Amended Shareholders' Derivative Complaint in Cain v. Hassan et al., (Finally!) Filed -- May 13, 2008 After-Hours

As I suggested over the weekend -- see background on this suit, under that link -- I suspected a pretty substantive amendment would be forthcoming, with many paragraphs of new allegations -- allegations unlike those set forth in almost all the other 120-plus individual lawsuits -- and it looks to be worth the wait, here, indeed.

I will add much more soon, but note, particularly-appropos of our discussion last night ("Those Ignorant of History are Doomed to Repeat It"), that new Paragraph 91 of the Amended Complaint features allegations about the "Corporate Integrity Agreement", reached in settlement with the US Attorneys' Offices in Massachusetts (and extending, through 2011, the earlier agreements with the Department of Justice -- out of Pennsylvania's US Attorneys' Offices, involving Schering's sales, marketing and clinical trial practices and programs):

. . . .91. On August 29, 2006, Director Defendants allowed and/or caused the Company to issue a press release entitled “Schering-Plough Reaches Agreement With U.S. Attorney’s Office for District of Massachusetts and U.S. Department of Justice.” Despite knowing that the ENHANCE study results were being wrongly suppressed by the Company, Director Defendants issued this release to make the shareholders believe that the Director Defendants had already strengthened Schering’s internal controls and operational procedures. . . .

The above-referenced agreement provided for an aggregate settlement amount of $435 million and provided that a subsidiary of Schering-Plough Corporation would, and did, plead guilty to one count of conspiracy to make false statements to the government and paid a criminal fine of $180 million, and Schering-Plough Corporation, itself, paid $255 million to resolve civil aspects of the investigation.

Well -- history may not actually repeat -- but it sure does echo, here, tonight.



Much, much more to come -- including statements about Dr. Bots feeling the data were "fine", among many other matters.

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UPDATING, now:

So -- let's start at the top, shall we? The Board of Directors of Schering-Plough is here charged with, among other matters, the wasting of corporate assets, the breach of fiduciary duites -- including the duties of loyalty, due care and candor, and unjust enrichment:

1. This is a shareholder derivative action brought by Plaintiffs, stockholders of Schering, on behalf of Nominal Defendant, Schering, and all Schering shareholders against its current Board of Directors (the “Board”) and certain of its current and former executive officers, seeking to remedy Individual Defendants’ (defined below) breaches of their fiduciary duties of loyalty, candor and due care, waste of corporate assets and unjust enrichment.

2. Beginning at least as early as April 1, 2006, and continuing through the present (the “Relevant Period”), certain of the Director Defendants (defined below), in breach of their fiduciary duties, devised, approved and implemented a plan to unlawfully and unethically suppress the finding of the ENHANCE study and escalate the marketing effort for VYTORIN and run advertisements that materially misrepresented the medical value of the drug in a manner that betrayed the trust of patients, physicians, regulators and investors. . . .

. . . .5. The Company provided several pretextual reasons for the delay in disclosing the results of the ENHANCE study. Schering’s excuses for the 21-month delay included data quality concerns, installation of new computer equipment, training of readers on the new reading procedures and missing data. To implement its tactic of delay, Schering hired an independent consultant in January 2007. After reviewing the ENHANCE data, the independent consultant declared the data quality was “fine.” Despite this conclusion, the Director Defendants still refused to reveal the results of the ENHANCE study and a few months later, the Company secretly (without advising Dr. John Kastelein, the director and principal investigator of the original study) created an Independent Expert Panel to review the ENHANCE data once again. . . .

6. In November 2007, Schering directors, in an attempt to manipulate the ENHANCE study findings, announced that on the recommendation of the Independent Expert Panel it created, the Company would change the study’s endpoint prior to the release of the results. However, after receiving considerable criticism in the media, and damage to its reputation, the Director Defendants flip-flopped again and decided to keep the original endpoint.

7. In December 2007, a member of the Independent Expert Panel took exception to how Schering had positioned the recommendations made by the panel. In an e-mail that became public after the ENHANCE results were revealed, an Expert Panel member criticized the purported meeting minutes Schering drafted over a month after the Expert Panel had met. He stated, and the Company was forced to agree, that when the panel actually met in November 2007 they were told there would be no minutes or transcript made and no minutes were taken. He also stated that it was the Company, not the Independent Expert Panel, that decided to change the endpoint.

8. Finally, on January 14, 2008, due to enormous media pressure, and after delaying planned presentations of the results at three conventions of either the American Heart Association or the American College of Cardiology, Schering announced to the press the results of the ENHANCE study which concluded that VYTORIN was no more effective than the generic alternative in preventing the formation of arterial plaque. There appeared to be no added benefit to taking the brand-name ZETIA and VYTORIN rather than taking the generic statin ZOCOR.

