1 consolidated class action complaint for violations of the federal securities laws 04/18/2008

UNITED STATES DISTRICT COURTDISTRICT OF MINNESOTA

MEDTRONIC, INC.,SECURITIES LITIGATION

Civil Action No. 0:07-cv-04564

CLASS ACTION

CONSOLIDATED CLASS ACTIONCOMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS

JURY TRIAL DEMANDED

Court-appointed Lead Plaintiff The Detroit General Retirement System (“Lead

Plaintiff”) and plaintiff Stanley Kurzweil make the following allegations, except as to allegations

specifically pertaining to plaintiffs and plaintiffs’ counsel, based upon the investigation undertaken

by Lead Counsel, which investigation included analysis of publicly available news articles and

reports, public filings, securities analysts' reports and advisories about Medtronic Inc. (“Medtronic”

or the “Company”), press releases and other public statements issued by the Company, and media

reports about the Company and believes that substantial additional evidentiary support will exist for

the allegations set forth herein after a reasonable opportunity for discovery.

NATURE OF THE ACTION AND OVERVIEW

1. This is a securities class action lawsuit brought on behalf of a class consisting

of all persons other than defendants who purchased securities of Medtronic, Inc. (“Medtronic” or

the “Company”) during the period March 21, 2007 through October 15, 2007, inclusive (the “Class

Period”), to recover damages caused by defendants' violations of the federal securities laws.

2. Medtronic is engaged in the medical technology business. One of the

Company's primary operating units is its Cardiac Rhythm Disease Management ("CRDM") segment,

Case 0:07-cv-04564-RHK-AJB Document 46 Filed 04/18/2008 of 82

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which manufactures and sells device-based medical therapies. The Company's CRDM products are

designed to treat and monitor a range of heart conditions. The Company offers products for the

diagnosis and treatment of heart rhythm disorders and heart failure, including implantable devices

such as pacemakers and implantable cardioverter defibrillators (ICDs).

3. As of the beginning of 2007, analysts considered Medtronic “the dominant

player” in the defibrillator market, holding a more than 50% market share against competitors

Boston Scientific and St. Jude.

4. To work properly, defibrillators depend upon a critical component –

implanted “leads.” Leads are complex wires that connect defibrillators to the heart muscle and

which monitor – and sense aberrant – patient heart rhythms. They also deliver jolts of electricity

when a heart beats abnormally to revive patients who would otherwise die.

5. When a lead malfunctions, breaks, or “fractures,” however, it may send false

signals that cause inappropriate or unnecessary defibrillator shocks, or the defibrillator may not

operate at all and shocks may not be delivered as needed.

6. On October 15, 2007, Medtronic shocked investors when it disclosed that it

was recalling and suspending sales of all models of its most popular defibrillator lead – the Sprint

Fidelis (the “Fidelis”) – because of the potential for dangerous fractures which the Company

revealed may already have contributed to five patient deaths.

7. According to the October 15, 2007 announcement, the decision to stop selling

the Fidelis leads came after a review of performance data showing that 30 months after it was

implanted, the leads were viable in only 97.7 percent of cases – lower than the 99.1 percent viability

rate at 30 months for the Sprint “Quattro”, another commonly used Medtronic lead. The Company


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stated that in connection with the recall the Company would suffer revenue loss of $150 million to

$250 million, in part because it did not have enough Quattro leads on hand to immediately replace

the expected returns of unused Fidelis leads or to fill new orders.

8. The market reacted predictably to these admissions. Medtronic's stock price

dropped from a close of $56.33 on October 12, 2007 to close at $50.00 a share on October 15, 2007,

a decline of 11.2% on volume of approximately 62.9 million shares (compared to average volume

of 6.8 million shares).

9. In the days that followed, Medtronic stock continued its decline to a low of

$45.54 on November 7, 2007 – a ten dollar stock price drop – on fears that Medtronic would lose

defibrillator market share as a result of the recall and that the Company faced legal liabilities from

injured patients.

10. The complaint alleges that, unbeknownst to investors, prior to and during the

Class Period defendants became aware of or recklessly disregarded the fact that the Company’s

Fidelis leads suffered from a serious design or manufacturing defect that made them prone to

breakage or “fracturing,” with potentially lethal consequences for patients and adverse impact on

the Company’s financial results and business prospects.

11. As investors learned only after the conclusion of the Class Period, doctors at

the Minneapolis Heart Institute (the “Heart Institute”) had contacted defendants and specifically

alerted them that “Medtronic had a serious problem with the Fidelis lead” as early as February 15,

2007, according to an exposé entitled “Medtronic Recall Exposes Gaps in Medical Safety – Spotty

Data and Testing Left FDA in the Dark: Firm Cites Five Deaths” published in the Wall Street

Journal on October 30, 2007.


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12. By January, the Minneapolis clinic had noticed an alarmingly high rate of

fractures in the Fidelis – including in a 65-year old patient who had been “zapped” 14 times in an

hour by her misfiring defibrillator. The doctors there, led by Dr. Robert G. Hauser – who in 2005

was instrumental in triggering recalls of defective pacemakers and defibrillators made by Medtronic

competitor Guidant Corp. – immediately contacted Medtronic and met with Company officials. The

doctors told Medtronic that they believed the Fidelis was unsafe and were discontinuing

implantation of the device.

13. Weeks later, on February 27, 2007, Dr. Hauser submitted a manuscript of a

study that he and his colleagues had completed on the Fidelis (the “Hauser Study”) to a leading

medical journal, Heart Rhythm. The study found that “the Sprint Fidelis high-voltage lead appears

to be prone to early failure” because of its tendency to “fracture”. An advance copy of the study –

which recommended against use of the Fidelis “until the failure mechanism is identified and

corrected” – was provided by Dr. Hauser to Medtronic by as early as February 27, 2007.

14. Of significance, the Hauser Study was based on three independent sets of data

– from the Heart Institute, Medtronic, and the FDA’s Manufacturer and User Facility Device

Experience (“MAUDE”) database, an online database containing information on medical devices

which have malfunctioned or caused a death or serious injury. All three sources painted a consistent

picture, leading the Hauser Study to conclude that the Heart Institute experience was not unique.

15. Additionally, unbeknownst to investors during the Class Period, defendants

were told by numerous hospitals and clinics across the country prior to and during the Class Period

that they were discontinuing implantation of the Fidelis after encountering fracture problems similar

to those experienced by the Heart Institute.


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16. Defendants had also been alerted to at least five patient deaths linked to

fractured Fidelis leads prior to and during the Class Period, unbeknownst to investors during the

Class Period.

17. Then, at a second meeting with doctors at the Heart Institute held on July 19,

2007, in response to continued urging by Dr. Hauser to withdraw the Fidelis, defendants admitted

to the doctors at the Heart Institute that “the company had identified a problem and was working

on a possible remedy, but had no intention of pulling the leads off the market,” according to the

October 30, 2007 Wall Street Journal article.

18. Indeed, only when announcing the recall of the Fidelis on October 15, 2007,

defendants finally admitted to the investing public that Medtronic had seen “higher than normal

expected rates in the springtime” (i.e., at the start of the Class Period) and that the number was an

“excessive number” – facts not disclosed to investors during the Class Period.

19. Notwithstanding the foregoing, during the Class Period defendants repeatedly

denied that the Fidelis was defective. Fearing loss of market-share in the lucrative defibrillator

market if they were to acknowledge that their popular Fidelis lead had a defect, defendants insisted

that the Fidelis functioned properly and that any reported problems were the result of physician error

in implanting the device.

20. Throughout 2007 – and as recently as last September – Medtronic

representatives across the country continued to reassure doctors that the Fidelis was free from

problems and blamed physicians’ implantation technique for the reported fractures, according to the



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21. On March 21, 2007, Medtronic issued a letter to physicians downplaying

concerns about the Fidelis, stating that the Company’s investigation “suggests that variables within

the implant procedure may contribute significantly to these fractures.” In other words, “it’s the

doctors’ fault.”

22. The letter also claimed that the performance of the Fidelis was “in line with

other Medtronic leads”, citing two sources of data – Medtronic’s analysis of returned Fidelis leads

and the Company’s post-market clinical surveillance study, dubbed the “System Longevity Study.”

23. As only became apparent to investors after the Class Period, however, the

physician letter contained material misrepresentations and omissions. It failed to make clear that

the returned-product analysis was “notoriously inaccurate,” non-representative and thus not a

reliable methodology for excluding the possibility of a defect because most malfunctioning leads

are not removed from patients and returned to the manufacturer, as Medtronic critic Dr.William H.

Maisel pointed out after the conclusion of the Class Period in a March 6, 2008 article in the New

England Journal of Medicine entitled “Semper Fidelis – Consumer Protection for Patients with

Implanted Medical Devices” (the “Maisel Article”).

24. The letter also omitted to state that the Longevity Study – which involved

fewer than 100 patients followed for only two years – was “grossly underpowered [because of the

small sample size] to detect even a moderate increase in fracture rate with Fidelis as compared to

its predecessors,” according to the Maisel Article.

25. Furthermore, the letter failed to disclose that Dr. Hauser – a senior and

prominent cardiologist – had explicitly disagreed with the Company and found that the Fidelis

“appears to be prone to early failure.” Specifically, the letter omitted to state that Dr. Hauser had


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previously provided Medtronic with an advance copy of his study – which was to be published by

a leading peer-reviewed medical journal – setting forth his recommendation that the Fidelis be

withdrawn “until the failure mechanism is identified and corrected.”

26. Additionally, the letter failed to mention the high rates of fracture in the

Fidelis that were then evident in the extensive data available from the “MAUDE” database, on

which Dr. Hauser had in part based his study.

27. The complaint also alleges that defendants’ materially false and misleading

statements and omissions about the Fidelis during the Class Period misled the efficient market for

Medtronic securities into believing that the Fidelis leads were safe and free from problems. A

March 26, 2007 analyst report issued by Deutsche Bank, for instance, noted that “we have learned

of a possible issue relating to Medtronic’s Fidelis ICD lead,” but, citing the March 21, 2007

physician letter, concluded, “[t]he early indication is that the issue has surfaced primarily in a

limited number of centers, thus suggesting a placement technique problem. . . . For now we do

not think this will have a near-terms impact given that the reliability of Medtronic’s Fidelis leads

still remains relatively high.”

JURISDICTION AND VENUE

28. This action arises under Sections 10(b) and 20(a) of the Securities Exchange

Act of 1934 (the "Exchange Act"), 15 U.S.C. § § 78j(b) and 78t(a), and the rules and regulations

promulgated thereunder, including Securities and Exchange Commission (the "SEC") Rule 10b-5,

17 C.F.R. 240.10b-5. Jurisdiction is based upon Section 27 of the Exchange Act, 15 U.S.C. § 78aa,

and 28 U.S.C. § 1331.


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29. Venue is proper in this District because many of the acts complained of,

including the dissemination of materially false and misleading statements, prepared by or with the

participation, acquiescence, encouragement, cooperation, or assistance of defendants, occurred, at

least in part, in this District. Additionally, Medtronic has its headquarters within this District.

30. In connection with the acts and conduct complained of, defendants, directly

or indirectly, used the means and instrumentalities of interstate commerce, including the mails,

interstate telephone communications, and the facilities of the national securities exchanges.

PARTIES

31. Court-appointed Lead Plaintiff The Detroit General Retirement System

(“Lead Plaintiff”) purchased shares of Medtronic common stock during the Class Period and

suffered damages, as described in the certification previously filed by it with the Court.

32. Plaintiff Stanley Kurzweil purchased shares of Medtronic common stock

during the Class Period and suffered damages, as described in the certification previously filed by

it with the Court.

33. Medtronic is a Minnesota corporation with offices at 710 Medtronic Parkway,

Minneapolis, Minnesota. It engages in the development, manufacture, and marketing of medical

devices worldwide. The Company's Cardiac Rhythm Disease Management ("CRDM") segment

offers implantable devices, leads, ablation products, electrophysiology catheters, and information

systems for cardiac rhythm diseases. The CRDM segment is the division of Medtronic that makes

the Fidelis defibrillation leads.

34. Defendant Arthur D. Collins, Jr., is a director of the Company and has been

Chairman of the Board since April 2002. He also served as Chief Executive Officer of Medtronic


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from April 2002 through August 23, 2007; President and Chief Executive Officer from May 2001

to April 2002; President and Chief Operating Officer from August 1996 to April 2001; Chief

Operating Officer from January 1994 to August 1996; and Executive Vice President of Medtronic

and President of Medtronic International from June 1992 to January 1994.

35. Defendant William A. Hawkins was named President and Chief Executive

Officer and a director of Medtronic at the August 23, 2007 board of directors meeting. Previously

he served as President and Chief Operating Officer from May 2004 until August 2007. He served

as Senior Vice President and President, Medtronic Vascular, from January 2002 to May 2004.

36. Defendant Gary L. Ellis has been Senior Vice President and Chief Financial

Officer of Medtronic since May 2005. Defendant Ellis joined Medtronic in 1989 as Assistant

Corporate Controller and was promoted to Vice President of Finance for Medtronic Europe in 1992,

until being named as Corporate Controller in 1994.

37. By reason of their positions as officers and/or directors of Medtronic,

defendants Collins, Hawkins, and Ellis (collectively, the "Individual Defendants") were at all

relevant times controlling persons of Medtronic within the meaning of Section 20(a) of the

Exchange Act. Because of their executive, managerial, and/or directorial positions with Medtronic,

the Individual Defendants had access to adverse, non-public information about the financial

condition, operations, and future business prospects of Medtronic as particularized herein and acted

to conceal the same. Any acts attributed to Medtronic were caused and/or influenced by the

Individual Defendants by virtue of their domination and control thereof.


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CLASS ACTION ALLEGATIONS

38. Plaintiffs bring this action as a class action under Rules 23(a) and 23(b)(3)

of the Federal Rules of Civil Procedure on behalf of the Class consisting of plaintiffs and all other

persons or entities who purchased the securities of defendant Medtronic on the open market during

the Class Period. Excluded from the Class are the defendants, members of their immediate families,

Medtronic and any officer or director of Medtronic.

39. The Class is so numerous that joinder of all members is impracticable. As

of March 21, 2007, approximately 1.14 billion shares of Medtronic common stock were outstanding,

registered, and listed on the New York Stock Exchange ("NYSE"), traded under the symbol "MDT."

Average daily trading volume during the Class Period (March 21, 2007 through October 15, 2007)

was approximately 6.8 million shares. There are believed to be thousands of persons who purchased

Medtronic securities on the open market during the Class Period.

40. Plaintiffs’ claims are typical of the claims of the other members of the Class,

as plaintiffs and all members of the Class sustained damages arising out of defendants' conduct in

violation of federal law as complained of herein.

41. Plaintiffs will fairly and adequately protect the interests of the members of

the Class and has retained counsel competent and experienced in class action and securities

litigation.

42. A class action is superior to other available methods for the fair and efficient

adjudication of this controversy since joinder of all members is impracticable. Furthermore, as the

damages suffered by individual members of the Class may be relatively small, the expense and

burden of individual litigation make it impossible for the members of the Class individually to


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redress the wrongs done to them. There will be no difficulty in the management of this action as a

class action.

