Medical Device Maker Obalon Therapeutics Facing Securities Case Following Balloon System IPO

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Obalon Therapeutics, Inc. and its CEO, CFO and VP of Finance are named as defendants in a proposed class action filed over alleged violations of federal securities laws. The 35-page complaint centers on the initial product offering (IPO) for Obalon’s balloon system, which the case says is an FDA-approved swallowable, gas-filled intragastric balloon meant to provided progressive and sustained weight loss for obese patients. The plaintiff alleges the defendants issued materially false and misleading statements about its business since the October 2016 IPO and specifically failed to disclose that: 

• Obalon recognized revenue in violation of Generally Accepted Accounting Principles (GAAP); and that
• The company was without “adequate internal controls” over financial and accounting reporting, such that financial details were allegedly “not prepared with conformity with GAAP.”

On January 23, 2018, a press release from Obalon revealed that a whistleblower had come forward to “make certain allegations” about possibly “improper revenue recognition during the Company’s fourth fiscal quarter of 2017,” according to the suit. Upon this news, Obalon’s stock reportedly sank by more than 33 percent to $1.73 per share, representing a 77 percent total decline in share price from the company’s initial IPO price per share, which was $15.00.