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

United States Court of Appeals
For the First Circuit

No. 10-1663

MISSISSIPPI PUBLIC EMPLOYEES' RETIREMENT SYSTEM,

Plaintiff, Appellant,

JACK YOPP, Individually and on Behalf of All
Others Similarly Situated, ET AL.,

Plaintiffs,

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. Douglas P. Woodlock, U.S. District Judge]

Before

Lynch, Chief Judge.
Boudin and Thompson, Circuit Judges.

Carolyn G. Anderson, with whom Anne T. Regan, Patricia A.
Bloodgood, Zimmerman Reed, PLLP, David S. Nalven, Hagens Berman
Sobol Shapiro, LLP, Richard A. Lockridge, Gregg M. Fishbein, Nathan
D. Prosser, Lockridge Grindal Nauen, PLLP, James E. O'Neil, Law
Offices of James E. O'Neil, Mike Moore, and Moore Law Firm were on
brief, for appellant.
Stuart J. Baskin, with whom John Gueli, Kirsten Cunha,
Shearman & Sterling LLP, William H. Paine, Timothy Perla, and
Wilmer Cutler Pickering Hale & Dorr LLP were on brief, for
defendants.
August 4, 2011
 LYNCH, Chief Judge. In this securities class action,

plaintiff Mississippi Public Employees' Retirement System alleges

that senior management of Boston Scientific Corporation (BSC), a

publicly traded manufacturer of medical devices in which plaintiff

invested, withheld material information and made misleading

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

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

Securities Exchange Commission Rule 10b-5, 17 C.F.R. § 240.10b-5.

In an earlier opinion, we reversed a Rule 12(b)(6)

dismissal of plaintiff's complaint, finding that the inference of

scienter advanced by the plaintiff was at least as cogent and

compelling as the contrary inference, satisfying the "strong

inference" pleading standard of the Private Securities Litigation

Reform Act. See Miss. Pub. Emps. Ret. Sys. v. Boston Scientific

Corp. (BSC I), 523 F.3d 75 (1st Cir. 2008). After the district

court permitted discovery, the defendants filed a motion for

summary judgment, testing whether the evidence, and not merely the

allegations, withstood scrutiny. The district court found that the

evidence did not and granted defendants' motion. See In re Boston

Sci. Corp. Sec. Litig., 708 F. Supp. 2d 110 (D. Mass. 2010). The

plaintiff appealed, and as is common in litigation, the shape of

the case has changed since we last reviewed it.

Plaintiff's central claim is that defendants were aware

that BSC would likely need to implement a significant recall of its

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TAXUS Express2 Paclitaxel–Eluting Coronary Stent System ("Taxus"),

and that through affirmative statements and omissions, defendants

intentionally or recklessly misled the investing public about the

existence, cause, and degree of this risk. As to omissions,

plaintiff argues that starting in November 2003, defendants chose

not to disclose or implement a manufacturing solution to a "no-

deflate" problem with Taxus because doing so would have caused a

delay in the FDA's approval of the device. This, in turn, would

have hampered BSC's business strategy of building up sufficient

Taxus inventory to flood the market upon its launch. As to

affirmative statements, plaintiff claims that defendants "lulled"

the market by repeatedly saying that the problems were due to

doctor inexperience with the stent system, rather than

manufacturing, and that recalls were unlikely.

The district court found that on the undisputed facts,

drawing all inferences in plaintiff's favor, no reasonable jury

could find sufficient evidence of three key elements of securities

fraud.1 We affirm on the sole ground that plaintiff has failed to

1
First, it held that the evidence regarding defendants'
statements, omissions, and stock sales did not support a reasonable
inference that they acted with scienter in not disclosing or
implementing the manufacturing fix or recalls sooner, and that
rather than lulling the market, defendants had made a reasonable
effort to address the risks inherent in the launch of Taxus.
Second, the court held that no reasonable jury could find that any
of the alleged misrepresentations by the defendants were material
because the market had available sufficient corrective information
to cure any arguably misleading statements or omissions. Third,
the court held that in light of the timing of BSC's disclosures

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produce evidence that would permit a reasonable inference that

defendants acted with scienter.

I.

We assume some familiarity with our prior opinion and

focus on the facts and claims that are key to this appeal.

A. Stent Systems

In treating coronary artery disease (i.e., clogged

arteries), physicians often use stents in angioplasty procedures as

an alternative to open heart surgery. A stent delivery system

consists of three central components: (1) a catheter, which is a

long hollow plastic tube used to guide the stent along the inside

of the arteries, (2) a balloon that is laser welded to the end of

the catheter, and (3) the stent itself, which is "crimped" (or

collapsed) on the deflated balloon. During an implant procedure,

the balloon is inflated, which expands and deploys the stent and

clears the blockage. After the stent is deployed and apposed to

the artery wall, the balloon is deflated and withdrawn.

BSC makes two different stent systems. There is the

Taxus system, on which plaintiff's claims rest, and the Express2

system, which is very similar to Taxus. The primary difference

between them is that the stent in the Taxus system is coated with

a polymer containing a drug to ease complications associated with

regarding the no-deflate complaints and its manufacturing solution,
there was insufficient evidence to support plaintiff's claim that
the alleged misrepresentations caused plaintiff's economic losses.

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stent implant, while the stent in the Express2 system is not

coated. Both the Express2 and Taxus systems are built using the

same Express2 catheter.

B. The Express2 System

We begin with an overview of the Express2 system and

BSC's gradual improvement of it, as this background is necessary to

understand the nature and basis of the plaintiff's claims about

Taxus. BSC's improvements to the Express2 system can be

categorized into three phases on the undisputed evidence.

1. Express2 Phase One: Reducing Process Variability

BSC began selling the Express2 system outside the United

States in June 2001, and received FDA approval for U.S. sales in

September 2002. The system was manufactured at company facilities

in Maple Grove, Minnesota, and Galway, Ireland.

In early 2003, BSC received 11 reports of complaints that

the balloon on Express2 devices had not deflated, including 3 from

the same manufacturing lot. While BSC had received occasional

complaints of this problem since the product's launch, the

increased rate and the existence of multiple no-deflates from the

same batch caused BSC to conduct an inquiry. Multiple-complaint

lots meant that the problem was not dispersed throughout all

devices, and consequently that the normal method of calculating

frequency did not apply.

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 BSC initiated a Site Level Correction Action (SLCA) at

Maple Grove led by Paul Weiss, and a corresponding Corrective and

Preventative Action (CAPA) at Galway led by Niamh O'Byrne. SLCA

and CAPA investigations are commenced to investigate issues that

are systemic or could disrupt business operations. As part of

their investigations, Paul Weiss and Niamh O'Byrne opened a Product

Inquiry Report (PIR). A PIR is used to investigate and make

recommendations for in-house actions or field actions to BSC's

Field Action Committee (FAC), which has ultimate responsibility for

instituting field actions such as recalls. Although the multiple-

batch no-deflate complaints were about Express2, Taxus (which was

only being sold outside the United States at the time) was included

in the PIR because both systems were built using the same Express2

catheter.

On May 15, 2003, the PIR team issued a report on the

primary cause of the no-deflate problem. The team found that the

problem was due to a condition known as "focal necking" or "focal

neckdown," where the "distal outer" (the portion of the catheter

that is welded to the balloon) becomes elongated or stretched,

preventing the withdrawal of the fluid used to inflate the balloon.

The team further found that this focal necking had two primary

causes: (1) excessive heat at the laser bond of the balloon and the

distal outer, which could be caused by a laser that was too hot or

misaligned, and (2) a subsequent excessive tensile force exerted in

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the area of the bond, which could occur either during or after

manufacturing.

While the team could not identify the specific cause of

the tensile force, it was able to identify several in-house actions

to prevent or lessen the incidence of focal necking. To address

issues with the laser weld, it recommended reducing the laser

energy settings, increasing the magnification of the alignment

camera, and retraining operators. For the same reason, the team

also recommended using only distal outers manufactured in Maple

Grove, which were found to be more robust than those manufactured

in Galway, and launching an investigation to understand why the

Galway distal outers appeared more prone to focal necking.

The PIR team also reported on the frequency of the no-

deflate issue. For Express2 devices manufactured in Galway, it

found twenty no-deflates out of over 260,000 revenue shipments,

with two lots producing three complaints each; for those

manufactured in Maple Grove, it found only one no-deflate.2 For

Taxus devices, which were only manufactured in Galway at the time,

it found zero no-deflates out of over 31,000 revenue shipments.

Given this "low rate of occurrence combined with the limited

severity in all but one case," the PIR team concluded that "[n]o

field action is recommended at this time."

2
A May 23 update reported twenty-one, rather than twenty,
no-deflates on Galway Express2 devices, accounting for a complaint
that was reported on May 16.

