In re Boston Scientific Corp. Securities Lit.
| Citation | 490 F.Supp.2d 142 |
| Decision Date | 21 June 2007 |
| Docket Number | No. 05-11934-JLT.,05-11934-JLT. |
| Parties | In re BOSTON SCIENTIFIC CORPORATION SECURITIES LITIGATION. |
| Court | U.S. District Court — District of Massachusetts |
Carolyn G. Anderson, Timothy J. Becker, Robert C. Moilanen, Anne T. Regan, Zimmerman Reed, PLLP, Gregg M. Fishbein, Lockridge Grindal Nauen P.L.L.P., Minneapolis, MN, John C. Martland, Mart-land & Brooks LLP, Saugus, MA, David S. Nalven, Thomas M. Sobol, Hagens Berman Sobol Shapiro LLP, Cambridge, MA, David Pastor, Gilman and Pastor, LLP, Boston, MA, for Plaintiff, Consolidated Plaintiff.
Stuart J. Baskin, John Gueli, William A. Haddad, Kirsten M. Nelson, Michael T. Rasnick, Shearman & Sterling LLP, New York, NY, Miranda Hooker, William H. Paine, Timothy J. Perla, Wilmer, Cutler Pickering Hale and Dorr LLP, Boston, MA, for Defendant.
Nancy F. Gans, Moulton & Gans, P.C., Wellesley, MA, Andrew C. Griesinger, Griesinger, Tighe & Maffei, LLP, Boston, MA, Stephen V. Saia, Law Offices of Stephen V. Saia, Pembroke, MA, for Movant.
City of Pontiac Policemen's and Firemen's Retirement System, pro se.
Locals 302 and 612 of the International Union of Operating Engineers-Employers Construction Industry Retirement Trust, pro se.
New England Health Care Employees Pension Fund, pro se.
Plumbers and Pipefitters Local No. 502 & 633 Pension Trust Fund, pro se.
City of Pontiac Policemen's and Firemen's Retirement System, pro se.
Lead Plaintiff, the Public Employees' Retirement System of Mississippi ("PERS") brings this action against Boston Scientific Corporation ("BSC"), and its executives, James R. Tobin, Paul A. La-Violette, Fredericus A. Colen, Lawrence C. Best, Stephen F. Moreci, Robert Mac-Lean, Peter M. Nicholas, Paul Sandman, and James H. Taylor, Jr. for (1) violations of Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and (2) violations of Section 20(a) of the Exchange Act. Defendants move to dismiss all counts. Presently at issue is Defendants' Motion to Dismiss [# 50].
The following background facts are taken as stated in Lead Plaintiffs Consolidated Amended Complaint ("CAC"), as well as publicly filed documents.1
Boston Scientific Corporation, headquartered in Natick, Massachusetts, manufactures medical device products in the areas of cardiovascular and endosurgery. Lead Plaintiff PERS brings this action on behalf of entities and individuals who purchased equity securities in Boston Scientific between March 31, 2003, and August 23, 2005 (the "Class Period"). In its 102-page Consolidated Amended Complaint, Lead Plaintiff alleges that the Defendants made false statements and concealed material information about BSC from the investment community, causing the market price of the BSC's securities to artificially inflate during the Class Period, and enabling the individual defendants to enrich themselves by an amount in excess of $332 million.
Lead Plaintiff asserts that Defendants' material misstatements and omissions can be broken into four areas: (1) Civil lawsuit with Medinol Ltd. ("Medinol"); (2) Department of Justice ("DOJ") investigation; (3) rush of TAXUS stents to market; and (4) Food and Drug Administration ("FDA") investigations and warnings.
(1) Civil Lawsuit with Medinol
Lead Plaintiff alleges that Defendants artificially inflated BSC's stock price by purposefully misleading investors about the nature, scope and severity of ongoing litigation with Medinol — which settled after five years of litigation; and resulted in BSC paying Medinol $750 million.
In 1995, BSC entered into an agreement with Medinol in which BSC took a 22% interest in Medinol. Medinol agreed to be responsible for developing and manufacturing stents, and BSC agreed to bring the stents to the market.
In a 2001 lawsuit filed in the Southern District of New York (two years before the class period began), Medinol asserted that BSC had engaged in a "multi-year scheme to defraud" by trying to copy Medinol's stent designs.2 BSC counter-claimed against Medinol for failing to meet BSC's stent demand requirements.
Lead Plaintiff alleges that in BSC's Report on Form 10-K for the year ending December 31, 2003, BSC failed to discuss the New York litigation in the narrative section of the reports and, instead, buried it deep within the report in a note.
