In a post on this past Thursday, Derek Lowe, over at Corante | In the Pipeline, has just [dis-]covered the Dow-Jones story on Judge Cavanaugh's CafePharma post rulings of May 18, 2009 (covered here, on May 19, 2009 -- and fairly obviously pre-saged, from my coverage of the relevant moving papers, as well -- on February 9, 2009). "Good on ya' Derek!" It is genuinely gratifying to see that responsible journalists are taking notice of this story. Derek wrote:
. . . .CafePharma's message boards have been described (accurately, I'd say) as often being the electronic equivalent of a bathroom wall. . . . So I'm surprised that these are going to be considered admissable. Anyone investing on the basis of CafePharma board chatter deserves to lose their money -- which will go out in brokerage commission fees, if nothing else. . . .
Maybe so -- as to trading stock for one's own account, based on anonymous CafePharma musings -- but that, with all due respect, did not form the basis of Judge Cavanaugh's ruling. Judge Cavanaugh, based on my experiences, here, is a very able, deliberate, yet practical, and even-tempered federal trial court judge. And he showed it in this May 18 ruling. So, here's what I think Derek misses -- set forth all in one spot, cobbled together from many of my prior posts on this topic:
I agree that much of the CafePharma content is gossip, rumor and innuendo.
That said, Judge Cavanaugh has simply ruled (PDF of the full opinion) that Schering cannot -- as a matter of law -- keep these items from the jury. It is up to the jury to decide the reliability of these posts, and on that score, Schering will be allowed to add some 75 pages of the "scrawls on a public mens' room wall" material, to suggest the high noise-to-signal ratio.
I think, though, the plaintiffs' lawyers are also making a little bit more subtle argument -- with these CafePharma posts. As I understand it, it runs along these lines: without regard to whether the anonymous CafePharma poster(s) had any actual information in the Spring of 2007, on ENHANCE, it is all but admitted that senior executives of Schering-Plough were "monitoring" that CafePharma board at that time. So, it is urged, Schering executives clearly knew that someone was saying "ENHANCE is a bust".
Moreover, Judge Cavanaugh may still decide -- during the trial -- that the "prejudicial effect" of these items on the jury will "outweigh the probabtive value" they offer, and thus he may still rule them inadmissable as evidence, during the trial, proper. However, in this regard, remember, the federal securities fraud putative class action suit includes sworn statements from six so-called "CWs 1 trough 6" -- confidential, unnamed witnesses, all ex-Schering-Plough employees, as well. Back to the story, then:
Then -- within days -- Carrie Cox exercised and sold (per her SEC Forms 4) 11 times her then annual salary's worth of stock -- at around $30 per share -- grossing about $29 million; netting over $11 million.
Whether the poster had actual information, or not, the plaintiffs are alleging that Carrie Cox may very well have been aware of the CafePharma posts, and at a minimum, should have done more than simply phone Susan Ellen Wolf (the SEC compliance lawyer at Schering-Plough), to clear her trades. Ms. Wolf has publicly told the SEC she pre-cleared Ms. Cox's trades.
She (Susan Ellen Wolf), the plaintiffs would say, should have asked many, many more questions, and received assurances that she (Carrie Cox) did not actually possess, and would not have the ENHANCE info -- whatever it was -- "attributed" to her, at the time of the stock trade, for insider trading rule purposes. She was/is the fourth highest officer in the company, afterall -- so (as de facto head of pharma marketing) she should have known "all there was to know" about Vytorin's future prospects, at the time (including any news on ENHANCE -- up or down), right? Right.
Now, why would Ms. Wolf arguably have this heightened duty? Because, the plaintiffs will urge, the CafePharma postings amounted to "unusual and persistent market rumors" that something was amiss. That, in turn, created additional duties of diligence -- atributable to both Ms. Cox and Ms. Wolf.
That's my take on all of this, for what it is worth. Your mileage may vary. In fact, it probably does.