| Sept 7
Sept 7 St. Jude Medical will face an
uphill battle in its corporate defamation lawsuit over a
short-seller's report that said the medical device company's
heart implants were vulnerable to cyber attacks, lawyers
familiar with such cases said.
The Minnesota-based company on Wednesday sued short-selling
firm Muddy Waters and cyber security company MedSec Holdings Ltd
in Minneapolis federal court, saying they intentionally
distributed false information in an Aug. 25 report to manipulate
St Jude's stock price. Muddy Waters placed a bet that the shares
In a statement, Muddy Waters and MedSec Holdings said they
would "vigorously defend our right to criticize a company that
puts its profits before its patients."
The right to free speech will be hard for St Jude to
overcome. The First Amendment of the U.S. Constitution is the
"first line of defense" in defamation lawsuits brought against
short-sellers, researchers, analysts, bloggers and anyone else
whose opinion of a company may have influenced its stock price,
said Michael Asaro of Akin Gump, who specializes in white-collar
and regulatory investigations and litigation.
In defamation cases generally, the plaintiff must prove the
defendant's statements were false. For public figures, such as
politicians or celebrities, there is an added burden of showing
statements were not just false, but also published willfully and
Under Minnesota law, St Jude, as a company whose products
have health implications, will almost certainly be considered a
public figure and have to meet that tougher standard, said
Minneapolis media lawyer Mark Anfinson, who has his own
But that does not necessarily mean Muddy Waters and MedSec
are out of the woods, Anfinson said. The actual malice defense,
more commonly wielded by the press, may not prove as powerful
for a short-seller with a financial motive to cause a stock to
"They may not get the benefit of the doubt" on malice, said
Muddy Waters said in its report that St. Jude's pacemakers
and defibrillators, which are used to regulate heart rhythm and
treat cardiac arrest, had cyber security flaws that enabled them
to be hacked and manipulated, with potentially fatal
St Jude was unsparing in its complaint.
"Only driving down the stock price by defaming [Cardiac
Rhythm Management] Devices with market-bombshell scare tactics
could make the short-positioned Defendants richer - with the
very unfortunate (and despicable) concomitant result of fueling
significant concern and fear in patients and their families,"
the company said.
In a pair of high-profile cases in recent years, defamation
claims against short-sellers failed on free speech grounds.
Last year, a San Francisco federal judge threw out a lawsuit
brought by casino magnate Steve Wynn against short-seller James
Chanos over comments Chanos made at a conference. The judge
awarded Chanos more than $420,000 in attorneys' fees.
A New York judge ruled in 2012 against a Canadian silver
producer, finding negative reports circulated by hedge funds
were constitutionally protected opinions.
Muddy Waters said its report was an expression of opinion.
The report raised the possibility of product recalls and St.
Jude's revenue disappearing for two years while safety problems
MedSec had a financial arrangement with Muddy Waters in
which the firm agreed to hire MedSec as a consultant, pay it a
licensing fee for research and a percentage of any profits from
Speaking generally, white-collar lawyer Asaro said the
guiding principle was that even wrong opinions could be
protected, so long as they were made in good faith and the
underlying facts were presented fairly. "Where people get into
trouble is where they misrepresent the facts," Asaro said.
"That's why these cases are so fact-specific."
Muddy Waters has courted controversy before with its
criticism of companies whose stocks it bet against. Two targets
of those comments, rice trader Olam International and bankrupt
Chinese timber company Sino-Forest, sued Muddy Waters in
Singapore and Canada, respectively. The cases were later
"St. Jude Medical now joins the ranks of Sino-Forest and
Olam International as companies that have filed frivolous
lawsuits against us for criticizing them," said Muddy Waters
founder Carson Block in an email.
St. Jude's spokeswoman Candace Steele Flippin said the
company is "confident in its legal position and took this action
because of the irresponsible manner in which the defendants have
Aside from any question of legal wrongdoing, some industry
experts are troubled by MedSec's arrangement with Muddy Waters.
"I think it would be a dark day if we go down this path,"
said Kevin Fu, a University of Michigan scientist who a decade
ago pioneered research into heart-device vulnerabilities.
Fu said researchers should abide by voluntary industry
guidelines for vulnerability disclosures in which researchers
typically give companies time to fix flaws before going public.
IOActive, NCC Group and Optiv, three prominent firms that
provide vulnerability consulting, said they would not enter into
an arrangement with short-sellers.
Yet some argue that the public interest is served by such an
Andrea Matwyshyn, a Northeastern University computer
scientist, said she supported using research to short a stock
because the approach pressures companies to be more upfront
about the risks associated with security bugs.
(Reporting by Jessica Dye and Jim Finkle; Editing by Anthony
Lin and Grant McCool)