A federal appeals court upheld a lower court decision to toss a shareholders lawsuit against Guidant Corp. that accused the Boston Scientific subsidiary and its former managers of malfeasance related to a defibrillator recall and the BSX acquisition.
The U.S. Court of Appeals for the Seventh Circuit upheld an Indiana district court’s ruling to dismiss the suit with prejudice, meaning the plaintiffs can’t seek to re-litigate the case. It stems from Guidant’s actions prior to a Food & Drug Administration recall of one of its defibrillator models, a never-consummated buyout by Johnson & Johnson and the eventual acquisition by Boston Scientific.
The appeals panel declined to overturn the lower court’s ruling that the plaintiffs in the case failed to deliver enough evidence to prove that Guidant’s statements were misleading and to prove “scienter” — intent or knowledge of wrongdoing.
In February 2002, Guidant discovered a design flaw in one of its implantable cardiac defibrillators, the Ventak Prizm 2 DR, after receiving reports of device failures. By April 2002, according to court documents, it fixed the flaws and begun producing a corrected version of the device — but didn’t recall the defective products.
“Instead, it continued selling its inventory of defective units without disclosing either to physicians or the public the design flaw or malfunctions that had led to device failures,” Judge Diane Wood wrote, adding that Guidant never mentioned the defects in subsequent press releases and filings with the Securities and Exchange Commission.
In 2004, the company began talks with Johnson & Johnson for a possible merger. On Dec. 1 of that year Guidant put out a press release touting “highly positive news” about the potential for growth for its ICD and pacemaker businesses. Shares of Guidant rose nearly 8 percent in the week following the announcement, from about $65 per share to $70.
Two weeks later the J&J merger was revealed and Guidant’s stock again surged, eventually reaching $75 per share. But neither release mentioned the problems with the Ventak Prizm 2 DR; merger filings with the SEC were also silent about the defects.
Then, on March 13, 2005, 21-year-old Joshua Oukrop’s Ventak Prizm 2 DR short-circuited, killing him. Guidant told his doctor of the problems with the device, disclosed that it knew of 25 other such cases and told the physician that about 24,000 ICDs similar to Oukrop’s had been sold. When the doctor asked Guidant whether the other recipients would be told, the company said no, it did not want to “alarm” anyone.
The company kept its word in subsequent SEC filings and press releases, never mentioning the defect or Oukrop’s death. In fact, Guidant’s first public acknowledgment of the problem came in a letter to physicians issued about a month after its shareholders approved the JNJ deal, and then only because of an impending New York Times article that was to reveal the device’s flaws.
The FDA issued a national recall for the devices June 17, 2005; Guidant issued a physician communication and a press release on the same day, disclosing 15 reports of failure of the Contak Renewal and Contak Renewal 2 defibrillators, out of approximately 16,000 implanted worldwide, and two memory error incidents among its four models of AVT defibrillators, out of about 21,000 implanted worldwide.
Share prices plunged to $70.33 on the news — a $1.09 billion loss for Guidant investors — and when J&J said it was reconsidering the buyout in October shares fell to $64.10.
“J&J began renegotiating the terms of the merger, but eventually another company, Boston Scientific, entered the bidding as well, and the latter firm ultimately agreed to buy Guidant for about $80 per share,” Wood wrote.
All told, until the merger, Guidant lost about $3 billion in value.