Mississippi Public Employees' Retirement System v. Boston Scientific Corp.

United States Court of Appeals
For the First Circuit

No. 07-1794

MISSISSIPPI PUBLIC EMPLOYEES' RETIREMENT SYSTEM,

Plaintiff, Appellant,

v.

BOSTON SCIENTIFIC CORPORATION; James R. Tobin; Paul A.
LaViolette; Fredericus A. Colen; Lawrence C. Best; Stephen F.
Moreci; Robert G. MacLean; Peter M. Nicholas; Paul W. Sandman;
James H. Taylor, Jr.,

Defendants, Appellees.

APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Joseph L. Tauro, U.S. District Judge]

Before
Torruella, Circuit Judge,
Tashima, Senior Circuit Judge,*
and Lynch, Circuit Judge.

Carolyn G. Anderson with whom Timothy J. Becker, Anne T.
Regan, Zimmerman Reed, P.L.L.P., David S. Nalven, Steve Berman,
Hagens Berman Sobol Shapiro, LLP, Richard A. Lockridge, Gregg M.
Fishbein, Lockridge Grindal Nauen, P.L.L.P., Mike Moore, and Moore
Law Firm were on brief for appellant.
Stuart J. Baskin with whom John Gueli, Kirsten M. Nelson,
Shearman & Sterling LLP, William H. Paine, Timothy J. Perla, and
Wilmer Cutler Pickering Hale & Dorr LLP were on brief for
defendants.

*
Of the Ninth Circuit, sitting by designation.
April 16, 2008

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 LYNCH, Circuit Judge. This securities case was brought

against Boston Scientific, a publicly traded manufacturer of

medical devices based in Natick, Massachusetts. The appeal

concerns dismissal of claims based on the company's launch of a new

product, the drug-eluting TAXUS coronary stent, and its eventual

recalls. Plaintiff, a Mississippi pension fund and purchaser of

Boston Scientific stock, alleges that company executives both

withheld material information about problems with the stent and

decisions addressing those problems, and made misleading positive

statements, in violation of sections 10(b) and 20(a) of the

Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b) and 78t(a),

and the attendant rules and regulations, including Rule 10b-5, 17

C.F.R. § 240.10b-5.

Plaintiff appeals the district court's grant of

defendants' motion to dismiss under Federal Rule of Civil Procedure

12(b)(6). The district court held, in a thoughtful decision, that

plaintiff failed to meet the heightened pleading requirements

imposed by the Private Securities Litigation Reform Act of 1995

("PSLRA"), Pub. L. No. 104-67, 109 Stat. 737. In re Boston

Scientific Corp. Sec. Litig., 490 F. Supp. 2d 142, 152, 162 (D.

Mass. 2007).

Applying the standards recently articulated by the

Supreme Court in Tellabs, Inc., v. Makor Issues & Rights, Ltd., ___

U.S. ___, 127 S. Ct. 2499 (2007), and by this court in ACA

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Financial Guaranty Corp. v. Advest, Inc., 512 F.3d 46 (1st Cir.

2008), we hold that plaintiff has pled claims sufficient to

withstand a motion to dismiss and so we remand the case. Our

remand permits the court, should it choose to do so, to allow a

limited discovery period on the issues raised. See, e.g., Greebel

v. FTP Software, Inc., 194 F.3d 185, 188 (1st Cir. 1999); Gross v.

Summa Four, Inc., 93 F.3d 987, 990 (1st Cir. 1996). "Our ruling

does not mean that plaintiffs' claims have any merit. It means

only that the claims are not to be dismissed at this very early

stage. Nothing has been proven yet." In re Cabletron Sys., Inc.,

311 F.3d 11, 20 (1st Cir. 2002).

I.

On September 23, 2005, the Public Employees' Retirement

System of Mississippi ("PERS") brought suit in federal district

court as the lead plaintiff in a class action against Boston

Scientific and company executives Peter M. Nicholas (Chairman of

the Board of Directors); James R. Tobin (President and Director);

Paul A. LaViolette (Chief Operating Officer and member of the

Executive Committee1); Fredericus A. Colen (Senior Vice President

and Chief Technology Officer); Lawrence C. Best (Senior Vice

President and Chief Financial Officer); Stephen F. Moreci (Senior

Vice President and Group President of Endosurgery); Robert G.

1
LaViolette became Chief Operating Officer in 2004, after
the beginning of the class period.

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MacLean (Vice President of Human Resources); Paul W. Sandman

(Senior Vice President, Secretary, and General Counsel); and James

H. Taylor, Jr. (Senior Vice President of Corporate Operations).

Consolidated Am. Compl. ("CAC") ¶¶ 1, 15-23.

Plaintiff sued on behalf of a putative class of

individuals and entities who purchased equity securities in Boston

Scientific from March 31, 2003 to August 23, 2005. Id. ¶ 1.

Plaintiff alleged that during that period, defendants made false

and misleading statements and caused the market price of the

company's securities to be artificially inflated, both harming

investors and allowing the individual insider defendants to enrich

themselves in excess of $332 million. Id.

Plaintiff's original complaint divided into four

categories its allegations regarding defendants' statements about

a civil lawsuit with Medinol Ltd., a Department of Justice

investigation into a 1998 product recall, the company's

introduction of TAXUS stents to the market, and FDA investigations

and warnings regarding Boston Scientific's plants. Only the TAXUS

stent issue is before us on appeal following the dismissal of all

claims.

In particular, plaintiff advances these theories. By

late 2003 defendants became aware of serious problems in patients

in Europe resulting from the insertion of the new TAXUS stent, not

yet introduced in the United States. The TAXUS stent was

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introduced in the United States in March 2004; American doctors

reported similar problems. In the spring of 2004 defendants made

affirmative statements attributing the problems reported about the

new TAXUS stent to the unfamiliarity of doctors with the new stent.

They did not correct the statements even though they had become

aware that the problem was not doctor unfamiliarity, but rather a

manufacturing defect in the stent that caused the balloon to fail

to deflate. Defendants continued to withhold information about a

manufacturing change Boston Scientific had instituted in December

2003 which would address the defect. They withheld the information

to build up inventory, in order to preserve market share, before

announcing recalls of TAXUS stents based on the potential defects.

