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(Article from Securities Law Alert, October 2014)

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On October 2, 2014, the Fifth Circuit reversed dismissal of a securities fraud action against Amedisys, Inc. on loss causation grounds.  Pub. Emps. Ret. Sys. of Mississippi v. Amedisys, Inc. (Amedisys II), 2014 WL 4931411 (5th Cir. 2014) (Gilstrap, J.).[1]  The Fifth Circuit found that plaintiffs’ alleged partial disclosures of Medicare fraud “collectively constitute[d] and culminate[d] in a corrective disclosure that adequately [pled] loss causation.” 

Background

In 2010, plaintiffs brought suit against Amedisys, Inc. and several of its current board members alleging that defendants had “defrauded investors by concealing a Medicare fraud scheme.” Plaintiffs claimed that they had “suffered economic loss from declines in Amedisys’s stock price in response to a series of five partial disclosures gradually exposing the nature of Amedisys’s business practices and the extent of the risks associated with such practices.”

The alleged partial disclosures were as follows:  (1) an August 12, 2008, Citron Research report “that raised questions about Amedisys’s accounting and Medicare billing practices;” (2) the September 2009 announcement of resignations of Amedisys’s Chief Operating Officer (“COO”), Larry Graham, and the company’s Chief Information Officer (“CIO”), Alice Ann Schwartz; (3) an April 26, 2010 Wall Street Journal article offering a “detailed analysis” by a Yale University professor “indicating that the company might be ‘taking advantage of the Medicare reimbursement system;’” (4) the disclosures of investigations by the Senate Finance Committee, the SEC, and the DOJ; and (5) Amedisys’s July 12, 2010 announcement of “disappointing second quarter 2010 operating results.”  Plaintiffs alleged that Amedisys’s stock dropped following each of these partial disclosures. 

On June 28, 2012, the Middle District of Louisiana dismissed the complaint based on its finding that none of the alleged partial disclosures constituted a corrective disclosure for loss causation purposes.  Bach v. Amedisys, Inc. (Amedisys I), 2012 WL 6947008 (M.D. La. 2012) (Jackson, J.).  Plaintiffs appealed. 

Fifth Circuit Addresses the Standard for Pleading a Corrective Disclosure for Loss Causation Purposes

On appeal, the Fifth Circuit considered the question of “what constitutes a corrective disclosure.”  Amedisys II, 2014 WL 4931411.  The Fifth Circuit explained that there is “little precedent directly addressing to what extent fraud must become known by the market before it can constitute a corrective disclosure — or revelation of the pertinent truth — for purposes of pleading loss causation in a private securities action.”  However, the court found “instructive” Fifth Circuit precedent addressing the pleading requirements for proximate causation. 

To plead proximate causation in the Fifth Circuit, plaintiffs must “allege the truth that emerged was ‘related to’ or ‘relevant to’ the defendants’ fraud and earlier misstatements.”  Amedisys II, 2014 WL 4931411 (quoting Lormand v. US Unwired, Inc., 565 F.3d 228 (5th Cir. 2009)).  The Amedisys II court explained that the test for evaluating proximate causation allegations “turns on the meaning of ‘relevance’” and considers whether “the truth disclosed … make[s] the existence of the actionable fraud more probable than it would be without that alleged fact, taken as true.”  The Amedisys II court determined that this test is also “the appropriate standard to measure corrective disclosures as they pertain to the adequacy of alleging loss causation at the initial pleadings stage.”

The Fifth Circuit underscored that there is “no requirement that a corrective disclosure take a particular form or be of a particular quality.”  The court explained that “[a] corrective disclosure can come from any source, and can take any form from which the market can absorb [the information] and react … so long as it ‘reveal[s] to the market the falsity’ of the prior misstatements.”  The Fifth Circuit further stated that a corrective disclosure need not “be a single disclosure” but “rather, the truth can be gradually perceived in the marketplace through a series of partial disclosures.”  The court noted that “the market may learn of possible fraud from a number of sources,” including “from whistleblowers, analysts questioning financial results, resignations of CFOs or auditors, announcements by the company of changes in accounting treatment going forward, [and] newspapers and journals.”

Fifth Circuit Finds Five Alleged Partial Disclosures “Collectively” Constitute a Corrective Disclosure for Loss Causation Purposes

Applying the “test for ‘relevant truth’” borrowed from the pleading standard for proximate causation, the Fifth Circuit found that the five alleged partial disclosures at issue “collectively constitute[d] and culminate[d] in a corrective disclosure that adequately pleads loss causation for purposes of a Rule 12(b)(6) analysis.”  The court explained that its “holding can best be understood by simply observing that the whole is greater than the sum of its parts.”

With respect to the Citron Research report, the Fifth Circuit found that “[s]peculation of wrongdoing cannot by itself arise to a corrective disclosure.” Similarly, the court determined that the announcement of the resignations of two Amedisys executives  did “not in and of itself constitute a corrective disclosure” because “nothing in the resignation announcement alone reveal[ed] the truth behind earlier misstatements.”  The Fifth Circuit explained that both the Citron Research report and the executive resignations must nevertheless “be considered within the totality of all such partial disclosures.”

As to the Wall Street Journal article, the Fifth Circuit found it “plausible” that the reported analysis of Amedisys’s Medicare billing practices “was not merely confirmatory.”  The court acknowledged the possibility that “the efficient market was not aware of the hidden meaning of the Medicare data that required expert analysis, especially where the data itself [was] only available to a narrow segment of the public and not the public at large.” 

Finally, with respect to the announced government investigations, the Fifth Circuit determined that the “district court [had] 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.”  The Fifth Circuit “agree[d] with the district court that generally, [the] commencement of government investigations on suspected fraud [does] not, standing alone, amount to a corrective disclosure.”  However, the Fifth Circuit found that “[t]o 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.” 

The Fifth Circuit held that plaintiffs’ “specific allegations of a series of partial corrective disclosures, joined with the subsequent fall in Amedisys[‘s] stock value” were sufficient to plead loss causation given “the absence of any other contravening negative event.”  The court explained that the issue of “[w]hether the connection between Amedisys’s misleading statements and the alleged corrective disclosures may ultimately be found too attenuated … is a highly fact intensive inquiry that need not be reached at this point.”  The Fifth Circuit reversed and vacated the district court’s dismissal, and remanded the case to the district court for further proceedings consistent with its opinion.