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Southern District Of California Dismisses Putative Class Action Against Medical Device Company For Failure To Adequately Allege Misrepresentations And Scienter
05/07/2024On April 30, 2024, Judge Marilyn L. Huff of the United States District Court for the Southern District of California dismissed with leave to amend a putative class action asserting claims under the Securities Exchange Act of 1934 against a medical device company and certain of its former officers. Lowe v. Tandem Diabetes Care Inc., 2024 WL 1898473 (S.D. Cal. Apr. 30, 2024). Plaintiffs alleged that the company made misrepresentations regarding the demand for its products. The Court held plaintiffs failed to adequately allege that any challenged statement was false at the time it was made and also failed to adequately allege scienter.
Plaintiffs alleged, relying on statements attributed to two former employees of the company, that defendants were aware of—and failed to adequately disclose—significant market headwinds arising from the COVID‑19 pandemic, macroeconomic conditions, and competition that the company faced. Id. at *2. Plaintiffs alleged that, as a result, the company had to restate its earnings guidance, reported lower than expected revenue, and restated its expected sales. Id. at *2–3.
The Court first assessed the statements attributed to the former employees of the company and found that the allegations failed to demonstrate the former employees’ knowledge or reliability. As to one former employee, the Court noted they were responsible for only a single sales region in the United States, and it was not clear why that employee would have knowledge of other regional sales activities, general market conditions throughout the country, or otherwise had access to the company’s financial reports, forecasting techniques, or other information showing how the company considered these market headwinds in developing its sales forecasts. Id. at *6. While this former employee also allegedly shared their concerns about the headwinds the company faced with “senior members of management,” the employee was not alleged to have shared these concerns with the named individual defendants. Id. at *7. The Court further determined that plaintiffs’ allegations were insufficient with respect to the second former employee because plaintiffs failed to allege when that employee was employed at the company and failed to show that employee had specific knowledge of the company’s forecasting techniques or knew of specific market concerns that were shared with the individual defendants. Id. The Court concluded that it would therefore “afford[] … little weight” to the former employees’ allegations in evaluating whether plaintiffs had adequately alleged falsity or scienter. Id.
With respect to falsity, the Court held that the company had, in fact, repeatedly disclosed to investors the headwinds that plaintiffs claimed the company had omitted. Id. at *8–9. The Court noted that the company repeatedly acknowledged the challenges it expected to face from market competition, the aftermath of the pandemic, and specific products that competed against its own that plaintiffs suggested were not taken into consideration in formulating performance guidance. Id. at *9. While plaintiffs suggested that the company represented the headwinds were dissipating, the Court observed that the company had been clear that headwinds would “persist through the end of the year” and concluded that the challenged statements—”we estimate that over the next few quarters that we’ll start to see [competitive noise] dissipate” and “we think that things will settle down in a quarter or two”—did not mean in the full context of the company’s disclosures that “competitive challenges were, in fact, dissipating or settling down.” Id. at *10.
In addition, the Court held that plaintiffs failed to adequately allege scienter because plaintiffs failed to allege a plausible motive for making the allegedly fraudulent statements. Id. at *11. The Court held that the company’s desire to prevent its stock from declining was too generic a motive to support an inference of scienter, especially since the individual defendants were not alleged to have financially benefited from the alleged fraud. Id. The Court also noted plaintiffs failed to establish that the individual defendants were aware of or reckless in not knowing any negative information that competition was not “in line” with their prior expectations, because plaintiffs alleged nothing beyond conclusory allegations that these defendants were closely monitoring the headwinds the company faced due to their positions within the company. Id. The Court also determined that plaintiffs’ scienter allegations otherwise lacked particularized facts, were not based on conduct that was alleged to be false or misleading, were not supported by the suggestion that the company’s stock underperformed other companies in the industry during the relevant period, and that scienter could not be inferred simply from the timing of various statements the company made that were more upbeat relative to its revised earnings guidance. Id. at *12–13.The Court further held that all these items collectively did not support a strong inference the company engaged in intentional or deliberately reckless misconduct, particularly compared to the competing inference that, although the company acknowledged the headwinds it faced, it mistakenly believed they could be overcome. Id. at *13.
