A Look at the Congressional Investigations. . . .

Other readers asked the following questions, earlier this week:

If the ongoing Congressional probe was to unearth enough evidence, or a clear smoking gun, in relation to the alleged delay in the release of the Enhance trial data what would be the next step? As a non-American, I’m not familiar with the intricacies of your legal/parliamentary system. Would the main protagonists be subpoenaed to testify before a hearing? Could they be found ‘guilty‘ in such a forum, and if so, are there precedents for the punishments that would be forthcoming?

My answers:

Congressional committees may call hearings at any time. They usually ask the witness to appear voluntarily, but the Committees — both of the House, and the Senate — are able to issue subpoenas to enforce these “invitations“. This is almost never necessary.

The Schering executives may well be asked to testify before Congress, in advance of, and even without any “findings” — the House, and Senate, Committees act as investigatory bodies.

A bad day of testimony — or a bad report out of the Committee — would be a[nother] public relations disaster for Schering-Plough. So, they’ll likely cooperate (or, at least, offer the “appearance” of doing so).

The more important legal (as opposed to public relations) wrangling will likely take place in our courts — there are over 100 lawsuits pending, many of them seeking class action certification (to act on behalf of thousands of parties), and many of them alleging RICO (racketeering) violations, securities fraud, consumer fraud and ERISA (retirement fund) violations. . . .

It is too early to tell how these will all turn out, but do check the left-margin links, of the site, for summaries of each “kind” of lawsuit/complaint, as well as a run-down on where Sen. Grassley’s committee stands, and what Chairman Dingell’s House Committee has been up to of late, on this score. . . .

One outcome of the Congressional hearings could be new, additional legislation, to restrict or eliminate Medicare or Medicaid reimbursement for classes of drugs not shown — by scientific evidence — to be an improvement over existing, lower-cost, proven therapies. Or, the Congress could decide to add to the legislative burden on advertising drugs. . . . Or, it could legislate increased “Sunshine in grant, and gift” laws, related to Pharma-sponsorship of medical associations, or doctors, or teaching hospitals — for example. . . .

There are, in actuality, very few limits to the longer-term sorts of ways that these Congressional investigations could end badly for Schering-Plough.

And, another question, along these lines:

What will be the fine & disgorgement penalty?

Again, my answers:

Well, it will likely take a while to sort this out — though I don’t believe Schering has — as yet — acknowledged officially whether the SEC is investigating these matters, at all. [Personally, I strongly suspect the SEC is, based primarily on the volume, and time-of-dwell visits/hits originating from wthin the DC office of the SEC -- to this website. Wild!] That acknowlegment will likely come in the Form 10-Q for SGP, for the quarter ended March 31, 2008 — if it comes, at all.

So all of that (fines and disgorgement) — if it comes, at all — is several quarters away, yet, at the earliest. . . .

I’ll update this, from time to time, as developments warrant.

New Civil RICO suit — Alleging Stein e-mail Comments help prove Racketeering "Enterprise-Wide Pattern Activity". . . .

A new lawsuit has been docketed tonight, April 18, 2008, against Schering and Merck, alleging RICO pattern-activity violations, various state Consumer Anti-Fraud violations, Unjust Enrichment and common-law fraud. The most newsworthy innovation of this “Johnny-come-lately” suit, though, is that it picks up, almost word-for-word, much of what has been written surrounding Dr. James Stein’s e-mailed comments — especially those highlighting the inaccuracies in the after-the-fact “Draft Minutes” of that now-pivotal November 16, 2007 ENHANCE science panel meeting.

The above suit then adds these new allegations to the factual allegations already made in other suits — with the objective being to plead, and prove, civil RICO “enterprise-wide racketeering pattern” activities. This new federal suit is captioned “Plumbers and Pipefitters Local 572 Heatlh and Welfare Fund v. Merck & Co., Inc., Schering-Plough Corporation, and Merck/Schering-Plough Pharmaceuticals, et al.” (Case No. 2:08-cv-01894, Complaint filed April 17, 2008, US Dist. Ct. NJ).

I’ll likely have more to say about it — after I digest the rest of it — in passing, I would note that the plaintiff has also used various of the April 2008 letters and statements by Sen. Grassley in its original complaint. Clever!

As ever, more to come.

Live-Blogged Analysis of Merck’s First Quarter Earnings Conference Call

On Monday morning, before NYSE open, I’ll take a shot at live-blogging the first quarter earnings conference call of Merck & Co. — we should learn more about Vytorin and Zetia ’script-trends — and the status of any write-downs to be taken inside the Schering/Merck Joint Venture, as well as an update on the status of the pending Congressional, and governmental, investigations and all that litigation. I expect that CEO Richard T. Clark will be pretty free-wheeling, much as he was on the 2007 Year-End Conference call.

