By Thomas O. Gorman Esq.
The shareholder complaint claimed that the company made false statements about
its key product Zicam, a cold remedy nasal spray. Zicam is the primary product
of Matrixx Initiatives, accounting for about 70% of its sales at one point.
Respondents claimed that statements made by the company about the product were
false because they failed to disclose certain adverse information.
Specifically, there were test results and consumer information demonstrating
that the product caused a loss of the sense of smell. Beginning as early as
1999 there were test results supporting this fact. In 2002 and 2003 the company
received additional clinical reports which were followed by the commencement of
product liability suits alleging that Zicam caused a loss of smell. The
negative test results were few in number.
Subsequently, in 2003 the company made statements touting the success of Zicam.
At one point Matrixx increased its earnings guidance based on Zicam sales. The
statements were made in press releases and a quarterly filing with the SEC.
In January 2004 media reports stated that the Food and Drug Administration was
looking into complaints that an over-the-counter cold remedy manufactured by
Matrixx Initiatives may be causing some users to lose their sense of smell. The
share prices for Matrixx stock fell from $13.55 to $11.97 following the report.
The company issued a press release noting that its product complied with the
applicable FDA guidelines and that there were no clinical trials reporting a
loss of smell from the active ingredient in Zicam. The press release went on to
note that many other things can negatively impact the sense of smell. The next
day the share price recovered to $13.40.
In February 2004 a national television broadcast highlighted the adverse
studies of Zicam and mentioned that there were four product liability suits
filed against the company. The share price fell to $9.94 the day of the
broadcast. The company again issued a press release and made a filing with the
SEC noting that there is insufficient scientific evidence at this time to link
the product to a loss of smell. Plaintiffs filed suit alleging violations of
Exchange Act Section 10(b).
The lower court decisions
The district court dismissed the complaint, concluding that the adverse product
reports were not material. In reaching this conclusion the court...
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ABOUT THE AUTHOR(S):
Thomas O. Gorman is a partner in the law firm of Dorsey & Whitney
LLP, resident in the Washington, D.C. office. He is Co-chair of the ABA's
Criminal Justice White Collar Crime Securities Fraud Subcommittee and the
author of a blog, which chronicles and analyzes trends in securities