A Cardiovascular Systems (NSDQ:CSII) shareholder sued the company in a derivative lawsuit this week, even as the medical device maker won an extension to negotiate a settlement in the very kickbacks case that prompted the derivative claim.
In the shareholder derivative suit filed yesterday, plaintiff Caroline Paradis alleged that Cardiovascular Systems and its management – including the late David Martin, the former CEO who stepped down after a stomach cancer diagnosis last year; Martin died May 1 – artificially inflated the company’s value with an off-label promotion scheme, even as executives sold portions of their stakes in CSI, according to the complaint filed in federal court in Minnesota.
The Paradis suit stems from a False Claims Act lawsuit based on allegations from a former sales rep that St. Paul, Minn.-based company ran kickbacks and an off-label marketing scheme to boost sales of its orbital atherectomy devices. In March CSI said it reach an agreement to settle the case for $8 million; yesterday the company said a federal judge in North Carolina agreed to extend the deadline for the negotiations from May 15 to June 29.
The FCA suit, filed in 2013 and unsealed 2 years later, accuses CSI of inducing physicians to use its products by offering free, all-expense-paid training programs “followed by explicit demands by CSI employees that attendees use CSI products on future patients,” giving away product for free, 3rd-party referral channel marketing, and “sham Speaker Bureau payments for high-prescribers and others whom CSI sought to cultivate,” according to the complaint filed in the U.S. District Court for Western North Carolina.
Travis Thams worked for CSI as a district sales manager from 2012 to 2013, according to the complaint.
The lawsuit also accused the company of running an off-label promotion scheme to push sales of its unapproved 4 French catheter. It alleges that CSI also promoted its devices for use in areas of the body it’s not approved for, such as the coronary arteries, and for conditions such as chronic total occlusion for which it is not approved.
In May 2014, CSI revealed that the district attorney for western North Carolina opened a probe into Thams’s allegations “to determine whether the company has violated the False Claims Act, resulting in the submission of false claims to federal and state health care programs, including Medicare and Medicaid.”
The case is also the subject of a purported class action lawsuit filed last month on behalf of shareholders, accusing the medical device company and its management of misleading investors about the alleged scheme, claiming it spurred a -70% plunge in the value of CSI’s stock.
Cardiovascular Systems has said it believes both the class action and derivative suits are without merit and pledged vigorous defenses. Shareholder derivative lawsuits are designed to allow stockowners to sue 3rd parties on behalf of the company (in this case, the 3rd parties are the company itself and its management). Any proceeds from shareholder derivative suits go to the company, not the plaintiffs.
Also in March, CSI said it would lay off 8% of its workforce as it looked to stabilize its sales force and grow the top line.