DOUGLAS P. WOODLOCK, District Judge.
This securities fraud class action was brought by Plaintiff Mississippi Public Employees' Retirement System ("PERS") against Boston Scientific Corporation, a publicly traded manufacturer of medical devices ("Boston Scientific" or the "Company"), and its executives (collectively, the "Defendants"). Plaintiff alleges that the Company withheld material information and made misleading statements about a medical product that was eventually re-called, thereby leading to artificial inflation of the market price of Boston Scientific stock, in violation of sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b) and 78t(a). Defendants have moved for summary judgment on all of Plaintiff's claims.
The matter was transferred to my docket upon remand from the First Circuit following reversal of Judge Tauro's grant of Defendants' motion to dismiss. See generally Miss. Pub. Employees' Ret. Sys. v. Boston Scientific Corp., 523 F.3d 75 (1st Cir.2008), rev'g In re Boston Scientific Corp. Sec. Litig., 490 F.Supp.2d 142 (D.Mass.2007). Taking advantage of the broad grant of permission under the remand order to shape discovery, Miss. Pub. Employees' Ret. Sys., 523 F.3d at 79, I have allowed full development of the factual issues. I now have before me a record appropriate to determine whether the Plaintiffs can present sufficient evidence to show that their claims have merit to proceed to trial. Finding that they do not, I will grant summary judgment in favor of Defendants.
Defendant Boston Scientific is a publicly traded manufacturer and distributor of medical devices. Individual defendants include Peter M. Nicholas (Co-Founder of the Company and Chairman of the Board of Directors), James R. Tobin (Chief Executive Officer), Paul A. LaViolette (Senior Vice President and Group President of Cardiovascular), Fredericus A. Colen (Senior Vice President and Chief Technology Officer), James H. Taylor, Jr. (Senior Vice President of Corporate Operations), Paul W. Sandman (Senior Vice President, Secretary, and General Counsel), Lawrence C. Best (Senior Vice President and Chief Financial
Plaintiff PERS is a Mississippi-based pension fund, which sues on behalf of a putative class of individuals and entities, which purchased Boston Scientific stock between November 20, 2003 and July 15, 2004 (the "Class Period").
Discovery has developed a substantial evidentiary record against which to measure the merit of Plaintiff's claims as alleged in its complaint. I will recite from that record in some detail, at all points considering the evidence in the light most favorable to the Plaintiff as non-moving party.
In 2001, the Company decided to sell a new drug-eluting coronary stent called TAXUS® Express
Beginning in 2001, the Company had received a few no-deflate complaints regarding Express
By May 2003, the PIR team's
As a result of its investigation, the PIR team identified several corrective and preventive actions to improve the quality of the Galway devices, including (1) using only Maple Grove-manufactured distal outers, which had been determined to be more robust and less susceptible to focal neckdown than Galway-manufactured distal outers,(2) lowering the temperature on the laser and improving a mechanism for aligning the laser more precisely, and finally (3) eliminating to the extent possible all potential sources of tensile that could be identified.
The Company implemented these corrective and preventive actions in April and May 2003. Specifically, the Company's decision to cease using Galway-produced distal outers in the manufacture of TAXUS and Express
In a May 23, 2003 report, the PIR team recorded twenty-one no-deflate complaints on Galway Express
Members of the PIR team ultimately concluded that "[n]o field action is recommended at this time," explaining that "[t]he low rate of occurrence combined with the limited severity observed in all but one case does not warrant a field action at this time." The finding of "low rate of occurrence" was based on the PIR team estimate that the overall rate on Galway-manufactured devices was 69 parts per million. Similarly, the finding of "limited severity" was based on the conclusion that only three of the twenty-one no-deflate incidents resulted in what could be classified as serious injuries, and that the remaining deflates had resulted in limited health consequences for the patient.
On May 27, 2003, the FAC, whose ultimate responsibility was to decide on any field action, met to discuss the PIR team's recommendations and consider whether a recall was warranted. Specifically, the minutes of the May 27 FAC meeting provide that:
During this meeting, the FAC also discussed the results of the investigation conducted by the PIR, in particular the fact that the no-deflate incidents were attributable to focal neckdown.