Meanwhile, while withholding this material information, several of

the individual defendants traded on the open market in unusual

patterns and unusual amounts. When the material information was

finally and belatedly disclosed, the market price for Boston

Scientific stock plummeted downward. The stock price dropped 7.6%

after the company announced an expanded recall and revealed that

three deaths and several dozen serious injuries had been connected

to balloon deflation failure, and it dropped another 6.6% when the

company expanded the recall of the TAXUS stent for a second time.

CAC ¶¶ 100, 102.

The defendants' theory is that at the time the company

received some thirty to forty reports of problems in Europe of

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balloon non-deflation following stent insertion, it was unable to

identify anything about the device itself that would cause the

problem and attributed the problem to doctor unfamiliarity.

Defendants' brief argues that independently and

[i]n an effort to improve the device, Boston
Scientific tried completely to eliminate the
possibility of balloon non-deflation. It
eventually identified a means to do so, by
changing the manner of bonding the delivery
catheter to the balloon and by implementing an
additional inspection test at the end of the
manufacturing process. These proposed
modifications were submitted to the FDA for
approval in April 2004 and approved by the FDA
the following month. In June 2004 Boston
Scientific began manufacturing the "new"
device.
After it identified how to completely
eliminate what was already an infrequently
occurring issue, Boston Scientific was able to
re-analyze its "old" Taxus inventory. That
process led to the identification of specific
lots that had the potential for non-deflation.
Out of an abundance of caution, Boston
Scientific voluntarily recalled a limited
number of specific production lots of its
"old" Taxus stents in July and August 2004.

It is the company's position that the changes would have

been implemented "whether it got a complaint or not." The removal

of the possibility that the balloon would fail to deflate by the

manufacturing change did not prove there was a defect, much less

that the company knew at an earlier date of a connection between

the manufacturing change and the problem that necessitated the

recalls, or that it was obliged to disclose it.

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A. Plaintiff's Allegations

Plaintiff brought the suit as a putative class action.

The class period plaintiff claims is relevant to this narrowed

appeal is December 2, 2003 to August 5, 2004.

In 2001, Boston Scientific decided to produce a drug-

eluting stent2 to compete with a similar product manufactured by

Johnson & Johnson. CAC ¶ 86. Boston Scientific's product is known

as TAXUS® Express Paclitaxel-Eluting Monorail® Coronary Stent

System. Id.

TAXUS debuted in Europe in January 2003. Id. ¶¶ 87, 92.

Plaintiff alleges that defendants felt "tremendous pressure" to

introduce TAXUS into the U.S. market because the company was losing

market share to Johnson & Johnson. Id. ¶ 87. While in the process

of obtaining final FDA approval for TAXUS, defendants allegedly

downplayed news that could delay the U.S. launch, such as failing

to disclose in a timely manner an FDA major deficiency letter that

the company received in September 2003. Id. ¶ 89. Meanwhile,

2
Coronary stents are tiny tubes placed in patients'
arteries to ameliorate blockages and facilitate blood flow. Drug-
eluting stents (also called "coated" or "medicated" stents) slowly
release drugs aimed at reducing restenosis, a narrowing of the
arteries that can occur after a stent is implanted. Stents are
implanted in arteries using a delivery catheter.
In 2002, Boston Scientific marketed a coronary stent
system called the Express², which combined its highly successful
Express™ coronary stent and Maverick® balloon dilation catheter,
which uses a tiny balloon to inflate the artery and permit the
stent to be inserted. TAXUS uses the same delivery catheter as the
Express²; the systems differ in that Express² is a bare metal stent
whereas TAXUS is a drug-eluting stent.

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defendants "provided to the investment community a drum roll

leading up to the FDA's approval of TAXUS which was deafening."

Id. ¶ 90. Plaintiff alleges that in anticipation of FDA approval

and in response to positive comments made by defendants, analysts

upgraded their rating of Boston Scientific stock, and by March

2004, the price of Boston Scientific stock on the New York Stock

Exchange hit a new high, trading at over $40 a share. Id. ¶¶ 15-

23, 91, 100.

On March 4, 2004, the FDA approved TAXUS for marketing

and distribution in the United States. Id. ¶ 92. Plaintiff

alleges that Boston Scientific "trumpeted [TAXUS's] immediate

impact in the Company's effort to take over market share for

stents." Id. Meanwhile, defendants did not disclose complaints

they had received from doctors in Europe that the balloon used

during insertion of the TAXUS stent did not deflate. Id. ¶ 93.

Defendants also knew that the Express² metal stent, upon which the

new TAXUS stent was based, "had a history of significant problems."

Id.

Despite this knowledge, defendants "minimized and

misrepresented . . . problems," including in the company's Form 10-

Q for the quarter ending March 31, 2004, which Boston Scientific

filed with the SEC on May 7, 2004. This report stated that the

company was "reviewing a limited number of reports related to

balloon withdrawal difficulty during TAXUS angioplasty procedures."

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Id. In meetings with analysts, defendants "further downplayed the

complaints" by attributing the problems to doctor unfamiliarity

with TAXUS rather than balloon non-deflation. Id.

Meanwhile, plaintiff alleges, defendants knew "the

problems with TAXUS were much more significant, based on the

complaints they had received out of Europe and the complaints which

were rolling in as a result of the product rollout in the United

States." Id. ¶ 95. In December 2003 defendants allegedly had

begun planning a manufacturing change for TAXUS because they had

become aware that the problem with TAXUS was not doctor

unfamiliarity but rather a "manufacturing defect." This

manufacturing change, which according to defendants was approved by

the FDA in May 2004, related to the manner of the laser bonding of

the delivery catheter and balloon. Defendants did not disclose

this manufacturing change to the public prior to July 2, 2004, when

they referred to it in a conference call with analysts. Id. ¶¶

95, 98. Defendants also discussed the manufacturing change in the

press releases announcing subsequent recalls on July 16 and August

5.

Plaintiff alleges that defendants had an obligation to

disclose this manufacturing change to the public at some point

prior to July 2 because it was necessary to correct defendants'

earlier and continuing statements that the adverse reports related

to U.S. doctors' unfamiliarity with TAXUS rather than to a defect

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with the product itself. As plaintiff put it at oral argument:

"The disclosure that we are asking for is that as soon as they

learned that . . . the problems with TAXUS were not related to

doctor [un]familiarity . . . they had a duty to disclose that."

