(CN) - The 1st Circuit appeals court tossed out claims that Boston Scientific Corp. directors committed securities fraud by failing to disclose alleged improper sales practices of 10 of its employees.
Part of Boston Scientific's 2008-2009 sales were for cardiac rhythm management (CRM) devices handled by a group within the company, according to the ruling. In 2009, Boston Scientific audited expense reports from trips of sales representatives who traveled with doctors on tours of Boston Scientific facilities. The company then received a subpoena from the U.S. Department of Health and Human Services, "requesting information about contributions made by CRM to charities with ties to physicians or their families."
This information was not immediately disclosed to shareholders, the ruling says and in 2010, a union pension trust and investment employment company filed a class action complaint against Boston Scientific, CEO Raymond Elliott, and CRM President Samuel Leno.
The complaint alleged securities fraud over omissions in statements made in connection with the firing of salespeople for unethical sales practices, and their defection to a Boston Scientific competitor, St. Jude Medical.
A U.S. district judge however, sided with Boston Scientific, finding that statements made in the run up to the firings did not violate the antifraud provisions of federal securities laws.
Judge Michael Boudin affirmed the lower court, finding that the plaintiffs failed to show how statements made throughout 2009 were false or misleading.
On appeal, the plaintiffs argued that in a January 2010 statement Elliot described the company's sales force as "'stable, large, experienced'" and "'very successful.'" The plaintiffs claimed that those comments failed to mention that one of the fired salespeople had been rehired by Boston Scientific's competitor.
But Judge Boudin wrote that the statement, though deemed "material" by the lower court, not did not suggest a "'strong inference'" that Elliot was reckless or dishonest under the Private Securities Litigation Reform Act (PSLRA).
"No such direct evidence is pled in the complaint here. The plaintiffs do not identify any other basis for imputing such wrongful intent, nor was the omitted information of such powerful importance that wrongful intent can reasonably be inferred," Boudin wrote for the three-judge panel.
The judge wrote that ten fired sales members made up less than one percent of Boston Scientific's U.S. CRM sales force, and that a projected loss in revenues "represented the combined effect of both the firings and a negative product advisory."
The judge also said that the complaint "did not even squarely allege" that directors knew that St. Jude had hired the salespeople when the January 2010 statement was made.
"In all events, even if Elliott knew of the St. Jude hirings, this was at best marginally material for reasons already indicated, and its marginal materiality not only defeats any independent inference of deliberate withholding but also makes the pled facts insufficient for a fact finder to find the 'extreme recklessness in not disclosing the fact' that is the least that is required to establish scienter," Boudin wrote. "If the likely magnitude of the loss was great in relation to company revenues, and had been so understood by defendants, a basis would likely exist for concluding that they were dishonest or at least reckless in failing to mention it. Because the losses, thereafter identified to the SEC, were extremely modest in relation to revenues and partly attributable to a different cause, no such inference exists."
"Thus, the January 2010 statements do not pass the PLSRA's heightened pleading standard for scienter," Boudin concluded.
Judges Juan Torreulla and Rogeriee Thompson joined the opinion.