9. While the results of the ENHANCE study were being suppressed, Schering increased its marketing efforts in support of ZETIA and VYTORIN. . . . Schering increased its direct-to-consumer budget from $155 million in 2005 to $200 million in 2007 in the U.S. The advertisements created the false impression that ZETIA and VYTORIN were effective in reducing LDL and the formation of arterial plaque. The increase in budget translated to 34 million prescriptions for ZETIA and VYTORIN in the U.S. and over $5 billion in revenue for Merck Schering-Pplough in 2007. . . .

10. . . .The House Committee on Energy and Commerce, the House Subcommittee on Oversight and Investigations, the Senate Finance Committee and the Senate Special Committee on Aging have all initiated investigations into Schering and collectively are seeking a combination of witness interviews, documents and information on a variety of issues related to the ENHANCE trial, the marketing of VYTORIN and stock sales by Schering executives. State Attorney Generals, including those in New York, Connecticut and Oregon, have also publicly announced initiating investigations into Schering. Additionally, the FDA has deemed VYTORIN marketing to be misleading in light of the ENHANCE study results. Upon information and belief, the United States Department of Justice has also commenced an investigation. Many lawsuits, some seeking class action relief, have been filed against the Company. . . .

11. This action seeks redress for Director Defendants’ collective and individual breaches of their fiduciary duties of loyalty, good faith, candor, due care, and their knowing, reckless and/or gross negligence in, inter alia:

(i) suppressing the results of the ENHANCE study for nearly two years;

(ii) allowing the continued dissemination of false and misleading marketing efforts on behalf of ZETIA and VYTORIN while in possession of the unfavorable ENHANCE results;

(iii) deceiving the investing public regarding Schering-Plough’s business, operations, disappointing results of its number one product, “the cholesterol franchise” and the intrinsic value of Schering common stock;

(iv) failing to properly implement, oversee and maintain appropriate and adequate accounting and business ethics, internal controls, practices and procedures;

(v) enabling Insider Defendants (defined below) to sell almost $45 million of their. . . Schering shares while in possession of material adverse non-public information about the Company, inuring to the detriment of the Company and unjust enrichment of the Insider Defendants; and

(vi) harming the value of the Company by the illegal and unethical conduct engaged in by the Individual Defendants. . . .

. . . .12. Director Defendants’ malfeasance has caused, and will continue to cause, Schering and its shareholders great harm, by (i) indelibly damaging its reputation and loss of goodwill in general; (ii) exposing the Company to potential criminal and civil liability, including suits for violations of securities laws, consumer protection laws and state antifraud laws, such as New York’s False Claims Act; and (iv) having the Company absorb the financial losses as the common stock price falls from its artificially inflated prices during the Relevant Period to a price considerably lowered because of a “liars discount” and a skepticism of its products by the medical community due to its unlawful, unethical, and deceptive manner of handling the ENHANCE trial results. . . .

18. . . .Sales of VYTORIN alone generated approximately $2 billion for the Company in 2007, and the “cholesterol franchise” of VYTORIN and ZETIA are the Company’s most important product. According to the Company’s First Quarter 2008 Form 10-Q, for the quarter ended March 31, 2008, “As of March 2008, total combined prescription share for VYTORIN and ZETIA in the U.S. was down approximately three market share points versus December 2007 from 16.9 percent to 14.2 percent. Subsequent prescription data in April 2008 indicates a further decline. . . . Continued reductions in the sales and/or market share of Schering-Plough’s cholesterol franchise would have a significant impact on Schering-Plough’s consolidated results of operations and cash flows as Schering-Plough’s current profitability is largely dependent upon the performance of the cholesterol franchise”. . . .

19. . . .According to the Company’s 2008 Proxy Statement, [CEO Fred] Hassan received over $30,323,752 in total compensation for his services as Chairman and CEO of the Company in 2007 and over $29,657,926 in total compensation in 2006. Moreover, according to the 2008 Proxy, Hassan directly or indirectly controls 4,970,800 shares
of the common stock of Schering. At times relevant hereto, Hassan sold approximately 92,700 shares of Schering for proceeds of roughly $2,033,000 while in possession of material adverse information about VYTORIN and ZETIA. . . .

33. Defendant Robert J. Bertolini (“Bertolini”), upon information and belief, is a citizen of Nebraska. Bertolini is, and during the Relevant Period was, Executive Vice President and Chief Financial Officer of the Company. At times relevant hereto, Bertolini sold approximately 50,986 shares of Schering for proceeds of roughly $1,119,000 while in possession of material adverse information about VYTORIN and ZETIA on various different dates. . .[detailed in Amended Complaint Paragrpah 129]. . . .

34. Defendant C. Ron Cheeley (“Cheeley”), upon information and belief, is a citizen of New Jersey. Cheeley is, and during the Relevant Period was, Senior Vice President of Global Human Resources. At times relevant hereto, Cheeley sold approximately 189,141 shares of Schering for proceeds of roughly $5,610,000 while in possession of material adverse information about VYTORIN and ZETIA on various different dates. . . .