In the months following the U.S. launch of TAXUS, Boston

Scientific's stock price rose and defendants began to sell large

quantities of their own stock. CAC ¶ 96. Plaintiff specifically

points to the following stock sales, all of which occurred within

two months of the FDA's March approval of TAXUS: over $40 million

by James R. Tobin; over $54 million by Lawrence C. Best; over $4

million by Fredericus A. Colen; and over $3 million by Robert G.

MacLean. Id. Additionally, defendant Paul LaViolette sold

approximately $3 million worth of company stock in June of 2004.

Id. ¶ 18. Plaintiff argues that these sales demonstrated "unusual

patterns" and occurred in "unusual amounts."

On July 2, 2004, Boston Scientific announced that it was

voluntarily recalling two lots of TAXUS stents (a total of 200

stents), which had not yet been implanted in patients. Id. ¶ 97.

In a press release announcing the recall, the company stated that

the FDA had received reports of one death and sixteen serious

injuries associated with balloon non-deflation, along with eight

reports of balloon malfunction that had not caused injury. Id.

The press release explained that the recall was due to

"characteristics . . . related to a narrowing in the area where the

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catheter and balloon are laser welded," a problem referred to as

"focal neckdown." "This narrowing resulted in the potential for

impeded deflation and removal of the balloon after stent

placement."

The manufacturing change that defendants had put into

motion in December 2003 addressed the problem of focal neckdown by

changing the manner of the laser welding of the catheter and

balloon. In a conference call with analysts on July 2, defendants

asserted that this manufacturing change had been in progress before

the TAXUS launch and "would have been submitted whether we got a

complaint or not." Id. ¶ 98.

Two weeks later, on July 16, defendants voluntarily

expanded the company's recall to 85,000 TAXUS stents and 11,000

Express² stents -- which use the same delivery catheter as TAXUS --

and admitted knowing of two additional serious injuries associated

with TAXUS as well as two deaths and twenty-five serious injuries

associated with balloon deflation failure in Express² stents. Id.

¶ 100. In a press release announcing this recall, defendants

assured the public: "The Company implemented review of its

manufacturing process, additional inspections, and an FDA-approved

modification to the manufacturing process for these products. The

current and future production are not expected to experience

similar balloon deflation problems."

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 After defendants announced this expanded recall on July

16, Boston Scientific's stock price dropped $3.09 per share, or

7.6%, to $37.40. Id. ¶ 100. Plaintiff connects the drop in stock

price to the revelations of the deaths and injuries associated with

the TAXUS and Express² stents. Id.

Plaintiff alleges that during July and early August 2004,

defendants "continued to try to reassure the market about the

safety of the Company's products through the issuance of public

statements which were false and misleading." Id. ¶ 101. In

particular, during a conference call with analysts on July 26,

2004, defendant Paul LaViolette responded to concerns about TAXUS

by saying, "[Y]ou are dealing with simple lag time in the

marketplace conversion of newer products, not necessarily a

continuation of complaints from the new issue product." Id. At a

meeting with a local hospital official on July 29, LaViolette

stated that the company had "identified and fixed the problem."

Id. On August 4, he stated that the problem was a "nuisance." Id.

On August 5, Boston Scientific announced that it was

voluntarily recalling an additional 3,000 TAXUS stents.3 Id. ¶

102. The press release announcing the recall stated that it was

prompted by the company's "ongoing monitoring" and noted that since

the company had "modified its manufacturing process, implemented

3
The complaint states the date of the third recall as
August 4, but the press release announcing the recall is dated
August 5.

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new tracking software and introduced new inspection protocols," it

had not had any confirmed non-deflation problems caused by focal

neckdown in the units made with these changes in place. At this

time, the company's stock price dropped another $2.41, or 6.6%.

Id.

By the end of 2004, Boston Scientific had recalled 99,000

TAXUS and Express² stents because of manufacturing defects that

plaintiff alleges had caused three deaths and dozens of serious

injuries. Id. ¶ 103. The company spent over $57 million on these

recalls. Id. ¶ 101. Between July 2, 2004, when the first recall

was announced, and August 5, 2004, when the recall was expanded for

a second time, the company's stock price dropped 21%. Id. ¶ 103.

Plaintiff's theory is that the investing world was aware

of reports of patient death and injury involving TAXUS. However,

defendants said that the problems with the TAXUS stents were caused

by doctor unfamiliarity with the new product. It was natural for

investors to conclude the problems would disappear over time as

doctors became more familiar with the product, and there would be

no recalls. Having given that explanation, the defendants,

plaintiff argues, were required to disclose as soon as they could

the connection between the patient problems, the manufacturing

defect, and the manufacturing change remedying this problem.

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B. District Court Opinion

In dismissing the TAXUS claims, the district court

reasoned in a series of discrete steps.4 It first noted that there

was no violation in not disclosing the FDA major deficiency letter

regarding TAXUS that Boston Scientific had received in September

2003, before the U.S. release of the product. Rather, the major

deficiency letter was simply "a step in the FDA approval process

which [Boston Scientific] had no duty to disclose." In re Boston

Scientific, 490 F. Supp. 2d at 158; see also id. at 158 n.91

(citing 21 C.F.R. § 814.37(b) ("A major deficiency letter informs

the applicant that its PMA [Premarket Approval Application] lacks

significant information needed for FDA to complete the scientific

review of, and render a final decision on, the PMA.")).

The court next turned to the adverse reports from doctors

that defendants received prior to announcement of the recalls of

the TAXUS and Express² stents in July and August of 2004. The

court examined the company's statements that complaints received

from American doctors in the spring of 2004 were comparable to

complaints it had received the previous year from European doctors.

Plaintiff asserted that these statements were false when made

because the company knew that the problems in both Europe and the

United States resulted from a product flaw rather than from the

4
We discuss the district court's opinion only as it
pertains to the TAXUS claims because only that part of the opinion
is being appealed.

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stated reason of doctor unfamiliarity with TAXUS. However, the

district court concluded, plaintiff provided "little in the way of

facts to support this claim. Lead Plaintiff pleads no facts to

suggest that the complaints [Boston Scientific] received from

American doctors were different than those it received from

European doctors." Id. at 159.

