Case 2:09-cv-01899-SRB Document 1 Filed 09/11/09 Page 1 of 19 1 Eric L. Zagar Robin Winchester 2 BARROWAY TOPAZ KESSLER MELTZER & CHECK, LLP 3 280 King of Prussia Road 4 Radnor, PA 19087 Telephone: (610) 667-7706 5 Fax: (610) 667-7056 [email protected] 6 [email protected] 7 Robert D. Mitchell, 011922 Julie M. Beauregard, 023093 Sarah K. Deutsch, 026229 8 MITCHELL & ASSOCIATES 9 A Professional Corporation Viad Corporate Center, Suite 1715 1850 North Central Avenue 10 Phoenix, Arizona 85004 Telephone (602) 468-1411 11 Fax (602) 468-1311 [email protected] 12 [email protected] [email protected] 13 www.mitchell-attorneys.com 14 Counsel for Plaintiff 15 UNITED STATES DISTRICT COURT 16 DISTRICT OF ARIZONA 17 TIMOTHY HALL, Derivatively on Behalf of ) 18 Nominal Defendant MATRIXX INITIATIVES, ) INC., ) 19 Plaintiff, ) Case No. 20 v. ) ) 21 WILLIAM J. HEMELT, SAMUEL C. ) COWLEY, CARL J. JOHNSON, L. WHITE) VERIFIED SHAREHOLDER 22 MATTHEWS, III, MICHAEL A. ZEHER,) DERIVATIVE COMPLAINT 23 WILLIAM C. EGAN, LORI H. BUSH, and ) JOHN M. CLAYTON, ) 24 Defendants, ) 25 ) and ) JURY TRIAL DEMANDED 26 ) MATRIXX INITIATIVES, INC., ) 27 ) 28 Nominal Defendant. ) ) Case 2:09-cv-01899-SRB Document 1 Filed 09/11/09 Page 2 of 19 1 Plaintiff Timothy Hall (“Plaintiff”), by the undersigned attorneys, submits this 2 Verified Shareholder Derivative Complaint (the “Complaint”) against the defendants named 3 herein, and alleges upon personal knowledge with respect to himself, and upon information 4 and belief based upon, inter alia, a review of public filings, press releases and reports, and an 5 investigation undertaken by Plaintiff’s counsel, as to all other allegations herein, as follows: 6 NATURE OF THE ACTION 7 1. This is a shareholder’s derivative action brought for the benefit of nominal 8 defendant Matrixx Initiatives, Inc. (“Matrixx” or the “Company”) against certain members of 9 Matrixx’s Board of Directors (the “Board”) and certain of its executive officers seeking to 10 remedy defendants’ breaches of fiduciary duties. 11 2. The Individual Defendants (as defined herein breached their fiduciary duties 12 by, among other things, (1) misrepresenting the safety of the Company’s Zicam Cold 13 Remedy Products (The Zicam Cold Remedy Products refer to Zicam Cold Remedy Nasal 14 Gel; Zicam Cold Remedy swabs; and Zicam Cold Remedy, Kids Size) and failing to warn 15 consumers and shareholders that the Zicam Cold Remedy Products could result in anosmia 16 (loss of smell) despite their actual knowledge of the problem; and (2) failing to disclose to 17 the United States Food and Drug Administration (“FDA”), despite the Company’s obligation 18 to do so, the existence of numerous reports of serious adverse events relating to the loss of 19 smell associated with the use of Zicam Cold Remedy Products. 20 3. Specifically, for several years the Individual Defendants were aware that 21 Matrixx had received hundreds of serious adverse events reports from consumers concerning 22 the loss of smell caused by the Company’s Zicam Cold Remedy Products. The Individual 23 Defendants, acting on behalf of the Company, knowingly failed to report these adverse 24 events to the FDA despite the Company’s obligation to do so. The Individual Defendants, 25 acting on behalf of the Company, knowingly failed to comply with FDA regulations despite 26 their repeated assurances of the Company’s compliance. 27 4. The failure of the Individual Defendants to report the serious adverse events to 28 the FDA created the false impression that the Zicam Cold Remedy Products were safe and - 1 - Case 2:09-cv-01899-SRB Document 1 Filed 09/11/09 Page 3 of 19 1 effective remedies for consumers. By failing to report the serious adverse events associated 2 with the Zicam Cold Remedy Products, the Individual Defendants caused the true risks 3 associated with the use of these products to be concealed from the public and the Company’s 4 shareholders. 5 5. Finally, on June 16, 2009, the FDA recalled the Zicam Cold Remedy Products 6 and told consumers to stop using them because of the risk of permanent damage to the sense 7 of smell. In a warning letter from the FDA to the Company on the same date (“FDA 8 Warning Letter”), the FDA stated that the agency was aware that Matrixx had received more 9 than 800 reports related to loss of sense of smell associated with the Zicam Cold Remedy 10 Products that were not submitted to the FDA as required by law. 11 6. As a result of the FDA advisory regarding the Zicam Cold Remedy Products, 12 the FDA Warning Letter, and the revelation of the existence of more than 800 serious 13 adverse incidents in the Company’s possession that went unreported to the FDA, Matrixx’s 14 stock price plummeted $13.46 to close on June 16, 2009 at $5.78, a one day drop of nearly 15 70%. 