UNITED STATES DISTRICT COURT DISTRICT OF MINNESOTAsecurities.stanford.edu/filings-documents/1034/...4. To operate the AngioJet, a physician first threads a catheter over a guidewire

UNITED STATES DISTRICT COURT DISTRICT OF MINNESOTA

—————————————————––––––––x THE CORNELIA I. CROWELL GST TRUST, Individually And On Behalf of All Others Similarly Situated, Plaintiff, vs. POSSIS MEDICAL, INC., ROBERT G. DUTCHER AND EAPEN CHACKO, Defendants.

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Case No. 0:05-CV-01084-JMR-FLN

JIM GLYNN, On Behalf of Himself and All Others Similarly Situated, Plaintiff, vs. POSSIS MEDICAL, INC., ROBERT G. DUTCHER AND EAPEN CHACKO, Defendants.

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Case 0:05-cv-01084-JMR-FLN Document 38-1 Filed 11/04/2005 Page 1 of 66

KEVIN LINCOLN, Individually And On Behalf of All Others Similarly Situated, Plaintiff, vs. POSSIS MEDICAL, INC., ROBERT G. DUTCHER AND EAPEN CHACKO, Defendants.

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CONSOLIDATED AMENDED CLASS ACTION COMPLAINT FOR VIOLATIONS OF FEDERAL SECURITIES LAWS

JURY TRIAL DEMANDED


INTRODUCTION AND OVERVIEW

1. This is a federal securities class action on behalf of all purchasers of the

common stock of Possis Medical, Inc. (“Possis” or the “Company”) traded on the open

market between January 21, 2004 and August 24, 2004, inclusive (the “Class Period”)

against the Company and certain of its officers and directors for violations of the

Securities Exchange Act of 1934 (the “Exchange Act”).

2. Possis develops, manufactures and markets medical devices for use within

the cardiovascular and vascular treatment markets. Its primary product, the AngioJet®

Rheolytic™ Thrombectomy System (the “AngioJet” or the “system”), is marketed in the

United States and Europe for the removal of blood clots (thrombus) from native coronary

arteries, coronary bypass grafts, leg arteries and kidney dialysis access grafts. Possis

markets the AngioJet primarily to interventional cardiologists, interventional radiologists

and vascular surgeons and secondarily to physician specialty groups, including

nephrologists and osteopaths.

3. As described by the Company, the AngioJet is a non-surgical, minimally-

invasive catheter system designed to rapidly remove blood clots with minimal vascular

trauma. The system is comprised of three parts: (i) a reusable drive unit that powers a

pump and monitors device performance; (ii) a disposable single-use pump set that

delivers pressurized saline to a catheter; and (iii) disposable, single-use catheters.

4. To operate the AngioJet, a physician first threads a catheter over a

guidewire down a patient’s blood vessel to the site of the clot. The system’s drive unit is

then activated, causing the disposable pump to pressurize sterile saline and send it

through the catheter to the tip. Saline jets that are enclosed within the catheter then spray


2

from the catheter tip back up the catheter at several hundred miles per hour. This creates

a localized low-pressure zone around the catheter’s tip; the difference between the low

pressure at the tip and the normal blood pressure in the vessel draws the blood clot into

the catheter through openings near the tip. The jets then break the clot into microscopic

fragments that are ultimately propelled down the catheter, out of the patient’s body and

into a disposable collection bag located on the drive unit.

5. Throughout the Class Period, the Company marketed the AngioJet as a

means of removing blood clots rapidly, safely, and cost-effectively, as compared to

conventional treatment methods, including clot-dissolving drugs (thrombolytics) such as

Urokinase, the common drug given to patients who are having acute angina (chest pains)

from a coronary blockage. The AngioJet is typically used in conjunction with other

medical devices, such as angioplasty balloons and stents, as well as drugs such as

thrombolytics and platelet inhibitors.

6. Under the leadership of Defendant Dutcher, Possis became a company

whose resources were almost entirely devoted to the development and marketing of one

product: the AngioJet.1 Defendants were successful in marketing the system as a safe

and effective alternative to existing methods of treatment, including clot-dissolving drugs

such as Urokinase and other mechanical thrombectomy devices.

7. Though the Company received U.S. Food and Drug Administration

(“FDA”) approval to market the AngioJet for use in several different areas, including

removal of blood clots in leg arteries, native coronary arteries, coronary bypass grafts and

access grafts used by patients on kidney dialysis, the coronary market held the most


3

opportunity.2 Defendant Dutcher stated in an interview published in The Wall Street

Transcript on February 25, 2002, that “[w]e believe [the AngioJet] technology lends

itself to a wide variety of clinical applications. Our focus right now is cardiovascular and

primarily on the coronary business.” As such, Possis made a concentrated effort to

establish itself as the leader in the coronary field.

8. In November 2003, Defendants Dutcher and Chacko participated in an

interview in which they discussed the current state of the Company and its prospects for

growth. During that interview, Defendant Dutcher characterized Possis as a “rapidly

growing company,” projecting that the Company could expand its market opportunity

over the following three to four years from approximately $260 million to approximately

$700 million or more. The Company would accomplish this, he said, “by increasing our

penetration into the existing markets and addressing new areas.” He then pointed to

several clinical trials, including the AngioJet Rheolytic Thrombectomy In Patients

Undergoing Primary Angioplasty for Acute Myocardial Infarction (“AiMI”) study, as

conduits toward expansion of Possis’ existing markets. The AiMI trial, he continued,

“could be a very important study for us to drive our existing coronary business.”

1 In effect, Defendant Dutcher was patterning the Company after Medtronic, Inc., where he had worked for 12 years, most recently as Director of Research and Development; Medtronic leveraged its proprietary electrical stimulation technology to become a leader in the medical devices industry. 2 In the Form 10-K for the 2004 fiscal year that the Company filed with the SEC on or about October 12, 2004, Possis estimated that the number of patients in the U.S. each year that would undergo treatment for coronary thrombosis (either in native coronary arteries or bypass grafts) was 2,513,000; of that number, the Company estimated that the AngioJet’s annual market potential (meaning number of potential procedures) was 251,000. These estimates are significantly higher than those for the second largest market for the AngioJet, treatment of peripheral arteries (in the legs); in that same 10-K, Possis estimated that 2,000,000 patients each year would receive treatment in that area, with the AngioJet’s market potential being 200,000 procedures. In addition, in the Form 10-K for fiscal 2003, Possis estimated that the number of patients worldwide each year that would undergo treatment for coronary thrombosis (either in native coronary arteries or bypass grafts) was 5,300,000, of which the AngioJet’s estimated market potential was 550,000 procedures.


4

During that same interview, Defendant Chacko observed, “We continue to grow

on an annual basis of about 30% per year, which makes us one of the fastest growing

companies, certainly in Minnesota and in the United States.” He also stated that “our

balance sheet shows sales growing at 35% with virtually no working capital growth,” and

that therefore, “our shares should have a place in a microcap growth portfolio.”

The above statements conditioned investors and analysts to expect that Possis

could continue its “rapid” growth at levels of up to 35%. Moreover, defendants made

these statements only a few months before the start of the Class Period, when they began

to issue false and misleading statements concerning the AiMI trial and the Company’s

financial prospects.

9. To achieve its objectives, the Company sponsored clinical marketing trials

intended to demonstrate to physicians that the AngioJet was a versatile mechanism that

had the potential for even further expansion within the coronary market. Of those

studies, the AiMI trial was by far the most vital to the AngioJet’s, and thus the

Company’s, prospects for expansion. Defendants emphasized repeatedly, from the time

of AiMI’s inception in October 2001, that this trial would establish the AngioJet, in

conjunction with balloon angioplasty and stenting, as the “standard of care” for treating a

broad range of heart attack patients, which, in turn, would position the AngioJet as the

standard treatment for all intravascular blood clots.

10. The hypothesis of the study was that patients suffering from myocardial

infarction (a/k/a MI or AMI, for acute myocardial infarction), i.e., heart attack, would

sustain less damage to the heart tissue as a result of the heart attack if the AngioJet were

used in connection with conventional treatment methods, namely angioplasty, stenting


5

and a GP IIb-IIIa inhibitor (a drug to prevent the aggregation of blood platelets in the

coronary arteries), than if angioplasty, stenting and a GP IIb-IIIa inhibitor were used

alone. The patient population included heart attack patients who exhibited

angiographically visible clots and those with clots that were not visible with angiography.

Favorable results thus would have established the AngioJet as a leading method of

thrombectomy for a broad range of heart attack patients.

11. Defendants recognized the potential impact the study could have on the

Company’s ability to perpetuate its growth and maintain profitability. At the time of

AiMI’s inception, the Company was coming off of two consecutive profitable quarters;

over the next three years, Possis experienced a period of solid revenue growth, due in part

to the introduction of new products and technologies (such as its Cross-Stream®

technology, XMI® catheter and XVG® catheter). However, Chad Simmer, an analyst at

Miller Johnson Steichen Kinnard, observed in a report published on November 15, 2001,

that “[t]he primary driver of Possis Medical’s performance has been the realization by a

portion of the medical community that the AngioJet has an important role to play in

treating patients.” With respect to the recently-initiated AiMI study, he stated that

“[p]ositive results from the trial, meaning that patients treated with the AngioJet fare

better, would help to support additional usage of the AngioJet.” As that report indicated,

a major factor underlying Possis’ previous success was its proficiency at convincing

physicians of the AngioJet’s usefulness. To increase its level of support within the

medical community, Possis sponsored clinical trials such as AiMI to demonstrate the

system’s versatility.


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12. The Company’s future growth depended less on past performance and

more on its ability to firmly cement the AngioJet as a cornerstone of the “standard of

care” for eliminating blood clots. This hinged, in turn, on Possis’ ability to demonstrate

that the AngioJet had the potential to treat a wide array of patients. To that end, if the

AiMI study were to show that heart attack patients who underwent treatment with the

AngioJet sustained less heart tissue damage than those who did not, the AngioJet’s

market potential would grow substantially. As noted herein, infra, defendants estimated

that treatment of heart attack patients could yield over 150,000 new patients each year.

However, the significance of the AiMI trial went beyond merely securing a new patient

base for the AngioJet; it would be a bellwether, providing a clear indication of how

versatile the AngioJet actually was and thus how far the Company could expect to expand

within its existing markets and into new ones.

13. Given what was at stake, defendants sought to promote the study as a

major initiative; throughout the period between October 2001 and August 2004, they

disseminated unwaveringly positive statements concerning the AiMI trial, hailing it as a

major undertaking that would establish the AngioJet as the “standard of care” in the field

of thrombectomy. These statements were intended to, and did, heighten the expectations

of both investors and analysts as to the impact the trial results would have on the financial

prospects of the Company. In particular, during the spring and summer of 2004, as

Possis prepared to announce the results, analysts issued very encouraging reports about

the Company in which they highlighted their expectation that the results would be

favorable.


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14. By consistently promoting the AiMI study over a span of nearly three

years, defendants had prepared investors and analysts for a watershed moment.

Defendants had suggested that Possis would soar to stratospheric financial heights on the

wings of the AngioJet, but after the Company disclosed the results on August 23, 2004,

Possis’ prospects came crashing down in one fell swoop. The results confirmed that

there was no statistically significant difference in heart tissue damage between the two

patient populations involved in the study. Thus, the AngioJet was not a viable method of

treatment for a broad range of heart attack patients. No longer could defendants promote

the AngioJet as the emerging “standard of care” for removing all intravascular blood

clots.

15. This news shocked the market. As investors reacted to the Company’s

announcement, the price of Possis stock plummeted. By the end of trading the next day,

the stock was down more than $11.75 per share, or 38%, finishing at $19.00 per share, as

the Company lowered its 2005 earnings and revenue guidance and analysts at First

Albany lowered their rating on Possis shares from BUY to NEUTRAL.

16. While the revelation of disappointing AiMI results took investors and

analysts, who had been conditioned by defendants during the previous several years to

expect great things from the study, completely by surprise, defendants were aware of the

outcome long before they released the results to the public. Not long after patient

enrollment in the trial ended in January 2004, individuals at the Company were getting

indications that the results would not be in line with expectations. These indications were

fully realized in or about May of that year, when Company insiders received the formal

results of the trial. Faced with the dire consequences that would almost certainly follow


8

any disclosure of negative news regarding the highly touted AiMI trial, defendants issued

a series of false and misleading statements that reinforced the positive expectations

surrounding the study that defendants had cultivated through their pre-Class Period

statements. In so doing, defendants also knowingly or recklessly disregarded their duty

to correct or amend the statements they had made regarding the AiMI study prior to the

Class Period.

