On July 12, 2012, the First Circuit affirmed dismissal of a securities fraud suit alleging that Boston Scientific Corporation and several of its officers made materially misleading statements in 2009 and 2010 in violation of Section 10(b). In re Boston Sci. Corp. Sec. Litig., 2012 WL 2849660 (1st Cir. July 12, 2012) (Boudin, J.). The court found that there was “clearly insufficient basis to find materiality” as to the statements at issue made in 2009 or to “infer scienter” as to the statements at issue made in 2010. Id. at *9.
The plaintiffs alleged that Boston Scientific and three of its officers failed to disclose information regarding the termination of several members of the company’s cardiac rhythm management (“CRM”) device sales team in statements they made in 2009 and January of 2010.
In late 2009, “ten members of the CRM sales force were [allegedly] fired for their ‘repeated[ ]’ breaches of Boston Scientific’s internal code of ethics.” Id. at *2. One of the terminated employees had been a Divisional Vice President of Sales, responsible for managing one of the company’s three domestic sales regions. At the time, the CRM sales force “consisted of about 1,100 employees[,]” and sales of CRM devices accounted for “around 30 percent” of Boston Scientific’s total sales. Id. at *1.
On January 4, 2010, St. Jude Medical, one of Boston Scientific’s competitors, hired the Divisional Vice President that Boston Scientific had discharged along with allegedly “‘many’ of the other nine fired CRM sales group members … .” Id. at *2. Boston Scientific “revealed the firing and St. Jude’s subsequent hiring of the CRM sales representatives” on February 11, 2010, when the company announced its fourth quarter 2009 results. Boston Scientific’s President and CEO Raymond Elliott stated that “‘[i]n the short haul,’” Boston Scientific would “‘for certain lose sales … .’” Id. “On the same day as these remarks, the price of Boston Scientific common stock … closed down about 10 percent” from the previous day. Id. at *3. “Several months later,” Boston Scientific reported that the CRM staff terminations and an unrelated CRM device issue “had [together] led to $16 million globally in lost sales for the first quarter of 2010—a period in which the CRM sales revenue was $538 million.” Id.
On September 19, 2011, the District of Massachusetts dismissed the plaintiffs’ claims, finding that the statements at issue made in 2009 “were not materially false or misleading” and that “the allegations of scienter as to the January 2010 statement were inadequate.” Id. The plaintiffs appealed.
Section 10(b) Does Not Require the Disclosure of All Material Information
At the outset of its analysis, the First Circuit emphasized that “Section 10(b) ‘do[es] not create an affirmative duty to disclose any and all material information.’” Id. at *4 (quoting Matrixx Initiatives v. Siracusano, 131 S. Ct. 1309, 1321 (2011)). “Instead, it extends to omissions only where affirmative statements are made and the speaker fails to ‘reveal[ ] those facts that are needed so that what was revealed would not be so incomplete as to mislead.’” Id. (quoting Hill v. Gozani, 638 F.3d 40, 57 (1st Cir. 2011)).
The First Circuit explained that the reason “[w]hy companies do not have to disclose immediately all information that might conceivably affect stock prices is apparent: the burden and risks to management of an unlimited and general obligation would be extreme and could easily disadvantage shareholders in numerous ways (e.g., if a new invention were prematurely disclosed to competitors or a take-over plan to the target company).” Id. “So the securities laws forbid false or misleading statements in general but impose more specific disclosure obligations only in particular circumstances.” Id.
The Complaint Fails to Allege the Statements Made in 2009 Were Material
The First Circuit determined that none of the statements made in 2009 was materially misleading because the employees under investigation “represented only about two percent of the CRM sales force, and CRM sales themselves were only a portion of the company’s business.” Id. The court explained that “the possible or imminent discharge of a tiny fraction of sales personnel for a single line of products [is] of minimal expected consequence for a company with global operations and 25,000 employees.” Id. at *5. “This is not even close to the level at which other cases have found omissions to be material.” Id.
The Complaint Fails to Allege the January 2010 Statements Were Made with Scienter
During a January 2010 conference call, Boston Scientific’s President and CEO Raymond Elliott “made several statements … favorable to the company’s sales, including a claim that it had a ‘stable, large, experienced’ and ‘very successful’ sales force.” Id. at *7. The plaintiffs contended that these statements were materially misleading because “by this time not only were the firings complete, but at least one, and perhaps more, of the fired employees had been re-hired by one of Boston Scientific’s competitors.” Id. “The district court found material the failure to disclose the threat in January 2010 … but also found the statement nonactionable for lack of adequate allegations of scienter.” Id. On appeal, the First Circuit assumed the district court’s materiality finding was correct and only considered scienter.
The First Circuit explained that under the Private Securities Litigation Reform Act (“PSLRA”), the complaint must “set forth facts making the inference of scienter ‘cogent and at least as compelling as any opposing inference one could draw from the facts alleged.’” Id. (quoting Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 324 (2007)). “Thus, when Elliott spoke blandly but favorably in January 2010 of the strength of the company’s sales force, the facts pled had to provide a clear indication that he was either dishonest or reckless in not mentioning the defection of up to ten salespeople to a competitor.” Id.
The court noted that “[i]n cases where [it has] found the pleading standard satisfied, the complaint often contains clear allegations of admissions, internal records or witnessed discussions suggesting that at the time they made the statements claimed to be misleading, the defendant officers were aware that they were withholding vital information or at least were warned by others that this was so.” Id. “No such direct evidence is pled in the complaint here.” Id. Moreover, the plaintiffs did “not identify any other basis for imputing such wrongful intent, nor was the omitted information of such powerful importance that wrongful intent [could] reasonably be inferred.” Id.
“In fact, the complaint does not even squarely allege that the individual defendants knew on January 12, 2010 that St. Jude had hired some Boston Scientific salespeople, and that cannot be merely assumed.” Id. at *8. If Elliott was aware of this information, the First Circuit found it reasonable to assume that his delay in disclosing it was due to the fact that “some or all of the fired employees had only very recently been hired by St. Jude,” and the company “surely required some period to assess” the amount of “business they might take with them[.]” Id.
The plaintiffs contended that the district court had “erred by failing to consider their arguments for scienter ‘holistically,’ as Tellabs suggests is proper.” Id. The First Circuit acknowledged that “allegations that are individually insufficient can sometimes combine together to make the necessary showing.” Id. “But in this case, a single central risk existed—that sales personnel might leave and perhaps take some of their business with them.” Id. “If the likely magnitude of the loss was great in relation to company revenues, and had been so understood by [the] defendants, a basis would likely exist for concluding that they were dishonest or at least reckless in failing to mention it.” Id. at *9. However, “[b]ecause the losses … were extremely modest in relation to revenues[,]” the First Circuit held that “no such inference exists.” Id. The court therefore concluded that “the January 2010 statements do not pass the PSLRA’s heightened pleading standard for scienter.” Id.