While the FAC declined to "take any specific actions in terms of a recall," the FAC decided to continue to monitor no-deflate complaints through bi-weekly reports. Later bi-weekly reports disclosed that no-deflate complaints continued to be filed on Galway devices manufactured before May 2003; however, only very few no-deflate complaints were received by Boston Scientific on devices manufactured after implementation of the May 2003 actions.
In May 2003, Boston Scientific empaneled a "six sigma"
In June 2003, Maple Grove engineers met "to discuss what additional component or full unit design specifications are needed to further ensure no focal necking occurs on Maverick/Exp. II style catheters in the future" and determined that "the most obvious specification was an elongation specification for the distal outer component." Once the testing and the validation work on this specification was concluded, the Company filed a Special PMA
The purpose of this submission was to add an inspection protocol related to distal outer elongation for catheters used with Express
PMA-S I was approved by the FDA on October 24, 2003, leading the Company to incorporate that improvement into its then-pending TAXUS PMA via an amendment filed on November 11, 2003.
Boston Scientific had established in 2003 a "TAXUS PMA Council"
On October 7, 2003, the TAXUS PMA Council determined that, because additional manufacturing changes to Express
Because the FDA review process for TAXUS could be jeopardized, no additional amendments will be filed after October 31 without consultation with the PMA Council.
At that time, the laser shift specification was, according to Defendants, not considered to be "critical," and its submission was therefore delayed until April 2004. In fact, Paul Weiss testified that, during the fall of 2003, he "would not have characterized th[e] laser alignment as a fix." Rather, he declared that "[i]t still was a preventative action to make the product more robust to focal necking."
On November 20, 2003—the first day of the Class Period, the Company issued a press release announcing that the FDA's circulatory devices panel would recommend that the FDA approve TAXUS stents for sale in the United States. In anticipation of the FDA approval of the TAXUS PMA, the Company "ramped up" the production of TAXUS stents for the U.S. market. At that time, most of the TAXUS stents being manufactured for the U.S. launch incorporated the May 2003 corrective actions (and the October 2003
As of November 2003, there had been only one no-deflate complaint reported on Express
On March 4, 2004, the FDA approved TAXUS stents for sale in the United States. Within the first couple of weeks following the U.S. launch, Boston Scientific received about a dozen no-deflate complaints on TAXUS stents manufactured in Galway and in Maple Grove. The Company later received notice that a hospital had undertaken to "cease using [TAXUS] stent at ALL our facilities until it is determined if this is a product defect or an isolated incident."
The design, testing and validation work regarding the laser weld shift initiated in the winter of 2003-2004 was completed in late March 2004. On April 2, 2004, Boston Scientific submitted a second Special PMA Supplement-Changes Being Effected ("PMA-S II") to the FDA requesting modifications to the TAXUS and Express
Meanwhile, no-deflate issues on TAXUS stents were reported to the press but the Company remained confident at the end of April 2004 that the TAXUS stents performed very well based on the low complaint rate. Reflecting this confidence, on April 23, 2004, the New York Times reported that:
Similarly, the Boston Globe announced that:
On May 5, 2004, the FDA approved PMA-S II, and the new laser location was put in place that month for stents manufactured both in Galway and in Maple Grove plants. Despite its approval however, the FDA expressed concerns with PMA-S II, in particular with the fact that the TAXUS stents were subjected to cone puffing process during manufacture. In addition, the FDA continued to scrutinize the Medical Device Reports ("MDRs") filed by the Company.
On the day of the FDA's approval of the Company's PMA-S II, a Merrill Lynch analyst report noted that "[m]eanwhile, we continue to hear periodic rumblings concerning handling issues with the TAXUS stent in which the balloon does not totally deflate. We continue to believe that the rate of events is very small and that this issue is highly manageable through in-service education by BSX reps."
