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Drugs, Satan Debated as Justices Mull Investor Suits

A case about an over-the-counter cold remedy morphed into a debate over how a company should handle allegations of satanic influence as the U.S. Supreme Court contemplated putting new limits on investor lawsuits.

Hearing arguments today in Washington, the justices questioned a lawyer representing Matrixx Initiatives Inc., a drugmaker accused of not telling investors that some users of its now-withdrawn Zicam cold remedy had lost their sense of smell. Matrixx, seeking to have the suit dismissed, says drugmakers need not say anything until reports of side effects become statistically significant.

That contention drew skepticism from several justices, including Stephen Breyer, who said the Matrixx argument “can’t be.” The court spent much of the hour discussing whether a company must disclose even clearly irrational allegations --such as the hypothetical suggestion that it is controlled by the devil -- if they might affect share prices.

“If I’m an investor in Matrixx, I worry whether my stock price is going to go down,” Chief Justice John Roberts said. “You can have some psychic come out and say ‘Zicam is going to cause a disease’ with no support whatsoever; but if it causes the stock to go down 20 percent, it seems to me that’s material.”

Sudden Blindness

Justice Elena Kagan said reports about even a handful of side effects, if serious enough, might affect how investors view a company’s prospects. She described a hypothetical company whose only product was a contact lens solution that was linked to 10 cases of sudden blindness.

“I’d stop using the product and if I were holding stock in that company, I’d sell the stock,” Kagan said.

Matrixx’s lawyer, Jonathan Hacker, argued that companies shouldn’t have to let investors know about isolated reports unless there’s a scientific and statistical basis to believe the product is problematic.

“A reasonable investor doesn’t want false information,” he said. “A reasonable investor wants accurate information.”

Hacker drew resistance from Breyer, who said statistical significance couldn’t be an absolute test. “Albert Einstein had the theory of relativity without any empirical evidence,” Breyer said.

Breyer later said he worried about overwhelming shareholders with information. “If we say they have to disclose too much, what will happen is people won’t pay attention to it,” he said.

Loss of Smell

The lawyer for the suing investors, David Frederick, said judges should look at “the total mix of information available to investors” in deciding whether a suit should go forward to the evidence-gathering stage of the litigation.

A federal appeals court let the Matrixx lawsuit proceed. The three-judge panel said statistical significance isn’t a requirement for filing a suit against a drugmaker under the federal securities laws.

Matrixx stopped selling its Zicam nasal spray and gel in June 2009 after the Food and Drug Administration warned consumers the treatments may cause a loss of smell, a condition known as anosmia. Matrixx says it disagrees with the FDA’s findings.

The suing investors contend that the company had indications of a problem years earlier, including lawsuits filed on behalf of nine people from October 2003 to January 2004. The complaint in the case alleges that the company had as many as 23 reports of anosmia.

The investor suit seeks class-action status on behalf of people who bought Zicam from Oct. 22, 2003, to Feb. 6, 2004.

Satanic Influence

Frederick was the one to raise the issue of satanic influence, saying a reasonable investor would want to be alerted if a “large body” believed a product was linked to the devil and if the stock price might be affected.

The hypothetical became a laugh line when Roberts said, “I don’t know what kind of product has particular satanic susceptibility.” Justice Antonin Scalia drew more chuckles when he asked a lawyer representing the Obama administration, “What do you think about Satan?”

That lawyer, Pratik Shah, said the answer might depend on whether a company had specifically told investors that consumers were eager to buy its products or that sales were likely to grow.

“If there is no projection about the company’s future success, then it wouldn’t have to disclose in that situation,” Shah said.

Matrixx, based in Scottsdale, Arizona, has said in regulatory filings that the case is one of two investor lawsuits that could have a material impact on the company’s financial results should any award not be covered by insurance. The company fell 22 cents, or 3 percent, to $8.42 at 3:56 p.m. in trading on the Nasdaq stock market.

The justices will rule by July in the case, Matrixx Initiatives v. Siracusano, 09-1156.

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