Genoptix Inc., a subsidiary of Novartis AG, will pay nearly $8 million to end a putative securities class action alleging the company misrepresented customer demand for diagnostic cancer testing and failed to disclose factors dragging down demand. The settlement agreement was filed in a California federal court. Lead Plaintiff City of Ann Arbor Employees’ Retirement System and Genoptix has requested that the court preliminarily approve the settlement. Pursuant to the agreement, $7.7 million plus interest would go to class members who bought Genoptix stock between July 2009 and June 2010.

Genoptix specializes in diagnostic testing for cancers of blood and bone marrow. During the proposed class period, its primary customers were oncologists in private practice. It was alleged in the suit that the company’s bottom line suffered as physicians joined hospitals and insurers resisted coverage for out-of-network care.

After shares lost 55 percent of their value, six confidential witnesses came forward, alleging that Genoptix management consciously ignored systemic weaknesses at the company and padded their bank accounts through insider trading as the firm’s finances were secretly disintegrating. Lead Plaintiff Ann Arbor allegedly lost $267,000 on its investments. The Plaintiffs claimed Genoptix made demand for diagnostic cancer services, its primary source of revenue, appear higher than it was. The suit also alleged that executives knew the company lost its largest customer account, the Georgia Cancer Center, but did not disclose it.

It appears that this lawsuit barely survived. In July 2012, a California federal judge dismissed the Plaintiffs’ complaint, ruling that the firm’s inaccurate revenue forecasts were forward-looking statements immune to litigation. The Plaintiffs had set out 80 allegedly deceptive statements by Genoptix’s big bosses, but U.S. District Judge Cathy Ann Bencivengo ruled that more than half were protected under the Private Securities Litigation Reform Act’s safe harbor provisions.          The Plaintiffs filed a second amended complaint in August 2012, which partially survived Genoptix’s renewed motion to dismiss. Judge Bencivengo dismissed all claims related to forward-looking statements and any claims relating to statements made before Feb. 25, 2010. After the judge’s final order, there was very little left to litigate in the case.


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