Similarly, on May 7, 2004, the Boston Globe noted that:
Plaintiff's expert, Chad Coffman, testified that the FDA's approval of the laser location manufacturing change was known to the market on or about May 7, 2004, and that "the market knew at that point they were responding to the no-deflate issue" in implementing the manufacturing change. A Prudential Equity Group, LLC analyst report observed on June 3, 2004 that
At the end of May 2004, the Company was informed that a Galway-manufactured TAXUS stent failed to deflate during surgery
In late June 2004, the FAC directed that a single lot of Maple Grove-manufactured TAXUS devices should be recalled. The Company advised the FDA of this decision on July 1. Later that day, Galway reported that another batch presented multiple out-of-box failures, leading Boston Scientific to update the FDA that it would be recalling not one but two batches.
On July 2, 2004, the Company announced that it was voluntarily recalling two lots of TAXUS stents (a total of 200 stents). In a press release announcing the recall, the Company stated that the FDA had received reports of one death and sixteen serious injuries associated with balloon non-deflation, along with eight reports of balloon malfunction that had not caused injury. Overall, the press release also stated that "[o]f the[] 445,000 implants, the Company has confirmed a small number of complaints (30 worldwide) about TAXUS balloons that did not deflate or were slow to deflate [approximately 0.0067%]." The press release further explained that the recall was due to "characteristics. . . related to a narrowing in the area where the catheter and balloon are laser welded."
This perspective was echoed by financial analysts. For instance, a Morgan Stanley analyst report noted on the same day that:
Similarly, Goldman Sachs indicated that:
Following the July 2 recall, Boston Scientific continued its investigation, including examination of any devices remaining in inventory from any batch that had even a single no-deflate complaint. During the same time period, a team of engineers in Maple Grove were working to identify "at risk" inventory, including (1) using laser pixel software available in Maple Grove which recorded detailed information regarding the precise location of the laser for each batch of catheters, and (2) conducting research on cone puffing and its effect on tensile events. Regarding the latter, the team discovered that tensile forces could result if a puffed balloon cone was atypically large because the stent protection was applied on the device.
On or about July 9, another out-of-box failure was discovered.
On July 16, Boston Scientific announced that it was voluntarily recalling 85,000 TAXUS stents and 11,000 Express
When trading closed on July 16, the Company stock price declined by 10.3%-or $4.17 per share loss. On that same day, Individual Defendant Nicholas reported in an email to another board member that "yes we discovered the problem and had a fix in place in advance of the events that led to the present situation—but we also knew of the problem on the level over a year ago and never looked inward at our own conduct."
Thereafter, on July 20, the Wall Street Journal announced that the FDA was treating the recalls as a "top priority" and decided to conduct audits at both Maple Grove and Galway manufacturing facilities. These audits revealed, however, no findings of any violations on the part of the Company. Additionally, on July 26, 2004, Boston Scientific reported 2Q 2004 earnings in line with expectations and stated the TAXUS recall sales reversal was $35 million instead of an expected $45 million.
On August 5, Boston Scientific announced that it was voluntarily recalling an additional 3,000 TAXUS stents. The press release announcing the recall stated that it was prompted by the Company's "ongoing monitoring" and noted that since the Company had "modified its manufacturing process, implemented new tracking software and introduced new inspection protocols, it ha[d] not yet had any confirmed non-deflation problems caused by focal neckdown in non-recalled units."
During the Class Period, Individual Defendants sold (or gifted) shares in the Company's stock as follows: stock sales of $40.8 million by James R. Tobin, of $90.7 million by Lawrence C. Best, of $3 million by Paul A. LaViolette, of $13.9 million by Fredericus A. Colen, of $13.6 million by Stephen F. Moreci, of $24.3 million by Paul W. Sandman, $5.1 million by James H. Taylor, Jr., of $25.5 million by Robert G. MacLean, as well as the stock gift of $8.2 million by Peter M. Nicholas.
The Company's Stock Trading Policy in place as of December 2003 permitted Company insiders to sell the Company stock during limited "open windows."
