M&A

SEC Probes Guidant as J&J Backs Away

Last week, Guidant shareholders filed a federal class action against the company and several of its officers.
Stephen TaubNovember 7, 2005

Guidant Corp. disclosed that it is cooperating with a Securities and Exchange Commission formal inquiry into issues related to certain product disclosures and trading in the company’s stock.

According to published accounts, reports of malfunctions in the company’s defibrillators and pacemakers and subsequent warnings and recalls by Guidant were the cause of the investigation. Those problems have also led Johnson & Johnson to walk away from its planned $25.4 billion acquisition of the company.

According to the Associated Press, last Friday was the deadline for completing the deal as specified under the agreement that the two companies reached on December 15, 2004. On Monday, Guidant sued J&J to force the health-care giant to complete the deal.

J&J responded that it is under no such obligation. “The company views the previously announced product recalls at Guidant and the related regulatory investigations, claims, and other developments as serious matters affecting both Guidant’s short-term results and long-term outlook,” it stated in a press release. “Johnson & Johnson believes those events have had a material adverse effect on Guidant and, as a result, that it is not required to close the acquisition. “

Last week, Guidant shareholders filed a class-action complaint in the U.S. District Court for the Southern District of Indiana, against the company and several of its officers, alleging they “concealed adverse information” about the company’s defibrillators and pacemakers and sold stock in violation of federal securities laws. The complaint seeks monetary damages and injunctive relief.

Also last week, New York Attorney General Eliot Spitzer filed a lawsuit against Guidant in New York State Supreme Court for allegedly concealing information about a design flaw in a heart defibrillator. The lawsuit alleges that Guidant failed to inform doctors about a mechanical problem that could cause the implanted device to malfunction with potentially fatal consequences.

“Concealment of negative facts that might influence a consumer to purchase another manufacturer’s product is the essence of fraud,” Spitzer said in a statement. “We wouldn’t permit this type of conduct in connection with the sale of cars or washing machines. It is simply unconscionable that it occurred with a critical medical device.”

In the past couple of months, Guidant has also been served with subpoenas by the Office of the California State Attorney General and by the U.S. Attorney’s Offices in Boston and Minneapolis.