43. Common questions of law and fact exist as to all members of the Class and

predominate over any questions affecting solely individual members of the Class. Among the

questions of law and fact common to the Class are:

a. whether the federal securities laws or the common law were violated

by defendants' acts as alleged herein;

b. whether statements disseminated by defendants to the investing

public and to the shareholders of Medtronic during the Class Period

omitted and/or misrepresented material facts about the business

operations and prospects of the Company;

c. whether defendants acted willfully or recklessly in omitting and/or

misrepresenting material facts;

d. whether defendants' non-disclosures and/or misrepresentations

constituted a fraud on the market by artificially inflating the market

prices of Medtronic securities during the Class Period; and

e. whether the members of the Class have sustained damages and, if so,

what is the proper measure of such damages.

SUBSTANTIVE ALLEGATIONS

Background

44. Medtronic is engaged in the medical technology business. One of the

Company's primary operating units is its Cardiac Rhythm Disease Management ("CRDM") segment,


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which manufactures and sells device-based medical therapies. The Company's CRDM products are

designed to treat and monitor a range of heart conditions, including bradycardia tachyarrhythmia,

heart failure and syncope. The Company offers products for the diagnosis and treatment of heart

rhythm disorders and heart failure, including implantable devices such as pacemakers and

defibrillators.

45. As of the beginning of 2007, analysts considered Medtronic “the dominant

player” in the defibrillator market, holding a more than 50% market share against competitors

Boston Scientific and St. Jude.

46. Defibrillators are $30,000, stop-watch sized devices designed to shock the

heart out of life-threatening heart rhythm disturbances, generally at very rapid rates, which causes

death in 95 percent of cases if not interrupted by an electrical discharge or shock.

47. To work properly, defibrillators depend upon a critical component –

implanted “leads.” Leads are complex wires that connect defibrillators to the heart muscle and

which monitor – and sense aberrant – patient heart rhythms. They also deliver jolts of electricity

when a heart beats abnormally to revive patients who would otherwise die.

48. When a lead malfunctions, breaks, or “fractures,” however, it may send false

signals. The defibrillator might not operate when needed or inappropriately misfire, zapping patients

with unnecessary jolts of electricity.

49. For years, defibrillator manufacturers used thick-diameter leads to make sure

they were capable of withstanding the repetitive bending and twisting associated with heart and body

motion and patient anatomy which can cause leads to wear out.


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50. There were risks, however, associated with the thick-diameter leads. Blood

clots and tissue growth tended to form around them, and they were difficult to implant, especially

in smaller veins. Doctors clamored for narrower designs.

51. Medtronic responded to this demand by developing the “Sprint Fidelis” lead

(the “Fidelis”) which, with a diameter of 2.2 millimeters, had about the thickness of a nickel. The

Fidelis was approved by the FDA in September 2004.

52. Because the device was similar to one already approved by the FDA – another

popular Medtronic lead called the “Quattro” – Medtronic was able to obtain the FDA’s approval for

the Fidelis with only “bench” tests and no human trials. Accordingly, there was no clinical data

demonstrating that the Fidelis was safe prior to the product’s introduction.

53. The Fidelis was rapidly adopted. Doctors favored it because it was thin and

flexible and “handled” well. Because doctors frequently used defibrillators and leads from the same

manufacturer in order to avoid potential compatibility and warranty-voidance problems, Medtronic

was counting on the attractiveness of the Fidelis to retain and expand its dominant share of the

lucrative defibrillator market.

54. The Fidelis quickly became the world's most widely used defibrillator lead.

By early 2007, about 90% of new Medtronic defibrillators used Fidelis leads, and they had been

implanted in over 160,000 patients worldwide. The leads have brought in about $1 billion in

revenue for Medtronic, which has annual sales of more than $12 billion, according to the October

30, 2007 Wall Street Journal article.

55. In January 2007, Medtronic launched a $100 million direct-to-consumer

advertising campaign designed to encourage patients to seek advice from their doctors as to whether


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they could benefit from having a defibrillator implanted. Dubbed “What's Inside”, the campaign

included a commercial promising viewers that inside the Medtronic defibrillation device, they’ll find

“10,000 more kisses . . . 200 more football wins,” saying it will “always be there for you – close to

your heart with the power to restart it in case of sudden cardiac arrest.”

Medtronic’s Awareness During the Class Period that the Fidelis Was Prone to Fracturing

56. Unbeknownst to investors, however, prior to and during the Class Period

defendants became aware of or recklessly disregarded the fact that the Company’s Fidelis leads

suffered from a serious design or manufacturing defect that made them prone to breakage or

“fracturing,” with potentially lethal consequences for patients and adverse impact on the Company’s

financial results and business prospects.

57. As investors learned only after the conclusion of the Class Period, doctors at

the Heart Institute had contacted defendants and specifically alerted them that “Medtronic had a

serious problem with the Fidelis lead” as early as February 15, 2007, according to the October 30,

2007 Wall Street Journal exposé.

58. In late January, on two successive days, patients had appeared at the

Minneapolis clinic with fractured Fidelis leads after receiving unnecessary electric shocks from their

defibrillators. One patient, a 65-year-old woman, had been “zapped” 14 times in an hour. The

doctors checked the hospital's records and discovered four similar cases in the previous seven

months. All six cases had involved Medtronic’s Fidelis.

59. The doctors, led by the Heart Institute’s senior consulting cardiologist Dr.

Robert G. Hauser – who in 2005 was instrumental in triggering recalls of defective pacemakers and


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defibrillators made by Guidant Corp. – immediately contacted Medtronic and met with Company

officials on February 15, 2007.

60. At the meeting, Dr. Hauser told Medtronic’s Warren Watson, a vice president

and an engineer, that the Heart Institute had concluded that the Fidelis “wasn’t safe enough” and was

discontinuing implantation of the device. Dr. Hauser also told Mr. Watson that he believed that the

six defects they had experienced at their single hospital signified a “broader problem” and that

“Medtronic had a serious problem with the Fidelis lead”, according the Wall Street Journal article.

61. Mr. Watson “disagreed that there was enough evidence yet” of a problem and

suggested to the doctors that the lead fractures “could have resulted from doctors’ mishandling the

devices”, according to the article. “They were blaming the implanters,” the article quoted a

participant in the meeting, Dr. Adrian K. Almquist, who was “offended by the suggestion,” as

stating.

62. Weeks later, on February 27, 2007, Dr. Hauser submitted a manuscript of a

study that he and his colleagues had completed on the Fidelis (the “Hauser Study”) to a leading

medical journal, Heart Rhythm. The study found that “the Sprint Fidelis high-voltage lead appears

to be prone to early failure” because of its tendency to “fracture” and recommended against use of

the Fidelis “until the failure mechanism is identified and corrected.”

63. The study also found that the Fidelis was “significantly less reliable” than

Medtronic’s thicker Quattro lead. Specifically, the study found that the incidence of failure in the

Fidelis was “1%-2% during the first two years after implant” which was “10-fold greater” than the

failure rate of the Quattro. The study stated that the smaller-diameter Fidelis apparently was “less

robust and subject to stress damage during and after implant” in comparison to the Quattro.


1 Hauser RG, et al., Early Failure of Small Diameter High-Voltage InflammableCardioverter-Defibrillator Lead, Heart Rhythm, July 2007: 4 (7), 892-896.

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64. Of significance, Dr. Hauser provided an advance copy of the study to

Medtronic as early as February 27, 2007.1

65. Also of significance, the Hauser Study was based on three independent sets

of data to which Medtronic had full access during the Class Period. First, it was based on data from

the Heart Institute which Dr. Hauser had provided to the Company in connection with the February

15, 2007 meeting at the Heart Institute. The Heart Institute was a busy practice, prominent in the

field, with a large number of patients.

66. Second, it was based on Medtronic’s own internal returned-product data (i.e.,

on Fidelis leads which had been returned to the Company after having been extracted from patients’

chests) which Medtronic had provided to Dr. Hauser.

67. Third, it was based on extensive data – relating to hundreds of failed leads

– available from the FDA’s Manufacturer and User Facility Device Experience (“MAUDE”)

database, an online database containing information on medical devices which have malfunctioned

or caused a death or serious injury. Though publicly available, MAUDE contains highly technical

information and is difficult and confusing to use, particularly for non-experts. According to the

Hauser Study, the MAUDE data showed 679 reports for the Fidelis and “the most frequent

complaints were fracture and inappropriate shocks”, one associated with a patient death.

68. All three sets of data painted a consistent picture, leading the Hauser Study

to conclude that the Heart Institute experience was not unique. As the study stated, “this is a single


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center study and may not reflect experience at other centers. However, the manufacturers’ [sic]

returned products data and the MAUDE database findings indicate otherwise.”

69. Notwithstanding the foregoing, defendants during the Class Period continued

to deny that the Fidelis was defective – although they later admitted that by spring 2007 they had

seen an “excessive number” of fractures in the Fidelis. Fearing loss of market-share in the lucrative

defibrillator market if they were to acknowledge that their popular Fidelis lead had a defect,

defendants insisted publicly that the Fidelis functioned properly and that any reported problems were

the result of physician error in implanting the device.

70. On March 21, 2007, Medtronic issued a letter to physicians downplaying

concerns about the Fidelis. As the letter stated, “Medtronic has received reports from a limited

number of implanting physicians indicating they have experienced higher than expected conductor

fracture rates in their centers with Sprint Fidelis leads.”

71. Nevertheless, the letter went on to state that the Company had reviewed the

fracture reports “with our Independent Physician Quality Panel” and that this investigation “suggests

that variables within the implant procedure may contribute significantly to these fractures.” In other

words, “it’s the doctors’ fault.” The letter also claimed that the performance of the Fidelis was “in

line with other Medtronic leads”, citing two sources of data – (I) Medtronic’s returned-product

analysis and (ii) the Company’s post-market clinical surveillance study, dubbed the “System

Longevity Study.”

72. As only became apparent to investors after the Class Period, however,

Medtronic’s March 21, 2007 physician letter contained material omissions. In particular, the letter

failed to disclose that the returned-product analysis cited by the Company was “notoriously


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inaccurate,” non-representative and thus not a reliable methodology for excluding the possibility of

a defect because most malfunctioning leads are not removed from patients and returned to the

manufacturer, as Dr. Maisel pointed out in his March 6, 2008 article in the New England Journal of

Medicine.

73. The letter also omitted to state that the Longevity Study – which involved

fewer than 100 patients followed for only two years – was “grossly underpowered [because of the

small sample size] to detect even a moderate increase in fracture rate with Fidelis as compared to

its predecessors,” as Dr. Maisel also later pointed out.

74. Furthermore, the letter failed to disclose that Dr. Hauser – a senior and

prominent cardiologist – had explicitly disagreed with the Company and found that the Fidelis

“appears to be prone to early failure.” Specifically, the letter omitted to state that Dr. Hauser had

previously provided Medtronic with an advance copy of his study – which was to be published

shortly by a leading peer-reviewed medical journal – setting forth his recommendation that the

Fidelis be withdrawn “until the failure mechanism is identified and corrected.”

75. Additionally, the letter failed to mention the high rates of fracture in the

Fidelis that were then evident in the extensive data available on the FDA’s MAUDE database, on

which Dr. Hauser had in part based his study.

76. The letter also failed to disclose that, as Medtronic officials finally admitted

to the investing public only after the Class Period, Medtronic was aware of an “excessive number”

of fractures in the Fidelis – a level of fractures that was “higher than normal expected” – prior to

issuance of the letter.


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77. The letter also failed to disclose that the so-called “Independent Physician

Quality Panel” (the “Independent Panel”) that supposedly had reviewed the Fidelis fracture reports

and assisted the Company with its investigation, was not in fact “independent” because half of its

members had conflicts of interest which compromised their objectivity and made them beholden to

Medtronic. In particular, the Independent Panel consisted of doctors R. Hardwin Mead, Steven J.

Compton, Kevin Hackett, Hugh Calkins, John DiMarco and Mariell Jessup.

78. Three of this group – doctors Calkins, DiMarco and Jessup – had financial

relationships with Medtronic. Specifically, Dr. Calkins “receives support” from Medtronic, as

disclosed in Dala D., et al., Arrhythmogenic Right Ventricular Dysplasia. A United States

Experience, Circulation: Journal of the American Heart Association, 2005 Dec 20/27: 3823-3832).

79. Dr. DiMarco "has reported that he receives research support from Medtronic",

as disclosed in Wyse D.G., et al., A Comparison of Rate Control and Rhythm Control in Patients

with Atrial Fibrillation, The New England Journal of Medicine, 2002 Dec 5:347 (23): 1825-1833.).

80. Dr. Jessup has received a "research grant" from Medtronic, is in Medtronic's

"speakers bureau" and serves as a "consultant/advisory member", as disclosed in Hunt S., et al.,

ACC/AHA 2005 Guideline Update for the Diagnosis and Management of Chronic Heart Failure in

the Adult, American College of Cardiology Foundation and the American Heart Association, 2005.

81. Defendants’ materially false and misleading statements and omissions about

the Fidelis during the Class Period misled the efficient market for Medtronic securities into believing

that the Fidelis leads were safe and free from problems. Indeed, the price of Medtronic stock did

not react noticeably to the March 21, 2007 physician letter, rising slightly from a closing price of


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$48.90 per share on March 20, 2007, to $49.30 per share on March 21, and $49.33 on March 22.

82. A March 26, 2007 analyst report issued by Deutsche Bank reflected the lack

of concern or alarm amongst Medtronic investors. It noted in pertinent part:

We continue to canvass interventional cardiologists andelectrophysiologists . . . . In talking to EPs, we have learned of apossible issue relating to Medtronic's Fidelis ICD lead and aremonitoring the situation. . . .

Medtronic lead fracture noise. Our recent channel checks at ACChave picked up a potential issue with one of Medtronic's leading ICDleads, the Fidelis. Specifically, a handful of clinicians havecommented that fracture rates could be on the rise for this lead.The early indication is that the issue has surfaced primarily in alimited number of centers, thus suggesting a placement techniqueproblem. . . . For now we do not think this will have a near-termimpact given that the reliability of Medtronic's Fidelis leads stillremains relatively high. . . . For now we will remain vigilant on thisissue, but are reluctant to change any estimates. Medtronic didrecently issue a "Dear Doctor" letter regarding the Fidelis fracture,but we consider this more of a technical update (i.e., how to placethe lead to minimize the risk of lead fractures) rather than a recall.[Emphasis Added]

83. A September 11, 2007 analyst report issued by Morgan Stanley indicated that

analysts continued not to perceive the Fidelis as raising possible problems for Medtronic into the

fall of 2007. The Morgan Stanley report rated Medtronic “Underweight.” However, it stated that

such rating was “driven by several issues” which it enumerated, with no mention of the Fidelis.

84. Meanwhile, throughout 2007 – and as recently as last September – Medtronic

representatives across the country continued to reassure doctors that the Fidelis was free from

problems and blamed physicians’ implantation technique for the reported fractures, according to the



21

85. Additionally, unbeknownst to investors during the Class Period, defendants

were told by numerous hospitals and clinics across the country prior to and during the Class Period

that they were discontinuing implantation of the Fidelis after encountering fracture problems similar

to those experienced by the Heart Institute.

86. Among such hospitals and clinics were the Children's Memorial Hospital in

Chicago, Brigham Women's Hospital in Boston, New York Hospital in Queens, Long Island Jewish

Medical Center in New Hyde Park, New York, and Western Pennsylvania Hospital in Pittsburgh,

according to the October 30, 2007 Wall Street Journal article and an October 16, 2007 article in the

York Times entitled “In Data for Heart Devices, Parts are a Blind Spot”.

87. The Company also learned of five patient deaths linked to fractured Fidelis

leads prior to and during the Class Period. According to the October 16, 2007 New York Times

article, the first patient death occurred as early as August 2006.

88. The second patient death occurred in January 2007 – a month prior to the

Heart Institute meeting.

