2 consolidated amended complaint for violation of federal securities laws 04/17/2006
TRANSCRIPT
UNITED STATES DISTRICT COURT DISTRICT OF MASSACHUSETTS
IN RE BOSTON SCIENTIFIC CORPORATION SECURITIES LITIGATION
Master File No. No. 0:05-cv-11934 (JLT)
Federal Securities Class Action Complaint Jury Trial Demanded
CONSOLIDATED AMENDED COMPLAINT
i
TABLE OF CONTENTS NATURE OF THE ACTION ............................................................................................................................1 JURISDICTION AND VENUE ........................................................................................................................6 THE PARTIES AND OTHER PLAYERS ........................................................................................................6
PUBLIC EMPLOYEES’ RETIREMENT SYSTEM OF MISSISSIPPI ..........................................................................6 BOSTON SCIENTIFIC .......................................................................................................................................8 DEFENDANT NICHOLAS .................................................................................................................................9 DEFENDANT TOBIN ......................................................................................................................................10 DEFENDANT BEST........................................................................................................................................12 DEFENDANT LAVIOLETTE ...........................................................................................................................14 DEFENDANT COLEN .....................................................................................................................................15 DEFENDANT MORECI ...................................................................................................................................16 DEFENDANT SANDMAN................................................................................................................................17 DEFENDANT TAYLOR...................................................................................................................................18 DEFENDANT MACLEAN ...............................................................................................................................20 OTHER OFFICERS .........................................................................................................................................21
BOSTON SCIENTIFIC – THE COMPANY: ITS TROUBLED HISTORY AND ITS TROUBLED PRODUCTS..............................................................................................................23 DEFENDANTS’ MATERIAL MISSTATEMENTS.......................................................................................38
I. THE DEFENDANTS’ CONCEALMENT OF THE MEDINOL FIASCO.................................................................38 A. Device Problems: “Taking a Gamble.”.......................................................................................39 B. The Contentious Medinol Litigation. ............................................................................................41 C. Misleading Investors About the Medinol Litigation......................................................................42 D. The Truth of the Company’s Exposure to Medinol Slowly Emerges.............................................46
II. MISREPRESENTATIONS AND CONCEALMENT OF THE DEPARTMENT OF JUSTICE INVESTIGATION. ...........47
III. THE DEFENDANTS’ COVER-UP OF THE PROBLEMS WITH TAXUS.........................................................53
A. Pumping Up the Market for TAXUS. ............................................................................................53 B. Undisclosed Manufacturing Changes, Undisclosed Complaints, and Insider Sales. ...................57 C. The Recall of TAXUS. ...................................................................................................................60
IV. THE DEFENDANTS’ SILENCE ON THE FDA WARNING LETTERS. ...........................................................63
A. Defendants’ History of “Disclosures” Regarding FDA Regulatory Activities. ............................63 B. Concealing FDA Warning Letter #1.............................................................................................66 C. Concealing FDA Warning Letter #2.............................................................................................70 D. Concealing FDA Warning Letter # 3. ...........................................................................................72 E. The Truth Slowly Emerges. ...........................................................................................................74
SCIENTER ALLEGATIONS: THE COMPENSATION STRUCTURE, STOCK REPURCHASE PROGRAM, AND INSIDER SALES ....................................................................80 NO SAFE HARBOR .......................................................................................................................................88 FRAUD ON THE MARKET DOCTRINE......................................................................................................89 CLASS ALLEGATIONS ................................................................................................................................89 CLAIMS FOR RELIEF ...................................................................................................................................91 COUNT I .........................................................................................................................................................91 COUNT II ........................................................................................................................................................95
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PRAYER FOR RELIEF ..................................................................................................................................97 DEMAND FOR TRIAL BY JURY .................................................................................................................97
1
NATURE OF THE ACTION
1. Defendants Peter M. Nicholas, James R. Tobin, Lawrence C. Best, Paul A.
LaViolette, Fredericus A. Colen, Stephen D. Moreci, Paul W. Sandman, James H. Taylor,
Jr., and Robert G. MacLean (“Individual Defendants”) enriched themselves in excess of
$332 million by concealing material information about Boston Scientific Corporation
(“Boston Scientific” or the “Company”) from the investment community. The material
information Individual Defendants withheld from the marketplace caused the market price
of the Company’s securities to be artificially inflated during the Class Period (March 31,
2003 – August 23, 2005). The misrepresentations and omissions of material fact include:
• The Medinol Litigation: In litigation brought by the Company’s stent supplier (Medinol), the Defendants repeatedly told investors during the Class Period that the lawsuit had “no merit,” despite the fact that Defendant Tobin admitted in a private meeting with Medinol that the officers of Boston Scientific had engaged in inappropriate conduct and were “crooks.” Ultimately, the Company paid $750 million to settle those “meritless” claims in 2005.
• The Department of Justice Investigation: While overwhelming evidence of
the Company’s misconduct was being presented by witness after witness to a grand jury empanelled by the Department of Justice, the Defendants repeatedly lied to the investing public during the Class Period by insisting that they had acted “responsibly” and “appropriately” in connection with a product recall which occurred in 1998. The conduct was hardly “responsible” as it ultimately cost the Company $74 million to settle the charges in 2005.
• The TAXUS Problems. When the Company was about to introduce a new
product, TAXUS Express Paclitaxel-Eluting Monorail® Coronary Stent System (“TAXUS”), the Defendants repeatedly pumped it to investors as a wonder medical device while knowing that the product was fraught with problems and was being released prematurely. Ultimately, TAXUS was recalled, leading to a plummeting of the market price of the Company’s stock in 2004.
• The FDA Investigations and Warnings. When the Food and Drug
Administration (“FDA”) sent the Defendants three separate warning letters (“Warning Letters”) in 2005 advising them that the Company’s plants failed to meet FDA quality standards, the letters were never provided to the investing
2
public by the Defendants. Ultimately, the Company would be subject to a corporate-wide warning letter from the FDA. As the news of the FDA regulatory action slowly leaked out, the market price of the Company’s stock dropped.
2. The Defendants’ misrepresentations and concealment of material facts during
the Class Period allowed the stock price of Boston Scientific to be artificially inflated.
During the Class Period, the price rose from $20.38 to $45.81. Ultimately, however, as the
truth slowly emerged, the price dropped from a high of $45.81 to $25.92, a drop of more
than 43%.
3. The wrongful conduct complained of arises from decisions by the Individual
Defendants to improperly place the Company on a shortcut to success, for their own
personal benefit to the detriment of shareholders. The Individual Defendants implemented
a plan to achieve an accelerated short term rise in the Company’s stock price. The plan
included imprudently accelerating the introduction of products to the market, knowingly
distributing adulterated products, recklessly engaging in staffing cuts, self-servingly
implementing an aggressive stock repurchase program, and improperly disseminating
misinformation to regulators, as well as the investing public. The plan, while permitting
the Individual Defendants to enrich themselves by $332 million, had repercussions,
including a protracted criminal investigation by the Department of Justice, extensive
litigation from business partners, and repeated product recalls. As set forth below, the
plan’s purpose was to artificially inflate the market price of the Company’s equity
securities by touting products like TAXUS, spinning analysts who were monitoring the
Company while simultaneously hiding serious deficiencies in the Company’s
manufacturing facilities and quality control.
3
4. When the stock price was peaking, the Individual Defendants unloaded their
equity interest in the Company. Soon after the selling frenzy, the truth began to slowly
leak out. TAXUS was not quite as successful as represented by the Individual Defendants,
the litigation was a lot more serious than the Individual Defendants let on, and the quality
problems within their manufacturing facilities were not isolated, as suggested by the
Individual Defendants, but were widespread and systemic. These disclosures led to a
precipitous fall of the stock price. While unwary investors took a beating, the Individual
Defendants were unscathed by the decline in the stock price. The Individual Defendants
had already cashed out for $332 million, securing their own retirement on the backs of
thousands of investors who collectively lost hundreds of millions of dollars.
5. The sale of stock by the Individual Defendants during the 29-month Class
Period was hardly typical. During the 29-month period preceding the beginning of the
Class Period, the Individual Defendants’ sales of stock were relatively nominal as reflected
below:
4
Pre-Class Period Sales (Blue) & Class Period Sales (Red)
0 1.02% 1.45%
20.21%
37.05%
21.82%
43.84%
21.73%24.52%
66.23%
83.80%
28.88%
97.40%
51.57%
78.34%
45.88%
0%
20%
40%
60%
80%
100%
1 2 3 4 5 6 7 8
Individual Denfendants
Per
cent
of S
hare
s S
old
Tobin Best Colen LaViolette Moreci Sandman Taylor MacLean
6. In April 2005, when the market price of Boston Scientific was sinking, in an
earnings conference call with analysts, Defendant Tobin reflected management’s self-
serving orientation:
Q. (By Glenn Novarro, Bank of America Securities): And then, maybe if anyone wants to comment about the desire, has there been any discussion among senior managers about personally buying back shares given that you know the stock is currently sitting at a 52 week low?
A. (By James Tobin): This is Jim Tobin, let me chime in on this one.
You know, I’ve bought shares twice now, it didn’t do any good. And, hell, my appetite for buying more, I don’t care how cheap it is. I have got $6 options; so buying at $30 is a bunch of bullshit. So I won’t be doing that and I truly believe that since we as a management team are largely paid in options that the decision of when to avail yourself of the profits on those options is a personal decision. And so I have for years now avoided trying to dictate to the management team what they should do in their personal finance area, and I intend to stick with that.
5
Boston Scientific Quarter 1, 2005, Earnings Call, corrected transcript at p. 19 (April 19, 2005), available at http://www.callstreet.com.
7. Lead Plaintiff, the Public Employees’ Retirement System of Mississippi, brings
this action to recover losses on behalf of itself and others similarly situated. The losses
incurred were the direct result of wrongful conduct, misleading statements, omissions of
material fact, and consciously articulated half-truths by the Defendants as set forth below.
Defendants’ wrongful conduct is the direct and proximate cause of Boston Scientific
securities trading at artificially inflated prices on the open market. This action is brought
on behalf of entities and individuals who purchased equity securities in Boston Scientific
between March 31, 2003, and August 23, 2005, inclusive (the “Class Period”). This action
seeks relief under the Securities Exchange Act of 1934 through recovery of the losses
experienced by unsuspecting investors who were unaware that the Individual Defendants
had put their personal financial interests ahead of those they had a duty to protect.
8. The allegations set forth below are based upon a review and analysis of public
filings, including filings by Boston Scientific with the Food and Drug Administration
(“FDA”), the Securities and Exchange Commission (“SEC”), and state regulatory bodies.
The allegations are also made after reviewing and analyzing newspaper articles, press
releases, court filings, and conducting interviews with former Boston Scientific
Corporation employees. Based on the evidence adduced thus far, the Public Employees’
Retirement System of Mississippi firmly believes that evidentiary support exists for each
of the allegations set forth below.
6
JURISDICTION AND VENUE
9. This action arises under Section 10(b) and 20(a) of the Exchange Act of 1934,
15 U.S.C. §§ 78j(b) and 78t(a), and the rules and regulations promulgated thereunder,
including SEC Rule 10b-5, 17 C.F.R. § 240.10b-5.
10. This Court has jurisdiction over this action pursuant to Section 27(a) of the
Securities Exchange Act, 15 U.S.C. § 78aa and 28 U.S.C. § 1331.
11. Venue is proper in the District of Massachusetts because Defendant Boston
Scientific is headquartered in Natick, Massachusetts, and the wrongful conduct which
occurred, involving concealment of information and the dissemination of false and
misleading information, took place in substantial part within the District of Massachusetts.
12. In connection with the actions alleged in this complaint, Defendants, directly
and indirectly, used means and instrumentalities of interstate commerce, including, but not
limited to, the United States mails, telephonic communications, and the national securities
markets.
THE PARTIES AND OTHER PLAYERS
Public Employees’ Retirement System of Mississippi
13. The Public Employees’ Retirement System of Mississippi (“PERS”) was
appointed Lead Plaintiff by order of the Court dated February 15, 2006. The PERS 10-
person Board currently oversees approximately $18 billion of investments (the “Fund”) on
behalf of approximately 300,000 former and current employees of the State of Mississippi.
PERS is the retirement system for nearly all non-federal public employees in the state.
PERS serves employees throughout the state, including those who work for public school
7
districts, municipalities, counties, community colleges, state universities, and such other
public entities as libraries and water districts.
With respect to its equity investments in Boston Scientific, PERS utilizes several
prominent investment advisors. PERS’ investment advisors are aware of the Mississippi
statutes restricting their market purchases. Those statutes are cautionary in nature, limiting
the exposure of the Fund to unstable investments and conforming any purchases to the
regulations under Mississippi Code §25-11-121. All investment advisors must utilize
prudent policies and procedures in pursuing the program’s objectives. The investment
advisors retained by PERS relied on the integrity and efficiency of the market when they
made their purchases of Boston Scientific stock and assumed the statements made by the
Individual Defendants in press releases, analyst reports, earnings conference calls, and
filings with regulatory bodies were truthful in determining whether to purchase Boston
Scientific stock for PERS.
During the Class Period, PERS purchased approximately $30 million of equity
securities in Boston Scientific on the open market through the New York Stock Exchange.
From this investment, PERS experienced over $5 million in losses during the Class Period.
In making its investments, PERS, as well as all those similarly situated, relied upon the
price of Boston Scientific stock as being reflective of an efficient market which had
digested all material information regarding Boston Scientific. Neither PERS nor its
investment advisors were aware that the historic, current, and future prospects of Boston
Scientific had been skewed by the Individual Defendants through their intentional decision
to conceal material facts about the Company. PERS’ investments were made without
knowledge or understanding of the wrongful conduct set forth below and, on information
8
and belief, PERS’ decision to purchase Boston Scientific stock is reflective of the
decisions made by tens of thousands of other investors who also mistakenly relied upon the
market price of Boston Scientific securities as an accurate reflection of the true value of
Boston Scientific.
Boston Scientific
14. Defendant Boston Scientific is a Delaware corporation headquartered at One
Boston Scientific Place, Natick, Massachusetts 01760. Boston Scientific is a publicly
traded company, trading on the New York Stock Exchange under the symbol “BSX.” In
its latest publicly filed reports, the Company reports having over 820 million shares of
common stock outstanding and, on information and belief, approximately 5.5 million
shares of the Company’s stock trade on an average day.
Boston Scientific is governed by a Board of Directors (“Board”) which meets
approximately six times a year. The Board is comprised of various committees, including
an Audit Committee, Nominating and Governance Committee, and Executive
Compensation and Human Resources Committee, which are intended to oversee certain
aspects of the Company. However, the Company’s day to day operations are managed,
directed, and controlled by a number of officers who make up an Executive Committee, a
number of who are named as Individual Defendants in this action. The Board relies
heavily on the information provided to it by the Company’s officers, including the
Individual Defendants identified below.
9
Defendant Nicholas
15. Defendant Peter M. Nicholas (“Nicholas”) is considered one of the founders of
Boston Scientific. During much of the 1990’s, Nicholas served as Director, Chief
Executive Officer and Chairman of the Board. Shortly after the announcement of a
criminal investigation by the Department of Justice in late 1998, Nicholas, who was
implicated in the investigation, left his position as Chief Executive Officer, but remained
Chairman of the Board during all those time periods relevant to the Complaint. Despite
being replaced by James R. Tobin as CEO, Nicholas confirmed his intention to remain
intimately involved with the Company’s operations when he told the BOSTON GLOBE in
March 1999, “this change should not be viewed as Pete Nicholas’s swan song. I will be
involved in many different ways. I will continue to focus on long-term issues and
strategies and be a partner with Jim.” As Chairman of the Board, Nicholas remained at all
times a controlling person of Boston Scientific, with the ability to alter, modify, approve,
disapprove, stop, or encourage the wrongful conduct set forth herein.
Nicholas was also a co-author or signatory on many of the public documents given
to the investment community and to regulators, including Reports on Form 10-K filed with
the SEC and Annual Reports provided to the Company’s shareholders. Throughout the
Class Period, Nicholas remained the largest holder of the Company’s stock, owning
approximately 13% of the outstanding shares. During the Class Period, Nicholas gifted
nearly $9.0 million of Boston Scientific securities when the market price was at artificially
inflated prices.
10
Value and Timing of Insider TradingDefendant Peter M. Nicholas: $9.0 million
$18
$24
$30
$36
$42
$48
3/31/0
3
4/29/0
3
5/28/0
3
6/25/0
3
7/24/0
3
8/21/0
3
9/19/0
3
10/17
/03
11/14
/03
12/15
/03
1/14/0
4
2/12/0
4
3/12/0
4
4/12/0
4
5/10/0
4
6/8/04
7/8/04
8/5/04
9/2/04
10/1/
04
10/29
/04
11/29
/04
12/28
/04
1/26/0
5
2/24/0
5
3/24/0
5
4/22/0
5
5/20/0
5
6/20/0
5
7/19/0
5
8/16/0
5
Class Period
Clo
se P
rice
per
Sha
re
$0
$2
$4
$6
$8
Sal
es (M
illio
ns)
Insider Sales
Boston Scientific Close Price
Defendant Tobin
16. Defendant James R. Tobin (“Tobin”) served as Boston Scientific’s President
and as a Director throughout the Class Period. Tobin began his career at Boston Scientific
in 1999 when he entered into an employment contract which provided him a lucrative
compensation package, including one million stock options. During the Class Period,
Tobin exercised these options at or about the time the price of the Company’s stock was
highly inflated. Boston Scientific stock were artificially inflated at the time of Tobin’s
sales, based in large part on Tobin’s failure to disclose material information about one of
the Company’s products (TAXUS) and distribution of other misleading information about
the Company’s health. Tobin received over $40 million dollars from his improper actions
and sale of Boston Scientific stock at artificially inflated market prices. The sales took
place as set forth below:
11
Value and Timing of Insider TradingDefendant James R. Tobin: $40.8 million
$18
$24
$30
$36
$42
$48
3/31/0
3
4/29/0
3
5/28/0
3
6/25/0
3
7/24/0
3
8/21/0
3
9/19/0
3
10/17
/03
11/14
/03
12/15
/03
1/14/0
4
2/12/0
4
3/12/0
4
4/12/0
4
5/10/0
4
6/8/04
7/8/04
8/5/04
9/2/04
10/1/
04
10/29
/04
11/29
/04
12/28
/04
1/26/0
5
2/24/0
5
3/24/0
5
4/22/0
5
5/20/0
5
6/20/0
5
7/19/0
5
8/16/0
5
Class Period
Clo
se P
rice
per
Sha
re
$0
$5
$10
$15
$20
Sal
es (M
illio
ns)
Insider Sales
Boston Scientific Close Price
During the 29 months constituting the Class Period, Tobin disposed of nearly 25%
of the common stock and options that he held at the beginning of the Class Period and
which were vested by the end of the Class Period. Conversely, during the 29 months
preceding the Class Period, he disposed of none of his shares and vested options.
