Opinion ID: 212733
Heading Depth: 3
Heading Rank: 1

Heading: 2005 NeuroMetrix Press Release

Text: According to ¶ 134 of the complaint, on October 27, 2005, NeuroMetrix issued a press release concerning its third quarter results. The release reported significant revenue increases. It also contained an express disclosure that the statements contained in the release involve a number of risks, uncertainties (some of which are beyond the Company's control) or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to, risks associated with ... reimbursement by third party payors to the Company's customers for procedures performed using the NC-Stat System. R.32 at 43 (quoting Oct. 27, 2005 press release) (emphasis and omission in original). The plaintiffs have not alleged any affirmative misstatement in this release, nor do we perceive one when the statement is read alongside the factual allegations. The claim, therefore, must rest on the omission of some fact, which, by its absence, rendered the release misleading. See 17 C.F.R. § 240.10b-5(b). The omitted material identified by the plaintiffs, as noted above, was: (1) that the company declined to apply for a new code, even though the reimbursement specialists had informed it that it was necessary; (2) sales personnel were advising physicians on use of the neurology codes; (3) reimbursement specialists had advised that use of the neurology codes was fraud; and (4) [t]here was a serious risk that insurers would not allow NC-Stat tests ... to be reimbursed under neurology-based CPT codes. R.32 at 44. There are sufficient factual allegations in the complaint to permit the conclusion that the principals of NeuroMetrix knew of the four alleged situations as early as 2005. According to the complaint, by mid-2005, the reimbursement expert had resigned because of a conflict with the principals over the coding recommendations, id. at 18; sales representatives were advising physicians to seek reimbursement under the neurology codes, id. at 19. By late 2005, regional insurance carriers had begun denying coverage, id. at 32. Reading the factual allegations of the complaint in whole, they support the assertion that the company was aware of at least some level of risk of non-reimbursement and had been apprised by experts that continuing in its then-current course of billing recommendations could have significant repercussions. We also agree with the plaintiffs that the omitted facts were material. As we have stated, information is material only if its disclosure would alter the total mix of facts available to the investor and if there is a substantial likelihood that a reasonable shareholder would consider it important to the investment decision. Cooperman v. Individual, Inc., 171 F.3d 43, 49 (1st Cir.1999) (quotation marks omitted); see also TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449, 96 S.Ct. 2126, 48 L.Ed.2d 757 (1976) (defining, in another type of securities action, information as material where it would have assumed actual significance in the deliberations of the reasonable shareholder). The omission of a known risk, its probability of materialization, and its anticipated magnitude, are usually material to any disclosure discussing the prospective result from a future course of action. Lormand v. U.S. Unwired, Inc., 565 F.3d 228, 248 (5th Cir. 2009). As this press release acknowledges on its face, the ability of physicians to receive third-party reimbursement for procedures performed with the NC-Stat is of critical importance to the profitability of the device and of NeuroMetrix itself. That experts flatly had informed the principals that the company's suggested method of billing was unsustainable certainly would have been relevant to a reasonable shareholder's investment decisions. We further have stated that [i]f an alleged omission involves speculative judgments about future events, ... materiality will depend at any given time upon a balancing of both the indicated probability that the event will occur and the anticipated magnitude of the event in light of the totality of the company activity. Milton v. Van Dorn Co., 961 F.2d 965, 969-70 (1st Cir. 1992) (emphasis in original) (internal quotation marks omitted). The complaint's allegations regarding the Medicare 10% rule and the company's sales growth are sufficient to demonstrate a significant probability that the noted risks would materialize and that the effect of those risks on the company's future would be significant. Nevertheless, the mere possession of material[,] nonpublic information does not create a duty to disclose it. Cooperman, 171 F.3d at 49 (internal quotation marks omitted); see also Chiarella v. United States, 445 U.S. 222, 235, 100 S.Ct. 1108, 63 L.Ed.2d 348 (1980). Instead, the issue ... is whether the securities law imposes on defendants a `specific obligation' to disclose information of the type that plaintiffs claim was omitted. Cooperman, 171 F.3d at 49-50. Rule 10b-5 requires that, when a company speaks, it cannot omit any facts 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; see also SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 862 (2d Cir. 1968) (en banc). [E]ven a voluntary disclosure of information that a reasonable investor would consider material must be complete and accurate. Backman v. Polaroid Corp., 910 F.2d 10, 16 (1st Cir.1990) (en banc) (internal quotation marks omitted). Nevertheless, this obligation has its limits: It does not mean that by revealing one fact about a product, one must reveal all others that, too, would be interesting, market-wise; a company must reveal only those facts that are needed so that what was revealed would not be so incomplete as to mislead.  