This link should anchor directly to a log-in for a Windows Media feed of the call on Monday.

It will likely go “live” — at Merck — around 8:30 am EDT.

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[UPDATED APRIL 21 @ 5:55 AM EDT]
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From Merck’s First Quarter 2008 Earnings Release:

“. . . .The $700 million decrease in equity income guidance [for the full year 2008] is solely attributable to the lower anticipated contribution from the Merck/Schering-Plough joint venture. . . .”.”

Editorial — Wow! So, take at least $700 million out of Schering’s 2008 expected profitability!

Schering’s share of the Joint Venture downturn may be greater than a 50/50 split, though, as Schering picks up more of the expenses from the venture, and — if certain levels of profitability are acheived, then Merck & Co. reimburses those expenses, fully. I’ll go see if this sized-down-turn will mean Yep — This means less reimbursement of expenses for Schering, and thus an increase Schering’s effective “share” of the downturn may turn out to be to more like $900 million in 2008.

Remember, the new 2008 Schering cost-cutting program will likely bring only $400 million “back into” Schering’s 2008 EPS (only 40 percent of the incremental $1 billion will be completed/realized in 2008).

So — I still see, at a mininum, a $500 million reduction to Schering’s profitability.

We’ll know much more on Wednesday, but on 1.62 billion share-equivalents outstanding, that will drop 2008 EPS, on a net-net basis, by at least $0.30 per share — which means the new low 2008 EPS estimate ought to be closer to $1.10, for all of 2008. At 14 times $1.10 2008 EPS, Schering is worth $15.40. And, a multiple of 14 is very generous, in a market where Merck can only muster 1 percent sales growth. At a 13 multiple, Schering is worth $14.30 per share, today.

Yikes.

More from the press release:

. . . . .Combined worldwide sales of ZETIA (ezetimibe) and VYTORIN (ezetimibe/simvastatin), as reported by the Merck/Schering-Plough joint venture, were $1.2 billion for the first quarter of 2008, representing a 6 percent increase compared with the first quarter of 2007. Worldwide sales of ZETIA, marketed as EZETROL outside the United States, were $582 million in the first quarter of 2008, an increase of 7 percent compared with the previous year’s first quarter. First-quarter 2008 worldwide sales of VYTORIN, marketed outside the United States as INEGY, were $651 million, an increase of 4 percent compared with the first quarter of 2007. The Company records the results from its interest in the Merck/Schering-Plough joint venture, which totaled $393 million in the first quarter of 2008 compared with $347 million in the same quarter a year earlier, in equity income from affiliates. . . .”

Remember three important things not stated above: (1) ACC didn’t happen until the last day of Q1 — so this is all pre-ACC – modest growth from Q1 2007 to Q1 2008 — but, overall, compared to Q4 2007 — the LAST quarter, sequentially, J/V sales are off 30 percent – $1.5 billion v. $1.2 billion. (2) And even that “modest growth” is quite a far fall from the “up 30 percent” expected at the end of 2007. And, (3) the Street expected sales of $6.1 billion from Merck for Q1 — Merck missed on the sales line this morning. It was only able to muster a 1 percent sales gain (even with the benefit of foreign currency “tailwinds“!), overall — or $5.82 billion, up 1 percent from $5.77 billion in the first three months of 2007.

Now to the truly ugly:

ENHANCE Study Litigation Update

“. . . .As previously disclosed, since December 2007, the Company and its joint-venture partner, Schering-Plough, have received several letters addressed to both companies from the House Committee on Energy and Commerce, its Subcommittee on Oversight and Investigations, and the Ranking Minority Member of the Senate Finance Committee, collectively seeking a combination of witness interviews, documents and information on a variety of issues related to the ENHANCE clinical trial, the sales and promotion of VYTORIN, as well as sales of stock by corporate officers. On Jan. 25, 2008, the companies and the Merck/Schering-Plough Partnership (MSP Partnership) each received two subpoenas from the New York State Attorney General’s Office seeking similar information and documents. Merck and Schering-Plough have also each received a letter from the Office of the Connecticut Attorney General dated Feb. 1, 2008 requesting documents related to the marketing and sales of VYTORIN and ZETIA and the timing of disclosures of the results of ENHANCE. Merck and Schering-Plough also recently received subpoenas dated April 4, 2008 from the Office of the New Jersey Attorney General seeking documents related to the ENHANCE trial and the sales and marketing of VYTORIN. The Company is cooperating with these investigations and is working with Schering-Plough to respond to the inquiries. In addition, since mid-January 2008, the Company has become aware of or been served with approximately 115 civil class action lawsuits alleging common law and state consumer fraud claims in connection with the MSP Partnership’s sales and promotion of VYTORIN and ZETIA. Certain of those lawsuits allege personal injuries and/or seek medical monitoring. Also, on April 3, 2008, a Merck shareholder filed a putative class action lawsuit alleging that Merck and its Chairman, President and Chief Executive Officer, Richard T. Clark, violated the federal securities laws. . . .”