89. The third patient death occurred in March 2007, the same month as

Medtronic’s misleading physician letter.

90. Investors and members of the general public did not learn about any of these

patient deaths until after the conclusion of the Class Period on October 15, 2007, when the Company

admitted that, “[b]ased on current information regarding the 268,000 implanted leads, Medtronic has

identified five patient deaths in which a Sprint Fidelis lead fracture may have been a possible or

likely contributing factor.”


22

91. While publicly maintaining that the Fidelis was free from problems,

Medtronic also applied to the FDA for approval of further design and manufacturing changes to the

device on May 5, 2007, unbeknownst to investors, according to a March 5, 2008 article in the

Minneapolis Star Tribune entitled “A call for Tighter Med-Tech Controls.”

92. In particular, the Medtronic pre-market approval application to the FDA

sought approval for “design and manufacturing changes to improve the def-1 leg strength and

handling characteristics of the sprint fidelis leads”, according to the FDA’s pre-market approval

database. In other words, during the Class Period Medtronic sought to implement design and

manufacturing changes regarding the “strength” of the Fidelis lead – one of the suspected causes of

the fracturing.

93. Then, on July 19, 2007, Company officials including Medtronic's vice

president for quality and regulatory issues, Reggie Groves, had a second meeting with doctors at the

Heart Institute, according to the October 30, 2007 Wall Street Journal article.

94. The Wall Street Journal article recounted that Medtronic admitted during the

meeting that they had “a problem” with the Fidelis but nevertheless still had no intention of pulling

them from the market. As the article stated:

According to the Heart Institute's [technical director], Ms. [Linda]Kallinen, Medtronic's Ms. Groves said the company had identifieda problem and was working on a possible remedy, but had nointention of pulling the leads off the market.” [Emphasis Added].

95. At no time during the Class Period did Medtronic admit to physicians, patients

or investors that it had identified a problem with the Fidelis lead. Instead, Medtronic continued to

insist that the product was safe and that the reports of fractures were the result of physician error.


23

96. Only when announcing the recall of the Fidelis on October 15, 2007,

Company officials finally admitted to the investing public the extent of the “problem” that

Medtronic had identified during the Class Period. In particular, they admitted that they had seen

“higher than normal expected rates in the springtime” (i.e., at the start of the Class Period) and

that the number was “excessive” – facts not disclosed to investors during the Class Period.

Materially False and Misleading Statements Issued During the Class Period

97. The Class Period begins on March 21, 2007. On that day, Medtronic issued

the physician letter referred to above in paragraphs 72-77, downplaying concerns about the Fidelis

and blaming any observed incidents on physician technique. The letter stated in relevant part:

Dear Doctor,

Medtronic has received reports from a limited number ofimplanting physicians indicating they have experienced higher thanexpected conductor fracture rates in their centers with SprintFidelis leads. While current overall Sprint Fidelis performance isconsistent with other leads, Medtronic is actively investigating thesereports, has reviewed them with our Independent Physician QualityPanel, and would like to share what we know at this time.

Through detailed assessment of reported fractures, we have identifiedtwo primary locations where conductor fractures have occurred: 1)distal portion of the lead and 2) near the anchoring sleeve tie down.The distal conductor fractures affect the anode (ring electrode) andfractures that occur around the anchoring sleeve affect the cathode(helix tip electrode). Fractures at both locations appear to presentclinically as over-sensing, increased interval counts and inappropriateshocks. Medtronic has worked closely with physicians who haveexperienced fractures and conducted significant bench testing in anattempt to reproduce the fractures and identify root cause. At thispoint, our investigation suggests that variables within the implantprocedure may contribute significantly to these fractures.

For distal conductor fractures, our investigation has identified severebending or kinking of the distal end of the lead over the lead body


24

while passing through tortuous vasculature as a significantcontributing factor. . . . Medtronic recommends avoiding severebending or kinking of the lead during implantation. If you encounterexcessive resistance resulting in severe bending or kinking whileadvancing the lead, please remove the lead and return it to Medtronic.

For conductor fractures that occur around the suture sleeve, ourpreliminary investigation suggests that under certain implanttechniques, the lead appears to be exposed to severe bending orkinking in the pectoral area. . . . Medtronic recommends the lead bere-sutured and/or pocket reassembled per guidelines in the Medtroniclead implant manual. In addition, positioning the anchoring sleeveagainst or near the vein may be helpful.

Sprint Fidelis lead models 6949, 6948, 6931, and 6930 were marketreleased in the U.S. and internationally in September and October2004. Performance of model 6949, the Sprint Fidelis lead currentlyfollowed in our System Longevity Study, indicated survival is 98.9%at two years. Sprint Fidelis 6949 performance based upon returnproduct analysis shows 99.86% chronic fracture-free survival attwo years. Both evaluation methods suggest performance is in linewith other Medtronic leads and consistent with lead performancepublicly reported by other manufacturers.

98. The statements contained in the March 21, 2007 physician letter were

materially false and misleading and omitted to state material facts necessary to make the statements

not misleading. Specifically, the statements failed to disclose or indicate, inter alia, the following:

a. That the Fidelis fracture problems were not a result of physician error

in implanting the device, as falsely suggested in the letter, but were,

in fact, a result of the fact that the Fidelis suffered from a serious

design or manufacturing defect which rendered them prone to failure

by breaking or “fracturing,” with potentially lethal consequences for

patients;


25

b. That the “performance” of the Fidelis leads was not “in line” with

that of other Medtronic leads, as falsely suggested in the letter;

c. That a recall of the Fidelis leads was warranted in light of the facts

known to defendants during the Class Period but that the Company

was failing to take such action; and,

d. That the Company would be forced to suspend distribution of the

Fidelis leads, with a significant impact on the Company’s financial

results.

e. That the returned-product analysis cited in the letter was “notoriously

inaccurate,” non-representative and thus not a reliable methodology

for excluding the possibility of a defect because most malfunctioning

leads are not removed from patients and returned to the manufacturer,

as Dr. Maisel pointed out in his March 6, 2008 article in the New

England Journal of Medicine;

f. That the Longevity Study data cited in the letter – which involved

fewer than 100 patients followed for only two years – was “grossly

underpowered [because of the small sample size] to detect even a

moderate increase in fracture rate with Fidelis as compared to its

predecessors,” as Dr. Maisel also later pointed out;

g. That Dr. Hauser – a senior and prominent cardiologist – had

explicitly disagreed with the Company and found that the Fidelis

“appears to be prone to early failure”;


26

h. That Dr. Hauser had previously provided Medtronic with an advance

copy of a study – which was to be published by a leading peer-

reviewed medical journal – setting forth his analysis and

recommendation that the Fidelis be withdrawn “until the failure

mechanism is identified and corrected.”

i. That high rates of fracture in the Fidelis were then evident in

extensive data available from the MAUDE database, on which Dr.

Hauser in part based his study.

j. That the Company had been told by numerous hospitals and clinics

across the country that they had discontinued implantation of the

Fidelis after encountering fracture problems;

k. That prior to issuance of the letter, Medtronic was aware of an

“excessive number” of fractures in the Fidelis – a level of fractures

that was “higher than normal expected”;

l. That the so-called “Independent Panel” that supposedly had reviewed

the Fidelis fracture reports and assisted the Company with its

investigation, was not in fact “independent” because half of its

members had conflicts of interest which compromised their

objectivity; and,

m. That the Company had learned of at least three patient deaths linked

to fractured Fidelis leads prior to issuance of the letter.


27

99. As alleged above, in January 2007, Medtronic launched a $100 million

direct-to-consumer advertising campaign designed to encourage patients to seek advice from their

doctors as to whether they could benefit from having a defibrillator implanted. Dubbed “What's

Inside”, the campaign included commercials promising viewers that inside the Medtronic

defibrillation device, they’ll find “10,000 more kisses . . . 200 more football wins,” saying it will

“always be there for you – close to your heart with the power to restart it in case of sudden cardiac

arrest.”

100. As alleged above, leads were an important component of the defibrillators

being advertised in the campaign, and 90% of Medtronic defibrillators used Fidelis leads.

101. Medtronic’s defibrillator advertising campaign ran publicly throughout the

Class Period. The campaign consisted of television spots, print ads in consumer magazines,

newspapers and medical trade publications, and online ads. It also included banner advertisement

featured prominently on the homepage of Medtronic’s website, and a website dedicated to the

campaign at http://www.whatsinside.com/.

102. The 60-second television spot aired more than two thousand times during the

Class Period on national, local and cable networks and on a wide range of consumer and investor

television programs including PGA Golf, Hannity & Holmes, Mad Money, On the Money, Headline

News, Channel 4 News, 60 Minutes, Geraldo at Large, MSNBC Investigates, Fox News Sunday and

the Chris Matthews Show.

103. The print ads included dozens of full-page ads published during the Class

Period in national publications including the New York Times, USA Today, and US News & World


28

Report, Newsweek, Time, Ebony, Better Homes and Gardens, Ladies Home Journal, and in medical

trade publications including the Annals of Internal Medicine.

104. The substance of the print and televison ads was similar. They prominently

featured Medtronic’s name and logo, and included statements such as, “if you’ve had a heart attack

or have heart failure, inside this little device you just might find ten thousand more kisses,” “an

implantable defibrillator is the most effective way to protect you from sudden cardiac arrest, one of

the nation’s leading causes of death”, “if you’ve had a heart attack, or have heart failure, an ICD

could make a big difference” and “this little device is an implantable cardiac defibrillator. An ICD

could make a big difference if you’ve had a heart attack”.

105. For example, a typical print ad, published numerous times during the Class

Period in Newsweek, Time and US News & World Report, included Medtronic’s name and logo,

and stated in relevant part:

165 long weekends

8 days in New York

48 Shopping Sprees

75 Road Trips

Look what’s inside.

Smaller than a cellphone, this little device is an Implantable CardiacDefibrillator - an ICD. If you've had a heart attack, or have heartfailure, an ICD could make a big difference. Because an ICD cangive you more time to do the things you love with the people youlove. You see, an ICD is the most effective way to protect you fromSudden Cardiac Arrest. one of the nation's leading causes of death.It 's the only device that 's always with you- close to your heart, withthe power to restart it should it fail to beat. ICDs aren't for everyone.They're proven effective in treating some heart rhythm disorders , butonly your doctor can say if one is right for you.


29

ICDs are implanted and, as with any surgery, there are potential risks.Physician follow-up is required. For more information, call1-866-950-5550 or visit whatsinside.com, then talk to your doctor.An ICD is just a little thing, but it can make the biggest difference inyour life.

Safely InformationMedtronic ICDs

Description and Indications for Implantable Defibrillators.An implantable cardioverter defibrillator system includes acardioverter defibrillator which is placed inside the body: aprogrammer, which is a specialized computer, used to program theimplantable cardioverter defibrillator; and leads which connect theimplantable cardioverter defibrillator to your heart tissue. Animplantable cardioverter defibrillator delivers therapies to treat heartrhythm disorders. ICD is intended for patients with heart rhythmdisorders or for patients who are at significant risk of developingheart rhythm disorders.

***Potential ComplicationsPotential complications include but are not limited to: possibleinfection at the surgical site and/or sensitivity to the device material,failure to deliver therapy when it is needed and receiving extratherapy when it is not needed.

106. The statements in Medtronic’s defibrillator ads during the Class Period set

forth in paragraphs 99-105 above were materially false and misleading and omitted to state material

facts necessary to make the statements not misleading. Specifically, the statements failed to disclose

or indicate, inter alia, the following:

a. That the Company’s Fidelis leads, an important component of 90%

of Medtronic’s defibrillators, suffered from a serious design or

manufacturing defect which rendered them prone to failure by

breaking or “fracturing,” with potentially lethal consequences for

patients.


30

b. That a recall of the Fidelis leads was warranted in light of the facts


was failing to take such action;

c. That the Company would be forced to suspend distribution of the


results; and,

d. That the Company had learned of patient deaths linked to fractured

Fidelis leads.

107. Throughout the Class Period, Medtronic also published detailed information

promoting the Fidelis to physicians on its website. The site touted the Fidelis as “The World's

Smallest Family of Defibrillation Leads” and as having “Outstanding Electrical Performance” and

claimed that “Medtronic leads are designed to be durable and reliable” and that the Fidelis was

designed to “resist fracture”. Under the heading “Resistance to Fracture, Abrasion”, the website also

claimed:

* The Sprint™ family of leads has built-instrain-relief, smooth edges, and is designed to resistfracture because connector legs cannot bend againstthe bifurcation/trifurcation.

* Extra layer of insulation on connector legs isdesigned to minimize the potential for fracture andabrasion. [Emphasis added]

108. The detailed information promoting the Fidelis to physicians published on

Medtronic’s website during the Class Period set forth in the foregoing paragraph was materially

false and misleading and omitted to state material facts necessary to make the statements not

misleading. Specifically, the statements failed to disclose or indicate, inter alia, the following:


31

a. That the Fidelis leads were not “resistant to fracture”, did not display

“outstanding electrical performance”, and were not “durable and

reliable”, as falsely suggested on the website, but in fact suffered

from a serious design or manufacturing defect which rendered them

prone to failure by breaking or “fracturing,” with potentially lethal

consequences for patients;

b. That a recall of the Fidelis leads was warranted in light of the facts



c. That the Company would be forced to suspend distribution of the


results; and,

d. That the Company had learned of patient deaths linked to fractured

Fidelis leads.

109. On May 22, 2007, Medtronic issued a press release entitled “Medtronic

Annual Revenue of $12.3 Billion Generates 15% Growth in Earnings Per Share Business Unit and

Geographic Balance Underscore Continued Growth” announcing positive financial results for its

fiscal year and fourth quarter ended April 27, 2007. The release stated in relevant part:

Year-Over-Year Diluted Earnings Per Share Growth was 15%Annually and 15% in the Fourth Quarter

Year-Over-Year Revenue Growth was 9% Annually and 7% inthe Fourth Quarter

Annual R&D Expenditure of $1.2 Billion was 10% of Revenue


32

Annual Revenue Outside the U.S. Grew 20%

Medtronic, Inc. (NYSE: MDT) today announced financial results forits fiscal year and fourth quarter ended April 27, 2007.

Medtronic recorded fiscal year 2007 revenue of $12.299 billion, a 9percent increase over the $11.292 billion in fiscal year 2006.Currency translation had a positive impact of $166 million for fiscalyear 2007. As reported, fiscal year 2007 net earnings were $2.802billion, or $2.41 per diluted share, an increase of 10 and 15 percent,respectively, over the prior year. Adjusting for special, certainlitigation and restructuring charges and certain income tax benefitsdetailed in the attached table, adjusted net earnings and dilutedearnings per share were $2.797 billion and $2.41, respectively, anincrease of 9 percent and 15 percent, respectively.

Fiscal fourth quarter revenue increased 7 percent to $3.280 billionfrom the $3.067 billion reported a year ago.

* * *Cardiac Rhythm Disease Management

Cardiac Rhythm Disease Management (CRDM) reported annualrevenue of $4.876 billion and fourth quarter revenue of $1.291billion, representing growth of 2 percent and 4 percent, respectively.Implantable Cardiac Defibrillator (ICD) annual revenue of $2.917billion was flat with the prior year. Fourth quarter ICD revenue of$770 million increased 2 percent. Worldwide annual pacingrevenue of $1.895 million increased 6 percent. Fourth quarterpacing revenue of $504 million increased 9 percent. Outside theU.S., CRDM annual and fourth quarter revenue continued to growat a double-digit rate, driven by the success of the ICD and CRT-Dproduct lines. . . .