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 The team was asked at a May 22 meeting to determine the

scope of the no-deflate issue in case a recall was needed, and it

found no factors that could be used to identify some devices as

being higher-risk. It considered data on numerous parameters of

the focally necked devices--including laser weld, elongation, type

of resin used, and extrusions--but found no correlations from which

to scope the problem. On May 23, the team issued a PIR with the

same conclusions and recommendations that it had reached in the May

15 report.

On May 27, the FAC accepted the PIR team's

recommendations and conclusions. It agreed that a recall was not

warranted at the time, finding that "the product in the field was

within all of its established specifications, the frequency of

issues reported [from] the field were extremely low, and the

consequences, while potentially severe in some cases are not

outside those expected with this type of procedure." The Chairman

of the FAC, Paul Sandman, later testified that the FAC did not

institute a recall because "there weren't any factors that

indicated that these failures were caused by a manufacturing

problem."

The FAC also directed that the PIR be "clarified to state

that the issue involves units within specification, and

indistinguishable from a visual standpoint, being subjected in the

field to a level of tensile force exceeding that for which the

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product was designed." It is unclear whether this was meant to

supplement, or replace, the PIR's statement that the tensile event

may have also occurred during manufacturing.3

In implementing the PIR team's suggestions, BSC sought to

harmonize the robustness of the stent systems produced at Galway

with those produced at Maple Grove. The changes focused on the

properties of the distal outers and the proximal welding process.

As to the proximal welding process, BSC increased the magnification

used to line up the stent system components, making it identical

with that in Maple Grove, and retrained the Galway operators on the

proper alignment of the laser weld and the proper handling of the

catheters to avoid tensile forces on the product. These changes

were implemented in May. As to the quality of the distal outers,

Galway immediately switched to using Maple Grove distal outers in

its production,4 and over the following three months, BSC

implemented various changes to harmonize the manufacturing of

distal outers at the facilities, including aligning their

elongation testing equipment, extrusion parameters, and distal

outer measurement methods. BSC also introduced changes to ensure

3
The FAC also directed that it be provided with bi-weekly
updates regarding no-deflates and the effectiveness of the
preventative actions recommended in the PIR. In addition, the PIR
team updated its analysis on June 10, July 10, and October 17,
2003, each time concluding that no field action was warranted.
4
Eventually, in December 2003, Galway resumed
manufacturing its own distal outers.

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that the area of the proximal weld was not exposed to excessive

heat during laser welding, including implementing an in-process

manufacturing acceptance criterion for the length of the weld (the

"Matte Finish Length").5

Because none of these changes affected device design or

performance specification, BSC determined that prior FDA approval

was not required, and implemented them in accordance with its

standard BSC Quality System procedures.

2. Express2 Phase Two: A New Design Specification

Although BSC determined that a recall was not necessary,

it nevertheless decided to further investigate the no-deflate

issue. Internal correspondence from this period shows that the no-

deflate issue was seen by some in the company as "urgent" and a

"severe compliance risk." So in Galway, a "six sigma" team was

initiated on May 28, 2003 to investigate the cause of focal

necking.6 In addition, following up on the CAPA investigation's

finding that the material properties of the distal outer shaft

could contribute to the robustness of the proximal balloon weld,

BSC created a team in Maple Grove--where the distal outer shafts

5
A weld length that is too long indicates that the device
might have been produced with excessive laser heat, thinning the
distal outer and making it more prone to focal necking.
6
Six sigma is an engineering problem-solving methodology
that employs mathematics and statistical tools to refine and
improve industrial processes.

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had been found to be more robust--to develop a new design

specification for the distal outer.

Over the next four months, the Maple Grove team developed

a proposal that focused on the elongation properties of the distal

outer. Elongation served as an "indirect measure of the molecular

orientation and crystallinity of the polymer material" used in the

distal outer. By setting a length that the distal outer could be

stretched before breaking, BSC aimed to ensure that each of its

distal outers had material properties that would "increase its

robustness to subsequent thermal processing that occurs when the

outer is laser welded to the balloon component of the delivery

system."

On October 3, 2003, BSC filed a supplement to its

Express2 Premarket Approval (PMA) with the FDA, seeking permission

to implement "a test method to evaluate the elongation property of

the extruded distal outer shaft component for the Express2." In

this document, BSC stated that the change was meant to address no-

deflate complaints. BSC disclosed that it had "received a small

number of field complaints (approximately 0.0148% complaint rate)

regarding the delivery system balloon's failure to deflate" and

provided a table listing the no-deflates by month and manufacturing

site for January through August 2003. It explained that although

it had been unable "to definitively confirm the root cause of the

failure," its investigation had determined that "at least part of

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the root cause is due to inconsistent material properties of the

distal outer shaft component," and that the new design

specification was intended "(1) to improve the robustness of the

distal outer shaft, and (2) to improve the consistency between

distal outer shafts manufactured at BSC's [Maple Grove and Galway]

facilities."

Finally, BSC notified the FDA in this supplement of all

of the May 2003 corrective actions that it had taken, explaining

its determination that these changes did not require FDA approval.

It also reported on the success of these measures, noting that the

fifteen no-deflate complaints for Express2 devices that it had

received between May and August 2003 were for devices built prior

to the implementation of the changes.

The FDA approved BSC's request on October 24, 2003.

3. Express2 Phase Three: Reticle Inspection
and Laser Shift

At the same time that BSC was implementing the elongation

specification, the six sigma team was completing its report on the

laser shift. It found that by shifting the location of the laser

used to bond the balloon to the distal outer, from .4 mm to .8 mm,

focal necking would be prevented, "regardless of the settings of

the other factors."7 However, as Peter Delmer, who headed the

7
An earlier company investigation, completed in November
2002, had identified a laser shift of .1 mm to .2 mm as one partial
solution, among several others, to the problem of focal necking.
However, the report stated that not all of recommendations needed

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effort in Galway, stated, "an awful lot more work would have to be

done in order to implement that solution." The company needed to

verify that the change would not introduce new problems and also

confirm whether .8 mm was the ideal position, or whether .7 mm

would be better.

This validation work was assigned to Kevin Griffin, a

Process Development Engineer at Maple Grove. On September 2,

Griffin created a plan estimating that a proposal could be

submitted to the FDA in November. However, he stated even at this

time that the plan was "a bit optimistic."8 His team was advised

to keep those working on Taxus, a different group, informed because

any manufacturing change submitted to the FDA would need to be

assessed for its "impact to the Taxus PMA." In the following

months, the team worked to develop a validation protocol, which

involved discussions with various branches of the company,

including manufacturing and regulatory.

At this point, as of the beginning of the Class Period in

November, there had been only two no-deflate complaints for the

to be implemented to prevent focal necking, concluding that "laser
dwell time has the greatest effect" and that "reducing the energy
applied to the bond site will have the most pronounced effect in
producing bonds more robust to focal necking." To "reduce the
chance of a 'hot' weld," the report recommended changes to the
Matte Finish Length criteria. Such changes were implemented in the
spring of 2003.
8
Griffin circulated another draft of the validation plan
on December 3, and another revised version on February 5. The
research was not completed until the spring.

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tens of thousands of Express2 and Taxus devices manufactured at

Galway after the introduction of the May 2003 changes, and there

had been only three no-deflates ever on Express2 devices

manufactured at Maple Grove. Consequently, Paul Weiss, the leader

of the no-deflate PIR, concluded on November 26, 2003 that "the

interim actions have been very effective."

C. The Taxus System

During this time period, BSC was also working to have

Taxus approved for sale in the United States, after having

distributed it outside the United States since February 2003. It

established a "Taxus PMA Council," which oversaw the filing of five

separate modules to the FDA between February and June 2003 and

continued to meet throughout the summer to monitor the PMA progress

and amendments.

On October 7, 2003, the Taxus PMA Council decided that no

additional manufacturing changes to the Taxus PMA would be

submitted after October 31 unless they were considered "critical"

and approved by the Council, as these changes could jeopardize the

FDA's review of the Taxus PMA. The Taxus Council was aware that a

separate team of engineers was also working on a laser shift for

the Express2 catheter, but did not consider the laser shift to be

"critical." Paul Weiss testified that "the evidence at that time

was we had corrected the issue" and that the laser shift was merely

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seen as "a preventive action to make the product more robust to

focal necking."

On November 20, 2003, the first day of the Class Period,

a company press release announced that the FDA's circulatory

devices panel would recommend that Taxus be approved for sale in

the United States. BSC ramped up Taxus production in anticipation

for the U.S. launch.

It is important to note that the units being manufactured

for the U.S. launch incorporated the October 2003 distal outer

elongation specification, as well as a new manufacturing process

known as "cone puffing," which had not been used on the units

produced for sale outside the United States. Cone puffing involves

inflating one cone of the balloon so that it goes over one end of

the stent. This technique was implemented to better secure the

stent's placement on the device, preventing the stent from becoming

dislodged during implantation. There is no evidence that anyone at

this point suspected or had reason to suspect that cone puffing

could contribute to focal necking.

