On February 8, 2018, a federal securities class action lawsuit against J&J was filed, charging the company with defrauding investors by failing to disclose the presence of asbestos and heavy metals in its baby powder products. The suit was filed in the United States District Court for the District of New Jersey. The case is Frank Hall v. Johnson & Johnson et al., case number 3:2018cv01833.

The complaint follows news reports that plaintiffs who have been suing Johnson & Johnson in baby powder ovarian cancer lawsuits have documents allegedly demonstrating that J&J was aware of asbestos fibers in their products that could cause cancer, but failed to disclose the contamination. According to the Johnson & Johnson fraud lawsuit, when Bloomberg and CNBC began to report on the case and incriminating documents, J&J stock prices fell, damaging investors.

The lawsuit names not only Johnson & Johnson as a defendant, but also J&J’s Chairman and Chief Executive Officer, Alex Gorsky, and the company’s Chief Financial Officer, Dominic J. Caruso.  They are referred to as the “Individual Defendants” in the suit.

Making the case even more perilous for J&J, particularly from a public relations point of view, is the fact that well-known civil rights attorney Ben Crump is serving as co-counsel for the plaintiffs in the suit. In a January 9, 2018 Business Wire story, Crump is quoted as saying that J&J engaged in “cynical tactics to market these products to women of color, while knowing their potential harm.”

Crump was referring to a J&J plan that was developed in the 1990s to target black and Hispanic women in their marketing campaigns. The company did so despite the fact that in 1992, a study in the Journal of Obstetrics and Gynecology reported that the risk of ovarian cancer nearly doubled for women who used the powder on a daily basis.

Crump noted that the pension funds of many black workers are invested in Johnson & Johnson and accused the company of “jeopardizing their physical and their financial health.”

How Johnson & Johnson Violated Federal Securities Fraud Law

The Johnson & Johnson fraud complaint alleges that both Gorsky and Caruso were involved in disseminating false and misleading statements about the presence of asbestos fibers in its talcum powder, in violation of federal securities laws.

Federal laws and regulations make it unlawful to mislead investors by omitting important facts or using deceptive schemes to affect the purchase or sale of stocks.

Code of Federal Regulations, Title 17, Section 240.10b-5

It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,

(a) To employ any device, scheme, or artifice to defraud,

(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or

(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.

Citing a legal doctrine known as respondeat superior, plaintiffs assert that “the company is responsible for the acts of the individual defendants and its employees.” They charge J&J with engaging in practices that “operated as a fraud or deceit” upon those who purchased J&J securities between February 22, 2013 and February 7, 2018.

The Johnson & Johnson fraud lawsuit is also based, in part, upon a legal principal known as the “fraud-on-the-market” theory. Fraud-on-the-market refers to the common sense idea that the price of a company’s stock is influenced by all the information on that company that is publicly available.

If a company makes misleading statements about its business, those statements will also influence the stock price and deceive or defraud investors. In 1988, the U.S. Supreme Court affirmed (in Basic Inc. v Levinson) that this is true even if the investors did not directly rely on those statements when purchasing a stock. It is presumed that the investor bought the stock relying on the belief that its price reflected the company’s public statements and that those statements were truthful.

“ . . . an investor who trades stock at the price set by an impersonal market does so in reliance on the integrity of that price. Because most publicly available information is reflected in market price, an investor’s reliance on any public material misrepresentations may be presumed for purposes of a Rule 10b-5 action.” [Rule 10b-5 is a federal regulation that prohibits fraud or deceit in connection with the purchase of a security. See info box above] U.S. Supreme Court, Basic Inc. v Levinson, 1988

The complaint charges J&J with making “public misrepresentations” and failing to disclose material facts. It further alleges that J&J’s misrepresentations and omissions “would tend to induce a reasonable investor to misjudge the value of the Company’s securities.”

Evidence for Johnson & Johnson Fraud Comes from Growing Ovarian Cancer Litigation

Evidence of J&J’s wrongdoing comes from documents that were recently discovered during the course of lawsuits filed against Johnson and Johnson by women who allege that genital use of J&J’s baby powder caused them to develop ovarian cancer. More than 5,500 ovarian cancer talcum powder lawsuits have been filed nationwide. Four early lawsuits resulted in verdicts against J&J awarding plaintiffs over $300 million.

In addition to the lawsuits filed in state courts, approximately 900 cases filed in federal courts nationwide have now been transferred to the U.S. District Court for the District of New Jersey (the same court in which the securities fraud lawsuit was filed) in what is known as multi-district litigation (MDL). In MDL proceedings, cases dealing with common questions of fact are transferred to one court for the purposes of pretrial motions and discovery.

The Johnson & Johnson fraud lawsuit references a February 7, 2018 press release from a firm that has represented numerous plaintiffs in ovarian cancer cases against J&J. The firm has a leadership role in the New Jersey MDL. The release makes the following claims:

  • In a May 2017 trial, an Israeli researcher whose lab was hired by J&J to test talc samples for asbestos testified that a majority of samples contained asbestos. J&J subsequently stopped funding the testing.
  • Internal J&J documents show that J&J found asbestos in 100% of samples tested in 1972, but failed to reveal the findings publicly.

Johnson & Johnson had been trying to prevent the release of key documents requested by the plaintiffs in the MDL, but the company was overruled in a November 2017 decision handed down by former U.S. District Judge Joel Pisano, who oversees the discovery process for the MDL.

Plaintiffs had subpoenaed documents from three companies that obtained talc from Imerys. They also asked to see documents from the Colorado School of Mines, which has provided raw material testing for the talc industry.

They were seeking evidence that the talc used by J&J during the time period in question may have been contaminated. Despite Johnson & Johnson’s efforts to block the subpoenas, Judge Pisano sided with the plaintiffs and ordered that they be permitted to see select documents from the three companies and the Colorado School.