NeuroMetrix Inc. (NSDQ:NURO) moved to settle a lawsuit filed against it by shareholders accusing the company and its management of misleading them over reimbursement for its NC-Stat device, after a federal judge dismissed the case late last year.

Judge Rya Zobel of the U.S. District Court for Massachusetts granted the Bedford, Mass.-based company’s motion to dismiss in December, 2009, ruling that the plaintiffs, the pension fund of the IBEW-NECA electrical workers’ union, failed to establish that NeuroMetrix and its then-management team misled investors in quarterly regulatory filings and in conference calls with analysts discussing quarterly results.

Under the terms of the settlement, which still must be approved by Zobel, NeuroMetrix will reimburse the plaintiffs for up to $350,000 in legal fees and institute a series of safeguards to prevent similar foofaraws in the future.

The case stems from the reimbursement structure for the company’s NC-Stat, a non-invasive device that measures nerve conduction. Before a January decision setting a lower rate for reimbursement for such treatments, the company instructed physicians to bill using one of three codes for neurological procedures.

“Initially, doctors were successful in billing NC-Stat to the neurology CPT codes. However, in late 2005 Blue Cross Blue Shield of both North and South Carolina began to deny reimbursement, and in the fall of 2006 and during 2007 a growing number of insurers followed suit,” according to court documents. “At the same time, many insurers continued to reimburse for NCStat.”

The lawsuit accuses the company and managers of deliberately withholding or concealing the possibilities that insurance companies would deny reimbursement at the higher neurological code rates or that new, lower rates would go into effect.

Zobel found that, to the contrary, the company’s executives and its regulatory filings delivered explicit warnings about the possibility of adverse reimbursement decisions, in terms of increasing severity as the problems grew.

“Plaintiffs’ central allegation that these warnings were insufficient, or that non-reimbursement was a certainty known to defendants, is more than the factual allegations in the complaint will bear,” she wrote. “Put simply, the reimbursement environment was uncertain; there was risk. The alleged misstatements contain express warnings of this risk, in more severe terms as reimbursement problems developed, that third-party payer reimbursement was essential to NC-Stat’s success and insurers may cease reimbursement.

“Further, the warnings contain express disclosures of defendants’ belief that existing CPT codes applied to the NC-Stat and the basis for that belief … and of the contrary policy pursued by some insurers. … Investors were fully informed as to both defendants’ reimbursement strategy and the substance of the dispute with insurance companies, and they could make their own judgment as to whether that strategy was wise or ill-considered.”

According to the terms of the proposed settlement, NeuroMetrix agreed to implement the following measures:

1. On September 10, 2009, NeuroMetrix appointed Thomas T. Higgins to serve as its new Chief Financial Officer.
2. The Board has committed the Company to continuing to review its marketing, training and other materials to ensure compliance with the Deferred Prosecution Agreement between the United States Attorney’s Office for the District of Massachusetts and NeuroMetrix, Inc. dated February 5, 2009 (the “DPA”).
3. The Company will submit to the Board a mutually-acceptable resolution formalizing the Board’s oversight of the Company’s Ethics and Compliance Committee.
4. Each member of the Board will complete two (2) hours of training annually regarding NeuroMetrix’s Compliance Program, as described in the Corporate Integrity Agreement between the Office of Inspector General of the Department of Health and Human Services and NeuroMetrix, Inc. dated February 6, 2009 (the “CIA”), regardless of whether each director meets the definition of “covered person[s]” in the CIA.
5. The Company’s Director of Ethics and Compliance will receive additional training as necessary to address changes in applicable standards in the relevant compliance, ethics, and healthcare fields through the expiration of the Company’s obligations under the CIA and DPA.
6. The Board’s Compensation Committee will be specifically charged with reviewing compensation paid for potential disgorgement issues in the event financial improprieties are discovered.
7. The Company’s Director of Ethics and Compliance will be charged with conducting or overseeing the investigation of potentially responsible employees in the event a “contradictory statement” (as defined in the DPA) is made.
8. The Company’s Director of Ethics and Compliance will continue to report to the full Board on a quarterly basis.
9. The Company will continue to maintain a toll free hotline in order to raise compliance issues.
10. The Company submitted to its Board a mutually-acceptable resolution formalizing the requirement that, so long as NeuroMetrix is listed on the National Association of Securities and Dealers Automated Quotation (“NASDAQ”), it will continue to comply with NASDAQ Stock Market Rule 5605(b).

NeuroMetrix posted third-quarter sales of $6.3 million during the three months ended Sept. 30, 2009, down 10.6 percent compared with $7.1 million during the same period last year. Net losses widened 18 percent to $9.3 million, compared with $7.9 million during the third quarter of 2008.

But Higgins — whom the company wooed from Caliper Life Sciences to be its own finance chief — told MassDevice that the bulk of the net loss was due to a one-time, $7.4 million accounting charge on the valuation of warrants related to a $17.3 million private equity placement during the quarter.