Bond v. Clover Health Invs., Corp.

• Citation: 587 F.Supp.3d 641
• Decision Date: 28 February 2022
• Docket Number: Case No. 3:21-cv-00096
• Parties: Timothy BOND, Lead Plaintiff and Jean-Nicolas Tremblay, Named Plaintiff, Individually and on behalf of all others similarly situated, v. CLOVER HEALTH INVESTMENTS, CORP. f/k/a Social Capital Hedosophia Holdings Corp. III, Vivek Garipalli, Andrew Toy, Joe Wagner, and Chamath Palihapitiya, Defendants.
• Court: U.S. District Court — Middle District of Tennessee

587 F.Supp.3d 641

Timothy BOND, Lead Plaintiff
and
Jean-Nicolas Tremblay, Named Plaintiff, Individually and on behalf of all others similarly situated,
v.
CLOVER HEALTH INVESTMENTS, CORP. f/k/a Social Capital Hedosophia Holdings Corp. III, Vivek Garipalli, Andrew Toy, Joe Wagner, and Chamath Palihapitiya, Defendants.

Case No. 3:21-cv-00096

United States District Court, M.D. Tennessee, Nashville Division.

Filed February 28, 2022

587 F.Supp.3d 647

Benjamin A. Gastel, James Gerard Stranch, IV, Branstetter, Stranch & Jennings, PLLC, Paul Kent Bramlett, Bramlett Law Offices, Nashville, TN, Jacob A. Walker, Jeffrey C. Block, Pro Hac Vice, Stephen J. Teti, Block & Leviton LLP, Boston, MA, for Lead Plaintiff Timothy Bond.

Larry Russell Belk, Jr., Sutherland & Belk, PLC, Nashville, TN, for Plaintiff Prabhjot Ahluwalia.

James A. Holifield, Jr., Holifield Janich Rachal & Associates, PLLC, Knoxville, TN, for Plaintiff Lori Brennan.

Brian Peter Calandra, Jeremy A. Lieberman, Pomerantz LLP, New York, NY, Brian Schall, Rina Restaino, Schall Law Firm, Los Angeles, CA, Patrick V. Dahlstrom, Pomerantz LLP, Chicago, IL, Paul Kent Bramlett, Robert P. Bramlett, Bramlett Law Offices, Nashville, TN, for Plaintiff Firas Jabri.

Britt K. Latham, Joseph B. Crace, Jr., Bass, Berry & Sims, Nashville, TN, Gary Anthony Crosby, II, Jed M. Schwartz, Scott A. Edelman, Milbank LLP, New York, NY, for Defendants Clover Health Investments, Corp., Vivek Garipalli, Andrew Toy.

Britt K. Latham, Joseph B. Crace, Jr., Bass, Berry & Sims, Nashville, TN, Gary Anthony Crosby, II, Milbank LLP, New York, NY, for Defendant Chamath Palihapitiya.

MEMORANDUM

ALETA A. TRAUGER, United States District Judge

Defendants Clover Health Investments, Corp. f/k/a Social Capital Hedosophia Holdings Corp. III ("SCH"), Vivek Garipalli, Andrew Toy, Joe Wagner, and Chamath Palihapitiya have filed a Motion to Dismiss (Doc. No. 74), to which lead plaintiff Firas Jabri and named plaintiff Jean-Nicolas Tremblay filed a Response (Doc. No. 80), and the defendants have filed a Reply (Doc. No. 83). For the reasons set out herein, the motion will be denied.

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I. BACKGROUND & PROCEDURAL HISTORY ¹

A. Introduction

United States securities laws allow the public trading of so-called "special purpose acquisition companies"—also referred to as "SPACs" or "blank check companies." A SPAC typically makes no products, provides no services, and has "no operating history, assets, revenue, or operations" of its own. Daniel S. Riemer, Special Purpose Acquisition Companies: SPAC and Span, or Blank Check Redux? , 85 Wash. U. L. Rev. 931, 933 (2007). Rather, a SPAC exists to become publicly traded itself and then "to buy a private company"—one that does actually provide a good or service but is not yet publicly traded—thereby allowing investors to "effectively [take the acquired] company public while avoiding the tradition[al] initial public offering [‘IPO’] process." Phillips v. Churchill Cap. Corp. IV , No. 1:21-CV-00539-ACA, 2021 WL 4220358, at *1 (N.D. Ala. Sept. 16, 2021). The SPAC process, all parties to this case agree, is legal, as long as the people and companies involved comply with relevant restrictions.

SCH, which now does business as Clover,² was originally a SPAC. Defendant Palihapitiya—who is purportedly known as the "King of SPACs"—formed SCH as a Cayman Islands exempted company in 2019,³ for the purpose of eventually combining with a functioning business that wished to bypass the hurdles of a conventional IPO. On October 6, 2020, SCH announced that it would be fulfilling its mission by acquiring Clover Health Investments, Corp., which SCH described in a joint press release as a "next-generation Medicare Advantage insurance company offering best-in-class plans that combine wide access to healthcare and rich supplemental benefits with low out-of-pocket expenses[.]" (Doc. No. 70 ¶¶ 2–3, 112.) Defendants Toy and Wagner are Clover executives. Toy is the company's co-founder and was, at the relevant times, its President and Chief Technology Officer ("CTO"), and Wagner was its Chief Financial Officer ("CFO"). (Id. ¶¶ 37–38.) Garipalli is the original founder of Clover, as well as the company's Chief Executive Officer ("CEO") and the Chairman of its Board of Directors. (Id. ¶ 32.) At least part of Clover's value proposition, according to the press release announcing the planned merger, came from its development of the "Clover Assistant," a software product designed to allow Clover to "partner[ ] with primary care physicians ... to deliver data-driven,

587 F.Supp.3d 649

personalized insights at the point of care." (Id. ¶ 2.)