Before coming to Boston Scientific, Tobin’s background included service at Baxter
International, formerly known as Baxter Healthcare. Tobin’s hiring by Boston Scientific
in 1999 was initially hailed by the investment community. At the time of Tobin’s arrival,
the Company had just completed a massive recall of one of its stent products and was the
subject of a criminal investigation which was targeting Defendant Nicholas and others. In
2001, with respect to the criminal investigation, Tobin stated he was “ashamed” about the
conduct of his fellow officers and advised representatives of the Company’s main stent
12
supplier, Medinol, that Boston Scientific had been run by “crooks.” Tobin’s comments
appeared to be directed at Defendants Nicholas and Best.
Investors mistakenly concluded that Tobin would bring knowledge and integrity to
the Company. Ultimately, it became clear that Tobin brought a commitment to his own
self-interest. Tobin’s wrongful conduct is reflected in numerous false and misleading
public statements he made to the investment community through press releases, newspaper
articles, letters to shareholders, presentations to analysts, and numerous public filings.
Tobin ran the Executive Committee, knew about the facts set forth herein, and yet
deliberately had the Company file false and misleading statements with the SEC and
repeatedly omitted material statements of fact in his communications with shareholders.
Defendant Best
17. Defendant Lawrence C. Best (“Best”) joined Boston Scientific in 1992 as the
Company’s Senior Vice President and Chief Financial Officer, a position he retained
through all periods relevant to the Complaint. Like his cohort Tobin, Best enjoyed a very
lucrative compensation package which awarded him with stock and stock options worth
millions of dollars. During the Class Period, Best exercised options and sold Boston
Scientific securities worth over $150 million dollars at artificially inflated prices as set
forth below:
13
Value and Timing of Insider TradingDefendant Lawrence C. Best: $156.5 million
$18
$24
$30
$36
$42
$48
3/31/0
3
4/29/0
3
5/28/0
3
6/25/0
3
7/24/0
3
8/21/0
3
9/19/0
3
10/17
/03
11/14
/03
12/15
/03
1/14/0
4
2/12/0
4
3/12/0
4
4/12/0
4
5/10/0
4
6/8/04
7/8/04
8/5/04
9/2/04
10/1/
04
10/29
/04
11/29
/04
12/28
/04
1/26/0
5
2/24/0
5
3/24/0
5
4/22/0
5
5/20/0
5
6/20/0
5
7/19/0
5
8/16/0
5
Class Period
Clo
se P
rice
per
Sha
re
$0
$5
$10
$15
$20
$25
Sal
es (M
illio
ns)
Insider Sales
Boston Scientific Close Price
During the 29-month Class Period, Best disposed of more than 66% of the common
stock and options which he held at the beginning of the Class Period and which were
vested at the end of the Class Period. Conversely, during the 29 months preceding the
Class Period, Best disposed of approximately 1% of his stock and vested options.
Best helped draft, approved, and certified many of the Company’s reports filed
with the SEC, had direct involvement over the section in those filings entitled
“Management Discussion and Analysis,” made frequent presentations to analysts, and was,
for purposes of federal securities laws, a controlling person of Boston Scientific. Best was
a member of the Executive Committee and knew the facts set forth herein. Despite his
knowledge of the adverse material information set forth below, Best repeatedly certified
the Company’s reports filed with the SEC as being truthful.
14
Defendant LaViolette
18. Defendant Paul A. LaViolette (“LaViolette”) joined Boston Scientific in
January 1994 as President of Boston Scientific International. Through his tenure,
LaViolette assumed greater responsibilities and was named Chief Operating Officer of
Boston Scientific in 2004. At times relevant to the Complaint, LaViolette served on the
Company’s Executive Committee and ultimately had direct responsibility for overseeing
“worldwide commercial activities, global quality, and manufacturing activities.”
During the 29-month Class Period, LaViolette sold over $14 million of Boston
Scientific securities at artificially inflated prices, constituting nearly 29% of the shares and
options which he held at the beginning of the Class Period and which were vested at the
end of the Class Period. The timing of LaViolette’s sales during the Class Period is set
forth below:
Value and Timing of Insider TradingDefendant Paul A. LaViolette: $14.8 million
$18
$24
$30
$36
$42
$48
3/31/0
3
4/29/0
3
5/28/0
3
6/25/0
3
7/24/0
3
8/21/0
3
9/19/0
3
10/17
/03
11/14
/03
12/15
/03
1/14/0
4
2/12/0
4
3/12/0
4
4/12/0
4
5/10/0
4
6/8/04
7/8/04
8/5/04
9/2/04
10/1/
04
10/29
/04
11/29
/04
12/28
/04
1/26/0
5
2/24/0
5
3/24/0
5
4/22/0
5
5/20/0
5
6/20/0
5
7/19/0
5
8/16/0
5
Class Period
Clo
se P
rice
per
Sha
re
$0
$2
$4
$6
$8
Sal
es (M
illio
ns)
Insider Sales
Boston Scientific Close Price
15
LaViolette was a frequent participant in conference calls with analysts along with
Defendants Best and Tobin. As set forth below, based upon the repeated Warning Letters
received from the FDA, the numerous complaints received by the Company, and its
frequent product recalls, LaViolette failed in his responsibilities and participated in hiding
his own failures from the investment community.
Much of the stock which LaViolette sold was following an FDA audit and within
one week of Boston Scientific receiving a Warning Letter from the FDA, which outlined
serious problems with one of Boston Scientific’s manufacturing facilities, a Warning
Letter which the Company failed to disclose to the investment community. During all
times relevant to the Complaint, LaViolette was a member of the Executive Committee
and a controlling person of the Company.
Defendant Colen
19. Defendant Fredericus A. Colen (“Colen”) became Senior Vice President and
Chief Technology Officer in July 2001, at which time he became a member of the
Executive Committee. During the Class Period, while the price was artificially inflated,
Colen sold more than $24 million of Boston Scientific stock while simultaneously acting in
concert with the other Defendants to sustain an artificial market price of the stock.
Specifically, during the 29-month Class Period, Colen disposed of nearly 84% of the
common stock and options he held at the beginning of the Class Period and which were
vested by the end of the Class Period. Conversely, during the 29-month period preceding
the Class Period, Colen disposed of only 1% of his stock and vested options as set forth
below:
16
Value and Timing of Insider TradingDefendant Fred A. Colen: $24.0 million
$18
$24
$30
$36
$42
$48
3/31/0
3
4/29/0
3
5/28/0
3
6/25/0
3
7/24/0
3
8/21/0
3
9/19/0
3
10/17
/03
11/14
/03
12/15
/03
1/14/0
4
2/12/0
4
3/12/0
4
4/12/0
4
5/10/0
4
6/8/04
7/8/04
8/5/04
9/2/04
10/1/
04
10/29
/04
11/29
/04
12/28
/04
1/26/0
5
2/24/0
5
3/24/0
5
4/22/0
5
5/20/0
5
6/20/0
5
7/19/0
5
8/16/0
5
Class Period
Clo
se P
rice
per
Sha
re
$0
$1
$2
$3
Sal
es (M
illio
ns)
Insider Sales
Boston Scientific Close Price
Defendant Moreci
20. Defendant Stephen F. Moreci (“Moreci”) served as Senior Vice President and
Group President of Endosurgery. Moreci originally joined the Company in 1989 and
became a member of the Executive Committee in December 2000. In his position, Moreci
oversaw and was responsible for the products involving Urology/Gynecology, Oncology,
and Endoscopy, and was privy to much of the adverse information discussed below.
During the Class Period, Moreci held options to purchase 576,374 shares of Boston
Scientific. During the Class Period, Moreci sold 561,370 shares after exercising options
and sold over $20 million at artificially inflated prices as set forth below:
17
Value and Timing of Insider TradingDefendant Stephen F. Moreci: $20.7 million
$18
$24
$30
$36
$42
$48
3/31/0
3
4/29/0
3
5/28/0
3
6/25/0
3
7/24/0
3
8/21/0
3
9/19/0
3
10/17
/03
11/14
/03
12/15
/03
1/14/0
4
2/12/0
4
3/12/0
4
4/12/0
4
5/10/0
4
6/8/04
7/8/04
8/5/04
9/2/04
10/1/
04
10/29
/04
11/29
/04
12/28
/04
1/26/0
5
2/24/0
5
3/24/0
5
4/22/0
5
5/20/0
5
6/20/0
5
7/19/0
5
8/16/0
5
Class Period
Clo
se P
rice
per
Sha
re
$0
$2
$4
$6
$8
$10
Sal
es (M
illio
ns)
Insider Sales
Boston Scientific Close Price
During the 29-month Class Period, Moreci disposed of approximately 97% of the
common stock and options which he held at the beginning of the Class Period and which
were vested by the end of the Class Period. Conversely, during the 29 months prior to the
Class Period, Moreci disposed of approximately 37% of the common stock and vested
options he held during that time period.
Defendant Sandman
21. Defendant Paul W. Sandman (“Sandman”) served as Senior Vice President,
Secretary and General Counsel of Boston Scientific at all times relevant to the Complaint.
Sandman served on the Executive Committee and his duties and responsibilities included
ensuring that the Company remained in compliance with regulations, monitoring and
reporting on litigation affecting the Company, and assisting with filings with regulatory
entities. During the Class Period, Sandman failed to meet these responsibilities.
18
In his capacity, Sandman knew about the status of grand jury proceedings taking
place during the Class Period, the Medinol litigation, the FDA audits, and the FDA
Warning Letters, all of which are discussed below. Rather than assist the Company in
complying with regulations, Sandman failed to address the wrongdoing and elected to
participate in the effort to conceal material facts from the investing public which helped
maintain the market price of the stock at artificially high levels. During the Class Period,
Sandman exercised options and sold over 50% of the equity he held in Boston Scientific
securities at artificially inflated prices, generating more than $24 million from these
transactions as set forth below:
Value and Timing of Insider TradingDefendant Paul W. Sandman: $24.3 million
$18
$24
$30
$36
$42
$48
3/31/0
3
4/29/0
3
5/28/0
3
6/25/0
3
7/24/0
3
8/21/0
3
9/19/0
3
10/17
/03
11/14
/03
12/15
/03
1/14/0
4
2/12/0
4
3/12/0
4
4/12/0
4
5/10/0
4
6/8/04
7/8/04
8/5/04
9/2/04
10/1/
04
10/29
/04
11/29
/04
12/28
/04
1/26/0
5
2/24/0
5
3/24/0
5
4/22/0
5
5/20/0
5
6/20/0
5
7/19/0
5
8/16/0
5
Class Period
Clo
se P
rice
per
Sha
re
$0
$2
$4
$6
$8
$10
Sal
es (M
illio
ns)
Insider Sales
Boston Scientific Close Price
Defendant Taylor
22. Defendant James H. Taylor, Jr. (“Taylor”) joined the Company as Senior Vice
President of Corporate Operations in August 1999. Taylor’s employment history prior to
19
joining Boston Scientific included spending 31 years at Baxter International where he
worked with Defendant Tobin. Taylor became a member of the Executive Committee
when he joined Boston Scientific.
In his position as Executive Vice President of Corporate Operations and as a
member of the Executive Committee, Taylor was aware of the material facts set forth
herein which were concealed from the investing public. During the Class Period, Taylor
exercised options and sold stock worth in excess of $15 million.
Value and Timing of Insider TradingDefendant James H. Taylor: $15.6 million
$18
$24
$30
$36
$42
$48
3/31/0
3
4/29/0
3
5/28/0
3
6/25/0
3
7/24/0
3
8/21/0
3
9/19/0
3
10/17
/03
11/14
/03
12/15
/03
1/14/0
4
2/12/0
4
3/12/0
4
4/12/0
4
5/10/0
4
6/8/04
7/8/04
8/5/04
9/2/04
10/1/
04
10/29
/04
11/29
/04
12/28
/04
1/26/0
5
2/24/0
5
3/24/0
5
4/22/0
5
5/20/0
5
6/20/0
5
7/19/0
5
8/16/0
5
Class Period
Clo
se P
rice
per
Sha
re
$0
$2
$4
$6
Sal
es (M
illio
ns)
Insider Sales
Boston Scientific Close Price
In January 2006, Taylor entered into a severance agreement with the Company.
The agreement was entered into shortly after the Company received the numerous Warning
Letters from the FDA which evidenced the Company’s failure to maintain quality
manufacturing operations. When he departed from Boston Scientific, Taylor was given
over $1.2 million, including a lump sum payment of $550,000, an additional $136,000 in
20
relocation expenses, a seven year annual payment of $72,000 and $22,500 for the first two
years after he retired. Further, Taylor received a special bonus of $550,000 and an
additional $100,000 for up to 50 days of “consulting services.” In order to receive these
benefits, Taylor merely had to sign a separation agreement containing a provision whereby
he agreed to maintain all of the information he knew about the Company as “confidential.”
On information and belief, the severance agreement with Taylor was negotiated and/or
approved by Defendants Tobin, Best, and Nicholas.
Defendant MacLean
23. Defendant Robert G. MacLean (“MacLean”) was the Vice President of Human
Resources for the Company until March 2005. MacLean was also a member of the
Executive Committee. In the period just preceding the Class Period, MacLean oversaw the
termination of hundreds of Boston Scientific employees, terminations directed, authorized,
and approved by Defendants Tobin and Nicholas. MacLean knew these terminations had
the effect of placing the Company in a circumstance where compliance with regulations
became virtually impossible. As part of the Executive Committee, MacLean was privy to
the adverse information described below, information not shared with the investment
community in a timely fashion. MacLean left the Company in March 2005 at which time
he received over $800,000 in benefits. To assure these benefits, MacLean also was
required to enter into a confidentiality agreement. MacLean exercised options and sold
Boston Scientific securities at artificially inflated prices, valued at nearly $26 million
during the Class Period as set forth below:
21
Value and Timing of Insider TradingDefendant Robert G. MacLean: $25.9 million
$18
$24
$30
$36
$42
$48
3/31/0
3
4/29/0
3
5/28/0
3
6/25/0
3
7/24/0
3
8/21/0
3
9/19/0
3
10/17
/03
11/14
/03
12/15
/03
1/14/0
4
2/12/0
4
3/12/0
4
4/12/0
4
5/10/0
4
6/8/04
7/8/04
8/5/04
9/2/04
10/1/
04
10/29
/04
11/29
/04
12/28
/04
1/26/0
5
2/24/0
5
3/24/0
5
4/22/0
5
5/20/0
5
6/20/0
5
7/19/0
5
8/16/0
5
Class Period
Clo
se P
rice
per
Sha
re
$0
$1
$2
$3
$4
Sal
es (M
illio
ns)
Insider Sales
Boston Scientific Close Price
Other Officers
24. Other officers of the Company not named as Defendants at this time but
discussed herein include:
a. Dennis Ocwieja (“Ocwieja”) was Senior Vice President, Regulatory Affairs
and Quality. Ocwieja joined Boston Scientific in February 2000 as Vice
President of Corporate Quality. In 2002 he became Vice President, Corporate
Quality and Regulatory Affairs and joined the Executive Committee in 2003,
just prior to the beginning of the Class Period.
Ocwieja’s employment history included working at Baxter International
with Tobin and Taylor. As the Company’s regulatory problems mounted,
Ocwieja entered into a separation agreement with the Company in January
2005. Like Defendant Taylor, the agreement included hundreds of thousands of
22
dollars of payments and benefits in return for which Ocwieja agreed to maintain
confidentially all information he possessed regarding the Company.
b. Paul Donovan (“Donovan”) was hired in March 2000 as Vice President of
Corporate Communications for the Company. Donovan’s background prior to
joining the Company was primarily in government service. Donovan did not
have any reported experience working with the SEC, the FDA or medical
device companies generally. Donovan served as a member of the Executive
Committee. Working with the Individual Defendants, Donovan oversaw public
statements made by the Company and helped draft many of the false and
misleading press releases, presentations, letters and reports discussed herein.
Donovan’s approach to disclosure was hardly forthcoming. For example, in
the spring of 2004, when the Company had received numerous complaints
about its drug eluting stent product called TAXUS, Donovan originally tried to
distract attention from the Company’s poor manufacturing practices by blaming
the physicians who were attempting to implant the defective product and then,
subsequently, by calling the problems “minor.” Ultimately, the Company was
forced to recall the TAXUS product after the “minor” problems resulted in
numerous injuries and several deaths.
Similarly, as reported in the BOSTON GLOBE, when the FDA was
scrutinizing Boston Scientific’s acid-reflux kit in 2004, the investment
community was outraged by the Company’s failure to report the FDA’s
investigation in a timely manner, but Donovan commented that the Company
did not have to tell investors because it was “not remotely material.”
23
As set forth below, Donovan, working with the Individual Defendants,
continued his practice of determining that FDA investigations and FDA
Warning Letters were not “material” when, during 2005, the Company received
three letters from the FDA concerning deficiencies in its manufacturing
operations which were not disclosed to the investing public.
BOSTON SCIENTIFIC – THE COMPANY: ITS TROUBLED HISTORY AND ITS TROUBLED PRODUCTS
25. Boston Scientific was founded in 1979. Over the years, the Company
proceeded to grow, largely through acquisitions. Currently, it operates manufacturing
plants in various locations throughout the world, which make a variety of medical devices
primarily used in interventional medical specialties. In the time period immediately
preceding and during the Class Period, the Company reported revenues as follows:
1998 $2.2 Billion
1999 $2.8 Billion
2000 $2.7 Billion Pre-Class Period
2001 $2.7 Billion
2002 $2.9 Billion
2003 $3.5 Billion
2004 $5.6 Billion Class Period
2005 $6.3 Billion
As the numbers show, Company revenues prior to the Class Period – while substantial –
were relatively flat. Between 1998 and 2002, the Company’s reported revenues grew by a
compound rate of approximately 7.2%. In contrast, during the Class Period, Company
24
revenues took a striking spike. Between 2002 and 2005, the Company’s reported revenues
grew by a compound rate of 29.5%, four times the earlier growth rate.