With respect to the manufacturing change which Boston

Scientific initiated prior to the U.S. launch of TAXUS, the court

rejected plaintiff's allegations that this change was evidence that

defendants knew TAXUS was defective and that the change was

material information that should have been disclosed. Id. Here

the district court invoked the doctrine of fraud by hindsight. The

court reasoned that a manufacturing change does not necessarily

mean that a product is defective or that a company knows that a

product is defective since "[c]ompanies frequently adjust and

change their products, and no rule requires a company to inform the

public every time it modifies its manufacturing process." Id. The

court pointed out that Boston Scientific's manufacturing change was

conducted with the FDA's knowledge, at a time when the company had

received only a limited number of complaints from European doctors,

which had been tapering off. Id. at 160. Plaintiff did not

contest that the manufacturing change was set in motion before

TAXUS's release in the United States and would have been made

regardless of whether the company received complaints from U.S.

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doctors. Id. The district court further noted that "[t]he recalls

were limited, and only applied to a fraction of the TAXUS stents

released on the domestic market." Id. Thus, the court concluded,

while "[i]n hindsight . . . it appears that this manufacturing

change may indeed have been material," id. at 159, plaintiff failed

"to allege facts that provide a strong inference that at the time

of the manufacturing change, Defendants knew that TAXUS was

defective or that the product would later be recalled," id. at 160.

With respect to defendant Paul LaViolette's July 29, 2004

remarks that Boston Scientific had identified and fixed the problem

with TAXUS, the district court also invoked the doctrine of fraud

by hindsight. A week after LaViolette's statements, the company

initiated an additional recall of 3,000 TAXUS stents. However, the

district court reasoned, there is no liability where "a plaintiff's

claim rests on the assumption that the defendants 'must have known

of the severity of their problems earlier because conditions became

so bad later on.'" Id. (quoting In re Boston Tech., Inc. Sec.

Litig., 8 F. Supp. 2d 43, 53 (D. Mass. 1998)). Here, the court

concluded that plaintiff failed to allege facts giving rise to a

strong inference that LaViolette knew at the time of his remarks

that they were false or that an additional recall would be

necessary. Id.

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 II.

On appeal, plaintiff argues that the district court erred

in several respects. It argues that the court misapplied the

doctrine of fraud by hindsight, resulting in the imposition of too

stringent a pleading standard. More specifically, it claims that

the court erroneously drew factual inferences against plaintiff

regarding the manufacturing change and failed to account for the

materiality of the change. Plaintiff further argues that the court

misapplied the fraud by hindsight doctrine to LaViolette's remarks

by discounting the temporal proximity between his statements and

the third TAXUS recall, and it challenges the district court's

factual assumption that the recall was limited in scope. Finally,

plaintiff faults the district court for failing to consider the

allegations of insider trading presented in the complaint.

Overall, plaintiff argues the district court atomized the complaint

and did not look at the overall pattern.

A. Pleading Requirements

We evaluate de novo whether a complaint meets the

requirements of the PSLRA. ACA Fin., 512 F.3d at 58. As with any

Rule 12(b)(6) motion to dismiss, we accept well-pled factual

allegations in the complaint as true and make all reasonable

inferences in plaintiff's favor. Id. The standard most recently

articulated by the Supreme Court is that a complaint must allege "a

plausible entitlement to relief" in order to withstand a motion to

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dismiss under Rule 12(b)(6). Bell Atl. Corp. v. Twombly, ___ U.S.

___, 127 S. Ct. 1955, 1967-69 (2007); ACA Fin., 512 F.3d at 58.

A claim for securities fraud under section 10(b) and Rule

10b-5 must contain six elements: (1) a material misrepresentation

or omission; (2) scienter; (3) a connection with the purchase or

sale of a security; (4) reliance; (5) economic loss; and (6) loss

causation. ACA Fin., 512 F.3d at 58 (citing Dura Pharm., Inc. v.

Broudo, 544 U.S. 336, 341-42 (2005)). Only the first two elements

are at issue in this appeal.

Information is material if a reasonable investor would

have viewed it as "having significantly altered the total mix of

information made available." Gross, 93 F.3d at 992 (quoting Basic

Inc. v. Levinson, 485 U.S. 224, 232 (1988)) (internal quotation

marks omitted). The PSLRA provides that a misleading statement or

omission is alleged when plaintiff claims that defendant made "an

untrue statement of a material fact," 15 U.S.C. § 78u-4(b)(1)(A),

or "omitted to state a material fact necessary in order to make the

statements made, in light of the circumstances in which they were

made, not misleading," id. § 78u-4(b)(1)(B). "While a company need

not reveal every piece of information that affects anything said

before, it must disclose facts, 'if any, that are needed so that

what was revealed [before] would not be so incomplete as to

mislead.'" Cabletron, 311 F.3d at 36 (quoting Backman v. Polaroid

Corp., 910 F.2d 10, 16 (1st Cir. 1990) (en banc)).

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 Scienter is a "mental state embracing intent to deceive,

manipulate, or defraud." Ernst & Ernst v. Hochfelder, 425 U.S.

185, 193 n.12 (1976); ACA Fin., 512 F.3d at 58. This circuit has

held that a plaintiff can demonstrate scienter by showing that

defendants either "consciously intended to defraud, or that they

acted with a high degree of recklessness." Aldridge v. A.T. Cross

Corp., 284 F.3d 72, 82 (1st Cir. 2002).

Securities fraud allegations also must meet the standards

of Federal Rule of Civil Procedure 9(b)5 and the PSLRA, which

imposes heightened pleading requirements on private securities

litigation. The PSLRA requires that when alleging that a defendant

made a material misrepresentation or omission, a complaint must

"specify each statement alleged to have been misleading [and] the

reason or reasons why the statement is misleading." 15 U.S.C. §

78u-4(b)(1). If the allegation is "made on information and

belief," then the complaint must "state with particularity all

facts on which that belief is formed." Id.

With respect to scienter, the complaint must, "with

respect to each act or omission . . ., state with particularity

facts giving rise to a strong inference that the defendant acted

5
Rule 9(b) requires that in alleging fraud or mistake, "a
party must state with particularity the circumstances constituting
fraud or mistake." Fed. R. Civ. P. 9(b). In securities fraud
cases, this requirement is comparable to and effectively subsumed
by the requirements of the PSLRA. See ACA Fin., 512 F.3d at 58
n.7.

