Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-casd-3_13-cv-02005/USCOURTS-casd-3_13-cv-02005-3/pdf.json

Nature of Suit Code: 850
Nature of Suit: Securities, Commodities, Exchange
Cause of Action: 

---

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF CALIFORNIA

BRAD MAUSS, individually and on

behalf of all other persons similarly

situated,

 Plaintiff,

CASE NO. 13cv2005 JM (JLB)

ORDER DENYING IN PART AND

GRANTING IN PART

DEFENDANTS’ MOTION TO

DISMISS PLAINTIFF’S FIFTH

AMENDED COMPLAINT

vs.

NUVASIVE, INC.; ALEXIS V.

LUKIANOV; KEVIN C. O’BOYLE;

and MICHAEL J. LAMBERT, 

Defendants.

 Defendants move to dismiss Plaintiff’s fifth amended complaint for failure

to state a claim (Doc. No. 73), and both parties request judicial notice of several

items (Doc. Nos. 73, 77). These matters were fully briefed and found suitable

for resolution without oral argument pursuant to Local Civil Rule 7.1.d.1. For the

reasons set forth below, the requests for judicial notice are granted, and Defendant’s

motion to dismiss is denied in part, and granted in part. 

BACKGROUND

A. Procedural History

This case is a putative securities-fraud class action on behalf of those 

who purchased NuVasive securities between October 22, 2008, and July 30, 2013. 

Danny Popov filed the initial complaint in August 2013. (Doc. No. 1). Brad Mauss

was appointed as lead plaintiff in December 2013. (Doc. No. 15). 

- 1 - 13cv2005

Case 3:13-cv-02005-JM-JLB Document 85 Filed 07/12/16 PageID.<pageID> Page 1 of 24
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

Plaintiff filed a first amended complaint in February 2014. (Doc. No. 22). 

The first amended complaint was dismissed for failure to state a claim because it

did not link the allegedly false statements to the asserted reasons for their falsity,

and it did not identify which Defendant made the statements. (Doc. No. 29.) 

Plaintiff filed a second amended complaint in September 2014. (Doc.

No. 30). The second amended complaint was dismissed because the loss-causation

allegations were insufficient under Loos v. Immersion Corp., 762 F.3d 880, 890 (9th

Cir. 2014), which had recently held that the announcement of an investigation,

without more, is insufficient to establish loss causation. (Doc. No. 38). At that

point, Plaintiff’s loss-causation theory rested solely on the announcement that the

company was being investigated for possible false or improper claims submitted to

Medicare or Medicaid. Additionally, although the claims were premised on alleged

misrepresentations about the company’s compliance with federal healthcare laws,

Plaintiff had not provided enough details about the violations and the relevant laws

to make it possible to assess whether the challenged statements were false. 

Plaintiff filed a third amended complaint in December 2014. (Doc. No. 39). 

Soon thereafter, the parties sought leave for Plaintiff to file a fourth amended

complaint (Doc. No. 44), which the court granted (Doc. No. 45). Plaintiff filed a

fourth amended complaint (“FAC”) in February 2015. (Doc. No. 47.) The FAC

was also dismissed because the court found the loss-causation allegations

insufficient under Loos v. Immersion Corp., 762 F.3d 880, 890 (9th Cir. 2014). 

However, the court took note of several new developments: the company’s

announcement that Defendant Lukianov resigned for failure to comply with certain

of the company’s expense-reimbursement and personnel policies; the company’s

announcement that it agreed to pay the Department of Justice (the “DOJ”) $13.8

million to settle the investigation; the DOJ’s announcement of the settlement and

the underlying allegations regarding false claims and kickbacks; and the filing and

purported settlement of a qui tam action in Maryland, which also involved

- 2 - 13cv2005

Case 3:13-cv-02005-JM-JLB Document 85 Filed 07/12/16 PageID.<pageID> Page 2 of 24
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

allegations of false claims and kickbacks. In its previous order dismissing Plaintiff's

FAC, the court held:

. . . [A]bsent something more substantial from Defendants, Plaintiff’s

theory—that Defendants engaged in illegal practices and did not

disclose the true risk of regulatory scrutiny to investors, who bought

their shares at an artificially inflated price and were harmed when the

foreseeable result of that risk materialized, beginning with the

investigation and culminating with Lukianov’s resignation and the

settlement—appears to be enough to support a claim.

(Doc. No. 69, p. 28). Additionally, the court found the scienter allegations against

Defendant O’Boyle insufficient and dismissed the claims against him. The court

granted Plaintiff leave to file a fifth amended complaint incorporating the new

developments. Plaintiff filed a fifth amended complaint (“5AC”) (Doc. No. 70). 

B. The Operative Complaint

Like the complaints before it, the 5AC asserts two claims, for (1) securities

fraud, in violation of Section 10(b) of the Securities and Exchange Act of 1934 and

Rule 10b-5, against all Defendants; and (2) control-person liability under Section

20(a) of the Securities and Exchange Act, against Defendants Lukianov, O’Boyle,

and Lambert. Lukianov was NuVasive’s Chief Executive Officer and Chairman of

the Board of Directors at all relevant times. O’Boyle was the company’s Executive

Vice President and Chief Financial Officer through November 2009. Lambert has

been Chief Financial Officer since November 2009.

Plaintiff alleges, in sum, that Defendants engaged in illegal sales, marketing,

and billing practices that exposed the company to an increased risk of regulatory

liability under the federal Anti-Kickback Statute and the False Claims Act, but they

did not disclose that risk to investors, who bought their shares at an inflated price

and were harmed when the concealed risk materialized. He provides the following

account: 

NuVasive develops and markets products and services for use in the 

surgical treatment of spine disorders. To sustain and grow its business, NuVasive

faces constant pressure to innovate, promote its products, establish relationships

- 3 - 13cv2005

Case 3:13-cv-02005-JM-JLB Document 85 Filed 07/12/16 PageID.<pageID> Page 3 of 24
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

with surgeons and hospitals, and convince surgeons to choose its products over

those of its competitors. At the same time, the company is subject to an extensive

regulatory framework that is designed to protect patients and government-funded

healthcare programs from fraud and abuse. Under that framework, sales and

marketing practices and other conduct that are commonplace in other industries

may be illegal when soliciting business that is ultimately paid for, in whole or in

part, by government healthcare programs. Failure to adhere to the applicable laws

and regulations can result in civil and criminal penalties and exclusion from

participation in government healthcare programs.

