Cytocare Loses Appeal to Stop Investors’ Suit
Cytocare Inc. and two former executives appear headed for trial in a shareholders’ lawsuit, after failing to convince the Supreme Court that there’s not enough evidence to support the holders’ claims.
The high court today rejected Cytocare’s appeal, in which the Aliso Viejo medical-device company asked for court guidance about how much proof shareholders need before they can pursue a securities fraud lawsuit citing insider stock sales by company executives. The company recently changed its name to Medstone International Inc.
Shareholders charge that insiders sold large blocks of stock before the company disclosed that the Food and Drug Administration would deny federal approval for use of a Cytocare product.
The company challenged a San Francisco-based federal appeals court’s decision that shareholders at least had enough of a case to warrant a trial on claims against the company, the executives, and the underwriter that handled its initial public offering.
The company argued that the appeals court set such a lenient standard of proof that insiders at any publicly traded company could face fraud claims every time they sell substantial blocks of stock. The ruling, the company said, could work against shareholder interests by discouraging executives from owning shares in the companies they manage.
Cytocare also claimed that the appeals court went too far in requiring the company to tell investors about preliminary, partial results of clinical studies, including material that must be kept secret under Food and Drug Administration rules.
Shareholders sued in October, 1989, five days after the FDA said it would not approve the company’s proposal to use a shock-wave device for treatment of gallstones. Company stock prices fell by more than half during the weeks after the announcement.
The fraud lawsuit claimed that, during the company’s June, 1988, initial public offering of stock and in later statements, Cytocare misled investors about the prospects for FDA approval.
