Second Circuit Affirms Dismissal Of Putative Securities Class Action, Holding That The Occurrence Of Regulatory Problems Do Not Render Materially Misleading Generic Positive Statements Regarding A Corporation’s Compliance Efforts
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  • Second Circuit Affirms Dismissal Of Putative Securities Class Action, Holding That The Occurrence Of Regulatory Problems Do Not Render Materially Misleading Generic Positive Statements Regarding A Corporation’s Compliance Efforts
    On March 5, 2019, the United States Court of Appeals for the Second Circuit affirmed the dismissal of a putative securities class action against Cigna and several of its officers.  Minohor Singh v. Cigna Corporation, et al., No. 17-CV-3484 (2d Cir. Mar. 5, 2019).  Plaintiffs alleged that defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder, by making a series of materially misleading statements concerning Cigna’s compliance with regulatory requirements.  Defendants filed a motion to dismiss.  Judge Vanessa L. Bryant of the United States District Court for the District of Connecticut granted the motion, holding that plaintiffs did not adequately allege material misstatements and scienter.  Plaintiffs appealed.  The Second Circuit affirmed, emphatically, agreeing that plaintiffs failed to adequately plead actionable material misrepresentations. 

    In 2012, Cigna acquired a regional Medicare insurer with the objective of entering the Medicare insurance market.  As a result of the acquisition, Cigna was required to comply with regulations relating to its participation in the Medicare insurance market.  Plaintiffs alleged that Cigna made misleading statements about its compliance efforts in its SEC filings and in another publication.  Specifically, plaintiffs focused on statements in the company’s 2013 Form 10-K that it had policies in place to comply with pertinent Medicare regulations, and Cigna’s statement in its 2014 Form 10-K that it would continue to “allocate significant resources” towards compliance.  Plaintiffs also alleged there were materially misleading statements in a pamphlet published in December 2014 discussing Cigna’s dedication to integrity and regulatory compliance. 

    The Second Circuit first considered whether the alleged misstatements were material.  Finding that a reasonable investor would not view the allegedly misleading statements as “important” or influential in their decision to purchase or sell stock, the Court concluded that these statements were immaterial.  In so holding, the Court found that: the language in Cigna’s Form 10-K filings were generic statements about its compliance efforts; the language in the pamphlet constituted mere puffery regarding Cigna’s “reputation, integrity and compliance with ethical norms”; and such statements were too vague with respect to Cigna’s compliance with regulatory requirements to cause reasonable reliance or an inference that Cigna was in “satisfactory compliance.”  The Court contrasted the statements at issue with statements in prior cases where the Court “found that descriptions of compliance efforts amounted to actionable assurances of actual compliance.”  The Court noted that in those cases “the descriptions of such efforts were far more detailed” and that “[s]uch detailed descriptions stand in sharp contrast to Cigna’s simple and generic assertions about having ‘policies and procedures’ and allocating ‘significant resources.’”  The Court further noted that the manner in which the allegedly misleading statements were presented—including to the extent they were framed by acknowledgements of the complexity and numerosity of applicable regulations—indicated Cigna was actually cautious about the adequacy of its compliance efforts and was focused on strengthening them. 

    Having found that no material misstatements were alleged, the Court declined to address the issue of scienter.  Accordingly, the Court held that plaintiffs failed to adequately plead that defendants made materially misleading statements and affirmed the judgment of the District Court.  The Court noted:  “This case presents us with a creative attempt to recast corporate mismanagement as securities fraud.  The attempt relies on a simple equation: first, point to banal and vague corporate statements affirming the importance of regulatory compliance; next, point to significant regulatory violations; and voila, you have alleged a prima facie case of securities fraud!  The problem with this equation, however, is that such generic statements do not invite reasonable reliance.  They are not, therefore, materially misleading, and so cannot form the basis of a fraud case.”

    This case should be an important precedent for securities litigants.  An increasing number of securities class actions in recent years have been geared toward allegations that companies failed to disclose shortcomings in legal and regulatory compliance, many of them falling within the much talked about “event-driven” trend in securities litigation.  Against that backdrop, Cigna reflects an important reminder to district courts from a critical appellate court for securities class actions.  Regulatory compliance issues or other alleged “events” allegedly evidencing failures by management to manage legal or compliance risks are not themselves disclosure frauds actionable under the securities law.