17. At the same time, Company insiders, including the Individual Defendants,

sold large amounts of Possis stock to the unsuspecting public at prices that were

artificially inflated due to defendants’ false and misleading statements. Although these

insiders dumped their stock periodically throughout the Class Period, the most striking

demonstration of their intention to exploit their inside knowledge for personal gain came

within a 6-day span, from May 27 to June 1, 2004. This was just after they had obtained

the formal results of the study, which confirmed the negative indications they had begun

receiving, early in 2004, that the AiMI results would be disappointing. During that 6-day

period, a group of seven Company insiders, including Defendants Dutcher and Chacko,

sold a total of 53,367 shares for a total value of approximately $1,506,159. Thus, as the

once high-flying AngioJet made its rapid descent, carrying with it the unsuspecting

investors who purchased the stock in reliance on defendants’ false and misleading

statements, the Individual Defendants and their cohorts parachuted to financial safety,

reaping large gains from their fraudulent activity. Plaintiffs, on the other hand, had just

been taken for a ride.

JURISDICTION AND VENUE


9

18. The claims asserted herein arise under and pursuant to Sections 10(b) and

20(a) of the Exchange Act [15 U.S.C. §§ 78j(b) and 78t(a)] and Rule 10b-5 promulgated

thereunder by the United States Securities and Exchange Commission (“SEC”) [17

C.F.R. § 240.10b-5].

19. This Court has jurisdiction over the subject matter of this action pursuant

to 28 U.S.C. §§ 1331 and 1337, and Section 27 of the Exchange Act [15 U.S.C. § 78aa].

20. Venue is proper in this District pursuant to Section 27 of the Exchange

Act, and 28 U.S.C. § 1391(b). Possis maintains its principal place of business in this

District and many of the acts and practices complained of herein occurred in substantial

part in this District.

21. In connection with the acts alleged in this complaint, defendants, directly

or indirectly, used the means and instrumentalities of interstate commerce, including but

not limited to the mails, interstate telephone communications and the facilities of the

national securities markets.

PARTIES

22. Lead plaintiffs David Russell and Francis Aberle, as set forth in the

previously filed certifications, incorporated by reference herein, purchased the common

stock of Possis at artificially inflated prices during the Class Period and have been

damaged thereby.

23. Defendant Possis Medical, Inc. is a Minnesota corporation with its

principal place of business and chief executive offices located at 9055 Evergreen

Boulevard NW, Minneapolis, MN 55433. According to the Company’s profile, Possis

develops, manufactures and markets medical devices.


10

24. Defendant Robert G. Dutcher (“Dutcher”) was, during the Class period,

Chief Executive Officer, President and Chairman of the Board of Directors of the

Company. During the Class Period, Defendant Dutcher signed and/or certified the

Company’s SEC filings, including but not limited to its Forms 10-Q and 10-K.

25. Defendant Eapen Chacko (“Chacko”) was, during the Class Period, Chief

Financial Officer and Vice President of Finance and Investor/Public Relations of the

Company. During the Class Period, Defendant Chacko signed and/or certified the

Company’s SEC filings, including but not limited to its Forms 10-Q and 10-K.

26. The defendants referenced above in ¶¶ 24-25 are referred to herein as the

“Individual Defendants.”

27. Because of the Individual Defendants’ positions with the Company, they

had access to the adverse undisclosed information about its business, operations,

products, operational trends, financial statements, markets and present and future

business prospects via access to internal corporate documents (including the Company’s

operating plans, budgets and forecasts and reports of actual operations compared thereto),

conversations and connections with other corporate officers and employees, attendance at

management and Board of Directors meetings and committees thereof and via reports and

other information provided to them in connection therewith.

28. It is appropriate to treat the Individual Defendants as a group for pleading

purposes and to presume that the false, misleading and incomplete information conveyed

in the Company’s public filings, press releases and other publications as alleged herein is

the collective action of the narrowly defined group of defendants identified above. Each

of the above officers of Possis, by virtue of his high-level position with the Company,


11

directly participated in the management of the Company, was directly involved in the

day-to-day operations of the Company at the highest levels and was privy to confidential

proprietary information concerning the Company and its business, operations, products,

growth, financial statements and financial condition, as alleged herein. Said defendants

were involved in drafting, producing, reviewing and/or disseminating the false and

misleading statements and information alleged herein, were aware, or recklessly

disregarded, that the false and misleading statements regarding the Company were being

issued, and approved or ratified these statements, in violation of the federal securities

laws.

29. As officers and controlling persons of a publicly-held company whose

common stock was, and is, registered with the SEC pursuant to the Exchange Act, and

was traded on the NASDAQ national market exchange (“NASDAQ”), and governed by

the provisions of the federal securities laws, the Individual Defendants each had a duty to

disseminate promptly, accurate and truthful information with respect to the Company’s

financial condition and performance, growth, operations, financial statements, business,

products, markets, management, earnings and present and future business prospects, and

to correct any previously-issued statements that had become materially misleading or

untrue, so that the market price of the Company’s publicly-traded common stock would

be based upon truthful and accurate information. The Individual Defendants’

misrepresentations and omissions during the Class Period violated these specific

requirements and obligations.

30. The Individual Defendants participated in the drafting, preparation and/or

approval of the various public and shareholder and investor reports and other


12

communications complained of herein and were aware of, or recklessly disregarded, the

misstatements contained therein and omissions therefrom, and were aware of their

materially false and misleading nature. Because of their Board membership and/or

executive and managerial positions with Possis, each of the Individual Defendants had

access to the adverse undisclosed information about Possis’ business prospects and

financial condition and performance as particularized herein and knew, or recklessly

disregarded, that these adverse facts rendered the positive representations made by or

about Possis and its business that were issued or adopted by the Company materially false

and misleading.

31. The Individual Defendants, because of their positions of control and

authority as officers and/or directors of the Company, were able to and did control the

content of the various SEC filings, press releases and other public statements pertaining

to the Company during the Class Period. Each Individual Defendant was provided with

copies of the documents alleged herein to be misleading prior to or shortly after their

issuance and/or had the ability and/or opportunity to prevent their issuance or cause them

to be corrected. Accordingly, each of the Individual Defendants is responsible for the

accuracy of the public reports and releases detailed herein and is therefore primarily

liable for the representations contained therein.

32. Each of the defendants is liable as a participant in a fraudulent scheme and

course of business that operated as a fraud or deceit on purchasers of Possis common

stock by disseminating materially false and misleading statements and/or concealing

material adverse facts. The scheme: (i) deceived the investing public regarding Possis’

business, operations, management and the intrinsic value of Possis common stock; (ii)


13

enabled defendants and/or other Company insiders to sell 146,604 shares of their

privately held Company stock for proceeds in excess of $3.98 million while in possession

of material adverse, non-public information about the Company; and (iii) caused

plaintiffs and the other members of the Class to purchase Possis common stock at

artificially inflated prices.

SUBSTANTIVE ALLEGATIONS

33. According to the Company’s profile, Possis develops, manufactures and

markets medical devices for use within the cardiovascular and vascular treatment

markets. Throughout the Class Period, the Company’s primary product was the

AngioJet, a non-surgical, minimally-invasive catheter system designed to rapidly remove

blood clots with minimal vascular trauma. The Company described the system as

consisting of three major components: (i) a reusable drive unit that powers a pump and

monitors device performance; (ii) a disposable single-use pump set that delivers

pressurized saline to a catheter; and (iii) disposable, single-use catheters.

34. Possis reported that revenue from AngioJet sales in the United States was

approximately 97%, 98%, 98%, 99% and 99% of the Company’s fiscal 2005, 2004, 2003,

2002 and 2001 revenues, respectively. As such, at the inception of and throughout the

Class Period, the financial prospects of the Company hinged almost entirely on the

present and future success of the AngioJet.

35. Throughout the Class Period, Possis repeatedly emphasized in its public

statements and SEC filings that sales of the AngioJet, and thus the Company’s future

success, depended in part on the results of its marketing clinical trials. Favorable results

would give the AngioJet the scientific credibility necessary for Possis to tap further into


14

the lucrative coronary market. The Company, and the Individual Defendants, thus had a

strong incentive to issue false and misleading statements concerning the AiMI trial, a

study that was crucial for Possis’ plan to establish the AngioJet as the “standard of care”

for treating heart attack patients.

36. Analysts covering the Company recognized that for Possis to sustain its

pattern of growth, it would have to demonstrate to physicians that the AngioJet would

prove beneficial when used either as a substitute for, or in conjunction with, conventional

treatment methods. As Douglas Eayrs, a research analyst at Dougherty & Company

LLC, opined, Possis’ future growth depended upon its ability to “keep producing good

clinical results in published papers, get additional approvals, get the device out in the

hands of experienced interventional cardiologists and interventional radiologists; give

them a chance to work with it.” Although the Company initiated a number of studies to

investigate the possibility of using the AngioJet to treat conditions such as ischemic

stroke, deep vein thrombosis and pulmonary embolisms, defendants placed by far the

greatest emphasis on the AiMI trial, describing it as “landmark,” “groundbreaking” and

“pioneering.” Defendants expected that the study would demonstrate that patients

suffering from a heart attack would sustain less heart tissue damage when they received

treatment by conventional methods, i.e., angioplasty, stenting and a GP IIb-IIIa inhibitor,

along with treatment by the AngioJet, as opposed to angioplasty, stenting and a GP IIb-

IIIa inhibitor alone.

37. A heart attack, or myocardial infarction, occurs when the blood supply to

part of the heart is cut off (ischemia) due to blockage in an artery; if the blood flow to the

heart is not restored, that part of the heart muscle/tissue will die, which causes disability


15

or death of the victim. Myocardial infarction is often the result of a clot that lodges in a

coronary artery. Given the success the AngioJet had previously achieved in treating

blood clots, the market for treating heart attack patients was an area defendants hoped to

penetrate.

PRE-CLASS PERIOD STATEMENTS

38. Defendants acknowledged that there was a lot riding on the outcome of the

AiMI trial. As John Riles, Possis’ Director of Marketing, expressed to Eli Kammerman

of Cathay Financial during a May 14, 2003 conference call to discuss the Company’s

financial results for the third fiscal quarter of 2003, “a lot of our uses come[] from

hospitals that have adopted a primary angioplasty approach. So we are indicated for use

in removing thrombus in patients and arguably, all AMIs [acute myocardial infarctions]

are caused by some sort of thrombus. So that is a strong driver of our utilization in

coronary procedures, this move to primary angioplasty, as well as our goal is to drive . .

. that via the clinical trial, which we call the AiMI trial. . . .And that specifically focuses

on using primary angioplasty with AngioJet to treat patients. So that is a key driver of

our business.3

39. The importance the Company placed on favorable results from the AiMI

trial is evident in the press release Possis issued on October 23, 2001, in which it

announced the inception of the study. Describing AiMI as a “landmark” clinical trial, the

release explained that it was “a multicenter, randomized 2-arm trial comparing AngioJet

therapy followed by immediate, definitive percutaneous treatment [i.e., angioplasty and

stenting] versus immediate percutaneous treatment only.” The release stated further that

both arms of the patient population were heart attack victims and they would be eligible


16

to receive an injection of INTEGRILIN, a drug marketed in the United States for, among

other things, the treatment of patients undergoing percutaneous coronary treatment.

In addition, Defendant Dutcher remarked,

We believe that the most effective and most efficient treatment for heart attack patients is a combination therapy involving both drugs and medical devices. The AngioJet System provides rapid, safe, and effective removal of thrombus, which when combined with primary angioplasty, stenting and effective compounds like INTEGRILIN, produces the best outcome for the patient and the institution.

40. Possis’ subsequent press releases and SEC filings repeatedly pointed to the

performance of clinical trials as a basis for defendants’ expectation that the Company

would achieve continued strong growth, as detailed below.

41. On November 13, 2001, Possis published a release on Business Wire

announcing “record” sales for the first fiscal quarter of 2002, the period ended October

31, 2001. In that release, Defendant Dutcher stated,

We expect that coronary approval for the XMI, new product development, the recently received coronary CPT Code and our marketing clinical trials will continue to help drive sales and profit growth during the remainder of fiscal 2002 and beyond.

