Barrack, Rodos & Bacine served as sole Lead Counsel in the securities class action against Mallinckrodt PLC, representing the State Teachers Retirement System of Ohio (Ohio STRS) , which served as the Court-appointed Lead Plaintiff. After five years of litigation, the parties settled the case for $65.75 million, one of the largest settlements in a securities action ever filed in the United States District Court for the District of Columbia.
Background
Mallinckrodt is a pharmaceutical company. This case began with Mallinckrodt’s acquisition of Questcor Pharmaceuticals in August 2014. As part of that acquisition, Mallinckrodt acquired ownership of a drug called H.P. Acthar Gel (“Acthar”), which had been developed in 1952 and is used for the treatment of infantile spasms among other indications. At the time of the Questcor acquisition, Acthar was the only therapeutic adrenocorticotropic hormone (ACTH) drug approved by the FDA. ACTH is an adrenal hormone made in the pituitary gland that acts on the adrenal cortex to stimulate the production of steroid hormones. Questcor and Mallinckrodt’s monopoly on ACTH allowed them to increase the cost of Acthar from $40 per vial in 2001 to $34,000 per vial in 2017, an 850,000% increase. Along with this seemingly immoral price increase concerning a drug that helps infants suffering from spasms, Questcor had acquired the rights to a drug called Synacthen in 2013, which was a potential competitor drug to Acthar, but after the Questcor acquisition, Mallinckrodt refused to develop Synacthen for any medical treatment that overlapped with Acthar in order to preserve its monopoly. Moreover and specific to the securities violations alleged in this lawsuit, the Lead Plaintiff alleged that Mallinckrodt and its top executives affirmatively lied or withheld the truth to investors regarding (1) Acthar’s reliance on Medicare and Medicaid; (2) an FTC investigation into whether Mallinckrodt and its subsidiary Questcor engaged in unfair monopolistic practices; and (3) the long-term prospects of Acthar sales.
The Prosecution of the Case
The class action against Mallinckrodt was initially filed in January 2017 after multiple stock drops associated with revelations of information relating to the first two claims described above. In March 2018, the Court appointed Ohio STRS as the Lead Plaintiff in the case and appointed BR&B as Lead Counsel. On May 18, 2018, we filed the Consolidated Amended Complaint on behalf of purchasers of Mallinckrodt common stock for the period from July 14, 2014 through November 6, 2017, who suffered damages as a result of their share purchases. The Amended Complaint named as defendants Mallinckrodt; Mark C. Trudeau, Mallinckrodt’s CEO; Matthew K. Harbaugh, Mallinckrodt’s former CFO; and Mallinckrodt’s COO who was thereafter dismissed voluntarily from the case. The Amended Complaint was the product of an extensive and thorough investigation that included a review of public filings, articles, transcripts of public hearings, analyst reports, and rating agency reports, as well as interviews with certain persons with relevant information. The 109-page, 240-paragraph Amended Complaint alleged that defendants made false and misleading statements and failed to disclose material adverse facts about the exposure of Acthar to Medicare and Medicaid payments, a pending investigation of the FTC, and the long-term sustainability of the Company’s revenues from Acthar. Lead Plaintiff asserted claims grounded in fraud based on alleged materially false and misleading statements made either intentionally or recklessly against the company and the individual defendants for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934.
On July 17, 2018, defendants moved to dismiss the Amended Complaint. On August 30, 2018, Lead Plaintiff filed its 67-page opposition brief that responded to the dismissal motions. After the defendants filed their reply submissions, the court held a lengthy oral argument on November 19, 2018 on cefendants’ motions to dismiss. Defendants thereafter filed a notice of supplemental authority to which Lead Plaintiff responded on December 3, 2018.
On July 30, 2019, the court issued a Memorandum Opinion and Order denying defendants’ motions to dismiss in part and granting them in part, which was reported as Shenk v. Mallinckrodt plc, 2019 WL 3491485 (D.D.C. July 30, 2019). In the Memorandum Opinion and Order, the court dismissed the claims based on alleged misstatements before October 6, 2015, and one claim based on an alleged misrepresentation made on May 19, 2017, and denied the motions to dismiss for the remainder of the claims. The court sustained claims regarding the following alleged misstatements: (1) an October 6, 2015 statement by the company’s CEO, defendant Mark Trudeau, concerning the portion of Acthar sales attributable to Medicare and Medicaid; (2) a statement in the company’s Form 10-K issued on November 29, 2016 relating to a Federal Trade Commission investigation; and (3) a series of statements in 2017 concerning Acthar sales and prospects, including financial and Acthar-related guidance to the market and insurer acceptance of Acthar claims. See Shenk, 2019 WL 3491485 at *11-13, *16-20, *23-26. The court further sustained the Amended Complaint’s claim that when the alleged corrective disclosures were made, the price of Mallinckrodt’s stock fell, which is the basis of the damages that were asserted on behalf of the putative class. The impact of the Memorandum Opinion and Order was to limit the time period of Lead Plaintiff’s claims to a period from October 6, 2015 through November 6, 2017, inclusive (“Class Period”). The defendants filed answers to the Amended Complaint on September 23, 2019. Fact discovery commenced in September 2019. Over the next nine months, the parties produced and exchanged over 250,000 pages of documents.
On July 29, 2020, Lead Plaintiff moved for class certification. Lead Plaintiff moved to certify a class of investors consisting of all persons or entities, other than defendants and their affiliates, who purchased or otherwise acquired Mallinckrodt common stock during the Class Period. Lead Plaintiff sought to have STRS Ohio and the Teamsters Local 677 Health Service and Insurance Plan, which had also purchased Mallinckrodt common stock during the Class Period, certified as representatives of the class. In support of the motion for class certification, we submitted a 34-page memorandum of law, and a Declaration of Counsel that provided factual support and exhibits, including a 48-page Expert Report of Michael L. Hartzmark, Ph.D. that itself had nearly 300 pages of exhibits.
