No Class Act at Candela

It's a rare day when I think a class action lawsuit has merit. There are just too few instances in which an Enron or a WorldCom will actually materialize from the litigation, and too many that amount to sour grapes among investors who try to win in the courtroom what they couldn't win in the marketplace.

Yet I think aesthetic-laser maker Candela (Nasdaq: CLZR) has some real problems with the class action lawsuit just filed against it. Not that I think that management's rosy forecasts have merit, as the lawsuit claims. You expect your CEO to be upbeat, after all. Rather, it's the 2006 patent-infringement lawsuit that Palomar Medical Technologies (Nasdaq: PMTI) filed against it that has the potential to burn management.

Investors shouldn't have to parse a CEO's previous words to see whether he's been shading the truth. But what else can an investor do, after Candela CEO Gerard Puorro flat-out denied that Palomar had ever contacted him regarding patent infringement, only to see news surface later that the laser rival had been notifying Candela for seven years?

That looks to this layman like an attempt to deceive investors about the status of Palomar's actions against them. In fact, the very next day after Palomar's action, Candela retaliated with its own patent infringement case against Palomar. Forewarned is forearmed, I guess.

Palomar has been rather successful over the years defending its patents. From IRIDEX (Nasdaq: IRIX) subsidiary Laserscope to Cutera (Nasdaq: CUTR), Lumenis to Cynosure (Nasdaq: CYNO), Palomar has won compliance with its patents. In the case of Cynosure, Palomar fully disclosed in its SEC registration filings before its IPO that it had been getting letters from its rival saying it was infringing on Candela's patents. Whether the claims against Candela have any merit is another question entirely, but it's not one that management should have been fudging about.

Unfortunately, there have been plenty of times when Candela has played fast and loose with the facts. From "white hot" sales forecasts that never materialized and fuzzy math over market share, to assurances of prevailing in a royalty dispute and using the industry's growth rate to justify its own growth projections, Puorro has tried to jawbone away investor and analyst doubts. With the report last month that activist hedge fund Third Point reduced its stake in the laser maker, the chance of a management shakeup was greatly reduced.

Funny, then, that everything comes down to hoping trial lawyers get a complacent and complicit board of directors to restore integrity and accountability to Candela's front office.

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