A Medical Device Daily

Guidant investors have lost a class-action suit claiming that the company s executives hid knowledge of defects in its heart defibrillators and pacemakers so the value of the company wouldn t slump at a time it was up for sale. The investors claimed they bought stock at inflated prices as a result of Guidant s not disclosing the problems.

Judge Sarah Evans Barker dismissed the case late last month, saying the investors failed to produce enough evidence to show they had been deceived.

Five suits were consolidated in the U.S. District Court of the Southern District of Indiana in March 2006. Investors bringing the case in Indianapolis bought Guidant stock between Dec. 1, 2004, and Oct. 18, 2005. Guidant was headquartered in Indianapolis until acquired in 2005 by Boston Scientific (Natick, Massachusetts).

Boston Scientific paid $27 billion to win a bidding war against Johnson & Johnson (J&J; New Brunswick, New Jersey). J&J began acquisition talks with Guidant in spring 2004.

The plaintiffs claimed Guidant continued issuing positive news about the company s growth prospects even as the product problems began to emerge.

The first of several deaths caused by faulty defibrillators occurred in March 2005. The company issued safety warnings or recalled more than 88,000 defibrillators and recalled or issued warnings on about 200,000 pacemakers. Electrical problems with the products were linked to at least seven deaths.

In other legalities: Merge Healthcare (Milwaukee) reported an agreement in principle with the plaintiff and other defendants in the derivative action against it, providing for the settlement and release and dismissal of all claims asserted.

But the company has not released any claims against its former officers. In exchange, Merge has agreed to a one-time payment of $250,000 for legal costs incurred by the plaintiff. In addition, the settlement will reflect that Merge and the other defendants continue to deny that they have committed or attempted to commit any violations or breached any duty owed to Merge or its shareholders.

The settlement is subject to court approval.

Merge also reported receiving $1.05 million in cash from its primary directors and officers liability insurance carrier for reimbursement of legal expenses in connection with the class action and derivative action against it and some of its current and former directors and officers.

The company said the collection of cash is only a partial reimbursement of the costs incurred in connection with the defense of the class action, derivative action and SEC investigation that the company is facing.

The agreement in principle to settle the derivative action is a significant step forward for Merge Healthcare, said Ken Rardin, president/CEO.

The company has undergone several problems recently. In July 2006, the company said it had uncovered improper accounting that required it to restate its financials from 2002 to 2005, prompting the resignation of three executives, including its then-interim CEO, William Mortimore (Medical Device Daily, July 7, 2006).

Beginning in January 20006, the company received anonymous letters alleging improprieties in its financial reporting, fulfillment of customer contracts and disclosure practices and improper revenue recognition. Its audit committee retained the law firm of Sidley Austin, along with Alvarez & Marsal, a forensic accounting firm, to investigate these allegations.

These firms conducted an investigation which included review of documents and interviews with current and former employees of the company and former employees of Cedara Software (Milwaukee), which Merge acquired in June 2005.

The company is under investigation by the SEC because it determined that it would have to restate all of its earning reports from 2002 through 2005 because of improper accounting and financial reporting practices. n