(Article from Securities Law Alert, February 2015)
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On February 6, 2015, the First Circuit affirmed dismissal of a securities fraud action against Abiomed on scienter grounds. Fire and Police Pension Ass’n of Colorado v. Abiomed, 2015 WL 500748 (1st Cir. 2015) (Lynch, C.J.). In evaluating plaintiffs’ scienter allegations, the First Circuit explained that “the materiality and scienter inquiries are linked.” The court found that “[t]he question of whether a plaintiff has pled facts supporting a strong inference of scienter has an obvious connection to the question of the extent to which the omitted information is material.” The First Circuit noted that “[i]f it is questionable whether a fact is material or its materiality is marginal, that tends to undercut the argument that defendants acted with the requisite intent or extreme recklessness in not disclosing the fact.”
Here, plaintiffs claimed that Abiomed had “fail[ed] to state that some of the [company’s] increased revenues were due to off-label marketing” of the Impella 2.5, a micro heart pump. The First Circuit found “[t]he materiality of [this] impugned omission” to be “marginal at best.” The court explained that “[p]laintiffs’ contention that the omission would have mattered to a reasonable investor depend[ed] on a long chain of inferences, most of which [were] not sufficiently substantiated by the allegations in the complaint.” While plaintiffs “allege[d] that off-label promotion was widespread,” the court pointed out that plaintiffs did “not state or even suggest what proportion of sales were made as a result of such efforts, or the significance of the contribution of those sales to Abiomed’s stock price.” The First Circuit concluded that “[t]he marginal materiality of the alleged statements and omissions concerning revenues weigh[ed] against an argument that defendants here [had] possessed the requisite scienter.”
As to allegations that Abiomed had made misstatements concerning its compliance with the FDA’s off-label marketing regulations, the First Circuit determined that “[s]cienter [was] not established” simply because there were “statements from confidential witnesses [“CWs”] that Abiomed management was in fact intentionally violating FDA regulations.” The court explained that “even if the CWs’ statements plausibly suggest[ed] that Abiomed [had been] acting improperly, they [did] not show that defendants’ statements about company policy and the FDA’s inquiries [had been] made with conscious intent to defraud or recklessly.” The First Circuit emphasized that the “key question” for scienter purposes “is not whether defendants had knowledge of certain undisclosed facts, but rather whether defendants knew or should have known that their failure to disclose those facts present[ed] a danger of misleading buyers or sellers.” Here, the court found that “far from suggesting an intent to defraud investors,” the CWs’ statements “suggest[ed] instead that Abiomed [had been] aggressively marketing the Impella 2.5 ‘every which way’ in order to sell more units.”
Although the First Circuit recognized that “Abiomed’s promotional and marketing activities for its core product might have been a risky course in terms of its likelihood of prompting sanctions from the FDA,” the court emphasized that “allegations of corporate mismanagement are not actionable under Rule 10b-5.” The First Circuit observed that “[n]ot all claims of wrongdoing by a company make out a viable claim that the company has committed securities fraud,” and found that “[t]his case is an example.” The court therefore affirmed dismissal of plaintiffs’ complaint.