Legal Briefing: Judge Rejects Guidant Defibrillator Settlement as Too Soft

A daily look at legal news and the business of law:

Judge Wants Harsher Penalty, More Accountability for Guidant

A few years ago, medical device manufacturer Guidant clearly put profits ahead of people when it made and sold defective implantable heart defibrillators, then failed to disclose the defects once they were discovered. Given that doctors generally implant defibrillators in patients so likely to have cardiac problems that having a device available to shock their hearts back into rhythm 24/7 is their best chance of surviving, the company's failure to notify people about the defective ones was shockingly dangerous. At least six people died as a result. Nonetheless, the Justice Department's proposed settlement involved only a $296 million fine and a plea to a couple of misdemeanors for lying to the Food and Drug Administration.

Outraged patients and doctors inundated U.S. District Court Judge Donovan Frank with demands for a harsher sentence, and Tuesday, Judge Frank agreed, rejecting the proposed settlement because it did "not adequately address Guidant's history and the criminal conduct at issue."

Frank suggested he would sign off on a deal that involved probation for the company and its parent, Boston Scientific (BSX). The judge rejected pleas to hold Guidant executives criminally liable, noting that it was up to the Department of Justice to decide whom to prosecute. While the judge is right about that, I'm not sure patients will find the result satisfying.

Ratings Agencies Lose Another Fraud Ruling

U.S. District Court Judge Shira Scheindlin, who already allowed one common law fraud case to proceed against Moody's Investors Service and Standard & Poor's Ratings Services, has just rejected Moody's and S&P's efforts to dismiss a different common law fraud case against them. The case involves debt issued by a structured investment vehicle called Rhinebridge, and pits King County, Wash., and the Iowa Student Loan Liquidity Corporation against German bank IKB (ironically, the victim in the Goldman Sachs fraud case), Moody's, S&P, Fitch (another ratings agency) and two individuals. In ruling against Moody's and S&P, Judge Scheindlin ruled the common law fraud claim based on inflated ratings could go forward because not only had the plaintiffs sufficiently alleged fraud, they had also sufficiently shown "loss causation," meaning that the inflated ratings, and their subsequent exposure through a dramatic downgrade, was at least a significant cause of their losses. The judge specifically rejected defendants' argument that the market crash as a whole, not the allegedly fraudulent ratings, was the sole or most important cause of the losses.

As I explained in a previous column, the ratings agencies appear vulnerable to these types of cases, though they've gone undefeated in federal securities law claims. Still, these two decisions aren't enough to qualify as a trend, particularly since both were written by the same judge. What's more, both cases are at a very early stage: There's no guarantee that plaintiffs will win either of them. Nonetheless, in light of the damning emails and testimony that came out at the congressional hearings last week on the role ratings agencies played in the events leading to the financial crisis, I'm happy that the agencies aren't off this hook yet.

And in the Business of Law...

• Greenberg Traurig faces a $20 million malpractice suit for allegedly botching a company's defense, reports the National Law Journal.

• Winston & Strawn associates are particularly demoralized, reports Above the Law.

• Sumner Redstone, billionaire head of Viacom (VIA), just gave his alma maters, Harvard University and Harvard Law School, a combined $1 million in part to enable 10 Harvard Law grads to take public interest jobs, reports ABA Journal.