9th Circ. Revives Matrixx Zicam Shareholder Action

By Erin Marie Daly

Law360, New York (October 28, 2009) -- A federal appeals court has reinstated a class action accusing Matrixx Initiatives Inc. of concealing from investors hundreds of consumer reports claiming cold medication Zicam caused users to lose their sense of smell.

In a ruling Wednesday, the U.S. Court of Appeals for the Ninth Circuit reversed and remanded the lawsuit, which targets Matrixx, CEO Carl Johnson, Chief Financial Officer William Hemelt and Vice President Timothy Clarot.

The U.S. District Court for the District of Arizona had previously granted the defendants’ bid to throw out the complaint by lead plaintiff NECA-IBEW Pension Fund and named plaintiff James Siracusano, who claim that Matrixx and its executives hid information about the reports from both the U.S. Food and Drug Administration and shareholders.

According to the plaintiffs, the defendants violated the Private Securities Litigation Reform Act of 1995 and the Securities Exchange Act of 1934 by failing to disclose that Zicam, a cold medication that has come under fire in recent months for its potential danger to consumers, causes anosmia, or the loss of one’s sense of smell.

Matrixx's stock traded at artificially inflated levels during the class period from October 2003 to June 2004, the plaintiffs claim. But after the information was revealed, they allege, the price of the company’s common stock plummeted and has continued to decrease, harming shareholders.

The district court had tossed the suit for failure to state a claim, prompting the plaintiffs’ appeal.

But the Ninth Circuit said that to the contrary, not only had the plaintiffs sufficiently alleged materiality, but viewing their complaint as a whole, the inference of scienter was “cogent and at least as compelling” as any “plausible nonculpable explanation” for the defendants’ conduct.

Withholding reports of adverse effects of and lawsuits concerning the product responsible for the company’s remarkable sales increase, the Ninth Circuit said, was “an extreme departure from the standards of ordinary care” and presented “a danger of misleading buyers or sellers.”

“The inference that appellees withheld the information intentionally or with deliberate recklessness is at least as compelling as the inference that appellees withheld the information innocently,” the appeals court said.

The news comes just after Matrixx revealed in a regulatory filing that the FDA is unwilling to reverse its stance that Zicam can cause users to lose their sense of smell.

Matrixx disclosed in an 8K filing with the U.S. Securities and Exchange Commission on Monday that the FDA was unlikely to change the position it took in a warning letter it sent to the company in June, which said the product could be harmful to consumers.

The FDA’s letter, dated June 16, said Zicam could not be marketed without FDA approval.

The letter also said the products were misbranded because their labeling did not bear adequate warnings regarding the risk of anosmia. The FDA asked the company to identify specific steps it had taken to correct the alleged violations within 15 working days.

The products are zinc-containing, intranasal cold remedies marketed for reducing the duration and severity of cold symptoms. The FDA said in its letter that the products had not been shown to be effective.

Less than two weeks after the warning letter was sent, the SEC started a probe into Matrixx’s practices, asking the company to turn over documents and other information related to Zicam.

Matrixx also said in the filing that it recently had been hit with a notice identifying several situations in which the company should have filed serious adverse event reports with the FDA’s MedWatch reporting system.

The company said it was reviewing the observations and would be responding soon.

In the past year Matrixx has faced a flurry of consumer and derivative litigation over its cold remedy products.

Matrixx is represented by O'Melveny & Myers LLP.

The plaintiffs are represented by Coughlin Stoia Geller Rudman & Robbins LLP.

The case is Siracusano et al. v. Matrixx Initiatives Inc. et al., case number 06-15677, in the U.S. Court of Appeals for the Ninth Circuit.

--Additional reporting by Melissa Lipman