Wednesday, February 18, 2009

Rather Compelling New Counter-Argument -- in Schering ERISA Suit Filing

Last night, the Plaintiffs' lawyers in the ERISA would-be class action, Gradone v. Hassan, et al. (Case No. 08-1432), which centers on the much-delayed Vytorin/Zetia ENHANCE disclosures (and the intervening allegedly unlawful insider sales of stock by Carrie Cox, among others), each of which allegedly sounds as breaches of ERISA fiduciary duties, made a 51-page motion in opposition to Schering's earlier motion to dismiss various aspects of the case. Significantly, the Schering board of directors, CEO Fred Hassan and CFO Bob Bertolini, among others, are each to be held personally responsible for damages (to be paid from personal, not corporate, assets), if the ERISA class action succeeds. So the stakes are high, and climbing, for Schering's executive management team, here.

One of the Schering team's arguments for dismissal was essentially that, due to the "efficient capital market hypothesis", no matter when ENHANCE was ultimately disclosed, the ERISA plan participants would have suffered some form of an investment loss, and thus (puzzlingly, apparently) they should have no claim. Here is how the plaintiffs have responded:

. . . .Finally, Defendants argue that the efficient market hypothesis precludes Plaintiffs from proving damages in this case. Defendants suggest that the market would have reacted immediately to earlier disclosure of the negative results, and the price of Schering stock would have dropped before the Plans or the Plan participants could have sold their shares, thus suffering an unavoidable loss in any event. That over-simplified argument should be rejected.

First, Defendants’ argument that Plan participants would have suffered an unavoidable loss on all the shares already in the Plans whenever the disclosure was made ignores the rather obvious fact that shares were added to the Plans during the Class Period. While Defendants’ argument (if it were correct) might suggest that some losses were unavoidable, it utterly fails to address losses on shares of Schering stock that were added to the Plans between October 31, 2007, and January 14, 2008. As to those additional shares, Defendants’ argument is silent.

Second, Defendants’ argument ignores the fact that timely disclosure of the negative ENHANCE trial results would have caused a much less precipitous decline in the price of Schering stock. Had Defendants promptly disclosed the negative results ahead of the news leaks on January 14, 2008, rampant speculation about the delayed release of the results and the Congressional and Attorneys General investigations would have been avoided, and the Company would not have been caught in a swirl of controversy (including having to make a rapid response to the January 14, 2008, news leaks). The market would not have held against the Company the fact that the results were concealed, management’s integrity would not have been questioned in the manner it has, and the market would have reacted less negatively to the news. Thus, even if they continued to hold the same number of shares, the Plans would have lost less if Defendants had acted responsibly. . . .

Ding. Ring the Bell! That is nearly a perfect rejoinder -- pithy, and clear.

And thus, here is a particularly snarky footnote -- Footnote 8, on why the earlier Schering ERISA dismissal approach is so completely disingenuous: . . . .The House Committee on Energy and Commerce also demanded information relating to a million share stock sale by a Schering executive, Carrie Smith Cox, between the end date of the study and the release of the results. . . .

And. . . that's gonna' leave a mark.

Why? Because, apparently, Carrie Cox was able to avoid at least some (about $11 million worth) of her Schering-Plough stock losses. The plaintiffs would (did) say she clevely sold before anyone (else) knew.

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