As alleged in the Complaint, During the Relevant Period, the Individual Defendants breached their fiduciary duties and violated the federal securities laws by concealing lapses in safety protocols at the Company’s Sturgis facility that resulted in environmental contamination with Cronobacter sakazakii bacteria (“Cronobacter”). In February 2022, an inspection by the United States Food and Drug Administration (the “FDA”) confirmed Cronobacter contamination at the Sturgis facility and uncovered that Abbott had previously identified incidents of such contamination, causing the Company to destroy contaminated products. By September 2021, the Company received several complaints concerning infant deaths related to Abbott’s infant formulas.
On February 17, 2022, Abbott issued a recall of various infant formula products manufactured at the Sturgis facility, including Similac, Alimentum, and EleCare. Abbott did not disclose the existence of the FDA investigation, instead portraying the recall as a proactive measure to protect the public.
Shortly after the FDA inspection, Abbott was forced to close the Sturgis facility due to significant safety concerns, temporarily eliminating a major source of supply of infant formula in the U.S., Canada, and other markets. As a consequence, the U.S. experienced massive formula shortages, causing the federal government to invoke the Defense Production Act to increase production of infant formula and import infant formula from overseas sources.
After the markets closed on March 22, 2022, the FDA released reports concerning its inspection of Abbott’s Sturgis facility which, inter alia, showed that between January and March 2022, the Company failed to establish controls sufficient to ensure that its infant formulas did not become adulterated by microorganisms in the formula or processing environment.
Moreover, a whistleblower complaint alleged that Abbott management falsified test records and released untested infant formula to the market, and attempted to mislead the FDA during a 2019 inspection audit. In addition, the complaint alleged that the Company used testing procedures that management knew were deficient and that Abbott was unable to adequately trace products subject to recall.
Abbott and the FDA eventually entered into a consent decree agreement. The FDA complaint upon which the decree was based disclosed the details and extent of the issues at the Sturgis facility, stating that certain principal executives for the Company failed to protect the infant formula from the risk of Cronobacter and Salmonella contamination.
In March 2022 testimony before a House of Representatives Subcommittee, FDA commissioner Robert Califf stated that there was bacteria growing at multiple sites in the Sturgis facility, cracks in key equipment, roof leaks, and standing water which were egregiously unsanitary. Mr. Califf stated that FDA had lost confidence that the Company had “the appropriate safety and quality culture and commitment to fix these problems quickly.”
On May 17, 2022, the Senate Finance Committee launched an investigation of the Company’s international tax practices and its $8 billion in stock buybacks. Among other things, the Committee requested information on how much Abbott spent on upgrades to its Sturgis facility prior to its closure due to bacterial contamination, and whether the Company used billions in tax cuts to repurchase shares instead of investing in the Sturgis facility. Committee Chairman, Sen. Ron Wyden, sent a letter to Abbott’s Chief Executive Officer, defendant Robert B. Ford, which stated “[a]s Abbott spent billions buying back its own stock, it appears that it failed to make necessary repairs to fix a critical manufacturing plant of infant formula located in Michigan . . . [t]he closure of the plant has contributed substantially to a national shortage of infant formula, putting families across the country at risk.”
On June 8, 2022, it was disclosed that the Company was aware of the allegations in the whistleblower complaint in early 2021, when the complaint was filed with the U.S. Labor Department’s Occupational Safety & Health Administration (“OSHA”) and delivered to both Abbott and the FDA. The Company’s response was submitted two months later.
From the time of the “voluntary” recall of Abbott’s infant formula products through the June 8, 2022 disclosure of the Company’s knowledge of the whistleblower complaint, the price of Abbott’s declined from $120.58 per share to $112.71 per share.
It is alleged that as a direct and proximate result of the Individual Defendants’ misconduct, Abbott has sustained millions of dollars in harm. Abbott, and others, have been named as defendants in wrongful death actions resulting from Similac contamination: Restad v. Abbott Laboratories, Inc., Case No. 1:21-cv-00798-AWI-SKO (E.D. Cal.); and from Alimentum contamination: Diebert v. Abbott Laboratories , Inc., Case No. 1:22-cv-01114-REB (D. Colo.). In addition, the Company is not only paying the cost of defending itself in the Securities Action, but it is exposed to massive potential liability for class-wide damages. The Company has also incurred costs and expenses in connection with the whistleblower complaint and the regulatory proceedings.
In addition, Abbott has also suffered and will continue to suffer a loss of reputation and goodwill, and a “liar’s discount” that will plague the Company’s stock in the future due to the Individual Defendants’ misconduct and breach of their fiduciary duties.
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