According to the plaintiffs in this case, however, SCH's sunny picture of Clover concealed a business that, far from being the budding next-generation industry leader that SCH claimed, had achieved what limited success it had, not through innovation, but through kickbacks and cronyism, with little, if any, help from the Clover Assistant or any other promising technology. The allegations in the 150-page Amended Complaint are voluminous, but the plaintiffs identify five general categories on which the defendants "made false and/or misleading statements and/or failed to disclose" material facts between October 6, 2020 and February 3, 2021 (the "Class Period"):

(i) the Company had committed multiple legal and regulatory violations since January 1, 2018 and was and remains under investigation by the DOJ for violations of the False Claims Act;

(ii) the Company's growth and positive performance stemmed from illegal gifts and/or payments to healthcare practitioners and/or office staff in violation of the Anti-Kickback Statute, the [False Claims Act], and the [Centers for Medicate & Medicaid Services ("CMS") Marketing] Guidelines ("MCM Guidelines"), and unreported related party transactions;

(iii) only a small fraction of the healthcare providers who had contracted with the Company were actually using the Company's Clover Assistant software platform;

(iv) Clover's financial statements did not comply with [Generally Accepted Accounting Principles ("GAAP")] because they failed to disclose material agreements and transactions with related parties; and

(v) the Company's SEC filings failed to comply with ... Regulation S-K.

(Id. ¶ 3 (formatting altered).)

At least according to the defendants’ contemporary statements, the deal between Clover and SCH was the result of careful research and vetting on behalf of SCH and investors. During an October 6, 2020 television interview, Palihapitiya touted the "months of diligence and work" that had gone into the SCH/Clover merger. (Id. ¶ 120.) Similarly, on October 20, 2020, SCH filed an S-4 form with the SEC representing that SCH and Clover had discussed "typical due diligence" and that, "[f]rom August 25, 2020 to August 28, 2020," SCH, Clover, and their legal representatives "held a meeting via video teleconference to discuss certain preliminary healthcare regulatory and compliance due diligence matters, given the regulated nature of Clover's business." (Id. ¶ 122.) That filing further provided that, on August 27, 2020, SCH's legal counsel was "provided with access to a virtual data room of Clover and began conducting a preliminary legal due diligence review of Clover." (Id. )

However, on February 4, 2021—after SCH's successful acquisition of Clover and the combination of the two firms into a single business under the Clover name—a market research firm called Hindenburg Research released a report ("Hindenburg Report") that, according to the plaintiffs, brought the truth about Clover's flawed operations to light. (Id. ¶¶ 3, 20.) When news of the Hindenburg Report reached the market, the value of Clover stock fell by more than 12%, wiping out a substantial amount of value held by investors who had purchased their shares at prices set by the pre-Hindenburg Report market. (Id. ¶ 22.)

587 F.Supp.3d 650

This case arises from those losses and is supported by information from four confidential witnesses who worked for Clover, identified as CW1 through CW4, who purport to be able to corroborate much of the wrongdoing alleged in the Hindenburg Report. (Id. ¶¶ 44–47.)

B. Medicare Advantage and the Risk Assessment-Based Payment Model

In 1997, "Congress created ‘Medicare Part C,’ sometimes referred to as Medicare Advantage [‘MA’]. Under Part C, beneficiaries may choose to have the government pay their private insurance premiums rather than pay for their hospital care directly." Azar v. Allina Health Servs. , ––– U.S. ––––, 139 S. Ct. 1804, 1809, 204 L.Ed.2d 139 (2019). MA plans are offered by Medicare-approved private insurers and must comply with CMS rules. (Doc. No. 70 ¶ 50.) Over time, Part C has become an increasingly larger component of the overall Medicare system, with the U.S. Congressional Budget Office predicting that the share of Medicare beneficiaries enrolled in an MA plan will rise to 51% by 2030. Currently, of the 62 million Americans eligible for Medicare, about 24 million are in Medicare Advantage. (Id. ¶ 51.)

CMS funds Medicare Part C plans on a per-member-per-month "capitated" basis, in contrast to the traditional fee-for-service model it uses for Medicare Part B or the per-hospitalization payment structure used under Medicare Part A. A private company operating a CMS-approved Part C plan "receive[s] in advance a monthly lump sum from CMS for every beneficiary that [it] enroll[s], without regard to the services that the beneficiaries will actually receive." UnitedHealthcare Ins. Co. v. Becerra , 16 F.4th 867, 873 (D.C. Cir. 2021). The capitated monthly rate for each patient, however, is not necessarily the same. "CMS uses a model—called the CMS Hierarchical Condition Category, or CMS-HCC, risk-adjustment model"—that assigns each Part C beneficiary a "risk assessment score" based on a formula considering various "demographic characteristics" that are "predictive of differing costs of care." Id. at 874 (citing 42 U.S.C. § 1395w-23(a)(1)(C)(i) ). (See Doc...