Opinion ID: 2799870
Heading Depth: 2
Heading Rank: 1

Heading: Statutory and Pleading Requirements

Text: In this class action, plaintiffs-appellants allege HMA and three of its executives violated § 10(b) of the Exchange Act 5 and Rule 10b-56 by failing to disclose the fraudulent scheme of HMA to increase its Medicare revenue. To state a claim for securities fraud under § 10(b) and Rule 10b-5, a plaintiff must allege adequately: 5 Section 10(b) of the Exchange Act provides: It shall be unlawful for any person, directly or indirectly, . . . [t]o use or employ, in connection with the purchase or sale of any security . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors. 15 U.S.C. § 78j(b). 6 Rule 10b–5, promulgated by the SEC pursuant to § 10(b), provides in relevant part: It shall be unlawful for any person, directly or indirectly, . . . [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 the light of the circumstances under which they were made, not misleading . . . . 17 C.F.R. § 240.10b–5(b). Plaintiffs-appellants also bring a control-person claim under § 20(a) of the Exchange Act. Section 20(a) liability derives from liability under § 10(b); an examination of their § 20(a) claim necessarily requires a finding of § 10(b) liability. See Thompson v. RelationServe Media, Inc., 610 F.3d 628, 635–36 (11th Cir. 2010). Since there was no § 10(b) liability, there is no derivative liability on which to base a § 20(a) claim, and we need not address it. See Laperriere v. Vesta Ins. Grp., Inc., 526 F.3d 715, 721 (11th Cir. 2008) (per curiam) (noting § 20(a) “unambiguously imposes derivative liability on persons that control primary violators of the Act”). 11 Case: 14-12838 Date Filed: 05/11/2015 Page: 12 of 31 (1) a material misrepresentation or omission; (2) scienter—a wrongful state of mind; (3) a connection between the misrepresentation and the purchase or sale of a security; (4) reliance, “often referred to in cases involving public securities markets (fraud-on-the-market cases) as transaction causation”; (5) economic loss; and (6) “loss causation, i.e., a causal connection between the material misrepresentation and the loss.” Meyer v. Greene, 710 F.3d 1189, 1194 (11th Cir. 2013) (quoting Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 341-42, 125 S. Ct. 1627, 1631 (2005)). We review a district judge’s dismissal of a complaint de novo and accept all well-pleaded facts as true, construing them most favorably to the nonmoving party. World Holdings, LLC v. Fed. Republic of Germany, 701 F.3d 641, 649 (11th Cir. 2012). Nonetheless, “[f]actual allegations that are merely consistent with a defendant’s liability fall short of being facially plausible.” Chaparro v. Carnival Corp., 693 F.3d 1333, 1337 (11th Cir. 2012) (citations and internal quotation marks omitted). An action alleging securities fraud is subject to the heightened pleading requirements of Federal Rule of Civil Procedure 9(b), which requires a complaint “to state with particularity the circumstances constituting fraud.” Fed. R. Civ. P. 9(b); Mizzaro v. Home Depot, Inc., 544 F.3d 1230, 1237 (11th Cir. 2008). “The particularity requirement of Rule 9(b) is satisfied if the complaint alleges facts as to time, place, and substance of the defendant’s alleged fraud, specifically the details of the defendants’ allegedly fraudulent acts, when they 12 Case: 14-12838 Date Filed: 05/11/2015 Page: 13 of 31 occurred, and who engaged in them.” United States ex rel. Matheny v. Medco Health Solutions, Inc., 671 F.3d 1217, 1222 (11th Cir. 2012) (citations and internal quotation marks omitted). In addition, the PSLRA provides for Rule 10b-5 claims predicated on allegedly false or misleading statements or omissions: “the complaint shall specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed.” 15 U.S.C. § 78u-4(b)(1). “[F]or all private Rule 10b-5 actions requiring proof of scienter, ‘the complaint shall, with respect to each act or omission alleged to violate this chapter, state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind [i.e., scienter].’” FindWhat Investor Grp. v. FindWhat.com, 658 F.3d 1282, 1296 (11th Cir. 2011) (quoting 15 U.S.C. § 78u-4(b)(2)) (first alteration added). The complaint also must allege facts supporting a strong inference of scienter “for each defendant with respect to each violation.” Phillips v. Scientific-Atlanta, Inc., 374 F.3d 1015, 1016 (11th Cir. 2004). The district judge found plaintiffs-appellants had satisfied the PSLRA heightened pleading requirements, because “the factual allegations, when accepted 13 Case: 14-12838 Date Filed: 05/11/2015 Page: 14 of 31 as true, plausibly state with the requisite particularity the securities fraud claims.” Order Dismissing Second Amended Complaint at 32. He also determined plaintiffs-appellants had “sufficiently plead the false and misleading statements” to show material misrepresentations, id., based on particularized allegations “HMA led the peer group in admissions because of the fraudulent admission of Medicare patients, not the success of the Emergency Department initiatives,” id. at 33. The judge further concluded, “[b]ecause Newsome put the source of HMA’s success at issue, the alleged failure to disclose the true source of this revenue could give rise to liability under § 10(b),” evidencing plaintiffs-appellants “h[ad] sufficiently alleged that defendants made false and misleading statements.” Id. at 34. Noting “allegations of the aggressive admission policies initiated by Newsom, the individual defendants’ heavy involvement in daily operations, the upgrade of the Pro-MED software, and the use of Accretive Health, the amount and widespread nature of the fraud, the allegations in the Meyer [whistleblower] action, and the investigation by the OIG,” the judge concluded these “allegations, when viewed holistically, create a strong inference of scienter.” Id. at 36. We agree with the district judge’s analysis regarding the second-amended complaint as to particularity, material misrepresentation, and scienter reflected in the purchase and sale of HMA stock. 14 Case: 14-12838 Date Filed: 05/11/2015 Page: 15 of 31 But the judge reasoned the OIG investigation, without disclosure of actual wrongdoing, did not qualify as a corrective disclosure, in accordance with our Meyer decision. The judge also determined the Meyer whistleblower case and the 2012 Skolnick Report, summarizing the facts of that lawsuit, could not qualify as a corrective disclosure, because the Meyer case did not establish the falsity of any prior statements, and the Skolnick Report was nothing more than a restatement of information that already was public. Therefore, the determinative factor for the district judge and before this court is whether plaintiffs-appellants’ adequately alleged loss causation. 7 7 Plaintiffs-appellants reference the materialization-of-concealed-risk theory of loss causation. This court “has never decided whether the materialization-of-concealed-risk theory may be used to prove loss causation in a fraud-on-the-market case,” and we do not do so now, because loss causation is sufficient to resolve this case. Hubbard v. BankAtlantic Bancorp, Inc., 688 F.3d 713, 726 n.25 (11th Cir. 2012). In their complaint, plaintiffs-appellants allege HMA created a risk that, absent its fraudulent conduct, revenues and admissions would decline. But plaintiffs-appellants fail to allege adequately how this risk materialized and caused harm to HMA shareholders. 15 Case: 14-12838 Date Filed: 05/11/2015 Page: 16 of 31