A federal judge in Massachusetts tossed a shareholders’ lawsuit accusing Boston Scientific Corp. (NYSE:BSX) of fraudulently concealing problems within its cardiac rhythm management division that prompted it to fire several members of its CRM sales force.
Judge Douglas Woodlock of the U.S. District Court for Massachusetts granted the Natick, Mass.-based medical device maker’s motion to dismiss the case, ruling that BSX seemed "diligent, rather than fraudulent or reckless" in its handling of the CRM disaster it inherited with its Guidant Corp. acquisition in 2006.
The suit accused Boston Scientific, former CEO James Tobin, his replacement Ray Elliott and COO Sam Leno of hiding Guidant’s problems between April 20, 2009, and March 12, 2010. Citing filings with the federal Securities & Exchange Commission and statements the executives made in press releases and during conference calls with analysts, the suit alleged that the men and the company made calculated, falsely rosy statements about the division designed to artificially boost Boston Scientific’s share prices.
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It also cited the November 2009 departure of the CRM division’s senior sales and marketing executive, William McConnell Jr., and Elliott’s move to cashier several BoSci sales staff and managers from its CRM division in Minnesota.
But, according to Woodlock, the company did well in handling the problems within the CRM sales force. Citing an internal audit begun in August 2009 to pore over "the expenses incurred for food and entertainment provided to physicians during trips to certain of Boston Scientific’s manufacturing facilities, and to determine whether these expenses complied with ethical guidelines,” according to court documents. That probe led to a weeks-long interrogation of 21 members of the CRM sales force – and to the eventual firings of several of them for "violation of the company’s ethical policies," according to the documents.
"Among the sales personnel terminated during that time period was Douglas Nock, one of the three Division Vice Presidents for CRM sales,” Woodlock wrote. “Nock was then hired by a competitor, St. Jude Medical, where he began working on January 4, 2010. Defendants did not disclose publicly the existence of the internal audit and the resulting dismissal of certain CRM sales personnel until the close of trading on February 10, 2010.”
(In fact, several of the fired sales staffers wound up with St. Jude Medical (NYSE:STJ), prompting some harsh words from BSX CEO Ray Elliott and a tart reply from STJ.)
"Fairly read, the complaint portrays [Boston Scientific] as being diligent, rather than fraudulent or reckless, when it chose to conduct an internal audit, just one month after the AdvaMed Code of Ethics was put into place, and then decided to terminate sales personnel who repeatedly breached its healthcare professional Code of Conduct,” Woodlock wrote. “The company knew the terminations of CRM sales representatives may have a cost, yet chose to move forward with the process. The disclosure by Defendants of the terminations and their potential impact on the company’s future revenues only two months after these terminations took place was ‘reasonable time,’ which was ‘necessary to get things right.’"