Ottmann v. Hanger Orthopedic Group, Inc.

• Decision Date: 22 December 2003
• Docket Number: No. 02-2283.,02-2283.
• Citation: 353 F.3d 338
• Parties: Norman OTTMANN, Plaintiff-Appellant, v. HANGER ORTHOPEDIC GROUP, INCORPORATED; Ivan R. Sabel; Richard A. Stein, Defendants-Appellees, v. David Chopko; Gary BACKOUS, Movant-Appellants.
• Court: U.S. Court of Appeals — Fourth Circuit

353 F.3d 338

Norman OTTMANN, Plaintiff-Appellant, v. HANGER ORTHOPEDIC GROUP, INCORPORATED; Ivan R. Sabel; Richard A. Stein, Defendants-Appellees, v. David Chopko; Gary BACKOUS, Movant-Appellants.

No. 02-2283.

United States Court of Appeals, Fourth Circuit.

Argued: September 25, 2003.

Decided: December 22, 2003.

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ARGUED:

Andrew M. Schatz, Schatz & Nobel, P.C., Hartford, Connecticut, for Appellants.

Glenn M. Kurtz, White & Case, New York, New York, for Appellees.

ON BRIEF:

Jeffrey S. Nobel, Schatz & Nobel, P.C., Hartford, Connecticut; Charles Juster Piven, Law Office Of Charles J. Piven, Baltimore, Maryland, for Appellants.

Before WILKINS, Chief Judge, and WIDENER and LUTTIG, Circuit Judges.

Affirmed by published opinion. Chief Judge WILKINS wrote the opinion, in which Judge WIDENER and Judge LUTTIG joined.

OPINION

WILKINS, Chief Judge:

Norman Ottmann, David Chopko, and Gary Backous (collectively, "Appellants") appeal a district court order dismissing their securities fraud suit against Hanger Orthopedic Group, Inc. (Hanger) and two of its senior officers, Ivan R. Sabel and Richard A. Stein,¹ pursuant to Federal Rule of Civil Procedure 12(b)(6) and provisions of the Private Securities Litigation Reform Act of 1995 (PSLRA), see 15 U.S.C.A. § 78u-4(b)(1), (2) (West 1997). Finding no reversible error, we affirm.

I.

Hanger provides services to patients who require orthotic and prosthetic devices, such as artificial limbs. On July 1, 1999, Hanger acquired NovaCare Orthotics & Prosthetics (NovaCare), another provider of orthotic and prosthetic devices. Through this acquisition, Hanger acquired 369 patient care facilities operated by NovaCare, and it hired former NovaCare personnel, including certified practitioners qualified to fit orthotic and prosthetic devices. The NovaCare acquisition more than doubled the size of Hanger's United States operations, bringing Hanger's total number of patient care facilities to 636, with a total of 920 certified practitioners in 42 states and the District of Columbia.

On November 8, 1999, Hanger issued a press release reporting financial results for the third quarter of 1999, which had ended on September 30. This was the first quarter in which Hanger's financial results included the results of the new NovaCare division. The November 8 press release reported third quarter revenue of $124.9 million and net income of $5.81 million, or $0.24 per share.

Also on November 8, Sabel, Stein, and another Hanger officer held a conference call with securities analysts and investors ("the November 8 call"). During this call, the officers reiterated the financial results set forth in the press release and discussed in detail the integration of NovaCare into Hanger. While the officers made mostly positive comments regarding the integration, they explained that revenue had been reduced by the departure of some former NovaCare practitioners in connection with the acquisition.

On January 6, 2000, Appellees announced in another press release that they expected revenue and earnings for the fourth quarter of 1999 and the year 2000 to fall substantially below analysts' expectations, with estimated fourth quarter revenue of $115 million and a break-even in earnings per share. The next morning, Sabel and Stein participated in another conference call with analysts and investors to discuss these results ("the January 7 call"). During this call, Stein explained that Hanger's disappointing results were attributable to three factors: (1) additional losses of former NovaCare practitioners, (2) a decision to conform the revenue recognition practices of the NovaCare division to Hanger's practices, and (3) a reduction in referral business from rehabilitation clinics due to the NovaCare acquisition. That same day (the first trading day after Hanger's negative financial news was released), the price of Hanger common stock dropped from the previous day's closing price of $9.375 per share to as low as $3.75 — a decline of 60 percent — before closing at $4.8125.

Appellants subsequently brought this proposed class action on behalf of investors who purchased Hanger stock between November 8, 1999 and January 6, 2000. Appellants claimed that Appellees made a series of oral and written misrepresentations and omissions of fact in violation of section 10(b) of the Securities Exchange Act of 1934, see 15 U.S.C.A. § 78j(b) (West Supp.2003), and Rule 10b-5, see 17 C.F.R. § 240.10b-5 (2003).² Appellants later amended their complaint.

