Del. Cnty. Emps. Ret. Sys. v. Adapthealth Corp.
| Decision Date | 09 June 2022 |
| Docket Number | CIVIL ACTION NO. 21-3382 |
| Citation | 606 F.Supp.3d 124 |
| Parties | DELAWARE COUNTY EMPLOYEES RETIREMENT SYSTEM, et al. v. ADAPTHEALTH CORP. f/k/a DFB Healthcare Acquisitions Corp., et al. |
| Court | U.S. District Court — Eastern District of Pennsylvania |
Danielle S. Myers, Douglas R. Britton, Michael Albert, Jennifer N. Caringal, Kevin A. Lavelle, Robbins Geller Rudman & Dowd LLP, San Diego, CA, Juan Carlos Sanchez, San Diego, CA, Andrew L. Zivitz, Helen Jane Bass, Naumon A. Amjed, Kessler Topaz Meltzer Check, LLP, Radnor, PA, for Delaware County Employees Retirement System, Bucks County Employees’ Retirement System.
Steven D. Costello, Saxton & Stump, LLC, Lancaster, PA, Todd G. Cosenza, Vincent P. Iannece, Willkie Farr & Gallagher LLP, New York, NY, Stephen J. Fleury, Jr., Saxton & Stump LLC, Malvern, PA, for AdaptHealth Corp., Luke McGee, Stephen P. Griggs, Jason Clemens, Frank J. Mullen, Richard Barasch, Joshua Parnes, Alan Quasha, Terence Connors, Dr. Susan Weaver, Dale Wolf, Bradley Coppens, David S. Williams, III.
Plaintiffs Delaware County Employees Retirement System and Bucks County Employees’ Retirement System bring this putative class action against defendant AdaptHealth Corp. and its individual corporate defendants1 pursuant to the Securities Act of 1933, 15 U.S.C. §§ 77a, et seq. ("Securities Act"), and the Securities Exchange Act of 1934, 15 U.S.C. §§ 78a, et seq. ("Exchange Act"). This action was filed on behalf of all persons who purchased or acquired AdaptHealth securities between the proposed class period of November 8, 2019 and July 16, 2021.
Before the court is the motion of defendants to dismiss the amended complaint pursuant to Rules 8, 9(b), and 12(b)(6) of the Federal Rules of Civil Procedure as well as under the Private Securities Litigation Reform Act ("PSLRA"), 15 U.S.C. § 78u-4.
When considering a motion to dismiss for failure to state a claim under Rule 12(b)(6), the court must accept as true all well-pleaded factual allegations in the complaint and draw all reasonable inferences in the light most favorable to the plaintiffs. See Phillips v. Cty. of Allegheny, 515 F.3d 224, 233 (3d Cir. 2008) ; Umland v. PLANCO Fin. Servs., Inc., 542 F.3d 59, 64 (3d Cir. 2008).
On a motion to dismiss under Rule 12(b)(6), the court may consider "allegations contained in the complaint, exhibits attached to the complaint and matters of public record." Pension Benefit Guar. Corp. v. White Consol. Indus., Inc., 998 F.2d 1192, 1196 (3d Cir. 1993) (citing 5A Charles Allen Wright & Arthur R. Miller, Federal Practice and Procedure § 1357 (2d ed. 1990) ). The court may also consider "matters incorporated by reference or integral to the claim, items subject to judicial notice, matters of public record, orders, [and] items appearing in the record of the case." Buck v. Hampton Twp. Sch. Dist., 452 F.3d 256, 260 (3d Cir. 2006) (citing 5B Charles Allen Wright & Arthur R. Miller, Federal Practice and Procedure § 1357 (3d ed. 2004) ).
Rule 8 requires that a pleading contain "a short and plain statement of the claim showing that the pleader is entitled to relief." Fed. R. Civ. P. 8(a)(2). As the Supreme Court has explained, a complaint need not include "detailed factual allegations," but it must state "more than labels and conclusions" and must provide factual allegations "enough to raise a right to belief above the speculative level." Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). Plaintiffs must "nudge[ ] their claims across the line from conceivable to plausible." Id. at 570, 127 S.Ct. 1955.
A plaintiff in a securities fraud action must satisfy the heightened pleading standards of the PSLRA, 15 U.S.C. § 78u-4. The plaintiff must "specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation ... is made on information and belief ... state with particularity all facts on which that belief is formed." 15 U.S.C. § 78u-4(b)(1). The complaint must also "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2)(A). These provisions require particularity similar to Rule 9 of the Federal Rules of Civil Procedure for claims based on fraud or mistake. As with Rule 9, for those allegations made on information and belief, "the complaint must not only state the allegations with factual particularity, but must also describe the sources of information with particularity, providing the who, what, when, where and how of the sources, as well as the who, what, when, where and how of the information those sources convey." Institutional Inv'rs Grp. v. Avaya, Inc., 564 F.3d 242, 253 (3d Cir. 2009).