The discussion of the Medinol litigation in BSC's annual Form 10-K is as follows:
On April 5, 2001, Medinol Ltd. (Medinol) filed a complaint against the Company and certain of its current and former employees alleging breaches of contract, fraud and other claims. The suit was filed in the U.S. District Court for the Southern District of New York seeking monetary and injunctive relief. On April 26, 2001, Medinol amended its complaint to add claims alleging misappropriation of trade secrets in relation to the Company's Express(TM) stent development program. Medinol seeks monetary and injunctive relief, as well as an end to the Company's right to distribute Medinol stents and to gain access to certain Company intellectual property. On April 30, 2001, the Company answered and countersued Medinol and its principals, seeking monetary and injunctive relief.3
BSC's public filings set forth the Medinol litigation as a "risk." The public filings stated,
Forward-looking statements discussed in the report include, but are not limited to, statements with respect to, and the Company's performance may be effected by:
• The impact of stockholder, patent, product liability, Medinol Ltd. and other litigation....4
This statement was misleading, Lead Plaintiff submits, because it understated the severity of the litigation. According to Lead Plaintiff, "[i]t was never a matter of whether the company would pay Medinol for the illegal conduct engaged in by individual Defendants Nicholas, Best, and others ... It was only a question of when and how much."5 In support of this claim, Lead Plaintiff notes that in 2000, Defendant Tobin admitted privately to Medinol officers that he was unaware when he joined BSC that he was involved with "such crooks" and that he was "ashamed to represent such a dishonest company."6
Lead Plaintiff asserts that Defendants made other misleading and false statements about the status of the Medinol litigation.
In an April 5, 2001, press release about the Medinol litigation, BSC Vice President of Corporate Communications Paul Donovan ("Donovan") said, "Medinol's complaint alleges breaches of contract, fraud and other claims ... These claims have no merit."7
On April 11, 2001, Defendant Tobin at the Company's Annual Meeting of Securities Analysts said about the Medinol litigation,
The bottom line about this lawsuit is that the party in the wrong is Medinol.
• It was Medinol that could not or would not fill our orders ...
• It was Medinol that consistently refused to provide us with enough stents
• It was Medinol that at least a dozen separate times threatened to cut off its supply of stents
This is all about leverage, plain and simple.8
In a July 22, 2003, meeting with analysts, Defendant Sandman said, in reference to the Medinol litigation, "I don't frankly think that theory [Medinol's trade secret theory] is going to hold up."9 Lead Plaintiff says this statement was false because Defendant Sandman knew that Medinol's underlying theory would prevail.
On December 2, 2004, BSC spokesman Donovan, under the direction of Defendants Tobin and Nicholas, issued a press release in response to an eighty-four page Medinol litigation summary judgment ruling10 issued that same day from the court in New York. The press release included the following language: "As the ruling states, this is essentially a breach of contract case, which alleges `grandiose estimates of damage' that are unlikely to succeed."11 Lead Plaintiff says this statement was false because at the time Defendants made positive statements about the Medinol litigation, they knew that insiders within the company had engaged in a scheme to defraud Medinol, and they knew that those acts exposed BSC to significant liability.
At a January 10, 2005, conference call with analysts, Defendant Tobin said in regards to the New York litigation, 12
At a June 15, 2005, Goldman Sachs Healthcare Conference, Defendant Best, in response to an inquiry asking for litigation updates, stated:
We also have a Medinol case dealing with our failed partnership with Medinol back in 1995-96-97 around there, and it's not a patent issue, it's not [an] intellectual property issue, it's primarily a straight out contract, breach of contract issue. We're not before a jury, we're before a judge, and we expect to go to trial in the next 4 or 5 weeks I think.13
Lead Plaintiff says this statement was misleading because when Defendant Best made this statement he knew as a result of ongoing settlement discussions that BSC was going to pay Medinol millions of dollars for the fraud that BSC had perpetrated on Medinol.
Settlement discussions with Medinol took place in early 2005.
On August 16, 2005, an Israeli newspaper reported the preliminary terms of the settlement as including a large payment to Medinol. The price of BSC securities then dropped 32 cents, or 1.30%.
On August 17, 2005, an analyst leaked the terms of the settlement on Bloomberg, and the stock dropped another 37¢ or 1.82%.
BSC ultimately settled with Medinol in September of 2005. In the settlement, BSC gave up its 22% equity interest in Medinol, paid Medinol $750 million and Medinol preserved for arbitration proceedings its intellectual property claims against BSC. In announcing the settlement, BSC spokesman Donovan said "[w]e're pleased to close this chapter, and put this matter behind us."14
Ultimately, the $750 million settlement was reflected in a special charge taken by the company which Defendant Best estimated cost...
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