In re Bos. Sci. Corp. Sec. Litig.

646 F.Supp.3d 249

IN RE BOSTON SCIENTIFIC CORPORATION SECURITIES LITIGATION.

CIVIL ACTION NO. 20-12225-DPW

United States District Court, D. Massachusetts

Signed December 20, 2022

MEMORANDUM AND ORDER

DOUGLAS P. WOODLOCK, UNITED STATES DISTRICT JUDGE

TABLE OF CONTENTS

I. BACKGROUND 261

A. The Parties 261

B. Factual Background 262

1. The Early Lotus Valve Recalls and Delays 263

2. Launch in the United States 263

3. The Launch as Reported by Boston Scientific 264

4. Boston Scientific Terminates the Lotus Valve Platform 264

5. Failures of the Lotus Launch Revealed after the Class Period 265

6. Allegations of Executive Defendant False Statements 267

a. Mr. Mahoney's Alleged Misstatements 267

b. Mr. Ballinger's Alleged Misstatements 268

c. Ms. Lisa's Alleged Misstatements 268

d. Mr. Fitzgerald's Alleged Misstatements 268

e. Mr. Brennan's Alleged Misstatements 269

f. Mr. McCarthy's Alleged Misstatements 269

g. Dr. Meredith's Alleged Misstatements 269

7. Allegations of Executive Defendant Scienter 269

a. Executive Defendant Knowledge throughout the Class Period 269

b. Boston Scientific's Need to Raise Funds to Keep Up with Its Debts 270

c. Executive Defendant Conduct throughout the Class Period 271

C. Development of Challenged Amended Complaint by Plaintiff 272

II. STANDARD OF REVIEW 272

III. COUNT I — VIOLATION OF SECTION 10(b) AND RULE 10b-5 273

A. Applicable Legal Standard 273

B. Material Misstatements and Omissions 273

1. Statements Regarding Lotus Edge Accounts and Orders 274

a. Statements Tallying the Lotus Edge Accounts and Expressions of Satisfaction with the Launch 277

b. Growing Use of Lotus Edge and Reorder Rates 277

2. Simplicity and Ease of Use of Lotus Edge 278

a. Ease of Use Statements 278

b. Failure to Disclose the Complexity of Device and Delivery Malfunctions 279

3. Misstatements and Omissions as to the Safety of the Lotus Edge Launch 280

4. Misleading Reports of the Success of the Lotus Platform and its Role in the TAVR Portfolio 281

a. Disclosure of the Lotus Recall and Termination 281

b. The Future of Lotus as a Growth Driver and Strategic Investment 282

5. Conclusion 284

C. Scienter 284

1. Plaintiff's General Scienter Allegations 285

a. Confidential Source Accounts 285

b. Insider Trading Activity 286

c. The Resignations of Mr. McCarthy and Mr. Ballinger 287

d. Boston Scientific's Need to Raise Capital and Renegotiate Its Debts 287

e. Conclusion 288

2. Scienter of Ms. Lisa and Mr. Fitzgerald 288

3. Scienter of Mr. Mahoney 288

D. Reliance 290

E. Economic Loss and Loss Causation 291

1. The Alleged Corrective Disclosures 291

2. Additional Loss Causation Considerations 292

3. Conclusion 292

F. Whether Boston Scientific May Be Held Liable 292

G. Summary 293

IV. COUNT II — VIOLATION OF SECTION 20(a) 293

V. CONCLUSION 294

APPENDIX A 294

Mr. Mahoney 295

Mr. Ballinger 299

Ms. Lisa 299

Mr. Fitzgerald 301

Mr. Brennan 301

Mr. McCarthy 303

Dr. Meredith 303

Before me is a motion [Dkt. No. 53] to dismiss a putative securities fraud class action against Boston Scientific Corporation ("Boston Scientific"). The motion to dismiss submissions were developed in accordance with the demanding protocols of the Private Securities Litigation Reform Act. The operative Amended Consolidated Complaint [Dkt. No. 44] ("the Complaint") presents a narrative alleging attempts to deceive investors regarding the success of the company's new medical device in an effort to prop up Boston Scientific stock prices, raise capital and support improper insider trading.

Boston Scientific and seven high-ranking executives are alleged to have perpetrated securities fraud on Boston Scientific investors by making a host of false and misleading statements about the commercial viability of Boston Scientific's Transcatheter Aortic Valve Replacement ("TAVR") device: the Lotus Edge. The overarching contention is that Boston Scientific executives hid technical failures and sluggish sales of the Lotus Edge from the public during the period February 6, 2019 to November 16, 2020. The Complaint alleges that by providing false reassurances that the device was safe, simple, and marketable, Defendants caused artificial inflation of Boston Scientific common stock, in violation of Section 10(b), 15 U.S.C. § 78j(b) and Rule 10b-5, 17 C.F.R. § 240.10b-5 (Count I) and in violation of Section 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78t(a) (Count II).

