The Court assumes the reader’s familiarity with the underlying

1

facts and allegations. For a detailed summary of the factual allegations

in this case, see this Court’s initial opinion, Marsden v. Select Medical

Corp., 04-4020, 2006 U.S. Dist. LEXIS 16795 (E.D. Pa. Apr. 6, 2006)

(Marsden I).

IN THE UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF PENNSYLVANIA

CLIFFORD C. MARSDEN and MING XU, : CIVIL ACTION

Individually and on Behalf of All :

Others Similarly Situated, : 04-4020

:

Plaintiffs, :

:

v. : 

:

SELECT MEDICAL CORP., MARTIN :

JACKSON, ROBERT A. ORTENZIO, :

ROCCO ORTENZIO, and PATRICIA RICE, :

:

Defendants. :

MEMORANDUM AND ORDER

Joyner, J. June 12, 2007

Presently before the Court is Plaintiffs’ Motion for

Reconsideration and Clarification of the Court’s Order Entered on

February 12, 2007 (“P. Mot.”) (Doc. Nos. 66-1, 66-2), Defendants’

opposition (“D. Resp.”) (Doc. No. 69), and Plaintiffs’ Reply

(Doc. No. 75). For the reasons below, the Court DENIES

Plaintiffs’ Motion.

Discussion1

On February 6, 2007, this Court held that, under Dura

Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005) (“Dura”),

Plaintiffs failed to plead loss causation with respect to their

theory of liability for securities fraud based on Defendants’

Case 2:04-cv-04020-JCJ Document 88 Filed 06/12/07 Page 1 of 11
 Plaintiffs’ two theories of securities fraud are: “(1) Select 2

Medical Corporation's ("Select") concealed its poor financial condition

by employing improper revenue practices ("improper revenue practices

theory") and (2) Select knew of likely changes to federal

Medicare/Medicaid regulations that could negatively affect its business

model but did not publicly alert investors of these changes ("regulatory

changes theory").” Marsden II, 2007 U.S. Dist. LEXIS 9893, at *12.

Although framing one of Plaintiffs’ theories in terms of “improper

revenue practices,” the Court fully recognized Plaintiffs were actually

alleging that Select misrepresented its financial condition (e.g.,

revenues), rather than made any specific misrepresentations about its

actual revenue practices (the improper revenue practices were the alleged

“how”). In any event, Plaintiffs failed to allege that the market ever

learned that Select maintained “improper revenue practices or

misrepresented its revenues.” Id. at *19.

Plaintiffs, however, continue to press the argument that they are

asserting a single, unified theory of securities liability (i.e. the

improper revenue practices claim and regulatory changes claim are not

distinct theories of liability). See P. Memo. at 8-9. They argue that

“concealment of both the deficient internal controls and the imminent

regulatory change were necessary to sustain” Defendants’ improper revenue

practices. Id. at 9 (emphasis in original and bold added). This makes no

sense. Let’s assume for a moment that Select had revealed the Centers

for Medicare and Medicaid Services’ (“CMS”) plan to modify the applicable

regulations; there is nothing in Plaintiffs’ Amended Complaint to suggest

that such an announcement would have impeded any of the alleged improper

revenue practices. It’s therefore not possible that concealing

information about the impending regulatory change was necessary for

Select to maintain its improper revenue practices. What Plaintiffs might

actually mean is that the amount of improper revenue that Select could

generate would likely be reduced with the introduction of (or even an

announcement proposing) new CMS regulations. But whether the amount of

allegedly ill-gotten revenue would diminish is irrelevant to determining

whether the improper practices could in fact continue. Likewise,

consider this situation: assume Plaintiffs did not allege Select engaged

in improper revenue practices. Select could nevertheless have continued

to mislead investors about the likelihood of impending regulatory

-2-

allegedly improper revenue practices. See Marsden v. Select

Medical Corp., 04-4020, 2007 U.S. Dist. LEXIS 9893, at *1, 12-20

(E.D. Pa. Feb. 7, 2007) (Marsden II). In doing so, this Court

reversed in part its earlier decision (Marsden I), which held

that Plaintiffs had in fact adequately pled loss causation with

respect to both of their theories of liability. See Marsden I,

2006 U.S. Dist. LEXIS 16795, at *41. Plaintiffs contend that 2

Case 2:04-cv-04020-JCJ Document 88 Filed 06/12/07 Page 2 of 11
changes. In other words, the success of one scheme (and ability to

perpetuate it) did not depend on that of the other. 

To be clear, Plaintiffs allege two distinct theories of fraud - one

in which Select misled investors about the true nature of its revenue by

engaging in improper revenue practices; and a second, in which Select

failed to inform the public about impending CMS regulatory change(s) that

would affect the sustainability of its business model. See also Marsden

II, 2007 U.S. Dist. LEXIS, at *14 n.11.