Because NuVasive and its customers—mainly hospitals and surgeons—rely

primarily on third-party reimbursement for surgical and monitoring fees, exclusion

from participation in government healthcare programs could be fatal to NuVasive’s

business. If hospitals and physicians cannot recover adequate payments from

programs like Medicare or Medicaid because NuVasive is ineligible to participate

or because there is a disagreement about reimbursement, they are unlikely to use

NuVasive’s products and services.

Plaintiff alleges that Defendants knew and recognized in public filings

that the Anti-Kickback Statute prohibits the knowing and willful solicitation, offer,

payment or receipt of any remuneration, direct or indirect, in cash or in kind, in

return for or to induce the referral of patients for items or services covered by

Medicare, Medicaid and certain other government health programs. They also 

knew that by compromising the independent judgment of physicians, promoting 

the use of equipment that was not medically necessary, manipulating and exploiting

loopholes in the billing coding system, and encouraging customers to do the same,

improper claims would be submitted for payment to Medicare and Medicaid in

violation of the False Claims Act. Nevertheless, Plaintiff claims, Defendants

determined to sustain NuVasive’s revenues and expand its customer base by

employing numerous aggressive sales and marketing practices that violated the

- 4 - 13cv2005

Case 3:13-cv-02005-JM-JLB Document 85 Filed 07/12/16 PageID.<pageID> Page 4 of 24
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

Anti-Kickback Statute and False Claims Act. 

Plaintiff identifies four specific practices that he claims violated these laws. 

First, NuVasive lured surgeons to use its products and services and to encourage

other surgeons to do the same by devising purported educational and training

programs and clinical studies that included, among other things, all-expense paid

trips to New York, San Diego, Puerto Rico, and other locations, first-class flights

on private jets, tickets to Broadway shows and NFL games, expensive cocktail

receptions and dinners, luxury hotel stays, and gift cards. Defendants also created

a network of prominent physicians, known within the company as “high end

rollers,” who received rewards and special treatment, such as all-expense-paid

travel, concierge services, and speaking engagements based on the number of

patients they referred to NuVasive and their promotion and publication of peerreviewed papers touting the benefits of NuVasive’s products and services. 

Second, in the course of these interactions with physicians, Defendants

knowingly marketed NuVasive products and services for uses that were not

approved or cleared by the Food and Drug Administration (“FDA”). This off-label

marketing further increased NuVasive’s revenues and resulted in submission of

false and improper claims to government healthcare programs in violation of the

False Claims Act and FDA regulations.

Third, after losses in revenue in NuVasive’s monitoring business due

to changes in the rules for billing and coding intra-operative monitoring services,

the company responded by having sales representatives place monitoring equipment

in operating rooms when it was redundant and not medically necessary; allowing

doctors to remotely monitor several patients simultaneously, then generating

separate invoices for the same time billed; developing marketing materials to

instruct customers on how to code monitoring services so as to take advantage of

coding loopholes; and improperly coding monitoring services in claims submissions

to Medicare and Medicaid.

- 5 - 13cv2005

Case 3:13-cv-02005-JM-JLB Document 85 Filed 07/12/16 PageID.<pageID> Page 5 of 24
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

Fourth, when coding disputes threatened to impact revenues for NuVasive’s

Extreme Lateral Interbody Fusion (“XLIF”) procedure, NuVasive’s most lucrative

and well-known line of business, the company waged a heated battle with thirdparty payers, including Medicare and Medicaid, insisting that they accept the coding

designation assigned by NuVasive. Ultimately, NuVasive decided to continue to

use the coding that resulted in the highest reimbursement for the XLIF procedure. 

Plaintiff supports this account with the alleged statements of various

confidential witnesses who observed and raised concerns about the company’s

apparent indifference to healthcare laws and regulations. For example, CW1 was

Defendant Lukianov’s executive assistant from December 2009 through September

2012, and had access to the company’s sales and marketing-related programs and

expenses, including Lukianov’s expense reports. CW1 became aware of millions

of dollars in gifts given to doctors who used NuVasive products extensively,

including flights on private jets to meetings with Lukianov in San Diego or New

York, and all-expense-paid vacations to destinations like Puerto Rico. According

to CW1, twenty or so doctors who were Lukianov’s favorites, some identified by

name, participated in Medicare and Medicaid, used the entire line of NuVasive

products to the exclusion of all others, were known within the company as “high

end rollers,” and received more gifts than others.

CW6, a NuVasive accounting manager from June 2010 to April 2012 who

audited the company’s expenses every quarter offers a similar account. According

to CW6, surgeons were flown on private jets or first-class flights to San Diego, 

New York, Puerto Rico, and other destinations for luxury trips, costing between

$80,000 and $200,000 per month, which Lukianov partook in and submitted as

expenses. A 2011 look-back audit requested by the board of directors revealed

that half of the expenses under review were inappropriate, including expense

reports that did not comply with the requirements set forth in the Patient Protection

and Affordable Care Act, and other expenses that violated the company’s internal

- 6 - 13cv2005

Case 3:13-cv-02005-JM-JLB Document 85 Filed 07/12/16 PageID.<pageID> Page 6 of 24
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

compliance policy, which was designed to maintain compliance with the

regulations. For example, the audit identified $40,000 spent on NFL tickets and

other entertainment, which was categorized as “employee recognition,” when, in

fact, the money had been used to entertain doctors. 

The audit results were provided to the executive leadership team and the

Board of Directors. Additionally, CW1 and CW6 informed Defendant Lambert,

NuVasive’s Chief Financial Officer, that inappropriate expenses were being billed

to the company. In early 2010, CW1 began informing Lambert of inappropriate

expenses. Lambert nevertheless “approved the expenses anyway. Always.” 

(Id. ¶ 76). CW6 also didn’t see any change in the company. Instead, steps were

taken to conceal the expenses after the audit. At the direction of the Controller

and General Counsel, CW6 was instructed to categorize inappropriate travel and

entertainment expenses for doctors with nondescript code names like “Wolverine,”

and senior executives, including Lukianov and Lambert, began approving each

others’ expense reports. 