26. Although Boston Scientific revenues grew, its reported net income often failed
to reflect the same growth. As with Company revenues, Company net income remained
flat in the period preceding the beginning of the Class Period:
1998 $ (264) Million
1999 $ 371 Million
2000 $ 373 Million Pre-Class Period
2001 $ ( 54) Million
2002 $ 373 Million
2003 $ 472 Million
2004 $ $1.062 Billion Class Period
2005 $ 628 Million
27. Throughout the late 1990’s and early 2000’s, the stock price of Boston
Scientific failed to keep up with its competitors, making the Company’s investors less than
satisfied. From 1996 to 2002 Boston Scientific’s competitors enjoyed the following
increases in their stock prices:
Guidant 250.7%
Johnson & Johnson 153. 8%
Medtronic 212. 8%
During that same time period, Boston Scientific’s stock price declined 19.6%.
28. In 1998, the Company reported a significant loss. That same year, the
Department of Justice began an investigation which implicated the Chairman of the Board
25
and President, Defendant Nicholas, and others. That investigation originally revolved
around a recall of one of the Company’s stent products and focused on whether the
Company had knowingly put the public at risk by distributing that product in an
adulterated state. The investigation would continue through the Class Period, with its
scope and seriousness never fully disclosed to the investment community until June 24,
2005.
29. In response to the Department of Justice investigation, the failure of the
Company to provide meaningful returns to its investors during the late 1990’s, and the
inability of the Company to keep up with its competitors, dynamic change in the
Company’s management was required. That change occurred in March 1999, with the
hiring of Defendant Tobin.
30. Defendant Tobin had served as President of Biogen, Inc. and had previously
worked at Baxter International. While Tobin’s time at Baxter International and Biogen had
been marred by lawsuits and regulatory issues, the market responded positively to the news
that Tobin would assume the helm at Boston Scientific. As set forth above, the Company’s
stock price had essentially remained flat in the years preceding March 1999, and the
Company was grappling with a federal criminal investigation. There was a sense that
Defendant Tobin’s selection to run Boston Scientific would result in an end of the decline
of Boston Scientific market share in products critical to its success.
31. Defendant Tobin joined the Company with an employment package which
included one million stock options, each of which could be exercised at $6 per share. His
original contract also provided that Tobin would receive $700,000 per year and made him
eligible to participate in a “performance bonus award system” which tied his bonus to the
26
Company’s achievement of certain financial targets. Ideally, Tobin’s incentives were
designed to align his interests with the shareholders’ interests. Instead, the lucrative
rewards gave Tobin a motive to deceive investors who were unaware that Tobin and the
other Individual Defendants would engage in a scheme to artificially inflate the stock price
so that they could unload their equity interest and wrongfully acquire hundreds of millions
of dollars.
32. Upon his arrival at Boston Scientific, Tobin began slashing jobs. The BOSTON
GLOBE described his approach as “performing surgery.” According to the BOSTON GLOBE
in 2001,
Tobin has closed manufacturing plants and laid off at least 1,900 workers around the world since he joined the Natick medical products company in June 1999. The results: Boston Scientific has been able to increase profits through most of last year despite lower sales.
33. The Individual Defendants’ approach to cost cutting was reflected in the
“global optimization program” instituted by the Company in 1999. As described in the
Report on Form 10-K submitted to the SEC for the calendar year ending 2002, that
“program” involved the discharge of hundreds of Boston Scientific employees, many of
whom were key to the Company’s operations.
During 2000, the Company recorded a $58 million pre-tax special charge for severance and related costs associated with the displacement of the approximately 1,700 manufacturing, manufacturing support and manufacturing employees under the plan.
Exhibit 12.1 to Boston Scientific Report on Form 10-K for year ended December 31, 2002, at p. 7.
34. Part of the downsizing involved an outsourcing of jobs from the United States
to Ireland where the Company moved its balloon catheter manufacturing operations.
However, a large part of the cuts were simply done as a cost containment measure by
27
Tobin, Nicholas, and Best who, based upon their compensation plans, had a substantial
interest in improving short term profits and in seeing the market price of the stock rise,
irrespective of the long-term negative effects massive lay offs would have on the ability of
the Company to comply with regulations governing product safety.
35. The downsizing took place over several years and did, in fact, result in a
drastically different ratio of employees to revenue. According to numbers reported by the
Company in Reports on Form 10-K, these ratios were as follows:
Number of Employees Per Revenue Dollars (Million)
2001 5.39
2002 4.76
2003 4.32
2004 3.11
2005 3.15
By 2005, Boston Scientific had a lower number of employees per revenue dollar than any
of its competitors including Guidant, Johnson & Johnson, Medtronic and St. Jude Medical.
Graphically, the Company’s ratio of employees to revenue is set forth below:
28
Ratio of Boston Scientific Employees to Reported Revenue
0
1
2
3
4
5
6
7
1998 1999 2000 2001 2002 2003 2004 2005
Rev
enue
/Net
Inco
me
in M
illio
ns
0
1
2
3
4
5
6
Num
ber
of E
mpl
oyee
s
Revenue Employees
36. In May 2003, Tobin described this downsizing to reporters:
It’s not magic. It’s actually kind of boring. But it’s what you need to do to convert wasted efforts in the plant into R&D dollars for products that will help people and ensure the Company’s future.
BOSTON GLOBE article dated May 20, 2003. Due to the concealment of material facts by
the Individual Defendants, no investor understood that Tobin’s concept of “wasted efforts
in the plant” related to the Company’s ability to comply with FDA regulations, to maintain
quality manufacturing, and to insure the efficacy of the medical devices produced and
distributed by the Company. According to one former employee, the cuts in staffing
resulted in greater turnover in the area of quality control. This, in turn, resulted in
individuals without expertise in quality control managing that area for the Company.
Further, the pressure created by Tobin to propel new products to market resulted in a lack
of independence in the area of quality control in violation of federal regulations.
29
37. Compliance became an issue in the time period leading up to the Class Period.
For example, Boston Scientific terminated one former employee who made complaints
about the lowering of quality standards relating to the release of the Company’s Vaxcel
product. Boston Scientific moved another employee who complained about problems with
the same product to another department. The concerns raised by Boston Scientific
employees about the Vaxcel product were shared with management, but not with the
investing public. Ultimately, the Company was forced to recall its Vaxcel product in the
spring of 2002.
Still another former Boston Scientific employee who worked in quality assurance
observed that, in the late 1990’s, the Company “would test each and every balloon.”
However, within a few years, that employee observed a dramatic change in the Company’s
practice as it began to test select groups of balloons. This change in the quality assurance
program was justified by upper management who concluded that, if the systems which
created the balloons were tested, that would be sufficient. As set forth below, the
Company subsequently experienced quality problems with its TAXUS stents – problems
attributable in part to balloons which failed to deflate after insertion of stents.
38. To implement their plan to increase profitability through reckless cost cutting
and rushing products to market, Tobin and Nicholas needed the assistance of others. Tobin
brought in several of his former cohorts from Baxter International and installed them on
the Company’s Executive Committee. Specifically, Ocwieja joined Boston Scientific in
2000 as Vice President of Corporate Quality and Defendant Taylor joined Boston
Scientific as Senior Vice President of Operations.
30
39. The inclusion of Taylor and Ocwieja on the Executive Committee of the
Company gave Tobin greater influence over Company direction. While Taylor and
Ocwieja had practical experience before joining Boston Scientific, both had a limited
educational background for the positions they held. Their primary asset was their loyalty
and shared camaraderie with Tobin. Tobin, Taylor, and Ocwieja would oversee the
deterioration of the Company’s quality assurance program as ultimately reflected by the
numerous and serious concerns raised by the FDA in 2005.
40. In working together at Baxter International, Ocwieja, Taylor, and Tobin were
all too aware of the impact that disclosing negative material events had on a company’s
stock price. For example, on September 7, 1993, Baxter International announced that due
to current market conditions and health care reform, neither the increase in sales nor the
improvement in gross margins had been as strong as the company expected. Baxter
forecast that the operating income earnings per share for the third quarter would be below
the prior year period. As a result of this disclosure, the next day the stock price dropped
13% to $7.78 per share. Based in part on their experience at Baxter International,
Defendants Tobin and Taylor knew that their pecuniary interests with Boston Scientific,
which were largely based on holding equity in the Company, would be greatly enhanced if
adverse information could be explained away, buried, or hidden altogether.
41. Defendant Taylor, in his capacity as Vice President of Operations, was given
authority over the manufacturing operations of the Company and Ocwieja’s duties
included working with regulators. As set forth more fully herein, throughout the Class
Period, the Company’s manufacturing operations were embroiled in regulatory issues
31
which led to product recalls as the Company’s operations failed to meet quality standards.
Those product recalls included:
• Express2 Monorail Coronary Stent System – recalled 3/20/2003
• Ultra-soft™ SV Monorail™ Balloon Dilatation Catheters – recalled 7/1/2003
• TAXUSExpress Paclitaxel-Eluting Monorail® Coronary Stent System–
recalled 7/1/2004
• Vaxcel Ports and Catheters – first recalled 2/10/2004
• LeVeen Needle Electrodes – first recalled 7/29/2005
• Enteryx Procedure Kits and Injector Single Packs– recalled 7/23/2005
42. Ultimately, Taylor left the Company shortly after public disclosure of the
serious operational difficulties facing the Company. However, during the short period he
was with the Company (1999-2005), Taylor sold over $19 million in stock and obtained a
generous severance package, in return for agreeing to maintain confidentiality relating to
all of the information about the wrongful practices engaged in at the Company. Similarly,
Ocwieja left the Company in January 2005, before the house of cards he helped build
collapsed. Ocwieja also left with a generous severance package; he too promised silence
in return for the severance package.
43. Tobin’s efforts to exercise complete control over Boston Scientific and the
concealment of the problems facing the Company extended beyond the hiring of
Defendants Taylor and Ocwieja. In 2000, Boston Scientific hired Donovan to handle
corporate communications. Donovan’s background for this position included no
meaningful work in the private sector, the medical device industry, or work with the SEC.
Donovan’s experience was primarily political in nature in that he helped elected officials
market themselves. Donovan’s job at Boston Scientific was to portray the Company and
Tobin in the most flattering light, irrespective of the deteriorating, adverse conditions
32
which were occurring. While Donovan’s efforts to pump the Company are reflected in
numerous press releases, a quick look at some of the language which Donovan and his
staff placed into the Annual Reports given to the Boston Scientific shareholders reflects his
upbeat approach:
In the coming year we will maintain our focus on Innovation and Operational Excellence. We will carry the momentum of the improvements and achievements of the past year into 2001. The changes we have put in place have begun to show results and will show even more in the future.
Undated letter from Tobin and Nicholas to shareholders, contained in 2000 Annual Report.
In the history of every company, there are defining moments: new product introductions, compelling clinical results, exciting new ventures, seized opportunities. We find ourselves on the cusp of an opportunity that will not only redefine us as a company, but also that promises to redefine an entire industry.
Letter dated March 25, 2003, from Tobin and Nicholas to shareholders, contained in 2002 Annual Report.
The past year was an extraordinary one for Boston Scientific. At every level of the organization, we demonstrated to clinicians and patients the meaning of Delivering what’s next. Most notably, this was the year we positioned ourselves to become the global leader in the treatment of coronary artery disease.
Letter dated March 26, 2004, from Tobin and Nicholas to shareholders, contained in 2003 Annual Report. Every year, the investment community was told that great results were just around the
corner. Pressure built internally to produce actual results so that the market price of the
stock would rise and options, some of which were growing fallow with time, could be
exercised.
44. While assisting Tobin and the other Defendants in touting the Company,
Donovan also played a role in downplaying other material events which were negatively
impacting the Company and which are discussed in greater detail below, including the
33
Department of Justice investigation, product recalls, the Medinol litigation, the FDA’s
investigation of the Company’s manufacturing operations, and the problems with TAXUS.
The failure to adequately disclose these facts while contemporaneously touting the
Company’s alleged accomplishments and rosy future created the environment in which
Boston Scientific’s stock price was artificially inflated.
45. During the Class Period, Boston Scientific repeatedly reported that it enjoyed
stiff competition from certain companies, including Guidant, Johnson & Johnson, and
Medtronic. However, with the exception of Boston Scientific, whose stock price was
being artificially inflated through the Individual Defendants’ misleading statements, that
entire market segment experienced a fairly flat 4-year period from 2002 to 2005. As
reflected in the graph below, competitors’ shareholders did not go through Boston
Scientific’s roller coaster stock price rise and fall during the Class Period, despite selling
many of the same products to the same customers, and facing the same economic climate.
The following graph reflects the market performance of the Company’s stock compared
with the market performance of the stock of Guidant, Johnson & Johnson, and Medtronic
from 2002 through 2005.
34
46. The Individual Defendants manipulated the rise of Boston Scientific’s stock
price, repeatedly reporting promising news to analysts who followed the Company stock.
Analysts responded to this good news by maintaining high ratings on the Company during
the Class Period. For example:
Date Analyst Rating
04/02/03 Banc of America Sec Buy
06/12/03 Prudential Buy
07/29/03 Goldman Sachs Outperform
09/16/03 Wells Fargo Sec Buy
02/03/04 RBC Capital Mkts Outperform
02/24/04 SunTrust Rbsn Humphrey Overweight
02/24/04 UBS Buy
04/13/04 CSFB Outperform
03/31/05 Jefferies & Co Buy
35
47. The Company also reported good news and its purported commitment to
“quality” to its shareholders in its Annual Reports:
2003 was a year of unprecedented accomplishment for Boston Scientific. We made significant strides throughout the company. We experienced solid growth across the organization and became the leader in the international drug-eluting stent market. Most significantly, we recently received approval from the U.S. Food and Drug Administration to market our TAXUS Express2 paclitaxel-eluting coronary stent system in the United States, positioning us for worldwide leadership in the treatment of coronary artery disease.
Boston Scientific 2003 Annual Report, at p. 2.
As a leader in the medical device industry, our success depends on operational excellence and quality in everything we do. No product, no matter how innovative and superior, can succeed without proper execution through the entire product development process, from research and development to clinical trials to manufacturing, launch, distribution and support. Our commitment to delivering on all these complex processes has become a hallmark of the Boston Scientific way of doing business, a key competitive advantage and a pledge our clinician customers trust us to fulfill every day.
* * *
As impressive as our operational performance is today, we view success as a journey, not a destination. That’s why we’ve made a commitment to continuous improvement of our processes across every part of Boston Scientific, just as we work to improve patient outcomes with every product.
Boston Scientific 2004 Annual Report, at pp. 20, 23.
48. The Company also touted its commitment to quality in its filings with the SEC:
Operational Excellence. The Company is focused on continuously improving its supply chain effectiveness, strengthening its manufacturing processes and optimizing its plant network in order to increase operational efficiencies within the organization. By centralizing its operations at the corporate level and shifting global manufacturing along product lines, the Company is able to leverage its existing resources and concentrate on new product development, including enhancement of existing products, and their commercial launch. In addition, the Company consistently strives to understand and exceed the expectations of its customers. The Company’s
36
commitment to quality and the success of its quality objectives builds customer trust and loyalty.
* * * The Company is committed to providing high quality products to its customers. To meet this commitment, the Company has implemented state-of-the-art quality systems and concepts throughout the organization. The Company’s quality system starts with the initial product specification and continues through the design of the product, component specification process and the manufacturing, sales and servicing of the product.
Boston Scientific Report on Form 10-K for year ended December 31, 2003, at pp. 6, 15-16.
The Company expects to achieve significant sales growth in 2004 following the launch of the TAXUS(TM) stent system in the United States (U.S.) in the first quarter of 2004. The Company believes drug-eluting stent technology represents one of the largest market opportunities in the history of the medical device industry.
Boston Scientific 2003 Consolidated Financial Statements, at p. 3.
We are focused on continuously improving our supply chain effectiveness, strengthening our manufacturing processes and optimizing our plant network in order to increase operational efficiencies within our organization. By centralizing our operations at the corporate level and shifting global manufacturing along product lines, we are able to leverage our existing resources and concentrate on new product development, including the enhancement of existing products and their commercial launch. In addition, we consistently strive to understand and exceed the expectations of our customers. Our commitment to quality and the success of our quality objectives are designed to build customer trust and loyalty.
* * * We are committed to providing high quality products to our customers. To meet this commitment, we are implementing state-of-the-art quality systems and concepts throughout our organization. Our quality system starts with the initial product specification and continues through the design of the product, component specification process and the manufacturing, sales and servicing of the product. Our quality system is designed to build in quality and process control and to utilize continuous improvement concepts throughout the product life.
37
Boston Scientific Report on Form 10-K for year ended December 31, 2004, at pp. 4, 10-11. See also Report on Form 10-K for year ended December 31, 2002, filed on March 31, 2003, at p.20.
Our commitment to quality and the success of our quality objectives are designed to build customer trust and loyalty. This commitment to provide quality products to our customers runs throughout our organization and is one of our most critical business objectives. During 2005, in order to strengthen our existing quality controls, we established a new cross-functional initiative further to improve and harmonize our overall quality processes and systems.
* * * We are focused on continuously improving our supply chain effectiveness, strengthening our manufacturing processes and optimizing our plant network in order to increase operational efficiencies within our organization. By centralizing our operations at the corporate level and shifting global manufacturing along product lines, we are able to leverage our existing resources and concentrate on new product development, including the enhancement of existing products and their commercial launch. We are committing additional resources to support our growth and implementing new systems designed to provide improved service, greater efficiency and lower supply chain costs.
Boston Scientific Report on Form 10-K for year ended December 31, 2005, at pp. 3, 4.
49. Despite these extremely positive representations, the Company was not
strengthening its manufacturing processes, implementing state-of-the-art quality systems,
or providing high quality products. Yet, the reality of problems which were occurring at
Boston Scientific went unreported. These problems included (1) the Medinol litigation,
where liability had been admitted, (2) the Department of Justice grand jury proceeding,
where liability was certain, (3) the over-aggressive, premature rushing of the TAXUS
product to market, and (4) the continued manufacturing problems and inadequate quality
controls which were systemic throughout the Company. The Individual Defendants were
38
burying the Company’s problems so that the Individual Defendants could sell over $332
million of stock while the price of Boston Scientific stock was artificially inflated.