115 Suits. Wow.

Now we wait for the call, and the analysts’ questioning of Clark. My sense of all of the conversations is that Merck is very lucky to be twice as large as Schering, at the revenue line, and to have the AstraZeneca partnership distribution to effectively fill the now-admitted “~ $700 million hole” that the ENHANCE results have recently-revealed, at Merck’s J/V equity income line.

Schering, plainly, will have no such luck — it has no other relationship on any remotely comparable scale, to back-fill with. As I type this, more than 55 percent of Schering’s 2008 profitability hinges on the Joint Venture with Merck. So, the question becomes, is that newly-announced $1.5 billion cost cutting going to be enough to fill Schering’s “~ $900 million hole” in 2008 profits? I — for one — strongly doubt it.

Next up, a live-blog of Schering’s Q1 call, on Wednesday.

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[UPDATED APRIL 21 @ 5:35 AM EDT]
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Now this is a Big Pharma to admire — and go long on — the ADRs are a good bet — Novartis’ Q1, per the Wall Street Journal:

“. . . .Novartis, based in Basel, said net profit attributable to shareholders rose to $2.32 billion in the three months ended March 31 from $2.17 billion in the year ago period. Net income from continuing operations — the company had sold its Gerber baby-food brand and its medical-nutrition business to Nestle SA last year — rose 10% to $2.31 billion, beating analysts’ estimates of a decline. . . .”

I do still see a decline for Schering-Plough today — based on what should be rather downbeat comments by Clark on the Merck & Co. Q1 conference call — about the Vytorin/Zetia Joint Veture.

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[END, UPDATED PORTION.]
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See here, below the line, on Monday, the 21^st, for insta-analysis:

To get things started, I have to point out how “spotty” some of the published reports get — with respect to understanding the impact of Vytorin on each company — Merck & Co., in contrast to Schering Plough. Merck is double the size of Schering, at the revenue line, and only one-third as levered, at the debt to equity line, yet otherwise “learned people” write goofy stuff, like this:

“. . . .The Street is looking for Merck to report EPS of 86 cents on $6.1 billion in revenue on Monday before the bell. Oddly, the estimates have hardly budged despite the routing of Vytorin, in which Merck shares revenue and earnings in a joint venture with Schering-Plough. Only a penny has come out of the first quarter’s estimate during the last three months, and only 10 cents out of the year. Either the market is greatly overreacting to the Vytorin blowup, or analysts are underestimating the ultimate impact as scripts dry up. . . .“

Or. . . . the market’s reaction is appropriate — for Merck — and the analysts are about right as to its impact on Schering. Two separate notions — two separate companies.

Don’t get me wrong, we all know Merck enjoys the Cholesterol Joint Venture profitability, but on the 2007 Merck year-end-earnings call, Richard T. Clark indicated that Merck then-expected to be able to fill “almost all” of the Vytorin J/V’s 2008 shortfall, at the net-income line, with other collaborative ventures, which are just now coming on-line.

So “the press” about how bad this all has been — is accurate, insofar as the stories refer to Schering’s future results of operations. And yet, at the same time, the relatively muted market-response, lately-seen in Merck’s stock price-performance, is appropriate for Merck’s much larger size, lower-leverage and higher earnings-quality/diversity — than Schering-Plough.

Said another way, then, Schering-Plough is likely very-fully-valued at anything over $15, unless Merck unambiguously signals that it has seen only scant fall-off in scripts for Vytorin/Zetia, on Monday morning. And that would seem very-nearly-impossible, given that IMS has consistently reported between 28 percent and 39 percent daily, and weekly, Vytorin/Zetia declines (in year over year comparables), post the March 30, 2008 ACC Panel Discussion of the ENHANCE results.

It will be a very rocky NYSE open, indeed, for Schering — if Clark indicates that the J/V scripts are off more — by Merck’s internal calculations — than the third-party IMS data has thus far revealed. Schering would be very lucky to stay above $14.50 territory, should that be what Clark has to say.

I would hope that all of the above becomes more widely-understood, over on Wall, at Broad Sreet, after Monday morning. We shall see.

An Emerging Legal Difficulty — for ERISA Class Action Suits — like the Schering ones. . . .

[UPDATED 5.4.08: -- The first ERISA suit has been filed, employing my newly-revamped theory, a theory to avoid Judge Easterbrook's cogent musings, below -- cool! It was just filed against Merck, in relation to many of the subjects covered by this blog.]