In the following months, research on validating the laser

shift continued. A December 24, 2003 memo from Kevin Griffin

reported that although the team had "learned a lot about what

affects focal necking, there is still uncertainty due to test

method repeatability, other known contributors (like heat shrink)

that are not well understood yet, and the underlying polymer

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science is still being investigated." He stated that on an

"aggressive" research time frame, validation could be completed by

February 20, 2004.

On March 4, 2004, the FDA approved Taxus for sale in the

United States, and within the first couple of weeks following the

U.S. launch, Boston Scientific received about a dozen no-deflate

complaints on Taxus (but not Express2) units manufactured in Galway

and in Maple Grove. This included multiple complaints for two

Taxus manufacturing lots. BSC initiated a "Worldwide Focal Necking

Operations Team" to investigate the failures and determine whether

any lots had a higher propensity to focally neck.

While the team was ultimately unable to identify any such

lots, the co-chair of this team issued a memo on March 23

suggesting that BSC add a criterion for the minimum outer diameter

("minOD") of the distal outer at the location of the laser weld to

eliminate the subjective nature of prior visual inspections, and

add an in-process inspection to measure the minOD to ensure that it

met the criterion. The memo also noted that based on simulations

with surgeons, it appeared that surgeons were not exerting the

degree of tensile force on the devices that would be necessary to

cause the necking. It concluded: "We don't know where in our

processing the tensile forces are occurring to cause the focal neck

. . . . The loading of the balloon protector after folding and

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after cone puffing has been highly suspected, but we have not been

able to draw [a] direct correlation to focal necking."

Two days later, on March 25, BSC received notice that one

hospital in which a no-deflate had required surgical removal of the

stent decided to cease using Taxus at all of its facilities until

it had determined whether this was an isolated incident or a

product defect.

At the end of March, the design, testing, and validation

work on the laser shift for both Express2 and Taxus was completed.

On April 2, 2004, BSC submitted a Special PMA Supplement to the FDA

for its Taxus and Express2 systems. BSC requested permission to

(1) shift the laser so that it was .8 mm, instead of .4 mm, from

the edge of the overlap between the balloon and the distal outer;

(2) add a criterion for the "minOD" of the distal outer at the

location of the laser weld to eliminate the subjective nature of

prior visual inspections; and (3) add an in-process inspection to

measure the minOD to ensure that it met the criterion.

As the minOD was determined to be important independent

of the laser shift, BSC also added a "reticle inspection" to

measure the minOD, which did not require FDA approval and was

implemented on April 28-29. The reticle inspection involved a

magnification tool with guidelines to assist in measuring the bond

width, because bonds of a certain minimum width were found to be

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robust against focal necking regardless of the location of the

laser.

On April 16, 2004, the FDA contacted BSC to schedule a

teleconference and to express concern regarding a type of complaint

regarding Taxus that BSC had not yet addressed to the FDA in any of

its PMA filings. The FDA had received a number of reports in which

the balloon deflated but was difficult to remove, in some cases

because the balloon was stuck to the distal end of the stent.

This issue, known as "sticky stent," was different from

the no-deflate problem and was caused by the fact that the Taxus

stent, unlike the Express2 stent, was coated with a polymer

containing a drug that could make the balloon feel stuck to the

stent. BSC had became aware of this issue in 2003, when it

launched Taxus outside of the United States and received many

complaints about it. During the months following the launch

outside the United States, BSC found that the complaints about this

issue subsided as physicians became familiar with the sticky feel

of the polymer-coated stent and learned, through BSC training and

experience, how to work with it.

During BSC's first quarter analyst conference call on

April 20, 2004, Paul LaViolette, Senior Vice President at BSC, was

asked about the sticky stent issue. An analyst with Bank of

America Securities asked if LaViolette had "any thoughts on why we

are hearing this occur in the U.S., while over the last 12 months

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we didn't hear much about this occurring in Europe." LaViolette

replied that BSC had received similar complaints internationally

when Taxus launched in 2003, but that once physicians became

accustomed to using Taxus, "essentially all complaint activity

subsided." He said that "if you look at international utilization

today, and if you look at complaints for any kind of removal

difficulty, there are virtually no ongoing complaints," and that

this "confirms for us what we understand about this particular

issue, which is that there are some things to get used to." He

also stated that were "no discussions related to any kind of field

action."

On April 24, the Boston Globe reported that BSC had

received 27 reports of difficulty implanting Taxus stents. The

article differentiated between the sticky stent and no-deflate

problems, reporting: "A Boston Scientific spokesman said that in

most of the reported cases the balloons . . . seemed to stick to

the coating of the stent, creating a potential blockage. In about

six of the cases the balloon wouldn't deflate, or would only

deflate slowly." It also reported:

Boston Scientific spokesman Paul Donovan said
the number of problem cases was minor relative
to the 84,000 Taxus stents implanted in
American patients since the FDA approved the
device March 4. He said a few doctors in
Europe reported similar problems when Taxus
was initially approved for use there last
year, but the complaints ended as doctors
became more comfortable with the stents.

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On April 26, 2004, The Wall Street Journal also reported on these

27 reports of difficulties with Taxus:

Boston Scientific said it has received 27
reports of difficulties removing or deflating
the balloon used in the angioplasty. But it
knows of no deaths or complications due to the
issue. It adds that it believes the problem
will disappear once physicians gain experience
using the Taxus.

"This sort of thing does tend to happen as
physicians gain experience with the device,"
said company Senior Vice President Paul
LaViolette.

The article also reported that "[c]opies of 21 of these reports

reviewed by The Wall Street Journal showed that most of the

complaints appeared to be minor annoyances, requiring the doctor to

fiddle a bit to remove or deflate the balloon."

On April 27, 2004, Goldman Sachs released a report

reiterating its buy rating for BSC, explaining that it had

"conducted a review of the most recently available adverse event

reports (MDR's) for the Taxus stent in the FDA database" and

"conclude[d] that the nature of the adverse events is within the

scope of what can be expected in the early stages of a new

interventional product launch." It reported that "the current rate

of adverse events on a worldwide basis is extremely rare at 0.01%

or 11.8 per 100,000 cases" and explained that although "there is a

tendency for under-reporting of events . . . we believe that the

event rate is so low that even with under-reporting there is no

significant issue." The report stated that Goldman Sachs had been

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in "extensive conversations" with BSC management, and that

management was "consistent in its stance that the performance

reports are far and few between, and not unexpected in the early

stages of a broad US launch."

In the meantime, progress continued on the laser weld

shift, and on May 5, the FDA approved the Special PMA Supplement

for Taxus and Express2 with an order--which was publicly available

on its website--stating that BSC had approval to implement "1) the

addition of an additional in-process inspection, 2) modification of

a current in-process inspection, and 3) modification of a

manufacturing process to address complaints related to failure of

the delivery system balloon to properly deflate following stent

deployment." BSC began to implement these changes immediately.

The day that the FDA approved these changes, they were

reported in a Merrill Lynch analyst report stating that BSC had "a

manufacturing fix to address the issue of 'no deflates' submitted

to the FDA to further reduce dependence on operator technique."

Two days later, the Boston Globe ran a story that covered both this

manufacturing solution to the no-deflate problem, as well as the

sticky stent issue. As to the no-deflate problem, the article

stated:

[T]o prevent the problem of balloons failing
to deflate, Boston Scientific is making a
small change in the laser-bonding process it
uses to join the balloon and catheter before
the stent is packaged around them, said
spokesman Paul Donovan. The change will not

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 affect the company's earnings and won't lead
to a recall of any of the thousands of Taxus
packages that have been shipped but not
implanted, he said.

As the article makes clear, Donovan differentiated between the no-

deflate and sticky stent issues, explaining that the manufacturing

change is "meant to address the problem of balloons failing to

deflate," while the company "has no plans for manufacturing changes

to address the other problem." The article reported that the

company "believes the withdrawal problems are probably because of

doctors' unfamiliarity with the new system."

On May 25, 2004, BSC learned that a patient had died due

to complications from no-deflate. And in early June, BSC received

a no-deflate complaint on one Taxus production lot for which there

was a report of a previous failure. The remaining inventory for

this batch was retrieved from the warehouse and a PIR update was

commenced.

While the PIR update was ongoing, a June 22 Dow Jones

Newswires article about Taxus reported that some doctors had

experienced "a 'stickiness' that makes it somewhat difficult to

withdraw auxiliary equipment after the stent is inserted," and that

there had been "a smattering of reports of patients undergoing

emergency surgery to deal with complications that arose during

procedures with the stent." The article stated: "These issues will

work themselves out once physicians get used to the product, the

company says, and it recently made a manufacturing change to deal

-23-
with one problem doctors cited." The article quoted Paul Donovan,

spokesman for Boston Scientific, as saying: "We had a similar

experience in Europe where there was a learning curve early on and

some initial problems, and then people got used to the product and

the number of complaints subsided and the issue went away." The

article then went on to more clearly differentiate between the no-

deflate issue and the stickiness issue, stating: "Problems doctors

have reported with Taxus include trouble getting the balloon to

deflate and difficulty withdrawing the balloon catheter. Boston

Scientific is making a change in its manufacturing process that

will result in the balloons deflating more easily, Donovan said."