50. The Individual Defendants knew and understood their obligation to disclose
material information and the prohibition against trading on material, nonpublic
information. The Individual Defendants oversaw the adoption of a Corporate Integrity
Program which provided, in part:
We are free to buy and sell Boston Scientific stock, as long as we do not engage in “insider trading.” Insider trading means buying or selling a company’s stock when we possess material nonpublic information. “Material nonpublic information,” generally speaking, is any information that a reasonable investor might use to decide whether to buy, sell, or hold a company’s securities. Insider trading is a serious violation of the securities laws that can result in substantial civil and criminal penalties.
2004 Corporate Integrity Program Code of Conduct, at p. 8. Unfortunately, the Individual
Defendants violated their own Corporate Integrity Program and federal securities laws
governing disclosure and insider trading.
DEFENDANTS’ MATERIAL MISSTATEMENTS
I. The Defendants’ Concealment of the Medinol Fiasco.
51. Medinol is a company based in Israel. In 1995, Boston Scientific entered into
an agreement with Medinol in which it took over a 22% interest in Medinol, Medinol
agreed to be responsible for developing and manufacturing stents, and Boston Scientific
agreed to be responsible for bringing the stents to market. Very early on, problems
emerged in the relationship and, specifically, with the products being manufactured and
distributed. During the Class Period, the price of Boston Scientific stock was artificially
39
inflated due to misrepresentations and concealment of material facts regarding the Medinol
fiasco.
A. Device Problems: “Taking a Gamble.”
52. The main product initially produced by Medinol and distributed by Boston
Scientific was the NIR ON Ranger with SOX (“NORS”) stent. The product first
received FDA approval on August 11, 1998. At the time the Company first started
shipping the product, numerous stents had failed the Company’s internal stress test. Yet
the Company kept shipping the stents. Within the first week of shipping, the Company
received reports of 17 balloon failures from doctors and hospitals. Nevertheless, the
Company kept shipping the stents. More reports kept coming in and, in some cases, the
balloon problems with the NORS stent resulted in critical medical emergencies. On
September 1, 1998, when a fifth NORS stent failed internal stress testing, the Company
pulled 200 stents off the shelf to test them individually. Boston Scientific’s Premarket
Approval Application (PMA) to the FDA represented that its final functioning testing
(FFT) demonstrated with 95% confidence that 99.99% of the devices would meet
hardiness standards. Ultimately, 10% of the stents which were tested post distribution
failed, a number far in excess of what the FDA would allow. Despite these failures, the
Company kept shipping stents at a rate which generated approximately $1.5 million of
revenue each day. Finally, after numerous complaints, Defendant Nicholas conceded that
all the stents had to be recalled. Cavalierly, on that same day, over $2 million worth of
additional NORS stents were shipped.
53. During this time, Nicholas conducted a private conference call with his
colleagues, as well as the Company’s counsel, Larry Pilot. During the call, Nicholas
40
acknowledged that there was “no way to avoid recall.” When attorney Pilot was asked for
his position, he advised that:
There is no doubt in my mind that when the agency [FDA] learns about what we know – namely that by our change in the manufacturing process, we introduced a defect into the product, that they will expect a recall.
BOSTON GLOBE article dated December 26, 2004. Despite the attorney’s warning, the executives decided against recalling the devices and
started to “engage” in conversations with the FDA.
54. When Boston Scientific’s Division President eventually testified before the
grand jury, he admitted that Boston Scientific was taking a “gamble” that the problem
would turn out to be one that would not require a recall. But no one at Boston Scientific
informed the public about that gamble. The Division President also admitted that Boston
Scientific had no idea how much of the inventory was affected by the problem. It was
soon determined that the problem applied to the entire product line. Despite this
determination, the Company kept shipping the product.
55. Debra Lano, Boston Scientific’s Regulatory Vice President, later admitted that
despite assuring the FDA it would cease shipping, the Company made an additional
shipment. In the grand jury proceeding, the Regulatory Vice President testified that she
told Arthur Rosenthal, Boston Scientific’s Chief Development Officer, that the recall
should have occurred two weeks earlier – but Rosenthal told her not to worry, because
Boston Scientific had gotten two more weeks of sales. In response to the Vice President’s
testimony, Boston Scientific’s attorney commented that if such a statement was ever made
it “obviously would have been gallows humor.”
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56. Finally, on October 5, 1998, once the FDA learned of the extensiveness of the
defect, a total recall was enforced. While some of the Individual Defendants had
effectively delayed the recall, the Company was able to generate millions of dollars of
revenue through the distribution of a product it knew was adulterated. Not surprisingly,
the strategy of knowingly shipping adulterated products prior to a mandated recall, in order
to generate millions of dollars in revenue would be repeated in 2004 with the introduction
and recall of the TAXUS stent.
B. The Contentious Medinol Litigation.
57. By 2001, the relationship between Medinol and Boston Scientific became,
according to Tobin, “contentious.” Litigation ensued in numerous venues around the
world. In a 2001 lawsuit filed in the Southern District of New York, Medinol asserted that
Boston Scientific had engaged in a “multi-year scheme to defraud.” Medinol asserted that
Defendant Boston Scientific had approved and directed the establishment of a “dummy”
corporation to steal Medinol business and had “defrauded” the FDA. According to
Medinol, the scheme was unearthed when Boston Scientific auditors refused to file
fraudulent reports requested by the Company. Further, when Tobin had to face Medinol
officers in 2000 about Boston Scientific’s role in the matter, Tobin admitted privately that
he was unaware when he joined Boston Scientific that he was involved with “such crooks”
and that he was “ashamed to represent such a dishonest company.”
58. The scheme to defraud Medinol and the FDA was carried out at the highest
level of Boston Scientific through instructions to maintain a “ghost office,” utilization of
“false signatures” and by making “false and misleading representations to Medinol and the
FDA.” The highest levels of Boston Scientific management were implicated in Medinol’s
42
charges, including Defendants Nicholas and Best who authorized and approved the scheme
to set up a dummy company in an attempt to steal Medinol intellectual property. When
finally placed under oath in 2004, Tobin called the effort to defraud Medinol a “stupid” act
on the part of Company officers.
C. Misleading Investors About the Medinol Litigation.
59. After the New York lawsuit was filed by Medinol in 2001, Tobin and Donovan
responded to the “allegations” by downplaying them and disparaging Medinol’s complaint.
Among their statements to the investing public were the following:
“Medinol’s complaint alleges breaches of contract, fraud and other claims . . . . These claims have no merit.” (Emphasis added)
Quote attributable to Donovan in a press release dated April 5, 2001.
“The bottom line about this lawsuit is that the party in the wrong is Medinol.
• It was Medinol that could not or would not fill our orders . . . • It was Medinol that consistently refused to provide us with enough
stents • It was Medinol that at least a dozen separate times threatened to cut
off its supply of stents This is all about leverage, plain and simple.”
Statement made by Defendant Tobin at the Company’s Annual Meeting of Securities Analysts on April 11, 2001. Boston Scientific counterclaimed against Medinol, leaving the investment community with
the impression that, at best, Medinol’s claims had no merit and that Boston Scientific was
the injured party.
60. After the New York litigation was filed by Medinol, various intellectual
property suits were filed by and between Boston Scientific and Medinol in jurisdictions
around the world, including Israel, the Netherlands, and Germany. These other cases
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became the focus of the disclosures which the Individual Defendants made while the New
York litigation – where Tobin had secretly admitted liability to Medinol by describing his
cohorts as “crooks” – was downplayed or not discussed at all. For example, in the Report
on Form 10-K for the years ended December 31, 2002, and December 31, 2003, the
Defendants failed to discuss the New York litigation in the narrative section of the
Reports. Instead, the litigation is mentioned in Note L to the financial statements, buried
deep within the Report. Similarly, while other litigation involving Medinol is discussed in
the Reports on Form 10-Q filed with the SEC throughout 2003 and 2004, there is no
mention of the New York litigation with Medinol, much less a discussion of the obvious
exposure facing the Company, until 2005. The Reports on Form 10-Q filed with the SEC
were certified to by Defendants Best and Tobin.
61. Although the New York Medinol litigation is not specifically referenced, the
entirety of the Medinol litigation generally is set forth as a “risk” in the public filings
which, throughout the Class Period stated:
Forward-looking statements discussed in this report include, but are not limited to, statements with respect to, and the Company’s performance may be effected by:
• The impact of stockholder, patent, product liability, Medinol Ltd. and other litigation, as well as the ultimate outcome of the U.S. Department of Justice investigation.
Exhibit 13.1, pp. 30-31 of Report on Form 10-K for year ended December 31, 2003. See also Report on Form 10-K for year ended December 31, 2004, at p. 16.
62. This statement was false and misleading since Defendants understood, and
Tobin had admitted previously, that the Medinol litigation had merit as Boston Scientific
had been run by “crooks.” It was never a matter of whether the Company would pay
Medinol for the illegal conduct engaged in by Individual Defendants Nicholas, Best, and
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others . . . it was only a question of when and how much. However, the Defendants
repeatedly downplayed its significance and materiality.
63. The Defendants’ efforts to play down the New York Medinol litigation were
evident in their characterization of the litigation during meetings with analysts. For
example, on July 22, 2003, Defendant Sandman was asked about the New York litigation
involving Medinol:
Q: So, in the U.S., again, you never want to talk about worst-case scenarios, but in the U.S. if you lost to Medinol, there is no chance of the stent actually being in the market. Is that correct?
A: (Sandman) I don’t see that as, well, they have asked, I think, that we be prohibited from selling the Express. Their theory is not patent infringement. It’s that we copied their trade secrets. I don’t frankly think that theory is going to hold up.
Boston Scientific Second Quarter 2003 Earnings Call, corrected transcript, at p. 9. This statement was false. In fact, the Express devices used by Boston Scientific were
created using Medinol plates and designs. Further, Defendant Sandman knew that the
underlying facts described by Medinol regarding the appropriation of Medinol’s products
were true and that Medinol’s theory would hold up.
64. Similarly, at a J.P. Morgan Healthcare Conference on January 10, 2005,
Defendant Tobin stated about the New York litigation involving Medinol,
Medinol, that thing has been brought down to this thing which is a contract dispute. So sooner or later that will get solved.
65. The downplay of the Medinol litigation by the Individual Defendants continued
while the Company was actually engaged in settlement discussions where they knew the
outcome was going to cost the Company hundreds of millions of dollars. On June 15,
45
2005, at a Goldman Sachs Healthcare Conference, Defendant Best in response to an
inquiry asking for litigation updates stated:
We also have a Medinol case dealing with our failed partnership with Medinol back in 1995-96-97 around there, and it’s not a patent issue, it’s not [an] intellectual property issue, it’s primarily a straight out contract, breach of contract issue. We’re not before a jury, we’re before a judge, and we expect to go to trial in the next 4 or 5 weeks I think.
66. This was misleading. When Best made this statement, he knew as a result of
settlement discussions that the Company was going to pay Medinol millions of dollars for
establishing its “dummy corporation” and its creation of fictitious invoices designed to
hide its efforts to steal Medinol’s technology. Best had played a role in approving
financing for the operation of the dummy corporation and certainly understood that the
underlying facts exposed the Company to millions of dollars in damages.
67. Whenever the Medinol litigation experienced any good news, the Individual
Defendants quickly issued a press release giving investors the sense the litigation was
under control and that Boston Scientific was the injured party. For example, on December
17, 2003, when Boston Scientific got a favorable ruling out of a Dutch Court limiting its
potential exposure to only the Netherlands, it promptly announced it and the price of
Boston Scientific stock rose over 5%. Similarly, on April 1, 2004, Boston Scientific
announced that the European Patent Office had declared invalid a patent held by Medinol,
making an injunction on the sale of those products by Boston Scientific no longer
effective. The market responded with a 2.5% stock price increase.
68. On December 2, 2004, the Company, upon receipt of an 84-page ruling from
the Court in the New York Medinol litigation placing the case on the trial calendar, spun
the impact of the decision. In a press release issued at that time, Donovan, who worked
46
under the direction of Defendants Tobin and Nicholas, held to his earlier “no merit”
comment by stating:
As the ruling states, this is essentially a breach of contract case, which alleges ‘grandiose estimates of damage’ that are unlikely to succeed.
Boston Scientific press release dated December 2, 2004.
69. At the time that Defendants made positive statements about the Medinol
litigation, buried bad news about the litigation, or provided the market with no news
whatsoever, they knew that insiders within the Company, including Defendant Best, had,
in fact, engaged in a scheme to defraud Medinol and the FDA, and they knew that those
acts had exposed the Company to significant liability.
D. The Truth of the Company’s Exposure to Medinol Slowly Emerges.
70. Settlement discussions with Medinol took place in early 2005. The end result
of those settlement discussions was hardly in line with prior comments made by Tobin and
Donovan that the litigation was “without merit” and being done only for “leverage.” Nor
was the settlement in line with comments that it was just a “simple” breach of contract case
where the theory relating to intellectual property theft was not going to “hold up,” as stated
by Defendant Sandman.
71. Boston Scientific ultimately gave up its 22% equity interest in Medinol, paid
Medinol $750 million and Medinol preserved for arbitration proceedings all of its
intellectual property claims against Boston Scientific.
72. Donovan’s public response to the settlement as set forth in an article in the
BOSTON GLOBE on September 22, 2005, was somewhat more contrite than his earlier
statements that the litigation lacked “merit” when he said: “We’re pleased to close this
chapter, and put this matter behind us.”
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73. The possibility of the settlement with Medinol was leaked out during the Class
Period. As it was leaked out, the market price of Boston Scientific securities dropped.
• On August 16, 2005, an Israeli newspaper reported the preliminary terms of the settlement as including a large payment to Medinol. The price of Boston Scientific securities dropped 32¢, or 1.30%.
• On August 17, 2005, an analyst leaked the terms of the settlement on
Bloomberg in a manner favorable to the Company and the stock dropped another 37¢ that day, or 1.82%.
• Ultimately, the $750 million settlement was reflected in a special charge taken
by the Company which Best estimated cost shareholders about $0.75 per share.
74. At no time during the Class Period did Tobin ever withdraw, clarify, or modify
his effort to depict Boston Scientific as the victim. In fact, Defendant Tobin, working with
Sandman and Donovan, rather than forthrightly advising the investment community that
Medinol’s complaint had merit in 2002, 2003, 2004, or 2005, repeatedly tried to attribute
other motives (“leverage”) to the lawsuit, left the impression the suit had “no merit,” or
that it was a simple breach of contract case without “grandiose” damages at stake. Instead,
the Individual Defendants engaged the Company in a pattern of deceit and obfuscation by
issuing public reports that failed to disclose the Company’s obvious liability while having
the Company incur unnecessary legal fees. All the while, these same Defendants
continued selling their own stock at artificially inflated prices.
II. Misrepresentations and Concealment of the Department of Justice Investigation.
75. In 1998, the Department of Justice began investigating Boston Scientific’s
recall of its NORS coronary stent delivery system following reports of balloon leaks. The
investigation also explored the Company’s relationship with Medinol and included the
empanelling of a grand jury by the Department of Justice. The Company and two of its
48
senior officers were advised that they were targets of the criminal investigation. Despite
the Company’s awareness of its exposure, it repeatedly told the investing community that
it had “acted responsibly and appropriately.” See Reports on Form 10-K for year ending
December 31, 2002, at p. 220; for year ending December 31, 2004, at p. 67; and for year
ending December 31, 2005, at p. 101.
76. At the same time the Individual Defendants were assuring investors that the
Company’s officers had acted “responsibly” and “appropriately,” Company officials were
invoking the Fifth Amendment during depositions in the Medinol litigation. These officers
had full knowledge that the parallel grand jury proceeding may not conclude that their
actions were either “responsible” or “appropriate.”
BSC [Boston Scientific Corporation] executives have repeatedly asserted their Fifth Amendment privilege not to incriminate themselves in criminal activity during depositions in this case. Indeed, BSC executive [redacted] invoked the Fifth Amendment at his deposition more than 400 times, and BSC executives [redacted] and [redacted] each invoked the Fifth Amendment more than 500 times.
May 28, 2002, Redacted Reply Memorandum of Law of Medinol, Ltd. In Support of Its Crime/Fraud and Waiver Motion, at p. 3.
77. Throughout the Class Period, Defendants knew that the Department of Justice
investigation had merit, that its officers, including Defendant Nicholas, had not acted
“appropriately” nor “responsibly” and that the disclosures being made to the investing
public concerning the investigation were misleading. In 2000, the U.S. Department of
Justice, as part of its investigation into the product recall, unearthed the secret “dummy”
business operated by Defendant Best and others which was designed to steal Medinol’s
intellectual property and defraud the FDA.
49
78. It was this Department of Justice discovery which led Tobin to meet with
Medinol officials, admit that Boston Scientific had been run by “crooks” and admit feeling
“ashamed” to be associated with the Company. In later explaining to the Company’s
Board why he made such confession to the Medinol owners (“the Richters”), Tobin tersely
summarized: “[R]ather than have the Richters find out about it from the Feds, I told
them.”
79. The Department of Justice’s primary investigation focused on whether or not
the Company’s officials, knowing that a problem existed with their stent delivery system,
took an improper risk by putting adulterated medical devices into the marketplace. The
Defendants knew that they had.
80. The Defendants also knew that the Department of Justice investigation which
involved a grand jury proceeding during the Class Period, had unearthed evidence of
deliberate disregard for FDA rules and regulations. The evidence unearthed in the grand
jury proceeding showed:
• Senior officials of the Company, including Defendant Nicholas, knew that NORS stents had experienced a catastrophic failure rate in clinical trials, but continued shipping, in total disregard of the public’s safety.
• The Company had lied to the FDA by indicating that they were no longer
shipping the product when, in fact, they continued to ship the product.
• The Company had repeatedly engaged in delay and attempted a cover-up through its efforts to withhold materials from the Department of Justice by the improper invocation of attorney-client communication privilege when, in fact, a criminal fraud exception existed not permitting the invocation of such a privilege.
81. Although the mounting evidence being provided to the grand jury was known
to the Individual Defendants throughout the Class Period, they continued to tell
unsuspecting investors that they had acted “responsibly” and “appropriately” in each
50
public filing they made with the SEC. In truth, the gravity of the fraud committed was of
such an egregious nature that after the Department of Justice investigation was
commenced, in November 1998, Defendant Nicholas was forced to step aside.
