On October 16, 2015, Natus Medical Incorporated announced it had obtained a large contract with the Ministry of Health of Venezuela through its Argentinian subsidiary Medix ICSA. But the complaint for this securities class action claims that the announcement was misleading for a number of reasons, in violation of the Securities Exchange Act of 1934.
The class for this action is all buyers of the common stock of Natus Medical between October 16, 2015 and April 3, 2016.
Natus makes newborn care and neurology healthcare products and services which it sells throughout the world. The company’s contract in Venezuela supposedly required it to provide newborn and obstetric equipment, supplies, and services over a period of three years, in exchange for $232.5 million. The company claimed to expect prepayments of approximately $69 million by the first quarter of 2016.
Analysts took this as good news, with one estimating that “this deal could contribute roughly 20% upside to the top line and 16% upside to the bottom line in 2016…” In a Form 8-K and press release a few days later, the company increased its revenue guidance for the fourth quarter of 2015 to $102 to $105 million. Payments from the contract were to be made up front. In December, the company’s stock reached an all-time closing high of $50.48 per share.
However, the complaint claims that Natus was not telling the full story of the contract.
First, as it was touting the contract during the end of that year, Venezuela had already failed to make payments that were due in October, November, and December.
Second, Venezuela was holding an election in December, which was risky for the company because, the complaint days, new administrations often ignored contracts agreed to by previous ones.
Third, according to the complaint, Natus had no way of enforcing its rights with the contract, because disputes were to be settled in Venezuela and the other party was the government. The complaint says that Venezuelan courts could not be relied on to be impartial under those circumstances.
Finally, and most stunningly, the contract had never actually been signed by the Ministry of Health, indicating that it had never fully been agreed to.
The complaint claims that Natus knew all of this and did not disclose them to investors, which artificially inflated its stock price. In fact, during this time, the complaint alleges that the company’s CEO and CFO sold off over $10 million worth of company stock.
The facts came out gradually, beginning with the company presenting missed payments by Venezuela as a “delay” only. At each disclosure, its stock price fell. By April 2016, the company revealed that it had had no payments at all from Venezuela, and its stock price fell to $31.84.