Matrixx Initiatives: Not A Pro-Business Decision

Matrixx Initiatives: Not A Pro-Business Decision

By Thomas O. Gorman Esq.


The complaint

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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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 litigation,