* * *In closing Collins said, “We continue to participate in some of themost attractive markets in the medical technology industry and lookforward to a number of important product introductions during theremainder of this year that will provide improved patient outcomesand further enhance Medtronic’s leadership position.”

110. On June 25, 2007, Medtronic filed its Annual Report on Form 10-K for its

fiscal year ended April 27, 2007. The 10-K, which was signed by Defendants Collins and Ellis,


33

reaffirmed the Company’s fiscal 2007 financial results previously announced on May 22, 2007.

Additionally, it stated in pertinent part:

CRDM fiscal year 2006 net sales grew by 14 percent from the priorfiscal year to $4.794 billion. Foreign currency translation had anunfavorable impact on net sales of approximately $50 million whencompared to the prior fiscal year. While the increase in CRDM netsales was solid across most product lines, fiscal year 2006 highlightsinclude the following:

*** Implantable defibrillator net sales for fiscal year 2006 increased 23percent over the prior fiscal year to $2.932 billion. This increase wasdriven by strong demand for the Maximo and EnTrust families ofICDs, and continued market acceptance of the InSync Maximo andInSync Sentry CRT-Ds. EnTrust ICDs were released in the U.S. inJune 2005, and offer anti-tachycardia pacing during charging, afeature designed to stop fast, dangerous heartbeats as it prepares todeliver a shock if needed. InSync Sentry was the world’s firstimplantable medical device offering automatic fluid status monitoringin the chest area encompassing the heart and lungs. Both the InSyncMaximo and InSync Sentry provide sequential biventricular pacing,which optimizes the beating of the heart and bloodflow throughoutthe body. In addition, growth was aided by continued strongperformance of our Sprint Fidelis leads, which were first releasedin fiscal year 2005. The strong market acceptance of these productsreflects CRDM’s continued product innovation as well as an overallexpansion of the tachyarrhythmia and heart failure markets due toincreasing clinical data that supports the uses of these devices forcertain patient populations. Net sales of implantable defibrillatorsfor fiscal year 2006 also benefitted from one key competitor beingout of the ICD market for a portion of the fiscal year due to qualityconcerns with its product. . . . [Emphasis Added]

111. The 10-K also contained a Risk Factor warning in pertinent part:

Quality problems with our processes, goods, and services couldharm our reputation for producing high quality products and erodeour competitive advantage.

Quality is extremely important to us and our customers due to theserious and costly consequences of product failure. Our qualitycertifications are critical to the marketing success of our goods andservices. If we fail to meet these standards our reputation could be


34

damaged, we could lose customers and our revenue could decline.Aside from specific customer standards, our success dependsgenerally on our ability to manufacture to exact tolerancesprecision engineered components, subassemblies, and finisheddevices from multiple materials. If our components fail to meetthese standards or fail to adapt to evolving standards, ourreputation as a manufacturer of high quality components will beharmed, our competitive advantage could be damaged, and wecould lose customers and market share. [Emphasis Added]

112. The statements made by defendants in Medtronic’s press release dated May

22, 2007 and Annual Report on Form 10-K for its fiscal year ended April 27, 2007 set forth in

paragraphs 109-111 above were materially false and misleading and omitted to state material facts

necessary to make the statements not misleading. Specifically, the statements failed to disclose or

indicate, inter alia, the following:

a. That the Company’s Fidelis leads suffered from a serious design or



patients;

b. That paragraph 110 above spoke of “strong market acceptance” of

and “strong performance” for the Fidelis but failed to disclose that

many clinics and hospitals had discontinued use of the Fidelis

because of concerns over fractures, and a leading cardiologist, Dr.

Hauser, had recommended against use of the Fidelis;

c. That paragraph 111 above warned of the harm that would befall

Medtronic as a result of “product failure”, but failed disclose that the


35

Company had already seen an “excessive number” of product failures

in the Fidelis;

d. That a recall of the Fidelis leads was warranted in light of the facts



e. That, as a result of the foregoing, the Company's positive statements

about its financial well-being and future business prospects, including

those relating to its CRDM segment, were lacking in any reasonable

basis when made;

f. That the Company would be forced to suspend distribution of the

Fidelis leads, with a significant negative impact on the Company’s

financial results and the overall difibrillation market; and,

g. That the Company had learned of patient deaths linked to fractured

Fidelis leads and that numerous hospitals and clinics had

discontinued use of the Fidelis after encountering fracture problems

similar to those experienced at the Heart Institute;

h. That the statements concerning the “strong performance” and “strong

market acceptance” of the Fidelis lead were materially false and

misleading in light of the foregoing.

113. On July 30, 2007, the Minneapolis Star Tribune published a story entitled

“Medtronic device under scrutiny” reporting about concerns raised about the Fidelis by Dr. Hauser.


36

114. Despite the fact that eleven days earlier on July 19, 2007, Medtronic officials

had privately admitted to doctors at the Heart Institute that “the company had identified a problem

and was working on a possible remedy, but had no intention of pulling the leads off the market,”

the Star Tribune article quoted Medtronic spokesperson Rob Clark as downplaying the occurrences

of fractures in patients treated by the Heart Institute as not representative. The article stated, in

pertinent part:

In late March, Medtronic Inc. sent a letter to doctors advising themthat the wire leads in a line of widely used heart defibrillators couldtear at a "higher than expected" rate.

The "Dear Doctor" letter assured physicians that the performance ofthe Sprint Fidelis line of leads is consistent with similar products, andit offered suggestions about how to best implant it.

***This month, one of the whistleblowers in the Guidant recall casepublished a study in the medical journal Heart Rhythm,recommending limiting the use of the Sprint Fidelis lead untilMedtronic corrects the tearing problem. (Medtronic makes a thickerlead, the Sprint Quattro, which is also used in defibrillators.)

The study by Dr. Robert Hauser, consulting cardiologist with theMinneapolis Heart Institute Foundation, found that six Sprint Fidelisleads failed in 592 patients implanted at the Heart Institute betweenSeptember 2004 and February this year. . . .

***Hauser concluded that the Sprint Fidelis leads appear prone to earlyfailure, probably because they are thinner, and perhaps less robust. .. . .

Medtronic spokesman Rob Clark said that the company supportsefforts such as Hauser's to examine product performance. But he saidthat the study "must be taken in context," as it hails from onecenter "and does not represent the total performance experience ofthe Fidelis lead."

115. The statements made by Medtronic spokesperson Rob Clark on behalf of the

Company set forth in the foregoing paragraph were materially false and misleading and omitted to


37

state material facts necessary to make the statements not misleading. Specifically, the statements

failed to disclose or indicate, inter alia, the following:




patients;

b. That Medtronic had seen an “excessive number” of fractures in the

Fidelis, indicating that the problem was not limited to “one center”,

as falsely suggested by Clark;

c. That a recall of the Fidelis leads was warranted in light of the facts



d. That the Company would be forced to suspend distribution of the


results;

e. That the Company had learned of patient deaths linked to fractured

Fidelis leads;

f. That the Fidelis fracture experiences reported by the Heart Institute

were in fact representative and were consistent with overall clinical

experience known to Medtronic; and

g. That eleven days earlier on July 19, 2007 Medtronic officials had

privately admitted to doctors at the Heart Institute that “the company


38

had identified a problem and was working on a possible remedy, but

had no intention of pulling the leads off the market.”

116. On August 21, 2007, the Company issued a press release announcing its fiscal

2008 first quarter (ended July 27, 2007) financial results entitled "Medtronic Reports 16 Percent

First Quarter Earnings Per Share Growth." Therein, the Company, in relevant part, stated:

• Revenue of $3.127 billion grew 8% over the prior year's quarter

• GAAP EPS of $0.59; Non-GAAP EPS of $0.62 grew 13%

Medtronic, Inc. (NYSE:MDT) today announced financial results forits first quarter of fiscal year 2008, which ended July 27, 2007.Medtronic recorded first quarter revenue of $3.127 billion, an 8percent increase over the $2.897 billion reported in the first quarterof fiscal year 2007. As reported, net earnings for the first quarter offiscal year 2008 were $675 million, or $0.59 per diluted share, anincrease of 13 percent and 16 percent, respectively, over the sameperiod in the prior year. Currency translation had a positive impact of$49 million to revenue in the first quarter. Adjusting for restructuring,certain litigation and purchased in process research and development(IPR&D) charges detailed in the attached table, non-GAAP netearnings and diluted earnings per share were $711 million and $0.62per share, an increase of 11 percent and 13 percent, respectively.

"Our quarterly performance reflected the positive impact of severalnew product launches, strong international growth, the benefits ofMedtronic's diverse business portfolio, and successful efforts toobtain P&L leverage," said Art Collins, Medtronic chairman andchief executive officer.

Non-U.S. revenue of $1.179 billion grew 16 percent, driven bydouble digit revenue growth in all major geographic areas. For thequarter, 38 percent of Medtronic's revenue was from outside the U.S.

* * *Cardiac Rhythm Disease Management

Cardiac Rhythm Disease Management (CRDM) revenue of $1.235billion grew 7 percent. Revenue from implantable cardiacdefibrillators (ICDs) was $726 million, up 8 percent. Worldwidepacing revenue of $494 million in the quarter increased 7 percent.


39

Outside the U.S., CRDM revenue grew 16 percent, driven by 25percent growth of the ICD and CRT-D product lines.

* * *In closing Collins said, "For more than 15 years I have had the honorto work for a company that has done so much to positively impactmillions of lives around the world. And, as I prepare to transition theCEO position to Bill Hawkins later this week, I am proud that thecompany has never been stronger. We are well positioned in some ofthe most attractive worldwide markets, and we have a top flightleadership team that will help take Medtronic to the next level asthe world's leading medical technology company. I also want toagain acknowledge the dedication, commitment and hard work ofMedtronic's 38,000 employees, and to thank them, our customers andour shareholders for their ongoing support.

117. On September 5, 2007, Medtronic filed its Quarterly Report for fiscal 2008

first quarter (ended July 27, 2007) on Form 10-Q with the SEC. The Company's 10-Q was signed

by Defendants Hawkins and Ellis, and reaffirmed the Company's financial results previously

announced on August 21, 2007. Additionally, the Company, in relevant part, stated:

Cardiac Rhythm Disease Management

CRDM products consist primarily of pacemakers, implantabledefibrillators, leads, ablation products, electrophysiology catheters,and information systems for the management of patients with ourdevices. CRDM net sales for the three months ended July 27, 2007grew by 7 percent compared to the same period in the prior fiscalyear to $1.235 billion. Foreign currency translation had a favorableimpact on net sales of approximately $22 million when compared tothe prior fiscal year.

Worldwide net sales of Defibrillation Systems, our largest productline, were $726 million for the three months ended July 27, 2007.The 8 percent increase compared to the same period in the priorfiscal year, is primarily the result of sales growth outside the U.S.Net sales from Defibrillation Systems in the U.S. were $504 million,an increase of 2 percent compared to the same period of the priorfiscal year. The increase in net sales for the first quarter of fiscalyear 2008 indicates the market has begun to stabilize as comparedto the downturn experienced starting in the first quarter of fiscalyear 2007. Outside the U.S., net sales from Defibrillation Systems


40

were $222 million, an increase of 25 percent when compared to thesame period of the prior fiscal year, driven by sales of the VirtuosoICD and the Concerto CRT-D. Both of these devices feature Conexuswireless technology which allows for remote transfer of patient dataand enables communication remotely between the implanted deviceand programmer at the time of implant, during follow-up in aclinician's office, or remotely using a patient home monitor.[Emphasis added.]

118. The 10-Q also stated that the Company was confident that the financial results

of its CRDM segment would continue to be strong because of an expected return to growth in

demand for defibrillators. As the 10-Q stated:

Looking ahead, we expect our CRDM operating segment shouldbenefit from . . . . A return to growth in the U.S. DefibrillationSystems market and continued strong growth outside the U.S. Webelieve the worldwide market is still significantly under-penetrated,and our investments to expand the physician referral network,enhance clinical evidence, and develop technologies that promote theease of use and care should drive increased usage of defibrillatortherapies.

119. The statements made by defendants in the public releases and SEC filings

issued during the Class Period set forth in paragraphs 116-118 above were materially false and

misleading and omitted to state material facts necessary to make the statements not misleading.

Specifically, the statements failed to disclose or indicate, inter alia, the following:




patients;


41

b. That the Company would be forced to suspend distribution of the


results;

c. That, as a result of the foregoing, the Company's positive statements

about its financial well-being and future business prospects, including

those relating to its CRDM segment, were lacking in any reasonable

basis when made;

d. That a recall of the Fidelis leads was warranted in light of the facts


was failing to take such action; and,

e. That the Company had learned of patient deaths linked to fractured

Fidelis leads.

The Truth Emerges

120. Despite Medtronic’s earlier assurances about the Fidelis, on October 15, 2007,

the Company shocked investors when it issued a press release entitled “Medtronic Voluntarily

Suspends Distribution of Sprint Fidelis Defibrillation Leads; Physician Experts Advise Against

Prophylactic Replacement of Implanted Leads.” The release disclosed that Medtronic was recalling

and suspending sales of all models of Fidelis because of the potential for dangerous fractures which

the Company revealed may already have contributed to five patient deaths.

121. According to the October 15, 2007 announcement, the decision to stop selling

the Fidelis leads came after a review of performance data showing that 30 months after it was


42

implanted, the leads were viable in only 97.7 percent of cases – far lower than the 99.1 percent

viability rate at 30 months for the Sprint Quattro lead. The release stated in relevant part:

Medtronic, Inc. (NYSE:MDT) said today that it has voluntarilysuspended worldwide distribution of the Sprint Fidelis® family ofdefibrillation leads because of the potential for lead fractures. Inaddition, the company recommends against new implants of theleads (Sprint Fidelis Models: 6930, 6931, 6948, 6949).

The Sprint Fidelis leads are used to deliver therapy in defibrillatorsonly, including Implantable Cardioverter Defibrillators (ICDs) andCardiac Resynchronization Therapy – Defibrillators (CRT-Ds).Approximately 268,000 Sprint Fidelis leads have been implantedworldwide. This action does not affect Medtronic pacemaker patients.The U.S. Food and Drug Administration (FDA) intends to issue apublic statement regarding Medtronic’s decision at www.fda.gov.

* * *This decision is based on a variety of factors that, when viewedtogether, indicate that suspending distribution is the appropriateaction. Based on Medtronic’s extensive performance data, SprintFidelis lead viability is trending lower than Medtronic’s SprintQuattro® lead at 30 months (97.7% Sprint Fidelis vs. 99.1% SprintQuattro). This difference is not statistically significant; however, ifthe current lead fracture rates remain constant, it will become soover time. Medtronic believes that given this performance trend andits ability to identify the primary fracture locations, this action is inpatients’ best interest.

Lead fractures may present clinically as audible alerts, inappropriateshocks and/or loss of output. Based on current informationregarding the 268,000 implanted leads, Medtronic has identifiedfive patient deaths in which a Sprint Fidelis lead fracture may havebeen a possible or likely contributing factor. [Emphasis added.]

122. Simultaneously, the Company issued a new physician letter to more than

13,000 physicians worldwide informing them of the suspension of the Fidelis. The letter also

updated doctors on Medtronic’s patient management recommendations, which included instructions

for resetting patients’ devices in order to monitor for potential problems and provide an audible alert

in the event of a lead fracture.


43

123. Unlike the March 21, 2007 physician letter downplaying concerns about the

Fidelis, the Company published the October 15, 2007 physician letter prominently on its website.

