Judge dismisses shareholder lawsuit against Cardiovascular Systems

New Brighton-based Cardiovascular Systems Inc. scored a legal victory this week as a federal judge in Minnesota tossed out a class-action shareholder lawsuit that accused the medical device company of defrauding investors by hiding illegal sales tactics.

U.S. District Court Judge Donovan Frank on Wednesday granted a motion to dismiss the shareholder complaint, but left the door open for the plaintiffs to refile their case with more specific allegations. Frank opted to dismiss the case for now because the plaintiffs didn't put forward concrete information alleging illegal conduct.

The plaintiffs in Shoemaker vs. Cardiovascular Systems had presented 14 confidential witness statements describing allegedly fraudulent sales tactics, including offering "kickbacks" in the form of free trips to "desirable locations" and free merchandise in exchange for business. The witnesses also said the company illegally promoted unapproved uses for its atherectomy drills, which are used to clear blocked arteries in the heart and legs.

However, Frank said the anonymous witness statements didn't amount to sufficient evidence to survive a motion to dismiss. Some of the statements seemed to be merely "office gossip" about the company.

"We are gratified the court has dismissed the case and, importantly, found the plaintiffs failed to show a factual basis for their claims of illegal conduct," CSI lead attorney Robert Stern said in an e-mailed statement. "Hopefully, this development puts an end to the litigation, but of course [we] will continue to vigorously defend against any such claims in the future."

It wasn't immediately clear whether the plaintiffs — including individual investor Sandra K. Shoemaker and the City of Miami Fire Fighters' and Police Officers' Retirement Trust — would appeal the ruling, file an amended complaint or accept the decision and move on.

Many of the same allegations were contained in a federal whistleblower lawsuit that accused CSI of using illegal sales tactics. CSI agreed to pay $8 million last June to settle that case without admitting wrongdoing.

The Justice Department had argued that CSI's alleged kickbacks violated federal laws against offering anything of value to induce sales or reward someone for using a particular company's products on Medicare patients.

Such under-the-table payments can drive up Medicare expenses without improving patient health, the government says.

In addition to paying the $8 million settlement, the company agreed to a five-year corporate integrity agreement with Medicare's inspector general office that subjects the medical device maker to close internal scrutiny over its sales tactics.

"We were pleased to complete a settlement agreement resolving all of the government's claims against the Company, with no admission of liability and avoiding potentially distracting, costly and protracted litigation," CSI CEO Scott Ward said in an Aug. 3, 2016, earnings call with investors shortly after the settlement.

For its most recent quarter, which ended Dec. 31, CSI reported net income of $1 million, or 3 cents per share, on revenue of $50 million.

The company reported a net loss of $15.2 million in the same period the previous year.

Joe Carlson • 612-673-4779