Elam v. Neidorff

• Decision Date: 16 October 2008
• Docket Number: No. 07-2833.,07-2833.
• Citation: 544 F.3d 921
• Parties: Larry ELAM, individually and on behalf of all others similarly situated, Appellant, v. Michael NEIDORFF; J. Per Brodin; Centene Corporation; Karey D. Witty, Appellees. William L. Smith, Movant. Wayne Stolte, Movant-Appellant. Layton Jackson, individually and on behalf of all others similarly situated, Plaintiff v. Centene Corporation; J. Per Brodin; Michael Neidorff, Defendants-Appellees. William L. Smith, Movant. Wayne Stolte, Movant-Appellant.
• Court: U.S. Court of Appeals — Eighth Circuit

544 F.3d 921

Larry ELAM, individually and on behalf of all others similarly situated, Appellant, v. Michael NEIDORFF; J. Per Brodin; Centene Corporation; Karey D. Witty, Appellees.

William L. Smith, Movant.

Wayne Stolte, Movant-Appellant.

Layton Jackson, individually and on behalf of all others similarly situated, Plaintiff v. Centene Corporation; J. Per Brodin; Michael Neidorff, Defendants-Appellees.

William L. Smith, Movant.

Wayne Stolte, Movant-Appellant.

No. 07-2833.

United States Court of Appeals, Eighth Circuit.

Submitted: April 18, 2008.

Filed: October 16, 2008.

Jill S. Abrams, argued, New York, NY (Nancy Kaboolian, Orin Kurtz, Grace E. Parasmo, Laurence D. Paskowitz and Roy L. Jacobs, New York, NY, and Joe D. Jacobson and Jonathan F. Andres, Clayton, MO, on the brief), for appellant.

Walter C. Carlson, argued, Chicago, IL (Hille R. Sheppard, Jason M. Bohm, Chicago, IL, and Thomas B. Weaver, Edwin L. Noel, and Glenn E. Davis, St. Louis, MO, on the brief), for appellees.

Before MURPHY, COLLOTON, and SHEPHERD, Circuit Judges.

SHEPHERD, Circuit Judge.

This appeal arises out of a securities fraud class action against Centene Corporation; Michael Neidorff, Centene's Chairman and Chief Executive Officer; Karey L. Witty, Centene's Senior Vice President and Chief Executive Health Plan Business; and J. Per Brodin, Centene's Senior Vice President and Chief Financial Officer (collectively "defendants"). Plaintiffs allege violations of sections 10(b) and 20(a) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. §§ 78j(b), 78t(a) and Securities and Exchange Commission Rule 10b-5, 17 C.F.R. § 240.10b-5, between April 25, 2006 and July 17, 2006.

Defendants moved to dismiss the consolidated amended class action complaint ("amended complaint") pursuant to Federal Rule of Civil Procedure 12(b)(6) and section 21D(b)(3)(A) of Exchange Act, as amended by the Private Securities Litigation Reform Act of 1995 (PSLRA), 15 U.S.C. § 78u-4(b)(3)(A). The district court¹ granted the motion to dismiss. Plaintiffs contend that the district court erred in determining that their pleading was insufficient under the PSLRA. We affirm.

I.

Because this appeal arises from the district court's grant of a motion to dismiss, we draw the relevant facts from the class complaint. In re Cerner Corp. Sec. Litig., 425 F.3d 1079, 1082 (8th Cir.2005). Centene is a St. Louis, Missouri-based healthcare enterprise that primarily provides programs and related services to individuals receiving benefits under Medicaid, including Supplemental Security Income and the State Children's Health Insurance Program. Centene acts as an intermediary between the government and Medicaid recipients in the states in which Centene has contracts. Centene receives a monthly amount for each Medicaid recipient in its plan and, in turn, pays for the recipient's healthcare services.

In reporting its quarterly earnings, Centene includes not only the costs incurred and billed during the quarter but also an estimate of medical costs that have been incurred but not reported (IBNR). IBNR is an estimate of claims liability because some medical events occur before the end of a given reporting period (and Centene is therefore liable to pay them) but have not yet been formally billed to the company. Centene estimates its IBNR on a monthly basis employing various factors, including in-patient hospital utilization dates and prior claims experience. Independent actuaries review Centene's quarterly estimates.

On April 25, 2006, Centene filed its Form 10-Q with the SEC for the first quarter of 2006 and issued a press release. As required by the Sarbanes-Oxley Act of 2002, 15 U.S.C. §§ 7201-7266, Neidorff and Witty certified that the financial statements were fairly presented. See 15 U.S.C. § 7241(a). Both documents were positive and in line with analyst estimates. Centene reported net earnings of $8.8 million, or $.20 per diluted share for the first quarter of 2006.