Nevertheless, in various public filings, press releases, and investor calls

beginning on October 22, 2008 (the beginning of the proposed class period),

Defendants stated that figures representing the company’s financial condition were

accurate and that the company was in compliance with regulatory requirements,

including the Anti-Kickback Statute and the False Claims Act. According to

Plaintiff, those statements were false or misleading, in sum, because they failed

to disclose that

(1) the Company utilized kickbacks, in the form of gifts, entertainment,

improper commissions and consulting fees, and other remuneration,

in order to induce doctors to utilize its products and services and to

encourage other doctors to do the same in violation of federal and state

laws and regulations; (2) the Company promoted its products and

services, which were unapproved and/or uncleared by the FDA; (3) the

Company employed improper sales and billing practices to sustain

revenues related to its monitoring business and XLIF procedure,

including by submitting false or otherwise improper claims to Medicare

and Medicaid; (4) the Company provided guidance to its customers as

to how to code NuVasive’s products and procedures in order to take

advantage of loopholes and maximize reimbursement by third party

- 7 - 13cv2005

Case 3:13-cv-02005-JM-JLB Document 85 Filed 07/12/16 PageID.<pageID> Page 7 of 24
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

payers, including Medicare and Medicaid; and (5) the Companys

earnings and revenues were earned, in part, as a result of violations of

healthcare fraud and abuse laws. 

(Id. ¶ 24). 

Plaintiff alleges the Company’s aggressive marketing and billing practices

and purported “educational” programs, which served as a thinly-disguised kickback

system to reward doctors for using NuVasive’s products, inevitably attracted the

attention of regulators and could no longer be concealed by Defendants. Thus, on

July 30, 2013, the end of the proposed class period, NuVasive disclosed in its Form

10-Q for the second quarter of 2013 that it was being investigated in connection

with possible false or improper claims submitted to Medicare and Medicaid. The

statement read: 

During the three months ended June 30, 2013, the Company received

a federal administrative subpoena from the Office of the Inspector

General of the U.S. Department of Health and Human Services (OIG)

in connection with an investigation into possible false or otherwise

improper claims submitted to Medicare and Medicaid. The subpoena

seeks discovery of documents for the period January 2007 through

April 2013. The Company is working with the OIG to understand the

scope of the subpoena and its request for documents, but do not expect

to have greater clarity regarding the request for several months. The

Company intends to fully cooperate with the OIG’s request. At June

30, 2013, the Company is unable to determine the potential financial

impact, if any, that will result from this investigation. 

(Id. ¶ 336). 

Later that day, during a conference call with investors, Lukianov described

the subpoena, stating:

The OIG subpoena is a very broad document request. It was very

focused on interbody CoRoent and biologics Osteocel and Formagraft,

but very very broad beyond those as well. And again, it’s a request

for information. It’s not litigation. And this will be going on for a few

months, I’m sure, as we sort it out with OIG in terms of the specific

information that they would like to see. 

(Id. ¶ 337). After an analyst remarked that the subpoena had the earmarks of a

false-claims or whistleblower action, Lukianov acknowledged that the subpoena

was not part of a broader request of similarly situated companies, but rather was

- 8 - 13cv2005

Case 3:13-cv-02005-JM-JLB Document 85 Filed 07/12/16 PageID.<pageID> Page 8 of 24
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

“specific to NuVasive and a very broad request.” (Id.) 

Almost immediately, analysts reported that the likely outcome of the

subpoena was a settlement, increased legal fees, the costs of hiring a governmentappointed monitor, fines in the tens of millions of dollars, and business disruptions

during the monitoring period: 

[The OIG subpoena] has plenty of precedence on how it plays out: 

The [OIG] has requested documents for the period January 2007

through April 2013. While the government is mainly focused on

Medicare billing claims on inter-body fusions (used for most of

NUVA’s fusion procedures) and biologics (Osteocel Plus), they

are ‘casting a very broad net.’ As NUVA points out, no charges

have been filed against the company, and they are complying with

the investigation. However, as these investigations have become

commonplace in the device industry (usually relating to sales

practices in violating Federal anti-kickback legislation, or the

Federal Healthcare Fraud and False Claims statute, which appears to

be the case here) there is plenty of precedence on the likely outcome. 

Specifically, almost all of these inquiries have led to a settlement,

in the form of a Corporate Integrity Agreement, which includes a

Deferred Prosecution Agreement (where the company agrees to clean

up questionable practices over a 1–2 year period to avoid prosecution

and disqualification from Medicare participation). Assuming the

investigation follows this path, the initial impact will be increased

legal cost near term (which the company has assumed in 2013,

leaving us to believe NUVA is not peripheral, but the focus of the

investigation), and an eventual settlement, leading to a DPA that

will require additional cost for hiring a government appointed monitor

(WMGI $27.37, Buy was of similar size, and paid $50 million per

year over initially a year and a half period), fines (hard to gauge,

but historically in the $25–75 million range, for a company of

NUVA’s size), and the strong likelihood of business disruptions over

the monitoring period. In addition, there is increased headline risk, and

given that NUVA is less likely to be acquired until the investigation

is resolved, we think valuation is capped at ~$25 or 2x 2014 EV/Sales,

as a near-term acquisition becomes unlikely. 

(Id. ¶ 338). On July 31, 2013, the day after the investigation was announced, 

NuVasive securities declined $3.28 per share, or over 12%, to close at $22.84 per

share. 

The 5AC details the following post-class period “confirming events.” First,

on April 1, 2015, NuVasive announced the forced resignation of Defendant

Lukianov from both his position as CEO and as a member of the Company’s Board

of Directors, based upon violations of the Company’s expense reimbursement and

- 9 - 13cv2005

Case 3:13-cv-02005-JM-JLB Document 85 Filed 07/12/16 PageID.<pageID> Page 9 of 24
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

personnel policies. On this news, NuVasive’s securities declined 5.4% on

higher-than-average trading volume, to close at $43.52 after a trading halt put in

place prior to the announcement was lifted.

On April 29, 2015, NuVasive announced that it had reached an agreement in

principle with the DOJ to resolve potential claims arising from the OIG’s

investigation of false and/or improper claims submissions to Medicare and

Medicaid in exchange for payment of approximately $13.8 million, including fees.

