UNITED STATES — On October 2, 2014, the Fifth Circuit published its opinion in Public Employees’ Retirement System of Mississippi, Puerto Rico Teachers’ Retirement System v. Amedisys, Inc., et al., No. 13-30580 (5th Cir. 2014), holding that multiple partial corrective disclosures “collectively constitute and culminate in a corrective disclosure that adequately pleads loss causation for purposes of a Rule 12(b)(6) analysis.” The three-judge panel, composed of Chief Judge Stewart, Circuit Judge Dennis, and District Judge Gilstrap, explained that “[t]his holding can best be understood by simply observing that the whole is greater than the sum of its parts.”
In the complaint, plaintiffs alleged that “Amedisys defrauded investors by concealing a Medicare fraud scheme.” They further claimed that “the truth of Amedisys’s misrepresentations became publicly known through a series of five partial disclosures.” These alleged partial disclosures consisted of (1) an online report published by Citron Research that raised questions about Amedisys’s accounting and Medicare billing practices, (2) the resignations of Amedisys’s President and CEO, and it Chief Information Officer, (3) a Wall Street Journal Article reporting on Amedisys that included a detailed analysis of Medicare data indicating that the company might be “taking advantage of the Medicare reimbursement system,” (4) the commencement of three separate government investigations into Amedisys’s billing practices by the Senate Finance Committee (SFC), the Securities and Exchange Commission (SEC), and the Department of Justice (DOJ), and (5) Amedisys’s announcement of disappointing second quarter operating results to its shareholders, which was made between the commencement of the SEC and DOJ investigations. Between the publishing of the report by Citron Research and the commencement of the DOJ investigation, “Amedisys stock declined a statistically significant 63.6%.”
The defendants moved to dismiss the case, arguing that the plaintiffs failed to state a claim upon which relief may be granted, and the district court agreed, finding the plaintiffs failed to adequately plead loss causation, an essential element of their claims under Section 10(b) of the Exchange Act. In reaching its decision, the district court found that individually, none of the partial disclosures were sufficient to constitute a corrective disclosure.
On appeal, the Fifth Circuit reversed and vacated the district court’s dismissal of the action, acknowledging that “[t]here is little precedent directly addressing to what extent fraud must become known by the market before it can constitute a corrective disclosure.” In order to clarify this issue, the three-judge panel explained that “[t]o establish proximate causation, the plaintiff must allege that when the ‘relevant truth’ about the fraud began to leak out or otherwise make its way into the marketplace, it caused the price of the stock to depreciate and, thereby, proximately caused the plaintiff’s economic harm.” The court further expounded that “[t]he test for ‘relevant truth’ simply means that the truth disclosed must make the existence of the actionable fraud more probable than it would be without that alleged fact, taken as true.”
Applying this standard, the Fifth Circuit noted that “[t]he 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.” Citing to the Eleventh Circuit case Meyer v. Greene, 710 F.3d 1189,1192-93 (11th Cir. 2013), the Fifth Circuit explained that it “agree[d] with the district court that generally, commencement of government investigations on suspected fraud do not, standing alone, amount to a corrective disclosure.” However, the Fifth Circuit emphasized that the three separate government investigations at issue in this case “must be viewed together with the totality of the other alleged partial disclosures.” In that light, the court found that the multiple partial corrective disclosures collectively constitute and culminate in a corrective disclosure that adequately pleads loss causation.
Unlike the Fifth Circuit case, in Meyer, the plaintiff premised his theory of loss causation solely on the announcement of an SEC investigation of the defendant. The Eleventh Circuit held that an “announcement of an investigation reveals just that—an investigation—and nothing more. To be sure, stock prices may fall upon the announcement of an SEC investigation, but that is because the investigation can be seen to portend an added risk of future corrective action.” The facts in PERSM v. Amedisys appear to provide the something “more” in order to qualify as a corrective disclosure that was absent in Meyer.