A little while ago, I said I’d summarize the ERISA suits filed against Schering-Plough’s Plan Fiduciaries, toward the end of this post. In the mean time, a very well-thought-of federal judge, on the Seventh Circuit — Judge Frank Easterbrook — has authored, and now published, an opinion that tends to cast doubt on of the viability of most ERISA suits of the kind now being brought against Schering.

Now, to be fair, what Judge Frank Easterbrook recently wrote (in PDF format) was, strictly speaking, obiter dicta (that is, not essential to his disposing of the case before him — think of it more of an editorial comment, if you will), and yet, because he is so-well-regarded, it may be the way “the path of the law” will ultimately evolve. I’ll get to that in a minute; first a summary of the Schering ERISA suits:

Some of Schering’s Puerto Rico employees and some of its U.S. employees (as well as current Schering retirees living in each place) have sued (in addition to Schering itself) the so-called “Plan Fiduciaries” that oversee Schering’s retirement plans, alleging in essence that the plans should not have permitted employees and retirees to invest in Schering stock during the period of time from April 1, 2006, through March 31, 2008. The central notion here is that Schering executives — including, presumably, the Plan Fiduciaries (as it is not uncommon to have current financial officers of Schering — the public company — serve also as ERISA “plan fiduciaries”, and that would seem to have been true in Schering’s case, based on the ERISA suits I’ve reviewed, thus far) should have prevented the employees and retirees from investing in Schering stock during the period that the ENHANCE study results remained undisclosed to the investing public. It is doubtless true that these pension-plan investors have suffered much the same losses as the general In Re Schering-Plough/ENHANCE Securities Litigation class action plaintiffs have alleged.

“. . . .Plaintiffs are participants in the retirement plan for [Schering-Plough's] employees. Each participant exercises some control over the investments in an individual account in this defined-contribution plan, though the plan and its trustees may limit what assets an account may contain and when trading may occur. In this suit under the Employee Retirement Income Security Act, plaintiffs contend that [Schering-Plough] and some of the plan’s trustees have violated §409(a), 29 U.S.C. §1109(a), in their capacity as fiduciaries. The defendants’ failing, according to the complaint, is that they allowed participants to invest in [Schering’s] stock, despite knowing that it was overpriced in the market and hence a bad deal. . . .

In order to pursue a claim under §409(a) of ERISA, the participants first need a private right of action. They invoke §502(a)(2) of ERISA, 29 U.S.C. §1132(a)(2), which says that suit may be brought “by the Secretary [of Labor], or by a participant, beneficiary or fiduciary for appropriate relief under section 1109 of this title”. . . .

LaRue v. DeWolff, Boberg & Associates, Inc., 128 S. Ct. 1020 (2008), holds that §502(a)(2), and thus §409(a), may be used by the beneficiary of a defined-contribution account that suffers a loss, even though other participants are uninjured by the acts said to constitute a breach of fiduciary duty. . . .”

“What was Judge Easterbrook’s boggle?“, then, you might ask. . . . Well, he has quite-cogently pointed out, I think, that expecting an ERISA Plan Fiduciary who is also a corporate “insider” at the Plan’s public-parent company (Schering-Plough), in the meaning of the federal securities laws and regulations, to use his or her “inside information” (the ENHANCE study difficulties, pre-disclosure, before January 14, 2008) to benefit only the ERISA Plan participants, over all other investors (by warning them to “get out” of Schering stock, or keeping them from buying it, in the first place) would — itself, plainly be a violation of the SEC’s insider trading rules:

. . . .Corporate insiders cannot trade on their own behalf using material private information, good or bad. See generally United States v. O’Hagan, 521 U.S. 642 (1997); Dirks v. SEC, 463 U.S. 646 (1983). In Harzewski we raised the question whether they may act on such information in their role as fiduciaries for pension plans. 489 F.3d at 808. That question remains unanswered but must be resolved in plaintiffs’ favor if they are to prevail.. . . .

So, Judge Easterbrook reasons, it would be a “steep hill” for ERISA plaintiffs to climb, to be able to prove that the federal ERISA scheme expects that corporate executives will knowingly violate federal SEC regulations, in order to fully-discharge their federal fiduciary duties to ERISA plan participants. That, he reasons, cannot be a result the law expects. And, he is right, I think.

What remains unwritten in this recent obiter dicta — from Easterbrook’s opinion — is that, perhaps, for exactly this reason, corporate “insiders” should not serve as ERISA Plan fiduciaries, in the first place – where — as here — the Plan allows an investment in the securities of the public-parent company.

So, it seems (to me, at least!), that the Schering ERISA suits should be recast, then, to allege that (to the extent a future court finds Judge Easterbrook’s obiter dicta persuasive, and so holds, in a case that presents this issue, squarely) the design of the Plan was “fatally-flawed by inherent conflicts of interest” — and that the public-parent ought to answer in damages for not having fully-disclosed and explained this inherent conflict of interest — a conflict created by the structure, itself — when the parent named insiders as ERISA Plan Fiduciaries.