Id. (internal quotation marks omitted) (emphasis added). We begin with the issue central to two of the four claimed omissions in the 2005 press release: the opinion of the experienced reimbursement experts that the billing practices were incorrect and possibly fraudulent. We previously have held that the existence of internal disagreement about strategy is not the kind of fact that must be disclosed to investors. In Cooperman v. Individual, Inc., 171 F.3d 43 (1st Cir.1999), we evaluated claims that a company had failed to disclose that its CEO had significant strategic disagreements with the board about the future direction of the company. After noting that the existence of a board-level conflict was material, we concluded that disclosure was not required. Disclosure of the business strategy supported by a majority of the directors did not obligate defendants also to disclose information about the extent to which each individual Board member supported that model. Id. at 51. Indeed, we held, [m]ore specifically, that disclosure of the business strategy supported by the majority of the Board did not obligate defendants also to disclose the fact that [the CEO]a distinct minority of a multi-member Boardopposed that strategy. Id. By contrast, in Lormand v. U.S. Unwired, Inc., 565 F.3d 228 (5th Cir.2009), our colleagues in the Fifth Circuit did find the statements misleading, and therefore actionable. In Lormand, the plaintiffs alleged that U.S. Unwired had been pressured by Sprint, with whom it had an affiliate relationship, to extend services to customers with sub-prime credit without requiring the usual safeguards. Through a series of negotiations, it became clear that the management of U.S. Unwired knew the business strategy would prove disastrous, saw some of the risks actually materialize, and fought hardif unsuccessfullyto prevent the policy's full implementation. Id. at 237; see also id. at 247. At the same time, U.S. Unwired's public statements touted the benefits of the program and omitted [the] serious risks inherent in the initiatives. Id. at 249. When risks were referenced, it was by way of generalized risk factors, and the real potential problems were glossed over as a future risk of limited magnitude. Id. at 247 (emphasis in original). The Fifth Circuit found our decision in Cooperman distinguishable because, in Lormand, the entire management team of the company knew that disastrous effects would result from the strategy Sprint had forced upon U.S. Unwired, but continued to present to the public a contrary, or incomplete, view. Id. at 250. Finally, in In re Cabletron Systems, Inc., 311 F.3d 11 (1st Cir.2002), we evaluated a complaint in which the allegations were that company officials, like the principals in Lormand, saw disaster looming on the horizon. According to the complaint, a number of adverse factors converged on the company nearly simultaneously, making clear that the company's immediate future was less than rosy. Id. at 23 (internal quotation marks omitted). In response, the leadership of the company engaged in a host of fraudulent practices designed to give the false impression that the company's prospects for success were much higher than they actually were: (1) They falsified sales records; (2) they timed shipments of goods to create the false impression of high sales for a quarter while knowing that massive returns would occur in the next quarter, sometimes with the cooperation of customers interested in the company's success; (3) they delayed reporting liabilities, including parking raw materials with suppliers to avoid entering them on balance sheets; and (4) they concealed negative facts about the products from sales staff to avoid disclosure to potential customers, although the facts were widely known internally. See id. at 24. We characterized the pleading as portraying a frenzied effort by a troubled company to conceal its difficulties for as long as possible, and concluded that the allegations were sufficient to survive dismissal. Id. In our view, the situation we confront in this case is closer to that of Cooperman than to that of Lormand or Cabletron. The kind of information the plaintiffs wanted the company to disclosethat the reimbursement experts informed the principals that they needed to apply for a new code and that the persistence in recommending the neurology codes was fraudulentis not on the order of the information withheld from investors in Lormand. There, the principals unquestionably were forced into a losing strategy and fully understood the near-certainty of financial disaster to come. Here, although knowledgeable employees of NeuroMetrix believed the strategy was both losing and potentially dangerous, there is simply nothing in the complaint to suggest that the expert opinions demonstrated that the danger posed by the reimbursement strategy was, at the time the statement was made, a near certainty of ruin. The principals of NeuroMetrix had this information to factor into their decision-making about coding recommendations to buyers of their device. They, however, had