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Fifth Circuit Clarifies Loss Causation Requirements in Securities Class Actions

Fifth Circuit Clarifies Loss Causation Requirements in Securities Class Actions

Plaintiffs Allege Medicare Fraud Led to Artificially Inflated Stock Prices

In Public Employees Retirement System of Mississippi, Puerto Rico Teachers’ Retirement System v. Amedisys, Inc., No. 13-30580, 2014 WL 4931411 (5th Cir. Oct. 2, 2014) (“PERSM”), the U.S. Fifth Circuit Court of Appeals clarified the level of pleading required to survive a 12(b)(6) motion to dismiss, at least with respect to loss causation. In PERSM, the class of plaintiffs sued Amedisys, Inc. (“Amedisys”) on the grounds that Amedisys fraudulently took advantage of certain Medicare reimbursement provisions, leading to a falsely inflated stock price. The plaintiffs further alleged that Amedisys made materially false and misleading statements which further artificially inflated the price of Amedisys stock.

Heightened Pleading Standards in Securities Cases

In cases involving publicly traded securities and purchases or sales in public securities markets, plaintiffs must demonstrate that there was (1) a material misrepresentation (or omission), (2) scienter, i.e., a wrongful state of mind, (3) a connection with the purchase or sale of a security, (4) reliance, often referred to in cases involving public securities markets (fraud-on-the-market cases) as “transaction causation,” (5) economic loss, and (6) “loss causation,” i.e., a causal connection between the material misrepresentation and the loss. Lormand v. U.S. Unwired, Inc., 565 F.3d 228, 238–39 (5th Cir. 2009) (citing Dura Pharmaceuticals, Inc. ., et al. v. Broudo, et al., 544 U.S. 336, 341–42 (2005)).

The Supreme Court in Dura and Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), identified the basic principles of pleading loss causation under FRCP 8(a)(2) as setting forth a standard of plausibility, or something beyond the mere possibility of loss causation. Twombly, at 557–58; Dura, 544 U.S. at 346 (stating that the plaintiff need only adequately allege and prove the traditional elements of causation and loss for recovery in private securities fraud actions). To establish proximate causation and survive a motion to dismiss, 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. Lormand, 565 F.3d at 255 (citing Dura, 544 U.S. at 342).

How to Sufficiently Plead Loss Causation

Loss causation in fraud-on-the-market cases can be demonstrated circumstantially by (1) identifying a ‘corrective disclosure’ (a release of information that reveals to the market the pertinent truth that was previously concealed or obscured by the company’s fraud); (2) showing that the stock price dropped soon after the corrective disclosure; and (3) eliminating other possible explanations for this price drop, so that the finder of fact can infer that it is more probable than not that it was the corrective disclosure—as opposed to something else—that caused at least a ‘substantial’ amount of price drop. PERSM, 2014 WL 4931411 at *4, citing FindWhat Investor Group v., 658 F.3d 1282, 1311–12 (11th Cir.2011).

Corrective Disclosure Based on Series of Ongoing Disclosures

Thus, in order to determine whether the Plaintiff sufficiently alleged loss causation so as to survive a motion to dismiss, the court had to determine whether there was a corrective disclosure which proximately caused the decrease in Amedisys’ stock price. The plaintiff relied on four disclosures as the corrective disclosures that caused the stock prices to drop: a 2008 report calling for deeper scrutiny of Amedisys’ Medicare reimbursement procedures, the resignation of the COO and CIO, a 2010 Wall Street Journal article stating that Amedisys might be taking advantage of the Medicare reimbursement system, and government investigations into Amedisys by the Securities and Futures Commission, Securities and Exchange Commission and the Department of Justice. Id. at *6-9.

Although the court did not hold that any single disclosure constituted a corrective disclosure, taking all of the facts in the complaint as true, the four disclosures together constituted a corrective disclosure that sufficiently pled loss causation. Id at *9.

To 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. Indeed, there is no requirement that a corrective disclosure take a particular form or be of a particular quality…It is the exposure of the fraudulent representation that is the critical component of loss causation.

Id. As the Fifth Circuit has a notorious reputation for being a very difficult district for plaintiffs in securities class actions due to the heightened pleading requirements, this case offers guidance on how to survive one of the many elements required to be pled.

Allen & Gooch is providing this legal update for informational purposes only. This article should not be construed as legal advice or a legal opinion as to any specific facts or circumstances. You should consult your own attorney concerning your particular situation and any specific legal questions you may have.