That may well turn out to be the ERISA plaintiffs’ class-action bar’s counter-punch to Judge Easterbrook’s otherwise very well-reasoned editorial comment.

As ever, we shall see. And so, if you came here looking for a Schering Plough ERISA class action suit summary, you left with an added bonus — a “path of the law” musing, gratis — to boot!

Lead Plaintiffs; Counsel Appointed Today in Securities Actions

U.S. District Court Judge Dennis Cavanaugh just entered an order appointing the so called “Public Pension Funds” as Lead Plaintiffs in the securities actions, which will be henceforth known as “In Re Schering Plough Corporation/ENHANCE Litigation (Case No. 2:08-397, Lead Case in the Securities Class Action)“.

This means that very significantly-interested, sophisticated senior executives of a series of institutional investors will make the decisions that guide this litigation, on behalf of all the various investor-plaintiffs in this putative federal securities law class-action. That is not particularly good news for Schering-Plough, and its counsel. As ever, click the images, above and below, to enlarge them:

A Look at the Congressional Investigations. . . .

Other readers asked the following questions, earlier this week:

If the ongoing Congressional probe was to unearth enough evidence, or a clear smoking gun, in relation to the alleged delay in the release of the Enhance trial data what would be the next step? As a non-American, I’m not familiar with the intricacies of your legal/parliamentary system. Would the main protagonists be subpoenaed to testify before a hearing? Could they be found ‘guilty‘ in such a forum, and if so, are there precedents for the punishments that would be forthcoming?

My answers:

Congressional committees may call hearings at any time. They usually ask the witness to appear voluntarily, but the Committees — both of the House, and the Senate — are able to issue subpoenas to enforce these “invitations“. This is almost never necessary.

The Schering executives may well be asked to testify before Congress, in advance of, and even without any “findings” — the House, and Senate, Committees act as investigatory bodies.

A bad day of testimony — or a bad report out of the Committee — would be a[nother] public relations disaster for Schering-Plough. So, they’ll likely cooperate (or, at least, offer the “appearance” of doing so).

The more important legal (as opposed to public relations) wrangling will likely take place in our courts — there are over 100 lawsuits pending, many of them seeking class action certification (to act on behalf of thousands of parties), and many of them alleging RICO (racketeering) violations, securities fraud, consumer fraud and ERISA (retirement fund) violations. . . .

It is too early to tell how these will all turn out, but do check the left-margin links, of the site, for summaries of each “kind” of lawsuit/complaint, as well as a run-down on where Sen. Grassley’s committee stands, and what Chairman Dingell’s House Committee has been up to of late, on this score. . . .

One outcome of the Congressional hearings could be new, additional legislation, to restrict or eliminate Medicare or Medicaid reimbursement for classes of drugs not shown — by scientific evidence — to be an improvement over existing, lower-cost, proven therapies. Or, the Congress could decide to add to the legislative burden on advertising drugs. . . . Or, it could legislate increased “Sunshine in grant, and gift” laws, related to Pharma-sponsorship of medical associations, or doctors, or teaching hospitals — for example. . . .

There are, in actuality, very few limits to the longer-term sorts of ways that these Congressional investigations could end badly for Schering-Plough.

And, another question, along these lines:

What will be the fine & disgorgement penalty?

Again, my answers:

Well, it will likely take a while to sort this out — though I don’t believe Schering has — as yet — acknowledged officially whether the SEC is investigating these matters, at all. [Personally, I strongly suspect the SEC is, based primarily on the volume, and time-of-dwell visits/hits originating from wthin the DC office of the SEC -- to this website. Wild!] That acknowlegment will likely come in the Form 10-Q for SGP, for the quarter ended March 31, 2008 — if it comes, at all.

So all of that (fines and disgorgement) — if it comes, at all — is several quarters away, yet, at the earliest. . . .

I’ll update this, from time to time, as developments warrant.

An Emerging Legal Difficulty — for ERISA Class Action Suits — like the Schering ones. . . .

[UPDATED 5.4.08: -- The first ERISA suit has been filed, employing my newly-revamped theory, a theory to avoid Judge Easterbrook's cogent musings, below -- cool! It was just filed against Merck, in relation to many of the subjects covered by this blog.]

A little while ago, I said I’d summarize the ERISA suits filed against Schering-Plough’s Plan Fiduciaries, toward the end of this post. In the mean time, a very well-thought-of federal judge, on the Seventh Circuit — Judge Frank Easterbrook — has authored, and now published, an opinion that tends to cast doubt on of the viability of most ERISA suits of the kind now being brought against Schering.