 The Court’s other so-called errors of law simply flow from this

3

alleged error. 

-3-

the Court’s decision to reverse itself constitutes clear error

for three reasons: (1) the "Court incorrectly applied 'heightened

pleading requirements' to the issue of loss causation;" (2) "the

Court incorrectly held that Plaintiffs cannot adequately plead

loss causation without alleging a specific 'corrective public

disclosure about its past improper revenue practices;’” and (3)

"by incorrectly reasoning that Plaintiffs were required to allege

loss causation with specificity . . . the Court incorrectly

concluded that Plaintiff did not properly plead loss causation."

Memorandum of Law in Support of Plaintiffs' Motion ("P. Memo.")

(Doc. No. 66-2) at 1 (emphasis added). The Court disagrees.

Plaintiffs most feverish contention is that the Court

erroneously applied a heightened pleading standard to loss

causation. And for support, they cite these sentences from 3

Marsden II: 

[U]nlike its common law predecessors, federal

private securities actions are subject to the

heightened pleading requirements of the

Private Securities Litigation Reform Act of

1995 ("PSLRA"). At issue here is the

requirement that private plaintiffs must

Case 2:04-cv-04020-JCJ Document 88 Filed 06/12/07 Page 3 of 11
-4-

prove loss causation under Section

78u-4(b)(4) of PSLRA. 

***

The heightened pleading requirements also

require a plaintiff to "specify each

statement alleged to have been misleading

[and] the reason or reasons why statement is

misleading [and allege] 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). Not to be forgotten, of

course, is the basic requirement under Rule

9(b) of the Federal Rules of Civil Procedure

that "all averments of fraud . . . shall be

stated with particularity.

Marsden II, 2007 U.S. Dist. LEXIS 9893, at *6-7 and n.5.

These passages do not illustrate that the Court applied a

heightened pleading standard to loss causation. On the contrary,

the Court did not require that Plaintiffs must allege loss

causation with particularity or specificity. The Court simply

noted that the PSLRA includes a number of heightened (i.e.

additional) pleading requirements - one of which is the

requirement that a federal securities plaintiff must plead loss

causation in its complaint. See, e.g., David S. Escoffery, Note,

A Winning Approach to Loss Causation Under Rule 10B-5 in Light of

the Private Securities Litigation Act of 1995, 68 Fordham L. Rev.

1781, 1810 (2000) (noting that Congress codified in the PSLRA the

requirement that a securities plaintiff must plead and prove loss

Case 2:04-cv-04020-JCJ Document 88 Filed 06/12/07 Page 4 of 11
 Technically speaking, the Supreme Court’s decision in Dura

4

confirmed that a securities plaintiff must not only prove but also plead

loss causation under the PSLRA. That the PSLRA demanded this of a

securities plaintiff was not new, however. Before Dura, the lower

federal courts had uniformly interpreted the PSLRA as requiring

securities plaintiffs to plead loss causation. The confusion lay not

with the need to plead loss causation, but what types of allegations were

sufficient to establish it.

-5-

causation). Separately, the PSLRA also requires a plaintiff to 4

plead certain elements of her securities claim (such as scienter)

with particularity. This is not, however, the same as saying

that a heightened pleading standard (one beyond that demanded by

Rule 8(a)(2) of the Federal Rules of Civil Procedure) applies to

loss causation. And although Plaintiffs suggest otherwise, at no

point did this Court hold that loss causation must be plead with

particularity (or specificity) of the nature contemplated by

Federal Rule of Civil Procedure 9(b) ("Rule 9(b)"). But to the

extent that Marsden II might be read as endorsing a heightened

pleading standard for loss causation, the Court emphatically

rejects such a reading.

Plaintiffs latest briefing betrays a severe misunderstanding

of loss causation as articulated by Dura. Their argument - when

stripped of its histrionics - amounts to standing for little more

than the proposition that a company's announcement of bad news

suffices to establishing loss causation with respect to any

theory of securities fraud. This is not what Dura held. Dura

makes clear that a particular misrepresentation (here Select's

alleged misrepresentations as to its revenues and revenue

Case 2:04-cv-04020-JCJ Document 88 Filed 06/12/07 Page 5 of 11
 Dura actually left open the question as to whether loss causation

5

must be plead with particularity. See 544 U.S. at 346 ("And we assume, at

least for argument's sake, that neither the Rules nor the securities

statutes impose any special further requirement in respect to the

pleading of proximate causation or economic loss.") (emphasis added).