Thereafter, on July 30, 2015, the DOJ announced that NuVasive had entered into a

definitive agreement to pay the U.S. $13.5 million, plus fees, to resolve allegations

that the Company caused false claims to be submitted to Medicare and other federal

health care programs by marketing the CoRoent System for surgical uses not

approved by the FDA and by paying kickbacks to induce physicians to use the

Company’s products, including the CoRoent System. 

The DOJ announcement explained the U.S. alleged that between 2008 and

2013, NuVasive promoted the use of the CoRoent System for surgical uses that

were not approved or cleared by the FDA, which caused physicians and hospitals to

submit false claims to federal health care programs for certain spine surgeries that

were not eligible for reimbursement. The U.S. further alleged that NuVasive

knowingly offered and paid illegal remuneration to certain physicians, including

promotional speaker fees, honoraria, and expenses related to attending company

events, to induce them to use the company’s products. 

The DOJ settlement also resolved a qui tam action involving NuVasive,

captioned U.S. ex rel. Kevin J. Ryan v. NuVasive, Inc., Case No. 12cv2683 

(D. Md), which similarly alleged that “NuVasive’s illegal scheme to promote the

use of CoRoent XL implants for indications that were not FDA approved greatly

increased CoRoent XL implants’ sales to the great financial benefit of NuVasive,

but caused federal and state health care programs to pay millions of dollars for the

use of medical devices that were not approved, were not reasonable and medically

- 10 - 13cv2005

Case 3:13-cv-02005-JM-JLB Document 85 Filed 07/12/16 PageID.<pageID> Page 10 of 24
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

necessary and were medically unsafe for non-approved uses.” (Id. ¶ 346). 

C. The Motion to Dismiss and Subsequent Procedural Developments

Defendants moved to dismiss the 5AC for failure to state a claim. (Doc.

No. 73). Defendants also filed a request for judicial notice of a number of

documents relating to historic stock prices, SEC filings and press releases as

evidence of what information NuVasive disclosed to the market, and evidence of

NuVasive’s annual revenues for the periods beyond the class period. (Doc. No. 73-

20). Plaintiff opposed the motion to dismiss (Doc. No. 76), and also filed a request

for judicial notice of two documents: (1) the RBC Capital markets Equity Research

Report, April 29, 2015, and (2) the PiperJaffray Comment, April 29, 2015 (Doc. No.

77). Defendant filed a reply. (Doc. No. 79). 

After the motion to dismiss was taken under submission, Plaintiff filed a

notice of supplemental authority in support of his opposition. (Doc. No. 81). The

court requested supplemental briefing on the loss causation issue. (Doc. No. 82). 

Specifically, the parties were asked to address the question of the impact, if any, of

Lloyd, et al. v. CVB Financial Corporation, et al., No. 13-56838 (9th Cir. Feb. 1,

2016) on the pending issues before the court. Both parties submitted supplemental

briefing. (Doc. Nos. 83 and 84). 

DISCUSSION

A. Requests for Judicial Notice

Courts can take judicial notice of matters that are either generally known

within the court’s jurisdiction or capable of accurate and ready determination by

resort to sources whose accuracy cannot reasonably be questioned. See Fed. R.

Evid. 201(b). Courts must take judicial notice of such facts if a party requests it and

the court is supplied with the necessary information. See Fed. R. Evid. 201(c)(2). 

In securities cases, courts routinely take judicial notice of SEC filings, 

press releases, and other publicly available financial documents. See Metzler Inv.

GMBH v. Corinthian Colls., Inc., 540 F.3d 1049, 1064 n.7 (9th Cir. 2008) (stock-

- 11 - 13cv2005

Case 3:13-cv-02005-JM-JLB Document 85 Filed 07/12/16 PageID.<pageID> Page 11 of 24
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

price history and publicly available financial documents); Dreiling v. Am. Express

Co., 458 F.3d 942, 946 n.2 (9th Cir. 2006) (SEC filings); Mallen v. Alphatec

Holdings, Inc., 861 F. Supp. 2d 1111, 1122 n.5 (S.D. Cal. 2012) (SEC filings,

press releases, and transcripts of conference calls). Courts may take judicial notice

that the market was aware of the information contained in such documents. See

Heliotrope Gen., Inc. v. Ford Motor Co., 189 F.3d 971, 981 n.18 (9th Cir. 1999).

Defendants request judicial notice of the following documents: 

(1) NuVasive’s Form 8-K filed with the SEC on April 1, 2015, and exhibit

announcing the resignation of Alex Lukianov; (2) NuVasive’s April 29, 2015 press

release announcing agreement in principle with DOJ; (3) NuVasive’s historic stock

prices for April 28-30, 2015, and July 28-29, 2015, reported by Yahoo! Finance;

(4) NuVasive’s Form 8-K filed with the SEC on July 28, 2015, and Ex. 99.2; 

(5) press release by the DOJ, dated July 30, 2015; (6) excerpts from NuVasive’s

Form 10-K for Fiscal Year 2008, ended December 31, 2008, filed with the SEC on

March 2, 2009; (7) excerpts from NuVasive’s Form 10-K for Fiscal Year 2012,

ended December 31, 2012, filed with the SEC on February 27, 2013; (8) settlement

agreement between the DOJ and NuVasive; (9) form 10-Q for the quarterly period

ended September 30, 2013, filed with the SEC on October 30, 2013; (10) excerpts

from NuVasive’s Form 10-K for Fiscal Year 2013, ended December 31, 2013, filed

with the SEC on March 3, 2014; (11) NuVasive’s Form 10-Q for the quarterly

period ended March 31, 2014, filed with the SEC on April 30, 2014; 

(12) NuVasive’s Form 10-Q for the quarterly period ended June 30, 2014, filed with

the SEC on July 30, 2014; (13) NuVasive’s Form 10-Q for the quarterly period

ended September 30, 2014, filed with the SEC on October 30, 2014; (14) excerpts

from NuVasive’s Form 10-K for Fiscal Year 2014, ended December 31, 2014, filed

with the SEC on February 25, 2015; (15) NuVasive’s Form 10-Q for the quarterly

period ended March 31, 2015, filed with the SEC on May 4, 2015; (16) NuVasive’s

Form 10-Q for the quarterly period ended June 30, 2015, filed with the SEC on 

- 12 - 13cv2005

Case 3:13-cv-02005-JM-JLB Document 85 Filed 07/12/16 PageID.<pageID> Page 12 of 24
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

July 28, 2015; and (17) NuVasive’s Form 10-Q for the quarterly period ended June

30, 2013, filed with the SEC on July 30, 2013. (Doc. No. 73-20). Plaintiff does not

oppose Defendants’ request for judicial notice. 

