Securities Regulation Daily Wrap Up, FRAUD AND MANIPULATION—E.D.N.Y.: CEO's attendance at quality meetings pointed to knowledge of product defect, (Oct 28, 2025)

By Rodney F. Tonkovic,J.D.

The CEO attended meetings for three years that were designed to discuss complaints and post-market surveillance.

A district judge found it implausible that knowledge of a severed product defect was kept from a CEO for years. In this case, the complaint alleged that the company misled about the scope of the defect and other matters affecting its business outlook. The court previously held that the allegations created a strong inference that the CEO acted recklessly. In an unpublished order addressing a motion for reconsideration of the scienter holding, the court came to the same conclusion, finding that it was not plausible that the CEO did not know about the issue well before it was made public (Patel v. Koninklijke Philips N.V., No. 1:21-cv-04606 (E.D. N.Y. Oct. 27, 2025)).

Foam degradation. Koninklijke Philips is a Dutch multinational health technology company. As relevant here, a division of the company manufactured ventilator devices intended to assist with sleep, breathing, and respiratory conditions. Starting in at least 2016, the company internally investigated and documented customer complaints about the degradation of the foam used in the ventilators, which caused harm to users who inhaled the foam particles.

In 2018, the company established a Quality & Regulatory Committee to discuss, among other issues, complaint handling. The company's CEO attended all of the QRC meetings between 2018 and 2021.

The company did not speak publicly about the foam degradation issue until April 2021, when the CEO noted that "post-market surveillance" uncovered a "quality issue" in certain products in a press release accompanying an earnings report. Following the recall of several devices in June 2021, the company's stock price fell.

The complaint alleged that the defendants made false statements about the scope of the degradation issue, safety protocols, and the company's business outlook. The allegations were supported by an FDA site investigation report noting that the division's risk analysis and procedures for preventative and corrective action were inadequate, and that management and executives were aware of the foam degradation issues.

Reconsideration. In a previous order, the court concluded that there was a strong inference of recklessness on the part of the CEO. The court said that allegations regarding the frequency and content of the QRC meetings attended by the CEO supported a strong inference of scienter.

The defendants sought reconsideration, arguing that the court misconstrued one of the CEO's statements as an admission of knowledge and that competing nonculpable inferences were not considered. The court denied the motion in its entirety.

First, the defendants maintained that the CEO did not directly admit that he personally learned of the issue through post-market surveillance. The court disagreed, noting that at this stage, a direct admission is not required. The court was able to infer that the CEO was alluding to post-market surveillance discussed at the QRC meetings he attended and at this stage, the plaintiff was not required to identify exactly when and how the information was learned.

The court also rejected the notion that it did not appropriately weigh nonculpable inferences. The defendants argued that the CEO only became aware of the foam issue shortly before the 2021 disclosure. The court said that the allegations instead supported the inference that the CEO had access to information about the foam issues starting in 2018. While the CEO's increasing his stockholdings during the relevant period supported a nonculpable inference, the court found it implausible that the CEO would not learn about a severe product defect while attending many meetings designed to discuss such issues.

The case is No. 1:21-cv-04606.

Judge, Korman, E.

Attorneys: Jeremy Alan Lieberman (Pomerantz LLP) for Subhash Patel. Alexandra Bodo (Sullivan & Cromwell LLP) for Koninklijke Philips N.V., Frans Van Houten and Abhijit Bhattacharya. Jenny Rebeca Kramer (Alston & Bird LLP) for John Frank.

Companies: Koninklijke Philips N.V.

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