 Dura did not hold that the defendant be the source of the 6

corrective disclosure. See 544 U.S. at 342-43 (describing the necessary

disclosure in terms of the “relevant truth leaking out”); see also In re

Intelligroup Secs. Litig., 468 F. Supp. 2d 670, 684 n.11 (D.N.J. 2006)

(“For instance, in addition to formal disclosure by a defendant, ‘the

market may learn of possible fraud [from] a number of sources: e.g., from

whisteblowers, analysis questioning financial results, resignation of

CFOs or auditors, announcements by the company of changes in accounting

treatment going forward, newspapers and journals, etc.’” (quoting Newby

v. Enron Corp. (In re Enron Corp. Secs.), 2005 U.S. Dist. LEXIS 41240, at

*16 (S.D. Tex. Dec. 22, 2005) (alteration in original))). That the

defendant need not be the source is not surprising because the emphasis

is not on whom reveals the “relevant truth,” but on whether the market

-6-

practices) “will not have caused any loss" to an investor unless

the "relevant truth" about that misrepresentation is made known

to the public. Dura, 544 U.S. at 342; see also Semerenko v.

Cendant Corp., 223 F.3d 165, 185 (3d Cir. 2000). Plaintiffs

appear to simply ignore that aspect of Dura. 

Although Dura does not require a securities plaintiff to

plead loss causation with particularity, she must still include 5

allegations in her complaint that the market learned about the

"relevant truth" of defendant's alleged misrepresentations. In

this case, Plaintiffs’ Amended Complaint contains not a single

allegation that the "relevant truth" about Select's improper

revenue practices and inadequate internal controls (or financial

condition in general) was ever made known to the market by way of

any public disclosures - be it by Defendants themselves, by stock

analysts, by government agencies, by anyone. And absent this 6

Case 2:04-cv-04020-JCJ Document 88 Filed 06/12/07 Page 6 of 11
ever learns about it.

 The Court expresses displeasure with Plaintiffs’ blatant

7

misrepresentation of its opinion. At no point did the Court hold that

Plaintiffs must allege a "specific corrective disclosure" in order to

properly allege loss causation. P. Memo. at 6. The Court also did not

hold that a securities plaintiff must allege a "corrective disclosure for

each fraudulent misrepresentation or omission." Id. at 7 (emphasis

added). The Court, following Dura, simply held that a securities

plaintiff does not adequately plead loss causation when it fails to

allege that the market ever learned of the relevant truth about an

earlier misrepresentation (or set of misrepresentations). See Marsden II,

2007 U.S. Dist. LEXIS 9893, at *18-19 (“In short, Select’s press release

merely acknowledges the impact of a future regulatory change. This was

not a corrective public disclosure about its past revenue practices.”). 

For example, if a defendant made numerous misrepresentations about their

revenue practices, a securities plaintiff need not identify a corrective

disclosure for each one of these misrepresentations. Rather, a plaintiff

need only allege that there was some corrective disclosure which in

general related to those misrepresentations.

Indeed, the word “specific” did not precede the phrase “corrective

public disclosure” in the Court’s opinion. And that alone should have

alerted Plaintiffs that they did not have to allege a specific corrective

disclosure in order to plead loss causation. Rather, the Court explained

Plaintiffs did not properly plead loss causation with respect to their

improper revenue practices theory of liability because they failed to

allege that “Select . . . publicly disclosed that it maintained improper

revenue practices or misrepresented its revenues.” Id. at *19. This

observation did not impose upon Plaintiffs the requirement that they must

identify specific corrective disclosures in order to successfully plead

loss causation, e.g., the public disclosure could be general in nature -

“Because of ‘x’ and ‘y,’ we are forced to revise revenue downward for

past quarters.” - but ‘x’ and ‘y’ need not specifically mirror an earlier

misrepresentation. An allegation including this information would

demonstrate that there was some disclosure - some information made public

- about the “relevant truth” regarding Select’s alleged improper revenue

practices. Plaintiffs never made this type of allegation, however. But

even more generally, Plaintiffs did not allege that Select ever revealed

that it had misrepresented its financial condition during the class

period.

-7-

type of disclosure, any drop in Select's stock price can not be

attributed to these allegations of improper revenue recognition

and inadequate internal controls. 

7

Plaintiffs are under the misapprehension that simply giving

“some indication of the loss and the causal connection that the

Case 2:04-cv-04020-JCJ Document 88 Filed 06/12/07 Page 7 of 11
-8-

plaintiff has in mind" is enough to establish loss causation.

