A securities fraud plaintiff pleaded "enough to give rise to inferences that are at least as strong as any competing inferences regarding scienter," wrote a 1st Circuit panel, as the court re-instituted one of four dismissed claims under a Tellabs analysis. The remand permitted the district court, to allow a limited discovery period on the issues raised.
A plaintiff class sued Boston Scientific, a medical device manufacturer, for securities fraud under four distinct allegations of securities fraud. The investor class claimed inadequate and misleading disclosures regarding 1) a civil fraud and contract lawsuit with another manufacturer, 2) a Department of Justice investigation into a 1998 product recall, 3) the company's introduction of TAXUS stents to the market, and 4) FDA investigations and warnings regarding Boston Scientific's plants. Only the TAXUS stent issue was before the court on appeal following the dismissal of all claims.
The class made several allegations concerning problems with the company's stent device. As alleged, the company knew of and did not reveal problems with the device from its use in Europe prior to its U.S. introduction, and the company's failure to disclose an FDA deficiency letter. The company also did not disclose a change in its manufacturing process, and according to the class complaint, the defendants misleadingly attributed any risks or problems to the unfamiliarity of doctors with the new device rather than to any functionality issues. This delay in addressing functionality evidenced scienter, according to the complaint, because of the desire of the defendants to build up inventory before announcing product recalls.
The district court dismissed all claims, finding in a pre-Tellabs decision that the allegations represented at most fraud by hindsight. "[N]o liability exists where a plaintiff's claim rests on the assumption that the defendants must have known of the severity of their problems earlier because conditions became so bad later on," wrote the trial court.
The 1st Circuit rejected this conclusion, however, because the district court failed to consider other allegations that the lead plaintiff made in its supporting documents. The panel found, in applying a Tellabs analysis, that "while there is support for defendants' inferences, we think, at this stage, that plaintiff's inferences are at least equally strong." Initially, the court found that it could draw a very reasonable inference that "defendants initiated the manufacturing change as a result of the complaints" it had received from Europe. Similar inferences could also be drawn from statements by the company's chief operating officer. These remarks to investors omitted any references to product problems, and were followed within a week by a recall announcement. While "[t]emporal proximity alone is insufficient to establish a claim for fraud," in this instance the COO was a "point person" on this product and "would presumably have been aware of the status of the company's `ongoing monitoring' of `old' TAXUS stents."
The appeals panel also noted that the trial court failed to consider insider trading claims as evidence of scienter. While noting that the fact of several insider transactions made outside the class period "undermines the inference that the timing of the trading was suspicious," and conceding that the insider trading claims "as alleged are on the weaker end of the spectrum" in terms of indicators of fraud, the court concluded, quoting a previous decision, that "we think that the
plaintiffs' allegations of insider trading, inasmuch as they are at least consistent with their theory of fraud, provide some support against the defendants' motion to dismiss."
The court declined to address the validity of claimed group pleadings, given that the trial court had not decided this issue. The panel also re-instated Section 20(a) controlling person claims.
In re Boston Scientific Corp. Securities Litigation (Mississippi Public Employees' Retirement System v. Boston Scientific Corp., 1st Circuit)