Now, to be fair, what Judge Frank Easterbrook recently wrote (in PDF format) was, strictly speaking, obiter dicta (that is, not essential to his disposing of the case before him — think of it more of an editorial comment, if you will), and yet, because he is so-well-regarded, it may be the way “the path of the law” will ultimately evolve. I’ll get to that in a minute; first a summary of the Schering ERISA suits:

Some of Schering’s Puerto Rico employees and some of its U.S. employees (as well as current Schering retirees living in each place) have sued (in addition to Schering itself) the so-called “Plan Fiduciaries” that oversee Schering’s retirement plans, alleging in essence that the plans should not have permitted employees and retirees to invest in Schering stock during the period of time from April 1, 2006, through March 31, 2008. The central notion here is that Schering executives — including, presumably, the Plan Fiduciaries (as it is not uncommon to have current financial officers of Schering — the public company — serve also as ERISA “plan fiduciaries”, and that would seem to have been true in Schering’s case, based on the ERISA suits I’ve reviewed, thus far) should have prevented the employees and retirees from investing in Schering stock during the period that the ENHANCE study results remained undisclosed to the investing public. It is doubtless true that these pension-plan investors have suffered much the same losses as the general In Re Schering-Plough/ENHANCE Securities Litigation class action plaintiffs have alleged.

“. . . .Plaintiffs are participants in the retirement plan for [Schering-Plough's] employees. Each participant exercises some control over the investments in an individual account in this defined-contribution plan, though the plan and its trustees may limit what assets an account may contain and when trading may occur. In this suit under the Employee Retirement Income Security Act, plaintiffs contend that [Schering-Plough] and some of the plan’s trustees have violated §409(a), 29 U.S.C. §1109(a), in their capacity as fiduciaries. The defendants’ failing, according to the complaint, is that they allowed participants to invest in [Schering’s] stock, despite knowing that it was overpriced in the market and hence a bad deal. . . .

In order to pursue a claim under §409(a) of ERISA, the participants first need a private right of action. They invoke §502(a)(2) of ERISA, 29 U.S.C. §1132(a)(2), which says that suit may be brought “by the Secretary [of Labor], or by a participant, beneficiary or fiduciary for appropriate relief under section 1109 of this title”. . . .

LaRue v. DeWolff, Boberg & Associates, Inc., 128 S. Ct. 1020 (2008), holds that §502(a)(2), and thus §409(a), may be used by the beneficiary of a defined-contribution account that suffers a loss, even though other participants are uninjured by the acts said to constitute a breach of fiduciary duty. . . .”

“What was Judge Easterbrook’s boggle?“, then, you might ask. . . . Well, he has quite-cogently pointed out, I think, that expecting an ERISA Plan Fiduciary who is also a corporate “insider” at the Plan’s public-parent company (Schering-Plough), in the meaning of the federal securities laws and regulations, to use his or her “inside information” (the ENHANCE study difficulties, pre-disclosure, before January 14, 2008) to benefit only the ERISA Plan participants, over all other investors (by warning them to “get out” of Schering stock, or keeping them from buying it, in the first place) would — itself, plainly be a violation of the SEC’s insider trading rules:

. . . .Corporate insiders cannot trade on their own behalf using material private information, good or bad. See generally United States v. O’Hagan, 521 U.S. 642 (1997); Dirks v. SEC, 463 U.S. 646 (1983). In Harzewski we raised the question whether they may act on such information in their role as fiduciaries for pension plans. 489 F.3d at 808. That question remains unanswered but must be resolved in plaintiffs’ favor if they are to prevail.. . . .

So, Judge Easterbrook reasons, it would be a “steep hill” for ERISA plaintiffs to climb, to be able to prove that the federal ERISA scheme expects that corporate executives will knowingly violate federal SEC regulations, in order to fully-discharge their federal fiduciary duties to ERISA plan participants. That, he reasons, cannot be a result the law expects. And, he is right, I think.

What remains unwritten in this recent obiter dicta — from Easterbrook’s opinion — is that, perhaps, for exactly this reason, corporate “insiders” should not serve as ERISA Plan fiduciaries, in the first place – where — as here — the Plan allows an investment in the securities of the public-parent company.

So, it seems (to me, at least!), that the Schering ERISA suits should be recast, then, to allege that (to the extent a future court finds Judge Easterbrook’s obiter dicta persuasive, and so holds, in a case that presents this issue, squarely) the design of the Plan was “fatally-flawed by inherent conflicts of interest” — and that the public-parent ought to answer in damages for not having fully-disclosed and explained this inherent conflict of interest — a conflict created by the structure, itself — when the parent named insiders as ERISA Plan Fiduciaries.

