Fifth Time’s A Charm – A Series Of Corporate Disclosures, Together, Can Be A “Corrective Disclosure.”

On October 2, 2014, a federal appeals court revived an investor class action that had been dismissed by the trial court for failure to plead loss causation. The case is Public Employees Ret. Sys. of Mississippi v. Amedisys, Inc., 13-30580 (5th Cir. Oct. 2, 2014).[1] In it, the Court found that a series of partial disclosures could collectively constitute a “corrective disclosure” of the defendant’s misrepresentations, which the plaintiffs plausibly alleged caused a decline in the defendant’s stock price.

The plaintiffs filed a complaint against Amedisys, a home health care services provider, and certain executives alleging that the company issued false and misleading public statements that concealed its fraudulent Medicare billing practices and artificially inflated its stock price between 2005 to 2010. The complaint alleged that a series of five “partial disclosures,” spread over two years, revealed the misrepresentations and caused a decline in the stock price, as the truth became known.

The disclosures, which spanned from August 2008 to September 2010, included two news reports questioning Amedisys’s billing practices; a press release announcing the resignation of its CEO and CIO; announcements of investigations into the company by the Senate Finance Committee, the SEC, and the DOJ; and the announcement of disappointing operating results in the second quarter of 2010. During the same time period, Amedisys’s stock price gradually declined from $66.07 to $24.02, a drop of over 60%.

The district court analyzed each of the disclosures separately and found that none of them constituted a “corrective disclosure,” which exposed the falsity of Amedisys’s prior statements. The district court dismissed the complaint with prejudice for failure to adequately plead that the plaintiffs’ losses were caused by the company’s misrepresentations.

The Fifth Circuit, however, found that a corrective disclosure does not have to be a single disclosure and analyzed the five disclosures in the Complaint “collectively.” The Court admitted that, if taken alone, the individual disclosures did not make the existence of fraud more probable, noting that neither media speculation concerning wrongdoing nor the mere commencement of a government investigation constitute a corrective disclosure of fraud. Nevertheless, the Court ruled that when taken together, the entire series of events plausibly indicated that the market “was once unaware of Amedisys’s alleged Medicare fraud, had become aware of the fraud and incorporated that information into the price of Amedisys’s stock.” Importantly, the Court noted that the Complaint linked each of the partial disclosures to a corresponding drop in stock value. Accordingly, the Court held that the plaintiffs adequately pled that Amedisys’s alleged false statements caused their loss and reversed the district court’s dismissal.

[1] http://www.ca5.uscourts.gov/opinions%5Cpub%5C13/13-30580-CV0.pdf

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