42. Throughout the remainder of that year, Possis issued a number of press

releases and SEC filings that reiterated defendants’ projection that the Company’s

marketing clinical trials would help foster continued growth. In particular, defendants

expressly highlighted the AiMI trial in a press release Possis published on Business Wire

on November 12, 2002, in which the Company announced “record” results for the first

fiscal quarter of 2003, the period ended October 31, 2002. In that release, Defendant

Dutcher stated:

3 Unless otherwise indicated, all emphasis is added, not in the original.


17

I am proud to announce record sales for the first quarter of fiscal 2003 and pre-tax earnings of $0.13 per share. . . .Our improved catheter line, coupled with results from the AiMI and AJILE marketing clinical trials, and the planned introduction of a rapid exchange version of the XMI catheter should continue to help drive sales and profit growth during the remainder of fiscal 2003.

43. In addition, Possis touted the prospects of the AngioJet, and specifically

the AiMI study, in its Annual Report to Shareholders published on or about November

12, 2002. In a section entitled, “To Our Shareholders,” the Company stated:

Our pioneering AngioJet System is the leader in the estimated $200 million current realizable market for mechanical thrombectomy, a market that did not even exist a decade ago. . . . The AngioJet System, in combination with other technologies, such as balloon angioplasty, stents and distal protection provides what we believe will be the future gold standard of care for patients with blood clots.

Under the subheading “Clinical trials establish our effectiveness,” Possis

emphasized to its shareholders the importance of the AiMI study, stating,

We embarked on a new physician-directed, clinical trial at the end of the year to measure the effectiveness of AngioJet technology in conjunction with other state-of-the-art therapies. Called AiMI (AngioJet in Myocardial Infarction), this study promises to firmly establish AngioJet therapy as a clinically proven standard of care, along with first line treatments including drug therapy, balloon angioplasty and stents.

The AiMI study will enroll approximately 500 patients, and is designed to test the AngioJet System against the current standard of care for treating heart attacks. We want to know, and will be able to measure with nuclear scans, if we save more heart muscle with AngioJet therapy than without. Favorable results would be very powerful evidence supporting future adoption of the AngioJet System as a standard of care.

44. Defendants also described the study to analysts as a key element of their

plan to expand the market for the AngioJet and thereby achieve continued strong revenue

growth. In a conference call held on September 25, 2002 to discuss the recently released


18

fourth quarter and fiscal year 2002 financial results, Defendant Dutcher highlighted the

AiMI study as one of several initiatives Possis was pursuing “to grow and expand the

AngioJet business during fiscal year 2003 and beyond.”

45. During that same conference call, T.V. Rao, Possis’ Vice President of

Sales and Marketing, spoke about the need for the Company to establish the AngioJet as

the “therapy of choice” as a means of increasing its market penetration. He explained,

“[T]he way we do that is to benchmark that versus the standard practice, which is what

our AMI trial does and what our AJILE trial will do.” According to Rao, the potential for

increasing the adoption of AngioJet therapy by more customers depended upon getting

favorable scientific data, which would, in turn, encourage prominent figures in the

scientific community to publish those results.

46. In response to defendants’ encouraging remarks, analysts issued very

positive ratings for Possis stock, citing, among other factors, the Company’s prospects for

future growth. On September 26, 2002, Miller Johnson Steichen Kinnard rated Possis a

STRONG BUY at $10.99 per share. The report stated, “Given the Company’s above

average expected growth and rapidly expanding earnings base, we believe that the shares

could sell at up to six times revenues in a market that is more forward looking and

favorably disposed to small medical device manufacturers.”

47. A report by Dougherty & Company on September 27, 2002 reflected

Possis’ statements that it was seeking to expand the array of indications for which the

AngioJet could be utilized. In raising its rating on Possis to STRONG BUY, Dougherty

& Company stated, “The company has a number of new product iterations in


19

development and several clinical trials underway or in preparation, all designed to expand

AngioJet’s medical indications.”

In addition, the report highlighted the AiMI study, which defendants had been

touting since its inception in October 2001, and noted the significance of having heart

muscle salvage as a key endpoint in the study. The report stated,

The AIMI trial is very important as one key endpoint will be heart muscle salvage confirmed via diagnostic scanning. Rapid evacuation of blood clot in these heart attack patients with AngioJet offers a good possibility, in our opinion, of increasing heart muscle salvage. Clinical investigators expect to present AIMI data at the ACC meeting next March.

48. Given the AiMI study’s focus on determining whether the AngioJet would

provide additional benefit to the existing standard practice of angioplasty, stenting and

injection of a GP IIb-IIIa inhibitor in treating heart attack patients, favorable results might

also place Possis in prime position to capitalize on the emerging market for drug-eluting

stents. A drug-eluting stent is a tiny mesh tube that is coated with medication to help

prevent re-blockage of the coronary arteries (restenosis); such stents are approved for use

during angioplasty. Several analysts who covered the Company saw the potential for

Possis to expand its current market and achieve growth by tapping into the market for

stents. As Miller Johnson Steichen Kinnard stated in a November 20, 2002 report in

which it reaffirmed a previous rating of BUY for Possis stock and increased the 12-month

target from $19 per share to $22 per share:

The AngioJet is one of the fastest ways to remove thrombus. Hence, there is a great opportunity for the company to capitalize on the drug eluting stent trend, particularly once the rapid exchange version of the XMI [catheter] is available in the coronary market. Given these opportunities, as well as others, we believe Possis is well positioned for continued growth.


20

49. Dougherty & Company echoed this belief in its December 19, 2002 report

that rated Possis a STRONG BUY at $14.43. The report noted,

A number of AngioJet users tell us that with the emergence of drug-eluting stents in 2003, this should create user-pull of the AngioJet system into more coronary procedures. Doctors are more likely to use the AngioJet thrombectomy to first prep the site so as to remove all thrombus, improve visualization of the lesion, accurately place the stent and help to prevent abrupt re-closure of the site.

In addition, the report stated,

We estimate that Possis Medical is the clear market leader in the mechanical thrombectomy market with a current market opportunity of about $260 million per year; $120 million in coronary occlusions, $80 million in A-V access grafts and $60 million in peripheral arterial occlusions. Although AngioJet usage is growing nicely, we estimate the company has less than a 25% market penetration of available procedures. . . .If Possis expands its product indications and just maintains the same patient penetration rate of 20%-25% of available patients, annual sales would grow to $125 million plus in three years.

50. As the foregoing analyst reports indicated, for Possis to bolster sales of the

AngioJet, it needed to demonstrate its efficacy in new treatment areas. Given that, as

Dougherty & Company observed, treatment of coronary occlusions (blockages)

accounted for almost 50% of the Company’s market opportunity at that time, defendants

had a huge interest in establishing the AngioJet as a viable treatment mechanism for

additional coronary indications.

51. The AiMI study, which, if successful, would have increased the

AngioJet’s market to include a broad range of heart attack patients, was thus the perfect

vehicle for Possis to attempt to demonstrate the AngioJet’s versatility and thereby foster

the growing interest in, and use of, the AngioJet among physicians. Defendant Dutcher

acknowledged that fact during an interview published in The Wall Street Transcript on

January 20, 2003. He stated, “[T]o increase therapy adoption, we have a number of post-


21

market clinical trials underway to further expand AngioJet system use and movement

toward becoming the standard of care for treating all intravascular blood clots.”

52. Throughout the next several months, defendants further heightened the

expectations of investors and analysts by continuing to issue positive statements about the

impact the AiMI study would have on the market for the AngioJet, as detailed below.

53. During a conference call held on February 12, 2003 to discuss the

Company’s financial results for the second fiscal quarter of 2003, the period ended

January 31, 2003, John Riles, who later became Director of Worldwide Marketing,

responded to a caller’s question concerning the size of the patient population that the

AngioJet might reach. Stating that the total number of interventions to remove coronary

blood clots performed with the AngioJet in any given year within the U.S. “is about

900,000,” Riles noted that out of that population, the number of patients treated who are

suffering from a heart attack is estimated to be “anywhere from 15 to 18 percent.” He

continued,

And when they take a look at those patients and try to determine which of those patients is appropriate for treatment of AngioJet, what they are often looking for are those patients who have angiographically evident thrombus. So that narrows it down somewhat, because sometimes patients are having a heart attack and you actually can’t identify the thrombus under angiography. So I think that is the sweet spot of our target; is that patient subset that is coming in with an acute MI.

And that really ties in nicely with the AiMI trial, where we’re taking that subset of patients and enrolling them, regardless of whether they have angiographically evident thrombus. So any patient with an acute MI or a heart attack is potentially a candidate for the AiMI trial. . . .So that trial does stand to expand our markets beyond that subset of patients where you can see the clots, and essentially into all patients that are having a heart attack.


22

54. The Company thus understood that demonstrating the AngioJet’s efficacy

in treating a broad range of heart attack patients would allow it to tap into a population of

patients that it had not yet reached. If the AiMI trial were to establish the AngioJet as a

viable treatment method both for heart attack patients with clots that were visible using

angiography and for those without angiographically visible clots, Possis could market its

system for use in all of these patients. By the Company’s own estimation, this could

mean the addition of over 150,000 new patients each year in the U.S. alone.

55. Moreover, for the Company to achieve “rapid” revenue growth as high as

35%, it was imperative that it succeed in identifying new patients who could be treated

successfully with the AngioJet, because the Company was reaching the limit of its

currently available market. As one clinical sales representative who worked for Possis

from April 2002 until March 2004 stated, although his territory achieved 35% revenue

growth for the three fiscal years he was at the Company, the potential for continued

growth of that magnitude was limited because “[y]ou can only saturate the market so

much and get so much use out of each hospital.” He continued, “Just when I was getting

out [in March 2004], we were reaching the end of the saturation potential for our

territory.” In other words, although Possis had effectively marketed the AngioJet for a

number of uses, thereby allowing the Company to meet and even exceed its financial

projections for 2002 and 2003, Possis would not be able to continue that pattern of

growth without finding new markets. This recognition prompted defendants to issue a

litany of positive statements about the study, which heightened investors’ expectations.

56. By issuing statements that touted the impending success of its AiMI study,

among others, Possis heightened the market’s expectations regarding the Company’s


23

growth potential, which was almost entirely dependent on the Company’s ability to

demonstrate that the AngioJet could be used to treat a wide array of conditions. In

particular, the treatment of patients suffering from myocardial infarction, i.e., heart

attack, was of great interest to Possis, as this represented a large demographic and thus a

potentially valuable source of revenue.

57. Defendant Dutcher expressed this sentiment in an interview published in

The Wall Street Transcript on January 20, 2003. When asked how broad the mechanical

thrombectomy market was at that point, he answered, “[T]he current realizable

mechanical thrombectomy market in the US is about $260 million. We estimate that the

opportunity will nearly triple to over $700 million over the next three years as we

increase therapy adoption, expand into new thrombectomy markets and related markets

and as we expand worldwide.”

In addition, when asked what was on the horizon that could make the next five or

six months a success for Possis, Defendant Dutcher responded, in part, “[T]o increase

therapy adoption, we have a number of post-market clinical trials underway to further

expand AngioJet System use and movement toward becoming the standard of care for

treating all intravascular blood clots.”

58. By convincing customers of the potentially expansive uses of the

AngioJet, Possis achieved significant increases in revenues from AngioJet sales in the

U.S. On May 13, 2003, Possis published a release on Business Wire announcing “record”

sales of $14.6 million for the third fiscal quarter of 2003, the period ended April 30,

2003. According to the Company, this represented a 34% increase from the third fiscal

quarter of 2002.


24

In addition, Defendant Dutcher stated,

I am pleased to announce record sales for the third quarter of fiscal 2003, along with improving margins and strong cash flow. Continuing customer acceptance of our improved coronary and peripheral product lines, our growing presence in the clinical and investigational community, and the hiring of additional clinical sales specialists in the third and fourth quarters should continue to help drive market penetration for the remainder of fiscal 2003 and beyond.

Defendant Dutcher’s comments further illustrate the importance Possis placed on

demonstrating to its customers that the AngioJet was a versatile product that could be

utilized in an array of treatment areas, including heart attack patients. In addition, Possis’

“growing presence in the clinical and investigational community” depended primarily on

the results of the marketing clinical studies, such as AiMI, that the Company sponsored.

59. Defendant Dutcher further stressed the importance of Possis’ clinical trials

during a May 14, 2003 conference call to discuss the Company’s financial results for the

third fiscal quarter of 2003. After describing the AiMI study, he concluded, “I believe

that the state of the company has never been stronger. We continue to generate excellent

financial results and we’re making good progress in our R&D and marketing efforts

which promise to create future revenue and earnings growth.”

