On August 18, 2022, a unanimous panel of the United States Court
of Appeals for the First Circuit affirmed a decision by the United
States District Court for the District of Rhode Island granting a
motion to dismiss a putative securities fraud class action
asserting claims under Section 10(b) of the Securities Exchange Act
(the "Exchange Act"), Rule 10b-5 promulgated thereunder,
and Section 20(a) of the Exchange against a health care and
pharmaceutical company (the "Company") and two of its
senior executives. City of Miami Fire Fighters' and Police
Officers' Retirement Trust, et. al. v. CVS Health
Corporation, No. 21-1479 (1st Cir. Aug 18, 2022). Plaintiffs
alleged that, following the Company's 2015 acquisition of
another health care company (the "Merger"), the
Company's executives issued false statements and misleading
omissions about various post-Merger issues. In affirming dismissal
of the amended complaint, the First Circuit held that the district
court's assessment was "right on the mark" and that
"[p]laintiffs failed to allege that defendants made statements
of fact that were false when made or misleadingly incomplete in
light of the contemporaneous circumstances."
Plaintiffs alleged that, following the Merger, the Company began to
mismanage the newly acquired business, which allegedly resulted in
lost customers. Plaintiffs further alleged that the Company
concealed these alleged losses by issuing goodwill write-downs from
February 2016 to February 2019 that were purportedly too late in
relation to the Company's actual suffered losses. Plaintiffs
also alleged that the Company's senior management misled
investors by affirmatively misrepresenting or omitting material
facts, which the Court grouped into the following five categories:
(1) alleged representations about the "condition and financial
performance" of the newly acquired business; (2) alleged
statements concerning the Company's leadership position in the
market; (3) alleged statements overstating the Company's
understanding of its newly-acquired customers; (4) alleged
statements concerning the Company's realization of synergies as
a result of the Merger, and (5) alleged "boilerplate"
statements about the risks the Company faced in the newly-acquired
business.
Addressing plaintiffs' Section 10(b) claim, the Court noted
that, "despite its length, [the amended complaint] fails to
allege sufficiently specific facts about the state of [the
Company's] business at particular points in time to enable us
to conclude that any of the goodwill write-downs were too late or
that any of the defendants' alleged misstatements contradicted
the state of that business as it then stood." The Court also
noted the district court's emphasis on "the
complaint's failure to juxtapose the proffered reports of lost
customers with what [the Company] was disclosing at the time of
those losses." Addressing the allegations of customer losses,
the Court found that only six of forty-six customer-loss
allegations attempted to place losses within specific periods of
time—and even then, "only in highly general terms."
The Court held that two of those allegations "cover[ed] such
broad swaths of time that they effectively provide no date
limitation." As to the other four allegations, which the Court
characterized as being painted "with only a slightly finer
brush," the Court held that only the first definitively
occurred prior to the first disclosed goodwill write-down, but the
amended complaint provided "no reason to think that that 2015
loss by itself was both material and not offset by new
business." As to the five categories of alleged misstatements
generally, the Court held that plaintiffs' allegations either
did not adequately allege that such statements were either actually
false or inconsistent with the Company's disclosures. With
respect to alleged omissions about the Company's purported
risks (by virtue of it issuing "boilerplate" statements
about the same), the Court held that plaintiffs did not plead
sufficient allegations to conclude that such risks would occur with
"near certainty[,]" thus requiring any further
disclosure. Moreover, the Court seized on "[p]laintiffs'
concession that they 'do not dispute anything about
Defendants' accounting,' which necessarily includes the
figures included in the Company's goodwill reports throughout
the class period," which only "reinforces the gap in
their pleading."
Having affirmed the dismissal of the Section 10(b) claim, the First
Circuit affirmed the dismissal of the Section 20(a) claim,
explaining that the viability of plaintiffs' section 20(a)
claim for control-person liability is contingent on their section
10(b) claim. Accordingly, the Court affirmed dismissal of
plaintiffs' 20(a) claim. Finally, the Court held that the
district court did not err in dismissing plaintiffs' amended
complaint with prejudice.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.