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Levine v. Atricure

September 13, 2007



Before the Court are two motions: a motion to dismiss named plaintiff Howard Levine's complaint pursuant to Rule 12(b)(1) and 12(b)(6) of the Federal Rules of Civil Procedure; and a motion to appoint James Duncan and Jackie Byrd as lead plaintiffs and to approve their selection of co-lead counsel. Defendants AtriCure, Inc., David J. Drachman, and Thomas Etergino oppose the motion to appoint lead plaintiffs by arguing that Howard Levine, the sole named plaintiff, lacks standing, and thus the Court is without jurisdiction to even consider the lead plaintiff motion and must dismiss the Complaint. For the reasons that follow, defendants' motion to dismiss the complaint is DENIED and the motion to appoint Duncan and Byrd as lead plaintiffs is GRANTED.


AtriCure, Inc. ("AtriCure" or "the Company") develops, manufactures, and sells surgical devices designed to create precise lesions in cardiac and soft tissues. (Compl. ¶ 17.) The corporation made an initial public offering ("IPO") in August 2005, with defendants UBS Securities LLC and Piper Jaffray & Co. as lead underwriters. Levine brings this action on behalf of himself and all persons "who purchased the common stock of AtriCure pursuant and/or traceable to the Company's initial public offering on or about August 4, 2005 through February 16, 2006." (Compl. ¶ 1.)

The Complaint alleges that AtriCure and certain of its officers and directors violated the Securities Act of 1933 ("Securities Act") by failing to disclose material facts in the Registration Statement and Prospectus ("Registration Statement") issued in connection with AtriCure's public offering. (Compl. ¶ 20.) Specifically, the Complaint alleges that AtriCure "failed to disclose that the Cleveland Clinic, where a significant portion of procedures with its products were being performed, was an investor in the Company and that doctors from the Cleveland Clinic had been paid consultants to the Company." (Compl. ¶ 25.)

On December 12, 2005, the Wall Street Journal published an article that revealed that the Cleveland Clinic used the AtriCure device in a large number of procedures and was a participant in an investment fund that was a significant shareholder in the Company, and that several doctors at the Cleveland Clinic had been paid consultants to the Company. (Compl. ¶ 27.) The article focused on potential conflicts of interest between the Cleveland Clinic and its patients stemming from its failure to disclose these facts to patients. On February 16, 2006, AtriCure announced its financial results for the fiscal year ended December 31, 2005, and disclosed, among other things, that the Company was experiencing a "negative impact" on its business due to these revelations. (Compl. ¶ 28.) Finally, the Complaint alleges that in response to this announcement, the price of AtriCure common stock dropped from $10.36 per share to $8.04 per share on extremely heavy trading volume. (Compl. ¶ 29.)

According to the Certification accompanying the Complaint,*fn2 Levine purchased 250 AtriCure shares at $12 per share on August 9, 2005 and sold all of those shares at $11.80 on November 21, 2005 for a total loss of $50. (Certification ¶ 4.) This sale was three weeks before the Wall Street Journal disclosed to the general public the allegedly omitted facts. Proposed co-lead plaintiffs Byrd and Duncan, on the other hand, both sold their AtriCure common shares after February 2006, when AtriCure released its financial results, for a combined loss of over $1,500.*fn3 (Decl. of David A. Rosenfeld, Ex. B.)

On December 11, 2006, one year after the Wall Street Journal article was published and one day before the expiration of the limitations period provided for § 11 actions, see 15 U.S.C. § 77m, plaintiff Levine initiated this lawsuit. On January 23, 2007, defendants moved to dismiss the Complaint pursuant to Rules 12(b)(1) and 12(b)(6) of the Federal Rules of Civil Procedure based on deficiencies of the named plaintiff. Specifically, defendants argued that by selling his AtriCure shares prior to the publication of the allegedly undisclosed facts in the Wall Street Journal, Levine would be unable to demonstrate that he was injured by the nondisclosure and therefore both failed to state a claim and lacked standing to bring this action. Before an opposition had been filed, the Court stayed briefing on the Rule 12(b) motion at plaintiff's request until the time for filing a lead plaintiff motion had expired. Putative class members Byrd and Duncan filed their lead plaintiff motion on February 9, 2007, within the time period set by the statute. See 15 U.S.C. § 77z-1(a)(3). The original named plaintiff, Levine, did not file a lead plaintiff motion. Defendants opposed the motion by again asserting Levine's lack of standing, referring to the substance of their Rule 12(b) motion, and argued that the Court was without jurisdiction to even consider the lead plaintiff motion and must dismiss the Complaint. Finally, the Court directed the parties to finish briefing on the Rule 12(b)(1) motion before addressing both motions.


