• Levine et al. v. AtriCure, Inc. et al. No. 06-14234 (S.D.N.Y. Jan. 29, 2009)
  • April 3, 2009 | Authors: Karen A. Gibbs; Bernadette M. Stafford
  • Law Firm: Crowell & Moring LLP - Irvine Office
  • Disagreeing with the theory that the absence of loss causation was apparent on the face of the complaint—an affirmative defense known as “negative causation”— the U.S. District Court for the Southern District of New York reaffirmed its prior holding denying the motion to dismiss by AtriCure, Inc. (“AtriCure”) and other defendants, and permitted a medical device company investor to proceed with a 1933 Securities Act Section 11 (“Section 11”) claim. In denying the motion for reconsideration, the court rejected defendants’ argument that Bell Atlantic v. Twombly, 550 U.S. 544 (2007) imposes a more stringent pleading standard.

    In August 2005, AtriCure, a maker of surgical cutting devices, conducted an initial public offering. On December 12, 2005, an article appeared in the Wall Street Journal revealing that the Cleveland Clinic, a “prestigious hospital that used an AtriCure device,” was an investor in AtriCure and that AtricCure had paid several of the clinic’s doctors as consultants. On February 16, 2006, AtriCure announced its 2005 financial results, disclosing a resulting adverse impact on its business. AtriCure’s stock price then dropped from $10.36 to $8.04 per share.

    The plaintiff, Howard Levine, had purchased 250 AtriCure shares at $12 on August 9, 2005 and sold them at $11.80 on November 21, 2005—three weeks before publication of the Wall Street Journal article. In a would-be class action lawsuit, Levine alleged that the prospectus and registration statement for the initial public offering were misleading under Section 11 because they omitted disclosure of the conflict of interest involving the Cleveland Clinic.

    In their motion, the defendants argued that because Levine sold his shares before publication of the Wall Street Journal article, “he had not plead and could not plead an essential element of his claim . . . , namely ‘loss causation.’” Since Levine sold his AtriCure shares prior to the publication of the allegedly undisclosed facts in the Wall Street Journal, he would be unable to demonstrate a causal connection between the misrepresentations and a decline in the stock price.

    The court dismissed the defendants’ arguments, finding no evidence in the complaint “that the ‘first’ disclosure of the alleged material omission was made in the Wall Street Journal article published on December 12, 2005.” In fact, the court pointed to the defendants’ statements that the possible conflict of interest between AtriCure and the Cleveland Clinic was actually disclosed before the initial public offering in August of 2005. Because this fact, if proven, would likely defeat Levine’s claim at summary judgment, the court found that “defendants’ reliance on unproven, highly fact-specific arguments regarding the timing and content of disclosures only underscores the impropriety of resolving these issues on a motion to dismiss.”

    The court concluded, standing on its own, the complaint sets out the elements of a Section 11 claim: a material omission in the registration statement; purchase of stock without knowledge of such misrepresentations; and the presuit sale of the shares at a loss.

    In denying the motion for reconsideration, the court considered defendants’ argument that reconsideration was appropriate because the Supreme Court’s decision in Bell Atlantic v. Twombly imposes a more “stringent” pleading standard under Federal Rule of Civil Procedure 8. Finding “defendants’ central argument does not turn on whether the Conley or Twombly pleading standard applies,” the court refused to address whether Twombly creates a more stringent standard.

    The court also declined to reconsider its ruling that the plaintiff does not lack constitutional standing. It found Levine’s allegations “sufficient at the pleading stage to satisfy the constitutional requirements of a traceable injury in fact as well as loss causation under Section 11 (though pleading loss causation is not plaintiff’s burden under the statute).”