On February 15, 2006, several related securities fraud class action were consolidated into a single action, In re Boston Scientific Corp. Sec. Litig., Civil Action No. 05-cv-11934-JLT (D.Mass.), before Judge Tauro. In connection with this consolidation, Judge Tauro approved PERS's motion for appointment as Lead Plaintiff. On April 17, 2006, PERS filed a Consolidated Amended Complaint, alleging Defendants had made false and misleading statements in connection with four events: (1) a Department of Justice investigation into a 1998 product recall, (2) a civil action with Medinol Ltd., (3) the 2004 recall of TAXUS stents, and (4) FDA investigations and warnings regarding the Company's manufacturing facilities.
Defendants subsequently filed a motion to dismiss the Consolidated Amended Complaint, which was granted in its entirety by Judge Tauro on June 21, 2007. In re Boston Scientific Corp. Sec. Litig. ("BSC I"), 490 F.Supp.2d 142 (D.Mass. 2007). On April 16, 2008, the First Circuit reversed with regard to the TAXUS recall claims, the only claims as to which an appeal had been pressed, and remanded the case. Miss. Pub. Employees' Ret. Sys. v. Boston Scientific Corp. ("BSC II"), 523 F.3d 75 (1st Cir.2008).
On March 2, 2009, PERS filed a Second Consolidated Amended Complaint, removing allegations that had been dismissed and refining their TAXUS stent allegations
Summary judgment is appropriate if the record shows "that there is no genuine issue as to any material fact" and that "the movant is entitled to judgment as a matter of law." FED.R.CIV.P. 56(c). On summary judgement, "[a] genuine issue exists where a reasonable jury could resolve the point in favor of the nonmoving party." Estrada v. Rhode Island, 594 F.3d 56, 62 (1st Cir. 2010) (quoting Meuser v. Fed. Express. Corp., 564 F.3d 507, 515 (1st Cir.2009)) (alteration in original) (internal quotation marks omitted). "A fact is material only if it possesses the capacity to sway the outcome of the litigation under the applicable law." Id. (quoting Vineberg v. Bissonnette, 548 F.3d 50, 56 (1st Cir.2008)).
When assessing the merits of a motion for summary judgment, "the court must consider the record in the light most favorable to the party opposing the motion and must indulge in all inferences favorable to that party." Evans Cabinet Corp. v. Kitchen Int'l, Inc., 593 F.3d 135, 140 (1st Cir.2010). Nevertheless, "the non-moving party must put forth specific facts to support the conclusion that a triable issue subsists" in order to overcome a motion for summary judgment. Martínez-Rodríguez v. Guevara, 597 F.3d 414, 419 (1st Cir. 2010). "With respect to each issue on which the nonmoving party has the burden of proof at trial, that party must `present definite, competent evidence to rebut the motion.'" Id. (quoting Vineberg, 548 F.3d at 56). Therefore, "[e]vidence that is merely colorable or is not significantly probative" will not defeat the motion. Evans Cabinet, 593 F.3d at 140 (quoting Mesnick v. Gen. Elec. Co., 950 F.2d 816, 822 (1st Cir.1991)) (internal quotation mark omitted).
More specifically with respect to securities fraud and scienter, "[a]lthough it is unusual to grant summary judgment on scienter, summary judgment on this issue is sometimes appropriate." SEC v. Ficken, 546 F.3d 45, 51 (1st Cir.2008). "Even in cases where elusive concepts such as motive or intent are at issue, summary judgment may be appropriate if the nonmoving party rests merely upon conclusory allegations, improbable inferences, and unsupported speculation." Id. (quoting Medina-Munoz v. R.J. Reynolds Tobacco Co., 896 F.2d 5, 8 (1st Cir.1990)).
The crux of Plaintiff's case is that Defendants knowingly or recklessly withheld material information regarding the no-deflate risk and the prospect of recall, thereby causing the Company stock price to be inflated, harming investors and allowing the Individual Defendants to enrich themselves in excess of $225.4 million by their own trading during the Class Period.