124. Also on October 15, 2007, the FDA issued a notice entitled "Medtronic

Recalls Sprint Fidelis Cardiac Leads Questions and Answers for Consumers." The FDA's notice, in

relevant part stated:

What are Sprint Fidelis Leads?

Manufactured by Medtronic, Inc., Sprint Fidelis Leads are specificmodels of cardiac electrodes (thin wires) that connect an implantablecardioverter-defibrillator (ICD) or cardiac resynchronization therapydefibrillator (CRT-D) directly to the heart. ICDs and CRT-Ds aredevices that protect patients when life-threatening heart rhythmsoccur.

* * *What is Medtronic announcing about the Sprint Fidelis Leads?

Medtronic, Inc., is announcing that it is voluntarily suspendingworldwide distribution of the Sprint Fidelis family of defibrillationleads. This includes four Sprint Fidelis Models: 6930, 6931, 6948,and 6949. FDA considers this removal action to be a medical devicerecall. Medtronic is advising physicians to stop implanting the leadsand to return unused products to the firm.

* * *What is a medical device recall?

A recall is an action taken when a medical device is defective, whenit could be a risk to health, or when it is both defective and a risk tohealth. A recall for an implantable medical device does not alwaysmean that the device has to be removed.

Why are the Sprint Fidelis Leads being recalled?

The devices are being recalled because of the potential for leadfractures. These electronic wires are prone to fracture in a smallnumber of patients. This could cause the defibrillator to deliverunnecessary shock or to not operate at all. Some deaths and otherserious injuries have been reported in which a fracture in a SprintFidelis lead may have been a possible or likely contributing factor.


44

How many people have had this device implanted?

As of October 4, 2007, there have been approximately 268,000 SprintFidelis leads implanted worldwide, including 172,000 Sprint Fidelisleads implanted in the United States.

What should patients do if they have had a Sprint Fidelis leadimplanted?

Patients who have had the Sprint Fidelis lead implanted shouldcontact their physician, especially if they have experienced multipleshocks, lightheadedness, fainting, or palpitations. [Emphasis added.]

125. After issuance of the press release, the Company held two conference calls

on the morning of October 15, 2007, one at 7:15am Central Time for analysts and shareholders and

a second at 11:00am Central Time for media.

126. During the first call, the Company stated that in connection with the recall the

Company would suffer revenue loss of $150 million to $250 million, in part because it did not have

enough Quattro leads on hand to immediately replace the expected returns of unused Fidelis leads

or to fill new orders. In addition, because the Fidelis was the only Medtronic lead approved for use

in Japan, the recall effectively eliminated Medtronic defibrillators from the Japanese market.

127. Defendant Ellis and other Company representatives, including Dr. David

Steinhaus, a Medtronic Vice President and Medical Director of CRDM, and Pat Mackin, Senior Vice

President and President, stated in relevant part on the call:

DR. DAVID STEINHAUS: Earlier this year, we received reportsfrom a limited number of implanting physicians indicating they hadexperienced higher-than-expected fracture rates with Fidelis leads.We communicated this information and the results of our initialreview in a physician letter on March 21st, and committed to sharingadditional information as we learned more.

As we reported in our March physician letter, based upon evaluationof initial 24-month data, there are two primary locations where


45

chronic conductor fractures have occurred on Sprint Fidelis leads --the distal portion of the lead, near the tip, and in the pocket near theanchoring sleeve tie-down. These fractures primarily affect thepace/sense circuit, and occasionally the high voltage circuit. Leadfractures may present clinically as audible alerts, inappropriateshocks and/or loss of output.

* * *Since our March letter, we have examined six months of additionalreturn product analysis and Medtronic System Longevity Study data.Return product analysis of Sprint Fidelis leads shows lead vitalityof 99.2% at 30 months. The Medtronic System Longevity Study dataindicates 97.7% lead vitality at 30 months. This is consistent withour analysis of Medtronic CareLink Network data fromapproximately 25,000 Sprint Fidelis leads, which also indicates97.7% lead vitality at 30 months.

Although these rates are not statistically significantly different from99.1% for the Sprint Quattro lead at 30 months from the SystemLongevity Study, this difference will become statistically significantover time if the current rates remain constant.

As I mentioned earlier, approximately 268,000 Sprint Fidelis leadshave been implanted worldwide. Based on current informationregarding these leads, we have identified five patient deaths in whicha Sprint Fidelis lead fracture may have been a possible or likelycontributing factor. We have confirmed 665 chronic fractures in[returned] leads. Based on the information available today, Medtronichas decided to voluntarily suspend distribution for several reasons.

First, the performance of this lead does not match the performance ofour other defibrillation lead, the Sprint Quattro.

Second, there are two primary non-random fracture locations.

And finally, the incremental benefits of the small diameter leadssimply do not outweigh even a small increase in patient risk.

* * *PAT MACKIN: We are in the process of transitioning all of ourSprint Fidelis manufacturing lines over to Sprint Quattro. My currentbest estimate is that we will be somewhat supply-constrained early inour fiscal third quarter, and be working hard to meet all customerimplant demands worldwide.


46

One geography of particular concern is Japan, as the SprintQuattro is not yet approved there. Removing Sprint Fidelis from themarket will have a major impact on this region. We will be workingwith the Japanese regulatory authorities to find a solution as quicklyas possible.

By monitoring lead performance and transparently communicating toour physician customers, Medtronic continues to demonstrate oursteadfast commitment to patient safety and quality monitoring. Asyou will hear from Gary, this issue will have a significantshort-term financial impact on our business. However, we remainconfident that this is the right thing to do for our patients, and we alsobelieve our physician customers will recognize this, and long-term,we will maintain our market share position.

GARY ELLIS: Obviously, this decision will have a significantfinancial impact, especially in our second quarter. However, giventhat we have not been -- however, given that we have not been in aposition to communicate with our worldwide field organization oraffected customers up until now, it has been virtually impossible toestimate the precise magnitude of the financial repercussions.

* * *GARY ELLIS: In terms of the impact on the fiscal second quarterrevenues, there are a number of factors to consider. As Pat described,there will likely be significant repercussions on the Japanesemarket because currently we have no other leads approved in thismarketplace.

In addition, we know that we will have meaningful product returnsof the Fidelis leads that we will need to account for as revenue creditsin our second quarter. Normally we would be able to replace theseleads with an alternative. But due to the Sprint Quattro supplylimitations that Pat described, we will not be able to resupply thecustomer inventory level until later this fiscal year. It is difficult toestimate the level of Fidelis inventory held by our customers, but itwill result in a significant revenue reversal in our second quarter.

The currently limited Sprint Quattro supply will also have apotentially significant impact on revenue over the final two weeksof our second quarter and the early part of the third quarter.European tenders in customer bulk purchase orders are typicallyfor system sales, both the generators and leads, and will either haveto be adjusted to reflect today's decision, or in many cases may not


47

be able to be filled at this time due to the limited Sprint Quattrosupply.

With all these factors taken together, we currently estimate therevenue impact in the second quarter to be in the range of 150 to$250 million. In terms of inventory write-offs, we currently estimatean impact of approximately 15 to $20 million in the second quarter.We also anticipate other direct costs associated with this action inthe range of 10 to $20 million.

I want to emphasize again that these revenue and cost estimates arevery preliminary and likely to change. As a result, at this time we arenot in a position to quantify the earnings impact for the quarter orthe entire fiscal year. It goes without saying that we will do whateverwe can to mitigate the short-term impact of this issue on our business,and as Pat indicated, increasing the supply of the Sprint Quattro leadswill be a top priority.

* * *[ANALYST]: … David, every time you've been quoted today in thevarious newspapers you've had a qualifier, which is if failure ratesstay at current rates. Is there any reason to believe they will? I'd loveto hear about the data and how it builds over time. And then I'll waitfor the second question.

DR. DAVID STEINHAUS: What's happening right now is that weactually don't have a statistically significant difference between thetwo leads. The confidence intervals are fairly large. But if thefailure rates remain constant, it will become statisticallysignificantly different. Now, will they become constant? It's just hardto know. It's very difficult to predict the future. After all, these areleads in human bodies. Each human body is different, and it reacts ina different way with each lead. So it's really very difficult to predictthe actual failure rate.

* * *[ANALYST]: First of all, is this a class 1 recall? And could weassume that the five-year failure rate will be capped at mid-singledigits? Would the software changes also enable -- what percent offailures will the programming changes enable you to catch? And justfinally, why shouldn't this be one impetus for hospitals to reallyaggressively diversify their recall risk?

BILL HAWKINS: Let me just answer the question about the class 1recall, and then I'll have Pat address the other parts of your question.We actually approached the FDA. This is a voluntary suspension. It


48

has not been classified yet as a class 1 recall. We suspect that theFDA will characterize this as a recall going forward. But we took theinitiative. We proactively met with the FDA late last week when wedetermined that we had a situation where we thought it was in thebest interest of the patients to do what we did. But at this juncture ithas not been classified.

* * *[ANALYST]: So we should assume that sales in Japan will besignificantly impacted basically to zero?

GARY ELLIS: As I mentioned, as we go through, we don't knowfor sure. But the reality is, as we indicated, we think there will be alarger impact in Japan because of that issue that first of all, theQuattro is not even approved at this point in time. And as weindicated in our [comments here], it is not customary. Now, couldyou see the physician community switch to doing that? That'ssomething we'll have to wait and see as we go through it. But you'reright; as we indicated, there will be a significant impact in Japanuntil we can get Quattro approved or you see a shift in kind ofculturally how they handle it. [Emphasis added.]

128. During the second conference call, reporters questioned the timing of the

recall, eliciting the admission that Medtronic had received reports of an “excessive number” of

Fidelis lead fractures which was “higher than normal expected” by “the springtime.” The transcript

of the call reads in relevant part:

NANCY CORDES [ABC NEWS]: Hi, my question is are youlooking into the possibility that had the research and developmentprocess or the regulatory process been more rigorous that you wouldhave caught this problem before the device went to market?

DR. DAVID STEINHAUS: I think we have to say that we did nothave the requisite information to support this decision until now. Itreally came together when we made the decision one week ago. AsI said earlier, we did have some reports of fractures that were seento be an excessive number earlier this year and we put out a letterin March, explaining that and explaining what we thought about that.Since that time we have had six more months of data on our leadanalysis studies and we've also been able to examine the 25,000patients from CareLink. It is that data which really gives us theconfidence that what we are doing is the right thing.


49

NANCY CORDES: But when you were developing this device, atany time were you concerned that because it was, so much moreslender that it might be more fragile and it might be more prone tobreakages?

PAT MACKIN: Yes, this is Pat Mackin. I mean, what I would saythere is, this is a smaller version as Dr. Steinhaus described of ourQuattro lead and this is a trend in the interventional field of trying toget smaller devices, because the physicians like the handlingcharacteristics and the potential benefits of the product. Throughrigorous testing, in fact we put this through our standard testingprotocols of 400 million cycles which basically replicate 10 years ofinside the patient. . . .

And as Dr. Steinhaus commented we saw higher than normalexpected rates in the springtime, we looked into those.

129. The market reacted predictably to these admissions. Medtronic's stock price

dropped from a close of $56.33 on October 12, 2007 to close at $50.00 a share on October 15, 2007,

a decline of 11.2% on volume of approximately 62.9 million shares (compared to average volume

of 6.8 million shares).

130. In the days that followed, Medtronic stock continued its decline to a low of

$45.54 on November 7, 2007 – a ten dollar stock price drop – on fears that Medtronic would lose

defibrillator market share as a result of the recall and that the Company would face legal liabilities

from injured patients.

131. An analyst report issued by Stifel Nicolaus & Company on October 15, 2007

termed the recall a “serious blow” to Medtronic and to the “overall” defibrillator market.

132. Also on October 15, 2007, a putative products liability class action lawsuit,

Luisi et al. v. Medtronic, Inc. et al., Case No. 0:07cv04250 RHK-JSM, was commenced in this

District on behalf of patients who experienced injury due to Fidelis lead fractures. The complaint

in Luisi alleges that Medtronic knew of the safety problems with the Fidelis by at least March 2007


50

but nevertheless continued to claim that the device was “safe.” On February 21, 2008, the

Multi-District Litigation Panel (“MDL”) issued a transfer order coordinating and consolidating for

pretrial proceedings all similar actions in this District.

133. The allegations set forth in any amended pleadings in Luisi or other lead

products liability case in the MDL are expressly incorporated herein by reference, including without

limitation any allegations relating to defendants’ scienter.

134. Also on October 15, 2007, The New York Times published an article entitled

"Patients Warned as Maker Halts Sale of Heart Implant Part." The article, in relevant part, stated:

The nation’s largest maker of implanted heart devices, Medtronic,said . . . that it was urging doctors to stop using a crucial componentin its most recent defibrillator models because it was prone to adefect that has caused malfunctions in hundreds of patients andmay have contributed to five deaths.

* * *The faulty component is an electrical “lead,” or a wire that connectsthe heart to a defibrillator, a device that shocks faltering hearts backinto normal rhythm. The company is urging all of the roughly235,000 patients with the lead, known as the Sprint Fidelis, to seetheir doctors to make sure it has not developed a fracture that canmake the device misread heart-rhythm data.

Such a malfunction can cause the device to either deliver anunnecessary electrical jolt or fail to provide a life-saving one to apatient in need. In most cases, the defibrillators can be reprogrammedwithout surgery to minimize the problem.

Medtronic estimated that about 2.3 percent of patients with theFidelis lead, or 4,000 to 5,000 people, would experience a leadfracture within 30 months of implantation. Those patients will requirea delicate surgical procedure to replace the lead, experts said.

Medtronic said it would stop selling the lead and recall all leads notyet implanted.

* * *Questions about the performance of the Fidelis lead have surfacedbefore. For example, earlier this year, Dr. Robert G. Hauser of the


51

Minneapolis Heart Institute published an analysis that found,among other things, that a significant number of patients wereexperiencing “inappropriate” shocks because their defibrillator wasfiring when not needed. Such jolts can be extremely painful.

Dr. Hauser, who played a central role several years ago in bringingto light malfunctions in defibrillators made by Guidant, said that hediscussed his findings earlier this year with Medtronic officials,who said there was not enough data to come to any conclusions. InMarch, however, the company issued a letter to doctors sharingthose concerns with doctors.

Last month, when 30 months of data showed a continuing fractureproblem, Medtronic began talking with its independent medicaladvisers about what to do next. “The numbers that we saw were notthat bad, but they were worrisome, troubling,” said Dr. Douglas P.Zipes, a professor at the Indiana University School of Medicine anda member of the advisory board.

Statistically speaking, there is not enough data to be sure that Fidelisis unusually prone to fracture. But with mounting evidence that therewas cause for concern, Medtronic decided to act now. Five deathshave been linked to the fractures as a possible, though not confirmed,contributor.

The numbers suggesting that the problem was significant enoughto halt sales of the lead come from two other sources: a clinical trialcurrently following the progress of 650 patients at 17 hospitals andthe mountain of data collected from 25,000 patients in CareLink,Medtronic’s system for remotely monitoring implants. Medtronicsaid that data from fractured leads that have been returned had helpedit understand where the malfunctions occur.

* * *Medtronic declined to discuss the potential financial impact of itsactions regarding Fidelis prior to a conference call scheduled for thismorning with Wall Street analysts. The company, which had $12.3billion in sales last year, has more than 55 percent of the defibrillatormarket, and the devices are its biggest product.