Because defendants have raised the possibility that the Court is without jurisdiction, the Court must first consider this assertion before turning to the motion to appoint lead plaintiffs. This requires resolution of two questions: (1) Does the alleged absence of loss causation deprive the plaintiff of standing? (2) If so, does the absence of standing preclude the Court from resolving a lead plaintiff motion that would cure the defect in standing? The Court finds that Levine has adequately pled constitutional standing, and thus it need not address the latter question. Turning then to the lead plaintiff motion, the Court finds that putative class members Byrd and Duncan have made an adequate showing and grants their motion to be appointed lead plaintiffs. Finally, the Court rejects defendants' argument that it should deny the lead plaintiff motion as an abuse of the Private Securities Litigation Reform Act of 1995.

I. Loss Causation

Loss causation (i.e. a causal connection between the material misrepresentation or omission and plaintiff's loss) is not an element of a § 11 claim under the Securities Act. See In re Flag Telecom Holdings, Ltd. Sec. Litig., 411 F. Supp. 2d 377, 382 (S.D.N.Y. 2006) ("A plaintiff need only plead a material misstatement or omission in the registration statement to establish a prima facie fraud claim under § 11 of the Securities Act; a plaintiff is not required to plead loss causation." (citation omitted)); Adair v. Kaye Kotts Assocs., No. 97 Civ. 3375 (SS), 1998 U.S. Dist. LEXIS 3900, at *24 (S.D.N.Y. Mar. 27, 1998) ("Loss causation is not an element of a Section 11 claim."); cf. Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 342 (2005) ("loss causation" is a required element of a § 10(b) claim). Rather, Congress enacted § 11(e), which makes the absence of loss causation, also known as "negative causation," an affirmative defense to reduce or avoid liability under § 11. See 15 U.S.C. § 77k(e); Akerman v. Oryx Commc'ns Inc., 810 F.2d 336, 341 (2d Cir. 1987) ("[S]section 11(e) expressly creates an affirmative defense of disproving causation.").

As an affirmative defense, the burden of disproving loss causation falls on defendants, reflecting Congress's "desire to allocate the risk of uncertainty to the defendants." Akerman, 810 F.2d at 341; see also Globus v. Law Research Serv., Inc., 418 F.2d 1276, 1288 (2d Cir. 1969) ("Civil liability under section 11 and similar provisions was designed not so much to compensate the defrauded purchaser as to promote enforcement of the Act and to deter negligence by providing a penalty for those who fail in their duties."). Thus, § 11 can be said to create a factual presumption that "any decline in value is . . . caused by the misrepresentation in the registration statement." McMahan & Co. v. Wherehouse Entm't, Inc., 65 F.3d 1044, 1048 (2d Cir. 1995) (citing Greenapple v. Detroit Edison Co., 618 F.2d 198, 203 n.9 (2d Cir. 1980) ("plaintiff need show no causal connection between the decline in the price of the security and the materially false misstatement or omission")).

Because an analysis of causation is often fact-intensive, negative causation is generally established by a defendant on a motion for summary judgment or at trial. Thus, in In re WRT Energy Sec. Litig., No. 96 Civ. 3610 (JFK), 2005 U.S. Dist. LEXIS 18701 (S.D.N.Y. Aug. 30, 2005), Judge Keenan vacated his earlier decision on a Rule 12(b)(6) motion and allowed plaintiffs to assert a § 11 claim for damages for declines in share value prior to the first alleged disclosure. Id. at *3. The court found that "[t]o conclude otherwise places a burden of pleading loss causation on the plaintiffs, and removes the burden of establishing negative causation from the defendants, where it properly lies." Id. at *5.

In support of the contrary position, defendants rely primarily upon In re Merrill Lynch & Co. Research Reports Sec. Litig., in which Judge Pollack granted a motion to dismiss a § 11 claim pursuant to Rule 12(b)(6) based on the absence of loss causation, after finding the absence was apparent from the face of the complaint.*fn4272 F. Supp. 2d 243, 255 (S.D.N.Y. 2003). The court relied on a finding that the decline in plaintiff's share price was proportional to sector-wide declines and plaintiff's losses occurred before the first alleged disclosure of the omission. However, ...

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