Central District Of California Denies Motion To Dismiss A Securities Fraud Complaint Against Medical Device Manufacturer Based On Statements Regarding Post-Acquisition Integration And Sales
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  • Central District Of California Denies Motion To Dismiss A Securities Fraud Complaint Against Medical Device Manufacturer Based On Statements Regarding Post-Acquisition Integration And Sales
     
    04/06/2021
    On March 29, 2021, Judge David O. Carter of the United States District Court for the Central District of California denied a motion to dismiss a consolidated putative class action complaint against a medical device manufacturer and marketer (the “Company”) and certain of its officers, alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934.  In re Merit Med. Sys., Inc. Sec. Litig., No. 8:19-02326 DOC (ADSx) (C.D. Cal. Mar. 29, 2021).  Plaintiffs alleged that the Company issued misleading statements regarding its acquisitions of two companies in late 2018 including with respect to the integration of those companies and their products sales.  The Court denied defendants’ motion to dismiss, adopting a report and recommendation by Magistrate Judge Autumn D. Spaeth, which found that most of the challenged statements were not forward-looking statements protected by the PSLRA’s safe harbor provisions and that plaintiffs had adequately pled all elements of their claims. 

    The complaint relates to two acquisitions by the Company in late 2018—one of a company that sells a therapeutic device designed to treat breast cancer and another of a company that has a product line to treat varicose veins.  Plaintiffs alleged that defendants made materially false statements and omissions regarding the integration of the acquired companies as well as the strength of the Company’s sales of their products.  According to plaintiffs, by not giving shareholders an accurate picture of the Company’s financial outlook, the Company artificially inflated its share price, which dipped in July 2019 following disappointing quarterly results.

    The Court first considered whether the challenged statements were forward-looking and protected by the PSLRA’s safe harbor.  Although the Court noted that the Company provided cautionary language for at least some of the statements, it held that many of the challenged statements were not forward-looking.  In particular, the Court denied the Company’s motion as to statements that the acquisition was “going as well as could be expected,” “working quite nicely,” managed “correctly,” “complete,” that “sales continue to grow” and that the Company “maintained their sales force,” on the basis that these were statements “about current or past facts.”  The Court, however, dismissed claims based on certain statements of corporate optimism including statements that the Company was “very pleased,” “generally satisfied with the overall business,” and “[e]verything is working quite nicely.”

    The Court held that plaintiffs had sufficiently pled falsity with respect to the remaining statements.  For example, the Court found that plaintiffs had adequately pled that the statement that the “transition is complete” was false because half of the integration plans were not complete, and that statements that “sales continue to grow” and the Company had “maintained the sales force” were misleading because over 20% of the sales force had quit.  The Court also credited plaintiffs’ allegations that statements that “the integration . . . ‘continued to drive growth,’” and that “sales [were] ramping up to [the Company’s] expectations” were false and misleading.  The Court rejected defendants’ arguments that these statements were taken out of context and that the investors “understood” that the acquired companies’ products sales would not drive the Company’s 2019 revenue.  Instead, the Court held that plaintiffs “specifically identif[ied] the allegedly false statement, when it was made, by whom, and why it was misleading.”

    The Court also found that plaintiffs sufficiently pled materiality.  Although it agreed with defendants that, under Ninth Circuit precedent, “revenue projections that are missed by 10% or less are not generally actionable,” it noted that the 10% threshold would be met if it related only to the revenue guidance for the specific products rather than the Company’s revenue as a whole.  Ultimately, the Court found that plaintiffs sufficiently alleged materiality because the challenged statements were much broader and were not just about 2019 revenue guidance. 

    Next, the Court held that plaintiffs sufficiently pled a strong inference of scienter because they offered “extensive allegations” that the two acquisitions were an important part of the Company’s growth strategy and that defendants were “actively and regularly” made aware of sales data and personnel issues including allegations that the individual officer defendants had access to and received real-time sales information and attended meetings in which relevant sales information was provided. 

    Finally, the Court also found that plaintiffs sufficiently alleged loss causation, rejecting defendants’ argument that the complaint failed to allege that the alleged corrective disclosures revealed the truth to the market.  The Court stated that, on a motion to dismiss, the Court does not consider whether the alleged corrective disclosures revealed the truth but rather whether the complaint sufficiently sets forth allegations that show a causal connection between the alleged misstatement and the drop in stock price. 

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