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Securities Fraud Plaintiffs Cannot Switch "Loss Theory" Midstream During Litigation

A Minnesota Federal District Court recently held that plaintiff-investors of a medical device company could not switch theories of loss recovery for securities fraud claims during litigation, as doing so would defeat the heightened pleading requirement and principles underlying enactment of the Private Securities Litigation Reform Act (PSLRA). Significantly, the Court's decision confirms that the PSLRA (and its heightened pleading requirements), enacted in 1995, is alive and well notwithstanding the mass proliferation of high-profile securities fraud and investment-related claims headlining the news. 

As background, plaintiffs filed an amended complaint against multiple parties, including St. Jude Medical, Inc. and several of its officers, alleging that the defendants stuffed various channels for St. Jude's products, including implantable cardioverter defribrillators (ICDs), which led to overstating revenue expectations for the first quarter of 2006. Plaintiffs also alleged that "St. Judge's management knew, but failed to disclose or recklessly disregarded the fact that, in overstuffing its customer supply lines, St. Judge actually suppressed demand of ICD sales in the new year." See In re: St. Judge Medical, Inc., Case No. 06-cv-1379, Order dated June 22, 2009. However, in briefing submitted to the Court opposing defendants' summary judgment motion, plaintiffs (according to the defendants' papers) "abandoned their original theory of the case, and now offer a new, unpled theory of fraud...[now claiming] St. Jude knowingly misled the market by failing to report slow or declining first quarter ICD sales prior to its April 4, 2006, announcement" - allegations premised on statements which the Court found were not referred to in the amended complaint. See Order at p. 15.  

The Court determined that "further amendment [of the pleadings] at this late stage would defeat Congress's expressed intention in enacting the PSLRA and prejudice defendants." See Order at p. 18. Simply put, this is because allowing plaintiffs to raise new theories of recovery at the summary judgment stage would end-run the threshold heightened pleading requirements parties must overcome to survive a motion to dismiss at the outset of litigation - a result antithetical to enactment of the PSLRA.

In short, securities fraud litigants take note: the PSLRA remains a viable hurdle for plaintiffs at all stages of litigation.

Full post as published by OverRegd - Securities Regulation and Litigation Blog on July 06, 2009 (boomark / email).