The Settlement Achieved During Mallinckrodt’s Bankruptcy
Following discussions in July and August 2020, Lead Plaintiff and defendants agreed to pursue mediation to try to reach a global resolution of the Action before the Honorable Layn Phillips (Ret.), a former federal district court judge in the United States District Court for the Western District of Oklahoma . On September 1, 2020, the court entered a stay of the Action pending the conclusion of the Mediation based on a joint motion of the Parties. Counsel for Lead Plaintiff and defendants began to establish a framework for the mediation.
On October 12, 2020, while preparations for the mediation were ongoing, Mallinckrodt filed a Notice of Suggestion of Pendency of Bankruptcy and Automatic Stay of Proceedings in the Action stating that it and its affiliated debtors had commenced bankruptcy cases on the same date under chapter 11 of title 11 of the United States Code, 11 U.S.C. §§ 101-1532 et seq. in the United States Bankruptcy Court in the District of Delaware, jointly administered for procedural purposes only under the caption, In re Mallinckrodt plc, Case No. 20-12522. Through the Notice of Bankruptcy, Mallinckrodt informed the court that the action was automatically stayed with regard to Mallinckrodt pursuant to section 362(a) of the Bankruptcy Code. The court then entered a minute order on October 13, 2020, staying the entire action. On November 15, 2020, the parties filed a stipulation in the bankruptcy action requesting that the Bankruptcy Court modify the automatic stay and the additional requested stay regarding the Individual defendants solely to allow the parties to participate in the mediation. On November 16, 2020, the Bankruptcy Court entered an order approving that stipulation.
In advance of the mediation, the parties agreed to exchange additional documents, and prepared and exchanged written submissions to the mediator in an effort to inform the mediator of the relative positions of the parties. The parties conducted two rounds of simultaneous submissions as part of the mediation, submitting and exchanging opening statements on November 11, 2020 (which collectively appended over 150 exhibits) and responding submissions on November 25, 2020 (which collectively appended an additional 31 exhibits). The mediation was conducted remotely by Zoom over two separate sessions. The parties and relevant Directors’ and Officers’ insurers (“D&O Insurers”) that had issued policies pertaining to the claims asserted in the action, with counsel, attended both sessions in full. The first mediation session, which was held on December 7, 2020 from 9:00 a.m. to 7:00 p.m., did not end in an agreement to settle the action. The second mediation session was scheduled for January 12, 2021. Between these two dates, the parties and D&O Insurers engaged in numerous additional discussions with the mMediator in an attempt to narrow the gap between them in advance of the second mediation session.
On January 12, 2021, during the second mediation session, which lasted from 9:00 a.m. to 5:30 p.m., the mediator continued to engage with the parties and D&O Insurers. At the end of the day, the parties conditionally agreed to settle the action for a cash payment of $65,750,000.00 for the benefit of the class, subject to certain terms and conditions, including the execution of a stipulation and agreement of settlement and related papers, and appropriate approvals of the Bankruptcy Court and the District Court.
In Judge Phillips’ opinion, “the proposed Settlement is the result of vigorous arm’s-length negotiation by all involved Parties. I believe, based on my extensive discussions with the Parties and the information made available to me both before and during the Mediation, that the Settlement was negotiated in good faith and that the Settlement is fair and reasonable.” The Parties entered into the Stipulation of Settlement on May 18, 2021.
It took some time for the settlement to be presented for a hearing and approval of the Bankruptcy Court, primarily related to other proceedings and claims that were being made in the company’s bankruptcy proceedings. Eventually, however, on February 23, 2022, the Bankruptcy Court authorized Mallinckrodt to enter into the settlement and proceed to seek approval of the settlement by the District Court.
On behalf of the Lead Plaintiff, we then sought preliminary approval of the settlement from the District Court, presenting the District Court with the terms of the settlement, laying out the procedural background summarized above, and further describing the significant risks that could have led to further delay and potentially no recovery at all if the settlement had not been reached. And on April 7, 2022, the District Court preliminarily approved the settlement, authorized a notice to be sent to potential class nembers, authorized a summary notice to be published and disseminated via the PR Newswire, and scheduled the settlement hearing to consider, among other things, whether to grant final approval to the settlement and the Lead Plaintiff’s proposed plan of allocation of the net settlement proceeds. Following an extensive notice program, Lead Plaintiff filed a motion for final approval of the settlement and for approval of the Lead Plaintiff’s proposed plan of allocation – which was presented in accordance with the three series of claims and corrective disclosures alleged in the Amended Complaint, and based on work done by a forensic economist. Tellingly, there were no objections filed by class members to the proposed settlement and plan of allocation. On August 2, 2022, the District Court granted final approval of the $65.75 million settlement. In approving the settlement, Judge Friedrich found that STRS Ohio had faithfully represented the class and that STRS Ohio and BR&B had appropriately entered into settlement discussions during discovery and after filing a motion for class certification. The judge also found that negotiating this substantial settlement while Mallinckrodt was in bankruptcy proceedings was a considerable accomplishment. Judge Friedrich concluded that “in light of the benefits to the Settlement Class, the complexity and expense of further litigation, the risks of establishing liability and damages, and the costs of continued litigation, said Settlement is, in all respects, fair, reasonable, and adequate to the Settlement Class.”