Shareholders should sue as soon as they hear about fraud?
Supreme Court justices seemed disinclined yesterday to accept pharmaceutical giant Merck’s somewhat interesting argument that there was enough evidence in the public domain for its shareholders to sue the company for fraud way back in 2001.
Merck argues shareholders, who filed suit in November 2003, waited too long to sue.
The case, involving the drug Vioxx, could have far-reaching impact, as the question presented was when shareholders have enough information to sue companies for securities fraud — in other words, when does the two-year statue of limitations begin ticking.
The justices seemed sceptical, reports say, of giving Merck an out based on a statute of limitations argument in the case.
Tony Mauro of The National Law Journal: Merck lawyer Kannon Shanmugam of Williams & Connolly argued that there was enough evidence of possible fraud in his client’s statements about the anti-inflammatory drug in the public domain by September 2001 that diligent investors should have filed their lawsuit before November 2003, in order to satisfy the two-year statute of limitations. Among the public evidence, Shanmugam said, was a September 2001 warning by the Food and Drug Administration that the claims made by Merck about Vioxx were false and misleading. The company removed Vioxx from the market in 2004 after increasing evidence that the drug increased the risk of heart attacks. The U.S. District Court for the District of New Jersey dismissed the class action in 2007 on statute-of-limitation grounds, but the 3rd U.S. Circuit Court of Appeals reinstated the case, ruling that the shareholders could not have been aware of the wrongdoing within the period advocated by Merck.
Justice Ruth Bader Ginsburg noted that Merck initially said there were explanations and that “diligent plaintiffs” may have had difficulty if finding out whether Merck really believed those theories. Justice Antonin Scalia said early evidence indicated only substantial “inaccuracy,” not fraud.
Justice Anthony Kennedy summarized the main crux of the criticism for Merck’s argument; “[C]ompanies can’t have it both ways,” he said, wanting both a heightened pleading standard and a strict timeline for filing suit.
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