Unfortunately, Tobin and Sandman, while not involved in the underlying acts giving rise to
the investigation, became full participants in defrauding investors by refusing to share the
truth about the seriousness and merit of the grand jury proceeding with the investment
community. For example, during a conference call with analysts on July 22, 2003, the
following exchange took place:
Q: (Ed Shenkan with Wells Fargo Securities) Thanks, gentlemen. And in an effort to better understand some of the risks involved with this Department of Justice inquiry, as you said it’s hard to know how long it goes or what becomes of it but, for us in the investment community to better understand it, is there a risk that the inquiry could somehow be related to the TAXUS drug-eluting stent in the United States? And if that could delay the submission or consideration, direct consideration by the FDA. Do you think a likelihood of that is more than 1% or perhaps just explain why that scenario wouldn’t play out, because you guys are a lot closer to this type of situation than we are.
A: I don’t see any evidence of a connection like that. As I say, we
don’t know everything that’s going on, but we do I think have a fairly good picture of what is involved, and I just haven’t seen any nexus that relates to TAXUS.
A: Let me try to put it in perspective. This is having to do; it was
prompted by a NIRON Ranger product that we launched in 1998. We no longer sell the product. It was in the market for 6 weeks where we voluntarily recalled it after 6 weeks with a very small incident rate. There’s never been any assertion by a patient or physician that the product was anything but okay. There is no trailing liability or product liability or otherwise. And there hasn’t been certainly any issues with our relationship with the FDA over the past 5 years. I think last year we had a record number of approvals. So just to put it in perspective, this is a product, one of the few recalls in the history of Boston Scientific. The product was launched, voluntarily recalled by Boston Scientific 6 weeks later. There’s never been any assertion of harm to a patient, by a patient or
51
a physician, and we have cooperated 100% with responding to the requests of the Department of Justice. And we, as Paul [LaViolette] pointed out, have even extended the statute of limitations in the spirit of cooperation. So, it doesn’t focus on any product we are selling today. We don’t believe it implicates our business, as you know it today.
Boston Scientific Second Quarter Earnings Conference Call, corrected transcript, at pp. 13-14 (quote unattributable, however, Defendants Best, LaViolette, Tobin, Moreci, and Sandman participated on the call, and the response came from one of them).
82. Rather than simply disclose that the Department of Justice investigation had
unearthed the wrongful conduct which the Individual Defendants knew had occurred in
1998, Tobin in concert with the other Individual Defendants, including Defendant
Sandman, repeatedly misled investors throughout the Class Period, by assuring them that
Company personnel had acted “responsibly” and “appropriately” in filing after filing with
the SEC. Like the Medinol litigation, the Company stated in public filings that the
Department of Justice investigation “may” affect the Company when they knew it would
affect the Company. While the grand jury investigation was taking place and while the
Defendants were attempting to downplay the investigation, they maintained a deceitful
cover-up, in order to advance their objective of exercising stock options and selling Boston
Scientific securities as quickly as possible, at artificially inflated prices.
83. On June 24, 2005, the Company announced a civil settlement with the U.S.
Department of Justice in which it agreed to pay $74 million so that criminal charges
against Defendant Nicholas and others could be avoided. In commenting on the
settlement, Tobin continued the fraud when he said in a press release:
We are very pleased that a six-year investigation into the 1998 recall of a now-obsolete product and related events has ended with no charges against the Company or any employee.
* * *
52
We believe that Boston Scientific and its employees acted legally, responsibly and appropriately at all times. We elected to settle this lingering matter so we could put it behind us and devote our full energies to developing our life-saving medical technologies.
Boston Scientific press release dated June 24, 2005.
84. Simultaneously with Boston Scientific’s press release, the Department of
Justice issued its own press release, with a tone and tenor significantly different than that
set forth by Tobin:
“This case represents a failure by Boston Scientific to take the most appropriate steps in a timely manner to ensure that the devices it was distributing to hospitals nationwide performed properly,” said U.S. Attorney Michael J. Sullivan. “The company identified the problem through its own internal testing and took a risk that those same problems would not occur in the marketplace. This type of behavior by a major medical device manufacturer is unacceptable.”
* * * “This is an example where a corporation made a poor business decision and did not sufficiently take into account its obligation to protect against the distribution of defective products,” stated FBI Special Agent in Charge Kaiser.
Department of Justice press release dated June 24, 2005 (emphasis added).
85. During the Class Period, while Defendants knew that they had committed
wrongful acts but continuously denied having done so, the Individual Defendants sold over
$332 million in stock. When the truth was revealed, and the Company paid $74 million
dollars, the market price of the stock was adversely affected. However, even more
problematic, while the Department of Justice investigation was ongoing, the Individual
Defendants were repeating the same wrongful conduct when they improvidently rushed a
drug-eluting stent to the marketplace in 2004 – TAXUS.
53
III. The Defendants’ Cover-Up of the Problems with TAXUS.
A. Pumping Up the Market for TAXUS.
86. In 2001, the Individual Defendants made a decision to produce a drug-eluting
stent which would compete with a similar product produced by Johnson & Johnson. The
name of the new product was TAXUS Express Paclitaxel-Eluting Monorail® Coronary
Stent System (“TAXUS”). The Defendants pumped the importance of its TAXUS product
in report after report provided to the investment community:
The Company believes it is poised to take advantage of the drug-eluting stent opportunity for a variety of reasons, including its more than five years of scientifically rigorous research and development, the promising clinical results of its TAXUS program, the combined strength of the components of its technology, its overall market leadership, and the largest sales force in interventional cardiology.
* * * Recognizing the promise and benefits of drug-eluting stents, physicians are expected to rapidly adopt this new technology. In addition, initial reimbursement rates have already been set in the United States.
Exhibit 13.1 of Report on Form 10-K for year ended December 31, 2002, filed with the SEC on March 31, 2003, at p. 9 of the Financial Statement and at pp. 5, 7. See also Report on Form 10-Q for period ending March 31, 2003, at p. 23.
We find ourselves on the cusp of an opportunity that will not only redefine us as a company, but that also promises to redefine an entire industry. Our TAXUS paclitaxel-eluting stent system has already been launched in Europe and other international markets, and we plan to launch it later this year in the United States. The TAXUS program, along with the continued success of our many other technologies, positions Boston Scientific for leadership today and for years to come.
Letter dated March 25, 2003, from Tobin and Nicholas contained in the Annual Report to shareholders for 2002.
In an hour long conference call yesterday with investors, Boston Scientific executives lowered their profit estimates for the year. They said they are spending more than initially planned to prepare for the launch (of TAXUS) because they are more confident in their ability to compete head
54
to head against Johnson & Johnson. At the same time, they said, sales of its older, bare metal stents in the United States are falling short of expectations as physicians switch in droves to Johnson & Johnson’s coated stent.
* * * “We’re going for it,” said Boston Scientific president and chief executive James Tobin.
BOSTON GLOBE article dated July 4, 2003.
The stock market’s excitement over Boston Scientific can be traced to several factors, but most of the run-up is simple anticipation for a single new product. The company’s Taxus stent, already available in other parts of the world, probably will receive final approval for sale from the U.S. Food and Drug Administration later this month or in March.
BOSTON GLOBE article dated February 5, 2004.
87. TAXUS made its debut in Europe in January 2003. There was tremendous
pressure however to get TAXUS into the U.S. market as the Company was losing market
share to Johnson & Johnson. According to the BOSTON GLOBE, in July 2003, “Tobin
disclosed the sales of some older stent models were falling short of expectations as doctors
switched to Johnson & Johnson’s Cypher stent.” BOSTON GLOBE article dated
September 15, 2003. In fact, as early as 2001, the Company had reported in its Report on
Form 10-K a 50% drop in NIR sales, creating tremendous pressure to get TAXUS to
market.
88. For purposes of obtaining final FDA approval for use in the United States, the
Company had to engage in clinical trials for TAXUS. Each positive step towards approval
was trumpeted by Defendants.
• On September 11, 2003, the Individual Defendants released data showing the purported effectiveness and safety of TAXUS. The stock rose 3.45%.
• On September 15, 2003, the Company released data showing the effectiveness
and safety of its TAXUS stent in a study of its use in 1,326 patients. The
55
company said only 7.9 percent of patients in a trial of the drug-coated stent showed signs of significantly narrowed arteries after the device was implanted. The rate for patients who received a stent without the drug coating was 26.6 percent….” Boston Scientific press release dated September 15, 2003. This favorable report alone caused the stock’s trading volume to swell to over 28 million shares as the price jumped 7.52%.
89. Conversely, when the Individual Defendants received bad news which could
delay the launch of TAXUS, it was downplayed. For example in September 2003, when
the Company received a Major Deficiency letter from the FDA raising questions about its
manufacturing process, the Company failed to disclose the FDA letter in a timely fashion.
90. The Individual Defendants provided to the investment community a drum roll
leading up to the FDA’s approval of TAXUS which was deafening.
We believe that it is a very solid indication of growing awareness to the TAXUS data, growing understanding of the role that our Express platform on Maverick technology and our Paclitaxel technology will play in the drug-eluting stent world. It’s fair to characterize today that we are in full pre-launch mode in our sales and marketing efforts, we have implemented a bare metal stent execution strategy to optimize new customer evaluations of the Express platform, prior to TAXUS availability. We think that is an important strategy to demonstrate our platform superiority in stent and stent delivery system in the drug-eluting stent world.
* * * Just in summary, again, TAXUS has met, I think, extremely impressive and consistent regulatory progress in the United States.
Comments by Defendant LaViolette, Mid-Year Update Conference Call with Analysts, July 3, 2003, corrected transcript, at pp. 7, 10.
Let me just take one minute here to sort of give you the punch line. I would say that Q1 – Q2, we did about what we thought we would. But there were really three things we needed to accomplish this year to make it a success. First one was to have a successful launch [of TAXUS] in International, and I think, from the numbers that Paul took you through, we are in the process of accomplishing that. Second thing was to file. We did that in June. Third, all that remains then is the data, which you will see in September, all of us will see in September. But based on the expectation that that data is going to be competitive, we are going for it. We are basically saying, okay
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the second half is going to be what it is, we are investing what we have to invest to ensure a spectacular launch, leadership in drug-eluting stents worldwide next year and a pipeline behind that. And that, in as few words as I can give you, is what this whole thing is about. So, let me turn it back to Larry [Best].
Comments by Defendant Tobin, Mid-Year Update Conference Call with Analysts, July 3, 2003, corrected transcript, at p. 10.
Now, let me give some supply updates. You may have heard some shipping delays internationally. We have actually had some very limited back orders, and we are on an allocation for one size of TAXUS. We are fully unconstrained on all other sizes, and we expect to be fully unconstrained once again on everything, all sizes, all configurations, in a week or so. So we’ve had a very minor disruption, what we consider to be a one-time-event. We are actually in a position to complete our international inventory build out, based on our strategy to build inventory buffers for International and then to convert all of our plant capacity in both Galway and Minneapolis to 100% support the U.S. launch. We expect to be in a position to do that within the next several weeks. We also expect to be in a position to launch with full launch quantities and a 100% replenishment rate for our market share expectations by the middle of January. So the ramp for operations is going exceptionally well. We have been very pleased with, and in some ways, surprised by the strength of our market share internationally, and that I think complements a very strong U.S. business. So in summary for the third quarter, excellent momentum, excellent stability in our businesses. We’ve got leadership in drug-eluting stents outside the United States. I think everyone is aware, TAXUS IV data was extremely well received by the market, and we’re on plan for our U.S. launch expectations. And with that I’ll turn over to Steve Moreci.
Comments by Defendant LaViolette, Third Quarter Earnings Conference Call with Analysts, October 21, 2003, corrected transcript, at pp. 5-6.
Addressing an investor conference at the Waldorf-Astoria Hotel in New York, the company’s chief financial officer, Lawrence C. Best, acknowledged what he called “the disconnect” between expectations. But he and other executives insisted conditions are just right for Taxus to overtake the only other drug-coated stent now on the U.S. market, from Johnson & Johnson, by the end of this year. “I hate to say it this way, but call it a perfect storm,” said James R. Tobin, Boston Scientific chief executive. “The market is prepared so things can happen quickly. There’s a large number of units, pricing is high, and the number of competitors is limited.”
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BOSTON GLOBE article dated February 24, 2004.
91. In anticipation of FDA approval and given the positive comments by the
Individual Defendants, analysts proceeded to upgrade Boston Scientific stock.
Specifically, the following upgrades took place shortly before the anticipated FDA
approval:
• February 3, 2004, RBC Capital Markets: Upgrade from Sector Perform to Outperform
• February 24, 2004, Sun Trust Rbsn Humphrey: Upgrade from Equal Weight to
Overweight
• February 24, 2004, UBS: Upgrade from Neutral to Buy By March 2004, the message orchestrated by the Defendants caused the trading price of
Boston Scientific securities to hit an all time high on the New York Stock Exchange.
B. Undisclosed Manufacturing Changes, Undisclosed Complaints, and Insider Sales.
92. On March 4, 2004, the FDA approved the marketing and distribution of
TAXUS in the United States. The Company rushed the TAXUS product to market and
trumpeted its immediate impact in the Company’s effort to take over market share for
stents.
TAXUS . . . has been on sale in Europe since last year and was approved by the U.S. Food and Drug Administration on March 4. Since then, Boston Scientific estimates it has captured 70 percent of the total market, worth $2.5 billion annually, for drug-coated stents. If so, it has rapidly overtaken Johnson & Johnson, whose Cypher drug-coated stent was approved by the FDA in 2003.
* * *
Chief executive James R. Tobin called the 70 percent market share figure share conservative . . . .
BOSTON GLOBE article dated April 21, 2004.
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The Company had been able to move quickly to capture market share because a large
amount of inventory of TAXUS had been built up in anticipation of FDA approval.
93. What the Defendants were slow to disclose was that months before the release
of TAXUS into the U.S. marketplace, they had been receiving adverse reports out of
Europe. European physicians were complaining that the balloon would not deflate after
insertion and that the balloon was sticking. The Individual Defendants also understood
that TAXUS used the Express2 metal stent as its platform and that the Express2 metal stent
had a history of significant problems. However, rather than provide any cautionary
language to the marketplace about TAXUS as it was being rolled out, the Defendants
minimized and misrepresented the problems they were hearing from the field. In its
Report on Form 10-Q for the period ending March 31, 2004, which was filed with the SEC
on May 7, 2004, the Company stated it was “reviewing a limited number of reports related
to balloon withdrawal difficulty during TAXUS angioplasty procedures.” In meetings
with analysts, it further downplayed the complaints it was reviewing.
Sure, the complaint rate actually is a world – which I have broken down in many, many ways, but we actually have that on a worldwide launch to date basis for all factors, total product and any cause if you will, any root cause complaint. And I think, let me just check the numbers, the complaint rate, there have been worldwide 40 complaints in the aggregate and that’s out of approximately 350,000 TAXUS stents. So, that complaint rate would be as we would describe it in quality terms parts per million 118 or 11.8 complaints per every 100,000 uses. So, we would describe that as an extremely low complaint rate. And I think to comment on the international side, we did hear some complaints about this issue if we go back to the April, May, June timeframe of last year which of course were the first few months of TAXUS launch. This issue surfaced in the first few months and then as physicians got used to TAXUS, essentially all complaint activity subsided and if you look at international utilization today, and if you look at complaints for any kind of removal difficulty, there are virtually no ongoing complaints.
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Comments by Defendant LaViolette, First Quarter Earnings Conference Call with Analysts, April 20, 2004, corrected transcript, at p. 10.
Boston Scientific spokesman Paul Donovan said the number of problem cases [involving TAXUS] was minor relative to the 84,000 TAXUS stents implanted in American patients since the FDA approved the device March 4. He said a few doctors in Europe reported similar problems when TAXUS was initially approved for use there last year, but the complaints ended as doctors became more comfortable with the stents.
BOSTON GLOBE article dated April 24, 2004.
94. Ocwieja, with the approval of the Individual Defendants, also tried to distract
the marketplace by downplaying reports of complaints about TAXUS when he told
newspapers on May 3, 2004: “I don’t see how it’s going to change the product. I do see
how it could potentially change the assay.” BOSTON GLOBE article dated May 3, 2004.
95. However, Defendants knew at that time the problems with TAXUS were much
more significant, based on the complaints they had received out of Europe and the
complaints which were rolling in as a result of the product rollout in the United States in
March 2004. In fact, while simultaneously telling the market there were no problems with
TAXUS, the Defendants had engaged in making a manufacturing change to address
complaints they had received, a manufacturing change which they failed to disclose to the
investing public.
96. While simultaneously placing good news in the market about the rollout of
TAXUS and stalling any type of meaningful disclosure about the complaints received
about TAXUS or the manufacturing change they were implementing, in April and May
2004, the Individual Defendants watched the stock price rise and began to rampantly sell
massive amounts of their own stock. For example, within two months of the
announcement that TAXUS received FDA approval, the following stock sales took place:
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James R. Tobin: $ 40,822,425
Lawrence C. Best: $ 54,205,189
Fredericus A. Colen: $ 4,220,707
Robert G. MacLean: $ 3,300,000
C. The Recall of TAXUS.
97. On July 2, 2004, only four months after receiving FDA approval and shortly
after the Individual Defendants sold over $100 million in Company stock, the Company
announced its first recall of two lots of TAXUS stents, constituting 200 stents. The
Company issued a press release to explain why the recall occurred which included the
following:
FDA has received reports of one death and 16 serious injuries associated with balloon deflation. In addition, the agency has received eight reports of balloon malfunction that were not associated with patient injury.
The Company finally admitted that 30 cases worldwide had previously been reported
involving balloons “that did not deflate or were slow to deflate.”
98. However, the Company attempted to minimize the problem by attributing it to
only “two batches [of TAXUS stents] out of 1,200 and some we produced so far” and that
the problem had been addressed with a manufacturing change they had implemented
before they launched TAXUS, but after they had built up defective TAXUS inventory. As
Defendants would be forced to admit during the July 2, 2004, conference call with
analysts, “That [manufacturing change] was in process before we launched TAXUS and
would have been submitted whether we got a complaint or not. So that was, all that
activity was going at the moment that we launched TAXUS.” July 2, 2004, corrected
transcript, at p. 6.