The article also quoted one doctor as saying that he had not seen

any Taxus devices that would not deflate, but that he experienced

stickiness 60-70% of the time. It quoted multiple doctors saying

that with practice, the stickiness issue was not a problem. The

article also reported Donovan as saying that "[t]here won't be a

recall" and describing the number of complaints as "tiny."

On the evening of June 22, the PIR team investigating the

multiple-complaint lot of Taxus issued a PIR reporting three field

complaints and four "out-of-box" failures (where the devices had

become focally necked during manufacturing) for this lot. It

reported that an examination of all remaining Taxus devices in the

warehouse from lots manufactured adjacent to this lot found no

problems. The PIR team recommended recalling the one lot. This

-24-
recommendation was sent to the Field Action Committee, which after

conducting its review, decided on June 30 to institute the recall.

On June 30, 2004, an email from BSC's Regulatory Affairs

Vice President Russell Felkey reported that he had spoken with

someone at the FDA who inquired "why BSC isn't conducting a field

action to remove product remaining in the field that was

manufactured prior to our PMA Supplement that included corrective

action for no-deflate." Felkey explained that he had told the FDA

that the company was prepared to discuss this possibility fully,

but that he had not "disclose[d] the pending recall since we

haven't fully completed the approval process."

On July 1, BSC advised the FDA that it would be recalling

the Maple Grove lot identified in the June 22 PIR. Later that day,

it received a report from Galway that it also had a lot with

multiple out-of-box failures. BSC informed the FDA of this, and on

July 2, it recalled both lots.

During a July 2 conference call with analysts, CEO Jim

Tobin explained that the recall affected only "two batches out of

about 1,200 . . . that we've produced so far," emphasizing "we've

learned a lot from this . . . that will help us avoid a repeat as

we go forward." When asked if the company was "completely positive

. . . that [the problem was] only in the two lots that were

recalled -- that there might not be another lot out there that has

maybe a couple of stents that had the same problem," he replied:

-25-
 You can't be completely sure until all of the
work has been done to investigate every
complaint. There will undoubtedly be more
complaints that are somewhere in the pipeline,
so there are still investigations to go, but
those would be single batch, small number kind
of situations based on what we think we know
today.

He explained that the complaints were from lots produced before the

introduction of the laser shift and that there had not yet been any

complaints from devices manufactured after the manufacturing

change, but emphasized that this "doesn't mean we won't."

Management made clear that there had only been 20,000 of the newer

devices shipped, so that if these lots "had a problem at the same

rate we've been having, you would have expected maybe zero or one,

two at the most. We haven't had any. What does that tell you?

Nothing, because the sample is too small."

When asked how many pre-manufacturing change lots were in

circulation, Tobin stated: "I don't know the number of lots, but

the number of units is probably in the 100,000 range--somewhere

around there." He stated that he did not believe that the limited

recall was "a tip of the iceberg sort of situation, but it is what

it is." Tobin explained: "We're looking at those batches for which

we have complaints, which is 25 batches, or some number like that,

out of 1,223. Of those 25, these two we're not happy with and

we're pulling them back. The analysis is not complete, so it is

possible that you would find another batch or two, but unlikely, I

would say."

-26-
 In discussing the laser shift, Vice President and CFO

Larry Best9 explained that the company had received complaints of

no-deflates since it launched Express2, that the company had "been

working on this for quite a while," and that the manufacturing

change was "in process before we launched Taxus and would have been

submitted whether we got a complaint or not." He later emphasized:

"This is not a fix that's being made in response to the Taxus

launch or the Taxus complaints."10

Market analysts labeled the July 2 recall a minor event.

A July 5 Goldman Sachs report stated: "In our opinion, the recall

is a minor issue, which should have a negligible impact on the

company's market position. . . . Based on management's comments, we

believe that the issue has already been resolved and the recall is

a remnant of a prior manufacturing process." It explained:

The company indicated that there are only 42
complaints worldwide (out of which 12 could
not be replicated) about the balloon deflation
issue with Taxus stent system out of the more
than 445,000 stents which have been implanted
worldwide, which implies an incidence rate of
0.009%. US FDA has received reports of one
death and 16 serious injuries associated with

9
Larry Best also spoke with caution, stating that the
people working on the issue were "pretty confident that they've
further reduced any incidence of no deflate, but who knows?"
10
Plaintiff contends that this is contradicted by
defendants' admission during a July 15 call that the laser shift
was implemented in reaction to no-deflate complaints. There is no
such contradiction. While the change to Express2 was in response
to the complaints, the decision to incorporate it into Taxus was
based on the fact that Taxus used the same Express2 catheter.

-27-
 balloon deflation and 8 reports of balloon
malfunction that were not associated with
patient injury, out of more than 220,000 US
stents implanted, implying an incidence rate
of 0.01%. These extremely low event rates
suggest that the incidence of non-deflation is
a rare occurrence (even with under-reporting)
and not likely to grow to be a larger issue.

Similar details and evaluations were reported in a Harris Nesbitt

analyst report on July 6.

Following the recall, BSC continued its investigation, as

Jim Tobin stated it would in the July 2 conference call. Examining

all devices remaining in inventory from any batch that had even a

single no-deflate complaint, a team at Maple Grove made two

discoveries. First, it found that by using laser pixel software

that recorded detailed information regarding the precise location

of the laser for each batch of catheters, it could identify lots in

which a "laser event" affecting the laser alignment, as measured by

pixel shifts, made the laser bonds more susceptible to tensile

forces. Second, it found that the cone puffing process--in

particular, the sliding of a protector over the stent prior to

puffing--could create significant tensile forces on the distal

outer when the balloon was atypically large, and that cone puffing

was a "large differentiator between [Taxus] and Express2 with

respect to inflate/deflate issues." This was the first time that

cone puffing was conclusively identified as a cause of no-deflates.

Cone puffing had not been used in the manufacture of Express2, nor

in the manufacture of Taxus for sale outside the United States.

-28-
The director of Process Development in Research & Development at

Maple Grove, Phil Ebeling, characterized the two discoveries as

"epiphanies or aha moments" for him and his team.

Based on these two discoveries, BSC instituted another

recall on July 16. This recall focused on devices that had been

produced prior to the implementation of the reticle inspection in

April 2004. Using laser pixel and cone puffing data for the pre-

reticle inspection lots at Maple Grove, it was able to identify

eight lots at risk for focal necking. In Galway, however, BSC did

not have the laser software being piloted in Maple Grove, so as a

precaution, it decided to recall all Taxus devices that had been

manufactured at Galway prior to the introduction of the reticle

inspection.

The recall covered 85,000 of the more than 500,000 Taxus

devices that it had shipped.11 In a press release announcing this

recall, BSC explained that in total, it had received reports of one

death and eighteen serious injuries associated with balloon

deflation failure with Taxus devices.12 The press release stated:

"The Company implemented review of its manufacturing process,

additional inspections, and an FDA-approved modification to the

11
As a further precaution, BSC also recalled 11,000
2
Express devices that had been manufactured in Galway before the
introduction of the May 2003 changes. It had shipped over 600,000
Express2 devices.
12
It also noted that it had received reports of two deaths
and twenty-five serious injuries associated with Express2 devices.

-29-
manufacturing process for these products. The current and future

production are not expected to experience similar balloon deflation

problems." The press release also stated that BSC expected the

recall to impact its second quarter financial results, including a

reversal of $45 million in sales and a write-down of $50 million in

inventory.

Following the announcement of the expanded recall, BSC's

stock price dropped. Plaintiff claims the investing shareholders

represented by the class lost over $700 million.13

II.

Our review of a grant of summary judgment is de novo.

City of Dearborn Heights Act 345 Police & Fire Ret. Sys. v. Waters

Corp., 632 F.3d 751, 756 (1st Cir. 2011). Summary judgment is

required when "the movant shows that there is no genuine dispute as

to any material fact and the movant is entitled to judgment as a

matter of law." Fed. R. Civ. P. 56(c).

A. The Elements of Securities Fraud

For plaintiff to prevail on its claim that defendants

violated Section 10(b) and Rule 10b–5, it must prove six elements:

"(1) a material misrepresentation or omission; (2) scienter, or a

13
After the July recall, BSC realized that it had made an
error in calculating the manufacture dates for the recall, as the
reticle inspection was not in place at Galway until 2.5 days later
than it had originally thought. On August 5, BSC recalled the
Taxus devices that had been manufactured at Galway during this time
period.

