Securities Regulation Daily Wrap Up, FRAUD AND MANIPULATION—D. Minn.: The beat goes on in class action against pacemaker part maker, (Dec 23, 2015)

By Rodney F. Tonkovic, J.D.

A class has been certified in a fraud action against a maker of parts used in medical devices. The complaint alleges that the company made a series of misstatements and omissions about the safety and reliability of its product. The court found that the class met the Rule 23 requirements and, specifically, was able to show that the market for the company's stock during the class period was efficient (Forsta AP-Fonden v. St. Jude Medical, Inc., December 22, 2015, Ericksen, J.).

St. Jude Medical, Inc. makes custom-designed, insulated wires that connect implanted devices like a pacemaker or defibrillator to a patient’s heart. At issue were the safety and reliability of two generations of lead wires, the older of which was allegedly subject to premature wear and electrical malfunctions. The complaint alleged that St. Jude made false statements and omissions in violation of the antifraud provisions of the Exchange Act about the quality, safety, and reliability of both generations of leads, as well as their compliance with the applicable laws and regulations.

Class certified. The court certified a class of purchasers of St. Jude stock during a class period from February 5, 2010 through November 20, 2012. According to the court, the class met the requirements of Rule 23(a) and (b). The numerosity, commonality, typicality, and adequacy requirements of Rule 23(a) were uncontested

The only disputed element was whether the lead plaintiff met the burden of showing that common questions of law or fact predominated. At issue was whether the fraud-on-the-market presumption of reliance was applicable, specifically whether the stock traded on an efficient market. To meet its burden the lead plaintiff outlined ten factors supporting a finding that St. Jude's shares traded on an efficient market: five of these factors were derived from Cammer v. Bloom. While the Eighth Circuit has not adopted any particular test for market efficiency, the court noted that the facts showed that a large number of people could buy St. Jude stock and that trading information on it was widely available.

The only disputed factor was the fifth Cammer factor: whether the facts showed a cause and effect relationship between unexpected corporate events or financial releases and an immediate response in the stock price. St. Jude maintained that the failure to establish this factor by itself was sufficient to doom class certification. The court disagreed with this notion, stating that a shortfall on the fifth Cammer factor does not outweigh showings on the other factors.

Additionally, St. Jude "overreached" in arguing that only one type of test can demonstrate cause and effect. Here, the plaintiffs' expert performed a comparative analysis of days on which significant news occurred and non-news days; this, the court said, showed at least some cause-and-effect relationship between news and stock price. The court said that the additional analysis, essentially a full-blown event study, suggested by St. Jude would be imposing a burden on the plaintiffs that the law does not mandate. There is no rule, the court explained, requiring the presentation of direct evidence in the form of an event study over the use of indirect proof. The court concluded that the lead plaintiff presented adequate proof that the market for St. Jude stock during the class period was efficient.

The case is No. 12-3070.

Attorneys: Christopher F. Moriarty (Motley Rice LLC) and James W. Anderson (Heins Mills & Olson, PLC) for Forsta AP-Fonden. Daniel C. Mulveny (Kessler Topaz Meltzer & Check, LLP) for Danske Invest Management A/S. Alycia Ann Degen (Sidley Austin LLP), Daniel L. Ring (Mayer Brown LLP) and Michelle S. Grant (Dorsey & Whitney LLP) for St. Jude Medical, Inc.

Companies: Forsta AP-Fonden; Danske Invest Management A/S; St. Jude Medical, Inc.

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