Opinion ID: 773420
Heading Depth: 3
Heading Rank: 2

Heading: Strong Inference

Text: 125 Adoption of the reports and the materiality of the statements and omissions aside, the majority has not convinced me that plaintiffs have alleged facts giving rise to a strong inference that management knew the statements were false or misleading. According to the majority, Vencor's statements were false or misleading because, [w]hen defendants disclaimed any ability to predict health care legislation, while persisting in favorable earnings estimates seven weeks after the enactment of the Budget Act, Vencor was representing that it knew of no way the Budget Act could adversely affect its operations. Maj. Op. at 25. 126 I do not think that is a precise statement of the facts and, moreover, I find that conclusion to be quite a leap. Management statements concerning the legislation were made on July 25, 1997, before the conference committee report was released on July 29 and before the legislation was signed into law on August 5, 1997. 2 127 The conclusion by analysts regarding management's feelings, which they did not attribute to any particular executive, was made on September 25, 1997. Even had they occurred at the same time, I hardly think that an appropriate reading of them is that Vencor was representing it knew of no way the Budget Act could adversely affect its operations. The only reasonable reading would be that, just as it said, Vencor was not certain of the effect--positive or negative--of the Act and therefore had not included the Act in its projections. 128 Proceeding from this more reasonable reading of the statements, I do not think the allegations to which the majority points give rise to a strong inference that management actually knew its statements were false or misleading. The majority points to three allegations in the complaint: (1) that in April of 1997, the president of the Federation of American Health Systems testified that the members of his organization, which included Vencor, were concerned about the effects the legislation might have, (2) Barr told employees in June of 1997 that they would be laid off because of the impact of the Budget Act and the 'tough times coming' that 'were going to make it difficult for Vencor to make money and stay profitable,' Maj. Op. at 26, and (3) that Reed sold three million dollars worth of stock. 129 As an initial matter, I do not believe the majority's statement of the occasion at which Barr spoke, accurately conveys what the complaint alleges. According to the complaint, Barr met with employees of Transitional, a company recently acquired by Vencor, who were being laid off for reasons unrelated to the Budget Act. Barr told [the employees] that they probably would have been laid off anyway because the proposed Medicare regulations were going to make it difficult for Vencor to make money and stay profitable. J.A. at 130. Having cleared that up, I do not think that statement can be reasonably said to give rise to a strong inference. The statement is not the product of a reasoned report or analysis. Rather, the statement is from an executive attempting to let unhappy employees down easy. Similarly, that the president of an organization to which Vencor belonged testified in April of 1997 that its members were concerned about some of the proposals in the Bill is of little significance. At that time the final form of the Act was not yet certain--as I noted earlier, the Bill had gone through several changes--and its passage was also uncertain. How then, could Vencor predict what the final version of the Act would look like or how that version would affect its revenue? Finally, I find unconvincing the argument that defendants had actual knowledge of the false or misleading nature of their statements because of their sale of stock. Combined, the defendants' ownership of stock during the class period decreased by less than five percent. See J.A. at 553. Moreover, during the class period, they purchased stock as well. Sale of stock is not evidence of scienter unless it is unusual in scope or timing. Oran v. Stafford, 226 F.3d 275, 290 (3d Cir. 2000); see also In re Comshare, Inc. Securities Litg., 183 F.3d 543, 553 (6th Cir. 1999). Here plaintiffs have made no allegation that the amount sold by defendants was not in line with prior practices. Consequently, the allegations of executive sales do not give rise to a strong inference of actual knowledge. See Oran, 226 F.3d at 290. 130 For all of the foregoing reasons, I dissent. I concur in the dismissal of the remaining claims. Notes: 1 Lest there be any doubt that the majority is rejecting the long-standing principle that soft information is immaterial, it says in response to my dissent that Basic, Inc. v. Levinson, 485 U.S. 224 (1988) has drawn the test [of materiality] more broadly than what the majority characterizes as my test of numbers alone. I think the majority misunderstands the basis for--at least what was--this Circuit's test for materiality. I agree with the proposition that whether information is material depends on whether it is determined that a reasonable investor would find the information important. We make that determination in the context of projections by ascertaining whether the projections are able to be calculated with substantial certainty. If they are not, then we have held that, as a matter of law, no reasonable investor could find the information important. See In re Sofamor Danek Group, Inc., 123 F.3d at 402. That was the test in this Circuit prior to Basic and it remained the test in this Circuit after Basic. To the extent the majority is suggesting that the Supreme Court's application of the materiality standard in Basiccontrols our analysis here and does not permit us to hold as a matter of law that soft information is immaterial, I draw the reader's attention to footnote nine of the Court's opinion which made clear the Court did not address . . . any other kinds of contingent or speculative information, such as earnings or forecasts. Basic, 485 U.S. at 232 n.9 (emphasis added). This Circuit has continued to use the standard I rely on today well after the Supreme Court's decision in Basic. See In re Sofamor Danek Group, Inc., 123 F.3d at 402. 2 The 10-Q warned, Congress is currently considering various proposals which could reduce expenditures under certain government health and welfare programs, including Medicare and Medicaid. Management cannot predict whether such proposals will be adopted or if adopted, what effect, if any, such proposals would have on its business. J.A. at 285. As indicated, the filing is for the quarter ending June of 1997; the signature sheet, however, is dated July 25, 1997. Thus, the filing was for a period ended almost two months before the conference report was printed and was signed four days prior to the report. It seems to me that we have to look at the statement in terms of the quarter for which it was intended--the quarter ending June of 1997--rather than the date on which it was signed. Anyone reading the statement should know that the analysis was made prior to the end of that quarter. The majority completely disregards the fact that the statement in the 10-Q was made in relation to a quarter that ended in June of 1997.