60. That the Company’s statements conditioned the market is evidenced in

analysts’ coverage of Possis. In response to defendants’ extremely positive statements

about the potential for the AiMI results to propel the AngioJet to the forefront of the

market for treating heart attack patients, Dougherty & Company stated the following in a

report issued on May 16, 2003 that rated Possis a STRONG BUY at $16.80:

[I]nterventionalists that we have spoken with and currently use AngioJet in AMI cases believe the device can help clear away thrombus and soft plaque prior to stenting. This better allows the DES [drug-eluting stent] to buttress up against the arterial wall, and


25

elute drug directly into the tissue. It is this drug-elution off the stent and directly into the artery wall that inhibits restenosis and improves patient outcomes.

* * *

In our opinion, final AIMI clinical trial results could speed adoption rates of AngioJet XMI [catheter] in heart attack cases. . . .We estimate Possis has penetrated about 15% of these cases to date. The AIMI clinical study endpoints are designed to statistically prove that heart attack patients have improved outcomes when AngioJet XMI is used as a primary treatment to remove thrombus prior to PTCA [percutaneous transluminal coronary angioplasty] and stenting.

61. On or about June 16, 2003, the Company filed with the SEC a 10-Q

disclosing its results for the third fiscal quarter of 2003, the period ended April 30, 2003.

In a section entitled, “Revenue - AngioJet System,” the Company projected:

The Company expects U.S. AngioJet System sales to continue to grow primarily through obtaining additional FDA-approved product uses, introduction of new catheter models for existing indications, more face time selling to existing accounts, peer-to-peer selling, and the publication of clinical performance and cost-effectiveness data.

62. As its current financial position remained strong during the remainder of

2003, Possis continued to issue statements touting the Company’s ability to keep

generating revenues at the level it had achieved throughout 2002 and into 2003. On

September 16, 2003, Possis issued a press release announcing “record” sales for fourth

quarter and fiscal year 2003, driven almost entirely by increased sales of the AngioJet. In

addition, Defendant Dutcher stated,

I am pleased to announce our tenth profitable quarter in a row based on record sales and net income. Continuing customer acceptance of our improved coronary and peripheral product lines, our growing presence in the clinical and investigational community, and the introduction of our rapid exchange catheter later in the year should help drive market penetration for fiscal 2004 and beyond.


26

63. On October 14, 2003, Possis issued a press release announcing that it had

been named one of the 500 fastest growing technology companies in the nation by

Deloitte & Touche. The release stated:

Possis Medical, Inc. (Nasdaq:POSS), today announced that it ranked number 418 in the 2003 Deloitte & Touche Technology Fast 500, a ranking of the 500 fastest growing technology companies in North America. Rankings are based on five-year percentage revenue growth from 1998-2002. Possis Medical, Inc. grew revenue 590 percent during this period.

In addition, Defendant Dutcher stated, “Our dedicated team of employees have

earned this prestigious distinction for the Company by providing innovative products to

our physician customers that meet acute patient needs and quickly restore health. We

look forward to continuing our rapid growth in the years ahead.”

64. For several years leading up to the Class Period, the price of Possis stock

reflected investors’ and analysts’ expectation of continued strong revenue growth. The

Company could not continue its strong revenue growth unless it could successfully

expand the market for the AngioJet by demonstrating that it was a viable treatment

method for a broad range of heart attack patients. However, as the AiMI study later

confirmed, this was, at best, a pipedream, and more likely, plaintiffs allege, a deliberate

or reckless manipulation of the market by defendants during the Class Period. According

to the clinical sales representative referred to above who worked for Possis from April

2002 until March 2004, although the sales representatives “were told to tell people” that

the AngioJet was going to work for a broad range of heart attack patients, in his

estimation the AngioJet had “more of a niche market, like saphenous vein graphs, but

even then there were competing products that doctors wanted to use instead.” He stated

as well that sales representatives “were expected to grow revenues by 35%” and that his


27

territory achieved that level of growth for the three fiscal years he was at Possis but that,

as he saw it, the potential for continued growth of that magnitude was limited because

“[y]ou can only saturate the market so much and get so much use out of each hospital. . .

.Just when I was getting out [in March 2004], we were reaching the end of the saturation

potential for our territory.” This sales representative explained that the Company

obtained 10 to 12 accounts per year, meaning 10 to 12 new customers who purchased the

capital equipment, i.e., the drive unit; the capital purchases generated “about 15-20,000

[dollars] plus catheters so you take that out of the equation, making the number would

have been real hard. I don’t think they made their number this year -- the same territory.”

He noted that sales representatives would discuss this at sales meetings but people

refrained from expressing these sentiments openly because “you wouldn’t be around

much longer.” In fact, he continued, “[t]he sales rep I started working for disappeared

after saying something like that.”

65. That Possis was heading toward saturation of the existing AngioJet market

is evidenced by the gradual decline in its percentage sales growth from fiscal 2000 to

fiscal 2004. Although the Company reported increased sales (in dollar value) throughout

that period, the year-to-year percentage increase in product sales fell from approximately

46% in fiscal 2001 to 42% in fiscal 2002, 35% in fiscal 2003, and 26% in fiscal 2004, the

last fiscal year prior to the end of the Class Period. Thus, while sales of the AngioJet

continued to increase, it was clear that for the Company to maintain revenue growth as

high as 35%, it would have to broaden the base of patients for whom the AngioJet proved

beneficial.


28

DEFENDANTS’ FALSE AND MISLEADING STATEMENTS DURING THE CLASS PERIOD

66. On January 21, 2004, Possis issued a press release announcing that the

Company expected earnings per share for the second fiscal quarter of 2004, the period

ended January 31, 2004, to exceed previous estimates. In addition, the Company stated

that it was revising its expectations for fiscal 2004 upward. The release stated:

Possis Medical, Inc. (Nasdaq:POSS), announced today that it expects net income per diluted share for the second fiscal quarter ended January 31, 2004 to be in the range of $0.14-$0.16 versus $0.11 per share in the prior year period. This expected reporting range is ahead of both the Company’s previously issued guidance of $0.10-$0.12 per share and the mean analyst estimate of $0.12 per share for the quarter. The Company expects revenues for the quarter to be in the range of $17.1-$17.5 million. . . .For fiscal 2004, the Company expects revenues in the range of $70-$73 million, with net income per diluted share in the range of $0.57-$0.62; this compares to net income per diluted share of $0.88 in the prior year. . . .Previously, the Company had expected fiscal 2004 net income per diluted share in the range of $0.54-$0.62.

In that same release, the Company disclosed that it had completed patient

enrollment in the AiMI study.

67. Not long after patient enrollment in the AiMI trial ended, it was becoming

clear to defendants that the results of the study would not show that the AngioJet indeed

should be used in a broad range of heart attack patients. According to one clinical

representative who worked for the Company from April 2002 until April 2004,

We were starting to get indications that the results weren’t panning out the way we thought. . . .I left in April [2004] and I was getting indications before April. Just you hear rumbling in the cath lab, people talking. . . .They didn’t think they were getting the results they wanted and they were also not getting the [patient] cases that they wanted. . . .They weren’t getting the patients . . . that they were looking to get . . . because doctors were not doing the study on patients that they really wanted to use the AngioJet on.


29

68. Possis is a small company; as reported in its 10-K for the 2004 fiscal year,

the Company had 281 employees as of August 31, 2004. As such, and given the

importance of the AiMI study to Possis’ financial prospects, it is reasonable to infer that

the Individual Defendants, who were intimately involved in the day-to-day operations of

the Company, were informed of the negative indications concerning the study that

individuals in the cath labs were receiving.

One former Possis sales representative, who worked for the Company for two

years, ending in September 2005, stated,

It’s amazing! It’s completely amazing that they were so --completely stupid. . . .Dr. A and Dr. B and Dr. C are doing their cases over that two year period. They’re sending them in. Those cases are gone over with a fine-tooth comb by the people over at Possis. To think they didn’t know that this thing was trending in a negative or neutral way. They knew. They had to have known. Anybody would know. . . .The majority of the hype was certainly in 2004, and I’m sure that they knew in the early to mid part of 2004.

Moreover, given the emphasis defendants had placed on obtaining favorable

results, they were motivated to, and did, conceal this potentially devastating news from

investors and analysts. In the face of this negative information, defendants reiterated, and

even intensified, the same positive outlook on the study that they had put forth prior to

the Class Period.

69. On February 17, 2004, Possis issued a press release announcing the

financial results for the second fiscal quarter of 2004. In that release, Defendant Dutcher

stated,

I am extremely proud to announce record sales for the second quarter of fiscal 2004 and robust year-over-year growth in earnings per share. . . .In January 2004, the Company completed patient enrollment in its pioneering AiMI study involving the combined use of the AngioJet System and stents to treat heart attack victims. Results from this groundbreaking study should be available this


30

summer. . . .We continue to invest in marketing, development and strategic initiatives that should deliver strong earnings growth throughout the remainder of fiscal 2004 and beyond.

In addition, the Company made the following projection:

Looking ahead to the remainder of fiscal 2004, the Company expects full-year revenues in the estimated range of $71-$73 million, with gross margins in the mid seventies, as a percent-of-sales. The Company expects net income per diluted share to be in the range of $0.58-$0.62 for the full fiscal year. The Company anticipates third quarter revenue to be between $18.7-$19.1 million with net income in the range of $0.15 to $0.17 per diluted share.

70. The statements in ¶¶ 66 and 69 were false and misleading when made

because, as described above, individuals at the Company were receiving indications early

in 2004 that the AiMI study results would be disappointing, meaning that the patients

involved in the study who were treated with the AngioJet in conjunction with

angioplasty, stenting and a GP IIb-IIIa inhibitor were not showing less heart tissue

damage than those who were treated with angioplasty, stenting and a GP IIb-IIIa inhibitor

alone. As a result, the Company would not be able to market the AngioJet to treat a

broad range of heart attack patients. Given the size of the Company and the importance

of the study to Possis’ financial prospects, it is reasonable to infer that key management

personnel, including the Individual Defendants, who were closely involved in the day-to-

day operations of the Company, were aware of these negative indications. Given that the

financial projections contained in the above statements were dependent upon favorable

AiMI results, the negative information defendants possessed at the time they made those

statements was material, as it is substantially likely that a reasonable investor would have

viewed disclosure of that information as having significantly altered the total mix of

information made available. As such, defendants had a duty to disclose that information.

Instead, they knowingly or recklessly disregarded their duty.


31

71. During a conference call held on February 18, 2004 to discuss the

Company’s financial results for the second fiscal quarter of 2004, John Riles, Possis’

Director of Marketing, responded to an analyst’s inquiry as to the potential impact

positive AiMI results could have on the Company’s ability to expand its market

opportunity. Riles stated,

[A] couple of things about the trial. One, the trial is taking essentially more patients than we typically target with the AngioJet currently. So those patients that don’t have a large angiographic clot[] are enrolled in our clinical trial. So arguably, clot is a positive result and that patient subset will significantly allow us to expand our market opportunity beyond those that just have a large angiographic clot. So that is really the impact, besides also proving kind of definitively that we do salvage heart tissue in patients where physicians are currently using our device. So the end result of a positive product we feel will one, help expand our market, and two, help strengthen the argument [for] using AngioJet.

72. This statement was false and misleading when made because, as described

above, individuals at the Company were receiving indications early in 2004 that the AiMI

study results would be disappointing, meaning that the patients involved in the study who

were treated with the AngioJet in conjunction with angioplasty, stenting and a GP IIb-IIIa

inhibitor were not showing less heart tissue damage than those who were treated with

angioplasty, stenting and a GP IIb-IIIa inhibitor alone. As a result, the Company would

not be able to market the AngioJet to treat a broad range of heart attack patients. Thus,

contrary to Riles’ statement, the study was not going to enable Possis to expand its

market opportunity.

73. Shortly after defendants issued the above false and misleading statements,

several Company insiders sold significant amounts of their privately held Possis stock.

On February 20, 2004, Director Donald Wegmiller sold 48,000 shares for proceeds of

approximately $1,173,120, by far his largest sale (in terms of both number of shares and


32

amount of proceeds) during the Class Period and over the previous eight years. In

addition, on February 26, Irving Colacci, Vice President of Legal Affairs and Human

Resources, General Counsel and Secretary, sold 2,096 shares for proceeds of

approximately $52,400. On that same day, Defendant Dutcher sold 9,731 shares, in two

transactions, garnering total proceeds of approximately $242,110. Finally, Director

Rodney Young sold 4,000 shares on March 8 for proceeds of approximately $112,800.