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99. The fact that a manufacturing change was taking place regarding TAXUS was
never disclosed until after the recall began to occur so that Defendants would be in a
position to substitute the “new” TAXUS product for the inventory of “old” TAXUS
products in the field which were being recalled. The Report on Form 10-Q for the Quarter
ending March 31, 2004, which was filed with the SEC on May 7, 2004, was silent about
the manufacturing change. However, after the recall, Defendants revealed the
manufacturing change in its Report on Form 10-Q filed with the SEC on August 9, 2004,
evidencing their own knowledge that the manufacturing change was material information
which the market had a right to know.
100. Subsequent to July 2, 2004, the Individual Defendants began to slowly leak out
more information about the problems with “old” TAXUS. On July 16, 2004, only two
weeks after the original announcement and assurance that the recall was limited, the
Individual Defendants expanded the recall to 85,000 TAXUS stents and 11,000 Express2
stents, and admitted that, in addition to the one death and 16 serious injuries associated
with the TAXUS stent system, they had previously known of two deaths and 25 serious
injuries associated with balloon deflation in the Express 2 (bare metal) stent system. Upon
the Company’s revelation of these reports, the stock dropped $3.09 per share or 7.6% to
$37.40. The Company’s stock would never visit the $40 per share price range again.
101. Throughout this time period, the Individual Defendants continued to try to
reassure the market about the safety of the Company’s products through the issuance of
public statements which were false and misleading. For example, on July 26, 2004,
Defendant LaViolette responded to analysts’ concerns about the recall by stating:
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So, you are dealing with simple lag time in the marketplace conversion of newer products, not necessarily a continuation of complaints from the new issue product.
Boston Scientific Second Quarter Earnings Conference Call, at p. 17. This was a misrepresentation since a continuation of complaints was occurring which
ultimately resulted in a larger recall. Similarly, in a meeting with a local hospital official
on July 29, 2004, Defendant LaViolette said the Company had “identified and fixed the
problem.” This was misleading. As the additional, expanded recalls would demonstrate,
nothing had been “fixed.” Further, on August 4, 2004, LaViolette tried to downplay the
problem as being a “nuisance,” however that “nuisance” resulted in a number of serious
injuries and ultimately required the Company to incur over $57 million in recalling the
product. The Company also set up a $75 million legal reserve fund during the third quarter
of 2004.
102. Despite its assurances, on August 4, 2004, the Company announced further
recalls of TAXUS covering an additional 3,000 stents. The Company’s stock dropped
another $2.41 or 6.6% upon the Company’s revelation.
103. By the end of 2004, the Company recalled 99,000 TAXUS and other stents
because of manufacturing defects linked to three deaths and dozens of serious injuries.
From July 2, 2004, when Defendants first disclosed the problems, to August 5, 2004, when
they expanded the TAXUS recall for a second time, Boston Scientific stock price dropped
an astounding 21%. In contrast, while public shareholders watched their investments in
Boston Scientific freefall, the Individual Defendants had safely cashed in over $100
million of their own stock prior to the fall.
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IV. The Defendants’ Silence on the FDA Warning Letters.
A. Defendants’ History of “Disclosures” Regarding FDA Regulatory Activities.
104. The Defendants understood that they were engaged in a highly regulated
business and that, for manufacturers of medical devices, the main regulator was the FDA.
In each of the Company’s Reports on Form 10-K, language identical or extremely similar
to the below was included:
The medical devices manufactured and marketed by the Company are subject to regulation by numerous regulatory bodies, including the FDA and comparable international regulatory agencies. These agencies require manufacturers of medical devices to comply with applicable laws and regulations governing the development, testing, manufacturing, labeling, marketing and distribution of medical devices.
* * *
The FDA can ban certain medical devices, detain or seize adulterated or misbranded medical devices, order repair, replacement or refund of these devices, and require notification of health care professionals and others with regard to medical devices that present unreasonable risks of substantial harm to the public health. The FDA may also enjoin and restrain certain violations of the Food, Drug and Cosmetic Act and the Safe Medical Devices Act pertaining to medical devices, or initiate action for criminal prosecution of such violations.
See Reports on Form 10-K for year ending December 31, 2003, at pp. 17-18 and Form 10-K for year ending December 31, 2004, at pp. 11-12.
105. The Defendants’ awareness of the FDA’s power caused them to tout those few
occasions when they actually complied with the law. For example, on September 8, 2004,
Boston Scientific issued the following press release:
Boston Scientific Corporation (NYSE:BSX) today announced that the U.S. Food and Drug Administration (FDA) has completed its inspection of the Company’s Galway, Ireland facility, and that the FDA reported no observations. The inspection began September 1 and ended yesterday.
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The Galway facility is one of two Boston Scientific facilities that manufacture the TAXUS Express2
� paclitaxel-eluting coronary stent system. The other is in Maple Grove, Minnesota. That facility was inspected by the FDA in July, and the agency reported no observations at the conclusion of that inspection as well.
The market responded with an increase of $.78 per share or 2%.
106. Further, whenever Boston Scientific received FDA clearance to distribute one
of its products, it was quick to let investors know. For example, on August 23, 2004, the
Company issued a press release entitled “Boston Scientific Announces FDA Clearance for
FilterWire EZ Embolic Protection System.” Defendants knew that good news moved
the market up, making the exercise of their own options more lucrative. Defendants also
knew that bad news from the FDA would depress the market, and accordingly, Defendants
frequently refused to share bad news with the investing public, despite an unequivocal
obligation to do so. The obligation to advise the investment community of adverse issues
involving the FDA was well understood by Defendants, although frequently ignored.
According to the Company’s own Corporate Integrity Program, contacts with the media
were tightly controlled:
Press releases and contact with news media, securities analysts, or investment bankers must be made only through or at the direction of the Chief Executive Officer [Tobin], Chief Financial Officer [Best] or Vice President – Corporate Communications [Donovan].
2004 Corporate Integrity Program Code of Conduct, at p. 9.
107. Boston Scientific had been previously admonished for its practice of
concealment. On August 14, 2004, Donovan failed to advise the market in a timely
fashion about FDA scrutiny concerning the Company’s Acid-Reflux Kit. Donovan had
argued that such information wasn’t “material.” The market disagreed:
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“Not releasing them [safety alerts] regularly can add volatility to stock prices,” said analyst Jan D. Wald of A.G. Edwards, “since investors are acting on incomplete information.”
* * *
Stanley Keller, a corporate attorney at the law firm of Palmer & Dodge, said that in general he would advise companies to assume the Security and Exchange Commission’s full-disclosure rules apply to their safety alerts as well.
BOSTON GLOBE article dated August 14, 2004.
108. Despite their knowledge of ongoing problems, and their knowledge that they
had a duty to disclose adverse events, the Company kept pumping its products to market
analysts and the investment community. At a meeting with analysts and investors on
February 1, 2005, in New York, Tobin announced “Our performance in 2004, fueled by
the success of our TAXUS Express 2 stent system, was nothing short of remarkable
and speaks to a truly global effort.” The industry seemed to buy the rosy picture;
according to Piper, Jaffray & Company analyst Thomas Gunderson, “They [the Company]
recovered from their stumble.” The market responded with a spike of $1.75 per share or
5.3%. On April 5, 2005, Boston Scientific issued a press release, announcing the FDA’s
approval of the Company’s enhancements for TAXUS, allowing immediate MRI exams
other than the typical two-month wait. The Company touted its “rigorous laboratory
testing.” On this news, share prices jumped $1.42 per share or 4.9%. However, the
Individual Defendants, in making these statements, failed to tell the market that the FDA
was conducting ongoing investigations into the deteriorating condition of the Company’s
manufacturing facilities.
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B. Concealing FDA Warning Letter #1.
109. Between March 9 and April 7, 2005, the FDA conducted an inspection of
Boston Scientific’s Watertown, Massachusetts facility. On April 7, 2005, the FDA mailed
to Mark Adams (“Adams”), the Company’s Quality Manager, a list of problems the FDA
had observed. Adams had been previously placed under pressure from Research and
Development management, including James Culhane, to cut corners on quality. On April
25, Adams prepared a preliminary response to the FDA which was copied to Defendants
Moreci, Tobin, and Taylor. These Defendants were fully aware of the problems observed
by the FDA at the Watertown facility during March and April 2005.
110. On May 18, 2005, the FDA wrote to Tobin and formally advised him that an
inspection of Boston Scientific’s “Watertown, Massachusetts facility which revealed
serious regulatory problems involving your implantable Vaxcel Low Profile
InfusionPorts.” The letter acknowledged Adams’ earlier correspondence, but noted that
Adams’ response “fails to address specific systemwide corrective actions that are
necessary to bring your facility into compliance.” The letter went on to describe in detail
that certain devices manufactured by the Company were adulterated and outlined
“significant deficiencies” which the inspectors uncovered including:
• Failure to establish adequate management controls to ensure that an effective quality system has been established and maintained as required by 21 C.F.R. 820.20.
• Failure to validate your manufacturing process with a high degree of assurance
to ensure that specified requirements are met as required by 21 C.F.R. 820.75(a).
• Failure to establish and maintain an adequate corrective and preventative action
procedure which ensures identification of actions needed to correct and prevent the recurrence of non-conforming products and other quality problems as required by 21 C.F.R. 820.100(a)(3).
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• Failure to validate changes to your manufacturing process with a high degree of
assurance to ensure that specified requirements are met as required by 21 C.F.R. 820.75(c).
• Failure to identify the acceptance status of products throughout manufacturing,
packaging, labeling, and servicing of the product to ensure that only product which has passed the required acceptance activities is distributed or used as required by 21 C.F.R. 820.86.
• Failure of your firm to establish procedures to completely address the
identification, documentation, evaluation, segregation, disposition and investigation of non-conforming products as required by 21 C.F.R. 820.90(a).
None of the Individual Defendants reported this regulatory warning to the investing public.
Accordingly, no market reaction occurred.
111. The first FDA Warning Letter presented examples for all of the failures listed
above and noted that, as to some of the failures, the Company was on notice of the
problems as early as August 19, 2004, when it received the first of numerous complaints
regarding the product, Vaxcel Low Profile Infusion Ports and had made misrepresentations
to the FDA. As stated in the letter:
Upon receipt of one complaint of port separation on August 19, 2004 of the valved port BSC order # 45-238, you instituted a “Precautionary” shipping hold on only the three valved products, to prevent further distribution of these devices. You have since received four additional complaints alleging port separation on September 2, 2004, October 19, 2004, November 16, 2004 and February 9, 2005. On March 11, 2005, you implemented a voluntary recall of all your Vaxcel Low Profile Valved ports. You have provided a document, dated April 6, 2005, entitled, “Vaxcel Low Profile Plastic Port Non-Valved justification,” which was provided as the rationale for not including the non-valved units in your voluntary recall. This document states, “To date Boston Scientific is not aware of any complaints for port separation on the Non-Valved product.”
112. Further, the first FDA Warning Letter went on to explain how a Corporate
Form Product Inquiry Report (PIR) initiated on August 26, 2004, and signed off on
September 29, 2004, misrepresented the knowledge of the Company when it stated “[no]
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assignable cause has been identified for the isolated weld failure” because additional
complaints received by the Company were not mentioned nor was the report updated.
113. Despite the gravity of the first FDA Warning Letter, the Individual Defendants
failed to make any public disclosure. While the Company was quick to publish good news
from the FDA, this first Warning Letter, which challenged the quality control at one of the
Company’s major manufacturing facilities, went unreported – whether in a press release or
SEC filing. As they had done with the Medinol litigation and the Department of Justice
grand jury proceeding, the Defendants refused to inform the investment community.
114. The FDA’s May 18, 2005, letter was disseminated among Boston Scientific
insiders. On May 27, 2005, the Senior Vice President of Global Quality wrote a response
to the FDA stating, in part, that Boston Scientific’s “Executive Leadership recognizes the
seriousness of the Warning Letter and believes that some of the issues identified during the
recent FDA inspections of Watertown, Quincy, and Glens Falls need to be addressed from
a corporate quality system perspective. . . .” The letter went on to acknowledge “linkage”
between some of the recent findings discovered at Watertown, Glens Falls, and Quincy.
However, despite the acknowledged “seriousness” by Boston Scientific’s “Executive
Leadership,” no public disclosure was made by the Company. But some action was taken.
On May 31, 2005, Defendant Moreci, who had been copied on the FDA Warning Letter
response, cashed in $1.4 million of his own stock.
115. The policy of concealment was not limited to Tobin, Taylor, and Moreci.
Defendant Best, a member of the Executive Committee and Chief Financial Officer,
participated in the concealment. Best failed to disclose the letter, its contents, or the
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Company’s response during a presentation at a conference hosted by Goldman Sachs on
June 15, 2005. In his presentation, Best gave the following glowing report:
Next slide, please. Boston Scientific is really burdened today by its enormous success. Now this is a high-end problem. I mean we’d like – if we’re going to have problems to solve, solve the ones that have to do with how do you grow after you’ve grew the top line in the prior year 60% and the bottom line 130% some or 120% whatever it was. These are nice problems to work on and we are excited about working on them. And in terms of the team at Boston Scientific, we try to you know not think about where [or] how we’re valued or our stock price in any point in time and if you can ignore that sometimes it’s hard to ignore – but when you ignore that you look at the cards that we have in the device community, and we basically have a set of cards that really are second to no one else.
June 15, 2005, corrected transcript, at p. 2.
116. Additionally, Defendants Best and Tobin who “certified” the Company’s filings
with the SEC continued to mislead investors by issuing Reports with the SEC on Form
10-Q which were silent about the first FDA Warning Letter, but which hollowly suggested
the Company was committed to quality. In fact, the commitment had been to slashing
costs which effectively prohibited the Company from maintaining quality manufacturing
standards. The Report on Form 10-Q for the quarter ending June 30, 2005, which was
certified to by Defendants Tobin and Best and filed with the SEC on August 9, 2005, not
only failed to mention the first (or second) FDA Warning Letter, it continued to repeat the
Company’s mantra of purporting to be committed to “quality.”
117. On July 19, 2005, in conjunction with an earnings conference call, despite
knowing of quality problems and the FDA’s audit of other Company plants, Defendant
Tobin was still touting the “new” TAXUS product to analysts, suggesting that it was
maintaining its share of the market. In response to the good news, RBC Capital Markets
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upgraded the Company, oblivious to the unreported mounting quality problems. The stock
price rose $1.15 per share or 4.23% on July 19, 2005.
C. Concealing FDA Warning Letter #2.
118. On August 1, 2005, a second FDA Warning Letter arrived, citing “significant
violations.” In response, the Company failed to issue a Report on Form 8-K or press
release, disclosing that it might be imploding due to quality and regulatory compliance
issues. Instead, the market was oblivious. By the time the Report on Form 10-Q was filed
on August 9, 2005, and certified to by Defendants Best and Tobin, Tobin had received the
second Warning Letter from the FDA yet, no effort to inform the investment community of
the first or second Warning Letter was included in the Report on Form 10-Q.
119. The quality problems were not limited to the Watertown facility. The second
Warning Letter directed to Defendant Tobin concerned the manufacturing facility at Glens
Falls, New York, a facility the Company describes as “world class” with “cutting edge
automation” on its website. The FDA’s view of the Glens Falls facility is somewhat
different. In its letter of August 1, 2005, the FDA stated:
The Food and Drug Administration (FDA) conducted an inspection of your Boston Scientific Corporation (BSC) medical device manufacturing facility located at 10 Glens Falls Tech Park, Glens Falls, New York, April 12, 2005 through May 6, 2005.
* * * During the inspection, FDA documented significant violations from the Quality System Regulation, Title 21 Code of Federal Regulations (CFR), Part 820. At the conclusion of the inspection, Form FDA 483, Inspectional Observations, was issued. On June 13, 2005, a revised Form FDA 483 was issued removing item 7. These violations cause the aforementioned medical devices manufactured at your firm to be adulterated within the meaning of section 501(h) [21 U.S.C. 352(h)] of the Act.
* * *
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Sixteen of twenty-one complaint records of investigation involving Introducer Sheaths used in Vaxcel Port kits failed to address either the root cause or follow up.(1)
Twelve of twenty-one complaint investigation records failed in obtaining return of the device for evaluation; (2)
Two of five complaint records of investigation involving Vaxcel Low Profile Ports with PASV kits failed to address the root cause or follow up; (3)
Six of nine Vaxcel Mini and Standard Ports with PASV kits complaint investigation records failed to identify the root cause or follow-up (4). The firm failed in three of nine instances to obtain return of the devices; (5)
Fourteen of nineteen complaint records of investigation records for Vaxcel PASV PICCs (IR/5/2) failed to identify the root cause or state the follow up.6 [sic] Four of nine such records failed to obtain return of the devices; (7)
Four of five complaint records of investigation for Vaxcel PASV PICCs(IR/5/1) failed to identify the root cause or follow up. (8) Two of five such records showed the firm failed to obtain return of the devices; (9) and
Ten of fourteen complaint records of investigation for Vaxcel PASV PICCs (CK/5/2) failed to identify the root cause or follow up. (10)
Records of complaint investigations do not always include the full device identifications including the control numbers as required by 21 CFR 820.198(e) (3). For example:
six of twenty-one complaint records of Introducer Sheaths used in Vaxcel Port kits;(11)
two of five complaint records for Vaxcel Low Profile Chest Implant Ports;(12) four of nine complaints for Vaxcel Mini and Standard Chest Implant Ports;(13) twelve of nineteen complaints for Vaxcel PASV PICCs (IR5/2);(14) three of five complaints for Vaxcel PASV (IR/5/1);(15) and
nine of fourteen complaints for Vaxcel PASV PICCs (CK/5/2).(16)
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120. On August 5, 2005, while still concealing FDA quality issues and the Warning
Letter, the Company’s S&P rating was raised “as the Company’s prospects improved for
existing and new products.” The rating for short-term credit rose to A-1 from A-2. On this
news, the stock made a $.76 increase (2.6%), while the market was still unaware of the
eroding quality issues at the manufacturing plants.
D. Concealing FDA Warning Letter # 3.
121. On August 10, 2005, Defendants received a third FDA Warning Letter relating
to its Quincy, Massachusetts facility. The third letter documented that Defendants remained
recalcitrant and evaded taking steps responding to the FDA’s concerns. As a result, the
Company now risked significant regulatory actions, including inventory seizures, court
injunction and civil monetary penalties. The third Warning Letter dated August 10, 2005,
addressed to Defendant Tobin stated in part:
We are writing to you because on March 28 through May 20, 2005, the Food and Drug Administration (FDA) conducted an inspection of your Boston Scientific Corporation, (BSC) Quincy, Massachusetts facility which revealed serious regulatory problems involving your medical devices, including the implantable Vaxcel Low Profile Infusion Ports, TAXUS paclitaxel drug eluting stents, and Symmetry balloon dilatation catheters.
