A federal judge in California quashed a bid by Merit Medical to dismiss a lawsuit alleging misrepresentation of success to stockholders.
The consolidated class action complaint states two claims for securities fraud, alleging that Merit CEO Fred P. Lampropoulos and CFO Raul Parra, plus the company itself, made multiple misrepresentations to investors that resulted in substantial losses to members of the class, according to court documents.
The stockholders claim Merit made false statements regarding its acquisitions of Cianna (a $200 million deal in October 2018) and Vascular Insights (a $60 million deal two months later). Those statements were allegedly made during investor calls and in press releases, along with SEC forms and letters to investors in February, March, April and July of 2019.
Plaintiffs claimed that Merit misrepresented the success of the transition and integration with Cianna, including product sales numbers and the status of Cianna’s sales team.
The complaint alleges that half of the items planned for integration were not integrated by April 23, 2019, resulting in over 20% of the sales force quitting and the subsequent decline of 25%-30% in sales in the western region. Merit later admitted that the acquisition didn’t pan out the way it wanted and resulted in “some painful lessons,” according to the recommendation that U.S. magistrate judge Autumn Spaeth made to U.S. District Judge David O. Carter of California’s central district.
The suit also alleges that Merit misrepresented the sales performance of Vascular Insights’ ClariVein line of catheters, whose primary purpose — the treatment of varicose veins — exceeded its FDA approval. The investors claim Merit’s leaders made “materially false and misleading” statements about ClariVein, despite knowing that the company had not received a single order for the product during the first half of 2019 and that insurance companies were not covering it.
They also state that false statements made by Merit inflated the price of its common stock, which reached $62.60 per share on April 11, 2019, the peak of the “class” period. At the end of that period, the price was $20.66, representing a 67% loss in value, the judge’s order noted.
Spaeth recommended that Carter deny Merit’s motion to dismiss. Merit responded by claiming that the plaintiffs’ lawsuit fails to show that the company made material misstatements about the acquisitions.
Merit alleges that the plaintiffs were off-base in their complaint that Merit’s revenue guidance for 2019 was unattainable because of problems with the acquisition. The company said it missed those projections by $16 million, or 1.6%, which it says is, under law, immaterial. Spaeth agreed.
Merit also said that while ClariVein’s low sales were viewed as material because of the missed guidance by 25% to 32%, the product was expected to bring in just 1% of the company’s total sales. Merit alleges that the $2.5 million miss on ClariVein represented 0.2% of the low end of its projected 2019 revenue.
Merit also claims the plaintiffs failed to provide facts regarding Lampropoulos and Parra and their alleged knowledge of whether statements they made were false or misleading at the time.
“Plaintiffs’ individual allegations do not raise the necessary strong inference of scienter, nor do they do so when viewed collectively and holistically,” Merit wrote in the objection. “There is no plausible motive (as the alleged stock sales negate an inference of scienter due to their relative small size), and plaintiffs do not identify a contemporaneous document or witness demonstrating that Lampropoulos or Parra knew that any of their challenged statements was false when made.”
But Spaeth wrote: “Although the (consolidated class action complaint) includes some allegations related to inactionable corporate optimism and puffery, it contains sufficient allegations to state a claim for securities fraud against all defendants.” Carter agreed, denying Merit’s motion to dismiss.
Merit Medical did not immediately respond to a request for comment. This story may be updated.