That may well turn out to be the ERISA plaintiffs’ class-action bar’s counter-punch to Judge Easterbrook’s otherwise very well-reasoned editorial comment.

As ever, we shall see. And so, if you came here looking for a Schering Plough ERISA class action suit summary, you left with an added bonus — a “path of the law” musing, gratis — to boot!

Lead Plaintiffs; Counsel Appointed Today in Securities Actions

U.S. District Court Judge Dennis Cavanaugh just entered an order appointing the so called “Public Pension Funds” as Lead Plaintiffs in the securities actions, which will be henceforth known as “In Re Schering Plough Corporation/ENHANCE Litigation (Case No. 2:08-397, Lead Case in the Securities Class Action)“.

This means that very significantly-interested, sophisticated senior executives of a series of institutional investors will make the decisions that guide this litigation, on behalf of all the various investor-plaintiffs in this putative federal securities law class-action. That is not particularly good news for Schering-Plough, and its counsel. As ever, click the images, above and below, to enlarge them:

A Look at the Congressional Investigations. . . .

Other readers asked the following questions, earlier this week:

If the ongoing Congressional probe was to unearth enough evidence, or a clear smoking gun, in relation to the alleged delay in the release of the Enhance trial data what would be the next step? As a non-American, I’m not familiar with the intricacies of your legal/parliamentary system. Would the main protagonists be subpoenaed to testify before a hearing? Could they be found ‘guilty‘ in such a forum, and if so, are there precedents for the punishments that would be forthcoming?

My answers:

Congressional committees may call hearings at any time. They usually ask the witness to appear voluntarily, but the Committees — both of the House, and the Senate — are able to issue subpoenas to enforce these “invitations“. This is almost never necessary.

The Schering executives may well be asked to testify before Congress, in advance of, and even without any “findings” — the House, and Senate, Committees act as investigatory bodies.

A bad day of testimony — or a bad report out of the Committee — would be a[nother] public relations disaster for Schering-Plough. So, they’ll likely cooperate (or, at least, offer the “appearance” of doing so).

The more important legal (as opposed to public relations) wrangling will likely take place in our courts — there are over 100 lawsuits pending, many of them seeking class action certification (to act on behalf of thousands of parties), and many of them alleging RICO (racketeering) violations, securities fraud, consumer fraud and ERISA (retirement fund) violations. . . .

It is too early to tell how these will all turn out, but do check the left-margin links, of the site, for summaries of each “kind” of lawsuit/complaint, as well as a run-down on where Sen. Grassley’s committee stands, and what Chairman Dingell’s House Committee has been up to of late, on this score. . . .

One outcome of the Congressional hearings could be new, additional legislation, to restrict or eliminate Medicare or Medicaid reimbursement for classes of drugs not shown — by scientific evidence — to be an improvement over existing, lower-cost, proven therapies. Or, the Congress could decide to add to the legislative burden on advertising drugs. . . . Or, it could legislate increased “Sunshine in grant, and gift” laws, related to Pharma-sponsorship of medical associations, or doctors, or teaching hospitals — for example. . . .

There are, in actuality, very few limits to the longer-term sorts of ways that these Congressional investigations could end badly for Schering-Plough.

And, another question, along these lines:

What will be the fine & disgorgement penalty?

Again, my answers:

Well, it will likely take a while to sort this out — though I don’t believe Schering has — as yet — acknowledged officially whether the SEC is investigating these matters, at all. [Personally, I strongly suspect the SEC is, based primarily on the volume, and time-of-dwell visits/hits originating from wthin the DC office of the SEC -- to this website. Wild!] That acknowlegment will likely come in the Form 10-Q for SGP, for the quarter ended March 31, 2008 — if it comes, at all.

So all of that (fines and disgorgement) — if it comes, at all — is several quarters away, yet, at the earliest. . . .

I’ll update this, from time to time, as developments warrant.

An Emerging Legal Difficulty — for ERISA Class Action Suits — like the Schering ones. . . .

[UPDATED 5.4.08: -- The first ERISA suit has been filed, employing my newly-revamped theory, a theory to avoid Judge Easterbrook's cogent musings, below -- cool! It was just filed against Merck, in relation to many of the subjects covered by this blog.]

A little while ago, I said I’d summarize the ERISA suits filed against Schering-Plough’s Plan Fiduciaries, toward the end of this post. In the mean time, a very well-thought-of federal judge, on the Seventh Circuit — Judge Frank Easterbrook — has authored, and now published, an opinion that tends to cast doubt on of the viability of most ERISA suits of the kind now being brought against Schering.