Under a United States law, the Federal Food, Drug and Cosmetic Act, (the Act) these products are considered to be medical devices because they are used to diagnose or treat a medical condition. Moreover, your manufacturing activities, including labeling, holding and distributing, make you a manufacturer under the law. The inspection found that these devices are adulterated under section 501(h) of the Act, 21 U.S.C. 351(h), in that the methods used in, or the facilities or controls used for, the manufacture, packing, storage or installation are not in conformance with the Current Good Manufacturing Practice (CGMP) requirements for medical devices which are set forth in the Quality System regulation, as specified in Title 21 Code of Federal Regulations, (21 CFR), Part 820. Significant deviations include, but are not limited to, the following:
(1) Failure to identify the acceptance status of product throughout manufacturing, packaging, labeling, and servicing of the product to ensure
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that only product which has passed the required acceptance activities is distributed as required by 21 CFR 820.86. For example, on a number of occasions, your firm shipped medical devices that were not considered acceptable for release.
* * *
(2) Failure to establish adequate management controls to ensure that an effective quality system has been established and maintained as required by 21 CFR 820.20. For example, BSC has failed to implement procedures to assure that only devices approved for release are distributed.
* * * (3) Failure to analyze processes, work operations and other sources of
quality data to identify existing and potential causes of non-conforming product as required by 21 CFR 820.100(a)(1).
* * *
(4) Failure to document all activities performed in regards to your corrective and preventive activities, including the investigations of causes of nonconformities, and the actions needed to correct or prevent recurrence of non conforming product and other quality problems, as required by 21 CFR 820.100(b). During our inspection, we reviewed several BSC CAPAs. This review indicated that your CAPAs fail to include all the necessary information to describe the incident and / or the non conforming condition.
* * *
(5) Failure to establish and maintain an adequate corrective and preventive action procedure which ensures identification of actions needed to correct and prevent the recurrence of nonconforming product and other quality problems, as required by 21 CFR 820.1 00(a)(3). Your CAPA system has failed to identify the necessary actions to correct and prevent the continued distribution of nonconforming product.
* * *
(6) Failure to document changes in your required records to include a description of the change, signature of the approving official and an approval date, as required by 21 CFR 820.40(b).
* * *
This letter is not intended to be an all-inclusive list of deficiencies at your facility. It is your responsibility to ensure adherence to each requirement of
74
the Act and regulations. The specific violations noted in this letter and in the Form FDA-483 issued at the conclusion of the inspection may be symptomatic of serious underlying problems in your establishment’s quality system. You are responsible for investigating and determining the causes of the violations identified by the FDA. You also must promptly initiate permanent corrective and preventive action on your Quality System.
You should know that these serious violations of the law may result in FDA taking regulatory action without further notice to you. These actions include, but are not limited to, seizing your product inventory, obtaining a court injunction against further marketing of the product, or assessing civil money penalties. Federal agencies are advised of the issuance of all Warning Letters about devices so that they may take this information into account when considering the award of contracts. Additionally, no premarket submissions for Class III devices to which the Quality System/Current Good Manufacturing Practice deficiencies are reasonably related will be cleared or approved until the violations have been corrected. Also, no requests for Certificates to Foreign Governments will be approved until the violations related to the subject devices have been corrected.
Again, Defendants failed to disclose this letter to the investment community.
E. The Truth Slowly Emerges.
122. On August 16, 2005, Reuters published a news article entitled, “Boston
Scientific Warned on Vaxcel Device Again.” The news of the August 1, 2005, FDA
Warning Letter was finally released. The article was published, despite Defendants’
efforts to prevent disclosure to the investment community. The article stated in part:
The U.S. Food and Drug Administration has warned Boston Scientific Corp. for a second time over poor oversight of its Vaxcel devices often used for chemotherapy, according to a letter made public on Tuesday. The FDA said the company had “inadequate” procedures in place to ensure quality of the devices. Inspections of the device maker’s Glens Falls, New York, plant in April and May also found that complaints about possible device failures “are not always thoroughly investigated where necessary” The Vaxcel chest port and catheter devices create a port in the chest to provide access to the body's vein system, usually to deliver chemotherapy.
75
Boston Scientific spokesman Charles Rudnick said the company no longer sells the devices cited in the FDA letter and has no plans to relaunch the products. “We are actively working to resolve all of the issues raised by the FDA in its letter,” he added. The agency first warned the company about the devices in May. At the time, Boston Scientific said it was recalling 2,000 of the devices and sent written responses to the FDA. But in the latest FDA warning letter, dated Aug. 1, the agency said the company's reply was lacking. “Several responses provide little detail regarding how your firm will achieve the desired corrections,” the agency said. Boston Scientific shares were off 25 cents to $28.15 on Tuesday on the New York Stock Exchange. The FDA sends dozens of warning letters each year. Many companies fix problems without further penalty, but the warnings can lead to product seizures, injunctions or fines. (Emphasis added.).
123. In its limited comments to Reuters, Defendants failed to disclose that the
Vaxcel recall had been initiated back in March of 2005 and not in response to the May 2005
Warning Letter. Moreover, by the insiders treating the Warning Letters as immaterial,
investors could not appreciate what the Defendants clearly knew, that it was the intention of
the FDA to move beyond Defendants’ denials and to document and seek remedies for what
was a company-wide defective quality assurance program.
124. Finally, on August 23, 2005, the market learned of the FDA’s third Warning
Letter, which had been sent to Boston Scientific on August 10, 2005. In this Warning
Letter, investors finally learned of Defendants’ broad concealment of its defective quality
program and the risks faced by the Company. Under the headline, FDA Scolds Boston
Scientific, THESTREET.COM reported “The Food and Drug Administration issued a warning
letter to medical-device maker Boston Scientific for distributing faulty stents, sending the
76
company’s shares lower Tuesday.” In response to the news, the price of Boston Scientific
stock dropped $1.23, or 4.5% to $25.92, on a volume of 15.8 million shares, marking a
decline of $19.89 or 43.4% from its Class Period high of $45.81 on April 5, 2004.
125. The 4.5% decline in Boston Scientific’s stock price on August 23, 2005, was a
direct result of the belated disclosures of the nature and extent of Defendants’ fraud.
Moreover, the 43.4% decline in the Company’s stock price from its Class Period high of
$45.81 on April 5, 2004, was a direct result of Defendants’ acts of concealment of the issues
facing the marketability of Defendants’ medical device products.
126. The Company’s decline in stock price was not related to general market trends.
During the same period in which Boston Scientific’s stock price fell almost 43.4% as a
result of Defendants’ fraud being revealed, the Standard & Poor’s 500 securities index was
flat and the Company’s competitors’ stock price increased:
Comparison of Stock Performance with Competitors: 4/1/04 - 9/30/05
$20
$40
$60
$80
4/1/20
04
5/1/20
04
6/1/20
04
7/1/20
04
8/1/20
04
9/1/20
04
10/1/
2004
11/1/
2004
12/1/
2004
1/1/20
05
2/1/20
05
3/1/20
05
4/1/20
05
5/1/20
05
6/1/20
05
7/1/20
05
8/1/20
05
9/1/20
05
Clo
sing
Pri
ce p
er S
hare
Boston Scientific (BSX)Medtronic (MDT)Guidant (GDT)Johnson & Johnson (JNJ)
(GDT)
(JNJ)
(MDT)
(BSX)
77
127. The damages suffered by PERS and other members of the Class was a direct
result of Defendants’ fraudulent scheme to artificially inflate Boston Scientific’s stock
price. The subsequent significant decline in the value of Boston Scientific’s stock
occurred when Defendants’ prior misrepresentations and other fraudulent conduct were
revealed.
128. The market reaction to the news in August 2005 was to be anticipated. The
Company never honestly addressed the concerns raised by the Department of Justice
investigation or by the FDA throughout the Class Period about the integrity of their
operations or the veracity of their management. Ultimately, the FDA was required to take
strong action by issuing a Corporate Warning Letter on January 25, 2006, several months
after the Class Period ended. That letter highlighted the systemic problems which were
occurring throughout Boston Scientific’s manufacturing facilities during the Class Period.
That letter was based on the review of three additional manufacturing sites and looked
beyond the manufacturing problems found at the facilities in Watertown, Quincy, and
Glens Falls. That letter, addressed to Defendants Tobin and Nicholas, included the
following statements by the FDA:
The purpose of this letter is to apprise top management of your inadequate corporate-wide corrective action plan as evidenced by the continuing serious deficiencies identified at each of these facilities and to remind you of your responsibility to ensure that all facilities continuously comply with the Act and all pertinent regulations.
* * *
The three most recent inspections at your Natick, MA (NATICK), Maple Grove, MN (MAPLE GROVE), and Spencer, IN (SPENCER) facilities revealed that the devices manufactured at these sites are adulterated under section 510(h) of the Act, in that the methods used in, or the facilities or controls used for, the manufacture, packing, storage or installation are not in conformance with the Current Good Manufacturing Practice (CGMP)
78
requirements for medical devices which are set forth in the QS regulation, as specified in 21 C.F.R. Part 820. FDA has found ongoing systematic violations in the quality management system employed to ensure the safety and effectiveness of the medical devices you distribute.
(Emphasis added.)
129. The January 25, 2006, letter from the FDA provides precise detail about all of
the violations observed by the FDA at the Company’s manufacturing facilities, making
clear that these problems existed throughout the Class Period and were known to the
Individual Defendants. The letter even cites to 66 late filings by the Company of Medical
Device Reports (MDRs) from July 2004 to July 2005. In their January 25, 2006, letter, the
FDA demanded an immediate meeting.
130. In response to this Corporate Warning Letter, Tobin admitted that the
Defendants “have clearly not done enough to resolve the issues raised by the FDA last
year.” However, the Defendants’ focus did not appear to on the fact that they had
systematically misrepresented the quality of their manufacturing operations to the FDA
and investors, nor that individuals using their adulterated products might suffer harmful
injuries. Instead, the Defendants appeared more concerned that the Corporate Warning
Letter might slow down the Company’s ability to rush yet another product to the market.
Paul Donovan, a spokesman for Boston Scientific, of Natick, Mass., acknowledged that the FDA warning would keep the Taxus Liberte stent off the market in the U.S. if it was ready for sale. However, he said “we’re going to do everything we can to clear up the deficiencies” in hopes of getting Taxus Liberte on the market as planned, during the third quarter of this year.
WALL STREET JOURNAL, January 27, 2006.
131. The Defendants’ knowledge and understanding that its manufacturing facilities
suffered from chronic quality control problems predated any of the FDA letters. The FDA
79
letters merely confirmed the material information that the Defendants had known
throughout the Class Period, that their aggressive cost containment procedures had put the
Company at risk. In fact, in early 2003, the Company was forced to go self-insured
because the cost of obtaining insurance for the Company became prohibitively expensive.
While other companies with some level of quality controls, like St. Jude Medical and
Johnson & Johnson, found it easy to get insurance for product liability claims, Boston
Scientific did not. The Defendants failed to disclose the risks which the insurers saw in
their operations and, in fact, hid the risks through public filings erroneously suggesting the
Company was committed to quality control or non-disclosure. For example, while the
January 25, 2006, letter from the FDA cited to manufacturing problems involving Enteryx,
a device for acid reflux disease, the Company was aware of problems with the device as
early as August 2004, during the Class Period, after receiving complaints of six serious
injuries and a death. Similarly, while the January 25, 2006, letter from the FDA discussed
problems with the Maple Grove, Minnesota manufacturing plant which manufactures the
Company’s TAXUS coronary stent system, the Company knew of problems as early as the
end of 2003 when it had received numerous complaints from European physicians and,
clearly, as of July 2004 when it was required to recall TAXUS after implementation of
undisclosed manufacturing changes. These systemic problems occurring in 2004 went
undisclosed, providing the market no opportunity to digest the information.
132. Defendants’ failure to timely disclose the FDA Warning Letters and the FDA’s
findings of widespread, systematic quality control problems has to be juxtaposed against
Defendants’ alleged commitment to quality that they were espousing throughout the Class
80
Period. In Reports on Form 10-K filed with the SEC annually, the following was
trumpeted:
The Company’s plan [Global Operations Plan] also included a manufacturing process control initiative which strengthened the Company’s technological resources to improve quality, reduce cost and accelerate time to market.
Boston Scientific Report on Form 10-K for year ended December 31, 2003, at p. 15.
The Company is committed to providing high quality products to its customers. To meet this commitment, the Company has implemented state-of-the-art quality systems and concepts throughout the organization. The Company’s quality system starts with the initial product specification and continues through the design of the product, component specifications process and the manufacturing, sales and servicing of the product.
Boston Scientific Report on Form 10-K for year ended December 31, 2003, at pp. 15-16.
See also Report on Form 10-K for year ended December 31, 2004, at p. 10 for almost
identical language.
133. Defendants’ statements were untrue and misleading. Defendants had created
cumulative savings of $600 million from 2001-2004 through layoffs, displacements, and
terminations. Having slashed and outsourced jobs while increasing revenues, the
Company’s “commitment” was not to maintain quality. As ultimately reflected in the
FDA Warning Letters, Defendants’ commitment was to meet short term financial
performance incentives set forth in the Company’s Compensation Program and personally
enrich themselves by exercising options when the stock price was artificially elevated.
SCIENTER ALLEGATIONS: THE COMPENSATION STRUCTURE, STOCK REPURCHASE PROGRAM,
AND INSIDER SALES
134. Defendants acted with scienter in that Defendants knew that the public
documents and statements issued or disseminated in the name of the Company were
81
materially false and misleading. Defendants also knew that such statements and
documents would be issued or disseminated to the investing public. Defendants knowingly
and substantially participated or acquiesced in the issuance or dissemination of such
statements or documents, in violation of the federal securities law. As set forth elsewhere,
Defendants, by virtue of their receipt of information reflecting the true facts regarding
Boston Scientific and their association with the Company, make them privy to confidential
information regarding Boston Scientific and participants in the fraudulent scheme alleged
herein.
135. The reasons for the Defendants’ participation are evident from the sale of over
$332 million in stock during the Class Period. As members of the Executive Committee,
each Individual Defendant knew or understood that the stock trading price of Boston
Scientific was artificially inflated by:
• The failure to disclose the actual risk and settlement negotiations in the Medinol litigation which ultimately resulted in a $750 million payment by the Company to settle a portion of the litigation;
• The failure to disclose the seriousness of the grand jury proceeding, which
ultimately resulted in the Company paying $74 million;
• The failure to disclose the existence and seriousness of the FDA Warning Letters;
• The failure to disclose that the Company was operating manufacturing facilities
which violated FDA regulations and which were producing adulterated products;
• The failure to disclose the risks associated with rushing TAXUS to market
and improperly pumping up the value of that product when they knew there were serious defects; and
• The failure to disclose that its global “optimalization” plan, which led to
massive layoffs, and put the Company in a circumstance where it lacked sufficient resources to ensure the efficacy and safety of its products.
82
136. As the stock price rose in response to Defendants’ actions, the Defendants, as
well as other insiders, took an aggressive approach to dumping their own shares when the
price reached artificially inflated highs on the New York Stock Exchange.
137. The Company’s compensation structure and stock repurchase program provided
heightened incentive and means for the Individual Defendants to artificially inflate Boston
Scientific stock for short-term goals and insider sales. The Board’s philosophy behind
their compensation policy as articulated in Schedule 14As filed with the SEC throughout
the Class Period was:
[T]hat executive officers are appropriately incentivized to deliver short-term results while creating substantial long-term stockholder value.
Schedule 14A filed on April 19, 2004, at p. 24. See also Schedule 14A filed on April 4, 2003, at p. 19.
138. The Board implemented this policy through providing remuneration which
revolved largely around stock options. As Defendant Tobin noted in an April 19, 2005,
Earnings Conference call with Analysts, the officers’ compensation was primarily derived
from stock options:
Q: (By Glenn Novarro): And then, maybe if anyone wants to comment about the desire, has there been any discussions among senior managers about personally buying back shares given that you know the stock is currently sitting at a 52 week low?
A. (By James Tobin): This is Jim Tobin; let me chime in on this one.
You know, I’ve bought shares twice now, it didn’t do any good. And, hell, my appetite for buying more, I don’t care how cheap it is. I have got $6 options; so buying at $30 is a bunch of bullshit. So I won’t be doing that and I truly believe that since we as a management team are largely paid in options that the decision of when to avail yourself of the profits on those options is a personal decision. And so I have for years now avoided trying to dictate to the management team what they should do in their personal finance area, and I intend to stick with that.
83
April 19, 2005, corrected transcript, at p. 19.
139. Boston Scientific had, throughout the Class Period, a compensation program for
the Individual Defendants which was, by any standard, “generous.” From 2003-2005, the
Individual Defendants whose salaries are reported publicly received the following:
Tobin $ 7,118,818
Best $ 5,109,073
LaViolette $ 3,336,722
Colen $ 2,522,305
Sandman $ 3,807,540
140. Additionally, the Individual Defendants also received millions of dollars in
bonus awards which were provided annually. Further, the Individual Defendants were
provided numerous perks, including having the Company pay for cars, medical
examinations, estate planning, and personal use of the Company’s aircraft.
141. However, the compensation policy did not end with salaries and perks. The
main ingredient of the Company’s compensation program was its generous grants of stock
and stock options to its executives. These stock options provided incentives for the
Defendants to artificially inflate the market price of Boston Scientific stock so that they
could maximize their own worth. The Individual Defendants held the following amount of
stock options at the beginning of the Class Period and options granted during the Class
Period which vested:
Tobin 4,077,500
Best 6,200,026
LaViolette 1,620,442
84
Colen 775,674
Moreci 576,374
Sandman 1,359,630
Taylor 545,698
MacLean 1,357,590
142. The Individual Defendants could realize the greatest value by exercising the
options when the market price was at its peak. The Individual Defendants exercised
influence over the market price by failing to provide timely and complete information to
the marketplace as set forth above, and ultimately exercised a majority of the stock options
that they held which were vested during the Class Period, walking away with the following
amounts:
Nicholas: $ 8,970,365 (gifted) Tobin: $ 40,822,425 Best: $156,461,689 LaViolette: $ 14,790,107 Colen: $ 24,042,576 Moreci: $ 20,665,638 Sandman: $ 24,296,878 Taylor: $ 15,609,986 MacLean: $ 25,916,895 TOTAL: $331,576,559
143. The Individual Defendants’ efforts to manipulate the market price of the
Company’s stock was not limited to nondisclosure of material information. The Company
85
maintained its own share repurchase program which was authorized by the Board, as
recommended by members of the Executive Committee, including Defendants Best and
Tobin. According to public reports, the shares repurchased under the program were
utilized by the Company for acquisitions as well as stock incentive programs for officers
and employees.
