders ... 36

a. Statements Tallying the Lotus Edge Accounts and Expressions of Satisfaction with the Launch.............. 42

b. Growing Use of Lotus Edge and Reorder Rates ......... 43

2. Simplicity and Ease of Use of Lotus Edge .............. 45

a. Ease of Use Statements .............................. 46

b. Failure to Disclose the Complexity of Device and Delivery Malfunctions.................................... 47

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3. Misstatements and Omissions as to the Safety of the Lotus Edge Launch ............................................... 51

4. Misleading Reports of the Success of the Lotus Platform and its Role in the TAVR Portfolio ........................ 53

a. Disclosure of the Lotus Recall and Termination ..... 53

b. The Future of Lotus as a Growth Driver and Strategic Investment..................................... 55

5. Conclusion ............................................ 59

C. Scienter ............................................... 59

1. Plaintiff's General Scienter Allegations .............. 62

a. Confidential Source Accounts ........................ 62

b. Insider Trading Activity ............................ 65

c. The Resignations of Mr. McCarthy and Mr. Ballinger .. 67

d. Boston Scientific's Need to Raise Capital and Renegotiate Its Debts.................................... 68

e. Conclusion .......................................... 69

2. Scienter of Ms. Lisa and Mr. Fitzgerald ............... 69

3. Scienter of Mr. Mahoney ............................... 71

D. Reliance .............................................. 74

E. Economic Loss and Loss Causation ...................... 76

1. The Alleged Corrective Disclosures .................... 77

2. Additional Loss Causation Considerations .............. 79

3. Conclusion ............................................ 80

F. Whether Boston Scientific May Be Held Liable ........... 80

G. Summary ................................................ 82

IV. COUNT II - VIOLATION OF SECTION 20(a)..................... 82

V. CONCLUSION................................................. 84

APPENDIX A.................................................... 86

Mr. Mahoney................................................... 86

Mr. Ballinger................................................. 90

Ms. Lisa...................................................... 90

Mr. Fitzgerald................................................ 92

Mr. Brennan................................................... 92

Mr. McCarthy.................................................. 94

Dr. Meredith.................................................. 94

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Before me is a motion [Dkt. No. 53] to dismiss a putative securities fraud class action against Boston Scientific Corporation (“Boston Scientific”). The motion to dismiss submissions were developed in accordance with the demanding protocols of the Private Securities Litigation Reform Act. The operative Amended Consolidated Complaint [Dkt. No. 44] (“the Complaint”) presents a narrative alleging attempts to deceive investors regarding the success of the company's new medical device in an effort to prop up Boston Scientific stock prices, raise capital and support improper insider trading.

Boston Scientific and seven high-ranking executives are alleged to have perpetrated securities fraud on Boston Scientific investors by making a host of false and misleading statements about the commercial viability of Boston Scientific's Transcatheter Aortic Valve Replacement (“TAVR”) device: the Lotus Edge. The overarching contention is that Boston Scientific executives hid technical failures and sluggish sales of the Lotus Edge from the public during the period February 6, 2019 to November 16, 2020. The Complaint alleges that by providing false reassurances that the device was safe, simple, and marketable, Defendants caused artificial inflation of Boston Scientific common stock, in violation of Section 10(b), 15 U.S.C. § 78j(b) and Rule 10b-5, 17 C.F.R. § 240.10b-5 (Count I) and in violation of Section 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78t(a) (Count II).

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Defendants have moved to dismiss the Complaint for failure to meet the heightened pleading requirements for securities fraud claims under FED. R. CIV. P. 9(b) and the Private Securities Litigation Reform Act. I consider primarily two questions, both of which must be answered in the affirmative if Plaintiff's case is to proceed: 1) whether any of the statements detailed in the Complaint are both misleading and actionable and, if so, 2) whether particularized facts alleged in the Complaint give rise to a strong inference of Defendants' scienter.

I will grant Defendants' Motion to Dismiss the Complaint as to Count I, except as to Defendant Mahoney - the Boston Scientific Chairman, President and Chief Executive Officer - and Boston Scientific, the corporation to which his scienter may be imputed - because Plaintiff successfully pleads scienter and material misrepresentations as to him. Meanwhile, I will deny Defendants' Motion to Dismiss Count II of the Complaint as to the Section 20(a) claims alleged against the Executive Defendants.

I. BACKGROUND

A. The Parties

Defendant Boston Scientific is a publicly traded manufacturer of medical devices. Headquartered in Massachusetts, Boston Scientific develops, manufactures, and markets a range of medical device platforms, including interventional cardiovascular technologies.

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The Complaint names seven individual Boston Scientific executives as Defendants (collectively, the “Executive Defendants”):

• Michael Mahoney, the Chairman, President, and Chief Executive Officer;

• Daniel Brennan, the Executive Vice President and Chief Financial Officer;

• Joseph Fitzgerald, the Executive Vice President and President of Rhythm Management (through July 6, 2020), and thereafter Executive Vice President and President of Interventional Cardiology;

• Shawn McCarthy, the Vice President and General Manager of Structural Heart Valves (through 2020);

• Kevin Ballinger, the Executive Vice President and President of Interventional Cardiology (through July 3, 2020);

• Ian Meredith, the Executive Vice President and Global Chief Medical Officer; and

• Susan Vissers Lisa, the Vice President of Investor Relations.

Union Asset Management Holding AG is the Lead Plaintiff.

Lead Plaintiff brings suit on behalf of a class of investors who purchased or acquired Boston Scientific common stock between February 6, 2019 and November 16, 2020 (the Class Period). Lead Plaintiff is the parent holding company of the Union Investment Group, an asset management firm based in Frankfurt-am-Main, Germany. Union Asset Management funds purchased common stock in Boston Scientific during the Class Period. I refer to Lead Plaintiff and the putative class it would represent as Plaintiff throughout the remainder of this Memorandum except when reciting the circumstances in which Union Asset Management became Lead Plaintiff.

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B. Factual Background

This action arises from Boston Scientific's 2020 recall of its Lotus Edge device and its decision to retire the entire Lotus Valve Platform.

The Lotus Edge device is a transcatheter heart valve used to treat patients suffering from aortic stenosis.^[1]Physicians historically treated aortic stenosis with surgical aortic valve replacement. A surgeon would perform open heart surgery to replace a faulty aortic valve with a new mechanical or biologic valve. Complaint, Dkt. No. 44 at ¶ 49. Surgical aortic valve replacement was attended by high risks and prolonged recovery times.

In 2002, however, surgeons began to see clinical success with a new method: transcatheter aortic valve replacement, or TAVR. TAVR surgery...