Guidant Faces Legal Battles after Recall

In addition to lawsuits from consumers, Guidant now faces several lawsuits over alleged illegal trading of Guidant shares by company executives. The lawsuits allege that Guidant executives were dumping the stock in advance of the public warnings about the defects in cardiac defibrillators manufactured by the company. This story appeared in the July 7, 2005 edition of the Washington Post, which is copied below:

By ASHLEY M. HEHER The Associated Press Thursday, July 7, 2005; 5:00 PM

INDIANAPOLIS -- Guidant Corp., which has recalled 87,600 implantable cardiac defibrillators in three weeks, is facing mounting legal pressure from angry shareholders and frightened patients. Securities fraud lawsuits filed in June and July allege six executives at the Indianapolis-based company sold nearly $40 million worth of stock at "artificially inflated prices" while knowing about undisclosed flaws in thousands of implantable defibrillators

Court documents show the leaders at Guidant sold a combined 537,571 shares of company stock between Jan. 31 and May 23. More than half the shares were sold by CEO Ronald Dollens. The suits, filed in federal court in Indianapolis, are the latest salvos aimed at Guidant, which faces lawsuits from dozens of patients for failing to notify physicians about flaws in several defibrillators.

The company also is under investigation by the Food and Drug Administration, which said July 1 that defects in 42,000 defibrillators could be deadly.

Analysts disagree about the impact of the suits, but nearly all say they're unlikely to affect a pending $24.5 billion acquisition offer from New Jersey-based Johnson & Johnson.

Jeffrey J. Leebaw, a J&J spokesman, said Wednesday that the company is reviewing Guidant data but still plans to close the deal in the third quarter.

John Putnam, an analyst with Stanford Group Co. in Boca Raton, Fla., said investors appear confident the deal will take place

Between June 17, when the company announced its first recall, and June 24, Guidant stock traded between $73.83 and $59.94 on the New York Stock Exchange. On June 24, the day the company issued its second safety advisory, the stock closed at $63.90.

Guidant stock closed down 4 cents Thursday at $64.99.

"Obviously, people are speculating that J&J is not going to walk away from the deal," Putnam said.

Guidant spokesman Steve Tragash declined to comment on the lawsuits.

Officials have previously said patient safety is "paramount" for the company. Many analysts said the flurry of lawsuits was expected after Guidant issued safety advisories for 11 models of its implantable defibrillators, which shock the heart back into a regular rhythm.

Keay Makae, a medical device analyst with C.E. Unterberg, Towbin, said the patient lawsuits could be more damaging. "I would say statistically, the number of (securities fraud) lawsuits that end up damaging a company seems to be on the low side," he said. "The patient ones potentially are more serious."

Robert C. Hilliard, a Texas attorney who has filed suit against Guidant in Texas District Court, said the outcry isn't surprising. "Most of these people are just very angry and betrayed," he said. "Most of them have heart conditions or preexisting heart problems, and now they're faced with going under the knife again or just hoping this one won't be a defective one."

But Bill Hicks, a professor at Indiana University's law school, said the shareholder lawsuits could pose more of a threat. "Product liability is part of doing business," he said.

Philip T. Powell, a professor at Indiana University's Kelley School of Business, disagreed. Stock sales aren't unusual when a company is preparing for a merger, he said. "These people are retiring," Powell said. "So they're going to move their portfolio around."

Experts predict the company ultimately will settle the complaints. "Guidant is not going to fight it," Powell said of the consumer lawsuits. "There's admitted liability. They'd be stupid to fight it."

Repeated messages were left by The Associated Press with lawyers from the Connecticut firm Scott & Scott, Pennsylvania-based Schiffrin & Barroway and Maryland attorney Charles J. Pivens. All three firms have filed securities fraud cases against Guidant.