If you represent a client who bought a stock that shed value more and more as bad news about the company trickled out, you can take courage from a rare pro-plaintiff decision by the Fifth Circuit. The court reversed the dismissal of a securities fraud class action on a tricky issue in such cases — the element of "loss causation".
The appeals court panel held that a class of investors in Amedysis — which "provides home health services to patients with chronic health problems" — could take their securities fraud case beyond the motion to dismiss stage. Public Employees' Retirement Sys. of Mississippi v. Amedisys, Inc., No. 13-30580 (5th Cir. Oct. 2, 2014).
Loss causation — huh?
The district court in Baton Rouge had thrown out the complaint on the ground that it failed to plead a plausible basis for the "loss causation" element of their claim.
Loss causation means, in essence, that false information about a company inflated the market price of a stock or other security and caused investors to overpay for the security. Proving it generally requires evidence showing that the post-purchase public airing of "corrective disclosures" about the company coincided with a drop in the market price of security.
Amedisys shareholders alleged that the company and company insiders hid the fact that it regularly engaged in fraudulently claiming reimbursement from Medicaid, grossly inflating its earnings beyond a sustainable amount. The district court thought that the public airing in dribs and drabs of the truth about Amedisys's crooked ways did not count as "corrective disclosure" of the true facts regarding those crooked ways.
Fifth Circuit decision
Citing the Supreme Court's ruling on loss causation in Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005), the court of appeals held:
According to the Complaint, Defendants made materially false and misleading statements about their compliance to artificially inflate the price of Amedisys securities throughout the Class Period. Once Amedisys was placed under the spotlight of government scrutiny for Medicare fraud, its earnings dropped significantly because its employees could no longer continue exploiting Medicare reimbursements. After each negative partial disclosure, Defendants attempted to mitigate the impact of those disclosures by making contemporaneous misstatements to the market and prevented the full truth from being revealed at once. As a result, PERSM and the other Class members purchased Amedisys securities at artificially inflated prices and suffered economic loss when the artificial inflation dissipated and the price of these securities declined in response to the series of partial disclosures revealing the true nature of Amedisys’s business practices.
Taking the above facts as true, the 2008 Citron Report, the Swartz and Graham resignations, the 2010 WSJ Article and the above governmental investigations, coupled with Amedisys’s second quarter 2010 earnings report, collectively constitute and culminate in a corrective disclosure that adequately pleads loss causation for purposes of a Rule 12(b)(6) analysis. This holding can best be understood by simply observing that the whole is greater than the sum of its parts. The district court erred in imposing an overly rigid rule that government investigations can never constitute a corrective disclosure in the absence of a discovery of actual fraud.4 5 “To require, in all circumstances, a conclusive government finding of fraud merely to plead loss causation would effectively reward defendants who are able to successfully conceal their fraudulent activities by shielding them from civil suit.” In re Questcor Sec. Litig., No. SA CV 12-01623[,] 2013 WL 5486762[,] at *22 (C.D. Cal Oct. 1, 2013). Indeed, “there is no requirement that a corrective disclosure take a particular form or be of a particular quality . . . It is the exposure of the fraudulent representation that is the critical component of loss causation.” In re Bristol Meyers Squibb Co. Sec. Litig., 586 F. Supp. 2d 148, 165 (S.D.N.Y. 2008) (citations and internal quotation marks omitted). Accordingly, when this series of events is viewed together and within the context of Amedisys's poor second quarter 2010 earnings, it is plausible that the market, which was once unaware of Amedisys's alleged Medicare fraud, had become aware of the fraud and incorporated that information into the price of Amedisys's stock.
A motion to dismiss challenges the adequacy of the initial pleading. To plead loss causation in a private securities action, the complaint need only allege facts that support an inference that the Defendants’ misstatements and omissions concealed the circumstances that bear upon the loss suffered such that Plaintiffs would have been spared all or an ascertainable portion of that loss absent the fraud. Lentell, 396 F.3d at 175. Whether the connection between Amedisys’s misleading statements and the alleged corrective disclosures may ultimately be found too attenuated at a later stage in litigation is a highly fact intensive inquiry that need not be reached at this point. The Complaint consists of over 200 pages of allegations regarding, among other things, Defendants’ fraudulent Medicare billing practices. Where the Complaint sets forth specific allegations of a series of partial corrective disclosures, joined with the subsequent fall in Amedisys stock value, and in the absence of any other contravening negative event, the plaintiffs have complied with Dura’s analysis of loss causation.
Id. at 16-19.
Amedisys teaches how to plead loss causation in cases where the truth comes out gradually and that plaintiffs should now despair a bit less about bringing securities fraud cases within the Louisiana-Mississippi-Texas area over which the Fifth Circuit presides.