Little Canada, Minn.-based St. Jude yesterday sued short-selling firm Muddy Waters Consulting and the hacking shop behind a report of alleged cybersecurity vulnerabilities that’s pushed STJ shares down more than 3% since late last month.
The Muddy Waters report claimed that St. Jude’s cardiac rhythm management devices are a cybersecurity risk due to vulnerabilities in the Merlin@home monitor. St. Jude immediately denied the charges and fired off a detailed rebuttal the next day; in response, Muddy Waters yesterday claimed that St. Jude instead proved the short-seller’s assertions.
St. Jude said that the next salvo from Muddy Waters, a video purporting to show a Merlin@home device succumbing to a hack, actually showed that the device functioned just as designed. Researchers at the University of Michigan, seeking to reproduce the faults alleged in the Muddy Waters report, concluded that the report has “major flaws” and that the so-called Merlin@home system crash “are the same set of errors that display if the device isn’t properly plugged in.”
The lawsuit alleges that the defendants – Muddy Waters and founder Carson Block; Justine Bone, the CEO of cybersecurity firm MedSec, and Dr. Hemal Nayak, a MedSec advisor – of making false statements, false advertising, conspiracy and manipulating public markets to reap the rewards of their bet that St. Jude Medical’s share price will fall.
Muddy Waters and MedSec Holdings yesterday said they would “vigorously defend our right to criticize a company that puts its profits before its patients,” according to Reuters, with a spokesman sating via email that, “It is not unusual for a company like this to try to silence its critics and we are always prepared to vigorously defend our right to criticize a company that puts its profits before its patients.”
But the 1st Amendment right to free speech poses a high hurdle for St. Jude’s lawsuit, experts say, citing a pair of high-profile cases against short-sellers that failed on free speech grounds.
Last year, a San Francisco federal judge threw out a lawsuit brought by casino magnate Steve Wynn against short-seller James Chanos over comments Chanos made at a conference. The judge awarded Chanos more than $420,000 in attorneys’ fees. A New York judge ruled in 2012 against a Canadian silver producer, finding negative reports circulated by hedge funds were constitutionally protected opinions.
Michael Asaro, a lawyer with Akin Gump who specializes in white-collar and regulatory investigations and litigation, said the free speech argument is generally the 1st line of defense in defamation cases. Even incorrect opinions can be protected as long as they were made in good faith and the underlying facts were presented fairly.
“Where people get into trouble is where they misrepresent the facts,” Asaro told Reuters. “That’s why these cases are so fact-specific.”
St. Jude will likely be required not only prove the Muddy Waters allegations false, but that they were published willfully and maliciously. An actual malice defense might not apply to a short-seller with a vested interest in causing a stock to fall, added Minneapolis media lawyer Mark Anfinson.
“They may not get the benefit of the doubt” on malice, Anfinson told the news service.
St. Jude isn’t the 1st Muddy Waters target to sue the short-seller. Rice trader Olam International and bankrupt Chinese timber company Sino-Forest both sued the firm and founder Block, but later dropped the cases.
“St. Jude Medical now joins the ranks of Sino-Forest and Olam International as companies that have filed frivolous lawsuits against us for criticizing them,” Block said via email.
St. Jude spokeswoman Candace Steele Flippin told Reuters that the company is “confident in its legal position and took this action because of the irresponsible manner in which the defendants have acted.”
Share prices for St. Jude, which is awaiting a $25 billion acquisition by Abbott (NYSE:ABT), are off -3.3% since August 25, the day the Muddy Waters report broke. The stock closed up 0.4% at $79.18 yesterday.