On 13 December 2017, the Sixth Circuit Court of Appeals (which covers appeals in Kentucky, Michigan, Ohio and Tennessee) reversed the dismissal of a consolidated putative class action against Community Health Systems, Inc. ("Community"), its CEO and CFO. The plaintiffs—shareholders of Community—alleged that Community and certain of its officers had violated Sections 10(b) and 20(a) of the Exchange Act by fraudulently inflating Community's share price through false and misleading statements regarding Community's operating model.
The holding—albeit limited to the Sixth Circuit—highlights that, when assessing the adequacy of loss causation allegations at the pleading stage, some courts may determine that information in the form of allegations in a related complaint may constitute true and new disclosures to the market.
The plaintiffs had alleged that the value of Community's shares fell immediately after a competitor, Tenet Healthcare Corporation, publicly disclosed in a civil complaint against Community expert analyses alleging that Community's profits depended largely on Medicare fraud, and fell further after one of Community's officers admitted to certain of Tenet's allegations. The district court, dismissing the putative class action complaint, found that, while the plaintiffs had sufficiently pled that the defendants intentionally made misleading statements, they had not adequately alleged that the misleading statements had caused the plaintiffs' losses because the disclosures came in the form of Tenet's complaint—and were therefore regarded by the market as mere "allegations" rather than truth. The Sixth Circuit reversed.
In considering loss causation, the court emphasized that the pleading requirement "is not meant to impose a great burden upon a plaintiff" but is rather "meant to prevent disappointed shareholders from filing suit merely because their shares have lost value and then using discovery to determine whether the loss was due to fraud." Thus, according to the Sixth Circuit, at the pleading stage a plaintiff need only provide a defendant with "some indication of the loss and the causal connection that the plaintiff has in mind."
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