EchoCath was a small New Jersey research and development company engaged in developing, manufacturing, and marketing medical devices to enhance and expand the use of ultrasound technology for medical applications and procedures. EchoCath consummated its initial public offering on January 17, 1996, and issued a lengthy prospectus, which cautioned that “an investment in the securities offered . . . is speculative in nature and involves a high degree of risk.” It also set forth several pages of risk factors. In particular, EchoCath cautioned investors that the company “intended to pursue licensing, joint development and other collaborative arrangements with other strategic partners . . . but there can be no assurance . . . that the Company will be able to successfully reach agreements with any strategic partners, or that other strategic partners will ever devote sufficient resources to the Company’s technologies.”

More than six months after the public offering, MedSystems began to consider a sizable investment in EchoCath. Frank DeBernardis, the CEO of EchoCath, orally represented to MedSystems that EchoCath had engaged in lengthy negotiations to license its products and was on the verge of signing contracts with a number of prominent medical companies, which he identified as including Uro- Health, Johnson & Johnson, Medtronic, and C.R. Bard, Inc., to develop and market EchoCath’s women’s health products. Throughout the negotiations and until the closing in February 1997, EchoCath’s CEO continued to represent to MedSystems officials that the contracts with these companies to develop these products were “imminent.” In the fifteen months after MedSystems made its investment, EchoCath failed to enter into a single contract.

MedSystems filed suit under Section 10(b) and Rule 10b–5, alleging that EchoCath intentionally or recklessly made misrepresentations to MedSystems in connection with the sale of securities in an effort to induce MedSystems to purchase its securities. MedSystems alleged that EchoCath was not on the verge of signing contracts with any company to develop its line of women’s health products in August 1996, or any other time up to the closing on February 27, 1997. EchoCath moved to dismiss the complaint on the grounds that the CEO’s statements were not material. Result? [ER MedSystems v. EchoCath, Inc., 235 F.3d 865 (3d Cir. 2000).]