• December 10, 2014

St_Jude_Medical_pacemaker_with_ruler2A securities fraud class action trial in Minnesota? Really? Anything’s possible but such trials are exceedingly rare. Since 1995, of the hundreds, if not thousands of securities fraud class actions brought over that time period (it seems the average per year might be about 150-165), there may have been fewer than a dozen trials nationwide. So the smart money is on a settlement between now and the February 23, 2015 start of trial.

But it is not looking like Defendant St. Jude is going to get out of trial before trial any way but by a cash settlement. Not for lack of trying. St. Jude and the co-defendants moved to dismiss, without success. They moved for summary judgment, with mixed results. Recently, they asked for permission to move to decertify Plaintiffs’ class, without success:

Defendants had the information they needed to bring their motion for decertification—or at least to notify the Court and Plaintiffs that they intended to seek leave to bring such a motion—in January 2014. Yet, they waited ten months to do so…the Court finds Defendants’ delay to be inexplicable and prejudicial.

U.S. District Court Judge Susan R. Nelson (D. Minn.) denied St. Jude’s request for leave to file a motion to decertify the class (and went on to rule that the motion would not have prevailed anyhow). It seems that St. Jude has one last chance to knock out plaintiff’s before trial with a pending Daubert motion to exclude plaintiffs’ expert. I’ve not dug into the arguments so as to be able to handicap that motion but in light of Judge Nelson’s rulings thus far and the plaintiffs’ expert’s qualifications, I will go out on a limb and predict that plaintiffs will prevail in opposition to that motion and further predict that this case will NOT go to trial, before or after the Court rules on the motion…

Chart-of-Prices2Original post (December, 2013) (under subject line: Did St. Jude Plump Up Its Earnings With Channel-Stuffing? Or Is St. Jude Being Charged With Fraud-by-Hindsight?): The 1995 Private Securities Litigation Reform Act has gutted securities fraud class actions because the pleading requirements are quite stringent and hard to meet.  So a great many cases are not brought that would have been brought in by-gone times.  Many other cases are dismissed on the pleadings, which would have survived in the earlier era.  The securities fraud claim against St. Jude brought in March, 2010 is a fairly rare post-PSLRA exception.  St. Jude did not succeed on disposing of the case on a motion to dismiss.  Now St. Jude takes another run at the complaint, this time with a motion for summary judgment.

What is the difference between pushing hard to meet projections by encouraging aggressive sales at the end of a quarter (perhaps offering discounts or being more flexible on returns if buyers find later they have over-bought), which, arguably, is business as usual in a great many businesses throughout our economy, and “channel stuffing,” which is defined as a kind of securities fraud?

Channel stuffing is “manipulative sales activity,” St. Jude counsel says.  I think that means the difference is whether certain commercial transactions (i.e. sales) were more “make-believe sales” to pump up share price than they were actual arms-length sales made in good faith.  (See this linked brief at p. 30 describing a number of channel stuffing cases.  For an obvious instance channel-stuffing, consider where the goods are sold, purportedly shipped to buyer but placed in storage owned by seller, and then, eventually, shipped back to seller. This really happens.)

In the St. Jude securities fraud class action, the question probably comes down to whether ••••••••••••••••••••••• or ••••••••••••••••••••••• when ••••••••••••••••••••••• said ••••••••••••••••••••••• and defendants •••••••••••••••••••••••.

What I mean by that is  ••••••••••••••••••••••• when ••••••••••••••••••••••• for ••••••••••••••••••••••• and defendants •••••••••••••••••••••••.

Seriously, it sure is tantalizing and frustrating to read heavily redacted briefs.  Check out page 6 or pages 18-19 of this brief.  I have a person favorite on p.25, “By this time, Hendrick was warning the QP sales force about ••••••••••••••••••••••• and militant •••••••••••••••••••••••.”  Footnote 30 on p.33 is pretty amusing, as well. You think the redactors are horsing around sometimes?  This starts to feel like a game of Mad Libs (“Zurbay, who did •••••••••••••, similarly understood the risks.” Tai-chi? Very well in math?)

Plaintiffs’ point in the end appears to be that, even if the alleged conduct was “merely”  pushing hard to meet projections by encouraging aggressive sales at the end of a quarter, this should have been disclosed to St. Jude investors because this information would be material to their evaluation of the company’s condition and prospects.  St. Jude’s point appears to be that wide-spread widely recognized business practices — like trying to do all one can within the law to meet projections and maximize company revenue — is not securities fraud every time those efforts fall short.

St. Jude is represented by Dorsey & Whitney LLP.  Plaintiffs are represented by Robbins Geller Rudman and Dowd LLP out of San Francisco and locally by Zimmerman Reed.

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