* * *Medtronic is recommending that doctors switch back to its olderQuattro lead, but doctors will have other options from othercompanies. The biggest long-term financial impact on Medtroniccould come not from doctors using other leads but from the


52

possibility that they could switch to complete defibrillator packagesfrom other companies. [Emphasis added.]

135. On October 16, 2007, The New York Times published the aforementioned

article entitled "In Data for Heart Devices, Parts Are a Blind Spot." The article, in relevant part,

stated:

Medtronic’s decision to stop selling a widely used part for implantedheart devices underscores the dearth of safety monitoring of suchproducts, as well as a design trend that may make them increasinglyprone to failure, several experts said yesterday.

Over the last two years, since the disclosure of safety problems withheart defibrillators made by another producer, Guidant, devicemakers and regulators have paid closer attention to trackingdefibrillators after they reach the market.

But several experts said yesterday that there was no similar focus ona crucial component of those products — the wires, or leads, thatconnect them to the heart and convey the potentially life-savingshocks. Defibrillators are intended to deliver an electric shock, whennecessary, to stabilize a dangerously erratic heartbeat.

* * *. . . . Meanwhile, F.D.A. records suggest that a patient deathapparently linked to the problem occurred in 2006, well beforeMedtronic sent an alert to doctors. Dr. William Maisel, a heart deviceexpert at Beth Israel Deaconess Medical Center in Boston, said thatMedtronic’s warning appeared to be another instance of industryexecutives and regulators scrambling to catch up to a problem, ratherthan creating ways to anticipate it.

“What is frustrating here is that this was another situation that waspredictable,” said Dr. Maisel, who is also a consultant to the F.D.A.

* * *Medtronic paid a price in the stock market yesterday, as its shares fellmore than 11 percent on news of the safety warning and after thecompany said it expected the problem to reduce sales in the currentquarter by up to a quarter of a billion dollars.

* * *According to F.D.A. records, one patient death that Medtronic hassaid may be linked to the lead occurred in August 2006. In theincident, which happened outside the United States, the patient


53

began to receive inappropriate shocks and subsequently developedvarious heart problems and died, according to that record, a reportfrom a hospital whose location was not contained in the report.

Two other patient deaths occurred this year, one in January and theother in March, according to F.D.A. records. In the Januaryepisode, the defibrillator failed to deliver life-saving therapy whenneeded, apparently because of a problem with the lead, F.D.A.records indicate.

The patient who died in March, who is described in an F.D.A.report as collapsing while “playing,” also received inappropriateshocks. Mr. Clark, the Medtronic spokesman, declined to specify thepatient’s age.

He added that two additional deaths — raising the known total tofive — had occurred since March and that Medtronic would soonreport details of them to the F.D.A. [Emphasis added.]

136. Also on October 16, 2007, Dr. Sidney M. Wolfe, Director of the Health

Research Group of Public Citizen, and Eunice Yu, a staff researcher with Health Research Group

of Public Citizen, wrote a public letter to the FDA calling for an investigation into the Fidelis lead

recall. Wolfe and Yu urged the FDA to investigate Medtronic’s delay in suspending the Fidelis in

light of Dr. Hauser’s warnings and mounting injury reports to MAUDE. As Wolfe and Yu noted:

Medtronic had been warned about the injuries. Dr. Robert Hauserof the Minneapolis Heart Institute says he contacted Medtronic inearly February about the problem and published a review of theinjury cases in late March. Indeed, The Heart Institute was soconcerned about the risk that it ceased implantation of thesedefibrillators in January. [Emphasis Added]

137. Also on October 16, 2007, Senator Charles E. Grassley of Iowa issued a letter

to the FDA stating:

As you may be aware, about two years ago, I initiated an inquiry intothe recalls of Guidant Corporation’s (Guidant) implantablecardioverter defibrillators (ICDs) and allegations that Guidant hadkept quiet about the serious malfunctions of some of its ICDs. I am


54

concerned that action may not have been taken in a timely fashionin this case as well. It appears that Medtronic was aware of thepotential lead fractures several months before suspending sales ofthe Sprint Fidelis defibrillation leads.

Accordingly, I am requesting that FDA arrange a briefing for myCommittee Staff by no later than October 31, 2007, to discuss theevents leading to Medtronic’s suspension of distribution of the leadsand FDA’s actions related to this matter. [Emphasis Added]

138. Senator Grassley also issued a letter on the same day to Medtronic,

demanding an explanation for the Company’s delay in withdrawing the Fidelis in light of the

publication of the Hauser Study months prior. As the letter stated:

This defect has caused malfunctions in hundreds of patients andmay have contributed to five deaths. What I find troubling is thatMedtronic took months to stop the sales of the faulty lead, eventhough the problem had been reported in a peer-reviewed journalmonths prior. This study found over 500 complaints of adverseevents with this particular lead that were reported in the FDA’sMAUDE data between September 2004 and January 2007.

Certainly this data was also available to executives at Medtronic.However, Medtronic took no apparent action to inform doctors andpatients of the potential risks. Meanwhile, it was reported by theChicago Tribune that Medtronic launched a $100 million marketingcampaign in January to advertise its heart defibrillators, some ofwhich used the faulty leads. [Emphasis Added]

139. On October 22, 2007, Representative Henry A. Waxman issued a letter to

FDA on behalf of the Committee on Oversight and Government Reform. The letter expressed

concerns about the agency’s failure to have required clinical testing of heart devices such as the

Fidelis before approval.

140. On October 19, 2007, the Minneapolis Star Tribune quoted Bank of America

analyst Glenn Navarro as stating that “[w]e think Medtronic will lose global ICD market share over

the next 12 to 18 months” as a result of the Fidelis recall.


55

141. The same day, Deutsche Bank issue a report indicating that Medtronic was

likely to lose defibrillator market share to competitor St. Jude. Deutsche Bank predicted that

Medtronic’s market share would fall from 52% to approximately 44%.

142. On October 30, 2007, the Wall Street Journal published the aforementioned

exposé entitled “Medtronic Recall Exposes Gaps in Medical Safety – Spotty Data and Testing Left

FDA in the Dar; Firm Cites Five Deaths.” The detailed page-one story related how Dr. Hauser

reported signs of premature failure in the Fidelis leads to Medtronic back in January 2007 and how

the Company responded belatedly to his concerns. The article stated in pertinent part:

In late January, something unsettling happened at the MinneapolisHeart Institute. On two successive days, patients came to the clinicafter their heart defibrillators had jolted them with huge, unnecessaryand painful electric shocks. One 65-year-old woman said she'd beenzapped 14 times in an hour.

Doctors checked the hospital's records and discovered four similarcases had occurred in recent months. Each stemmed from a brokenwire -- called a lead -- that tells a defibrillator when to send anelectric shock to a malfunctioning heart. All six cases involved theSprint Fidelis 6949, manufactured by Medtronic Inc., a leadingmedical-device maker.

Within days, the Heart Institute concluded that the Sprint Fideliswasn't safe enough, told the company of its concerns, and stoppedusing the product.

Across the country, physicians at leading hospitals from Chicago'sChildren's Memorial Hospital to Boston's Brigham and Women'sHospital came across similar problems and some took similar steps.

But it wasn't until this month that Medtronic of Minneapolisreached the same conclusion. On Oct. 7, Medtronic President andChief Executive Bill Hawkins convened a meeting of top executiveswho decided that the company should suspend sales of the Fidelisleads. In one of the biggest recalls of a medical device, it pulled allSprint Fidelis models from the market, citing five deaths in thedevices' three years on the market.


56

***Throughout 2007 -- and as recently as late September -- Medtronicsought to reassure doctors, at times blaming the problems largelyon physicians' technique. In March, a Medtronic letter to doctorssaid its investigation "suggests that variables within the implantprocedure may contribute significantly to these fractures." Inannouncing that it was suspending sales of the Sprint Fidelis leads onOct. 15, the company said they were failing at a rate of 2.3% over 30months, more than twice as often as its other top lead.

***Dr. Hauser contacted Medtronic. In February, he and several otherclinic physicians met at the Heart Institute with Warren Watson, aMedtronic vice president, and an engineer. Dr. Hauser says he toldMr. Watson that Medtronic had a serious problem with its Fidelislead. Three identical device defects at one hospital, he argues, cansignify a broader problem.

Mr. Watson disagreed that there was enough evidence yet that theFidelis lead performed worse than others, several participants inthe meeting recall. Medtronic officials also suggested that leadfractures could have resulted from doctors' mishandling thedevices, according to participants. "They were blaming theimplanters," says Dr. Almquist, who says he was offended by thesuggestion.

***In part due to information from Dr. Hauser, Medtronic on March21 sent out a "dear doctor" letter saying, "Medtronic has receivedreports from a limited number of implanting physicians indicatingthey have experienced higher than expected" fracture rates. Theletter cautioned doctors about how to handle the device to avoidproblems.

Meanwhile, Dr. Hauser submitted a manuscript to the journalHeart Rhythm. Based on his analysis of his multihospital databaseas well as a federal database, Dr. Hauser concluded that "theSprint Fidelis high-voltage lead appears to be prone to earlyfailure." He sent an early copy of the manuscript -- whose findingswould be published by Heart Rhythm online in April -- to the FDAand Medtronic.

By this spring, doctors were reaching their own conclusions. FrankMazzola, an electrophysiologist at Long Island Jewish MedicalCenter in New Hyde Park, N.Y., stopped using the Sprint Fidelis inApril after seeing patients with lead fractures.


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Physicians at Brigham and Women's Hospital did the same afterthey too saw problems. At Western Pennsylvania Hospital inPittsburgh, cardiologist Leonard I. Ganz says he stopped using theFidelis leads in May after two patients suffered multiple shocks."Even though there was no statistical trend yet, I was concernedenough that it might be" in time, Dr. Ganz says.

***On July 19, Medtronic officials met again with Dr. Hauser andother physicians at the Heart Institute. Dr. Hauser urged Medtronicto stop selling the leads. Medtronic's vice president for quality andregulatory issues, Reggie Groves, demurred, using a PowerPointpresentation to show that the incidence of fractures still wasn'tstatistically significant, according to people present. The companydeclines to elaborate.

According to the Heart Institute's [technical director] Ms. [Linda]Kallinen, Medtronic's Ms. Groves said the company had identifieda problem and was working on a possible remedy, but had nointention of pulling the leads off the market. [Emphasis Added].

143. On November 2, 2007, Think Equity Partners LLC, issued a report giving a

negative outlook on Medtronic shares, stating: “We think [Medtronic’s] ICD market share will

steadily decline as practices manage risk” and that “with additional quality issues possible, we

believe [Medtronic] shares carry more risk.”

144. On March 6, 2008, Dr. William H. Maisel published the aforementioned

article entitled “Semper Fidelis — Consumer Protection for Patients with Implanted Medical

Devices”, which was highly critical of Medtronic’s handling of the Fidelis lead recall, in the New

England Journal of Medicine. The article states, in pertinent part:

When the Food and Drug Administration (FDA) approved theMedtronic Sprint Fidelis implantable cardioverter – defibrillator(ICD) lead in 2004 on the basis of bench testing but no humanclinical data, there was no public outcry. Physicians rapidlyincorporated the new electrode into their practice, welcoming itssmall diameter and ease of implantation. During the ensuing 3 years,90% of Medtronic ICDs were implanted with this lead (see diagram).But in October 2007, after 38 months on the U.S. market and 268,000


58

implantations worldwide, the Fidelis was voluntarily recalled byMedtronic because of its propensity to fracture. The large number ofaffected patients, the billions of dollars at stake in the ICD market,and the controversy surrounding the timing of communication withphysicians and patients about the lead’s performance highlight theshortcomings of the regulatory system for medical devices andunderscore the urgent need for legislation that will ensure adequateprotection for the patients receiving them.

Obviously, no complex device can be 100% free of design,manufacturing, and performance flaws. Malfunctions inevitablyoccur, and manufacturers should be rewarded, not criticized, foridentifying and correcting problems. The demands placed on ICDleads, in particular, are intense: they must withstand hundreds ofmillions of repetitive cardiac cycles, survive in the hostileenvironment of the human body, and allow delivery of high-voltageenergy at a moment’s notice. But ICD-lead fractures can result inclinically significant adverse events, including a failure to pace, afailure to defibrillate, unnecessary shocks, and death.

After concerns arose about the performance of the Fidelis,Medtronic notified physicians by letter in March 2007 of “a limitednumber” of physicians who were seeing a higher-than-expectedrate of lead fractures. Medtronic concluded that the lead’sperformance was “in line with other Medtronic leads” on the basisof two main factors: analysis of returned products (though suchanalysis is notoriously inaccurate because most malfunctioningleads are not removed from patients and returned to themanufacturer) and a small prospective post-marketing study thatfound a 1.1% rate of lead failure within 2 years of implantation.Medtronic failed to note that the study — which included fewerthan 100 patients followed for 2 years — was grossly underpoweredto detect even a moderate increase in fracture rate in the Fidelis ascompared with its predecessors. In short, despite implantation ofthe device in hundreds of thousands of patients during several yearson the market, the available post-marketing data were insufficientto provide a definitive conclusion about whether there was aperformance problem. Medtronic therefore began collecting andanalyzing data from more than 25,000 patients participating in itsremote ICD monitoring program.

Though publicly maintaining that the lead functioned withinacceptable parameters, Medtronic submitted an FDA applicationfor design and manufacturing changes in May 2007 and, according


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to the FDA’s public pre-market approval database, receivedapproval 2 months later. Already-manufactured leads remained onhospital shelves and continued to be implanted. By October 2007,Medtronic had confirmed the occurrence of 665 fractures in returnedleads, five patient deaths to which a Fidelis lead fracture may havecontributed, and a 2.3% fracture rate within 30 months ofimplantation (according to an analysis of the remote-monitoringdata). Medtronic then voluntarily recalled the product and requestedthe return of unused leads.

Almost immediately, numerous lawsuits were filed against Medtronicalleging personal injury, negligence in manufacturing, and failure towarn patients about the possible defects in a timely manner. Inreality, manufacturers have repeatedly and knowingly sold potentiallydefective devices without public disclosure. . . .Often, a flawedproduct continues to be marketed while the manufacturer submits arevised marketing application to the FDA and awaits approval of theamended product design and manufacturing plan.

145. On March 5, 2008, the Minneapolis Star Tribune published the

aforementioned article entitled “A call for Tighter Med-Tech Controls” about Dr. Maisel’s

comments in the New England Journal of Medicine. The article stated in pertinent part:

Airline passengers, cell-phone users and cable-TV customers enjoymore consumer protections than patients who have life-sustainingmedical devices, a prominent cardiologist writes in today's NewEngland Journal of Medicine.

Fridley-based Medtronic Incorporated's recall of a popular heartdefibrillator lead in October underscores serious flaws in the waygovernment regulators track devices and the "urgent need" forlegislation to protect consumers, according to Dr. William Maisel,director of the Medical Device Safety Institute at Beth IsraelDeaconess Medical Center in Boston.

Maisel uses last year's recall of Medtronic's Sprint Fidelis heartdefibrillator lead to illustrate his opinion piece, which is occasionallycritical of the way the medical technology company and the Food andDrug Administration (FDA) handled the matter.

***


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Maisel wrote that when the Sprint Fidelis lead was approved by theFDA in 2004, the device was never tested on humans, so there wasno clinical data to show whether it was safe. . . .

The FDA permits this type of approval, but only if the device issimilar to one already cleared by the agency -- in this case, anotherMedtronic lead called Quattro.

That approval process is controversial in some circles.

