Category Archives: loss causation

“Nothing Succeeds Like Success” Unless “Success” Is Based On Inflated AUM

Having substantial assets under management (AUM) can really boost an investment adviser’s ability to attract new money. Accordingly, there is tremendous pressure to report strong numbers to the investing public, including through news sources (e.g., Barron’s top advisors list). As one adviser has found out, the price of inflating such AUM numbers can be millions in dollar in fines and a permanent bar from the industry.

Specifically, an SEC Administrative Law Judge (ALJ) has found that Dawn Bennett and her firm falsely claimed between $1 – $2 billion in AUM when the most she ever had was $400 million. Ms. Bennett made such claims on a radio show she hosts and to Barron’s magazine in order to secure “top Barron’s advisor” recognitions for three years. In addition, Ms. Bennett provided performance information based upon “model portfolios” while representing that such returns were actual customer returns. Ms. Bennett and her firm also face FINRA customer arbitrations relating to the above issues as well as alleged account churning.

In its decision, the ALJ fined Ms. Bennett $600,000 and her firm $2.9 million. The ALJ also ordered $556,000 in disgorgement and imposed a permanent industry bar finding that Ms. Bennett “is not fit to remain in the industry in any capacity.”

Bottom line — while the temptation to inflate performance is very strong, especially in this competitive market, advisors who make false statements do so at their own peril.

Here is a link to the ALJ opinion — https://www.sec.gov/alj/aljdec/2016/id1033jeg.pdf

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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