Masimo Execs Made 'False and Misleading Statements' About Product Demand: Suit

Medical devices company Masimo and its CEO Joe Kiani made “materially false and misleading statements” touting “purportedly strong demand” for its products following its $1 billion purchase of consumer audio products company Sound United in April 2022, alleged a verified shareholder derivative class action Wednesday (docket 3:24-cv-00781) in U.S. District Court for Southern California.

Shareholder Linda McClellan brought the lawsuit on behalf of Masimo against certain of its officers and current and former board members for breach of fiduciary duties from May 4, 2022, to Aug. 8, the complaint said. The class action contains detailed allegations based on interviews with former Masimo and legacy Sound United employees, who provided information on a confidential basis, it said.

Kiani was advised internally and by outside consultants against the Sound United purchase, announced in February 2022, said the complaint. The acquisition “confused investors” and caused the stock to “decline dramatically,” losing $5.1 billion in market capitalization in the wake of the announcement, it said.

The complaint cited an October 2022 lawsuit filed by Politan Capital Management that said: “Never before" in the history of U.S. publicly traded companies "has an acquiring company’s market cap declined by more than twice, let alone five times, the purchase price of a material acquisition." Masimo’s strategy in buying Sound United was to gain entry into Best Buy, where it would be able to sell hearables and its health-focused smartwatch, which it saw as a competitor to Apple Watch, it said.

Following the Sound United buy, Masimo was “plagued by rising inventory and stagnating sales” in the non-healthcare segment, alleged the complaint. Issues were exacerbated by “pervasive deficiencies” in the company’s internal controls and by a “complete failure to integrate Sound United into the company’s existing operations,” it said. Demand for Masimo’s core healthcare products began to decline by the end of 2022, and the company “lost its ability to compensate for its struggling non-healthcare segment,” it said.

Masimo and legacy Sound United employees expressed “confusion and concern” about the acquisition, the complaint said. Employees of both companies didn’t understand the purpose of the deal and considered it a “strange marriage,” alleged the complaint. One former employee quoted Sound United’s former chief financial officer referencing a “fire sale” because the “Sound United brand was on the decline, and he ‘failed to understand’ Masimo’s strategy” in acquiring it.

Masimo revealed “dismal financial results” for Q2 2023 and lowered its financial guidance for the year, said the complaint. The announcements caused a “precipitous decline” in the company’s stock, “harming shareholders,” it said. In the five quarters preceding the Sound United buy, Masimo had inventory levels between $201 million and $216 million; they soared from $449.2 million in April 2022 to $585 million by Sept. 30, it said. Masimo's cash position fell during the relevant period to $124 million by the end of Q3, and inventory levels exceeded quarterly revenue, it said. Sound United’s sales fell from $265 million in Q4 2022 to $171 million in Q3 2023, and coupled with rising inventory, “Masimo has faced an aging inventory at risk of obsolescence,” the complaint said.

In addition to Masimo founder Kiani, the suit names board members Adam Mikkelson, Craig Reynolds, Michelle Brennan, Quentin Koffey, Julie Shimer and Michael Cohen, plus Chief Financial Officer Micah Young, Chief Operating Officer Bilal Muhsin, and Vice President-Business Development and Investor Relations Eli Kammerman. The defendants had fiduciary obligations of trust, loyalty, good faith and due care to manage Masimo in a fair and just manner in the best interests of the company and shareholders, the complaint said. Two current board members -- Robert Chapek and Rolf Classon -- are not parties to the action.

The complaint cited numerous instances from earnings calls and investor events during which executives made “materially false and misleading statements.” It cited Kammerman’s statement at a June investor event that Masimo expected sensor growth of 1%-3% in its healthcare segment, 7% in installed base growth. The statement was “patently false” because at that time, sales across Masimo, including sensors, “had actually been declining,” the complaint said. The company issued revised revenue guidance the next month, lowering full-year revenue projections, it said.

Masimo announced in a March 22 news release that the board authorized management to evaluate a proposed separation of the consumer business -- healthcare and consumer audio products -- peeling off its Stork baby monitor and Freedom smartwatch and tracker business from professional healthcare and telehealth products.

On April 1, Masimo confirmed that Politan intends to nominate two candidates to stand for election to the Masimo board. The company said Politan’s efforts “to take control of the Board" and unseat Kiani "run counter to stockholders’ best interests, as well as those of the hundreds of millions of patients who rely on Masimo’s innovations.” Politan’s managing partner Koffey and nominee Brennan were elected to the board last year.

The Masimo board and its nominating, compliance and corporate governance committee will review Politan’s proposed nominees and present the board’s recommendations in Masimo’s definitive proxy materials, which will be filed with the SEC and mailed to all Masimo stockholders eligible to vote at the 2024 annual meeting, said the release. The date and location of the annual meeting haven’t been announced; the company's Q1 earnings call is slated for Tuesday.

The complaint alleges violations of the Securities Exchange Act and asserts claims of breach of fiduciary duty, aiding and abetting breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement and waste of corporate assets.

The plaintiff seeks awards of money damages against the individual defendants for all losses and damages suffered, “molded in a fashion to ensure the Individual Defendants do not participate therein or benefit thereby” and for them to account for all damages, profits, special benefits and unjust enrichment they obtained. She also seeks punitive damages, litigation expenses and pre-judgment interest. Masimo didn’t comment Thursday.