"Congress needs to close the loophole that allows manufacturers tointroduce new products that [support or sustain life] without fulltesting and peer-review by an outside panel of experts," said Dr.Robert Hauser, senior consulting cardiologist with the MinneapolisHeart Institute Foundation and a critic of the FDA. "Fidelishighlighted the weakness of the current regulation."

***Maisel notes that the company was operating with severely limitedinformation, but continued to sell the leads. Even though the leadshad been implanted in thousands of patients, "the availablepost-marketing data were insufficient to provide a definitiveconclusion about whether there was a performance problem," hewrote.

Although Medtronic continued to maintain publicly that the SprintFidelis leads were performing at acceptable levels, the companysubmitted an application to the FDA in May to change the way itwas designed and manufactured, Maisel wrote. That application wasapproved by the FDA.

But patients and doctors were not aware of changes to the leads, hesaid. Plus, leads made before the changes were still used onpatients. . . . .

"It really highlights the holes in the regulatory process when amanufacturer can continue to market a device while at the sametime trying to figure out what's wrong with it," said Hauser, one oftwo Minneapolis doctors who went public in 2005 after a patient diedwhen a Guidant Corp. defibrillator malfunctioned.

After five deaths, and a 2.3 percent fracture rate 30 monthspost-implant, Medtronic stopped selling the leads in October. Severallawsuits were filed by patients, some claiming that the companyshould have pulled the product off the market sooner.


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ADDITIONAL SCIENTER ALLEGATIONS

146. Defendants acted with scienter because at the time that they issued public

documents and other statements in Medtronic’s name, they knew or recklessly disregarded the fact

that such statements were materially false and misleading, or omitted to disclose material facts.

Moreover, the Defendants knew such documents and statements would be issued or disseminated

to the investing public, knew that persons were likely to rely upon those misrepresentations and

omissions, and knowingly and recklessly participated in the issuance and dissemination of such

statements and documents as primary violators of the federal securities laws.

147. As set forth in detail throughout the Complaint, the Defendants, by virtue of

their control over, and/or receipt of Medtronic’s materially misleading statements, and their

positions with the Company which made them privy to confidential proprietary information

concerning the failure rate of the Fidelis defibrillation leads, used such information to artificially

inflate Medtronic’s financial results. The Defendants created, were informed of, participated in, and

knew of, the scheme alleged herein to distort and suppress material information pertaining the failure

rate of the Sprint Fidelis leads. With respect to non-forward looking statements and omissions, the

Defendants knew and recklessly disregarded the falsity and misleading nature of that information,

which they caused to be disseminated to the investing public.

148. A strong inference of scienter is raised by the fact that, as alleged above:

a. Doctors at the Heart Institute had contacted defendants and

specifically alerted them that “Medtronic had a serious problem with

the Fidelis lead” as early as February 15, 2007;


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b. Weeks later, on February 27, 2007, Dr. Hauser provided an advance

copy of the Hauser Study to Medtronic;

c. Defendants were told by numerous hospitals and clinics across the

country prior to and during the Class Period that they were

discontinuing implantation of the Fidelis after encountering fracture

problems similar to those experienced by the Heart Institute;

d. Medtronic learned of five patient deaths linked to fractured Fidelis

leads prior to and during the Class Period;

e. On July 19, 2007, Medtronic officials privately admitted to doctors

at the Heart Institute that “the company had identified a problem

and was working on a possible remedy, but had no intention of

pulling the leads off the market.” [Emphasis Added];

f. Defendants admitted that Medtronic had seen “higher than normal

expected rates in the springtime” and that the number was an

“excessive number” – facts not disclosed to investors during the

Class Period.

149. A strong inference of scienter is also raised by the fact that, as alleged above,

while publicly maintaining that the Fidelis was free from problems, Medtronic applied to the FDA

for approval of design and manufacturing changes to the device on May 5, 2007. The Medtronic

pre-market approval application to the FDA sought approval for changes regarding the “strength”

of the Fidelis lead – one of the suspected causes of the fracturing.


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150. In particular, this raises a strong inference that during the Class Period

Medtronic was aware of the problems that resulted in the recall of the Fidelis and was attempting

to correct the problems. As Dr. Maisel stated in his article in the New England Journal of Medicine

after the Class Period, on March 6, 2008:

Though publicly maintaining that the lead functioned withinacceptable parameters, Medtronic submitted an FDA applicationfor design and manufacturing changes in May 2007 and, accordingto the FDA's public pre-market approval database, receivedapproval 2 months later. Already-manufactured leads remained onhospital shelves and continued to be implanted. [Emphasis Added].

A Strong Inference of Scienter is Raisedby the Fact that Medtronic Actively Monitoredthe Sales and Clinical Performance of its Leads

151. A strong inference of scienter is also raised by the fact that at all times prior

to and during the Class Period, Medtronic actively monitored and kept apprised of all material

developments concerning the sales and clinical performance of Fidelis leads.

152. In the ordinary course of business, Medtronic maintained close contact with

its physician customers through its large staff of field representatives and salespersons, called

“physicians relations specialists,” throughout the country. In most cases, such salespersons and

representatives were present and involved whenever a defibrillation unit or lead was implanted in

a patient, replaced, serviced or periodically “interrogated”, i.e., evaluated electronically for what is

occurring internally, for instance, how many arrhythmias occurred in the patient, the remaining

battery life of the unit or – significantly – how many times the defibrillator misfired due to

fracturing. They would also be present in the operating room for all procedures relating to the

devices, and be responsible for delivering and unpacking new units, replacements and returns. Such

salespersons and representatives were also required in the normal course of business to prepare


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“adverse event reports” with respect to any problems encountered with the devices and to file such

reports with Medtronic management in Minneapolis.

153. Accordingly, when during the Class Period patients received unnecessary

shocks from their defibrillators and five died and when medical practices encountered fracture

problems with Fidelis leads, were required to replace fractured leads, expressed concerns in light

of the Hauser Study, experienced adverse events such as fractures, or decided to discontinue

ordering or implanting the Fidelis, Medtronic management had access to and/or quickly learned

those facts from its staff of representatives and salespersons including through “adverse event”

reports filed with management. Because these events occurred during the Class Period due to

fractures in the Fidelis, as alleged above, and were conveyed to Medtronic, this raises a strong

inference of scienter.

154. A strong inference of scienter is also raised by the fact that Medtronic

management kept careful track of sales data for all of Medtronic’s products, including specifically

data on how many units of the Fidelis leads were being sold, in what regions, and to what medical

facilities. Accordingly, when during the Class Period, as alleged above, hospitals and clinics

discontinued purchase of the Fidelis, it immediately showed up in the sales data provided to

management. This raises a strong inference of scienter.

155. In particular, defendants learned through at least Medtronic sales data that the

Children's Memorial Hospital in Chicago, Brigham Women's Hospital in Boston, New York

Hospital in Queens, Long Island Jewish Medical, and Western Pennsylvania Hospital in Pittsburgh,

discontinued purchase of the Fidelis. Through its staff of field representatives and through direct

contacts between Medtronic management and these facilities, Medtronic also would have learned,


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and did learn, the reasons for such discontinuations, i.e., adverse fracture experiences with the

Fidelis.

156. Additionally, at all relevant times it was also common practice for physicians

privately to contact and raise problems directly with Medtronic management, including Reggie

Groves, Defendant Collins or President of CRDM Steve Marhle. Dr. Hauser – who met with

Medtronic officials on February 15, 2007 and July 19, 2007, informed Medtronic of safety problems

with the Fidelis and urged its recall – is a prime example. During the Class Period other physicians

similarly would have contacted, and did contact, Medtronic top management expressing the same

concerns. This also raises a strong inference of scienter on the part of defendants.

157. A strong inference of scienter is also raised by the fact that Medtronic also

actively monitored the clinical performance of its Fidelis leads through an ongoing and active

clinical surveillance study, dubbed the System Longevity Study (the “Longevity Study”). The

Longevity Study monitored the performance and survival of all of Medtronic’s market-released

cardiac therapy products. It involved the collection of data on hundreds of patients from multiple

clinics and hospitals on pacemakers, defibrillators and leads.

158. The protocol for the Longevity Study required participating medical facilities

to provide regular follow-up reporting on all leads actively followed in the study, including

whenever a lead “complication” has occurred, which would include a fractured lead.

159. The sample sizes in the study were large, involving some 70,000 leads, and

considered to be “representative.” Thus, “the survival estimates” generated by the study “should

be representative of the performance worldwide of these models,” according to Medtronic.


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Medtronic released updated results of the Longevity study as part of its Product Performance

Reports, issued every six months, in March and November.

160. In 2007, the first edition of the Product Performance Report was published

in March and analyzed data through a January 31, 2007 cutoff date. The second edition of the report

was published in November and analyzed data through July 31, 2007.

161. Accordingly, during the Class Period defendants had access to up to six

months of data on the performance of the Fidelis – from January 31, 2007 through July 31, 2007 –

that was not publicly available during the Class Period. The recall of the Fidelis at the conclusion

of the Class Period was based in part on such not-previously-disclosed data. In particular, in

announcing the recall on October 14, 2007, Medtronic finally admitted that such data indicated that

Fidelis lead viability was “trending lower” than Medtronic’s Quattro lead at 30 months (to 97.7%

for the Fidelis vs. 99.1% for the Quattro). Because defendants had access to this nonpublic

Longevity Study data throughout the Class Period, this raises a strong inference of scienter on the

part of defendants.

162. In addition, a strong inference of scienter is raised by the fact that at all times

prior to and during the Class Period defendants had access to comprehensive computer data about

the performance of thousands of Fidelis leads implanted in patients worldwide through the

Company’s “CareLink Network” system. CareLink, an internet-based system developed by

Medtronic, allows doctors to monitor patients and their defibrillators remotely by phone or

computer. Patients place computer-mouse shaped antennas over their chests which read

defibrillator-related and physiological data similar to that obtained during an office visit. The data

is then transmitted by standard telephone to a secure website.


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163. As of February 2007, Medtronic began to tap into the CareLink Network to

measure fractures and prefracture conditions with respect to the Fidelis, according to the October

30, 2007 Wall Street Journal article. Nevertheless, during the Class Period did not utilize or

interrogate the data on Fidelis lead vitality from CareLink in a timely or adequate fashion. For

instance, the March 21, 2007 physician letter ignored the CareLink data, citing only the returned-

product analysis and the Longevity Study data.

164. The recall of the Fidelis at the conclusion of the Class Period, however, was

based in part on the CareLink data which was then publicly revealed for the first time. In particular,

in announcing the recall on October 14, 2007, Medtronic finally admitted that the CareLink data

indicated Fidelis lead viability of 97.7% at 30 months, which was consistent with the Longevity

Study data. The fact that defendants had access to CareLink data demonstrating decreased Fidelis

lead vitality throughout the Class Period raises a strong inference of scienter on the part of

defendants.

165. A strong inference of scienter is also raised by the fact that prior to and during

the Class Period defendants filed reports with – and actively monitored reports filed by other users

with – the FDA’s MAUDE database with respect to the Fidelis. As alleged above, the FDA’s

Manufacturer and User Facility Device Experience database is an online database containing

information on medical devices which have malfunctioned or caused a death or serious injury.

Though publicly available, MAUDE contains highly technical information and is difficult and

confusing to use, particularly for non-experts.

166. As alleged above, the Hauser Study found 679 adverse event reports on

MAUDE for the Fidelis between September 2004 and January 2007 and “the most frequent


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complaints were fracture and inappropriate shocks”, one associated with a patient death. This

MAUDE data led the Hauser Study to conclude that the Heart Institute experience was not unique,

and in part to conclude that “the Sprint Fidelis high-voltage lead appears to be prone to early failure”

and was “significantly less reliable” than Medtronic’s Quattro lead.

167. Of significance, of the 679 adverse MAUDE reports analyzed by Dr. Hauser,

357 or more than half had been filed by Medtronic itself, the Hauser Study determined. Because

MAUDE updates only every two months and users have up to 30 days to file reports after an adverse

event occurs, Medtronic thus knew about large numbers of Fidelis failures up to three months before

the information was available on MAUDE. Prior to and during the Class Period Medtronic, like all

medical device manufacturers, also followed up on and investigated reports of adverse events filed

in MAUDE by other users if the Company was not otherwise aware of them. This raises a strong

inference of scienter on the part of defendants.

A Strong Inference of Scienter is Raisedby Insider Sales of Stock During the Class Period

168. Additionally, a strong inference of scienter is raised by the fact that, during

the Class Period, Company insiders, including the Individual Defendants, benefitted personally and

directly from the artificial inflation of Medtronic stock by selling 456,931 shares of Medtronic stock

during the Class Period for gross proceeds of over $25 million. Company insiders sold 97,931

shares of the Company's stock for gross proceeds of approximately $5.5 million.

169. This trading by the Individual Defendants and Company insiders triggered

a duty to disclose all material non-public information about Medtronic, including adverse

information about the Fidelis.


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170. This trading by the Individual Defendants and Company insiders is evidenced

by the following chart:

Individual Defendants:

Inside Trader Date of Trade Number ofShares

Price per Share GrossProceeds

Arthur D. Collins,Chairman of the Board ofDirectors

September 18, 2007 24,005 $54.27 - $54.27 $1,303,000

September 17, 2007 45,561 $54.21 - $54.21 $2,470,000

August 23, 2007 38,000 $53 - $53 $2,014,000

July 2, 2007 338,896 $53.37 $18,087,000June 6, 2007 5,877 $52.55 $309,000Total 452,339 $24,813,000

William A. Hawkins,President and COO

August 27, 2007 728 $53.69 - $53.69 $39,000

June 6, 2007 2,743 $52.55 $144,000April 17, 2007 445 $52.05 $23,000Total 3,916 $206,000

Gary Lee Ellis, SVP and CFO

June 6, 2007 676 $52.22 $35,000

Total 676 $35,000Overall Total 456,931 $25,054,000

Company Insiders:

Inside Trader Date of Trade Number ofShares

Price per Share GrossProceeds

Stephen Mahle, VP & SrHealthcare Advisor

September 19, 2007 5,596 $56 - $56 $313,000

September 13, 2007 2,000 $55 - $55 $110,000 August 9, 2007 6,000 $54 - $54 $324,000 August 8, 2007 20,000 $53.60 - $53.88 $1,075,000 June 6, 2007 1,321 $52.55 $69,000Total 28,917 $1,891,000

Scott Ward, SVP & President MDTCardio

June 28, 2007 820 $51.52 $42,000


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June 6, 2007 1,293 $52.55 $68,000May 31, 2007 3,680 $53.14 - $53.15 $196,000April 17, 2007 8,498 $52.50 $422,000April 13, 2007 250 $50.67 $13,000Total 14,541 $741,000

Michael Demane, SVP &Pres EUR, CAN, LA,EM

June 6, 2007 1,149 $52.55 $60,000

April 25, 2007 5,107 $53.55 $273,000April 20, 2007 1,278 $52.13 - $52.64 $67,000April 18, 2007 8,934 $51.85 - $51.98 $463,000April 17, 2007 5,770 $52.05 $300,000Total 22,238 $1,163,000

Stephen Oesterle, SVP Medicine andTechnology

June 6, 2007 1,273 $52.55 $67,000

April 18, 2007 14,000 $51.85 - $51.98 $726,000April 17, 2007 7,089 $52.50 $369,000Total 22,362 $1,162,000

Oern Stuge, SVP &President MDT EUR;EM; & CAN

September 26, 2007 3,037 $56.90 - $56.91 $173,000

Total 3,037 $173,000Carol McCormick, SVPHuman Resources

September 24, 2007 2,666 $56.93 - $56.95 $152,000

Total 2,666 $152,000Gordon Sprenger,Director

July 26, 2007 772 $50.92 - $50.92 $39,000

Total 772 $39,000Terrance Carlson, SVP,Gen'l Counsel & CorpSec'y

June 6, 2007 1,030 $52.55 $54,000

Total 1,030 $54,000Jean Butel, SVP &President Asia/Pacific

June 6, 2007 674 $52.55 $35,000

Total 674 $35,000Chistopher O’Connell,SVP & Pres MDTDiabetes

June 6, 2007 629 $52.55 $33,000

Total 629 $33,000Barry Wilson, SVP Int'lAffairs

June 6, 2007 384 $52.55 $20,000

Total 384 $20,000Susan Alpert, VP, Chief June 6, 2007 681 $52.55 $36,000


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Quality & Reg OfficerTotal 681 $36,000Overall Total 97,931 $5,499,000

171. According to the Form 4 filed on January 3, 2008, as of December 31, 2007

Arthur Collins held 1,124,263 shares of Medtronic common stock, excluding options. According

to Form 4’s filed on July 5, 2007 and September 18, 2007, during the class period he exercised

options on 569,566 shares of Medtronic common stock. Defendant Collins exercised 500,000

options on July 2, 2007 which were set to expire on August 11, 2007. He exercised 69,566 options

on September 17, 2007 which were set to expire on October 29, 2007. All of these options were due

to expire the month after they were exercised, motivating Defendant Collins and the Company to

withhold the negative disclosures of October 15, 2007 until after the options had been exercised and

the shares sold. According to the Form 4’s filed during the class period Defendant Collins sold

452,339 shares of Medtronic common stock for proceeds over $24 million. Based on a review of

the Proxy Statement filed July 20, 2007 and of the Form 4’s filed since July 20, 2007, as of April

10, 2008, Defendant Collins continued to hold 1,702,408 of exercisable options and 557,247 of

un-exercisable options.