Now, to be fair, what Judge Frank Easterbrook recently wrote (in PDF format) was, strictly speaking, obiter dicta (that is, not essential to his disposing of the case before him — think of it more of an editorial comment, if you will), and yet, because he is so-well-regarded, it may be the way “the path of the law” will ultimately evolve. I’ll get to that in a minute; first a summary of the Schering ERISA suits:

Some of Schering’s Puerto Rico employees and some of its U.S. employees (as well as current Schering retirees living in each place) have sued (in addition to Schering itself) the so-called “Plan Fiduciaries” that oversee Schering’s retirement plans, alleging in essence that the plans should not have permitted employees and retirees to invest in Schering stock during the period of time from April 1, 2006, through March 31, 2008. The central notion here is that Schering executives — including, presumably, the Plan Fiduciaries (as it is not uncommon to have current financial officers of Schering — the public company — serve also as ERISA “plan fiduciaries”, and that would seem to have been true in Schering’s case, based on the ERISA suits I’ve reviewed, thus far) should have prevented the employees and retirees from investing in Schering stock during the period that the ENHANCE study results remained undisclosed to the investing public. It is doubtless true that these pension-plan investors have suffered much the same losses as the general In Re Schering-Plough/ENHANCE Securities Litigation class action plaintiffs have alleged.

“. . . .Plaintiffs are participants in the retirement plan for [Schering-Plough's] employees. Each participant exercises some control over the investments in an individual account in this defined-contribution plan, though the plan and its trustees may limit what assets an account may contain and when trading may occur. In this suit under the Employee Retirement Income Security Act, plaintiffs contend that [Schering-Plough] and some of the plan’s trustees have violated §409(a), 29 U.S.C. §1109(a), in their capacity as fiduciaries. The defendants’ failing, according to the complaint, is that they allowed participants to invest in [Schering’s] stock, despite knowing that it was overpriced in the market and hence a bad deal. . . .

In order to pursue a claim under §409(a) of ERISA, the participants first need a private right of action. They invoke §502(a)(2) of ERISA, 29 U.S.C. §1132(a)(2), which says that suit may be brought “by the Secretary [of Labor], or by a participant, beneficiary or fiduciary for appropriate relief under section 1109 of this title”. . . .

LaRue v. DeWolff, Boberg & Associates, Inc., 128 S. Ct. 1020 (2008), holds that §502(a)(2), and thus §409(a), may be used by the beneficiary of a defined-contribution account that suffers a loss, even though other participants are uninjured by the acts said to constitute a breach of fiduciary duty. . . .”

“What was Judge Easterbrook’s boggle?“, then, you might ask. . . . Well, he has quite-cogently pointed out, I think, that expecting an ERISA Plan Fiduciary who is also a corporate “insider” at the Plan’s public-parent company (Schering-Plough), in the meaning of the federal securities laws and regulations, to use his or her “inside information” (the ENHANCE study difficulties, pre-disclosure, before January 14, 2008) to benefit only the ERISA Plan participants, over all other investors (by warning them to “get out” of Schering stock, or keeping them from buying it, in the first place) would — itself, plainly be a violation of the SEC’s insider trading rules:

. . . .Corporate insiders cannot trade on their own behalf using material private information, good or bad. See generally United States v. O’Hagan, 521 U.S. 642 (1997); Dirks v. SEC, 463 U.S. 646 (1983). In Harzewski we raised the question whether they may act on such information in their role as fiduciaries for pension plans. 489 F.3d at 808. That question remains unanswered but must be resolved in plaintiffs’ favor if they are to prevail.. . . .

So, Judge Easterbrook reasons, it would be a “steep hill” for ERISA plaintiffs to climb, to be able to prove that the federal ERISA scheme expects that corporate executives will knowingly violate federal SEC regulations, in order to fully-discharge their federal fiduciary duties to ERISA plan participants. That, he reasons, cannot be a result the law expects. And, he is right, I think.

What remains unwritten in this recent obiter dicta — from Easterbrook’s opinion — is that, perhaps, for exactly this reason, corporate “insiders” should not serve as ERISA Plan fiduciaries, in the first place – where — as here — the Plan allows an investment in the securities of the public-parent company.

So, it seems (to me, at least!), that the Schering ERISA suits should be recast, then, to allege that (to the extent a future court finds Judge Easterbrook’s obiter dicta persuasive, and so holds, in a case that presents this issue, squarely) the design of the Plan was “fatally-flawed by inherent conflicts of interest” — and that the public-parent ought to answer in damages for not having fully-disclosed and explained this inherent conflict of interest — a conflict created by the structure, itself — when the parent named insiders as ERISA Plan Fiduciaries.

That may well turn out to be the ERISA plaintiffs’ class-action bar’s counter-punch to Judge Easterbrook’s otherwise very well-reasoned editorial comment.

As ever, we shall see. And so, if you came here looking for a Schering Plough ERISA class action suit summary, you left with an added bonus — a “path of the law” musing, gratis — to boot!