Plaintiff has made allegations against Defendants under section 10(b) and Rule 10b-5 thereunder. Section 10(b) of the
To establish securities fraud under section 10(b) and Rule 10b-5 requires proof of six elements: "(1) a material misrepresentation or omission; (2) scienter; (3) connection with the purchase or sale of a security; (4) reliance; (5) economic loss; and (6) loss causation." Day v. Staples, Inc., 555 F.3d 42, 56 (1st Cir.2009) (quoting Ezra Charitable Trust v. Tyco Int'l, Ltd., 466 F.3d 1, 6 (1st Cir.2006)); see generally Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 341-42, 125 S.Ct. 1627, 161 L.Ed.2d 577 (2005). To support their claim that summary judgment should be granted as a matter of law, Defendants argue that Plaintiff has failed as a matter of law to satisfy three of these elements: that a misrepresentation or omission (1) was made with scienter, i.e., a wrongful state of mind, (2) was material, and (3) caused an economic loss. I will discuss these three issues in turn.
Scienter refers to a "mental state embracing intent to deceive, manipulate, or defraud." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n. 12, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976). In this circuit, scienter requires "a showing of either conscious intent to defraud or a high degree of recklessness." Ficken, 546 F.3d at 47 (quoting ACA Fin. Guar. Corp. v. Advest, Inc., 512 F.3d 46, 58 (1st Cir.2008)) (internal quotation marks omitted). Here, Defendants argue that summary judgment is required on the element of scienter because: (a) there is no evidence that Defendants recklessly disregarded a significant risk of no-deflate and the prospect of recall, and (b) Plaintiff's insider trading allegations cannot substitute for scienter here, thereby (c) negating any demonstration of corporate scienter.
As a general proposition, "[k]nowingly omitting information is probative, although not determinative, of scienter." N.J. Carpenters Pension & Annuity Funds v. Biogen IDEC Inc. ("Biogen IDEC"), 537 F.3d 35, 47 (1st Cir.2008) (quoting BSC II, 523 F.3d at 87). "However, the fact that the defendants published statements when they knew facts suggesting the statements were inaccurate or misleadingly incomplete is classic evidence of scienter." Aldridge v. A.T. Cross Corp., 284 F.3d 72, 83 (1st Cir.2002). In this connection, "[r]ecklessness is a highly unreasonable omission, involving not merely simple, or even inexcusable[] negligence, but an extreme departure from the standards of ordinary care, and which presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious the actor must have been aware of it." Ficken, 546 F.3d at 47-48 (quoting SEC v. Fife, 311 F.3d 1, 9-10 (1st Cir.2002)) (second alteration in original) (internal quotation marks omitted).
Here, Plaintiff's main argument is that Defendants failed to disclose adverse facts regarding the Company's manufacturing of the Express
In response, Defendants contend that, even if the manufacturing change solved the problem by preventing balloon non-deflation, it does not mean that Defendants were obliged to disclose it earlier. Essentially, Defendants contend that they did not recklessly disregard a "significant risk" of no-deflate by failing to disclose the manufacturing change which they were developing through an orderly internal product review and development process. Defendants rely on, among other cases, Biogen IDEC in which the First Circuit held that "[a] statement cannot be intentionally misleading if the defendant did not have sufficient information at the relevant time to form an evaluation that there was a need to disclose certain information and to form an intent not to disclose it." 537 F.3d at 45 (emphasis added). The First Circuit in Biogen IDEC ultimately affirmed the district court's dismissal of a securities fraud action for failure to plead a strong inference of scienter based, inter alia, on the fact there was no allegation suggesting that "defendants knew of any causal relationship between the use of [a drug] and the separate opportunistic infections diagnosed for the five patients, and then intentionally withheld the data" or even "knew of a significant risk of . . . opportunistic infections while the FDA was reviewing [the drug application]." Id. at 50.
