Shareholders revive class-action kickbacks suit against Cardiovascular Systems

Shareholders revived a purported class-action kickbacks lawsuit against Cardiovascular Systems (NSDQ:CSII) that was dismissed without prejudice earlier this year, citing in the new complaint a $25 million judgment against the company in a related case.

St. Paul, Minn.-based CSI paid $8 million to settle a federal False Claims Act suit in July 2016 that accused it of running a kickbacks program 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 a complaint filed by Travis Thams, who worked for CSI as a district sales manager from 2012 to 2013. The Tham lawsuit also accused the company of running an off-label promotion scheme to push sales of its unapproved 4 French catheter.

After the Tham suit was unsealed, shareholders leveled another lawsuit against CSI, alleging that the company and its management misled investors about the alleged schemes, causing a sharp drop in the company’s share price. But Judge Donovan Frank of the U.S. District Court for Minnesota dismissed that suit with leave to amend in March, ruling that the plaintiffs failed to prove their allegations in part because of their reliance on confidential witnesses in the Tham case.

A week later, CSI was found liable for approximately $25.1 million in a separate, third whistleblower and wrongful termination suit involving a former regional sales manager. That suit, filed by Steven Babyak in November 2015, alleged that the company engaged in retaliation and the eventual discharge of Babyak in response to his expressed concerns over issues relating to patient safety and violations of state and federal laws. Babyak worked for the company for 3 years before being fired in June 2015. A jury in the Superior Court of California for the County of Los Angeles found in his favor April 24, awarding Babyak $2.7 million in compensatory damages and another $22.4 million in punitive damages.

This week the shareholders amended their complaint to cite the result in the Babyak case, seeking class action status for owners of CSII stock between Sept. 12, 2011, and Jan. 21, 2016.

“Defendants’ illegal sales tactics have been confirmed through multiple sources, including: (i) evidence, including internal documentation, submitted in Babyak v. Cardiovascular Systems Inc., a California lawsuit brought by a former CSI sales representative, who won a $25 million jury verdict against CSI for terminating him in retaliation for reporting illegal marketing and sales tactics; (ii) statements by former employees, including CSI sales representatives (‘sales reps’) with direct knowledge of the practices alleged herein; and (iii) CSI’s settlement with the government to resolve claims of illegal kickbacks to physicians,” the shareholders alleged in the new complaint filed July 27.

“Documents, affidavits, and verified interrogatories filed publicly in the Babyak action show CSI executives were involved in a ‘Triangle Offense’ program, which was used to push sales reps to illegally steer referrals to doctors expressly in order to induce purchases of CSI’s PAD devices. As described by one senior CSI official to sales reps: ‘the Triangle Offense gives you control. If you own the bottom base of the triangle (referring physicians) you will control the top point of the triangle (physician end user). If the physician end user isn’t a loyalist then we can steer referrals to someone that is loyal because we control the referral spigot.’ The official told sales reps to ‘[g]et an agreement [from the customer] that you will market for them as long as he uses our device.’” according to the lawsuit [emphasis theirs].

Cardiovascular Systems said in a regulatory filing that it “believes that this lawsuit is without merit and intends to defend itself vigorously.”

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