-30-
wrongful state of mind; (3) a connection with the purchase or sale

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

causation." Waters Corp., 632 F.3d at 756. This case turns on the

second of these requirements, scienter, and the question of whether

plaintiff has produced sufficient competent evidence that

defendants acted with scienter to survive their motion for summary

judgment.14

Scienter is an intention "to deceive, manipulate, or

defraud." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 & n.12

(1976); see also SEC v. Ficken, 546 F.3d 45, 47-48 (1st Cir. 2008).

Under this circuit's precedent, proving scienter requires "a

showing of either conscious intent to defraud or 'a high degree of

recklessness.'" ACA Fin. Guar. Corp. v. Advest, Inc., 512 F.3d 46,

58 (1st Cir. 2008) (quoting Aldridge v. A.T. Cross Corp., 284 F.3d

72, 82 (1st Cir. 2002)). Recklessness in this context means "a

highly unreasonable omission, involving not merely simple, or even

inexcusable[] negligence, but an extreme departure from the

standards of ordinary care, and which presents a danger of

misleading buyers or sellers that is either known to the defendant

14
"Although it is unusual to grant summary judgment on
scienter, summary judgment on this issue is sometimes appropriate.
'Even in cases where elusive concepts such as motive or intent are
at issue, summary judgment may be appropriate if the nonmoving
party rests merely upon conclusory allegations, improbable
inferences, and unsupported speculation.'" SEC v. Ficken, 546 F.3d
45, 52 (1st Cir. 2008) (quoting Medina-Munoz v. R.J. Reynolds
Tobacco Co., 896 F.2d 5, 8 (1st Cir. 1990)).

-31-
or is so obvious the actor must have been aware of it." SEC v.

Fife, 311 F.3d 1, 9-10 (1st Cir. 2002) (quoting Greebel v. FTP

Software, Inc., 194 F.3d 185, 198 (1st Cir. 1999)) (internal

quotation marks omitted).

Although this case turns on scienter, it is important to

identify the related requirement of materiality. See BSC I, 523

F.3d at 87 ("Knowingly omitting material information is probative,

although not determinative, of scienter."). As the Supreme Court

recently stated in Matrixx Initiatives, Inc. v. Siracusano, 131 S.

Ct. 1309 (2011), the "materiality requirement is satisfied when

there is 'a substantial likelihood that the disclosure of the

omitted fact would have been viewed by the reasonable investor as

having significantly altered the "total mix" of information made

available.'" Id. at 1318 (quoting Basic Inc. v. Levinson, 485 U.S.

224, 231-32 (1988)) (internal quotation marks omitted).

The Court explained that it was "'careful not to set too

low a standard of materiality,' for fear that management would

'bury the shareholders in an avalanche of trivial information.'"

Id. (quoting Basic, 485 U.S. at 231). But at the same time, the

Court rejected the use of a bright line rule that "reports of

adverse events associated with a pharmaceutical company's products

cannot be material absent a sufficient number of such reports to

establish a statistically significant risk that the product is in

fact causing the events." Id. at 1318-19. The Court explained

-32-
that because "medical professionals and regulators act on the basis

of evidence of causation that is not statistically significant, it

stands to reason that in certain cases reasonable investors would

as well." Id. at 1321.

The Court cautioned, however, that it was not holding

that all adverse events must be disclosed. It stressed that Rule

10b-5 and Section 10(b) "do not create an affirmative duty to

disclose any and all material information." Id. It explained that

"disclosure is required under these provisions only when necessary

'to make . . . statements made, in the light of the circumstances

under which they were made, not misleading.'" Id. (quoting 17

C.F.R. § 240.10b–5(b)); see also Basic, 485 U.S. at 239 n.17

("Silence, absent a duty to disclose, is not misleading under Rule

10b-5."). The Court explained that "[e]ven with respect to

information that a reasonable investor might consider material,

companies can control what they have to disclose under these

provisions by controlling what they say to the market." Matrixx,

131 S. Ct. at 1322.

B. Plaintiff's Proposed Inference of Scienter

We understand plaintiff's case to rest in general on the

claim that the defendants were aware of a risk that no-deflate

problems with U.S. Taxus devices would require a significant

recall; that the company's statements and omissions misled the

market about the nature, cause, and degree of this risk; and that

-33-
these facts support an inference that defendants acted with

scienter. Specifically, plaintiff argues that a reasonable

inference of defendants' scienter is established by evidence that

on three issues, defendants had "knowledge of facts or access to

information contradicting their public statements." Evidence that

"defendants published statements when they knew facts suggesting

the statements were inaccurate or misleadingly incomplete is

classic evidence of scienter." Aldridge, 284 F.3d at 83. Here,

however, plaintiff's evidence considered individually and as a

whole makes clear that no reasonable jury could find that

defendants recklessly misled the market about a significant risk of

Taxus no-deflates or the need for a recall, much less that they

intentionally did so.

1. Disclosure of the Laser Shift

Plaintiff argues that defendants' failure to implement

the planned laser shift in November recklessly created a

significant risk that the newly launched U.S. Taxus devices would

need to be recalled and is evidence that defendants "acted with

scienter in not disclosing the existence of the fix" sooner than

they did.

At its core, this argument rests on the premise that the

laser shift was not only the ultimate solution to the problem of

focal necking, but also the criterion that defined whether or not

a device needed to be recalled. This premise is flawed for a

-34-
number of reasons. First, there is no evidence that the laser

shift was itself sufficient to prevent focal necking in Taxus; the

fall 2003 conclusion by the six sigma team that the laser shift

would prevent focal necking for Express2 regardless of other causal

factors did not apply to the causal factor of cone puffing, as cone

puffing was not used in the manufacture of Express2 and its

relevance to focal necking in Taxus was not known until the summer

of 2004. Second, the implementation of the laser shift was not a

determinative criterion in the recall.

The July 16, 2004 decision about which lots of Taxus to

recall was not based on whether they had been produced using the

new laser alignment. Rather, the decision was based on whether the

lots had been produced before or after the introduction of the

reticle inspection at the end of April. The recall covered all

Galway-manufactured devices that were manufactured before this, and

none that were manufactured after it. Likewise, no devices

manufactured in Maple Grove after this were recalled. While BSC

was able to limit the recall of Maple Grove lots manufactured pre-

reticle inspection by using manufacturing data not available in

Galway, the introduction of the reticle inspection was nevertheless

the defining moment in time. Therefore, although the laser shift

was a manufacturing solution to focal necking that eliminated the

-35-
need for some of BSC's other solutions, it was not determinative of

whether a product needed to be recalled.15

Plaintiff nevertheless contends that defendants were

required to disclose the laser shift sooner than they did. It

claims that BSC "was prepared to submit its change to the FDA by

November 2003," but that "the process was aborted" by the Taxus PMA

Council in order to keep the Taxus release on schedule, thereby

misleading the market about the risk that it would be introducing

a new product that had a manufacturing defect. It argues that "the

decision to build inventory without the permanent fix in place made

the recalls not just foreseeable, but probable."

There is no evidence in the record that supports this

claim. The evidence is that as of November 2003, BSC had not

validated the .8 mm laser shift and was not prepared to submit this

documentation to the FDA, as it needed to do before implementing

the change. Although plaintiff is correct that on September 2, the

engineer leading the laser shift team, Kevin Griffin, "proposed a

15
Plaintiff's claim that the laser shift was a crucial
manufacturing change is further weakened by the fact that it was
also irrelevant to the recall of Express2 devices. For Express2,
the recall fence was the May 2003 changes. The fact that the
determinative date for Express2 was the introduction of the May
2003 changes--and not the laser shift, or even the reticle
inspection--also indicates that the causes of focal necking in
Taxus devices were not, as plaintiff contends, identical to the
causes in Express2 devices. This further undermines plaintiff's
claim that in November 2003, the Taxus PMA Council postponed the
implementation of the validation plan for the laser shift on
Express2 despite awareness that it was a "critical fix."

-36-
validation plan for the laser shift that would be completed and

submitted to the FDA by November 7, 2003," the email to which

Griffin attached this plan also stated that it was "a bit

optimistic." Likewise, while six sigma team leader Peter Delmer

testified that the laser shift had been "confirmed" as a

manufacturing solution to focal necking by October 2003, he also

testified that at this point, "an awful lot more work would have to

be done in order to implement" the manufacturing change. Further,

the additional work that Griffin and Delmer said was required was

in fact done. In October, the team had only recommended shifting

the laser from .4 mm to .6 mm, rather than the .8 mm position that

was ultimately implemented. It would have been inappropriate for

the company to disclose that it was considering a manufacturing

change before it was satisfied that the change would not itself

cause other problems, and no inference of scienter can be drawn

from this non-disclosure.

Moreover, Griffin's validation plan was created for

Express2 not Taxus--a fact that plaintiff ignores in arguing that

the Taxus PMA Council modified the plan. Although both the

Express2 and Taxus systems were built using the same catheter, the

teams worked independently and plaintiff cites no evidence that the

validation plan and FDA submissions for Express2 were influenced by

the Taxus PMA Council's decision to only allow "critical"

-37-
modifications to the Taxus PMA after October 31.16 On the contrary,

when Griffin sent the validation plan to Paul Bulger and asked

whether he should "keep the Taxus reg folks involved," Bulger

replied: "I have informed Taxus regulatory of the proposed changes.