16 7. As a result of the Individual Defendants’ breach of their fiduciary duties, the 17 Company has sustained significant damages, as alleged herein. 18 JURISDICTION AND VENUE 19 8. This Court has subject matter jurisdiction pursuant to 28 U.S.C. § 1332 in that 20 Plaintiff and Defendants are citizens of different states and the amount in controversy 21 exceeds $75,000.00, exclusive of interest and costs. This action is not a collusive one to 22 confer jurisdiction on a court of the United States of America which it would not otherwise 23 have. 24 9. Venue is proper in this District pursuant to 28 U.S.C. § 1391(a) and (c) in that a 25 substantial part of the events or omissions giving rise to the claim occurred in this District, 26 and defendants have received substantial compensation in this district by engaging in 27 numerous activities and conducting business here, which had an effect in this district. 28 - 2 - Case 2:09-cv-01899-SRB Document 1 Filed 09/11/09 Page 4 of 19 1 PARTIES 2 10. Plaintiff, a citizen of Nevada, is a shareholder of Matrixx, was a shareholder of 3 nominal defendant Matrixx at the time of the wrongdoing alleged herein and has been a 4 shareholder of Matrixx continuously since that time. 5 11. Nominal defendant Matrixx is a Delaware corporation with its principal 6 executive offices located at 8515 East Anderson Drive, Scottsdale, Arizona 85255. 7 According to its public filings, Matrixx develops, produces, markets and sells over-the- 8 counter healthcare products. 9 12. Defendant William J. Hemelt (“Hemelt” ), a citizen of Arizona, has served as 10 the Company’s Acting President, Chief Operating Officer and Chief Financial Officer since 11 October 2008. 12 13. Defendant Samuel C. Cowley (“Cowley”), a citizen of Arizona, has served as a 13 director of Matrixx since July 2005 and as the Company’s Executive Vice President, 14 Business Development, General Counsel and Secretary since May 2008. 15 14. Defendant Carl J. Johnson (“Johnson”), a citizen of Arizona, served as a 16 director of Matrixx and as the Company’s President and Chief Executive Officer from July 17 2001 until his retirement on October 31, 2008. 18 15. Defendants Hemelt, Cowley, and Johnson are referred to herein as the “Officer 19 Defendants.” 20 16. Defendant L. White Matthews, III (“Matthews”), a citizen of Wyoming, has 21 served as a director of Matrixx since March 2003. 22 17. Defendant Michael A. Zeher (“Zeher”), a citizen of New York, has served as a 23 director of Matrixx since September 2000. 24 18. Defendant William C. Egan (“Egan”), a citizen of New Jersey, has served as a 25 director of Matrixx since August 2001. 26 19. Defendant Lori H. Bush (“Bush”), a citizen of California, has served as a 27 director of Matrixx since October 2004. 28 - 3 - Case 2:09-cv-01899-SRB Document 1 Filed 09/11/09 Page 5 of 19 1 20. Defendant John M. Clayton (“Clayton”), a citizen of Tennessee, has served as 2 a director of Matrixx since October 2005. 3 21. Defendants Matthews, Zeher, Egan, Bush, and Clayton will be referred to as 4 the “Director Defendants.” 5 22. Collectively, the Officer Defendants and Director Defendants will be referred 6 to herein as the “Individual Defendants.” 7 DUTIES OF THE INDIVIDUAL DEFENDANTS 8 23. By reason of their positions as officers, directors, and/or fiduciaries of Matrixx 9 and because of their ability to control the business and corporate affairs of Matrixx, the 10 Individual Defendants owed Matrixx and its shareholders fiduciary obligations of good faith, 11 loyalty, and candor, and were and are required to use their utmost ability to control and 12 manage Matrixx in a fair, just, honest, and equitable manner. The Individual Defendants 13 were and are required to act in furtherance of the best interests of Matrixx and its 14 shareholders so as to benefit all shareholders equally and not in furtherance of their personal 15 interest or benefit. Each director and officer of the Company owes to Matrixx and its 16 shareholders the fiduciary duty to exercise good faith and diligence in the administration of 17 the affairs of the Company and in the use and preservation of its property and assets, and the 18 highest obligations of fair dealing. 19 24. The Individual Defendants, because of their positions of control and authority 20 as directors and/or officers of Matrixx, were able to and did, directly and/or indirectly, 21 exercise control over the wrongful acts complained of herein, as well as the contents of the 22 various public statements issued by the Company.