no obligation to make it public simply because they mentioned the risk associated with non-reimbursement by third-party payers in a profit statement. Moreover, although there are allegations of other questionable business practices, such as the use of potentially illegal incentive programs, there is no allegation, as there was in Cabletron, that the principals were engaged in a comprehensive scheme to disguise negative information to keep the house of cards standing. Cabletron, 311 F.3d at 24. The total mix of information available to investors in the short press statement at issue was not highly skewed, Lormand, 565 F.3d at 249, by the failure to disclose the opinions of the reimbursement experts. The plaintiffs submit, however, that Cooperman is inapposite because there is no evidence of disagreement. In their view, the facts of the complaint show that the only informed opinion was that of the experts; the principals did not disagree with that opinion, but disregarded it to maximize profits and shed their own stock at an artificially inflated market price. We cannot accept this argument. At bottom, Cooperman discusses when factors that predate a company's chosen course of action must be disclosed to investors, and that question encompasses more than the issue of board-level strategic disagreements. In neither Cooperman nor the present case was the undisclosed information insignificant; both involved something material to the investment decision and both predicted that significant risks would materialize from the course the company ultimately chose. But in neither case did the undisclosed opinion even approach the widely-accepted certainty of failure or the comprehensive cover-up in Lormand or Cabletron. At the time the statement was made, the final resolution of the third-party reimbursement issue was indeed unknown. As our colleague in the district court noted, the RVUs for a CPT code reflect[] the estimated physician, practice, and malpractice costs for the service represented by that code. R.52 at 2. Although the company took an aggressive, and in the view of some, an unrealistically aggressive view of the appropriate resolution in the promotion of its product, its press release does state explicitly that the ultimate resolution of the issue is unknown and, by reasonable implication, out of its hands. Turning to the other alleged omissions, we conclude that they too were not sufficient to demonstrate that the statement itself was misleading. First, that the company's sales team provided advice on appropriate billing practices is plainly beyond the scope of the disclosure. The statement as quoted by the plaintiffs was not incomplete for failure to state specifically that the company had a reimbursement-advice strategy, or for failure to state what that strategy specifically was. Finally, the plaintiffs maintain that the statement was misleading for failing to disclose a serious risk of non-reimbursement. Nevertheless, a risk of non-reimbursement specifically was disclosed. To the extent that the plaintiff's complaint is that the precise degree of risk was not stated, that failure is not sufficient to have rendered the statements misleading. Cf. In re Cabletron Sys., Inc., 311 F.3d at 23-24 (noting that allegations of a company's unremittingly optimistic statements in the face of numerous adverse factors, coupled with company efforts to hide th[e] downward spiral, were sufficient to state a claim). A statement that discloses a level of risk may be so understated as to be misleading. In Backman v. Polaroid Co., 910 F.2d 10, 16 (1st Cir.1990) (en banc), we considered claims regarding misleading statements made in reference to the Polavision camera. We concluded that the company's disclosure that Polavision was being sold below cost was not misleading by reason of not saying how much below. Nor was it misleading not to report the number of sales, or that they were below expectations. Id. We contrasted those statements with another allegation, namely, that the principals knew that the Polavision camera was a commercial failure, but stated only that earnings were negative; we noted that the negative-earnings statement might well be found to be a material misrepresentation by half-truth and incompleteness. Id. Although we ultimately dismissed the commercial failure claim as not supported by the allegations of the complaint, the distinction between our treatment of these two allegations is instructive, and it is mirrored again in the Fifth Circuit's decision in Lormand. A statement of risk does not insulate the speaker from liability, particularly where it is generic and formulaic. See Lormand, 565 F.3d at 245. At the same time, neither does it create liability simply because it does not disclose, at the level of detail the plaintiffs request in retrospect, all of the factors that contribute to the risk assessment. In cases where the risk approaches a certainty, courts have no difficulty in finding a duty of disclosure. But where the level of risk is unknown and the existence of a risk is disclosed, we shall hesitate to conclude that disclosure is misleading merely because it did not state that the risk was serious. R.32 at 44. [5] In sum, we agree with the district court that the November 2005 NeuroMetrix press release is not misleading because it failed to include the four facts alleged by the plaintiffs.