California District Court Dismisses Exchange Act Claims Based On The PSLRA Safe Harbor For Forward Looking Statements
On December 13, 2018, Judge Manuel L. Real of the United States District Court for the Central District of California granted defendants’ motion to dismiss plaintiffs’ first amended complaint asserting claims for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”). Steamfitters Local 449 Pension Plan v. Molina Healthcare, Inc., No. CV 18-3579-R, 2018 WL 6787349, at *1 (C.D. Cal. Dec. 13, 2018). Defendants are a company that provides managed health care services (“the Company”) and certain of its senior executives. Plaintiffs alleged that defendants repeatedly claimed that their existing administrative infrastructure was scalable and could handle an increase in business generated from its entry into the Affordable Care Act (“ACA”) marketplace, even though they allegedly knew that this statement was not true. The Court dismissed the action, holding that the alleged misstatements were protected as a matter of law by the Private Securities Litigation Reform Act’s (“PSLRA”) safe harbor for forward-looking statements.
According to plaintiffs, the Company stated in 2012 that it would soon double its revenue, in large part through its entry into the ACA marketplace and through acquisitions. Plaintiffs allege that, because the Company described its existing administrative infrastructure as scalable, investors were led to believe that defendants’ expansion would drive shareholder value and not require the Company to upgrade or replace its existing information technology platform. Ultimately, however, defendants’ IT infrastructure was unable to handle the growing volume of business. Plaintiffs alleged that defendants either knew that the infrastructure could not support the added volume or that they recklessly disregarded this fact. Defendants moved to dismiss.
The Court held that defendants’ allegedly false statements concerning scalability were protected under the PSLRA’s safe harbor, which renders forward-looking statements inactionable as a matter of law even if the statements prove to be false. Under the PSLRA, the safe harbor applies to statements that are identified as forward-looking and that are accompanied by meaningful cautionary language. The Court held that defendants’ statements concerning the scalability of the Company’s infrastructure were forward-looking because they referred to the system’s capacity to handle a growing amount of work in the future. In addition, the Court found that the forward-looking statements were accompanied by meaningful cautionary language because the disclosures made by the Company in its Form 10-Ks identified in extensive detail the challenges posed by the ACA and the Company’s related growth. Finally, the Court held that plaintiffs failed to plead any facts establishing that defendants had actual knowledge that their statements regarding scalability were false at the time they were made.