The 8th Circuit Court of Appeals largely revived a proposed securities fraud class action that had been dismissed in its entirety by a trial court in 2010.

In the lawsuit, investors claimed to have suffered $1.5 billion in losses because KV, a generic drug maker, first misled the FDA in its compliance reports, and subsequently shut down its manufacturing operations in 2009.

Neither KV Pharmaceutical nor a lawyer for the company responded to requests for comment.

The decision marks the latest setback for KV Pharmaceutical, which starting in 2008 was subject to a series of recalls and investigations by the Justice Department and the FDA related to the company's manufacturing and distribution of oversized morphine pills.

In March 2010, former KV subsidiary Ethex Corp, pleaded guilty to two felony counts of criminal fraud and agreed to pay $27.6 million in fines and restitution in connection with the charges stemming from the investigations.

A year later, KV's former chief executive, Marc Hermelin, pleaded guilty to misdemeanor violations of the Food, Drug and Cosmetic Act. He was sentenced to 30 days in jail and ordered to pay $1.9 million in fines and forfeitures.

Investors pursued the fraud claims separately in a case filed in 2009 in U.S. District Court in St. Louis. The lawsuit focused on FDA inspections of KV facilities over a six-year period. Results of those inspections were reported to the company's management on a document called a Form 483.

The shareholders argued that information on the Forms 483 about KV's compliance with FDA regulations contradicted statements KV made to investors. The forms showed that KV was not in compliance with FDA regulations, investors said.

KV countered that the forms did not represent the FDA's final determination, a view adopted by U.S. District Judge Carol Jackson in dismissing the suit. But a three-judge panel of the 8th Circuit appeal court reversed the dismissal, saying investors could have considered them significant given the company's assurance's that it was in compliance.

"There is a substantial likelihood the presence of these factors would be viewed by a reasonable investor as significantly altering the total mix of information made available, irrespective of whether the Form 483 represents the FDA's final say on compliance issues," Judge Kermit Bye wrote.

The decision could have ramifications for other drug companies since it is the first time a federal appeals court has determined that FDA's issuance of a Form 483 can be considered material under federal securities laws, said Javier Bleichmar of Labaton Sucharow, the lead lawyer for the investors.

The 8th Circuit also said Judge Jackson abused her discretion by denying the investors' motion to amend their complaint to add details from the guilty pleas of KV subsidiary Ethex and former KV CEO Hermelin. Both pleas followed Judge Jackson's earlier February 2010 decision to dismiss the shareholders' case.

The appellate court did uphold Jackson on a separate point, though, in dismissing the investors' claims that KV made false or misleading statements about its manufacturing of a generic version of the blood pressure drug metoprolol.

The case is Public Pension Fund Group v. KV Pharmaceutical Co, 8th Circuit Court of Appeals, no. 10-3402.

For the plaintiffs: Javier Bleichmar of Labaton Sucharow

For KV Pharmaceutical: Andrew Tulumello of Gibson Dunn

(Reporting By Nate Raymond in New York; Editing by Tim Dobbyn)

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