Plaintiff requests judicial notice of (1) the RBC Capital Markets Equity

Research Report, April 29, 2015, and (2) the PiperJaffray Comment, April 29, 2015

(Doc. No. 77). Defendants do not oppose Plaintiff’s request for judicial notice. 

NuVasive’s financial forms and press releases are appropriate for judicial

notice under the rules set forth above. As for the settlement agreement between the

DOJ and NuVasive (Doc. No. 73-10), and the documents requested by Plaintiff

(Doc. Nos. 77-1, 77-2) , the court takes notice of those items to the extent that they

reflect the information available to the market. 

B. Defendants’ Motion to Dismiss

A Rule 12(b)(6) motion to dismiss challenges the legal sufficiency of

the pleadings. See Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001). When

deciding such a motion, the court must construe the pleadings in the light most

favorable to the non-moving party, accepting as true all material allegations in

the complaint and any reasonable inferences to be drawn from them. See Broam

v. Bogan, 320 F.3d 1023, 1028 (9th Cir. 2003). While dismissal is proper only in

“extraordinary” cases, United States v. City of Redwood City, 640 F.2d 963, 966

(9th Cir. 1981), “[f]actual allegations must be enough to raise a right to relief above

the speculative level,” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). 

The court’s review “is limited to the complaint, materials incorporated into

the complaint by reference, and matters of which the court may take judicial notice.” 

Metzler, 540 F.3d at 1061. The court should grant relief under Rule 12(b)(6) if

the complaint lacks either a cognizable legal theory or facts sufficient to support a

cognizable legal theory. See Balistreri v. Pacifica Police Dep’t, 901 F.2d 696, 699

(9th Cir. 1990). 

Because Plaintiff has alleged securities-fraud claims governed by the

- 13 - 13cv2005

Case 3:13-cv-02005-JM-JLB Document 85 Filed 07/12/16 PageID.<pageID> Page 13 of 24
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

Private Securities Litigation Reform Act of 1995 (“PSLRA”), 15 U.S.C. § 78u-4,

he must satisfy the heightened pleading standards set forth by Rule 9(b) of the

Federal Rules of Civil Procedure and the PSLRA, the latter of which imposed

“formidable pleading requirements to properly state a claim and avoid dismissal

under [Rule] 12(b)(6).” Metzler, 540 F.3d at 1055; see Zucco Partners, LLC v.

Digimarc Corp., 552 F.3d 981, 990 (9th Cir. 2009). 

Rule 9(b) requires a plaintiff alleging fraud to “state with particularity

the circumstances constituting fraud.” Fed. R. Civ. P. 9(b); see Nursing Home

Pension Fund, Local 144 v. Oracle Corp., 380 F.3d 1226, 1230 (9th Cir. 2004). 

To satisfy this requirement, “[a]verments of fraud must be accompanied by the

who, what, when, where, and how of the misconduct charged.” Vess v. CibaGeigy Corp., USA, 317 F.3d 1097, 1106 (9th Cir. 2003) (internal quotation marks

omitted). Recently, the Ninth Circuit held that “Rule 9(b) applies to all elements

of a securities fraud action, including loss causation.” Oregon Pub. Emps. Ret.

Fund v. Apollo Group Inc., 774 F.3d 598, 604 (9th Cir. 2014). 

Similarly, the PSLRA requires a plaintiff alleging securities fraud to “plead

with particularity both falsity and scienter.” Zucco Partners, 552 F.3d at 990

(internal quotation marks omitted). The complaint must “specify each statement

alleged to have been misleading [and] the reason or reasons why the statement is

misleading,” and “state with particularity facts giving rise to a strong inference that

the defendant acted with the required state of mind.” 15 U.S.C. § 78u-4(b)(1)–(2);

Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 321 (2007). The

allegations must give rise not simply to a plausible inference of scienter, but to

an inference of scienter that is “cogent and at least as compelling as any opposing

inference of nonfraudulent intent.” Tellabs, 551 U.S. at 324. 

1. Section 10(b) Claim

Section 10(b) of the Securities Exchange Act makes it unlawful "[t]o use or

employ, in connection with the purchase or sale of any security . . . any

- 14 - 13cv2005

Case 3:13-cv-02005-JM-JLB Document 85 Filed 07/12/16 PageID.<pageID> Page 14 of 24
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

manipulative or deceptive device or contrivance in contravention of such rules and

regulations as the [SEC] may prescribe . . . ." 15 U.S.C. § 78j(b). SEC Rule 10b-5

makes it unlawful "[t]o make any untrue statement of a material fact or to omit to

state a material fact necessary in order to make the statements made, in light of the

circumstances under which they were made, not misleading" in connection with the

purchase or sale of any security. 17 C.F.R. § 240.10b-5(b).

There are six elements to a private securities-fraud claim under Section 10(b)

and Rule 10b-5: (1) a material misrepresentation or omission; (2) scienter; (3) a

connection between the misrepresentation and the purchase or sale of a security; 

(4) reliance upon the misrepresentation; (5) economic loss; and (6) loss causation. 

See Loos, 762 F.3d at 886-87. Defendants challenge Plaintiff's allegations on loss

causation, falsity, and scienter with respect to Defendant O’Boyle. The court

addresses each of these elements below.

a. Loss Causation

"Broadly speaking, loss causation refers to the causal relationship between a

material misrepresentation and the economic loss suffered by an investor." Loos v.

Immersion Corp., 762 F.3d 880, 887 (9th Cir. 2014). "Ultimately, a securities fraud

plaintiff must prove that the defendant's misrepresentation was a substantial cause

of his or her financial loss." Id. (internal quotation marks omitted). "At the

pleading stage, however, the plaintiff need only allege that the decline in the stock

price was proximately caused by a revelation of fraudulent activity rather than by

changing market conditions, changing investor expectations, or other unrelated

factors." Id. "In other words, the plaintiff must plausibly allege that the defendant's

fraud was revealed to the market and caused the resulting losses." Id. (internal

quotation marks omitted).

