First Circuit Affirms Denial Of Motion To Dismiss Securities Fraud Class Action, Finding Plaintiffs Failed To Allege Any Actionable False Statements Or Misleading Omissions By Healthcare Company In Connection With Its Merger
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  • First Circuit Affirms Denial Of Motion To Dismiss Securities Fraud Class Action, Finding Plaintiffs Failed To Allege Any Actionable False Statements Or Misleading Omissions By Healthcare Company In Connection With Its Merger

    On August 18, 2022, a unanimous panel of the United States Court of Appeals for the First Circuit affirmed a decision by the United States District Court for the District of Rhode Island granting a motion to dismiss a putative securities fraud class action asserting claims under Section 10(b) of the Securities Exchange Act (the “Exchange Act”), Rule 10b-5 promulgated thereunder, and Section 20(a) of the Exchange against a health care and pharmaceutical company (the “Company”) and two of its senior executives.  City of Miami Fire Fighters’ and Police Officers’ Retirement Trust, et. al. v. CVS Health Corporation, No. 21-1479 (1st Cir. Aug 18, 2022).  Plaintiffs alleged that, following the Company’s 2015 acquisition of another health care company (the “Merger”), the Company’s executives issued false statements and misleading omissions about various post-Merger issues.  In affirming dismissal of the amended complaint, the First Circuit held that the district court’s assessment was “right on the mark” and that “[p]laintiffs failed to allege that defendants made statements of fact that were false when made or misleadingly incomplete in light of the contemporaneous circumstances.”

    Plaintiffs alleged that, following the Merger, the Company began to mismanage the newly acquired business, which allegedly resulted in lost customers.  Plaintiffs further alleged that the Company concealed these alleged losses by issuing goodwill write-downs from February 2016 to February 2019 that were purportedly too late in relation to the Company’s actual suffered losses.  Plaintiffs also alleged that the Company’s senior management misled investors by affirmatively misrepresenting or omitting material facts, which the Court grouped into the following five categories:  (1) alleged representations about the “condition and financial performance” of the newly acquired business; (2) alleged statements concerning the Company’s leadership position in the market; (3) alleged statements overstating the Company’s understanding of its newly-acquired customers; (4) alleged statements concerning the Company’s realization of synergies as a result of the Merger, and (5) alleged “boilerplate” statements about the risks the Company faced in the newly-acquired business.

    Addressing plaintiffs’ Section 10(b) claim, the Court noted that, “despite its length, [the amended complaint] fails to allege sufficiently specific facts about the state of [the Company’s] business at particular points in time to enable us to conclude that any of the goodwill write-downs were too late or that any of the defendants’ alleged misstatements contradicted the state of that business as it then stood.”  The Court also noted the district court’s emphasis on “the complaint’s failure to juxtapose the proffered reports of lost customers with what [the Company] was disclosing at the time of those losses.”  Addressing the allegations of customer losses, the Court found that only six of forty-six customer-loss allegations attempted to place losses within specific periods of time—and even then, “only in highly general terms.”  The Court held that two of those allegations “cover[ed] such broad swaths of time that they effectively provide no date limitation.”  As to the other four allegations, which the Court characterized as being painted “with only a slightly finer brush,” the Court held that only the first definitively occurred prior to the first disclosed goodwill write-down, but the amended complaint provided “no reason to think that that 2015 loss by itself was both material and not offset by new business.”  As to the five categories of alleged misstatements generally, the Court held that plaintiffs’ allegations either did not adequately allege that such statements were either actually false or inconsistent with the Company’s disclosures.  With respect to alleged omissions about the Company’s purported risks (by virtue of it issuing “boilerplate” statements about the same), the Court held that plaintiffs did not plead sufficient allegations to conclude that such risks would occur with “near certainty[,]” thus requiring any further disclosure.  Moreover, the Court seized on “[p]laintiffs’ concession that they ‘do not dispute anything about Defendants’ accounting,’ which necessarily includes the figures included in the Company’s goodwill reports throughout the class period,” which only “reinforces the gap in their pleading.”

    Having affirmed the dismissal of the Section 10(b) claim, the First Circuit affirmed the dismissal of the Section 20(a) claim, explaining that the viability of plaintiffs’ section 20(a) claim for control-person liability is contingent on their section 10(b) claim.  Accordingly, the Court affirmed dismissal of plaintiffs’ 20(a) claim.  Finally, the Court held that the district court did not err in dismissing plaintiffs’ amended complaint with prejudice.