With respect to IBNR, the Form 10-Q provided that:

Failure to Accurately Predict Our Medical Expenses Could Negatively Affect Our Reported Results. Our medical expenses include estimates of IBNR medical expenses. We estimate our IBNR medical expenses monthly based on a number of factors. We cannot be sure that our IBNR estimates are adequate or that adjustments to those estimates will not harm our results of operations. From time to time in the past, our actual results have varied from our estimates, particularly in times of significant changes in our members. Our failure to estimate IBNR accurately may also affect our ability to take timely corrective actions, further harming our results.

In terms of guidance for the second quarter,² Witty was quoted in the press release as stating:

For the second quarter of 2006, we expect revenue in the range of $495 million to $500 million and earnings per diluted share of $0.25 to $0.30. For the full-year 2006, we anticipate revenue in the range of $2.08 billion to $2.16 billion and earnings per diluted share of $1.53 to $1.70.

On June 6, 2006, Centene hosted an investor day where its management reiterated its guidance for the second quarter for 2006 and the full year 2006, with earnings estimated at $1.53 to $1.70 per share. An investor comment by Wachovia Securities reported that Centene's management had stated that first quarter medical cost trends were improving in Indiana and Ohio.

On June 20, 2006, Neidorff discussed the ongoing cost pressures that Centene was facing. Neidorff did not comment on guidance, explaining that it was Centene's policy not to do so absent a material change. Neidorff stated,

We're not projecting anything that is devastating or any devastation out there. I'm not worried about big issues or big blowups. I'm worried about little things like I'm talking to you about, our ability to fix them in a timely enough fashion that it doesn't impact one quarter or another.

Neidorff's remarks were available to the public via the Internet.

On July 18, 2006, Centene issued a press release announcing that its second quarter earnings would be substantially lower than expected as a result of an adjustment of approximately $9.7 million, or $0.14 per diluted share, for additional medical costs primarily related to March 2006 in Indiana and Texas. Centene reported preliminary earnings of $0.10 to $0.12 per diluted share for the second quarter of 2006. Centene also reduced its earning guidance for the remainder of 2006 to a range of $0.95 to $1.04 a share, citing adverse medical cost trends. Following the announcement, Centene stock dropped from $21.04 to $13.60, or approximately 35 percent. Analysts expressed surprise at Centene's revised guidance.

Shortly thereafter, securities fraud class actions were filed against the defendants. The district court consolidated those actions and appointed Wayne Stolte as lead plaintiff. Stolte subsequently filed an amended complaint. Defendants moved to dismiss the amended complaint, asserting that the allegations contained therein failed to state a security fraud claim against any of the defendants. After a hearing, the district court granted the motion to dismiss, finding that plaintiffs failed to allege facts demonstrating that defendants had misrepresented a material fact or acted with scienter. Plaintiffs bring this appeal.

II.

We review de novo the district court's dismissal of a securities fraud amended complaint, In re NVE Corp. Sec. Litig., 527 F.3d 749, 751 (8th Cir.2008), affirming only if the plaintiffs can prove no set of facts which would entitle them to relief, In re Hutchinson Tech., Inc. Sec. Litig., 536 F.3d 952, 958 (8th Cir.2008). Although we construe the complaint liberally and accept the facts pleaded as true, we reject unwarranted inferences and conclusory or catch-all assertions of law. In re Cerner Corp. Sec. Litig., 425 F.3d at 1083.

III.

The PSLRA imposes "heightened pleading requirements" on securities fraud plaintiffs. In re NVE Corp. Sec. Litig., 527 F.3d at 751. In order to survive a Rule 12 motion to dismiss, the complaint must: "1) `specify each statement alleged to have been misleading, [and] the reason or reasons why the statement is misleading,' and 2) `state with particularity facts giving rise to a strong inference that the defendant acted with [scienter].'" Id. (quoting 15 U.S.C. § 78u-4(b)(1)-(2) (internal citation omitted)); see Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. ___, 127 S.Ct. 2499, 2508, 168 L.Ed.2d 179 (2007); see also Cornelia I. Crowell GST Trust v. Possis Med., Inc., 519 F.3d 778, 782 (8th Cir.2008) (listing elements which must be shown for securities action to survive a motion to dismiss). On appeal, plaintiffs assert that their pleading sufficiently alleges both falsity and scienter, satisfying the elevated pleading standard for their securities fraud class action.

A.

Plaintiffs allege that Centene's stock price was artificially inflated because of three sets of false statements made by Centene and its officers on April 25, 2006; June 6, 2006; and June 20, 2006. Plaintiffs assert that defendants must have been aware of the additional $9.7 million in medical costs as early as February and March 2006 through Centene's mandatory prior-authorization program for various treatments and through its monitoring systems. Defendants acknowledge Centene's efforts to monitor medical costs. However, defendants contend that plaintiffs have not pled facts demonstrating that defendants had access to, or knowledge of, information contradicting the April or June statements when made.

Plaintiffs' argument is that Centene must have known about the additional $9.7 million in medical costs in April and June of 2006, when the allegedly false statements were made, because Centene touts its ability to predict medical costs. Thus, plaintiffs ask this court to infer that defendants' April and June statements must be false based solely on defendants'...