Cardiovascular Systems escapes class-action kickbacks suit

Cardiovascular Systems (NSDQ:CSII) escaped a purported class-action lawsuit brought over allegations that it ran an off-label promotion and kickbacks scheme, but the reprieve could be short-lived because the case was dismissed without prejudice.

St. Paul, Minn.-based CSI paid $8 million to settle a federal False Claims Act suit in July 2016 that accused CSI of inducing physicians to use its products by offering free, all-expense-paid training programs “followed by explicit demands by CSI employees that attendees use CSI products on future patients,” giving away product for free, 3rd-party referral channel marketing, and “sham Speaker Bureau payments for high-prescribers and others whom CSI sought to cultivate,” according to the complaint.

Plaintiff Travis Thams worked for CSI as a district sales manager from 2012 to 2013, according to the suit.

The lawsuit also accused the company of running an off-label promotion scheme to push sales of its unapproved 4 French catheter. It alleges that CSI also promoted its devices for use in areas of the body it’s not approved for, such as the coronary arteries, and for conditions such as chronic total occlusion for which it is not approved.

The class-action suit, seeking to represent shareholders who bought CSII stock between Sept. 12, 2011, and Jan. 21, 2016, alleged that the company and its management misled investors about the alleged scheme, which caused a sharp drop in the company’s share price.

This week Judge Donovan Frank of the U.S. District Court for Minnesota dismissed the suit with leave to amend, ruling that the plaintiffs failed to prove their allegations, in part because of their reliance on confidential witnesses.

“Because plaintiffs’ claim is predicated on illegal conduct, plaintiffs must plead facts that, if true, would constitute illegal conduct. Here, plaintiffs have failed to adequately plead that CSI was engaged in illegal conduct. The court therefore dismisses plaintiffs’ complaint without prejudice and grants their request for leave to amend the complaint,” Frank wrote. “Allowing shareholders to sue based on conclusory allegations that a company has engaged in widespread illegal conduct without adequately pleading facts that demonstrate illegal conduct would just allow strike suits by another name.”

The plaintiffs’ reliance on confidential witnesses failed to adequately specify their roles or how they came into their information, the judge wrote.

“Here, plaintiffs, for the most part, have failed to adequately plead the confidential witnesses’ roles or how they came into possession of the information. In particular, plaintiffs have failed to allege the job duties for the confidential witnesses. As a result, the court disregards the statements of those confidential witnesses for whom plaintiffs did not provide a description of the witnesses’ job duties,” Frank wrote. “Additionally, plaintiffs’ confidential witnesses, at times, merely relay office gossip. For example, [confidential witness 3] ‘heard’ about allegedly illegal sales practices. Similarly, vague allegations from witnesses that CSI had implemented ‘shady’ practices or that CSI was a ‘different place’ after [vice president of sales Jim] Breidenstein left are not detailed enough to be reliable. Thus, the court also disregards the confidential witnesses’ statements to the extent they are vague or based on 2nd-hand knowledge.”

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