74. On or about March 15, 2004, Possis filed a 10-Q with the SEC for the

second fiscal quarter of 2004. The 10-Q, which was signed by Defendants Dutcher and

Chacko, stated,

The Company expects U.S. AngioJet System sales to continue to grow primarily through obtaining additional Food and Drug Administration (FDA) approved product uses, introduction of new catheter models for existing indications, introduction of AngioJet System-related products, more face-time selling to existing accounts, peer-to-peer selling, and the publication of clinical performance and cost-effectiveness data.

In addition, the Company reiterated the projections for fiscal year 2004 that it had

presented in its February 17, 2004 press release.

75. During the next several months, Possis emphasized, both in its press

releases and in discussions with analysts, that the AngioJet would soon become the

“standard of care” in the market for blood clot removal. As noted herein, defendants

recognized that, to achieve that level of prominence, they had to expand the uses of the

AngioJet into new treatment areas. In a Bloomberg interview published on April 5, 2004,

Defendant Dutcher estimated that the realizable market at that time for the AngioJet was

approximately $260 million, but he projected that over the following three years that

number would increase to approximately $760 million. Moreover, he stated his

expectation that the additional $500 million of market opportunity would come from


33

“simply expanding the [AngioJet’s] applications.” That was the impetus behind the

Company’s initiation of the AiMI study.

When asked to comment on the difficulty of selling the AngioJet or in gaining

acceptance of the system by doctors, Defendant Dutcher responded:

Well, to start out it was somewhat difficult because, whenever you pioneer a new medical device, you have to have a lot of science to kind of back it up. And that’s what really drives physicians to use your product. They need to see the evidence. And of course, it takes time to get that evidence. And we spent years getting scientific information from clinical trials. Once we had that, then it became a concept sell. And once you do that, why then physicians will start to follow, and pretty soon you have -- become more or less a standard of care, and that’s what we’re approaching with our product.

76. The statements referred to in ¶¶ 74 and 75 were false and misleading when

made for the reasons set forth in ¶ 70.

77. Shortly after defendants made the false and misleading statements referred

to in ¶¶ 74 and 75, several Company insiders sold significant amounts of their privately

held Possis stock. On April 2, 2004, Shawn McCarrey, Vice President of Worldwide

Sales, sold 2,300 shares for proceeds of approximately $67,712. On April 12, Robert

Scott, Vice President of Management Operations and Information Technology, sold

1,501 shares for proceeds of approximately $41,338; the next day, he sold 2,814 shares

for proceeds of approximately $77,047. In addition, on April 14, Irving Colacci sold

2,272 shares, in two transactions, garnering total proceeds of approximately $59,928.

78. Of course, defendants knew, and had acknowledged repeatedly over the

previous several years, that the results of the AiMI trial would prove crucial to the

AngioJet’s ability to reach the lofty status of industry standard. In fact, the very impetus

behind the Company’s initiation of the study was to establish the AngioJet as the gold

standard for treating a broad range of heart attack patients.


34

In light of the already apparent indications to the contrary, defendants had a duty

to correct or amend the numerous pre-Class Period statements that they had used to

heighten the expectations of investors and analysts regarding the study. Contrarily, they

intensified their campaign to disseminate nothing but positive news about the study; in so

doing, they issued a number of materially false and misleading statements during the

remainder of the Class Period that raised the market’s expectations even higher.

79. On May 18, 2004, Possis issued a press release announcing “record” sales

and a 60% increase in earnings per share for the third fiscal quarter of 2004, the period

ended April 30, 2004. In that release, Defendant Dutcher stated,

I am very proud to announce record sales for the third quarter of fiscal 2004 and robust year-over-year growth in earnings per share. We had a very rapid expansion of our U.S. drive unit base in the quarter, which along with some of our recent market approvals, make us optimistic about the balance of the fiscal year. We expect to enter fiscal 2005 with a large domestic installed base, a solid array of catheter products, and potentially promising results from our AiMI coronary marketing trial.

In that same release, the Company also announced its projections for fiscal 2005.

In presenting its financial forecast, Possis suggested that the AiMI results would be

“compelling.” The release stated,

Looking ahead to its 2005 fiscal year, the Company’s preliminary guidance is to expect total revenue in the range of $92-$98 million, with AngioJet revenue in the range of $90-$96 million. The upper end of the revenue range will require that the Company have compelling clinical results from its AiMI coronary clinical marketing trial, which we expect to announce in September.

80. The following day, the price of Possis shares rose from $26.00 to $28.32.

81. On or about June 14, 2004, Possis filed with the SEC a Form 10-Q, signed

by Defendants Dutcher and Chacko, disclosing its financial results for the third fiscal

quarter of 2004. The filing contained the following projection:


35

For fiscal 2005, the Company’s preliminary guidance is to expect total revenue in the range of $92-$98 million, with AngioJet revenue in the range of $90-$96 million. The upper end of the range will require that findings of the Company’s AiMI coronary clinical marketing trial, which we expect to announce in July or August 2004, support increased utilization of the AngioJet System. The Company projects full-year gross margins in the mid seventies, as a percent-of-sales. Preliminary estimates for diluted EPS in fiscal 2005 are in the range of $0.83 to $0.96 per share, with the upper end of the range contingent on the impact of clinical results from AiMI. The Company expects to refine its guidance for fiscal 2005 once it has fully analyzed and disclosed the AiMI results.

82. On June 15, 2004, the price of Possis stock rose from $30.97 per share to

$32.32 per share. Moreover, just over two weeks later, on June 30, the stock price

reached its Class Period high of $34.15 per share.

83. The statements in ¶¶ 79 and 81 were false and misleading when made for

the reasons stated in ¶ 70. In addition, according to a clinical specialist who worked for

Possis from November 2003 until August 2005, the AiMI data arrived at the corporate

headquarters in or about May of 2004. At that point, it appears that the negative

indications that had surfaced were confirmed. The suspicious selling of Possis stock by

Company insiders at or around that time, as described below, further supports this

conclusion. The magnitude and timing of the insiders’ flurry of trading activity in late

May and early June of 2004 evidence defendants’ awareness of unfavorable data from the

AiMI trial.

84. The Company’s failure to disclose to the market the impending negative

results of the AiMI study is striking in light of its previous disclosure of problems

associated with one of its other studies, the TIME (Thrombectomy in Middle Cerebral

Embolism) trial. Possis had initiated that study to determine the efficacy of the AngioJet

in treating ischemic stroke, i.e., stroke caused by a clot or other material that gets lodged


36

in the middle cerebral artery. In a press release published on Business Wire on August

11, 2003, the Company disclosed that the study investigators had concluded, and the

Company agreed, that the catheter being tested, the NV 150 neurocatheter, “while safe,

had not met the clinical challenges of being effective enough to warrant a Phase II trial.

Overall, the device effectiveness at delivering thrombectomy, or clot removal, was

approximately 30%.”

In that release, Defendant Dutcher stated, “While we are disappointed in the

short-term outcome, we are resolved to continue our research efforts along several paths,

including using drugs and our device together, to discover a therapy with the right

balance of safety and effectiveness.”

The Company also stated that the ending of the TIME trial “will not have any

revenue or earnings impacts on the financial forecasts for fiscal 2004, previously given

by the Company. The Company still expects full-year revenues in the range of $72-75

million, and diluted earnings per share in the range of $0.54-$0.64.”

85. In stark contrast to the market’s reaction to the disclosure of unfavorable

results from the AiMI trial, the disclosure concerning the TIME trial had no negative

impact on the price of Possis stock. In fact, the day after the announcement, the stock

price rose to $17.64 per share from $17.35 per share the previous day. The disparity

between the benign effect of the TIME announcement and the pernicious effect of the

AiMI revelation stems from the fact that Possis had not tied its financial future to the

success of the TIME trial as it had with the AiMI trial. The Company recognized that the

market for treating heart attack patients presented a significantly more lucrative

opportunity than the market for ischemic strokes. The Company had not projected that


37

the TIME study would establish the AngioJet as the “standard of care” for treating stroke

patients, whereas Possis repeatedly made statements of that magnitude regarding the

AiMI trial.

86. The market’s dramatic reaction to the announcement of the unfavorable

AiMI results, as compared to its ambivalence regarding the failed TIME trial,

demonstrates the extent to which defendants had conditioned investors and analysts to

use the AiMI study as a measure of Possis’ financial prospects and to expect a positive

outcome. As a result, the false and misleading statements and omissions concerning

AiMI were the direct and proximate cause of plaintiffs’ losses.

ADDITIONAL SCIENTER ALLEGATIONS

87. At the same time they were issuing false and misleading statements that

were intended to, and did, condition investors to expect the announcement of favorable

results from the AiMI trial, the Individual Defendants and other Company insiders

realized substantial gains from sales of their privately held shares of Possis stock.

Although many of these insiders sold stock several times during the Class Period, it is

particularly noteworthy that seven directors and officers, including Defendants Dutcher

and Chacko, all sold stock at virtually the same time, between May 27 and June 1, 2004.

These sales came little over one week after the Company’s May 18 press release, in

which it indicated that the AiMI results would be positive, even “compelling.” Robert

Scott, Vice President of Manufacturing Operations and Information Technology, sold

6,840 shares on May 27 for approximately $193,777, the most he received on any single

sale during the previous eight years. On May 28, Director Rodney Young sold 5,000

shares for proceeds of approximately $139,800, his largest single sale (in amount of


38

shares and proceeds) since he became a director in 1999. Director Donald Wegmiller

sold 27,064 shares in two transactions on May 28 for total proceeds of approximately

$763,121. Defendant Dutcher sold 7,482 shares on June 1 for approximately $212,040,

the most he received on any single sale during the previous eight years.

Three other insiders sold during that same short time period: James Gustafson,

Vice President of Research, Development and Engineering, sold 400 shares on May 27,

in two transactions, for a total of $11,203; Irving Colacci, Vice President of Legal Affairs

and Human Resources, General Counsel and Secretary, sold 2,581 shares on that same

day for approximately $72,578; and Defendant Chacko sold 4,000 shares that day for

approximately $113,640.

In all, these insiders sold a total of 53,367 shares of Possis stock for proceeds of

approximately $1,506,159 over a 6-day span.

In addition, shortly thereafter, on June 7 and 8, Director Wegmiller sold 20,523

additional shares, in two transactions, reaping total proceeds of $649,541.

88. The timing and magnitude of the stock sales by these Company insiders

provides powerful evidence of scienter. These sales are unusual and suspicious because,

although these individuals sold Possis stock periodically prior to and during the Class

Period, the collective selling activity that occurred over a 6-day span in late May and

early June 2004 was unprecedented; these insiders had never all sold within such close

proximity to each other. Moreover, the timing of this mad rush to dump off substantial

amounts of stock is suspicious, given that, as detailed above, the AiMI data arrived at

corporate headquarters at or around that time. In addition, these sales came little more

than a week after the Company’s May 18 press release, in which defendants suggested


39

that the AiMI results would be “compelling.” The Individual Defendants and their

colleagues thus reaped large personal financial benefit by selling their shares in a

coordinated effort at prices that were artificially inflated due to defendants’ false and

misleading statements regarding the AiMI trial and the financial prospects of Possis.

89. The Individual Defendants were also motivated by the prospect of

substantial personal benefit for ensuring that the Company was meeting its financial

targets. The compensation packages for Defendants Dutcher and Chacko included a

guarantee of large bonuses predicated on Company performance. Prior to and during the

Class Period, Defendants Dutcher and Chacko received bonuses. Moreover, the amounts

of these bonuses jumped up more than tenfold between fiscal 2001 -- the year the AiMI

study was instituted -- and fiscal 2002, and increased again in fiscal 2003 and fiscal 2004.

90. As reported in Possis’ 2003 Proxy Statement, filed on or about November

7, 2003, Defendant Dutcher received a salary of $167,504 and a bonus of $15,500 in

fiscal 2001; in fiscal 2002, he received a salary of $214,881 and a bonus of $175,300; and

in fiscal 2003, he received a salary of $225,998 and a bonus of $177,500. In fiscal 2001,

Defendant Chacko received a salary of $108,682 and a bonus of $6,000; in fiscal 2002,

he received a salary of $131,441 and a bonus of $70,200; and in fiscal 2003, he received

a salary of $138,602 and a bonus of $83,200. Additionally, as reported in the Company’s

2004 Proxy Statement, filed on or about November 5, 2004, Defendant Dutcher received

a salary of $258,392 and a bonus of $176,300 in fiscal 2004. In addition, Defendant

Chacko received a salary of $148,516 and a bonus of $91,300 in fiscal 2004.