172. Defendant Collins sales of Medtronic common stock were also highly

suspicious and unusual in that he was more active in his trading of Medtronic common stock during

the class period than he had been during the previous year or in the months of 2007 surrounding the

Class Period.

173. From January 1, 2006 through March 20, 2007 (over the course of a little over

14 months), Defendant Collins, sold only 62,539 shares of Medtronic common stock for proceeds


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of approximately $3.6 million, a small fraction of the 452,339 shares he sold during the seven month

class period for proceeds over $24 million. During the last part of 2007, from October 16, 2007

through December 31, 2007, Defendant Collins sold 1,141 shares of Medtronic common stock for

proceeds of approximately $55,000. Defendant Collins sales of Medtronic common stock were

further suspicious and unusual in that the amounts of the sales were massive, both in dollar terms

and in terms of the numbers of shares sold.

174. Defendant Hawkins’ sales of Medtronic common stock were also highly

suspicious and unusual in that he was also more active in his trading of Medtronic common stock

during the class period. Prior to the class period, from January 1, 2006 through March 20, 2007

(over the course of a little over 14 months), he had sold only 921 shares of Medtronic common stock

for proceeds of $47,275. During the seven month class period Defendant Hawkins sold 3,916 shares

of Medtronic common stock for proceeds of $206,393. Defendant Hawkins did not make any other

sales during 2007 other than those made during the Class Period.

175. Further, Defendant Collins’ stock sales occurred in June through September,

the last portion of the Class Period, and immediately before the corrective disclosures were made.

176. The Individual Defendants also had a strong financial motive to engage in the

fraud alleged herein in order to safeguard their lucrative incentive-based compensation. According

to the July 20, 2007 Proxy Statement, each of the Individual Defendants were highly compensated

with the following base salaries: Defendant Collins had a base salary of $1,275,000 for each fiscal

year 2007 and 2008, Defendant Ellis had a base salary of $525,000 for fiscal year 2007 and

$600,000 for fiscal year 2008, and Defendant Hawkins had a base salary of $775,000 for fiscal year

2007 and $806,000 for fiscal year 2008. For fiscal 2007 defendants Collins, Hawkins, and Ellis had


73

total executive compensation of $11.5 million, $4.4 million, and $2.0 million, respectively. The

Proxy Statement breaks out the percentage of each Individual Defendants' compensation which was

performance-based: 88% of Defendant Collins' compensation is performance based, 80% of

Defendant Ellis's compensation is performance based, and 82% of Defendant Hawkins compensation

is performance based.

LOSS CAUSATION

177. Defendants' wrongful conduct, as alleged herein, directly and proximately

caused the economic loss suffered by plaintiffs and the Class.

178. During the Class Period, plaintiffs and the Class purchased Medtronic's

securities at artificially inflated prices and were damaged thereby. The price of Medtronic's

securities significantly declined when the misrepresentations made to the market, and/or the

information alleged herein to have been concealed from the market, and/or the effects thereof, were

revealed, causing investors' losses.

APPLICABILITY OF PRESUMPTION OF RELIANCE: FRAUD ON THE MARKET DOCTRINE

179. At all relevant times, the market for Medtronic's securities was an efficient

market for the following reasons, among others:

a. Medtronic's securities met the requirements for listing, and were

listed and actively traded on the NYSE, a highly efficient market. The

average daily volume of Medtronic shares during the Class Period

was 6.8 million shares. The total number of shares traded during the

Class Period was 992,864,006;


74

b. As a regulated issuer, Medtronic filed periodic public reports with the

SEC and the NYSE;

c. Medtronic regularly communicated with public investors via

established market communication mechanisms, including through

regular disseminations of press releases on the national circuits of

major newswire services and through other wide-ranging public

disclosures, such as communications with the financial press and

other similar reporting services; and

d. Medtronic was followed by several securities analysts employed by

major brokerage firms who wrote reports which were distributed to

the sales force and certain customers of their respective brokerage

firms. Each of these reports was publicly available and entered the

public marketplace.

e. Medtronic’s stock price reacted promptly to all material information,

as is

180. As a result of the foregoing, the market for Medtronic's securities promptly

digested current information regarding Medtronic from all publicly-available sources and reflected

such information in the price of Medtronic securities. The stock price reacted promptly to all

material information, as is demonstrated by the reaction to the October 15, 2007 announcement of

the suspension of the Fidelis. Under these circumstances, all purchasers of Medtronic's securities

during the Class Period suffered similar injury through their purchase of Medtronic's securities at

artificially inflated prices and a presumption of reliance applies.


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NO SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS

181. The statutory safe harbor provided for forward-looking statements under

certain circumstances does not apply to any of the allegedly false statements pleaded in this

Complaint. Many of the specific statements pleaded herein were not identified as "forward-looking

statements" when made. To the extent there were any forward-looking statements, there were no

meaningful cautionary statements identifying important factors that could cause actual results to

differ materially from those in the purportedly forward-looking statements. Alternatively, to the

extent that the statutory safe harbor does apply to any forward-looking statements pleaded herein,

defendants are liable for those false forward-looking statements because at the time each of those

forward-looking statements was made, the particular speaker knew that the particular

forward-looking statement was false, and/or the forward-looking statement was authorized and/or

approved by an executive officer of Medtronic who knew that those statements were false when

made.

FIRST CLAIM Violation of Section 10(b) of The Exchange Act

and Rule 10b-5 Promulgated Thereunder Against All Defendants

182. Plaintiffs repeat and reallege each and every allegation contained above as

if fully set forth herein.

183. During the Class Period, defendants carried out a plan, scheme and course of

conduct which was intended to and, throughout the Class Period, did: (I) deceive the investing

public, including plaintiffs and other Class members, as alleged herein; and (ii) cause plaintiffs and

other members of the Class to purchase Medtronic's securities at artificially inflated prices. In


76

furtherance of this unlawful scheme, plan and course of conduct, defendants, and each of them, took

the actions set forth herein.

184. Defendants (I) employed devices, schemes, and artifices to defraud; (ii) made

untrue statements of material fact and/or omitted to state material facts necessary to make the

statements not misleading; and (iii) engaged in acts, practices, and a course of business which

operated as a fraud and deceit upon the purchasers of the Company's securities in an effort to

maintain artificially high market prices for Medtronic's securities in violation of Section 10(b) of

the Exchange Act and Rule 10b-5. All defendants are sued either as primary participants in the

wrongful and illegal conduct charged herein or as controlling persons as alleged below.

185. Defendants, individually and in concert, directly and indirectly, by the use,

means or instrumentalities of interstate commerce and/or of the mails, engaged and participated in

a continuous course of conduct to conceal adverse material information about Medtronic's financial

well-being and prospects, as specified herein.

186. These defendants employed devices, schemes and artifices to defraud, while

in possession of material adverse non-public information and engaged in acts, practices, and a course

of conduct as alleged herein in an effort to assure investors of Medtronic's value and performance

and continued substantial growth, which included the making of, or the participation in the making

of, untrue statements of material facts and omitting to state material facts necessary in order to make

the statements made about Medtronic and its business operations and future prospects in light of the

circumstances under which they were made, not misleading, as set forth more particularly herein,

and engaged in transactions, practices and a course of business which operated as a fraud and deceit

upon the purchasers of Medtronic's securities during the Class Period.


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187. Each of the Individual Defendants' primary liability, and controlling person

liability, arises from the following facts: (I) the Individual Defendants were high-level executives

and/or directors at the Company during the Class Period and members of the Company's

management team or had control thereof; (ii) each of these defendants, by virtue of their

responsibilities and activities as a senior officer and/or director of the Company, was privy to and

participated in the creation, development and reporting of the Company's internal budgets, plans,

projections and/or reports; (iii) each of these defendants enjoyed significant personal contact and

familiarity with the other defendants and was advised of, and had access to, other members of the

Company's management team, internal reports and other data and information about the Company's

finances, operations, and sales at all relevant times; and (iv) each of these defendants was aware of

the Company's dissemination of information to the investing public which they knew or recklessly

disregarded was materially false and misleading.

188. The defendants had actual knowledge of the misrepresentations and omissions

of material facts set forth herein, or acted with reckless disregard for the truth in that they failed to

ascertain and to disclose such facts, even though such facts were available to them. Such defendants'

material misrepresentations and/or omissions were done knowingly or recklessly and for the purpose

and effect of concealing Medtronic's financial well-being and prospects from the investing public

and supporting the artificially inflated price of its securities. As demonstrated by defendants'

overstatements and misstatements of the Company's financial well-being and prospects throughout

the Class Period, defendants, if they did not have actual knowledge of the misrepresentations and

omissions alleged, were reckless in failing to obtain such knowledge by deliberately refraining from

taking those steps necessary to discover whether those statements were false or misleading.


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189. As a result of the dissemination of the materially false and misleading

information and failure to disclose material facts, as set forth above, the market price of Medtronic's

securities was artificially inflated during the Class Period. In ignorance of the fact that market prices

of Medtronic's securities were artificially inflated, and relying directly or indirectly on the false and

misleading statements made by defendants, or upon the integrity of the market in which the

securities trades, and/or in the absence of material adverse information that was known to or

recklessly disregarded by defendants, but not disclosed in public statements by defendants during

the Class Period, plaintiffs and the other members of the Class acquired Medtronic's securities

during the Class Period at artificially high prices and were damaged thereby.

190. At the time of said misrepresentations and omissions, plaintiffs and other

members of the Class were ignorant of their falsity, and believed them to be true. Had plaintiffs and

the other members of the Class and the marketplace known the truth regarding the problems that

Medtronic was experiencing, which were not disclosed by defendants, Plaintiffs and other members

of the Class would not have purchased or otherwise acquired their Medtronic securities, or, if they

had acquired such securities during the Class Period, they would not have done so at the artificially

inflated prices which they paid.

191. By virtue of the foregoing, defendants have violated Section 10(b) of the

Exchange Act and Rule 10b-5 promulgated thereunder.

192. As a direct and proximate result of defendants' wrongful conduct, plaintiffs

and the other members of the Class suffered damages in connection with their respective purchases

and sales of the Company's securities during the Class Period.


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SECOND CLAIMViolation of Section 20(a) of The Exchange Act

Against the Individual Defendants

193. Plaintiffs repeat and reallege each and every allegation contained above as

if fully set forth herein.

194. The Individual Defendants acted as controlling persons of Medtronic within

the meaning of Section 20(a) of the Exchange Act as alleged herein. By virtue of their high-level

positions, and their ownership and contractual rights, participation in and/or awareness of the

Company's operations and/or intimate knowledge of the false financial statements filed by the

Company with the SEC and disseminated to the investing public, the Individual Defendants had the

power to influence and control and did influence and control, directly or indirectly, the

decision-making of the Company, including the content and dissemination of the various statements

which plaintiffs contend are false and misleading. The Individual Defendants were provided with

or had unlimited access to copies of the Company's reports, press releases, public filings and other

statements alleged by plaintiffs to be misleading prior to and/or shortly after these statements were

issued and had the ability to prevent the issuance of the statements or cause the statements to be

corrected.

195. In particular, each of these defendants had direct and supervisory involvement

in the day-to-day operations of the Company and, therefore, is presumed to have had the power to

control or influence the particular transactions giving rise to the securities violations as alleged

herein, and exercised the same.

196. As set forth above, Medtronic and the Individual Defendants each violated

Section 10(b) and Rule 10b-5 by their acts and omissions as alleged in this Complaint. By virtue of


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their positions as controlling persons, the Individual Defendants are liable pursuant to Section 20(a)

of the Exchange Act. As a direct and proximate result of defendants' wrongful conduct, plaintiffs

and other members of the Class suffered damages in connection with their purchases of the

Company's securities during the Class Period.

WHEREFORE, plaintiffs pray for relief and judgment, as follows:

(a) Determining that this action is a proper class action under Rule 23 of the Federal

Rules of Civil Procedure;

(b) Awarding compensatory damages in favor of plaintiffs and the other Class

members against all defendants, jointly and severally, for all damages sustained as a result of

defendants' wrongdoing, in an amount to be proven at trial, including interest thereon;

(c) Awarding plaintiffs and the Class their reasonable costs and expenses incurred

in this action, including counsel fees and expert fees; and

(d) Such other and further relief as the Court may deem just and proper.


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JURY TRIAL DEMANDED

Plaintiffs hereby demand a trial by jury.

Dated: April 18, 2008 ZELLE HOFMANN VOELBEL MASON & GETTE LLP

By: /s/ Jonathan F. Mack Jonathan F. Mack (Bar No. 265846)

Richard M. Hagstrom (Bar No. 39445) 500 Washington Avenue South Suite 4000 Minneapolis, MN 55415 Tel: (612) 339-2020 Fax: (612) 336-9100

Liaison Counsel for Plaintiff

KIRBY McINERNEY LLP

By: /s/ Ira M. Press Ira M. Press (admitted pro hac vice)Peter S. LindenMark A. Strauss

830 Third Avenue New York, NY 10022Tel: (212) 371 - 6600Fax: (212) 751 - 2540

Lead Counsel for Lead Plaintiff The Detroit General Retirement System

ALLEN BROTHERS, PLLCJames P. Allen, Sr.400 Monroe Street, Suite 220Detroit, MI 48226Tel: (313) 962-7777Fax: (313) 962-0581


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WOLF POPPER LLPRobert C. FinkelE. Elizabeth Ferguson, Esq.845 Third Avenue, 12th FloorNew York, NY, 10022Tel: (212) 759-4600Fax: (212) 486-2093

Additional Plaintiff’s Counsel


Case 0:07-cv-04564-RHK-AJB Document 46-2 Filed 04/18/2008 Page 1 of 1

1 consolidated class action complaint for violations of the federal securities laws 04/18/2008

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