35. Defendant Carrie S. Cox (“Cox”) , upon information and belief, is a citizen of New Jersey. Cox is, and during the Relevant Period was, Executive Vice President and President of the Company’s Global Pharmaceutical Business. At times relevant hereto, Cox sold approximately 978,795 shares of Schering for proceeds of roughly $29,692,000 while in possession of material adverse information about VYTORIN and ZETIA on various different dates. . . .

36. Defendant Thomas P. Koestler (“Koestler”), upon information and belief, is a citizen of New Jersey. Koestler is, and during the Relevant Period was, Executive Vice President and President of Schering-Plough Research Institute. At times relevant hereto, Koestler sold approximately 19,467 shares of Schering for proceeds of roughly $135,905 while in possession of material adverse information about VYTORIN and ZETIA on various different dates. . . .

37. Defendant Raul E. Kohan (“Kohan”), upon information and belief, is a citizen of New Jersey. Kohan is, and during the Relevant Period was, Senior Vice President for Corporate Excellence and Deputy Head for Global Animal Health. At times relevant hereto, Kohan sold approximately 29,745 shares of Schering for proceeds of roughly $666,000 while in possession of material adverse information about VYTORIN and ZETIA on various different dates. . . .

38. Defendant Thomas J. Sabatino, Jr. (“Sabatino”), upon information and belief, is a citizen of New Jersey. Sabatino is, and during the Relevant Period was, Executive Vice President and General Counsel. At times relevant hereto, Sabatino sold approximately 32,445 shares of Schering for proceeds of roughly $907,000 while in possession of material adverse information about VYTORIN and ZETIA on various different dates. . . [all as described in Amended Complaint Paragraph 129. . . .]

39. Defendant Brent L. Saunders (“Saunders”), upon information and belief, is a citizen of New Jersey. Saunders is, and during the Relevant Period was, Senior Vice President and President for Consumer Health Care. At times relevant hereto, Saunders sold approximately 63,541 shares of Schering for proceeds of roughly $1,833,000 while in possession of material adverse information about VYTORIN and ZETIA on various different dates. . . .

40. Defendant Cecil B. Pickett (“Pickett”), upon information and belief, is a citizen of Massachusetts. During the Relevant Period, Pickett was Senior Vice President and President of Schering-Plough Research Institute. He retired from the Company on August 31, 2006. At times relevant hereto, Pickett sold approximately 100,000 shares of Schering for proceeds of roughly $2,010,000 while in possession of material adverse information about VYTORIN and ZETIA on various different dates. . . .

. . . .49. According to the Company’s Corporate Governance Guidelines, “Schering-Plough’s Vision” is “to earn trust every day.” The Director Defendants are represented to be knowledgeable people who are tasked with actually knowing the strategic plans of the Company. The Company’s Corporate Guidelines state:

The Board takes an active role with senior management regarding strategic planning and business development. All members of senior management participate in portions of meetings of the Board and Committees. Upon request, Directors have access to any employee of Schering-Plough and any of Schering-Plough’s information.”

50. As described herein, the Individual Defendants breached their fiduciary duties either by consciously disregarding the Company’s operations and business practices to ensure that the Company complied with all applicable laws, rules, and regulations, and permitting egregiously unethical and unlawful conduct, or by actually making the strategic decisions to unlawfully suppress the results of the ENHANCE trial, attempt to manipulate the endpoints and engage in false advertising. In either event the Director Defendants’ conduct could not possibly have been undertaken in good faith discharge of business judgment. . . .

[Emphasis supplied.]

Wow! "Now, that's the way we do it, downtown!"

This complaint, as amended, hits every single note in the symphony of corporate law claims-pleading-theory. And at a perfectly-aggressive pitch, too. The sheer breadth of the allegations will likely make this a discovery nightmare for the Schering board of directors, and CEO Hassan. I smell an emerging, practical sense to talk settlement, on the Schering's part -- there are far too many long-blades being brandished here.

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UPDATED -- 05.14.08 AM:

Now, the individual defendants named in Paragraphs 19 though 39 (all of the directors, and several officers) of the Amended Complaint are very likely to assert that because at least some of their stock transactions (sales of stock) were undertaken with Schering-Plough as the counter-party (the buyer of the stock), there is no securities law liability. The argument generally runs that there can be no "fraud on the market", where no market transaction occured -- as these are entirely private, off-market, transactions. And, that argument usually prevails, at least as to securities law liability.

Note, however, that Ms. Cain also alleges "unjust enrichment" as a theory of recovery. It is doubtless true that -- if one accepts as proven the rest of the allegations in the complaint -- the individual defendants were "unjustly enriched" by making Schering-Plough, the company itself, bear the brunt of an artificially-inflated selling price for the stock, in all of those private stock transactions. Accordingly, all of those funds must be restored to the corporate coffers, by the defendants, personally, out of their own bank accounts, if Ms. Cain wins the day on unjust enrichment. And, that is great pleading.

But,as ever, we shall see.

Now, if I didn't already know it, I might have guessed that Ms. Cain's law firm visits this blog. But I knew that, already. Heh.