91. The 2003 Proxy Statement contained a Report of the Compensation

Committee, which stated:


40

Our compensation program is intended to attract and retain high quality executive leadership and to motivate these executives to perform consistent with shareholders’ interests. Executive officer compensation is directly linked to both individual and Company performance necessary to drive increasing value to shareholders. The program is designed to provide a competitive base salary while retaining flexibility through the structuring of short- and long-term incentives that recognize progress toward achievement of both individual and corporate goals.

The Report noted that for fiscal year 2003, based on the assessment that Possis

performed at 96% of its goals and objectives, Defendant Dutcher received approximately

45% of his total compensation in the form of a cash bonus. In addition, 50% of the

compensation given to the Vice President of Sales came in the form of commissions and

a cash bonus, and the other Vice Presidents each received 38% of their total

compensation in the form of a cash bonus.

92. The Company’s officers were thus reaping large percentages of their

yearly compensation through performance-based bonuses and commissions. Moreover,

there would be a similarly powerful incentive for meeting Company goals and objectives

in 2004. According to the Report contained in the 2003 Proxy Statement, “the

opportunity to receive a portion of total compensation in the form of variable

compensation was increased such that for fiscal year 2004, officers can receive variable

cash compensation . . . of 40% of total compensation, with [Defendant Dutcher] eligible

to receive up to 45% and sales management eligible to receive up to 50% of total

compensation in the form of commissions and cash bonus.”

93. Company officers were also eligible to receive stock options, which the

Company described as “long-term equity-based compensation,” pursuant to Possis’ Stock

Compensation Plan. Moreover, as stated in the Report, “[o]fficers with a greater degree


41

of influence over the Company’s ability to achieve its strategic goals will receive larger

long-term incentive awards.”

According to the 2004 Proxy Statement, Defendant Dutcher received 56,300 stock

options for fiscal 2004; 49,800 for fiscal 2003; and 57,400 for fiscal 2002. Defendant

Chacko received 22,800 stock options for fiscal 2004; 19,500 for fiscal 2003; and 21,700

for fiscal 2002.

In addition, the Report in the 2003 Proxy Statement specified the driving forces

that would guide future compensation decisions, stating

The development of appropriate criteria to guide compensation decisions going forward continues to be driven by two factors: the fact that the Company has entered a new stage in its development and is establishing a foundation for long-term growth and profitability; and the need to continue to enhance the alignment of management’s interests with those of the shareholders. As we increase our market penetration through the sale and placement of AngioJet® System products and enhance performance through the realization of operational efficiencies, our performance will be evaluated on our ability to increase profitability while maintaining strong new product development efforts. Corporate and individual performance measures will continue to reflect an emphasis on financial goals, sales growth, profitability targets, and product development, research and regulatory approvals necessary to support sustained growth.

DEFENDANTS CONTINUE TO DEFRAUD THE MARKET

94. Despite their initial awareness early in 2004 of indications that the study

would likely yield poor results and the subsequent confirmation of those indications in or

around May of that year, defendants persisted in issuing positive statements about the

AiMI trial. They had already spent more than two years preparing investors for the

announcement of positive results from the trial. The Company’s announcement on

January 21, 2004 that it had completed patient enrollment in the study and that it

expected second fiscal quarter 2004 earnings per share and fiscal 2004 performance to


42

exceed previous estimates ushered in a period of substantial and steady increase in the

price of Possis stock. The price rose from $21.60 on January 21, the first day of the Class

Period, to a Class Period high of $34.15 on June 30, and ultimately settled at $30.76 on

August 23, the day Possis released the unfavorable AiMI results. This ascendance was

propelled by investors’ expectation that the culmination of the AiMI study was now in

sight, with the release of the results to come that summer.

95. Moreover, the information relating to the AiMI trial that hit the market

during this period was the direct cause of the stock price upsurge. As the Company

announced that patient enrollment had ended and that the results were soon to follow, the

stock price reached and remained at a level it had never before attained. Investors relied

on defendants’ grandiose projection that the AiMI study would firmly establish the

AngioJet as the “standard of care” for thrombectomy.

96. As noted herein, defendants recognized, and stated repeatedly to investors

and analysts, that a major factor in determining whether they would be able to continue to

generate significant revenue growth was the result of clinical trials. Their

characterizations of the AiMI study as “landmark,” “groundbreaking” and “pioneering” --

words they did not use to describe their other major studies -- evidence their belief that

the importance of this study to the Company’s growth potential far surpassed that of other

studies they had initiated. Thus, investors’ decisions to purchase Possis stock during the

Class Period were based on their expectation, which defendants fostered, that the

Company could achieve continued strong growth as high as 35%. The Company’s ability

to grow at that level was dependent, in turn, on the success of the AiMI study.


43

97. Through their numerous positive statements about the AiMI study,

defendants had cultivated a great deal of anticipation regarding the results; both investors

and analysts now expected that the time had come for the expectation to be realized.

Analysts issued very encouraging reports that cited the impending AiMI results as a

factor that would bolster the Company’s revenue growth and investors, in turn, eagerly

bought Possis stock.

98. On February 18, 2004, Cathay Financial issued an OUTPERFORM rating

for Possis shares and raised the price target from $27 to $29. The report highlighted the

AiMI trial, stating that the results “should bolster visibility and demand for the AngioJet

in treating heart attack patients” and that “we expect the results to strongly favor the

AngioJet group based upon previously reported clinical data.”

99. On May 14, 2004, Miller Johnson Steichen Kinnard maintained its

previous BUY rating for Possis stock. The report characterized the AiMI trial results as

“[t]he next big catalyst for Possis,” noting that “[p]ositive data from the study could

support expanded use of the AngioJet. The better the results, the larger the opportunity.

Of course, negative results could have the opposite effect. We anticipate that the trial

results will be favorable.”

100. On May 20, 2004, Cathay Financial reiterated its previous

OUTPERFORM rating for Possis. The report noted that “[a] major milestone for Possis

should be the release of expected positive clinical trial data from the AiMI . . . trial in

August or September this year.” The report also reiterated Cathay’s projection that the

results would “strongly favor the AngioJet group based upon previously reported clinical


44

data” and that they “should greatly bolster visibility and demand for the AngioJet in

treating heart attack patients.”

101. On June 24, 2004, Cathay Financial downgraded its recommendation from

OUTPERFORM to NEUTRAL based on valuation, noting that the shares had appreciated

150% since July 2003. While noting the potential downside risk of unfavorable AiMI

results, the report stated that “[i]f the results are positive, as we expect, we believe that

the shares could rally by 6%-10%, up to $35-$36.

THE ONCE HIGH-FLYING ANGIOJET COMES CRASHING DOWN

102. On August 23, 2004, Possis issued a press release announcing that the

AiMI trial showed no statistically significant difference in final infarct size-- i.e., the

percentage of heart tissue that remains non-viable after heart attack and treatment--

between patients who had undergone treatment with the AngioJet in conjunction with

angioplasty, stenting and a GP IIb-IIIa inhibitor and those who received angioplasty,

stenting and a GP IIb-IIIa inhibitor alone.

The release stated,

As measured by nuclear scan, the 197 intent-to-treat patients in the AngioJet arm had a mean final infarct size of 12.5% (12.1 S.D.), while the 205 patients in the control arm had a mean final infarct size of 9.8% (10.9 S.D.). . . .The p-value for this difference was 0.0182. For all of the secondary endpoints, there was no statistically significant difference between the two treatment arms.

103. In light of the litany of statements defendants had issued, both prior to and

during the Class Period, touting the value of the study to the Company’s future and the

likelihood that the results would be favorable, this news jolted the market, shocking both

investors and analysts. The following day, the price of Possis shares fell from $30.76 to


45

$18.53, on a trading volume of 14,872,723, as investors reacted to the devastating

announcement. This represented an almost 40% drop in Possis’ market capitalization.

104. In the Company’s release, Dr. Arshad Ali, Principal Investigator of the

AiMI study, stated, “While the study showed that the AngioJet was safe to use in heart

attack patients and effectively removes angiographically visible thrombus, the AiMI

study, based on a nuclear endpoint, did not provide a basis for concluding that the

AngioJet device should be routinely used for all heart attack patients to reduce final

infarct size.” Thus, the results of the study completely contradicted the hypothesis that

defendants sought to prove.

Possis also stated that, due to the AiMI study results, it had adjusted its

preliminary guidance for fiscal year 2005:

Previously, the Company had expected revenues in the range of $92-98 million for the year, with U.S. AngioJet revenues in the range of $90-96 million; diluted EPS were expected to be in the range of $0.83-$0.96. The Company now projects revenues in the range of $85-$90 million, with U.S. AngioJet revenues in the range of $81-$85 million. The revised expectation for diluted EPS is now in the range of $0.70-$0.82 per diluted share.

105. Analysts, whose evaluations of the Company were based in part on

defendants’ encouraging statements about the AiMI trial, lowered their ratings for Possis

stock and their estimates as to the Company’s growth potential. On August 24, First

Albany characterized the trial results as “profoundly disappointing” and removed any

price target for Possis shares. The firm told clients that it viewed the data as “a worst-

case outcome, surprising to the investigators, and even our most pessimistic expectations,

especially in light of favorable data from previous AngioJet clinical trials.”

106. That same day, Cathay Financial lowered its price target for Possis stock

from $35 to $21, noting that “[t]he negative AiMI trial results should dampen sales


46

growth for Possis and management is lowering its sales and EPS estimates for FY 2005.”

The report further stated,

Our old FY 2005 estimate was sales of $97m and EPS of $0.87. We are lowering our FY05 sales estimate by 8% to $89m and reducing our FY05 EPS est to $0.78. We are also lowering our FY06 EPS est. to $0.90 from $1.05 due to lower sales growth and less operating leverage, with a new sales projection for FY06 of $101m, down from $115m. . . .We now expect Possis Medical to achieve sales growth of 23% in FY05, down from our prior estimate of a 34% increase. . . .The main practical implication of the negative AiMI trial results are a lack of justification to begin using the AngioJet in heart attack patients who do NOT have angiographically visible thrombus, a population of patients which is 10x-12x larger than the population of heart attack patients with visible thrombus typically treated with the AngioJet.

We anticipate some positive conclusions to be derived from the forthcoming subgroup analysis of the AiMI data, especially with regard to differential benefit depending upon initial thrombus burden, as proven in several earlier trials which pre-screened patients based upon angiographic criteria. Unfortunately, as a retrospective analysis which simply reinforces prior guidelines for use of the AngioJet, these conclusions are not likely to expand use of the device as had been hoped.

107. The events that followed the watershed August 23 announcement

confirmed that the fallout from the negative AiMI was substantial. On September 14,

2004, when defendants announced results for the fourth fiscal quarter of 2004, the period

ended July 31, 2004, they reported that fourth quarter net income fell to $3.59 million, or

$0.18 per share, from $11.1 million, or $0.58 cents per share, in the year-ago period.

Revenue was $20 million, shy of the First Call revised consensus target of $20.1 million.

The Company also issued a profit outlook for the first fiscal quarter of 2005, the period

ended October 31, 2004, in the range of $0.11-$0.13 per share -- significantly less than

analysts’ revised expectations of $0.15 per share.


47

108. On October 14, 2004, Possis issued a release on Business Wire

announcing that it was reducing both its revenue and EPS estimates for the first fiscal

quarter of 2005 and its fiscal 2005 outlook. That release stated,

Possis Medical, Inc. (Nasdaq:POSS) announced today that it expects revenue for the first fiscal quarter ended October 31, 2004 to be approximately $17.5 million, up 12% from $15.6 million in the prior-year period, but less than the previously announced projected revenue range of $19.0-$19.5 million. The decrease in revenue is due to a greater than expected impact from the results of the post-marketing study called “AiMI.”

* * *

The revenue shortfall has been driven both by reductions in coronary sales, as well as by slower sales in peripheral and av access products, as the Company’s sales force has been intensely focused on helping customers put the AiMI results into the context of their clinical practice, as opposed to growing the product portfolio. The Company expects net income per diluted share for the first fiscal quarter ended October 31, 2004 to be in the range of $0.10-$0.11 versus $0.10 per share in the prior year period. This expected reporting range is less than the Company’s previously issued estimate of $0.11-$0.13 per share. Diluted earnings per share were negatively impacted by the reduction in revenues.

For fiscal 2005, the Company expects revenues in the range of $75-$80 million, with net income per diluted share in the range of $0.57-$0.62; this compares to net income per diluted share of $0.60 in the prior year. The revenue reduction for the full year reflects the impacts from the AiMI clinical results, and reduced expectations for non-core, U.S. AngioJet product sales. Previously, the Company had expected fiscal 2005 revenues in the range of $85-$90 million and net income per diluted share in the range of $0.70-$0.82.