144. The program was originally authorized by the Board in 1995 and permitted the
Company to repurchase up to 60 million shares on the open market. The program was
expanded to permit the Company to repurchase, on the open market, a total of 119 million
shares. Share repurchases by the Company had the effect of maintaining or boosting the
market price as the Company’s purchases increased demand for the stock. While the
Board authorized the repurchases, the precise timing of when the Company would buy its
own shares back was, on information and belief, under the control of Defendant Best.
145. In the time period just prior to the Class Period, the Company’s share
repurchases were somewhat minimal compared to what was authorized under the program.
In 2000, the Company repurchased 12 million shares at a cost of $220 million. In 2001
and 2002, the Company did not repurchase any of its stock on the open market. However,
leading up to and during the Class Period, in order to bolster the stock price, the number of
shares being repurchased by the Company dramatically grew, giving the market a false
sense that the Company believed the stock was undervalued. For example:
2003 – 22 million shares for $ 570 million
2004 – 10 million shares for $ 360 million
2005 – 25 million shares for $ 734 million
86
146. As set forth below, the timing and degree of corporate repurchase of shares was
substantially higher during the Class Period and influenced the stock price of Boston
Scientific:
2000 - 2005 Stock Purchases by Boston Scientific Corp.
$0
$10
$20
$30
$40
$50
11/1/
1999
2/25/2
000
6/20/2
000
10/12
/2000
2/7/20
01
6/4/20
01
10/2/
2001
1/28/2
002
5/22/2
002
9/16/2
002
1/9/20
03
5/6/20
03
8/28/2
003
12/22
/2003
4/19/2
004
8/12/2
004
12/6/
2004
4/1/20
05
7/26/2
005
11/16
/2005
Adj
uste
d C
lose
Pri
ce p
er S
hare
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
Pur
chas
e P
rice
(Mill
ions
)
Boston Scientific Corp. Stock Price
Company Stock Purchases
Class Period: 3/31/03 - 8/23/05
147. Simultaneously with the massive corporate repurchases, the Individual
Defendants were unloading their stock.
87
Timing of Significant Insider Sales
$18
$28
$38
$48
1/2/03
2/2/03
3/2/03
4/2/03
5/2/03
6/2/03
7/2/03
8/2/03
9/2/03
10/2/03
11/2/
03
12/2/
031/2
/042/2
/043/2
/044/2
/045/2
/046/2
/047/2
/048/2
/049/2
/04
10/2/
04
11/2/
04
12/2/
041/2
/052/2
/053/2
/054/2
/055/2
/056/2
/057/2
/058/2
/059/2
/05
Clo
se P
rice
per
Sha
re
$92.7 Million
$207 Million
$4.8 Million
$8.7
148. The $332 million in sales by the Individual Defendants was completely
inconsistent with the Individual Defendants’ prior practices. In fact, prior to the Class
Period, the Defendants had exercised their stock options in a minimal manner:
Percentage of Exercise of Stock Options by Defendants
29-Month Period Class Period Preceding Class Period (29 Months)
Tobin 0 25%
Best 1% 66%
LaViolette 20% 29%
Colen 1% 84%
Moreci 37% 97%
Sandman 22% 52%
88
Taylor 44% 78%
MacLean 22% 46%
149. The timing and degree of Defendants’ insider trades reflects knowing and
wilful conduct predicated on knowledge that their own actions had artificially inflated the
price of Boston Scientific stock during the Class Period. Defendants took advantage of
their own wrongful conduct by enriching themselves while open market purchasers were
being exploited. Further, the manipulation of the Company’s stock repurchase program
was done to maximize the price of Boston Scientific stock at a time when Defendants
could unload their shares.
NO SAFE HARBOR
150. The statutory safe harbor providing for forward-looking statements under
certain circumstances does not apply to the allegedly false statements pleaded in this
complaint. 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
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 the Company who
knew that those statements were false when made.
89
FRAUD ON THE MARKET DOCTRINE
151. Plaintiff will rely, in part, upon the presumption of reliance established by the
fraud-on-the-market doctrine in that:
� Defendants made public misrepresentations or failed to disclose material facts to the investing public during the Class Period;
� the omissions and misrepresentations were material;
� the securities of the Company traded in an efficient market;
� the misrepresentations and omissions alleged would tend to induce a
reasonable investor to misjudge the value of the Company’s securities; and
� PERS and members of the Class purchased their Boston Scientific stock between the time the Defendants failed to disclose or misrepresented material facts and the time the true facts were disclosed, without knowledge of the omitted or misrepresented facts.
152. Based upon the foregoing, PERS and the members of the Class are entitled to a
presumption of reliance upon the integrity of the market.
CLASS ALLEGATIONS
153. PERS brings this action as a class action pursuant to Federal Rule of Civil
Procedure 23(a) and (b)(3) on behalf of a class, consisting of all those who purchased or
otherwise acquired the equity securities of Boston Scientific between March 31, 2003,
through August 23, 2005, both dates inclusive, and who were damaged thereby. Excluded
from the Class are Defendants herein, the officers and directors of the Company, members
of their immediate families and their legal representatives, heirs, successors or assigns and
any entity in which Defendants have or had a controlling interest. On information and
belief, the excluded parties hold in excess of 30% of the outstanding securities of the
Company. Also excluded from the Class are those entities or individuals who purchased
bonds or held options.
90
154. The members of the Class are so numerous that joinder of all members is
impracticable. Throughout the Class Period, Boston Scientific common shares were
actively traded on the New York Stock Exchange. While the exact number of Class
members is unknown to PERS at this time and can only be ascertained through appropriate
discovery, PERS believes that there are tens of thousands of members in the proposed
Class, given the outstanding number of shares reported by the Company and the volume of
trading. Record owners and other members of the Class may be identified from records
maintained by Boston Scientific or its transfer agent and may be notified of the pendency
of this action by mail, using the form of notice similar to that customarily used in securities
class actions.
155. PERS’ claims are typical of the claims of the members of the Class as all
members of the Class are similarly affected by Defendants’ wrongful conduct in violation
of federal law that is complained of herein.
156. PERS will fairly and adequately protect the interests of the members of the
Class and has retained counsel competent and experienced in class and securities litigation.
PERS has no interests antagonistic to or in conflict with those of the Class.
157. Common questions of law and fact exist as to all members of the Class and
predominate over any questions solely affecting individual members of the Class. Among
the questions of law and fact common to the Class are:
� whether the federal securities laws were violated by Defendants’ acts as alleged herein;
� whether statements made by Defendants to the investing public during the
Class Period misrepresented material facts about the business and operations of Boston Scientific;
91
� whether the Individual Defendants’ collective sale of over $332 million of Boston Scientific securities during the Class Period violated federal securities’ regulations and should be disgorged;
� whether the Defendants caused Boston Scientific to issue false and
misleading statements during the Class Period;
� whether Defendants acted knowingly or recklessly in issuing false and misleading statements;
� whether the market price of Boston Scientific securities during the Class
Period was artificially inflated by Defendants’ misconduct; and
� whether Class members have sustained damages and, if so, what is the proper measure of damages.
158. A class action is superior to all 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 Class members may be relatively
small, the expense and burden of individual litigation make it impossible for members of
the Class to individually redress the wrongs done to them. There will be no difficulty in
the management of this action as a class action.
CLAIMS FOR RELIEF
COUNT I
(Against All Defendants for Violations of Section 10(b) and Rule 10b-5 Promulgated Thereunder)
159. PERS repeats and realleges each and every allegation contained above as if
fully set forth herein.
160. This Count is asserted against all Defendants and is based upon Section 10(b)
of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder by the
SEC.
92
161. During the Class Period, Defendants engaged in a plan, scheme, conspiracy,
and course of conduct, pursuant to which they knowingly or recklessly engaged in acts,
transactions, practices, and courses of business which operated as a fraud and deceit upon
PERS and the other members of the Class; made various untrue statements of material fact
and omitted to state material facts necessary in order to make the statement made, in light
of the circumstances under which they were made, not misleading; and employed devices,
schemes, and artifices to defraud in connection with the purchase and sale of securities.
Such scheme was intended to, and, throughout the Class Period, did: (i) deceive the
investing public, including PERS and other Class members, as alleged herein; (ii)
artificially inflate and maintain the market price of Boston Scientific’s common stock; and
(iii) cause PERS and other members of the Class to purchase Boston Scientific’s securities
at artificially inflated prices. In furtherance of this unlawful scheme, plan, and course of
conduct, Defendants, and each of them, took the actions set forth herein.
162. Pursuant to the above plan, scheme, conspiracy, and course of conduct, each of
the Defendants participated directly or indirectly in the preparation and/or issuance of the
quarterly and annual reports, SEC filings, press releases, and other statements and
documents described above, including statements made to securities analysts and the
media that were designed to influence the market for Boston Scientific common stock.
Such reports, filings, releases, and statements were materially false and misleading in that
they failed to disclose material adverse information and misrepresented the truth about
Boston Scientific’s finances and business prospects.
163. By virtue of their positions at Boston Scientific, Defendants had actual
knowledge of the materially false and misleading statements and material omissions
93
alleged herein and intended thereby to deceive PERS and the other members of the Class,
or, in the alternative, defendants acted with reckless disregard for the truth in that they
failed or refused to ascertain and disclose such facts as would reveal the materially false
and misleading nature of the statements made, although such facts were readily available to
defendants. Said acts and omissions of Defendants were committed willfully or with
reckless disregard for the truth. In addition, each Defendant knew or recklessly
disregarded that material facts were being misrepresented or omitted as described above.
164. Individual Defendants were personally motivated to make false statements and
omit material information necessary to make the statements not misleading in order to
personally benefit from Boston Scientific’s compensation policy, as well as the sale of
Boston Scientific common stock from their personal portfolios. Indeed, during the Class
Period, the Individual Defendants were able to sell over $332 million in stock.
165. Information showing that Individual Defendants acted knowingly or with
reckless disregard for the truth is peculiarly within Defendants’ knowledge and control.
As the senior managers and directors of Boston Scientific, each of the Individual
Defendants had knowledge of the details of Boston Scientific’s internal affairs.
166. The Individual Defendants are liable both directly and indirectly for the wrongs
complained of herein. Because of their positions of control and authority, the Individual
Defendants were able to and did, directly or indirectly, control the content of the
statements of Boston Scientific. As officers and directors of a publicly-held company, the
Individual Defendants had a duty to disseminate timely, accurate, and truthful information
with respect to Boston Scientific’s businesses, operations, future financial condition and
future prospects. As a result of the dissemination of the aforementioned false and
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misleading reports, releases and public statements, the market price of Boston Scientific
common stock was artificially inflated throughout the Class Period. In ignorance of the
adverse facts concerning Boston Scientific’s business and financial condition which were
concealed by the Individual Defendants, PERS and the other members of the Class
purchased Boston Scientific common stock at artificially inflated prices and relied upon
the price of the stock, the integrity of the market for the stock and/or upon statements
disseminated by the Individual Defendants and were damaged thereby.
167. During the Class Period, Boston Scientific common stock was traded on an
active and efficient market. PERS and the other members of the Class, relying on the
materially false and misleading statements described herein, which the Defendants made,
issued or caused to be disseminated, or relying upon the integrity of the market, purchased
shares of Boston Scientific common stock at prices artificially inflated by Defendants’
wrongful conduct. Had PERS and the other members of the Class known the truth, they
would not have purchased said shares or would not have purchased them at the inflated
prices that were paid. At the time of the purchases by PERS and the Class, the true value
of Boston Scientific stock was substantially lower than the prices paid by PERS and the
other members of the Class. The market price of Boston Scientific common stock declined
upon public disclosure of the facts alleged in this complaint.
168. By reason of the conduct alleged herein, Defendants knowingly or recklessly,
directly or indirectly, have violated Section 10(b) of the Exchange Act and Rule 10(b)-5
promulgated there under. As a direct and proximate result of Defendants’ wrongful
conduct, PERS and the other members of the Class suffered damages in connection with
their respective purchase and sales of the Company’s securities during the Class Period.
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COUNT II
(Violations of Section 20(a) of the Exchange Act Against the Individual Defendants)
169. PERS repeats and realleges each and every allegation contained in the
foregoing paragraphs as if fully set forth herein.
170. As to Individual Defendants Peter M. Nicholas, James R. Tobin, Lawrence C.
Best, Paul A. LaViolette, Fredericus A. Colen, Stephen F. Moreci, Paul W. Sandman,
James H. Taylor and Robert G. MacLean:
a. During the Class Period, the Individual Defendants were either members of
the Board and/or members of Boston Scientific’s “Executive Committee,”
participated in the operation and management of Boston Scientific, and
conducted and participated, directly and indirectly, in the conduct of Boston
Scientific’s business affairs. Because of the Individual Defendants’ senior
positions, each knew the adverse non-public information about Boston
Scientific.
b. As officers and directors of a publicly owned company, each Individual
Defendant had a duty to disseminate accurate and truthful information with
respect to Boston Scientific’s financial condition and results of operations,
and to correct promptly any public statements issued by Boston Scientific
which had become materially false or misleading.
c. Because of the Individual Defendants’ positions of control and authority as
senior officers and/or members of the Board of Boston Scientific, the
Individual Defendants were able to, and did, control the contents of the
various reports, press releases and public filings which Boston Scientific
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disseminated in the marketplace during the Class Period concerning Boston
Scientific’s results of operations.
d. Throughout the Class Period, the Individual Defendants exercised their
individual power and authority to either directly, or indirectly, cause Boston
Scientific to engage in the wrongful acts complained herein. These acts
include, but are not limited to, obscuring the true nature and threat posed by
the Medinol litigation, minimizing and mischaracterizing the Department of
Justice’s investigation of Boston Scientific and its officers, misleading
investors about the quality of Boston Scientific’s products and facilities,
providing no information to the investment community about the FDA
Warning Letters until discovered by the media, prematurely rushing the
TAXUS product to market despite knowledge of potential failures and
mischaracterizing its “optimalization” plan, which produced massive
layoffs in critical areas and left the company unable to produce acceptably
safe products. Each of the Individual Defendants was a “controlling
person” of Boston Scientific within the meaning of Section 20(a) of the
Exchange Act. In their capacities, each Individual Defendant participated in
the unlawful conduct alleged which artificially inflated the market price of
Boston Scientific common stock.
e. Boston Scientific violated Section 10(b) of the Exchange Act and Rule
10(b)-5 promulgated thereunder by its acts and omissions as alleged in this
Complaint. By virtue of their positions as controlling persons of Boston
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Scientific, the Individual Defendants are liable as control persons pursuant
to Section 20(a) of the Exchange Act.
f. As a direct and proximate cause of the Individual Defendants’ wrongful
conduct, Plaintiffs and other members of the Class suffered damages in
connection with their purchases of Boston Scientific securities during the
Class Period.
171. By reason of the above conduct, the Individual Defendants are liable pursuant
to Section 20 of the Exchange Act for the violations of committed by Boston Scientific.
PRAYER FOR RELIEF
WHEREFORE, PERS demands judgment against Defendants as follows:
A. Determining that the instant action may be maintained as a class action
under Rule 23, Federal Rules of Civil Procedure, and certifying PERS as the Class
Representative;
B. Requiring Defendants to pay damages sustained by PERS and the Class by
reason of the acts and transactions alleged herein;
C. Awarding PERS and the other members of the Class prejudgment and post-
judgment interest, as well as their reasonable attorneys’ fees, expert fees, and other costs;
and
D. Awarding such other and further relief as this Court may deem just and
proper.
DEMAND FOR TRIAL BY JURY
Pursuant to Rule 38(b) of the Federal Rules of Civil Procedure, PERS hereby
demands trial by jury of all issues that may be so tried.
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Dated: April 17, 2006
Respectfully submitted, ZIMMERMAN REED, P.L.L.P. /s/ Carolyn G. Anderson______ Carolyn G. Anderson, Pro Hac Vice Robert C. Moilanen, Pro Hac Vice Anne T. Regan, Pro Hac Vice 651 Nicollet Mall, Suite 501 Minneapolis, MN 55402 Tel: 612.341.0400 Fax: 612.341.0844 Lead Counsel for Plaintiffs HAGENS BERMAN SOBOL SHAPIRO LLP David S. Nalven Steve Berman One Main Street, Fourth Floor Cambridge, MA 02142 Tel: 617.482.3700 Fax: 617.482.3003 Liaison Counsel for Lead Plaintiffs LOCKRIDGE GRINDAL NAUEN, P.L.L.P. Gregg M. Fishbein. Pro Hac Vice Nathan D. Prosser 100 Washington Ave. So., Suite 2200 Minneapolis, MN 55401 Tel: 612.339.6900 Fax: 612.339-0981 MOORE LAW FIRM Mike Moore, Esq. P.O. Box 321048 Flowood, MS 39232-1048 Tel: 601.933.0070 Fax: 601.933.0071
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CERTIFICATE OF SERVICE
In re Boston Scientific Corporation Securities Litigation Master File No. 0:05-cv-11934 (JLT)
I, Carolyn G. Anderson, hereby certify that I am one of the attorneys for the Lead Plaintiff and the Class, and that, on April 17, 2006, I caused the CONSOLIDATED AMENDED COMPLAINT to be filed through the ECF system, and that copies of this document will be sent electronically to the registered participants as identified on the Notice of Electronic Filing (NEF).
I further certify that I caused copies of the Consolidated Amended Complaint in this action to be served on the following attorneys for defendants by Federal Express overnight delivery: Stuart J. Baskin Shearman & Sterling LLP 599 Lexington Avenue New York, NY 10022 212-848-4000 William H. Paine Wilmer Cutler Pickering Hale and Dorr LLP 60 State Street Boston, MA 02109 617-526-6000
/s/ Carolyn G. Anderson
Dated: April 17, 2006