Opinion ID: 4301416
Heading Depth: 3
Heading Rank: 5

Heading: Medicare Audits/Janus Implementation

Text: The only other potential red flags alleged are Hanger’s problems with Medicare audits and its implementation of Janus. The Fund contends that Asar and, to a lesser extent, McHenry knew of the problems with Medicare audits, which were heightened by the Janus rollout. The Fund thus contends that we may infer that Asar and McHenry would have known that Hanger’s Medicare claim reserve was inadequate and that they were severely reckless stating otherwise. 65Ind. Elec., 537 F.3d at 545. 66Owens, 789 F.3d at 546 (“A pleading of scienter may not rest on the inference that defendants must have been aware of the misstatement based on their positions within the company.” (quoting Abrams, 292 F.3d at 432)). 19 Case: 17-50162 Document: 00514587918 Page: 20 Date Filed: 08/06/2018 No. 17-50162 The Fund alleges that Asar and McHenry were on notice of the slowdown in Medicare audit success because (1) Asar and McHenry “paid close attention to Medicare reimbursements, as demonstrated by their regular discussions with investors about the Company’s performance in Medicare audits;” 67 and (2) Medicare reimbursement was critically important to Hanger’s business. As explained above, “[a] pleading of scienter may not rest on the inference that defendants must have been aware of the misstatement based on their positions within the company.” 68 But an exception to this rule exists in cases with “special circumstances”: The “special circumstances” cases exhibit some combination of four considerations that might tip the scales in favor of an inference of scienter. First, the smaller the company the more likely it is that corporate executives would be familiar with the intricacies of day to day operations. Second, the transaction at issue may have been critical to the company’s continued vitality. Third, the misrepresented or omitted information at issue would have been readily apparent to the speaker. Fourth, the defendant’s statements were internally inconsistent with one another. 69 Recently, in Neiman v. Bulmahn, this court held that a company with over 60 employees was too large to implicate the first consideration, and an oil well that was “projected to produce 22.5% of [the company’s] total output” did not implicate the second consideration. 70 Hanger operated more than 740 clinics “with over 1,300 clinical practitioners.” Although Medicare represented 29% of Hanger’s sales, that is only slightly larger than the 22.5% in Neiman, and a far cry from Nathenson v. Zonagen, Inc., in which “[s]ubstantially all” of the 67 Specifically, McHenry told investors “we are watching [the audits] very closely,” and Asar told investors “[w]e continue to monitor and adapt to the changing reimbursement environment driven by the volume of Medicare audits and delayed appeals process.” 68 Owens, 789 F.3d at 546 (quoting Abrams, 292 F.3d at 432). 69 Diodes, 810 F.3d at 959 (citations omitted). 70 Neiman, 854 F.3d 741, 750 (5th Cir. 2017). 20 Case: 17-50162 Document: 00514587918 Page: 21 Date Filed: 08/06/2018 No. 17-50162 company’s sales depended on one patented product. 71 Further, none of the officers’ statements were internally inconsistent. This is not a specialcircumstances case. As for Asar’s and McHenry’s statements that they followed the Medicare audits closely, we have held that a CEO’s puffery that “there is nothing in this company that I don’t know” could not support a strong inference of scienter. 72 Such a boast was not sufficiently specific about what the CEO might have known. 73 Here, the allegations of what Asar and McHenry knew are more specific, but they used variations of the phrase “we are monitoring,” not “I am monitoring.” These statements could support knowledge of the Medicare problems, but it is equally possible that they merely mean that Hanger as a company monitored the audits. The Fund also notes that Asar and McHenry were likely to notice problems related to Medicare because they were aware of the other problems in the accounting department. But, as noted above, these problems were not so glaring as to make Asar and McHenry severely reckless. Knowing that the accounting department was having problems is different from knowing what each of those specific problems were. Asar’s and McHenry’s statements thus contribute only slightly to the inference of scienter.