In its previous order dismissing Plaintiff's FAC, the court held that under

Loos, the controlling Ninth Circuit precedent at the time, the announcement of an

investigation, without more, was insufficient to establish loss causation. Id. at 890. 

- 15 - 13cv2005

Case 3:13-cv-02005-JM-JLB Document 85 Filed 07/12/16 PageID.<pageID> Page 15 of 24
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

The court noted, however, that Loos did not hold that the announcement of an

investigation could never be part of a viable loss-causation theory, and

acknowledged that the company's settling or paying fines could provide the

"something more" required for a viable theory of loss-causation. The Ninth Circuit

answered the "something more" question in Lloyd v. CVB Financial Corp., 811

F.3d 1200, 1209-11 (9th Cir. 2016), where it held that the announcement of a

government investigation, coupled with subsequent information revealing the

inaccuracy of prior representations, is sufficient to plead loss causation. 

Lloyd involved allegations against a lender, CVB Financial Corporation

("CVB"). Plaintiff alleged that CVB misrepresented in its SEC filings that it was

unaware of any credit problems of its borrowers that would cause serious doubts

about such borrowers' ability to comply with payment terms. Id. at 1203-04. 

Plaintiff further alleged that CVB failed to disclose that one of its borrowers, Garret

Group, had informed CVB that it was contemplating bankruptcy and would not

make the payments on its loans. 

CVB made the last two representations in March and May 2010. In May and

June 2010, an anonymous blogger suggested that CVB was engaging in a "cycle of

extend and pretend" with its loans to Garrett Group and others. Id. at 1204. On 

July 26, 2010, CVB received a subpoena from the SEC. In its August 9, 2010 form

10-Q, CVB disclosed the receipt of the subpoena, stating:

The subpoena requests information regarding our loan underwriting

guidelines, our allowance for credit losses and our allowance for loan

loss calculation methodology, our methodology for grading loans and

the process for making provisions for loan losses, and our provision for

credit losses. In addition, the subpoena requests information regarding

presentations we have given or conferences we have attended with

analysts, brokers, investors or prospective investors.

Id. 

The day following this announcement, CVB's stock fell 22%, from $10.30 to

$8.00 per share. Id. A month later, CVB announced that Garrett Group was unable

to pay its loans as scheduled; the bank charged off $34 million in Garrett Loans and

- 16 - 13cv2005

Case 3:13-cv-02005-JM-JLB Document 85 Filed 07/12/16 PageID.<pageID> Page 16 of 24
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

characterized the remaining $48 million as nonperforming. Id. at 1205. The

following day, CVB's stock dropped only slightly, from $7.05 to $6.99. Id. By the

following week, the stock had risen above $7.05, and it never again fell below that

price. Id. 

In determining whether loss causation was sufficiently pled here, the court

noted that Loos had left open whether the announcement of an investigation could

form a basis for a viable loss causation theory if the complaint also alleged a

subsequent corrective disclosure by defendant. The court answered that question in

the affirmative. The court discussed that while CVB's stock fell over 20% the day

after the announcement of the subpoena receipt, the market reacted hardly at all to

CVB's "bombshell" disclosure about charging off millions in Garrett loans,

"confirming that investors understood the SEC announcement as at least a partial

disclosure of the inaccuracy of the previous serious doubts statements." Id. at 1210. 

Thus, under the facts of the case, the Ninth Circuit found that loss causation was

sufficiently pled, explaining that "any other rule would allow a defendant to escape

liability by first announcing a government investigation and then waiting until the

market reacted before revealing that prior representations under investigation were

false." Id.

The court stated that its conclusion was consistent with a recent Fifth Circuit

decision, Public Employees' Retirement System of Mississippi v. Amedisys, Inc.,

769 F.3d 313, 317-19 (5th Cir. 2014), which held that a government investigation

can constitute a corrective disclosure in the absence of discovery of actual fraud. Id.

at 324-25. The Fifth Circuit held that an announcement of government

investigation, when "viewed together with the totality of the other alleged partial

disclosures," can be sufficient to plead loss causation. Id. at 324. Additionally,

"[t]o be corrective, the disclosure need not precisely mirror the earlier

misrepresentations, but it must at least relate back to the misrepresentation and not

to some other negative information about the company." Id. at 321. The Fifth

- 17 - 13cv2005

Case 3:13-cv-02005-JM-JLB Document 85 Filed 07/12/16 PageID.<pageID> Page 17 of 24
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

Circuit found that the combination of five partial disclosures, which spanned a

period of about two years, collectively constituted and culminated in a corrective

disclosure sufficient to allege loss causation. Id. at 324. The partial disclosures

included (1) an inconclusive report, ending with a statement that "it is not yet

concluding that Amedisys is committing Medicaid fraud, but there are many

indications that this inquiry needs deeper scrutiny"; (2) the company's

announcement of the resignations of Amedisys' Chief Operating Officer and Chief

Information Officer "to pursue other interests"; (3) a Wall Street Journal article

discussing questionable Medicare practices at Amedisys; (4) the announcement of

government investigations into Amedisys' billing practices; and (5) Amedisys'

disappointing second quarter earnings report, followed by a 24.13% decline in

company's share prices. Id.

Consistent with the approach of the Fifth Circuit, the Ninth Circuit concluded

Plaintiff had adequately pled loss causation by alleging that: 

(1) CVB's disclosure of the subpoena caused its stock price to drop

precipitously; (2) the market and various analysts perceived the

subpoena to be related to CVB's alleged misstatements about Garrett's

ability to repay; (3) the market's fears about the subpoena were

confirmed by CVB's September 9 disclosure that it was writing off $34

million in Garrett loans and categorizing the remainder as

non-performing; and (4) the September 9 disclosure's minimal effect on

CVB's stock price indicates that the earlier 22% drop reflected, at least

in part, the market's concerns about the Garrett loans.

Id. at 1210-11.

