This story in yesterdayâ€™s Boston Herald asserts that during the bidding war for Guidant between J&J and Boston Scientific (BSX), BSX â€œused highly questionable investment advice to swing the battle their way and give their stock a good â€˜pop.â€™â€? Specifically, BSX put out a press release that quoted various Wall Street analysts endorsing the BSX bid.
If Boston Scientific won the takeover, it would be â€œa â€˜must ownâ€™ stockâ€? (UBS), could rise â€œ35-40â€? percent (Lehman Brothers), â€œ56 percent (in) two yearsâ€? (JMP Securities), or over 30 percent more than the market (SG Cowen), the statement said.
There is no problem with a company quoting analyst statements in a press release, although securities lawyers bristle whenever a company includes predictions that its stock will perform well. But that is where the bespeaks caution doctrine and the forward-looking statement safe harbors under the â€™33 Act and â€™34 Act come in. Under these provisions, as long as the forward-looking statements are identified as such and accompanied by meaningful cautionary language, the company can generally not be sued for the statements even if they turn out to be false.
The problem with the BSX press release, however, is that the quoted recommendations were out of date. They related to an earlier and lower BSX bid. By the time BSX had put out the release, it had significantly raised its bid in response to counter an upped bid by J&J.
As a result of this timing issue, it seems to me that the press release was materially misleading (the story linked above goes into some reasons as to why). The story states, however, that â€œ[i]t doesnâ€™t look like BSX has done anything illegal, although in the era of Sarbanes-Oxley youâ€™re never sure.â€? Is that right? Hasnâ€™t BSX violated Rule 10b-5 which prohibits fraud in connection with the purchase or sale of a security? I think the answer to the second question is maybe, but a plaintiff is going to have a difficult time meeting the pleading and proof requirements for scienter and loss causation as required by PLSRA. Also, the Boston Herald story and this blog post would contribute to a truth on the market argument for cutting-off a class period. Regardless, it was a risky move by BSX, especially because as part of the deal, BSX will soon be issuing shares to the current Guidant shareholders pursuant to a registration statement that will likely incorporate by reference the press release. This in turn will make â€™33 Act causes of action available.