EP Medsystems v. Echocath Legal

EP MedSystems v. EchoCath

Legal Analysis- EP MedSystems Inc. v. EchoCath Inc.

EP MedSystems Inc. v. EchoCath Inc. presents an opportunity to examine the required seven elements requisite to "recovering damages from a defendant under rule 10b-5 of section 10(b) pursuant to the SEC Act of 1934" (Textbook. N.D. PP. 895). Explication of these elements provides the fundamental analytical tool for reaching the conclusion that EchoCath did violate 10b-5 in its statements to MedSystems.

The underpinnings of the case stem from statements made by Frank DeBernardis, CEO of EchoCath, to executives of MedSystems from August 1996 through February 1997 (FindLaw.com. December 26, 2000. PP. 2). These representations offered assurances that EchoCath was in active and "imminent" negotiations with major medical companies for product licensing contracts. While legal counsel for EchoCath argued that the materiality of the statements was the critical issue in determining liability, a point with which the District Court agreed; the dismissal also relied on failure of MedSystems to "adequately plead scienter, reasonable reliance, and loss causation" (FindLaw.com. December 26, 2000. PP. 1). On appeal the Third Circuit examined not just materiality but the remaining six necessary conditions of 10b-5 liability.

Rule 10b-5 makes it unlawful for a person 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, in connection with the purchase or sale of any security. (Sarkar, D.N.D. PP. 1).

On further analysis of the seven conditions necessary to assign liability under 10b-5, two can be taken as incontrovertible to MedSystem's-claim: interstate commerce/national securities exchange, and statements made in connection with the purchase of securities . (Textbook. N.D. PP. 895). The remaining five items merit further scrutiny.

Misrepresentation

First did DeBernardis make "a statement that either misrepresented or omitted a fact" (Textbook. N.D. PP. 895)? Yes, the multiple references to "imminent" contract signings over the period August 1996 to February 1997, and specifically in phone calls from December 16-20, 1996 (FindLaw.com. December 26, 2000. PP. 3) demonstrates that the CEO understood the importance of the MedSystem investment. An investment dependent on the execution of the major medical contracts, which he knew were not coming to fruition. More interesting though was the delivery of updated financial operating model statements on December 20, 1996 which projected a massive surge in sales from $852,000 in 1997 to $3,286,000 in 1998 (FindLaw.com. December 26, 2000. PP. 3); key because these figures tie the medical contracts to revenues, as well as an articulation that "negotiations for these contracts are in process" (FindLaw.com. December 26, 2000. PP. 3 ). Based on EchoCath's failure to deliver any contracts or income from these "imminent" contracts over the following 15 months, there is reason to assert that there was "no reasonable basis for a prediction and is a misstatement because the person who made it could not honestly have believed it" (Textbook. N.D. PP. 897).