Appellees moved to dismiss, arguing that Appellants had failed to plead with particularity any false or misleading statements by Appellees, the materiality of such statements, or scienter. The district court agreed and dismissed the amended complaint. The court expressed "serious doubts as to whether [Appellants would] be able to meet the threshold requirements for pleading with particularity in a securities class action suit," J.A. 41, but nevertheless granted Appellants an opportunity to amend their complaint. Further, the district court gave Appellants specific guidance regarding how to redraft their complaint.

Appellants subsequently filed a second amended complaint, and Appellees again moved to dismiss based on essentially the same grounds asserted in their earlier motion. Emphasizing that it had previously given Appellants an opportunity to plead their claims with greater particularity, the district court determined that Appellants' new complaint contained the same defects as the earlier one. Thus, based on its conclusion that Appellants had "not met the threshold requirements for pleading with particularity in a securities class action suit," id. at 332, the district court dismissed the complaint with prejudice.

II.

To state a claim under section 10(b) and Rule 10b-5, a plaintiff must allege that "(1) the defendant made a false statement or omission of material fact (2) with scienter (3) upon which the plaintiff justifiably relied (4) that proximately caused the plaintiff's damages." Phillips v. LCI Int'l, Inc., 190 F.3d 609, 613 (4th Cir.1999) (internal quotation marks omitted). At issue here is whether Appellants adequately pleaded the first two elements. We review the dismissal of a complaint pursuant to Rule 12(b)(6) de novo. See Baird ex rel. Baird v. Rose, 192 F.3d 462, 467 (4th Cir.1999).

A. Standards for Material Misrepresentation or Omission

To allege a false statement or omission of material fact, a plaintiff "must point to a factual statement or omission — that is, one that is demonstrable as being true or false." Longman v. Food Lion, Inc., 197 F.3d 675, 682 (4th Cir.1999). Additionally, the plaintiff must allege that the statement is false or that the omitted fact renders a public statement misleading. See id. And, "any statement or omission of fact must be material," i.e., there must be "a substantial likelihood that a reasonable purchaser or seller of a security (1) would consider the fact important in deciding whether to buy or sell the security or (2) would have viewed the total mix of information made available to be significantly altered by disclosure of the fact." Id. at 682-83. Under the PSLRA, the complaint must "specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, ... state with particularity all facts on which that belief is formed." 15 U.S.C.A. § 78u-4(b)(1).

B. Standards for Scienter

1. Substantive Standard

In a securities fraud action, "the term `scienter' refers to a mental state embracing intent to deceive, manipulate, or defraud." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 194 n. 12, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976); see Malone v. Microdyne Corp., 26 F.3d 471, 478 (4th Cir.1994). Mere negligence will not suffice. See Phillips, 190 F.3d at 621. Additionally, every circuit that has considered the issue has held that scienter may also be established by a showing of recklessness.³ See Hudson v. Phillips Petroleum Co. (In re Phillips Petroleum Sec. Litig.,) 881 F.2d 1236, 1244 (3d Cir.1989); Van Dyke v. Coburn Enters., 873 F.2d 1094, 1100 (8th Cir.1989); McDonald v. Alan Bush Brokerage Co., 863 F.2d 809, 814 (11th Cir.1989); Hackbart v. Holmes, 675 F.2d 1114, 1117-18 (10th Cir.1982); Broad v. Rockwell Int'l Corp., 642 F.2d 929, 961-62 (5th Cir. Apr.1981) (en banc); Mansbach v. Prescott, Ball & Turben, 598 F.2d 1017, 1023-25 (6th Cir.1979); Sundstrand Corp. v. Sun Chem. Corp., 553 F.2d 1033, 1044-45 (7th Cir.1977); cf. Rolf v. Blyth, Eastman Dillon & Co., 570 F.2d 38, 46 (2d Cir.1978) (concluding that scienter may be established by recklessness "in appropriate circumstances"). However, neither this circuit nor the Supreme Court has addressed this particular question. See Ernst & Ernst, 425 U.S. at 194 n. 12, 96 S.Ct. 1375; Phillips, 190 F.3d at 620 (noting that scienter "may perhaps be shown by recklessness" (emphasis added)).

In Phillips, we defined "recklessness" as "an act so highly unreasonable and such an extreme departure from the standard of ordinary care as to present a danger of misleading the plaintiff to the extent that the danger was either known to the defendant or so obvious that the defendant must have been aware of it." Phillips, 190 F.3d at 621 (internal quotation marks omitted); see, e.g., Nathenson v. Zonagen Inc., 267 F.3d 400, 408 (5th Cir.2001) (articulating same definition of recklessness); City of Philadelphia v. Fleming Cos., 264 F.3d 1245, 1258 (10th Cir.2001) (same); In re Advanta Corp. Sec. Litig., 180 F.3d 525, 535 (3d Cir.1999) (same). Such "severe recklessness" is, in essence, "a slightly lesser species of intentional misconduct." Nathenson, 267 F.3d at 408 (internal quotation marks omitted). This definition of recklessness comports with the observation of the Supreme Court that "[t]he words `manipulative or...