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with the required state of mind." Id. § 78u-4(b)(2) (emphasis

added). This requirement that plaintiffs plead facts giving rise

to a strong inference of scienter differs from the general rule

applied to other cases that a reasonable inference is sufficient to

survive a Rule 12(b)(6) motion; in the PSLRA "Congress has

effectively mandated a special standard for measuring whether

allegations of scienter survive a motion to dismiss." Greebel, 194

F.3d at 195.

The Supreme Court's recent decision in Tellabs clarified

that scienter should be evaluated with respect to "the complaint in

its entirety, as well as other sources courts ordinarily examine

when ruling on Rule 12(b)(6) motions to dismiss, in particular,

documents incorporated into the complaint by reference, and matters

of which a court may take judicial notice." Tellabs, 127 S. Ct. at

2509; see also ACA Fin., 512 F.3d at 58. "The inquiry . . . is

whether all of the facts alleged, taken collectively, give rise to

a strong inference of scienter, not whether any individual

allegation, scrutinized in isolation, meets that standard."

Tellabs, 127 S. Ct. at 2509. Tellabs also directed that courts

consider "not only inferences urged by the plaintiff . . . but also

competing inferences rationally drawn from the facts alleged," id.

at 2504, and held that a complaint survives when there are equally

compelling inferences for and against scienter, id. at 2510; see

also ACA Fin., 512 F.3d at 59.

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B. Plaintiff's Allegations

We evaluate plaintiff's allegations in this context. In

reviewing a motion to dismiss under Rule 12(b)(6), courts

ordinarily will consider only documents attached to the complaint,

but have made exceptions "for documents the authenticity of which

are not disputed by the parties; for official public records; for

documents central to plaintiffs' claim; [and] for documents

sufficiently referred to in the complaint." Watterson v. Page, 987

F.2d 1, 3 (1st Cir. 1993).6

1. Manufacturing Change

Plaintiff alleges that defendants failed to disclose

information about the manufacturing change prior to July 2, 2004,

and this information was material. The primary motive alleged for

the delay is that defendants wanted to build up inventory before

announcing product recalls. Under the requirements of section

6
We do not consider the transcripts of conference calls
mentioned by both parties in their briefs and attached as an
appendix to plaintiff's brief. In an order dated October 30, 2007,
we rejected plaintiff's motion to expand the record before this
court to include three transcripts that were not before the
district court. We held that plaintiff had not demonstrated the
"extraordinary circumstances" necessary to invoke this court's
power to supplement a record under Federal Rule of Appellate
Procedure 10(e)(2). United States v. Muriel-Cruz, 412 F.3d 9, 12
(1st Cir. 2005). We further held that although the complaint
"contained some brief quotations from the documents, it did not
expressly incorporate the entire documents, including the
additional statements that [plaintiff] relies upon in its appellate
brief." We also noted that regardless of whether the district
court could have considered the transcripts if they were offered
below, they had not been so offered.

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10(b) and Rule 10b-5, plaintiff must demonstrate both that the

defendants omitted material information and that they did so with

the requisite scienter.

Securities actions raise questions of what corporate

managers knew and when they knew it. These issues are pertinent

both to materiality and to scienter. Moreover, something may be

material because of other information or explanations that have

been given by defendants. Thus plaintiff does not need to rely on

a theory that there was an independent duty to disclose the

manufacturing change. Further, we do not reach the district

court's reasoning on the materiality, standing alone, of either

manufacturing changes or the receipt of FDA major deficiency

letters.

The existence of a material omission is usually a

question for the trier of fact. See ACA Fin., 512 F.3d at 65

(citing Shaw v. Digital Equip. Corp., 82 F.3d 1194, 1217 (1st Cir.

1996)). In this case, we cannot say that as a matter of law the

complaint fails to raise a reasonable inference that this was a

material omission.

The company's own statements draw a connection between

the manufacturing change and the resolution of the balloon non-

deflation problems, whether or not the earlier product had a

defect. Indeed, Boston Scientific's Form 10-Q for the quarter

ending June 30, 2004 included the following statements: "As a

-23-
result of its investigation, the Company has implemented reviews of

its manufacturing process, additional inspections, and an FDA-

approved modification to the manufacturing process for [TAXUS and

Express² stents]. The Company believes these measures will be

effective in reducing the occurrence of balloon non-deflation."

Because the manufacturing change, in combination with

other changes, would have the effect of reducing balloon non-

deflation, a jury could find that the company's continuing

assertions that reported problems about TAXUS in the United States

resulted from doctor unfamiliarity with the product rather than any

defect in the product were misleading unless accompanied by

disclosure of the manufacturing change and its connection to the

balloon non-deflation problem. See Cabletron, 311 F.3d at 36.

Among other things, the existence of this manufacturing change was

pertinent to the issue of potential recalls, and it would raise the

question whether, if there were continuing problems or recalls, the

company would have on hand sufficient new products incorporating

the manufacturing change in order to allow the company to replace

the original TAXUS stents and maintain market share.

Assuming that a jury could find a material omission, the

next requirement under section 10(b) and Rule 10b-5 is that

defendants acted with the requisite scienter in not disclosing the

manufacturing change sooner, i.e., prior to the first recall

announced on July 2, 2004. Knowingly omitting material information

-24-
is probative, although not determinative, of scienter. Aldridge,

284 F.3d at 83 ("[T]he fact that the defendants published

statements when they knew facts suggesting the statements were

inaccurate or misleadingly incomplete is classic evidence of

scienter."); see also ACA Fin., 512 F.3d at 65.

Plaintiff alleges that at some point prior to the FDA

approval of TAXUS in March 2004, defendants knew that the problem

with TAXUS was not doctor unfamiliarity but rather a manufacturing

defect, and the company had already determined how to fix that

defect. Specifically, plaintiff alleges that prior to the U.S.

launch of TAXUS, defendants knew of adverse reports from doctors in

Europe about balloon non-deflation, and that they also knew that

the Express² metal stent, which used the same delivery system as

TAXUS, had a "history of significant problems." CAC ¶ 93.

