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CHICAGO--A securities lawsuit that relied heavily on confidential witnesses against senior management at Baxter International Inc. was not "compelling" enough under new U.S. Supreme Court guidelines to allow the case to proceed to trial, a federal appellate court has ruled.
A 7th U.S. Circuit Court of Appeals panel ruled 3-0 on July 26 to dismiss the litigation, Dennis Higginbotham et al. vs. Baxter International Inc., on which the panel had deferred action earlier this year. At that time, the panel had decided to await Supreme Court guidance on how lower courts should determine whether plaintiffs' complaints in securities-related cases are strong enough to survive defendants' initial dismissal motions.
In Tellabs Inc., et al. vs. Makor Issues & Rights, Ltd., et al., the Supreme Court ruled that plaintiffs' allegations should survive only if--after considering all plausible inferences of fraudulent and innocent activity--a reasonable person would find the plaintiffs' arguments "at least as compelling" as any opposing argument (BI, July 2). The Tellabs decision overturned the 7th Circuit's process of evaluating cases, which did not take into account inferences the court could draw from facts in the case that would suggest the defendants had not acted with any intent to commit fraud.
In the Baxter case, which the lower court never classified as a class action before dismissing it, reinstating it and then dismissing it again in 2005, the 7th Circuit panel said it had to heavily "discount" the plaintiffs' evidence based on confidential witnesses.
"It is hard to see how information from anonymous sources could be deemed 'compelling' or how we could take account of plausible opposing inferences. Perhaps these confidential sources have axes to grind. Perhaps they are lying. Perhaps they don't even exist," the 7th Circuit panel explained.
But the panel said it would not totally ignore evidence from confidential witnesses. "It is possible to imagine situations in which statements by anonymous sources may corroborate or disambiguate evidence from disclosed sources," the panel noted. "Informants sometimes play this role in applications for search warrants. Because it is impossible to anticipate all combinations of information that may be presented in the future, and because Tellabs instructs courts to evaluate the allegations in their entirety, we said above that allegations from 'confidential witnesses' must be 'discounted' rather than ignored. Usually that discount will be steep."
The case stems from the disclosure in May 2004 that executives at a Brazilian subsidiary of Deerfield, Ill.-based Baxter, a medical equipment manufacturer and pharmaceutical concern, had misrepresented the timing of sales and had fabricated some sales to drive up profits.
The 7th Circuit panel also noted that Baxter executives initiated a timely investigation of the reported fraud once they became aware of the possible problem.