Boston Scientific Ordered to Finish Scuttled Data-Fraud Deal

(Bloomberg) -- Boston Scientific Corp. must complete a $275 million buyout of Channel Medsystems Inc., a judge said, ruling the deal couldn’t be canceled just because a former Channel executive submitted false data to federal regulators about its flagship product.

Delaware Chancery Judge Andre Bouchard said Wednesday Boston Scientific couldn’t prove ex-Channel Vice President Dinesh Shankar’s false submissions about its Cerene menstruation treatment provided proper grounds to cancel the buyout under the acquisition agreement. As a result of the judge’s ruling, Boston Scientific must acquire the Cerene system.

“Shankar’s fraud did not compromise Channel’s quality system or its clinical study in such a manner that would warrant termination of the agreement,” Bouchard said in the 119-page ruling.

Kelly Leadem, a spokeswoman for Marlborough, Massachusetts-based Boston Scientific, said Thursday the company was disappointed with Bouchard’s ruling and is weighing its options.

Boston Scientific has been expanding its offerings in the fast-growing field of urology and women’s health since 2015, when it paid $1.6 billion for American Medical Systems’ urology business. It also paid $600 million for Bedford, Massachusetts-based Augmenix. That company makes a device to help healing in men undergoing radiation treatment for prostate cancer.

Cerene System

Boston Scientific was attracted to Channel’s Cerene system for treating heavy menstrual bleeding. It was one of Channel’s original funders and in 2017 offered to buy the medical technology company after European regulators approved the tecnology.

Prior to the deal’s closing, Channel officials notified Boston Scientific that they’d uncovered Shankar’s fraud. He was the head of quality control and submitted false data about Cerene to the U.S. Food & Drug Administration, which was weighing whether to approve the system for use in the U.S. The treatment was approved later.

Channel’s investigations also found Shankar had defrauded the company out of almost $3 million by filing false expense reports through shell companies disguised as vendors. The executive pled guilty to mail-fraud charges and was sentenced to 33 months in prison.

Boston Scientific called Shankar’s phony Cerene submissions to the FDA a “material adverse change” that allowed it to pull out of the deal.

Bouchard rejected that argument, noting Channel executives alerted Boston Scientific and federal regulators about Shankar’s misdeeds before the menstruation treatment was approved. He also dismissed the acquirer’s concerns about potential product-liability lawsuits and competitive harm because of publicity about Shankar’s misdeeds is “based on little more than unsubstantiated speculation.”

The case is Channel Medsystems Inc. v. Boston Scientific Corp., 2018-0673, Delaware Chancery Court (Wilmington).

To contact the reporters on this story: Jef Feeley in Wilmington, Delaware at jfeeley@bloomberg.net;Michelle Fay Cortez in Minneapolis at mcortez@bloomberg.net

To contact the editors responsible for this story: David Glovin at dglovin@bloomberg.net, Joe Schneider

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