Here, unlike the defendants in Biogen IDEC, however, it is clear that Defendants were aware, as a result of the on-going six sigma investigation, of some potential "causal relationship" between the laser weld shift and the balloon no-deflation, i.e., the fact that this change could have the effect of reducing no-deflation incidents. As the First Circuit observed in BSC II, this is not "a case where there is no contemporaneous evidence at all that defendants knew earlier what they chose not to disclose until later." BSC II, 523 F.3d at 91. Nevertheless, as Delmer, the engineer in charge of conducting the six sigma investigation, explained, "by October 2003, we had determined that there was a[] solution, but an awful lot more work would have to be done in order to implement that solution." As a result, further research was conducted throughout the December 2003-February 2004 time-period in order to understand whether the Company was "going to create another negative consequence" by implementing the laser weld shift. The design, testing and validation protocol was not finalized until late March 2004. The evidence of record therefore demonstrates that, in November 2003 and thereafter, the Company was not aware of a "significant risk" in delaying the submission of the change to the FDA; rather it was proceeding cautiously on the assumption that further research remained to be conducted in order to avoid any potential negative consequences that the implementation of the laser weld shift could have on the no-deflate issue.
That finding is further corroborated by the very small number of complaints reported on TAXUS stents by November 20,
On this record, a reasonable jury could not find that the Defendants knew of or recklessly disregarded a "significant risk" of no-deflate incidents and therefore acted with scienter in not disclosing the laser weld shift from the fall of 2003 until May 2004. Nor could a reasonable jury find that the Defendants were aware of a significant prospect for recalls until shortly before those recalls were undertaken.
All Individuals Defendants engaged in insider trading during the Class Period. To the extent "there is reason to be concerned about material omissions or misrepresentations, the presence of insider trading can be used, in combination with the other evidence, to establish scienter." Biogen IDEC, 537 F.3d at 55. "Unusual trading or trading at suspicious times or in suspicious amounts by corporate insiders has long been recognized as probative of scienter." Greebel v. FTP Software, Inc., 194 F.3d 185, 197 (1st Cir.1999). "At a minimum, the trading must be in a context where defendants have incentives to withhold material, non-public information, and it must be unusual, well beyond the normal patterns of trading by those defendants." Id. at 198.
I find that the evidence developed during the course of discovery provides no triable question regarding insider trading
The evidence of record establishes that the Individual Defendants' sales (or gift) of the Company stock during the Class Period were neither unusual, nor suspicious. Consequently, I conclude that no genuine issue of material fact exists as to whether insider trading during the Class Period evidences scienter.
Plaintiff argues more generally for a theory of corporate scienter that derives from the actions of the Company's agents. The concept of "corporate or (collective) scienter" has not yet been discussed in this circuit; courts in other circuits have addressed the issue at the pleading stage, but reached divergent conclusions.
On the one hand, the Second Circuit has observed that:
Teamsters Local 445 Freight Div. Pension Fund v. Dynex Capital, Inc., 531 F.3d 190, 195 (2d Cir.2008). The Seventh Circuit reached a similar conclusion, holding that "it is possible to draw a strong inference of corporate scienter without being able to name the individuals who concocted and disseminated the fraud." Makor Issues & Rights, Ltd. v. Tellabs Inc., 513 F.3d 702, 710 (7th Cir.2008).
Other circuits have rejected the collective scienter theory of liability. See, e.g., Southland Sec. Corp. v. INSpire Ins. Solutions Inc., 365 F.3d 353, 365 (5th Cir.2004) ("group pleading doctrine conflicts with the scienter requirement of the PSLRA" because the PSLRA requires the plaintiffs "to distinguish among those they sue and enlighten each defendant as to his or her particular part in the alleged fraud.");
Here, I find that the evidence contained in the record is insufficient to show either that the Company as a whole or the Individuals Defendants acted with scienter when they chose not to disclose the manufacturing change until the spring of 2004. To the contrary, the evidence demonstrates a measured effort, in furtherance of a prudently cautious approach, by a corporation seeking to understand and correct the limitations of a product and to respond with appropriate adjustments. Even viewing the evidence in the light most favorable to Plaintiff, the corporate process evidenced in the record establishes a reasonable effort in light of developing information to address, rather than ignore, risks inherent in the launch of a product such as the TAXUS stents. Consequently, there is no sufficient evidence to support a finding of corporate scienter.