To do so, the court must examine the complaint as well as any other documents incorporated by reference of which the court can take judicial notice. City of Edinburgh Council v. Pfizer, Inc., 754 F.3d 159, 166 (3d Cir. 2014).
For present purposes, the court accepts as true the following allegations set forth in the amended complaint. AdaptHealth is a home medical equipment business. Plaintiffs acquired AdaptHealth shares during the proposed class period of November 8, 2019 through July 16, 2021. Plaintiffs claim they acquired these shares at artificially inflated prices, including in a secondary offering in January 2021, due to the violations by defendants of federal securities laws.
Defendant Luke McGee was the Chief Executive Officer ("CEO") and later co-CEO of AdaptHealth until he was removed from office in June 2021. Defendant Stephen Griggs served as co-CEO from February 2021 through June 2021 and now serves as the sole CEO subsequent to McGee's removal. Defendant Jason Clemens has been Chief Financial Officer ("CFO") since August 2020. Defendant Frank Mullen was the Chief Accounting Officer ("CAO") in December 2020. Defendant Richard Barasch was Chairman and member of the Board of Directors in December 2020 while defendant Joshua Parnes was President and a member of the Board of Directors in December 2020. Defendants Alan Quasha, Terence Connors, Dr. Susan Weaver, Dale Wolf, Bradley Coppens, and David S. Williams III were also Directors in 2020.
On July 8, 2019, DFB Healthcare Acquisitions Corp. ("DFB") announced that it had entered into an agreement to merge with AdaptHealth.2 Following its merger with DFB, AdaptHealth began publicly trading on November 8, 2019.
Prior to its merger, AdaptHealth had acquired at least fifty-nine businesses between 2012 and 2019 under the direction of defendant Luke McGee, its CEO. In the three years prior to its merger with DFB, AdaptHealth had increased its revenue 200%, although projected revenue from organic growth was 6% to 8% each year. Organic growth relates to revenue growth from the company's existing businesses rather than revenue gained from acquiring new businesses.
In a press release announcing the merger, DFB highlighted AdaptHealth's impressive organic growth revenue as the key driver for the merger along with AdaptHealth's "seasoned team of industry and financial professionals, including ... McGee" as well as the president and CFO. The press release went on to state that AdaptHealth "believes it can add approximately $100 million of acquired revenue each year" and specifically credited McGee with building "one of the industry's leading [home medical equipment] providers" through capital deployment, customer engagement, and an effective operating model. It also explained that following the merger, AdaptHealth would "continue to focus on increasing net revenue and profitability, both organically and via accretive acquisitions."
In addition, on its Forms 10-Q filed with the Securities Exchange Commission ("SEC") throughout 2020, AdaptHealth stated that its
Plaintiffs in their amended complaint allege two grounds for violations of federal securities law by AdaptHealth and its officers and Directors. One is based on the undisclosed fact that McGee was the subject of criminal investigations and civil lawsuits. The other relates to how AdaptHealth reported its revenue and growth to investors.
At the time that AdaptHealth was merging with DFB, McGee was under investigation by the Danish authorities for a major tax scheme that defrauded Denmark and other European countries of billions of dollars. The scheme involved pension funds that submitted fraudulent applications for tax refunds to the Danish SKAT, the equivalent of the United States Internal Revenue Service. McGee owned North Channel Bank, a German entity, which agreed to pay a criminal fine of 110 million Danish Kroner in September 2019 for faking trades in exchange for tax reimbursements. Earlier, in May 2019, McGee had personally agreed to a settlement with the Danish authorities to repay 1.55 billion Danish Kroner in proceeds that he and two others had received from the tax scheme.
Then on November 19, 2019, the Kingdom of Denmark filed suit in the United States District Court for the Southern District of New York against hundreds of entities including 2321 Capital Pension Plan ("2321 Capital") and Lion Advisory Inc. Pension Plan ("Lion Advisory"), both of which are owned and controlled by McGee. This suit sought recovery of $120 million, close to $20 million of which was tied to 2321 Capital and Lion Advisory. While McGee was not personally named in this action, 2321 Capital was identified as involving a "sole participant" with a listed address in New York associated in public records with McGee. Lion Advisory was also listed with an address in New York associated in public records with McGee....
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