Dura, 544 U.S. at 347. In other words, Plaintiffs think that

because they have informed Defendants (and the Court) of their 

their theory as to why they suffered losses as a result of

Defendants’ alleged improper revenue practices they have

adequately pled loss causation. But what Dura actually explains

is that a securities plaintiff “gives an indication” of the loss

and causal connection they have in mind by linking the alleged

misrepresentations with an economic loss. See 544 U.S. at 347

(“[T]he complaint nowhere else provides the defendants with

notice of what the relevant economic loss might be or of what the

causal connection might be between that loss and the

misrepresentation concerning Dura's ‘spray device.’) (emphasis

added). And so here, the linkage (causal connection) between

Plaintiffs’ alleged losses and the misrepresentations concerning

Select’s true financial condition could only be established by

allegations that the “relevant truth” about its financial

condition (i.e. as a result of improper revenue practices and

inadequate internal controls) became known to the market.

Plaintiffs have also moved for clarification of the Court’s

February 6, 2007 decision. They contend that the decision may be

understood as significantly limiting (if not foreclosing)

discovery into the facts and circumstances surrounding

Defendants’ revenue recognition practices and internal revenue

Case 2:04-cv-04020-JCJ Document 88 Filed 06/12/07 Page 8 of 11
 Scienter is a “mental state embracing intent to deceive,

8

manipulate, or defraud.” Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193

n.12 (1976). To successfully plead scienter, a securities plaintiff must

plead (1) facts showing that defendants had both motive and opportunity

to commit fraud, or (2) by presenting strong circumstantial evidence of

“conscious misbehavior or recklessness.” GSC Partners CDO Fund v.

Washington, 368 F.3d 228, 236 (3d Cir. 2004) (citations omitted).

-9-

controls. See P. Memo. at 9-10. They understand correctly. 

Plaintiffs argue that discovery is proper into these areas

because it is relevant to establishing scienter on the part of 8

Defendants with respect to the remaining theory of liability

before the court - the regulatory changes theory. See P. Memo. at

10. This argument has no merit. 

First, the Amended Complaint is devoid of any allegations

that Defendants’ alleged improper revenue practices or inadequate

controls served to establish scienter with respect to the

regulatory changes theory of liability. See, e.g., Am. Compl. ¶¶

211, 212. Second, the fact that Select may have engaged in

improper revenue practices does not establish that it had

knowledge of the impending change in applicable regulations. As

the Court noted, Plaintiffs’ theory of liability premised on

improper revenue practices is distinct from their theory premised

on regulatory changes. See Marsden II, 2007 U.S. Dist. LEXIS

9893, at *14 n.11. The Court reached this conclusion, in part,

by observing that Defendants’ alleged improper revenue practices

could have continued even after the implementation of the new

regulation. See id. (“[T]he proposed regulatory changes mentioned

Case 2:04-cv-04020-JCJ Document 88 Filed 06/12/07 Page 9 of 11
 Plaintiffs suggest that Defendants “directly participated in the 9

improper [revenue] practices that resulted in the changes in Medicare

regulations.” P. Memo. at 12 (citing Am. Compl. ¶¶ 209-210). This

implies that Select’s improper revenue practices, in particular, led to

the regulatory changes announced by CMS on May 11, 2004. This is

patently untrue. There are absolutely no allegations in Plaintiffs’

Amended Complaint that either (1) federal regulators were specifically

investigating Defendants’ revenue practices (or had deemed them

improper); or (2) that CMS’ proposed regulatory change stemmed from any

improper revenue practices on the part of Select.

-10-

in the May 11, 2004 Press Release refer only to placing a cap on

the percentage of ‘hospital within a hospital’ referrals. It

makes no mention of other regulatory changes or any specific

investigations into Select's revenue practices. And there is

nothing to suggest that Defendants' alleged practices of bribing,

offering kickbacks and patient churning could not continue even

after the new regulations went into place.”). That these alleged

improper revenue practices could continue regardless if there

were any regulatory changes highlights quite plainly that

engaging in these activities does not in itself establish that

Defendants had knowledge about the impending regulatory changes

and motive to keep this information from the public. The Court 9

therefore DENIES Plaintiffs' Motion for Clarification.

Case 2:04-cv-04020-JCJ Document 88 Filed 06/12/07 Page 10 of 11
IN THE UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF PENNSYLVANIA

CLIFFORD C. MARSDEN and MING XU, : CIVIL ACTION

Individually and on Behalf of All :

Others Similarly Situated, : 04-4020

:

Plaintiffs, :

:

v. : 

:

SELECT MEDICAL CORP., MARTIN :

JACKSON, ROBERT A. ORTENZIO, :

ROCCO ORTENZIO, and PATRICIA RICE, :

:

Defendants. :

ORDER

AND NOW, this 12th day of June, 2007, the Court DENIES

Plaintiffs’ Motion for Reconsideration and Clarification (Doc.

Nos. 66-1, 66-2).

BY THE COURT:

s/J. Curtis Joyner 

J. Curtis Joyner, J.

Case 2:04-cv-04020-JCJ Document 88 Filed 06/12/07 Page 11 of 11