Loss Causation In A Securities Fraud Case From a Stream of Small Disclosures
A critical element in a Section 10(b) and Rule 10b-5 securities fraud claim for damages is loss causation. Mandated as a key component of such a claim by the PSLRA, the element provides the essential link between the alleged injury and the claimed damages. It is not enough that the plaintiff claim the price of the securities purchased was inflated by the fraud. Rather, the PSLRA, as interpreted by the Supreme Court in Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005), requires plaintiffs demonstrate that the truth emerged about the fraud and that he share price drop resulted primarily from the revelation of that fraud.
A recent Fifth Circuit decision concluded that the truth emerged – or enough of it – through a series of disclosures despite the fact that each may not have been sufficient to inform the market of the truth. Public Employees’ Retirement System of Mississippi v. Amedisys, No. 13-30580 (5th Cir. Decided October 2, 2014).
Amedisys provides home health services to patients with chronic health problems. About 90% of its revenue comes from Medicare payments. During the class period Medicare paid a flat fee for treatment of a patient with at least five but fewer than ten therapy visits per episode – a course of treatment over sixty days. If the number of treatments exceeded ten, more was paid. In 2008 Medicare revised the rules, dropping the ten visit threshold in favor of paying increased reimbursements upon the occurrence of six, fourteen and twenty visits during an episode for medically necessary services.
Plaintiffs claim that the company committed fraud by pressuring employees into providing medically unnecessary treatment visits to hit the more lucrative reimbursement thresholds. As the fraud unfolded the defendants, which include the company and several of its officers, made a series of materially false statements which artificially inflated the price of Amedisys’ stock. The truth finally emerged through a series of five partial disclosures, according to the complaint. The share price dropped, injuring plaintiffs.
The district court found the five partial disclosures insufficient to reveal the truth about the fraud and dismissed for not adequately pleading loss causation. The First Circuit reversed.
The five partial disclosures are:
- Research report: The report raised questions about the firm’s accounting and Medicare billing practices. The share price dropped over 17% the day it was issued despite contrary claims by the company.
- Employee departures: The company President and CEO and its CIO resigned to pursue other interests. The share price dropped over 21%.
- WSJ: A study published in the Wall Street Journal of Medicare reimbursements by a Yale professor analyzed payments to Amedisys, revealing a questionable pattern of home visits clustered around reimbursement targets that changed after the revision of the targets. It also quoted a former company nurse who stated employees were told to get 10 visits, the last of which was not always necessary. The share price dropped over 6% following publication of the article.
- Government investigations: The Senate Finance Committee, the SEC and the DOJ all launched inquiries regarding the Medicare billing practices of the company following the Wall Street Journal article.
- Disappointing quarterly earnings: The company announced disappointing quarterly results for the second quarter. The share price declined over 24%.
The critical question here is whether the relevant truth emerged. This 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,” according to the Court. The disclosure need not be in one episode – it can gradually be perceived in the market place.
Here each of the events may not be sufficient to establish loss causation. The report is “admittedly inconclusive . . . Speculation of wrongdoing cannot by itself arise to a corrective disclosure,” according to the Court. Likewise, the resignation of the officers by itself is insufficient, although the share price drop is not insignificant.
The Wall Street Journal article, while based on public facts which normally are insufficient to reveal the truth, does contain new information – an expert analysis. The analysis of complex economic data understandable only through expert analysis does plausibly present new information that is not merely confirmatory.
Finally, the Court considered the disappointing quarterly results and the three government inquiries. While normally the initiation of an investigation is not sufficient to establish loss causation, in this case these facts must be considered with the others. Media speculation here was followed by three government investigations targeting the reimbursement practices of the company. In the glare of this spotlight Amedisys could no longer game the system and its earnings dropped. Throughout all of these events the share price dropped significantly. Collectively “the whole is greater than the sum of its parts.” Collectively, these facts are sufficient to demonstrate that the truth emerged, establishing at this stage of the case, loss causation.