Plaintiff also alleges that defendants received numerous adverse

reports in the spring of 2004 from U.S. doctors, which they

"minimized and misrepresented," and attributed to doctors'

unfamiliarity with the new product. Id. Yet defendants proceeded

with the U.S. launch of TAXUS and did not disclose this information

until July 2, 2004.

Plaintiff alleges that defendants withheld this

information to allow the company to build up its inventory of new,

non-defective products which had been made with the manufacturing

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change in place, in order to avoid loss of market share.7

Plaintiff also alleges that several of the defendants engaged in

insider trading during this lag period, benefitting from the delay.

Inferences supporting plaintiff's allegations about

defendants' knowledge can be drawn from statements in Boston

Scientific's Form 10-Q for the quarter ending June 30, 2004, filed

on August 9, 2004. The Form 10-Q discusses the company's voluntary

recall of the TAXUS Express² stent "due to characteristics in the

delivery catheters that have the potential to impede balloon

deflation during a coronary angioplasty procedure. Further

analysis and investigation of the TAXUS Express² (paclitaxel-

eluting) and Express² (bare metal) stent systems, both of which

share the same delivery catheter, revealed that certain additional

production lots exhibited these same characteristics." This

statement acknowledges a connection between the balloon non-

deflation problem and the characteristics of the delivery catheter.

The statement also acknowledges that the company had been

conducting ongoing analysis and investigation of the problem and as

a result voluntarily expanded its recall on July 16. The statement

goes on to say that the company would continue to work with the FDA

to monitor the non-deflation problem.

7
Companies, of course, have other reasons not to have made
an announcement from which some might have inferred there may have
been a product defect causing injury and death, which could have
been avoided by using different manufacturing techniques.

-26-
 Tellingly, the statement also says that "[a]s a result of

its investigation, the Company has implemented . . . an FDA-

approved modification to the manufacturing process." (Emphasis

added.) To the extent the company may be arguing that there was no

connection between the manufacturing change and any characteristics

of the catheter, defendants' own statements can be read to say that

they implemented the manufacturing change in response to adverse

reports, not independent of them.

Defendants made a similar statement in the press release

announcing the July 16 expanded recall. After noting that the

company had conducted "further analysis and investigation" that

demonstrated the need for an expanded recall, the press release

states: "The Company implemented review of its manufacturing

process, additional inspections, and an FDA-approved modification

to the manufacturing process for these products. The current and

future production are not expected to experience similar balloon

deflation problems."

Defendants make a different argument, addressed below,

that even if the manufacturing change did solve the problem by

preventing balloon non-deflation, that does not mean they knew the

connection or were obliged to disclose it earlier.

Plaintiff gave a reason why defendants withheld

information: so that they could build up an inventory of "new"

TAXUS stents prior to announcing the recalls, thereby minimizing

-27-
supply disruptions and maximizing profit. In support of this

theory is the fact that defendants asserted in their Form 10-Q for

the quarter ending June 30, 2004 that they had been able to use

their "existing supply of coronary stents not subject to the recall

to replenish the U.S. market," although they also noted that they

were unable to replenish the European market with existing stock

and were hoping to do so during the third quarter of 2004.

Similarly, in the press release announcing the July 16 recall,

defendant James Tobin stated that, "We're fortunate that current

TAXUS inventory levels will minimize service disruption in the

United States, but we do expect some disruption internationally."

Plaintiff's proposed inferences are that defendants knew

about the connection between adverse reports and the manufacturing

change well before July 2, and withheld that information in order

to build up inventory prior to announcing recalls. Under the PSLRA

these inferences must be strong and must be weighed against

competing ones. Defendants' inferences are that the manufacturing

change was implemented for "innocuous" reasons not owing to any

defect in the product, and that they did not know of a connection

between the manufacturing change and the adverse reports they were

receiving from U.S. doctors until the time of the first recall.

Defendants' inferences are supported by the fact that balloon non-

deflation complaints that defendants received from doctors in

Europe in 2003 faded over time, indicating that such complaints

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were in fact tied to doctor unfamiliarity. Additionally,

defendants' press releases and Form 10-Q for the quarter ending

June 30, 2004 stated that it was not the manufacturing change alone

but rather this change in combination with others, including an

improved inspection process, that would prevent non-deflation in

the future. At no point did defendants communicate that the

manufacturing change alone would fix the non-deflation problem.

Given these allegations, the district court held that

plaintiff failed to plead facts providing a strong inference that

at the time of the manufacturing change, defendants had the

requisite scienter. In re Boston Scientific, 490 F. Supp. 2d at

160. It reasoned that the manufacturing change was implemented

with the FDA's knowledge and approval, at a time when the company

had received only a "limited number of complaints from Europe which

had tapered off after the product's release." Id. Moreover,

defendants asserted and plaintiff did not dispute that the

manufacturing change would have been put into place regardless of

whether the company received complaints from doctors in the United

States. Id. The district court did not address the key question

of inferences about whether defendants knew that the manufacturing

change was related to non-deflation complaints at some point prior

-29-
to the July 2 recall, not just when they first initiated the

change.8

The district court did not have the benefit of the

Tellabs opinion, which reversed a higher standard for scienter

imposed by the prior law of this circuit. We apply Tellabs and

that leads us to a different result. While there is support for

defendants' inferences, we think, at this stage, that plaintiff's

inferences are at least equally strong. First, there is a very

reasonable inference that defendants initiated the manufacturing

change as a result of non-deflation complaints it had received from

Europe, even if these complaints had tapered off over time.

Other inferences may be drawn favorable to plaintiff by

proper recognition of the limits of the doctrine of fraud by

hindsight. Fraud by hindsight refers to allegations that assert no

more than that because something eventually went wrong, defendants

must have known about the problem earlier. "[A] plaintiff may not

simply contrast a defendant's past optimism with less favorable

actual results, and then 'contend[] that the difference must be

8
Plaintiff and defendants dispute the extent of the
recall, with plaintiff arguing that all pre-manufacturing change
stents were recalled and defendants responding that approximately
445,000 "old" TAXUS stents had already been shipped and implanted
and therefore were not problematic or recalled. We need not
resolve this factual question at this point because the extent of
the recall is largely irrelevant to our analysis. There seems not
to be a dispute that a connection existed between the manufacturing
change and the non-deflation problem that necessitated the recall.