They have not given any specific feedback or concerns. Since this

is a change to the delivery system only, it should have a minimal

impact to the Taxus PMA review."17

Moreover, no inference of scienter can be drawn from the

fact that BSC management decided at the end of November that it did

not immediately need to disclose or implement the laser shift. At

this point, there had been only two no-deflate complaints for the

tens of thousands of Express2 and Taxus devices manufactured at

Galway after the introduction of the May 2003 changes, and there

had been only three no-deflates ever on Express2 devices

manufactured at Maple Grove. Based on the information available,

no inference of scienter can be drawn from defendants' conclusion

that the preventive measures implemented in May had been effective

16
After October 31, BSC did submit changes to the Taxus
PMA. On November 11, it submitted a PMA Amendment notifying the
FDA of the new elongation specification that it had already
incorporated into Express2.
17
Plaintiff also states that the laser shift was included
on BSC's submission schedule on October 6, but no longer on the
list on October 29, due to the Council's decision. Its citations
to the record do not support this claim. Both lists include the
laser shift, and neither has a proposed submission date.

-38-
in further reducing what was already, by industry standards, a very

low rate of complications.

Plaintiff also claims that later, "in the March-May 2004

time period, no Defendant affirmatively disclosed any . . .

information" about "the approval of manufacturing changes" and "the

fact that some pre-manufacturing change inventory remained in the

field." However, it is clear that the market knew that BSC was

implementing a manufacturing change to address no-deflates on May

5, when the FDA approved the Special PMA Supplement requesting

permission to make the change. The FDA approval, which was

publicly available on its website, informed the market that BSC was

making a "modification of a manufacturing process to address

complaints related to failure of the delivery system balloon to

properly deflate following stent deployment." The change was also

reported later that day in a Merrill Lynch analyst report, which

stated that the company was implementing "a manufacturing fix to

address the issue of 'no deflates.'" It would have been clear to

the market that the stents produced prior to this date did not

incorporate this modification.

2. Statements Regarding Physician Unfamiliarity

Plaintiff also claims that from April 2004 through the

July 16 recall, BSC misled and lulled the market by maintaining

that "the problems with Taxus were due to physician unfamiliarity

with the device," rather than a manufacturing issue, and that

-39-
"[o]nly after the recalls did [BSC] admit that the defect in the

catheter was manufacturing related." Plaintiff has produced no

evidentiary support for its claim, having often conflated the no-

deflate problem with the sticky stent problem and failed to

differentiate between the problems and their causes.

Plaintiff claims that Senior Vice President Paul

LaViolette misrepresented the cause of problems with the stent

system, and lulled the market, when he said during the first

quarter analyst conference call on April 20, 2004 that "essentially

all complaint activity subsided" as physicians became accustomed to

using Taxus. This statement was in response to a specific question

in which an analyst asked about the sticky stent problem (not the

no-deflate problem) and why there had been no reports of such a

problem in Europe over the past 12 months. LaViolette explained

that there had in fact been sticky stent complaints when Taxus was

first launched in Europe, but that these complaints subsided as

physicians became accustomed to using Taxus. He did not say that

physician technique was the cause of the no-deflate problem.

Plaintiff also focuses on statements by BSC spokesman

Paul Donovan, who was reported in a Boston Globe article on April

24 as saying that "a few doctors in Europe reported similar

problems when Taxus was initially approved for use there last year,

but the complaints ended as doctors became more comfortable with

the stents." This was true as to the sticky stent problem, and as

-40-
the article reported, Donovan differentiated between the two

problems. In discussing the 27 complaints that had been received,

he explained that "in most of the reported cases the balloons

. . . seemed to stick to the coating on the stent, creating a

potential blockage. In about six of the cases the balloon wouldn't

deflate, or would only deflate slowly."

It is true that not every article was as clear in

differentiating between the 27 complaints, but no inference of

scienter can be drawn from this fact. Plaintiff cites an April 26

Wall Street Journal article that stated:

Boston Scientific said it has received 27
reports of difficulties removing or deflating
the balloon used in the angioplasty. . . . It
adds that it believes the problem will
disappear once physicians gain experience
using the Taxus. 'This sort of thing does
tend to happen as physicians gain experience
with the device,' said company Senior Vice
President Paul LaViolette.

Even so, the article went on to state that "[c]opies of 21 of these

reports reviewed by The Wall Street Journal showed that most of the

complaints appeared to be minor annoyances, requiring the doctor to

fiddle a bit to remove or deflate the balloon," apparently

referring to the same break-down of complaints reported in the

Boston Globe article. The fact that this Wall Street Journal

article was not as clear as the Boston Globe in reporting that

there were two different issues--no-deflate and sticky stent--and

that physician familiarity solved the latter, does not support a

-41-
claim that defendants recklessly misled the market as to the cause

of the complaints. This is especially so given that reports and

statements issued over the next month clearly noted the different

problems and solutions.

On May 5, the market had clear notice that BSC was not

attributing the no-deflate problem to physician mishandling when

the FDA announced approval of BSC's request for a "modification of

a manufacturing process to address complaints related to failure of

the delivery system balloon to properly deflate following stent

deployment." The day that the FDA approved the change, it was

reported in a Merrill Lynch analyst report stating that "the

company has a manufacturing fix to address the issue of 'no

deflates' submitted to the FDA to further reduce dependence on

operator technique." And two days later, the Boston Globe ran a

story that covered both the laser-shift solution to the no-deflate

issue, as well as the sticky stent problem. As to the no-deflate

issue, the article stated: "[T]o prevent the problem of balloons

failing to deflate, Boston Scientific is making a small change in

the laser-bonding process it uses to join the balloon and catheter

before the stent is packaged around them, said spokesman Paul

Donovan." The article makes clear that Donovan differentiated

between the no-deflate and sticky stent issues, and their

solutions, explaining that the manufacturing change is "meant to

address the problem of balloons failing to deflate," while the

-42-
company "has no plans for manufacturing changes to address the

other problem," which was sticky stent. Likewise, a May 27, 2004

Goldman Sachs report stated that "the worldwide rate of 'withdrawal

resistance' (balloons sticking to the stent) is only 0.03%, which

has largely been controlled through additional physician training,"

while "other issues, including the 0.0005% worldwide rate of

'deflation difficulty' (balloons unwilling to deflate following

dilatation), were more-or-less corrected with slight adjustments

implemented to the balloon catheter."

That physician experience and technique could solve

complaints of stent stickiness continued to be clearly reported to

the market in the following month. On June 22, a Dow Jones

Newswires article stated: "Problems doctors have reported with

Taxus include trouble getting the balloon to deflate and difficulty

withdrawing the balloon catheter." As to the former, it noted that

"Boston Scientific is making a change in its manufacturing process

that will result in the balloons deflating more easily." It quoted

one doctor as saying that he had not seen any Taxus stent systems

that would not deflate, but that he experienced stickiness with

them 60-70% of the time. It also quoted multiple doctors saying

that with practice, the stickiness issue was not a problem.18

18
Plaintiff claims that this article also "reported that
the Company had said that no-deflate problems 'will work themselves
out once physicians get used to the product.'" (Emphasis added).
This mischaracterizes the article. The relevant text of the
article states: "Some doctors say there is extra effort associated

-43-
 Given that market analysts and BSC management regularly

differentiated between the two problems and their causes, there is

no basis for plaintiff's contention that "[e]ven on July 2," after

the first recall, "market analysts continued to believe that

doctors' techniques were the problem behind no-deflate." In fact,

the July 2, 2004 Merrill Lynch analyst report that plaintiff cites

in support of this claim contradicts it. The report highlighted

the manufacturing solution to the problem of no-deflates,

explaining that BSC identified "a series of manufacturing events"

that increased the risk of no-deflate; that the recall was based on

these manufacturing lots; and that BSC had introduced "a

manufacturing change in May that is meant to further reduce the

incidence of 'no deflates.'" The report's only reference to the

role of physician handling was a single sentence that noted that

BSC was sending a letter to physicians to inform them of "handling

issues that can prevent or mitigate" complications with no-deflate.

with Taxus, including a 'stickiness' that makes it somewhat
difficult to withdraw auxiliary equipment after the stent is
inserted. There have also been a smattering of reports of patients
undergoing emergency surgery to deal with complications that arose
during procedures with the stent. . . . These issues will work
themselves out once physicians get used to the product, the company
says, and it recently made a manufacturing change to deal with one
problem doctors cited." Although it is not entirely clear what the
author of the article meant by "these issues," and this phrase can
be read to include the no-deflate issue, this does not provide a
basis for a reasonable inference of scienter, as the rest of the
article--and many other articles--report BSC management as clearly
differentiating between the two different issues and their
solutions.

