Investors sued Matrixx Initiatives alleging that the company made numerous public statements of support for its pharmaceutical, Zicam, despite having knowledge about a link between that drug and a serious medical condition. Had the company not issued misleading statements, investors allege, the investors would have acted more prudently regarding their investment and not suffered the losses they suffered when the stock price eventually plummeted.
The lawsuit alleges that users of Zicam, a pharmaceutical produced by Matrixx Initiatives that is applied by being sprayed inside the nose, began reporting a condition called anosmia (a potentially dangerous failure in the ability to perceive odors) in 1999. The lawsuit also alleges that in 2002, Matrixx's own scientists, investigating the Zicam-anosmia link, were unable to disprove a link between the condition and the drug. The lawsuit goes on to allege that in 2003, Matrixx knew that a group of medical researchers were presenting findings regarding at least 10 patients who had developed anosmia after Zicam use and the proof that the company knew of this was that it withheld its consent to use Matrixx's or Zicam's name in the presentation.
Despite these facts, investors allege, Matrixx in October 2003 issued statements touting Zicam's potential for growth and profitability. Statements by the company about the drug were extremely influential in stock price, the lawsuit claims. For example, as AARP's brief notes, after the Dow Jones Newswires reported that the federal Food and Drug Administration was looking into complaints of a Matrixx product that might cause users to lose their sense of smell, Matrixx stock dropped precipitously. Shortly after, Matrixx responded with a news release calling statements linking Zicam to anosmia "completely unfounded" and the stock returned to almost the same prior level. Subsequent news stories about Zicam users were followed by an even sharper drop in the stock price. Thus, the brief points out, "It is evident that … the reasonable investor was paying attention to the news concerning the safety of Zicam. Consequently, this information was material in the decision to buy and sell the stock."
Moreover, the lawsuit claims, Matrixx failed to report in a timely fashion, as required by law, to the federal Securities and Exchange Commission (SEC) that it had been the defendant in an anosmia-related lawsuit — a requirement designed precisely to put investors and potential investors on notice about developments that might affect stock prices and thus allow investors to make informed business decisions.
Matrixx moved to dismiss the lawsuit, arguing that the Private Securities Litigation Reform Act (PSLRA) requires a plaintiff to plead facts that the defendant acted with specific knowledge about a fact, and that because defendant's knowledge was not sufficiently alleged in the pleadings, the lawsuit should be dismissed. The question in Matrixx Initiatives v. Siracusano is how much detail concerning direct knowledge ("scienter") investors must describe in their initial pleadings in order to survive a motion to dismiss their case.
AARP's "friend of the court" brief, filed by attorneys with AARP Foundation Litigation, takes a close look at the PSLRA, the federal rule governing dismissal of cases, and prior precedents. "A complaint will survive a motion to dismiss so long as the inference that the defendant acted with scienter is 'cogent and compelling' or 'strong in light of other explanations,'" the brief argues. The brief also points out that neither statute nor precedent require that the inference be irrefutable.
The brief addresses the heightened pleading standard imposed by the PSLRA and notes that Matrixx's actions meet all the criteria that the law outlines. The brief argues that Matrixx (1) was aware from consumer complaints, communication with independent researchers and its own scientific data that there existed links between Zicam and anosmia, (2) despite this, knowingly issued misleading news releases denying the existence of the link and (3) deliberately failed to notify the SEC about pending lawsuits as required by law.
The U.S. Court of Appeals for the Ninth Circuit agreed with the position of investors, and the company appealed to the U.S. Supreme Court.
What's at Stake
A significant percentage of people 50 and older tend to comprise the investing public in U.S. markets. Older people are frequent targets of financial fraud because they may have significant assets and are looking for investment opportunities to supplement Social Security and other sources of retirement income.
To maintain market integrity, there must be full disclosure of material information to the investing public.
The case is before the Supreme Court, where AARP has urged that the Court uphold the decision of the U.S. Court of Appeals for the Ninth Circuit, thereby allowing the lawsuit to proceed.
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