The U.S. Supreme Court has indicated that a stock fraud lawsuit can move forward against the makers of the cold remedy Zicam, whom investors say misrepresented their company’s growth potential by hiding the fact that some users were reporting problems with loss of their sense of smell from Zicam.
In a unanimous decision, justices rejected arguments by Matrixx Initiatives that manufacturers only needed to tell investors about complaints that are “statistically significant.” The justices determined that Matrixx Initiatives investors had enough evidence to proceed with a Zicam class action lawsuit, affirming an earlier decision by the U.S. 9th Circuit Court of Appeals.
The lawsuit was filed about five years before a Zicam recall was issued in June 2009, when the FDA warned about reports of loss of smell with Zicam Cold Remedy Nasal Gel, Zicam Cold Remedy Nasal Swabs and Zicam Cold Remedy Swabs Kids Size.
Following that recall, FDA investigators determined that Matrixx Initiatives may have received as many as 800 reports of Zicam problems that were not properly turned over to the FDA as required by federal regulations. It is unclear how many of those reports came after 2004, or whether their existence contradicts Matrixx’s claim that there were only a dozen or so reports during the time involved in the class action suit.
In the 2004 shareholder class action suit, Matrixx Initiatives argued that companies should not be forced to disclose to investors all complaints they receive from consumers, because it would flood investors with false and unconfirmed information. Attorneys for the cold remedy maker argued that the threshold for releasing such reports should be statistical significance.
Justice Sonia Sotomayor wrote that even if the allegations of loss of smell were false, investors were entitled to the information because allegations, true or untrue, could affect a company’s potential. However, the ruling should not be interpreted to mean businesses have to make public every adverse event report, Justice Sotomayor added.
To win their case, investors must show that Matrixx Initiatives held the information back intentionally as a form of damage control and to deceive investors about the state of the company and its products. Sotomayor said the investors had enough evidence to make a credible case in court.