-44-
This does not blame physicians for the problem. Rather, it says

that physicians could be part of a solution that was being

primarily achieved through a manufacturing change.

3. Statements Regarding Recall Risk

Plaintiff claims that the July recalls were foreseeable

and that BSC should have disclosed the risk sooner. They state

that "a recall of Taxus was not merely in the universe of risks

recognized by Defendants, it was a certain risk known to the

Defendants, thus transforming this case from one of mere negligence

to one of deliberate indifference." Plaintiff's proposed inference

of scienter is not only based on what defendants failed to say

about the introduction of the laser shift, discussed above, but

also on what they did say about the risk of recall. Plaintiff

argues that defendants affirmatively misled the market about this

risk.

Plaintiff claims that starting in April 2004, BSC told

the market "that there would be no recall of devices manufactured

prior to the implementation of the FDA-approved manufacturing

change," and that "[e]ven on June 22, the date the Company had

determined a recall was necessary, the Company continued to make

statements that there would be no recall." The evidence does not

support these claims.

Plaintiff points to the fact that a June 22 Dow Jones

Newswires article reported Paul Donovan as saying there would not

-45-
be a recall, while a June 22 PIR recommended the recall of one

batch of Taxus devices manufactured in Maple Grove. However, the

PIR was not completed until the evening of June 22, while the

article was published in the morning. It is also unclear from the

article when Donovan made this statement. Further, standard

company protocol required that PIR recommendations be evaluated and

approved by the FAC, and the FAC did not make its final decision to

institute the recall until about a week later on June 30.

Plaintiff also argues that CEO Jim Tobin misrepresented

the known risk of a second recall when, during the analyst call on

July 2, he said that he did not believe that the recall was a "tip

of the iceberg sort of situation." Plaintiff argues that this

statement is inconsistent with an email that Tobin sent earlier in

the day in which he mentioned that he was "not totally confident"

that everything was "under control," expressing concern that he had

just learned that twenty more lots were being tested in Galway.

The two statements are not inconsistent and do not

support an inference of scienter. Subsequent emails made clear

that the company was assessing the risk of receiving additional

complaints on the twenty lots for which there had been only one

complaint, and was not in fact testing any of these devices in

these lots. Further, plaintiff fails to note that Tobin expressly

discussed this during the conference call. In response to a

question about future recalls, Tobin explained: "We're looking at

-46-
those batches for which we have complaints, which is 25 batches, or

some number like that, out of 1,223. Of those 25, these two we're

not happy with and we're pulling them back. The analysis is not

complete, so it is possible that you would find another batch or

two, but unlikely, I would say."19

During the July 2 conference call, Tobin even expressly

identified the risk that there could also be complaints for the

lots produced after the introduction of the laser shift. He

explained that BSC had not received any complaints about devices

manufactured after the introduction of the laser shift, but

emphasized that this "doesn't mean we won't." This discussion with

analysts made clear that because only 20,000 post-laser shift

devices had shipped, and the historical rate of error was very low,

the fact that there had been no complaints so far meant "[n]othing,

because the sample is too small." Defendants were clear about the

risk of another small recall.20

19
In response to another question on this topic, he
emphasized this point, stating that the company could not be sure
that the problems were only in the two lots that were recalled
"until all of the work has been done to investigate every
complaint." He explained: "There will undoubtedly be more
complaints that are somewhere in the pipeline, so there are still
investigations to go, but those would be single batch, small number
kind of situations based on what we think we know today."
20
This caution was also reported by market analysts. A
July 2 report from Morgan Stanley stated, "we believe that it is
reasonable to expect that there could be a similar announcement
over the next few months potentially pertaining to other batches
with similar problems."

-47-
 There is no evidence that management had reason to

suspect a recall on the order of the second recall, much less that

they recklessly or intentionally misled the market about it, such

as to permit an inference of scienter. Rather, the evidence is

that it was not until after July 2 that the company recognized the

significance of the factors that provided the basis for the second

recall. Defendants testified that it was not until after the first

recall that the company recognized that the cone puffing process

was creating tensile forces on the devices significant enough to

cause focal-necking, and plaintiff fails to identify any evidence

that draws this testimony into question.

Plaintiff argues that defendants' account of when they

learned of the role of cone puffing is contradicted by an internal

report circulated on March 23, 2004 stating that the "loading of

the balloon protector after folding and after cone puffing has been

highly suspected" as a source of "high tensile forces during

processing." But plaintiff fails to note that the report then

states "but we have not been able to draw direct correlation to

focal necking" and concludes that additional research "activities

need to be started to assess the tensile forces that are being

applied at various processes (i.e. balloon folding & cone

puffing)."

Plaintiff also argues that defendants' account of the

role of cone puffing in no-deflates and the recall is contradicted

-48-
by an email from BSC engineer Ken Pucel on August 24, 2004 stating

that there was "too much uncertainty" to draw a definitive

conclusion about whether cone puffing was causing the rate-increase

for Taxus no-deflates. However, Pucel's email also stated that

"there is good reason to suspect conepuffing," noting that Galway's

no-deflate complaint rate increased from 15 ppm to 240 ppm after

the introduction of cone puffing and concluding that the company

"need[ed] to have a six sigma black belt further analyze the data."

Even if this August email indicated what defendants knew in early

July, rather than late August, it would do nothing to undermine

defendants' evidence that the second recall was instituted in part

because of new information they learned about the risk of focal

necking due to cone puffing.21

21
Plaintiff also suggests that BSC misled the investing
public about the risk of recall in failing to affirmatively
disclose no-deflate complaints. In fact, BSC reported the no-
deflate complaints to the FDA in Medical Device Reporting (MDR)
reports, which were publicly available on the FDA website. These
MDRs were regularly cited in analyst reports on BSC. For example,
on April 27, 2004, Goldman Sachs released a report reiterating its
buy rating for BSC, explaining that it had "conducted a review of
the most recently available adverse event reports (MDR's) for the
Taxus stent in the FDA database" and "conclude[d] that the nature
of the adverse events is within the scope of what can be expected
in the early stages of a new interventional product launch." It
reported that "the current rate of adverse events on a worldwide
basis is extremely rare at 0.01% or 11.8 per 100,000 cases."
Plaintiff argues that BSC did not accurately report complaints to
the FDA, noting that in 2005, the FDA cited BSC for failing to
comply with its disclosure obligations. The FDA review found that
"from January 2004 to June 2005, 66 MDR reports of death or serious
injury were not submitted within 30 days." However, plaintiff
cites no facts that would support an inference of scienter. It
does not specify what fraction of the 66 complaints in these 18

-49-
C. The Grant of Summary Judgment

In considering defendants' motion for summary judgment,

we must look at the record in the light most favorable to plaintiff

and indulge all reasonable inferences in its favor. Evans Cabinet

Corp. v. Kitchen Int'l, Inc., 593 F.3d 135, 140 (1st Cir. 2010).

Plaintiff, however, must nonetheless "put forth specific facts to

support the conclusion that a triable issue subsists."

Martínez–Rodríguez v. Guevara, 597 F.3d 414, 419 (1st Cir. 2010).

Evidence that "is merely colorable or is not significantly

probative" cannot defeat the motion. Anderson v. Liberty Lobby,

Inc., 477 U.S. 242, 249-50 (1986). With respect to each issue on

which plaintiff has the burden of proof at trial, it must "present

definite, competent evidence to rebut the motion,"

Martínez–Rodríguez, 597 F.3d at 419 (quoting Vineberg v.

Bissonnette, 548 F.3d 50, 56 (1st Cir. 2008)) (internal quotation

marks omitted), and as our review of the facts and plaintiff's

claims makes clear, plaintiff has failed to produce evidence that

would support a reasonable inference that defendants acted with

scienter.

months occurred during the first few months at issue here, nor does
it identify how many of these were due to no-deflate, which was
generally responsible for only a small fraction of total
complaints. Further, while the FDA report notes that some of the
under-reporting was due to human error, it does not suggest that
this was intentional or reckless. Moreover, market analysts
repeated throughout the class period that the rate of complaints
was so low that even assuming under-reporting, they believed the
complaints were a minor issue unlikely to affect the stock price.

-50-
 A statement or omission is only actionable if, at the

relevant time, defendants knew, or were reckless in not knowing, of

material information that they were obligated to disclose and acted

intentionally or recklessly in failing to disclose it. See N.J.

Carpenters Pension & Annuity Funds v. Biogen IDEC Inc., 537 F.3d

35, 45 (1st Cir. 2008); see also ACA Fin., 512 F.3d at 62

(statements were not materially misleading where there was "nothing

. . . to establish that the defendants were aware of facts, at the

time they made their predictions, that would have made those

predictions unreasonable"); BSC I, 523 F.3d at 86 ("Securities

actions raise questions of what corporate managers knew and when

they knew it.").