-30-
attributable to fraud.'" Shaw, 82 F.3d at 1223 (quoting DiLeo v.

Ernst & Young, 901 F.2d 624, 627 (7th Cir. 1990)).

The doctrine has been applied in a number of different

situations. We recognize that the effect of use of the doctrine at

the Rule 12(b)(6) dismissal stage is to cut off the case as a

matter of law, without further factual development. As some

commentators have stated, "[A]t this stage, a court must be

cautious. The case has not yet developed. In cutting off the case

on the pleadings by citing hindsight, the court is essentially

making a prediction that the discovery process will yield only

evidence that requires the benefit of the hindsight bias to seem

adequate [to support the allegations]." M. Gulati, J. Rachlinski

& D. Langevoort, Fraud by Hindsight, 98 Nw. L. Rev. 773, 787

(2004). Meanwhile, at the pleadings stage, "a bad outcome truly is

relevant to the likelihood of fraud." Id. at 815. Indeed, this

court has held that "in determining the adequacy of a complaint

. . . we cannot hold plaintiffs to a standard that would

effectively require them, pre-discovery, to plead evidence." Shaw,

82 F.3d at 1225. The law "proscribes the pleading of 'fraud by

hindsight,' but neither can plaintiffs be expected to plead fraud

with complete insight." Id. (quoting Denny v. Barber, 576 F.2d

465, 470 (2d Cir. 1978) (Friendly, J.)).

In Shaw, we held that the doctrine did not apply when

plaintiffs provided "a series of factual allegations relating to a

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combination of developments known to the company . . . that could

have provided a basis for advance knowledge of the information"

which was eventually disclosed. Id. at 1224. We held that these

allegations of developments known to the company, along with

(admittedly weak) evidence of insider trading and the temporal

proximity between the date of the alleged omission and the eventual

disclosure (less than a month), were sufficient to survive a motion

to dismiss.9 Id. at 1225.

Defendants in this case urged, and the district court

accepted, that plaintiff's allegations amounted to nothing more

than an allegation of fraud by hindsight: that simply because the

manufacturing change eventually was linked as a remedy for the

balloon non-deflation problem, defendants must have known about the

connection earlier. This approach fails to consider the other

allegations that plaintiff made from supporting documents. For

instance, there is no dispute that the manufacturing change related

to the laser welding of the delivery catheter and balloon, and it

may be inferred this addressed the same problem which resulted in

the recalls. It is also clear that defendants had received non-

deflation reports from doctors in Europe before instituting the

manufacturing change, as well as numerous non-deflation complaints

from U.S. doctors while the company was in the process of

9
Shaw was decided before the PSLRA was enacted, but Rule
9(b)'s particularity requirement is similar to the requirements of
the PSLRA. See supra n.5.

-32-
implementing the change. Moreover, defendants' own SEC filings and

press releases reveal that they reassured the public that they had

implemented the manufacturing change in response to complaints of

non-deflation, so that the "new" TAXUS would not suffer from the

same problems. The company said it had been monitoring, analyzing,

and investigating the problem and appropriate responses. It is

fair to infer the company has highly effective information systems.

Cf. id. at 1224 n.38. Defendants are in a highly regulated

industry and the company, it can be inferred, constantly monitors

reports of patient injury and death and looks for prompt solutions

to such problems.

This is not the classic fraud by hindsight case where a

plaintiff alleges that the fact that something turned out badly

must mean defendant knew earlier that it would turn out badly.

Denny, 576 F.2d at 470. Nor is this a case where there is no

contemporaneous evidence at all that defendants knew earlier what

they chose not to disclose until later. DiLeo, 901 F.2d at 626-7.

2. LaViolette's Statements

Plaintiff also disputes the district court's rejection of

the LaViolette allegations under the doctrine of fraud by

hindsight. The allegations are that defendant Paul LaViolette made

public statements that were "false and misleading" and constituted

a "misrepresentation" (1) when he stated on July 29 -- a week

before the third recall was announced on August 5 -- that the

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problem with TAXUS had been "fixed," and (2) when he stated on July

26 that there was simply a "lag time" in the marketplace's

conversion to the improved version of TAXUS. CAC ¶ 101.

Plaintiff's complaint may be read as alleging a material

omission and as supporting scienter. LaViolette's remarks were

misleading not because the problem had not been "fixed," but

because LaViolette excluded any mention of the upcoming recall. In

other words, it was misleading for LaViolette to say that the

problem had been "fixed" while failing to mention that a third

recall, of another 3,000 stents, would be announced a week later.

As with plaintiff's allegations regarding the

manufacturing change, we cannot say that LaViolette's omission was

immaterial as a matter of law. The investors with whom LaViolette

was speaking in the conference call would very well have wanted to

know about the existence of an upcoming recall in addition to

hearing LaViolette's assurances that the TAXUS problems were in the

past.

With respect to scienter, the district court held that

plaintiff was merely alleging fraud by hindsight because plaintiff

was claiming no more than that LaViolette should have known about

the recall earlier. According to the district court, "Lead

Plaintiff fails to allege facts that provide a strong inference

that Defendant LaViolette knew that an additional recall was

-34-
necessary or that his remarks were false when he made them." In re

Boston Scientific, 490 F. Supp. 2d at 160. We disagree.

This fails to account for the very short amount of time

between LaViolette's remarks, some of which were made on Thursday,

July 29, and the third recall, which was announced the following

Thursday, August 5. Temporal proximity alone is insufficient to

establish a claim for fraud, see Shaw, 82 F.3d at 1225, but this

court has insisted on a "fact-specific inquiry" regarding scienter.

Greebel, 194 F.3d at 196. The extremely short time period here is

strong evidence.

Moreover, LaViolette was the company's Chief Operating

Officer and a point person on TAXUS, and so he would presumably

have been aware of the status of the company's "ongoing monitoring"

of "old" TAXUS stents. CAC ¶¶ 18, 93. The third recall, like the

two before it, was voluntary and initiated by Boston Scientific

rather than the FDA.

3. Insider Trading

Because the district court dismissed on scienter grounds,

it did not consider the insider trading allegations. We do

consider these allegations in the overall mix.