109. In an October 15, 2004 report, Miller Johnson Steichen Kinnard lowered

its price target for Possis stock from $18 to $11. The report attributed a “sales slump” to

the disappointing AiMI results. It stated,

The company guided lower for the current quarter (ends October) and FY05 (July ending) based on the negative impact from the AIMI trial. The sales force is spending significantly more time on damage control than was previously anticipated. Additionally, the sale of


48

coronary catheters has dropped as a direct result of the poor AIMI results. Our concern is that the mix of procedures using the AngioJet was more weighted toward heart attack than management believed, which is resulting in the lost sales. The results of the AIMI trial did not support the use of the AngioJet in treating heart attacks. We anticipate that it will take a couple of quarters to see if the smoke clears. It is also likely that competitors are taking advantage of this situation to grab market share. Besides the immediate concern of poor financial results, we are also concerned that the slump in sales due to the trial, as well as the decrease in stock price (and hence the value of options), may have a negative impact on the morale of the sales force.

* * *

Our FY05 estimate before this announcement was $84.9mm and EPS of $0.72. With this announcement, we are lowering our FY05 revenue projection to $75.2mm with EPS of $0.58.

* * *

The negative impact from the AiMI trial is greater than we, or the company, were anticipating. Given the lack of near-term catalysts, it may be some time before Possis resumes a growth path. Consequently, we continue to rate the company a Neutral. We are lowering our price target to $11 from $18.

110. Reacting to the Company’s lowered fiscal year 2005 earnings forecast,

analysts at First Albany again cut their rating on Possis shares from “Neutral” to

“Underperform” and slashed the price target by half, to $10.00 per share. Moreover,

following the publication of disappointing results for the first fiscal quarter of 2005 and

the downgrade by First Albany, the price of Possis stock crashed again, falling another

33% in one day, from $14.73 per share to $9.89 per share. Analysts at First Albany

projected that, for fiscal 2005, Possis would have no earnings growth and may even

have to reduce its sales force to account for its significantly impaired sales and reduced

cash flow.


49

111. On November 24, 2004, shares of Possis stock again fell by more than

10% following the Company’s announcement the previous day that full-year results

would come in below expectations. Possis shares traded down an additional $1.23, to

$9.70, in early morning trading after closing the previous day at $10.93.

112. On November 22, 2004, Cathay Financial issued a report in which it

maintained a NEUTRAL rating on Possis stock. It stated,

Sales for Possis have been hurt since the late August announcement of negative clinical trial results for the AiMI (AngioJet Myocardial Infarction) trial. The benefit of using the company’s thrombectomy device as an adjunct to angioplasty and/or stenting has been made uncertain by the AiMI results, hurting sales of new systems and catheters.

We do not expect a rebound in sales growth for Possis this year. . . .We maintain our Neutral rating on the shares with the view that there are few potential catalysts ahead to drive shareholder value in the near term.

113. During a conference call held on November 24, 2004 to discuss Possis’

financial results for the first fiscal quarter of 2005, the period ended October 31, 2004,

Defendant Dutcher noted that “[w]hile we reported a first quarter that was in line with

our expectations, we have had to lower our revenue and earnings expectations for the

balance of the fiscal year. That’s due to the impact of the trial outcomes of our business.”

In addition, Defendant Chacko attributed the decline in the number of coronary units sold

to “customer caution” following the Company’s presentation of the full results from the

AiMI trial.

114. On that same day, in response to defendants’ revised estimates, Miller

Johnson Steichen Kinnard maintained its NEUTRAL rating for Possis stock, but

increased the price target from $11 to $13. The report noted the following:


50

Given the quarterly results and additional feedback from customers following the negative AIMI trial results, management has cut guidance for FY05 (ends July) again. Revenue guidance for FY05 now stands at $66mm to $72mm compared to the previous guidance of $75mm to $80mm issued in September. EPS guidance for FY05 is now in a range of $0.40 to $0.54 compared to the previous guidance of $0.57 to $0.62.

* * *

Sales are expected to remain weak through the remainder of the year as the sales force continues to deal with fallout of AIMI.

* * *

Clearly, given the failure of AIMI, it appears that management is starting to focus more on peripheral applications of the technology, such as deep vein thrombosis and pulmonary embolism. These markets are much less developed than the coronary market given the lack of devices to address the indications. While competition in these markets is lower, a lack of competition also makes development of a market potentially slower.

115. On February 22, 2005, Possis issued a press release announcing its

financial results for the second fiscal quarter of 2005, the period ended January 31, 2005.

Defendants revealed that profits had fallen by at least 45%.

In that release, Defendant Dutcher stated,

Although there is no question that the market’s perception of the AiMI study has hurt our sales, we believe that the AngioJet System will re-emerge as the device of choice for treating visible thrombus in high risk patients. This process of regaining our growth momentum will take time. We expect our full-year revenues to be approximately $65 million, with gross margins in the low to mid seventies as a percent-of-sales.

116. On February 24, 2005, Miller Johnson Steichen Kinnard lowered its price

target back to $11, stating that “[t]he negative results from AIMI continue to affect the

top line. For the third time since AIMI was released, management reduced expectations.”


51

The report observed further that the negative results were exerting, and would continue to

exert, a dramatic impact on the Company’s performance. It concluded,

Given management’s repeated decrease in guidance, the failure of AIMI has had a much more profound impact on Possis than anyone expected. Clearly, management is in the process of searching for new growth opportunities. Given the surprise that the AIMI trial results presented, it is our opinion that it could take at least a couple of years for Possis to reposition itself for the type of growth that it was experiencing before the AIMI failure.

117. On May 10, 2005, defendants announced that Defendant Chacko had

suddenly decided to retire as the Company’s Chief Financial Officer and Vice President

and head of Investor/Public Relations. According to the Company’s release, Defendant

Chacko had left “for personal reasons” and to “pursue other interests.” His departure was

neither planned nor pre-announced.

APPLICABILITY OF PRESUMPTION OF RELIANCE: FRAUD-ON-THE-MARKET DOCTRINE

118. At all relevant times, the market for Possis’ common stock was an

efficient market for the following reasons, among others:

(a) Possis’ stock met the requirements for listing, and was listed and actively traded on the NASDAQ national market exchange, a highly efficient and automated market;

(b) As a regulated issuer, Possis filed periodic public reports with the

SEC and the NASDAQ; (c) Possis regularly communicated with public investors through

established market communication mechanisms, including regular disseminations of press releases on the national circuits of major newswire services and other wide-ranging public disclosures, such as communications with the financial press and other similar reporting services; and

(d) Possis was followed by several securities analysts employed by

major brokerage firms who wrote reports that were distributed to the sales force and certain customers of their respective brokerage


52

firms. Each of these reports was publicly available and entered the public marketplace.

119. As a result of the foregoing, the market for Possis common stock promptly

digested current information regarding Possis from all publicly available sources and

reflected such information in Possis’ stock price. Under these circumstances, all

purchasers of Possis common stock during the Class Period suffered similar injury

through their purchase of Possis common stock at artificially inflated prices and a

presumption of reliance applies.

NO SAFE HARBOR

120. The statutory safe harbor provided for forward-looking statements under

certain circumstances does not apply to any of the allegedly false and misleading

statements pleaded in this complaint. Many of the specific statements pleaded herein

were not identified as “forward-looking statements” when made. To the extent there

were any forward-looking statements, there were no meaningful cautionary statements

identifying important factors that could cause actual results to differ materially from

those in the purportedly forward-looking statements. Alternatively, to the extent that the

statutory safe harbor does apply to any forward-looking statements pleaded herein,

defendants are liable for those false and misleading forward-looking statements because

at the time each of those forward-looking statements was made, the particular speaker

knew that the particular forward-looking statement was false and misleading, and/or the

forward-looking statement was authorized and/or approved by an executive officer of

Possis who knew that those statements were false and misleading when made.


53

THE INDIVIDUAL DEFENDANTS’ GUIDANCE TO SECURITIES ANALYSTS

121. The Individual Defendants provided guidance to securities analysts and

used analysts as a conduit to provide materially false and misleading information to the

securities markets. Possis was followed by securities analysts employed by brokerage

firms that, throughout the Class Period, reported information provided to them by the

Individual Defendants and made recommendations concerning the Company’s securities

based on the information provided by the Individual Defendants. Among the securities

firms that followed the Company during the Class Period were Dougherty & Company

LLC, Miller Johnson Steichen Kinnard, Cathay Financial and First Albany. In writing

their reports, analysts reflected information provided by the Individual Defendants.

122. Prior to and during the Class Period, it was the Company’s frequent

practice to have its top officers and key members of its management team, including the

Individual Defendants, communicate regularly with securities analysts at the firms

identified above (among others) on a regular basis to discuss, among other things, the

Company’s financial results, and to provide detailed guidance to these analysts with

respect to the Company’s business. These communications included, but were not

limited to, conference calls where the defendants discussed relevant aspects of the

Company’s operations and financial prospects. The Individual Defendants knew that by

participating in these regular and direct communications with analysts, Possis

disseminated information to the investing community, and that investors relied and acted

on such information by purchasing and selling the Company’s securities. In fact, during

an interview in May 2002, Defendant Chacko emphasized the active role he played in


54

relaying information about Possis to investors and analysts and in spurring their interest

in the Company. He stated,

On the investor relations side, I believe that I brought a very high degree of professionalism and service to our individual and institutional shareholders, and to our analysts. I have communicated pro-actively, consistently, and clearly. I have also brought their concerns in to our management and Board. I believe that an effective IR officer has to function both as a partner to the CEO and as a “shareholder ombudsman.” I believe that I can point to our record level of institutional ownership, increasing analyst coverage, and declining short interest as evidence of this.

As the above statement indicates, the Individual Defendants were intimately

involved in disseminating information about Possis to the market.

123. Many of the analyst reports issued during the Class Period were

remarkably similar or reported substantially the same facts after communications with the

Company. This confirms that the information contained in analyst reports came from

Possis and the Individual Defendants.

124. The Individual Defendants engaged in the above-referenced

communications with analysts to cause or encourage them to issue favorable reports

concerning Possis, and used these communications to present the prospects of the

Company to the marketplace in a falsely favorable light to artificially inflate the market

price of Possis’ securities. Despite their duty to do so, the Individual Defendants failed to

correct these statements during the Class Period.

125. The investment community, and in turn investors, relied and acted on the

information communicated in these written reports that recommended that investors

purchase Possis securities. The Individual Defendants manipulated and inflated the

market price of Possis securities by falsely presenting to analysts the prospects of the


55

Company, as well as by failing to disclose the true adverse information about the

Company that was known only to them.

LOSS CAUSATION

126. Plaintiffs and the Class were damaged as a result of defendants’ fraudulent

conduct. As noted herein, Possis’ stock price rose substantially due to defendants’

positive statements during the Class Period. For example, Possis’ common stock closed

at $21.19 per share on January 20, 2004 – the day before the start of the Class Period.

The stock price closed at $23.90 per share on double volume on January 22, 2004 – the

day after the first positive statement at issue. In addition, on May 19 -- the day after the

Company issued a press release in which it suggested that the AiMI results could be

“compelling,” the stock rose to $28.32 per share from $26.00 per share the previous day.

127. These changes in the stock price demonstrate a direct relationship between

defendants’ issuance of positive statements and increases in the price of Possis shares.

Moreover, the stock price continued on an upward surge throughout the remainder of the

Class Period, reaching a high of $34.15 per share on June 30, 2004 and ultimately settling

near that peak, at $30.76 per share, on August 23, 2004, the day that the Company

released the disappointing AiMI results. The next day, in response to that revelation, the

stock price dropped to $18.53 per share on a trading volume of 14,872,723; the next

highest trading volume over the previous 9 years was a little under 2 million. Moreover,

the August 24 plunge was the first time since the beginning of the Class Period that the

stock price dropped below the pre-Class Period price of $21.19.

Moreover, as detailed more fully in ¶¶ 84-86, supra, while the disclosure of the

unfavorable AiMI results had a profound and lasting effect on the price of Possis stock,


56

the disclosure of the failure of another one of Possis’ clinical initiatives, the TIME trial,

was met with indifference by the market. This disparity further demonstrates the degree

to which the AiMI study uniquely affected the price of Possis stock.

