To Sue or Not To Sue

On Friday, May 11th, 2012 it was reported in various media outlets that multiple law firms had announced that a law suit seeking class action status had been filed in the U.S. District Court for the Southern District of Florida on behalf of purchasers of Common Stock of Mako Surgical between January 9th, 2012 and May 7th, 2012.

The Complaint alleges that Mako Surgical and certain Officers and Directors had violated the federal securities laws.  Specifically, the Complaint alleges that Mako had failed to disclose adverse facts, including that the Company was poised to suffer a wider first quarter loss, that utilization rates were dropping, that the Company outlook lacked a reasonable basis, and that the defendants lack a reasonable basis for their claims regarding the Company's outlook.  So this got us thinking and debating the financial issues surrounding multiple companies that exist in spine, and the potential legal action that investors could take regardless whether these spine companies are publicly traded or not.

We have witnessed the demise of multiple companies, Vertebron (RIP), Impliant (IP acquired), Archus (Acquired), Spinal Concepts (Acquired) Innovative Spine Technologies (RIP), Applied Spine Technologies (IP acquired), Disc Dynamics (RIP), Disc Motion Technologies (MIA), Hydrocision (Acquired), Cardo-Medical, and REO Spine (A blast from the past), for various reasons.  Some for mismanagement of funds, some for plain stupidity, and some for plain old greed. So the question that we posed during our round table discussion was whether or not current investors in some of the smaller spine companies, that are hanging on a thread or show no growth, have legal recourse if some of these ventures have failed to achieve forecasted milestones?  How does one take control of your investment?  A hostile takeover?  Litigation? What happens if the BOD is stacked with Cousins, Brothers and Sisters? What if the company is spiraling out of control?

Does it behoove an investor to access audited financials, or should the investors be able to hire an independent auditor acting on behalf of their interest?  What happens if a CEO and CFO are "doctoring" the books by transferring money from one company to another company without disclosing these facts, is this grounds for litigation. Could these individuals be perpetrating fraud? What happens when a company claims that it is doing better than it really is, utilizing this information to create an atmosphere of growth when in fact a company has no growth or has lost revenue?  The beauty of the U.S. legal system is that every company or individual has a right to a fair trial, but can some of these companies sustain the financial burden that litigation would present?   

Granted there are companies out there that have raised tens to hundreds of millions of dollars and probably generate revenue that leaves investors shaking their heads.  If you were an investor in a privately held company wouldn't you want to know how your money is being managed?  What the Mako scenario tells us is that investors are unlikely to sit back and be duped by the company or the underwriters.  Granted Mako will have its day in court, but could this lawsuit be setting a new precedent across the board in the device industry?  TSB wants to know what our readers think?