Insider trading cannot establish scienter on its own, but

it can be used to do so in combination with other evidence.

Greebel, 194 F.3d at 197-98; Shaw, 82 F.3d at 1224. Insider

trading in suspicious amounts or at suspicious times may be

-35-
probative of scienter. Greebel, 194 F.3d at 197; Greenstone v.

Cambex Corp., 975 F.2d 22, 26 (1st Cir. 1992). Plaintiff alleges

that all defendants engaged in insider trading during the narrowed

class period of December 3, 2003 to August 5, 2004, see CAC ¶¶ 15-

23, and they argue that stock sales of $40.82 million by James R.

Tobin, $54.2 million by Lawrence C. Best, $4.2 million by

Fredericus A. Colen, and $3.3 million by Robert G. MacLean within

the two months following the FDA's approval of TAXUS are

particularly suspicious, see id. ¶ 96.

However, we acknowledge that plaintiff's complaint has

allegations going the other way. Plaintiff alleges that all but

one (Tobin) of these defendants engaged in insider trading at

periods outside of the narrowed class period, including some after

the recalls were announced and the manufacturing change was

disclosed. This undermines the inference that the timing of the

trading was suspicious. Id. ¶¶ 15-23. Plaintiff also does not

allege that the particular timing of the trading was suspicious

other than that it occurred during the eight-month period to which

the appeal is limited: the trading has not been linked, for

instance, to defendants' non-disclosed knowledge of the

manufacturing change or problems with TAXUS.

Defendants respond that many of these stock sales,

including all of Best's and many of Tobin's, were effectuated

pursuant to Rule 10b5-1 trading plans that removed control of the

-36-
sales from the individual defendants. It was defendants' choice to

move to dismiss the case on the pleadings without presenting

evidence. As a result, there is no evidence of when the trading

plans went into effect, that such trading plans removed entirely

from defendants' discretion the question of when sales would occur,

or that they were unable to amend these trading plans.

The insider trading claims as alleged are on the weaker

end of the spectrum. But, as in Shaw, "we think that the

plaintiffs' allegations of insider trading, inasmuch as they are at

least consistent with their theory of fraud, provide some support

against the defendants' motion to dismiss." 82 F.3d at 1224; see

also Greebel, 194 F.3d at 197-98 ("The vitality of the inference to

be drawn depends on the facts, and can range from marginal to

strong." (citations omitted)).

Plaintiff has alleged a significant amount of insider

trading in the months before the announcement of recalls in July,

which caused the stock price to drop. CAC ¶¶ 100, 102. The

company's stock price was at an all-time high in the months before

the recalls were announced, often closing above $40. Id. ¶¶ 15-23,

96, 100. It fits with plaintiff's theory that defendants would

have sold stock at this time, knowing that the price would drop

when the manufacturing change, acknowledging a defect, was

announced. If defendants were unaware of the connection between

the non-deflation reports they were receiving and the manufacturing

-37-
change, a fact finder could reasonably ask why they would have sold

so much stock at a time when the company appeared to be soaring on

the strength of TAXUS.

Given plaintiff's specific factual allegations, the

temporal proximity between LaViolette's statements and the third

recall, and the alleged insider trading, we think that plaintiff

has pled enough to give rise to inferences that are at least as

strong as any competing inferences regarding scienter.

C. Group Pleading

Defendants argue that plaintiff has engaged in

impermissible group pleading and that several of the defendants

should be dismissed from the case now that the subject area has

been narrowed on appeal because they are not specifically alleged

to have been involved with TAXUS.10 The district court did not

address the issue. We decline to address the issue in the first

instance.

We take into account, as in Cabletron, the fact that the

overall complaint survives, the pre-discovery posture of the case,

and the fact that all of the individual defendants held positions

10
Under the group pleading presumption, a court may
attribute all statements to the defendants as collective actions
without considering the liability of each individual defendant.
This court has recognized "a very limited version of the group
pleading doctrine for securities fraud." Cabletron, 311 F.3d at
40. There has been "great debate about the doctrine's continued
existence after enactment of the PSLRA," a question on which this
circuit has not taken a position. Id. We need not here resolve
whether group pleading survives the PSLRA.

-38-
of significant responsibility within the company and therefore

potentially face control person liability under section 20(a).

Cabletron, 311 F.3d at 41. We think the questions should be

resolved in the first instance by the district court.

D. Section 20(a) Liability

Plaintiff has also made allegations against defendants

under section 20(a), which establishes liability for any person who

"directly or indirectly[] controls any person liable" for a

violation of securities laws. 15 U.S.C. § 78t(a). The district

court summarily dismissed the section 20(a) claims on account of

its dismissal of the section 10(b) claims. Reinstatement of

section 20(a) claims is generally appropriate when section 10(b)

claims have been reinstated and the section 20(a) claims had been

dismissed by the district court because of its dismissal of the

section 10(b) claims. Cabletron, 311 F.3d at 41; see also

Nathenson v. Zonagen Inc., 267 F.3d 400, 426 n.29 (5th Cir. 2001);

Hollin v. Scholastic Corp. (In re Scholastic Corp. Sec. Litig.),

252 F.3d 63, 77-78 (2d Cir. 2001).

On appeal, defendants claim that plaintiff has failed to

allege facts demonstrating that any of the individual defendants

are subject to control person liability and therefore the section

20(a) claims should be dismissed even if the section 10(b) claims

are allowed to stand. We disagree. "Control is a question of fact

that 'will not ordinarily be resolved summarily at the pleading

-39-
stage.' The issue raises a number of complexities that should not

be resolved on such an underdeveloped record." Cabletron, 311 F.3d

at 41 (citation omitted) (quoting 2 T.L. Hazen, Treatise on the Law

of Securities Regulation § 12.24(1) (4th ed. 2002)). The practical

effect of reinstating the section 20(a) claims is small since the

same defendants are involved as with the section 10(b) claims, and

individual defendants are not foreclosed from challenging their

liability under section 20(a) in the future. Id. at 41-42.

III.

We do not address the other requirements of section 10(b)

and Rule 10b-5, which were not raised in this appeal by either

party.

We reverse the dismissal and remand the case to the

district court for further proceedings consistent with this

opinion.

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