After three years of litigation, a medical device manufacturer has agreed to pay $7 million to settle a class action lawsuit that claimed the company misled investors regarding significant FDA regulatory violations.

Staar Surgical Company was sued by shareholders under the Securities Exchange Act after FDA issued a Warning Letter to the company in May 2014. In their complaint, the shareholders alleged “wrongful acts and omissions” regarding the company’s press releases and quarterly filings with the SEC did not adequately disclose Staar Surgical was not in conformity with FDA regulations and that this caused the shareholders significant damages after the share price fell.

This case further underscores the need for underwriters and companies looking to acquire burgeoning biotech businesses to be mindful of what those businesses have and should have reported in their SEC filings, among other materials, with respect to FDA regulatory matters.

FDA’s inspection that led to the May 21, 2014 Warning Letter (and ultimately the settlement) lasted over one month and cited numerous quality system violations relating to design history files, customer complaint procedures, and risk analysis documentation. Prior to the FDA inspection and Warning Letter, Staar Surgical had been consolidating manufacturing operations from its Switzerland facility to Monrovia, California. However, due to inadequate disclosures in filings with the SEC, what was intended to be a venture that would “yield significant savings in costs of goods, lower … global administrative and regulatory costs and reduce income taxes,” instead yielded an outcome that may have been avoided with a more accurate representation of Staar’s regulatory status.

As underwriters and acquirers know, compliance with FDA regulations is undoubtedly critical to the success of a medical product. Likewise, from an SEC compliance standpoint, overlooking the importance of adequate disclosures can risk sinking a deal or facilitating significant and costly regulatory hurdles down the road. In this instance, Staar Surgical was alleged to have whitewashed the importance of the FDA inspection and violations the agency observed.

In April and May 2014, Staar Surgical issued a press release and filed a quarterly report with the SEC, respectively, shortly after the company sent a formal letter to FDA responding to the compliance violations observed and documented by the agency. Notably, and as asserted in the plaintiff’s complaint, neither the company’s press release nor the quarterly report mentioned the FDA inspection, notice of violations, or Staar Surgical’s formal response to FDA. Had Staar Surgical been more transparent regarding their encounters with FDA, shareholders may not have had a cause of action under the Securities Exchange Act and the fallout from the May 2014 Warning Letter may have been largely limited to regulatory remediation negotiated with FDA.

Acquiring or initiating the public offering of a medical product company, although profitable, can increase a firm’s legal exposure, and not just with FDA. Strategic due diligence is essential when preparing to undertake these promising ventures and, when performed properly, can help ensure a target company is operating in an acceptably compliant manner and the assets in question have been properly described. By verifying that material representations made by a company in offering documentation or other transaction documents are accurate and not misleading, costly and significant legal or regulatory consequences after the deal has closed can be minimized.