As to the laser shift, the key issue is not whether

defendants were aware that the change was being contemplated, as

plaintiff suggests, but rather whether they were aware or

recklessly unaware that the no-deflate problem threatened Taxus's

viability and hence the price of BSC's stock. See Detroit Gen.

Ret. Sys. v. Medtronic, Inc., 621 F.3d 800, 809 (8th Cir. 2010)

("[T]he material question . . . is whether [the medical] devices

were known to exceed acceptable failure rates overall."); In re

Carter-Wallace, Inc., Sec. Litig., 220 F.3d 36, 41 (2d Cir. 2000)

(focusing on whether defendants had sound reason to doubt the

"commercial viability" of product); Backman v. Polaroid Corp., 910

F.2d 10, 16 (1st Cir. 1990) (en banc) (distinguishing between

-51-
allegations of "commercial failure" and allegations of undisclosed

details relating to risks); see also Biogen IDEC, 537 F.3d at 48-

50. Plaintiff did not produce evidence that would support a

reasonable inference that defendants intentionally or recklessly

misled the public about such a risk.

A company does not commit securities fraud merely by

failing to disclose all non-public material information that it

possesses. ACA Fin., 512 F.3d at 61. Disclosure is required only

when necessary "to make . . . statements made, in the light of the

circumstances under which they were made, not misleading." 17

C.F.R. § 240.10b–5(b); Matrixx, 131 S. Ct. at 1321. Given the

statements and disclosures that defendants did make, they had no

obligation to disclose the fact that they were working on an

improvement that would reduce the very small number of no-deflate

complaints that they received, and of which the market was aware.

Cf. Geffon v. Micrion Corp., 249 F.3d 29, 37 (1st Cir. 2001)

(finding that although the defendant "could have provided still

more information" regarding an alleged omission, "its failure to do

so does not mean that the omission was purposely deceptive in a

manner actionable under Rule 10b-5").

The investing public was not only aware of the no-deflate

complaints, but also of the risk of recall, which defendants openly

discussed. "To the extent that the plaintiff's complaint is that

the precise degree of risk was not stated, that failure is not

-52-
sufficient to have rendered the statements misleading." Hill v.

Gozani, 638 F.3d 40, 60 (1st Cir. 2011) (emphasis added).

While a statement of risk "does not insulate the speaker

from liability . . . neither does it create liability simply

because it does not disclose, at the level of detail the plaintiffs

request in retrospect, all of the factors that contribute to the

risk assessment." Id.; see also Backman, 910 F.2d at 16 (company

disclosure that product was being sold below cost need not say how

much below or that sales were below expectations). As we stated in

Hill, "where the level of risk is unknown and the existence of a

risk is disclosed, we shall hesitate to conclude that disclosure is

misleading merely because it did not state that the risk was

'serious.'" Hill, 638 F.3d at 60.

Our conclusion as to scienter does not change when we

consider plaintiff's insider trading claims. Cf. Waters Corp., 632

F.3d at 760-62; Biogen IDEC, 537 F.3d at 55-57. Insider trading

cannot establish scienter on its own, but rather can only do so in

combination with other evidence. BSC I, 523 F.3d at 92. No such

evidence exists here. While there were stock trades during this

period, they did not suggest there was trading based on insider

information. We agree with the district court that the nature and

circumstances of defendants' trades would not in any event support

an inference of scienter for the reasons the court identified. See

In re Boston Sci. Corp., 708 F. Supp. 2d at 126-27.

-53-
 Because plaintiff failed to produce evidence that would

support a reasonable inference that defendants acted with scienter,

the district court properly granted defendants' motion for summary

judgment on the Section 10(b) and Rule 10b–5 claims. Because

plaintiff's Section 20(a) claim was derivative of the Rule 10b–5

claim, it was properly dismissed as well. See 15 U.S.C. §§ 78t(a),

78t; Waters Corp., 632 F.3d at 762.

III.

In addition to appealing the district court's grant of

defendants' motion for summary judgment, plaintiff appeals the

court's denial of its motion to compel production of certain

documents that defendants claimed were privileged. Almost all of

these documents were generated in connection with an internal

company investigation of the July 2004 recalls that was instituted

in late August 2004 at the request of BSC's general counsel, Paul

Sandman, in response to inquiries by the SEC and DOJ. The district

court reviewed these documents in camera. Concluding that they

were protected by either or both attorney-client privilege and work

product privilege, it denied plaintiff's motion to compel

production.22

22
After these documents were reviewed in camera, they were
returned to defendants and did not become part of the record.
Plaintiff subsequently moved to have these documents added to the
record but treated as confidential for purposes of appellate review
of the court's denial of its motion to compel production. On
February 7, 2011, the district court granted plaintiff's motion.
The documents have been provided to us.

-54-
 When an appeal concerns "a claim of privilege, the

standard of review depends on the precise issue being litigated."

In re Keeper of Records (Grand Jury Subpoena Addressed to XYZ

Corp.), 348 F.3d 16, 21 (1st Cir. 2003). We review a district

court's evidentiary decisions for abuse of discretion, its

underlying findings of fact for clear error, and questions of law

de novo. Id. The fact that the district court did not provide a

detailed account of its reasoning does not change the standard.

Id. at 21-22.

Attorney-client privilege protects communications made in

confidence by a client and a client's employees to an attorney,

acting as an attorney, for the purpose of obtaining legal advice.23

See Upjohn Co. v. United States, 449 U.S. 383, 394-95 (1981). "By

safeguarding communications between client and lawyer, the

privilege encourages full and free discussion, better enabling the

client to conform his conduct to the dictates of the law and to

present legitimate claims and defenses if litigation ensues." In

re Keeper of Records, 348 F.3d at 22.

23
More specifically, eight criteria must be met: "(1) Where
legal advice of any kind is sought (2) from a professional legal
adviser in his capacity as such, (3) the communications relating to
that purpose, (4) made in confidence (5) by the client, (6) are at
his instance permanently protected (7) from disclosure by himself
or by the legal adviser, (8) except the protection be waived."
Cavallaro v. United States, 284 F.3d 236, 245 (1st Cir. 2002)
(quoting 8 J.H. Wigmore, Evidence § 2292, at 554 (McNaughton rev.
1961)).

-55-
 Plaintiff argues that accidentally disclosed documents

from BSC's internal "Recall Investigation Working Group" (RIWG)

reveal that its investigation was a post-mortem on the recall to

help the company avoid similar problems in the future and was

unrelated to the provision of legal advice. The fact that

communications between the RIWG and BSC's attorneys focused on ways

to prevent similar mistakes in the future does not, however, remove

them from attorney-client privilege. On the contrary, this type of

information was highly relevant to BSC's potential liability and

consequently directly related to providing legal advice to BSC's

management.24

Plaintiff also argues that defendants "funneled"

documents unrelated to legal advice through attorneys to "cloak[]

24
Plaintiff makes a similarly unavailing argument about
work product privilege. The work-product doctrine protects
documents prepared by an attorney if, "in light of the nature of
the document and the factual situation in the particular case, the
document can be fairly said to have been prepared or obtained
because of the prospect of litigation." Maine v. U.S. Dept. of
Interior, 298 F.3d 60, 68 (1st Cir. 2002) (quoting United States v.
Adlman, 134 F.3d 1194, 1202 (2d Cir. 1998)) (internal quotation
mark omitted); see also Fed. R. Civ. P. 26(b)(3). Plaintiff claims
that the accidentally disclosed documents reveal that they were
produced "not in anticipation of litigation, but for the purpose of
specifying future 'improvement opportunities.'" But an attorney's
work product does not lose protection merely because it is also
"intended to inform a business decision influenced by the prospects
of the litigation," Maine, 298 F.3d at 68 (quoting Adlman, 134 F.3d
at 1197-98), and the evidence is clear that the RIWG was instituted
because of the prospect of litigation. See also Adlman, 134 F.3d
at 1198-99 ("Nothing in the Rule states or suggests that documents
prepared 'in anticipation of litigation' with the purpose of
assisting in the making of a business decision do not fall within
its scope.").

-56-
the documents with a claim of privilege," citing accidentally

disclosed documents showing that RIWG members were instructed to

and did send written communication to each other through BSC's

general counsel and in-house counsel. In taking steps to protect

attorney-client privilege--such as telling the RIWG that all

written communication should go through BSC's attorneys and that

RIWG members should not directly write to each other--BSC's general

counsel did not manufacture privilege but rather protected it when

the communications were made for the purpose of providing requested

legal advice. Cf. Upjohn Co., 449 U.S. at 394-95 (employees were

given "explicit instructions" by company management to treat

communications as "highly confidential" by not sharing them with

others during an investigation directed by in-house counsel).

There is nothing in the documents that plaintiff

identifies or in the confidential documents that we have reviewed

that provides a basis for reversing the district court's denial of

plaintiff's motion to compel their production.

IV.

We affirm entry of judgment for defendants. Costs are

awarded to defendants.

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