by T. GormanPosted on Posted in SECActions

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.

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by T. GormanPosted on Posted in SECActions

This is the final part of an occasional series. The first is available here, the second here, the third here, the fourth here and the fifth here. The entire paper will be published by Securities Regulation Law Journal early next year.

Conclusion: The FCPA Today

The FCPA was unique in the world at passage. It was born of controversy and scandal. The Watergate hearings which transfixed Director Sporkin and the rest of the country spawned unprecedented and far ranging issues and questions. The hearings ushered in a new era of moral questioning.

In the turmoil of that environment Director Sporkin focused on corporate governance, viewing corporate boards and officers as stewards of investor funds. That principled view propelled the SEC investigations, enforcement actions and the Volunteer Program, all of which culminated after two years of Congressional hearings and debate in the Foreign Corrupt Practices Act.

The statute was intended to implement the principles that gave rise to its birth. It was tailored and focused:

· Bribery prohibited: The anti-bribery provisions prohibit issuers and other covered persons from corruptly attempting, or actually obtaining or retaining, business through payments made to foreign officials;

· Accurate books and records: The books and records provisions were designed to ensure that issuers – those using money obtained from the public – keep records in reasonable detail such that they reflect the substance of the transactions;

· Auditors get the truth: Making misstatements to auditors examining the books and records of issuers was barred; and

· Effective internal controls: Companies were required to have internal control provisions as an assurance that transactions with shareholder funds are properly authorized and recorded.

The impetus for the passage of the FCPA was not a novel crusade but the basic premise of the federal securities laws: Corporate managers are the stewards of money entrusted to them by the public; the shareholders are entitled to know how their money is being used. The settlements in the early enforcement actions and the Volunteer Program were designed to implement these principles. The FCPA was written to strengthen these core values.

Today the statute continues to be surrounded by controversy. While the FCPA is no longer unique in the world, U.S. enforcement officials are without a doubt the world leaders in enforcement of the anti-corruption legislation. A seemingly endless string of criminal and civil FCPA cases continues to be brought by the Department of Justice (“DOJ”) and the SEC. The sums paid to resolve those cases are ever spiraling. What was a record-setting settlement just a few years ago is, today, not large enough to even make the list of the ten largest amounts paid to settle an FCPA case. The reach of the once focused statute seems to continually expand such that virtually any contact or connection to the United States is deemed sufficient to justify applying the Act.

For business organizations the potential of an FCPA investigation, let alone liability, is daunting. Compliance systems are being crafted and installed which often incorporate each of the latest offerings in the FCPA market place at significant expense. If there is an investigation, the potential cost of the settlement is only one component of the seemingly unknowable but surely costly morass facing the organization. Typically business organizations must deal with the demands of two regulators in this country and perhaps those of other jurisdictions. The internal investigations that are usually conducted to resolve questions about what happened are often far reaching, disruptive, continue for years and may well cost more than the settlements with the regulators. Since most companies cannot bear the strain of litigating an FCPA case, enforcement officials become the final arbitrator on the meaning and application of the statutes – arguing legal issues may well mean a loss of cooperation credit with a corresponding increase in penalties.

Enforcement officials today continue to call for self-reporting as the SEC did at the outset of the Volunteer Program. Today, however, while many companies do self-report since they may have little choice, there can be an understandable reluctance in view of the potential consequences. Indeed, self-reporting might be viewed as effectively writing a series of blank checks to law firms, accountants, other specialists and ultimately the government with little control over the amounts or when the cash drain will conclude.

This is not to say that companies that have violated the FCPA should not be held accountable. They should. At the same time it is important to recall the purpose of the statutes: To halt foreign bribery and to ensure for public companies that corporate officials are accountable as faithful stewards of shareholder money.

While business organizations may express concern about enforcement, accountability begins with the company, not the government. That means installing effective compliance systems using appropriate methods, not just adopting something off the shelf or purchasing the latest offering in the FCPA compliance market place. It means programs that are effective and grounded in basic principles, not just ones that furnish good talking points with enforcement officials if there is a difficulty.

The key to effective programs is to base them on the principles of stewardship which should be the bedrock of the company culture. Accountability for the funds of the shareholders begins with effective internal controls, a key focus when the statute was passed which remains critical today. As Judge Sporkin recently commented: “The problem I see in compliance is that they are not really putting in the kinds of effort and resources that’s necessary here. And I really think that you’ve got to get your compliance department, your internal audit department working together; in too many instances you find that they’re working separately.” Transcript at 18.

The focus is also critical. These systems are not just a defense to show regulators if something goes wrong. Rather, the systems should reflect the culture of the organization. As SEC Commissioner John Evans stated as the events which led to the passage of the FCPA were unfolding:

“I am somewhat concerned that the issue of illegal and questionable corporate payments is being considered by some in a context that is too narrow, legalistic, and short-sighted. In view of the objectives of the securities laws, such as investor protection and fair and honest markets, compliance with the spirit of the law may be more meaningful and prudent than quibbling about meeting the bare minimum legal requirements. I would submit that many companies and their profession accounting and legal advisers would serve their own and the public interest by being less concerned with just avoiding possible enforcement action by the SEC or litigation with private parties and more concerned with providing disclosure consistent with the present social climate. Such a course of conduct should promote the company’s public image, its shareholder relations, its customer relations, and its business prospects . . . .” Evans at 14-15.

Accountability is also critical on the part of enforcement officials. Every case does not demand a draconian result with a large fine, huge disgorgement payments, multiple actions or a monitor. Every case need not be investigated for years at spiraling costs which may bring diminishing returns. The statutes need not be interpreted as an ever expanding rubber band with near infinite elasticity. Rather, enforcement officials would do well to revisit the remedies obtained in the early enforcement cases and those employed with great success in the Volunteer Program. And, they would do well to recall the reason 450 major corporations self-reported without a promise of immunity or an offer of cooperation credit: As Judge Sporkin said, “They trusted us.”

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