Plaintiff argues that the 5AC is "on all fours" with Lloyd and Amedisys:

It alleges that NuVasive disclosed the receipt of an OIG subpoena

probing false and improper claims submitted to Medicare and

Medicaid, followed by a significant drop in NuVasive's securities, that

NuVasive's CEO resigned as a result of his improper expenses,

resulting in a further decline in NuVasive's share price, and that

NuVasive eventually reached an agreement with the DOJ, requiring

the Company to pay $13.8 million in fines and penalties to resolve

allegations of Medicare and Medicaid fraud.

 (Doc. No. 83, p. 1). 

- 18 - 13cv2005

Case 3:13-cv-02005-JM-JLB Document 85 Filed 07/12/16 PageID.<pageID> Page 18 of 24
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

More specifically, Plaintiff argues the following facts illustrate loss causation

is sufficiently pled here. The 5AC alleges that on July 30, 2013, NuVasive

disclosed that it received a subpoena from the OIG probing possibly false and

improper claims submitted to Medicare and Medicaid. (Id. ¶ 336). On the same

day, during an investor conference call, Defendant Lukianov stated: "The OIG

subpoena is a very broad document request. It was very focused on interbody

CoRoent and biologics Osteocel and Formagraft, but very, very broad beyond those

as well." (Id. ¶ 337). The 5AC further alleges that analysts remarked the subpoena

"ha[d] kind of the earmarks of false claims or whistleblower type action" and

advised the market that the OIG subpoena "ha[d] a predictable outcome," likely to

result in tens of millions of dollars to be paid by NuVasive as a result of illicit sales

practices in violation of the federal anti-kickback legislation or the Federal

Healthcare Fraud and False Claims statutes. (Id. ¶ 338). The 5AC alleges that on

this news, NuVasive's securities declined $3.28 per share or over 12%, to close at

$22.84 per share on July 31, 2013. (Id. ¶ 339).

Next, the 5AC alleges that subsequent developments confirmed what

investors partially recognized upon the announcement of the OIG investigation. (Id.

¶ 340). First, on April 1, 2015, NuVasive announced the forced resignation of

Defendant Lukianov from both his position as CEO and as a member of the

company's Board of Directors based upon violations of the company's expense

reimbursement and personnel policies. (Id.). On this news, NuVasive's securities

declined 5.4%. (Id.). Less than one month later, on April 29, 2015, NuVasive

announced that it had reached an agreement in principle with the DOJ to resolve

claims arising from the OIG's investigation of false and improper claims

submissions to Medicare and Medicaid, in exchange for payment of approximately

$13.8 million, including fees. (Id. ¶ 341). Subsequently, on July 30, 2015, the DOJ

announced that NuVasive had entered into a definitive agreement to pay the U.S.

$13.5 million, plus fees, to resolve allegations that NuVasive caused false claims to

- 19 - 13cv2005

Case 3:13-cv-02005-JM-JLB Document 85 Filed 07/12/16 PageID.<pageID> Page 19 of 24
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

be submitted to Medicare and other federal health care programs by marketing the

CoRoent System for surgical uses not approved by the FDA and by paying

kickbacks to induce physicians to use NuVasive products, including the CoRoent

System. (Id. ¶ 342). The DOJ further alleged that NuVasive knowingly offered and

paid illegal remuneration to certain physicians, including, inter alia, promotional

speaker fees, honoraria, and expenses related to attending company events, to

induce them to use the company's products. (Id. ¶ 344). Plaintiff concludes that

these facts, taken together, compel the inescapable conclusion that the 5AC

adequately alleges loss causation, similar to Lloyd. "Any other finding "would

allow [NuVasive] to escape liability by first announcing the [OIG] investigation and

then waiting until the market reacted before revealing that prior representations

under investigation were false." (Doc. No. 83, p. 13, citing Lloyd, 811 F.3d at

1210) (internal quotations omitted). 

Defendants argue Lloyd is inapposite and that its application to this case is

impractical. First, Defendants argue, unlike Lloyd, the announcement of the

investigation here was not preceded by speculation in the market that NuVasive was

engaged in improper conduct. (Doc. No. 84, p. 3). Second, while the analysts in

Lloyd noted a connection between the subpoena and Garret loans, the analysts'

predictions here were both incorrect, as the investigation did not lead to a "deferred

prosecution agreement," and far less specific because they did not note the

connection between the subpoena and the alleged off-label uses for CoRoent®. 

(Id.). Third, the announcement of Defendant Lukianov's departure did not suggest

that it was connected to the investigation. (Id.). Fourth, the DOJ press release

stated that the DOJ and NuVasive settled allegations only and did not make any

reference to “fines” and “penalties” or findings of liability. (Id. at p. 4, 5). Fifth,

while in Lloyd, only one month had passed between the announcement of the

investigation and the write-off of Garrett loans, here, more than 20 months elapsed

between the disclosure of the investigation and the announcement of the settlement. 

- 20 - 13cv2005

Case 3:13-cv-02005-JM-JLB Document 85 Filed 07/12/16 PageID.<pageID> Page 20 of 24
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

This, according to Defendants, illustrates that the lack of market reaction is far less

telling here than in Lloyd. (Id. at p. 8). Finally, Defendants argue that the

application of Lloyd in this case is impractical because “[i]f a plaintiff only had to

allege that the outcome of an investigation ‘confirmed the market’s fears’ at the time

an investigation was announced, securities cases arising from an announcement of

an investigation would be unmanageable.” (Id.). Since it took two years to resolve

the investigation in this case, Defendants suggest courts would have to wait years or

even stay cases, pending investigations if they applied Lloyd to cases such as this. 

(Id.).

Defendants’ position is too restrictive and ultimately unpersuasive. While the

facts of this case are not identical to Lloyd, the logic behind Lloyd is perfectly

applicable here. The court finds that just as in Lloyd and Amedisys, the

combination of “partial disclosures” here, including (1) the disclosure of the receipt

of an OIG subpoena probing false and improper claims submitted to Medicare and

Medicaid, followed by a significant drop in NuVasive's securities; (2) the market

analysts’ remarks regarding the subpoena having “earmarks of false claims or

whistleblower type action,” resulting in a decline in Nuvasive’s share price; (3) the

resignation of NuVasive's CEO, resulting in a further decline in NuVasive's share

price; and (4) the settlement reached between NuVasive and the DOJ, requiring

NuVasive to pay $13.8 million, is sufficient to plead loss causation at this stage of

the lawsuit. 