Defendants have moved to dismiss the Complaint for failure to meet the heightened pleading requirements for securities fraud claims under FED. R. CIV. P. 9(b) and the Private Securities Litigation Reform Act. I consider primarily two questions, both of which must be answered in the affirmative if Plaintiff's case is to proceed: 1) whether any of the statements detailed in the Complaint are both misleading and actionable and, if so, 2) whether particularized facts alleged in the Complaint give rise to a strong inference of Defendants' scienter.

I will grant Defendants' Motion to Dismiss the Complaint as to Count I, except as to Defendant Mahoney — the Boston Scientific Chairman, President and Chief Executive Officer — and Boston Scientific, the corporation to which his scienter may be imputed — because Plaintiff successfully pleads scienter and material misrepresentations as to him. Meanwhile, I will deny Defendants' Motion to Dismiss Count II of the Complaint as to the Section 20(a) claims alleged against the Executive Defendants.

I. BACKGROUND

A. The Parties

Defendant Boston Scientific is a publicly traded manufacturer of medical devices. Headquartered in Massachusetts, Boston Scientific develops, manufactures, and markets a range of medical device platforms, including interventional cardiovascular technologies.

The Complaint names seven individual Boston Scientific executives as Defendants (collectively, the "Executive Defendants"):

• Michael Mahoney, the Chairman, President, and Chief Executive Officer;

• Daniel Brennan, the Executive Vice President and Chief Financial Officer;

• Joseph Fitzgerald, the Executive Vice President and President of Rhythm Management (through July 6, 2020), and thereafter Executive Vice President and President of Interventional Cardiology;

• Shawn McCarthy, the Vice President and General Manager of Structural Heart Valves (through 2020);

• Kevin Ballinger, the Executive Vice President and President of Interventional Cardiology (through July 3, 2020);

• Ian Meredith, the Executive Vice President and Global Chief Medical Officer; and

• Susan Vissers Lisa, the Vice President of Investor Relations.

Union Asset Management Holding AG is the Lead Plaintiff. Lead Plaintiff brings suit on behalf of a class of investors who purchased or acquired Boston Scientific common stock between February 6, 2019 and November 16, 2020 (the Class Period). Lead Plaintiff is the parent holding company of the Union Investment Group, an asset management firm based in Frankfurt-am-Main, Germany. Union Asset Management funds purchased common stock in Boston Scientific during the Class Period. I refer to Lead Plaintiff and the putative class it would represent as Plaintiff throughout the remainder of this Memorandum except when reciting the circumstances in which Union Asset Management became Lead Plaintiff.

B. Factual Background

This action arises from Boston Scientific's 2020 recall of its Lotus Edge device and its decision to retire the entire Lotus Valve Platform.

The Lotus Edge device is a transcatheter heart valve used to treat patients suffering from aortic stenosis.¹ Physicians historically treated aortic stenosis with surgical aortic valve replacement. A surgeon would perform open heart surgery to replace a faulty aortic valve with a new mechanical or biologic valve. Complaint, Dkt. No. 44 at ¶ 49. Surgical aortic valve replacement was attended by high risks and prolonged recovery times.

In 2002, however, surgeons began to see clinical success with a new method: transcatheter aortic valve replacement, or TAVR. TAVR surgery involved only a small incision to insert a catheter, as opposed to an open heart surgery. Using the catheter, a surgeon could then implant a new aortic valve prosthesis to replace the diseased aortic valve. TAVR patients recovered far faster and more easily than open-heart patients.

The new TAVR procedure took the medical community by storm. The global market for TAVR devices was projected to double in between 2018 and 2023. Id. at ¶ 51. With the increasing popularity of TAVR treatment came "immense competition among several of the top medical device manufacturers to develop TAVR valves." Id. at ¶ 52. Boston Scientific's competitors, Edwards [Lifesciences Corporation] and Medtronic [PLC], quickly developed their own TAVR devices and enjoyed "near total market domination." Id. Their devices utilized self-expanding or balloon expanding valves.²

In 2010, Boston Scientific sought to claim a share of the lucrative TAVR market by developing its own unique valve replacement device, the Lotus Valve Platform.³Id. at ¶ 53. Unlike other TAVR devices on the market, the Lotus valve was the first "fully repositionable device." Id. at ¶ 53. With the Lotus device, surgeons could position the valve, deploy it, and then recapture and reposition it after deployment, allowing optimal final placement of the valve. Id. at ¶ 55. The Lotus valve also included a seal that would fill in gaps between the implanted valve and the cardiac tissue, thereby preventing leakage.⁴

Boston Scientific marketed the Lotus device as offering surgeons "superior ease of use" and "total control" over the replacement valve's positioning. Id. at ¶¶ 58-60.

Beginning with its announcement of the product in 2016, Boston Scientific maintained an optimistic view of the device's potential in the structural heart therapies market. On November 17, 2020, however, Boston Scientific initiated a voluntary recall of all Lotus Edge devices and announced its decision to terminate the entire Lotus Valve Platform.

1. The Early...