Electronic Medical Records and Securities Fraud?

Can a failure to disclose knowledge about a medication’s side-effects lead to a successful suit for securities fraud? In March 2011 the Supreme Court ruled that it can.

In this case, the medication was Zicam Cold Remedy, an over the counter product. The company received information from several sources that patients had suffered from anosmia (loss of the sense of smell) after using Zicam to treat their cold symptoms.

Shortly thereafter, two patients sued Matrixx in a products liability lawsuit based on Zicam-related anosmia.

“According to plaintiff/respondent investors, Matrixx reacted to these events with a series of public statements that were misleading and amounted to securities fraud.  These statements related in large part to the company’s financial prospects, including estimates that “revenues ‘would be up in excess of 50%'” as well as similar predictions regarding share earnings for investors.  Later, the company increased its rosy forecast to have revenues increasing by 80%.  The company acknowledged the products liability suits in required SEC filings (Form 10-Q) but did not disclose that such suits had already been filed.  In addition, the company responded to a Dow Jones Newswires story relating to reports of anosmia as a consequence of Zicam use (and the concomitant drop in share price by almost 12%) by releasing a statement that the company believed the allegations that Zicam use caused anosmia were “completely unfounded and misleading,” further stating that:

In no clinical trial of intranasal zinc gluconate gel products has there been a single report of lost or di­minished olfactory function (sense of smell).  …  In fact, in nei­ther study were there any reports of anosmia related to the use of this compound.  The overall incidence of adverse events associated with zinc gluconate was extremely low, with no statistically significant difference between the adverse event rates for the treated and placebo subsets.

The share price dropped even further when Good Morning America aired a segment highlighting research results relating Zicam use to anosmia and disclosing the existence of four product liability lawsuits.  “Matrixx persisted in its public statements that the link between Zicam use and anosmia was without merit, and filed documents (SEC Form 8-K) that it had convened a scientific panel that had concluded that there was “insufficient scientific evidence” that Zicam affected sense of smell in users.  These statements formed the basis of plaintiff/respondents’ complaint.”

Writing for a unanimous Court, Justice Sotomayor started with the language of the statute that … made it unlawful for “any person” to “make any untrue statement of a material fact or to omit to state a material fact necessary . . . to make the statements . . . not misleading.” … the materiality requirement can be satisfied “when there is “‘a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the “total mix” of information made available.”*

The availability of information from large, near-real-time databases like Practice Fusion’s** expands the “total mix of information … available.”  Does that create an obligation for pharmaceuticals – both prescription and over the counter – to make a reasonable effort to obtain that information and take appropriate action or risk claims of securities fraud in addition to compensatory and punitive damages for any harm done to patients? Does a securities firm that recommends a pharmaceutical company’s stock have an obligation to obtain and use that information? As often happens, the Zicam case raises more questions than it answers.

*Additional information at: http://www.patentdocs.org/2011/03/supreme-court-increases-disclosure-burdens-on-pharma-companies.html

**70,000 users and 8 million patients: http://www.ehrbloggers.com/2011/03/happy-third-birthday-practice-fusion.html

Hal Amens is a senior management consultant specializing in process improvement. He is a Certified Consultant with Practice Fusion and a guest blogger. He is not an attorney and his comments are not to be interpreted as legal advice.

Shortlink: http://wp.me/pyfFd-9g

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