Materiality requires that "the complainant must believe there is a `likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the total mix of information made available.'" Staples, 555 F.3d at 57-58 (quoting Basic, Inc. v. Levinson, 485 U.S. 224, 231-32, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988)). Further, "[w]hile a company need not reveal every piece of information that affects anything said before, it must disclose facts, if any, that are needed so that what was revealed [before] would not be so incomplete as to mislead." Biogen IDEC, 537 F.3d at 44 n. 10 (quoting In re Cabletron Sys., Inc., 311 F.3d 11, 36 (1st Cir.2002)) (internal quotation marks omitted). "The existence of a material omission is usually a question for the trier of fact." BSC II, 523 F.3d at 87. Defendant's response to Plaintiff's allegations is two-fold, (a) the facts alleged by Plaintiff were known to the market before July 16, and (b) disclosure of these facts had no impact on the Company stock price. In making this response, Defendants essentially raise a "truth on the market" defense.
The "truth on the market" defense "is intended to rebut the plaintiff's presumption of reliance on the market by suggesting that `even if fraudulent statements were made in attempt to manipulate the market price of a security, if corrective information credibly entered the market and dissipated the effects of the misstatements, those who traded [defendant's] shares after the corrective statements would have no direct or indirect connection with the fraud.'" In re Biogen Sec. Litig., 179 F.R.D. 25, 36-37 (D.Mass.1997) (quoting Rand v. Cullinet Software, Inc., 847 F.Supp. 200, 205 (D.Mass.1994)) (internal quotation marks omitted). Generally, "a truth on the market defense is intensely fact-specific." Id. at 37. "Nonetheless, summary judgment may be appropriate in cases involving curative disclosures where, in view of the information in the market from all sources, a reasonable jury could not conclude that any misconduct by the defendant was material." Id.
Here, the record establishes, and the Plaintiff's expert conceded, that the market was aware of the no-deflate complaints prior to the July 16 recall. In fact, the Company filed MDRs' for all no-deflate failures on TAXUS and Express
I conclude that no reasonable jury could find that any misconduct by the Defendants was material because the market had available sufficient corrective information to cure any arguably misleading statements or omissions to state material facts.
Loss causation refers to "a causal connection between the material misrepresentation and the loss." Dura Pharms, 544 U.S. at 342, 125 S.Ct. 1627. "Normally, in cases such as this one (i.e., fraud-on-the-market cases), an inflated purchase price will not itself constitute or proximately cause the relevant economic loss." Id. (emphasis added). As discussed in section III.A.2. supra, the record establishes that the market was aware, before the July 16 recall, that no-deflate complaints existed; that the Company had identified a "fix," the laser weld shift, to eliminate the problem; and that the Company had delayed the implementation of the "fix" until after the U.S. launch of TAXUS stents. Further, there is no evidence that Defendants were aware before the recall that cone puffing could be said to have created tensile forces. In fact, even Plaintiff's expert admitted that it was only "clearly after the fact it's—it became known that cone puffing could add tensile forces."
Under these circumstances, the record evidence establishes that the mere fact the Company stock price was inflated before the July 16 recall is insufficient in itself to prove that the alleged misrepresentations caused the economic loss alleged by Plaintiff.
I conclude that Plaintiff has failed to show that a genuine issue of material fact exists as to the scienter, the materiality, and the loss of causation requirements. Plaintiff cannot establish on the evidence of record before me essential elements of a Rule 10b-5 claim. Consequently, summary judgment will be entered for Defendants with respect to Count I.
Plaintiff has also made allegations against Defendants under section 20(a) of the Securities Exchange Act, which establishes joint and several liability on "[e]very person who, directly or indirectly, controls any person liable" for a violation of securities fraud. 15 U.S.C. § 78t(a). However, "[t]he plain terms of section 20(a) indicate that it only creates liability derivative of an underlying securities violation." ACA Fin., 512 F.3d at 67; see also In re Stone & Webster Sec. Litig., 424 F.3d 24, 27 (1st Cir.2005) ("[I]t is an essential element of the § 20(a) controlling person claims in question that plaintiffs show a Rule 10b-5 violation by the controlled entity.").
Because I have concluded there is no underlying 10b-5 violation, the section 20(a) must fail. Consequently, summary judgment will be entered for Defendants as to Count II.
For the reasons set forth more fully above, I GRANT Defendant's motion for summary judgment.
