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J&J Directors Ignored ‘Red Flags’ on Recalls, Probes, Suit Says

A group of Johnson & Johnson shareholders accused the company’s directors of ignoring “red flags” foreshadowing product recalls and government probes of manufacturing defects and marketing practices.

The shareholders asked a judge to find that directors and top executives mismanaged J&J and order them to pay damages. They also want J&J to “improve its corporate governance and internal procedures,” according to a complaint filed Dec. 17 in federal court in Trenton, New Jersey. Any money recovered would go to the company and not investors individually.

J&J, the world’s biggest maker of health-care products, recalled more than 40 types of medicines this year because of contamination and incorrect labeling. U.S. lawmakers began investigating J&J after a recall of batches of children’s Tylenol in April forced the company to suspend operations at a Pennsylvania plant. The probe uncovered the use of contractors to buy defective Motrin painkiller.

J&J also faces government investigations into whether it illegally marketed drugs and devices for uses not approved by the Food and Drug Administration and paid kickbacks. On Dec. 17, shareholders amended their so-called derivative lawsuits that seek to force directors and officers to pay the company.

While J&J once set “the gold standard for integrity and excellence,” the directors’ “utter disregard for their fiduciary duties, including permitting and fostering a culture of systemic, calculated and widespread legal violations has destroyed J&J’s hard-earned reputation,” shareholders claim.

Carol Goodrich, a spokeswoman for New Brunswick, New Jersey-based J&J, said the company is reviewing the complaint and has no comment.

Shares Fall

J&J fell 15 cents to $62.34 in New York Stock Exchange composite trading yesterday. The company has dropped 3.2 percent this year, compared with a 1.1 percent gain in the Standard & Poor’s 500 Health-Care Index of 52 stocks.

The board received “years of red flag warnings of systemic misconduct,” according to the complaint. “These red flags came in the form of federal and state regulatory investigations, subpoenas and requests for documents, FDA Warning Letters, news articles and the recall of products accounting for hundreds of millions of dollars in corporate losses.”

Earlier this year, J&J got three letters from shareholders demanding that it “investigate a variety of alleged issues and take appropriate action,” according to an Aug. 9 court filing. The suing shareholders include the Minneapolis Firefighters’ Relief Association and the Hawaii Laborers Pension Fund.

Special Committee

In response, the board voted April 22 to appoint a special committee to investigate and named four independent directors. Charles O. “Chuck” Prince, the former Citigroup Inc. chief executive officer, was named chairman. Other members of the committee are Anne Mulcahy, former CEO of Xerox Corp.; William D. Perez, former CEO of Wm. Wrigley Jr. Co.; and Michael M.E. Johns, chancellor of Emory University.

The committee appointed Lowenstein Sandler PC of Roseland, New Jersey, as its independent counsel, according to the filing. Sidley Austin LLP of Chicago is defending the company in the derivative litigation.

The case is In Re Johnson & Johnson Derivative Litigation, 10-cv-2033, U.S. District Court, District of New Jersey (Trenton).

To contact the reporters on this story: David Voreacos in Newark, New Jersey, at dvoreacos@bloomberg.net; Alex Nussbaum in New York anussbaum1@bloomberg.net.

To contact the editors responsible for this story: David E. Rovella at drovella@bloomberg.net; Reg Gale at Rgale5@bloomberg.net.

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