The factual differences outlined by Defendants are inconsequential. First,

Lloyd does not require that an announcement of an investigation be preceded by

market speculation of company wrongdoing in order for the announcement to

qualify as a corrective disclosure. The important consideration is the market’s

understanding of a given disclosure at the time it was made. Here, the

announcement, followed by a significant drop in NuVasive's securities and the

market analysts’ remarks about the nature of the subpoena, sufficiently rendered this

- 21 - 13cv2005

Case 3:13-cv-02005-JM-JLB Document 85 Filed 07/12/16 PageID.<pageID> Page 21 of 24
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

a partial disclosure under Lloyd and Amedisys. Second, while the market analysts

here did not predict the outcome of the subpoena with the same particularity and

accuracy as the analysts in Lloyd, they did remark that the subpoena had “earmarks

of false claims or whistleblower type action.” Requiring that the market accurately

predict precise company wrongdoing is neither a necessary nor realistic standard for

the court to adopt.

Third, the announcement of Defendant Lukianov’s resignation can qualify as

a partial disclosure, even if the announcement did not connect his resignation to the

investigation. See Amedisys, 769 F.3d. at 323 (holding that the announcement of

the resignations of Amadisys’ two executive officers to “pursue other interests”

constituted a “partial disclosure”). Fourth, the fact that NuVasive and the DOJ

settled allegations without findings of liability is similarly inconsequential. See id.

at 324-25 (holding that a government investigation can constitute a corrective

disclosure in the absence of a discovery of actual fraud). Finally, the 20 month

interval between the disclosure of the investigation and the announcement of the

settlement does not buttress the theory that lack of market reaction to the settlement

renders it irrelevant as a partial disclosure. While Lloyd involved only one month

between the announcement of an investigation and the write-off of Garrett loans,

Amedisys considered a series of five disclosures and their corresponding market

reactions in the span of two years. 

Similar logic applies here: the combination of partial disclosures, which

spanned a period of 20 months, including (1) the disclosure of the receipt of the

subpoena, followed by a significant drop in NuVasive's securities; (2) the market

analysts’ remarks regarding the subpoena having “earmarks of false claims or

whistleblower type action,” resulting in a decline in Nuvasive’s share price; (3) the

resignation of NuVasive's CEO, resulting in a further decline in NuVasive's share

price; and (4) the settlement reached between NuVasive and the DOJ, requiring

NuVasive to pay $13.8 million, is sufficient to plead loss causation at this stage.

- 22 - 13cv2005

Case 3:13-cv-02005-JM-JLB Document 85 Filed 07/12/16 PageID.<pageID> Page 22 of 24
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

b. Falsity

To adequately plead falsity, the complaint must identify “(1) each statement

alleged to have been misleading; (2) the reason or reasons why the statement was

misleading; and (3) all facts on which that belief is formed.” Desaigoudar v.

Meyercord, 223 F.3d 1020, 1023 (9th Cir. 2000). The plaintiff must “set forth, as

part of the circumstances constituting fraud, an explanation as to why the disputed

statement was untrue or misleading when made.” Yourish v. Cal. Amplifier, 191

F.3d 983, 993 (9th Cir. 1999). This requirement can be satisfied “by pointing to

inconsistent contemporaneous statements or information (such as internal reports)

which were made by or available to the defendants.” Id. (internal quotation marks

omitted). 

The court points the parties to the court’s discussion of falsity in its previous

order dismissing Plaintiff's FAC. (See Doc. No. 69). The court previously found

Plaintiff had sufficiently pled falsity, a finding not undermined by the 5AC’s

inclusion of newly acquired information alleged by Plaintiff as a result of the DOJ

settlement and the unsealing of the qui tam action. The 5AC sets forth sufficient

details regarding NuVasive’s off-label marketing, including statements directly

related to it by two confidential witnesses, CW14 and CW18. 

c. Scienter

In the context of Section 10(b), scienter is defined as a “mental state

embracing intent to deceive, manipulate, or defraud.” Ernst & Ernst v. Hochfelder,

425 U.S. 185, 193 n.12 (1976). To satisfy the scienter requirement at the pleading

stage, “the complaint must allege that the defendants made false or misleading

statements either intentionally or with deliberate recklessness.” In re Daou Sys.,

Inc., 411 F.3d at 1015. The allegations must give rise to an inference of scienter

that is “cogent and at least as compelling as any opposing inference of

nonfraudulent intent.” Tellabs, 551 U.S. at 314. 

In its previous order dismissing Plaintiff’s FAC (Doc. No. 69), the court

- 23 - 13cv2005

Case 3:13-cv-02005-JM-JLB Document 85 Filed 07/12/16 PageID.<pageID> Page 23 of 24
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

found scienter sufficiently pled as to Defendants Lukianov and Lambert, but not as

to Defendant O’Boyle. For O’Boyle, Plaintiff previously relied and continues to

rely on the “core operations” inference, under which scienter may be imputed to key

officers based on their role in the company. In its previous order, the court found

the scienter allegations against O’Boyle’s presented a close call, but ultimately fell

short of the proposition that it would have been “absurd” to think that he did not

know the truth about the company’s alleged misconduct. (Doc. No. 69, p. 23). As

to O’Boyle, the 5AC has not alleged additional facts sufficient to meet the scienter

threshold either with respect to intentional or deliberately reckless conduct. 

Because Plaintiff has been provided with several opportunities to plead a viable

case against O’Boyle and has been unsuccessful in doing so, O’Boyle is dismissed

without leave for Plaintiff to further amend. 

CONCLUSION 

For the foregoing reasons, Defendants’ motion to dismiss (Doc. No. 73) is

DENIED in part and GRANTED in part. The claims against Defendant O’Boyle are

dismissed without leave to amend. Remaining Defendants are to file an answer to

the 5AC within 14 days after the entry of this order. 

DATED: July 12, 2016

 Hon. Jeffrey T. Miller

 United States District Judge

- 24 - 13cv2005

Case 3:13-cv-02005-JM-JLB Document 85 Filed 07/12/16 PageID.<pageID> Page 24 of 24