BASIS OF ALLEGATIONS

128. Plaintiffs have alleged the following based upon the investigation of

plaintiffs’ counsel, which included a review of SEC filings by Possis, securities analysts’

reports and advisories about the Company, press releases and other public statements

issued by the Company, media reports about the Company, and interviews with former

Possis employees, and plaintiff believes that substantial additional evidentiary support

will exist for the allegations set forth herein after a reasonable opportunity for discovery.

CLASS ACTION ALLEGATIONS

129. Plaintiffs bring this action as a class action pursuant to Rule 23 of the

Federal Rules of Civil Procedure on behalf of all persons who purchased or acquired

Possis’ publicly traded common stock (the “Class”) on the open market during the Class

Period. Excluded from the Class are the defendants herein, members of each Individual

Defendant’s immediate family, any entity in which any defendant has a controlling

interest, and the legal affiliates, representatives, heirs, controlling persons, successors,

and predecessors in interest or assigns of any such extended party.

130. The members of the Class are so numerous that joinder of all members is

impracticable. The disposition of their claims in a class action will provide substantial

benefits to the parties and the Court. During the Class Period, Possis had millions of

shares outstanding, owned by hundreds if not thousands of persons.


57

131. There is a well-defined community of interest in the questions of law and

fact involved in this case. Questions of law and fact common to the members of the

Class that predominate over questions that may affect individual Class members include:

a) Whether the Exchange Act was violated by defendants;

b) Whether defendants omitted and/or misrepresented material facts;

c) Whether defendants’ statements omitted material facts necessary to make the statements made, in light of the circumstances under which they were made, not misleading;

d) Whether defendants knew or recklessly disregarded that their statements were false and misleading;

e) Whether the price of Possis’ publicly traded common stock was artificially inflated; and

f) The extent of damage sustained by Class members and the appropriate measure of damages.

132. Plaintiffs’ claims are typical of those of the Class because plaintiffs and

the Class sustained damages from defendants’ wrongful conduct.

133. Plaintiffs will adequately protect the interests of the Class and have

retained counsel who are experienced in class action securities litigation. Plaintiffs have

no interests that conflict with those of the Class.

134. A class action is superior to other available methods for the fair and

efficient adjudication of this controversy.


58

FIRST CLAIM

Violation Of Section 10(b) Of The Exchange Act And Rule 10b-5

Promulgated Thereunder Against All Defendants

135. Plaintiffs repeat and reallege each and every allegation contained above as

if fully set forth herein.

136. During the Class Period, defendants carried out a plan, scheme and course

of conduct that was intended to and, throughout the Class Period, did: (i) deceive the

investing public, including plaintiffs and the other Class members, as alleged herein; (ii)

enable the Individual Defendants and other Possis insiders to sell 146,604 shares of their

privately held Company stock while in possession of material adverse, non-public

information about Possis to the unsuspecting public during the Class Period; and (iii)

cause plaintiffs and the other members of the Class to purchase Possis common stock at

artificially inflated prices. In furtherance of this unlawful scheme, plan and course of

conduct, defendants, jointly and individually, took the actions set forth herein.

137. Defendants (a) employed devices, schemes, and artifices to defraud;

(b) made untrue statements of material fact and/or omitted to state material facts

necessary to make the statements not misleading; and (c) engaged in acts, practices, and a

course of business that operated as a fraud and deceit upon the purchasers of the

Company’s common stock in an effort to maintain artificially high market prices for

Possis’ common stock in violation of Section 10(b) of the Exchange Act and Rule 10b-5

promulgated thereunder. All defendants are sued either as primary participants in the

wrongful and illegal conduct charged herein or as controlling persons as alleged below.

138. Defendants, individually and in concert, directly and indirectly, by the use,

means or instrumentalities of interstate commerce and/or of the mails, engaged and


59

participated in a continuous course of conduct to conceal adverse material information

about the business, operations and future prospects of Possis as specified herein.

139. These defendants employed devices, schemes and artifices to defraud,

while in possession of material adverse non-public information and engaged in acts,

practices, and a course of conduct as alleged herein in an effort to assure investors of

Possis’ value and performance and continued substantial growth, which included the

making of, or the participation in the making of, untrue statements of material facts and

omitting to state material facts necessary in order to make the statements made about

Possis and its business operations and future prospects in the light of the circumstances

under which they were made, not misleading, as set forth more particularly herein, and

engaged in transactions, practices and a course of business that operated as a fraud and

deceit upon the purchasers of Possis common stock during the Class Period.

140. Each of the Individual Defendants’ primary liability, and controlling

person liability, arises from the following facts: (i) the Individual Defendants were high-

level executives and/or directors at the Company during the Class Period and members of

the Company’s management team or had control thereof; (ii) each of these defendants, by

virtue of his responsibilities and activities as a senior officer and/or director of the

Company, was privy to and participated in the creation, development and reporting of the

Company’s internal budgets, plans, projections and/or reports; (iii) each of these

defendants enjoyed significant personal contact and familiarity with the other defendants

and was advised of and had access to other members of the Company’s management

team, internal reports and other data and information about the Company’s finances,

operations and sales at all relevant times; and (iv) each of these defendants was aware of


60

the Company’s dissemination of information to the investing public that they knew or

recklessly disregarded was materially false and misleading.

141. The defendants had actual knowledge of the misrepresentations and

omissions of material facts set forth herein, or acted with reckless disregard for the truth

in that they failed to ascertain and to disclose such facts. Such defendants’ material

misrepresentations and/or omissions were done knowingly or recklessly and for the

purpose and effect of concealing Possis’ operating condition and future business

prospects from the investing public and supporting the artificially inflated price of its

common stock. As demonstrated by defendants’ overstatements and misstatements of the

Company’s business and financial prospects throughout the Class Period, defendants, if

they did not have actual knowledge of the misrepresentations and omissions alleged,

were reckless in failing to obtain such knowledge by deliberately or recklessly refraining

from taking those steps necessary to discover whether those statements were false or

misleading.

142. As a result of the dissemination of the materially false and misleading

information and failure to disclose material facts, as set forth above, the market price of

Possis common stock was artificially inflated during the Class Period. In ignorance of

the fact that the market price of Possis’ publicly traded common stock was artificially

inflated, and relying directly or indirectly on the false and misleading statements made by

defendants, or upon the integrity of the market in which the securities trade, and/or on the

absence of material adverse information that was known to or recklessly disregarded by

defendants but not disclosed in public statements by defendants during the Class Period,


61

plaintiffs and the other members of the Class acquired Possis common stock during the

Class Period at artificially high prices and were damaged thereby.

143. At the time of said misrepresentations and omissions, plaintiffs and the

other members of the Class were ignorant of their falsity, and believed them to be true.

Had plaintiffs and the other members of the Class and the marketplace known the truth

regarding the problems that Possis was experiencing, which were not disclosed by

defendants, plaintiffs and the other members of the Class would not have purchased or

otherwise acquired their Possis common stock, or, if they had acquired such common

stock during the Class Period, they would not have done so at the artificially inflated

prices that they paid.

144. By virtue of the foregoing, defendants have violated Section 10(b) of the

Exchange Act, and Rule 10b-5 promulgated thereunder.

145. As a direct and proximate result of defendants’ wrongful conduct,

plaintiffs and the other members of the Class suffered damages in connection with their

respective purchases and sales of the Company’s common stock during the Class Period.

SECOND CLAIM

Violation Of Section 20(a) Of The Exchange Act Against the Individual Defendants

146. Plaintiffs repeat and reallege each and every allegation contained above as

if fully set forth herein.

147. The Individual Defendants acted as controlling persons of Possis within

the meaning of Section 20(a) of the Exchange Act as alleged herein. By virtue of their

high-level positions, and their ownership and contractual rights, participation in and/or

awareness of the Company’s operations and/or intimate knowledge of the false and


62

misleading financial statements filed by the Company with the SEC and disseminated to

the investing public, the Individual Defendants had the power to influence and control

and did influence and control, directly or indirectly, the decision-making of the

Company, including the content and dissemination of the various statements that

plaintiffs contend are false and misleading. The Individual Defendants were provided

with or had unlimited access to copies of the Company’s reports, press releases, public

filings and other statements alleged by plaintiffs to be misleading prior to and/or shortly

after these statements were issued and had the ability to prevent the issuance of the

statements or cause the statements to be corrected.

148. In particular, each of these defendants had direct and supervisory

involvement in the day-to-day operations of the Company and, therefore, is presumed to

have had the power to control or influence the particular transactions giving rise to the

securities violations as alleged herein, and exercised the same.

149. As set forth above, Possis and the Individual Defendants each violated

Section 10(b) and Rule 10b-5 by their acts and omissions as alleged in this complaint.

By virtue of their positions as controlling persons, the Individual Defendants are liable

pursuant to Section 20(a) of the Exchange Act. As a direct and proximate result of

defendants’ wrongful conduct, plaintiffs and the other members of the Class suffered

damages in connection with their purchases of the Company’s common stock during the

Class Period.

WHEREFORE, plaintiffs pray for relief and judgment, as follows:

A. Determining that this action is a proper class action under Rule 23

of the Federal Rules of Civil Procedure;


63

B. Awarding compensatory damages in favor of plaintiffs and the

other Class members against all defendants, jointly and severally, for all damages

sustained as a result of defendants’ wrongdoing, in an amount to be proven at trial,

including interest thereon;

C. Awarding plaintiffs and the Class their reasonable costs and

expenses incurred in this action, including counsel fees and expert fees;

D. Awarding extraordinary, equitable and/or injunctive relief as

permitted by law, equity and the federal statutory provisions sued hereunder, pursuant to

Rules 64 and 65 and any appropriate state law remedies to assure that the Class has an

effective remedy; and

E. Such other and further relief as the Court may deem just and

proper.

JURY TRIAL DEMANDED

Plaintiffs hereby demand a trial by jury.

Dated: November 4, 2005

REINHARDT WENDORF & BLANCHFIELD GARRETT D. BLANCHFIELD, JR. (#209855) FRANCES E. BAILLON (#284358)

s/Garrett D. Blanchfield, Jr. GARRETT D. BLANCHFIELD, JR.

E-1250 First National Bank Building 332 Minnesota Street St. Paul, MN 55101 Telephone: (651) 287-2100 (651) 287-2103 (fax)

Liaison Counsel for Plaintiffs and the Class


64

MILBERG WEISS BERSHAD & SCHULMAN LLP Barry A. Weprin One Pennsylvania Plaza New York, NY 10119 Tel.: (212) 594-5300

Lead Counsel for Plaintiffs and the Class


UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MINNESOTA THE CORNELIA I. CROWELL GST TRUST, ) Individually and On Behalf of All Others ) No. 0:05-cv-01084-JMR-FLN Similarly Situated, )

Plaintiff, ) CLASS ACTION )

vs ) )

POSSIS MEDICAL, INC., et al., ) )

Defendants. ) ________________________________________ ) JIM GLYNN, On behalf of Himself and ) All Others Similarly Situated, ) No. 0:05-cv-01239-JMR-FLN

) Plaintiff, ) CLASS ACTION

) vs )

) POSSIS MEDICAL, INC., et al., )

) Defendants. )

) ________________________________________ ) KEVIN LINCOLN, Individually and On ) behalf of All Others Similarly Situated, ) No. 0:05-cv-01401-JMR-FLN

) Plaintiff, ) CLASS ACTION

) vs )

) POSSIS MEDICAL, INC., et al., )

) Defendants. )

) ________________________________________ ) CERTIFICATE OF SERVICE

I hereby certify that on November 4, 2005, I caused the following documents:

1. Amended Consolidated Complaint


2

to be filed electronically with the Clerk of Court through ECF, and that ECF will send an e-notice of the electronic filing to the following: Carolyn Glass Anderson [email protected] [email protected] Garrett D. Blanchfield, Jr. [email protected] [email protected] Michael Goldberg [email protected] [email protected] Nancy A. Kulesa [email protected] James K. Langdon [email protected] [email protected] Gregory Linkh [email protected]

Robert C. Moilanen [email protected] [email protected] Andrew M. Schatz [email protected] Barry A. Weprin [email protected]

Dated: November 4, 2005 s/Garrett D. Blanchfield, Jr.

Garrett D. Blanchfield, Jr. Reinhardt Wendorf & Blanchfield E1250 First National Bank Bldg. 332 Minnesota St. St. Paul, MN 55101 651-287-2100


Documents

UNITED STATES DISTRICT COURT DISTRICT OF MINNESOTAsecurities.stanford.edu/filings-documents/1034/...4. To operate the AngioJet, a physician first threads a catheter over a guidewire