Helwig v. Vencor, Inc.

• Decision Date: 06 December 2000
• Docket Number: No. 99-5153,99-5153
• Parties: (6th Cir. 2001) A. Carl Helwig, on Behalf of Himself and All Others Similarly Situated; Gary Barnes; Meredith Wilson Brown; Robert Brown; S. Kay Lutes; Sybil R. Meisel; Barbara E. Shuster, Plaintiffs-Appellants, v. Vencor, Inc.; W. Bruce Lunsford; W. Earl Reed, III; Michael R. Barr; Thomas T. Ladt; Jill L. Force; James H. Gillenwater, Jr., Defendants-Appellees. Argued:
• Court: U.S. Court of Appeals — Sixth Circuit

Page 540

251 F.3d 540 (6th Cir. 2001)

A. Carl Helwig, on Behalf of Himself and All Others Similarly Situated; Gary Barnes; Meredith Wilson Brown; Robert Brown; S. Kay Lutes; Sybil R. Meisel; Barbara E. Shuster, Plaintiffs-Appellants, v. Vencor, Inc.; W. Bruce Lunsford; W. Earl Reed, III; Michael R. Barr; Thomas T. Ladt; Jill L. Force; James H. Gillenwater, Jr., Defendants-Appellees.

No. 99-5153

UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT

Argued: December 6, 2000

Decided and Filed: May 31, 2001

Appeal from the United States District Court for the Western District of Kentucky at Louisville, No. 97-00835, Charles R. Simpson, III, Chief District Judge. [Copyrighted Material Omitted]

[Copyrighted Material Omitted]

[Copyrighted Material Omitted] James F. Milliman, Thomas P. O'Brien, ILL, Charles G. Middleton, III, MIDDLETON & REUTLINGER, Louisville, Kentucky, Kenneth J. Vianale, MILBERG, WEISS, BERSHAD, HYNES & LERACH, Boca Raton, Florida, David Kessler, SCHIFFRIN & BARROWAY, Bala Cynwyd, Pennsylvania, Arthur R. Miller, HARVARD LAW SCHOOL, Cambridge, Massachusetts, for Appellants.

David B. Hennes, Gregory P. Joseph, Kirsa Phillips, Rachel S. Fleishman, FRIED, FRANK, HARRIS, SHRIVER & JACOBSON, New York, New York, David B. Tachau, TACHAU, MADDOX, HOVIOUS & DICKENS, Louisville, Kentucky, for Appellees. J

Jacob H. Stillman, Luis DeLaTorre, Eric Summergrad, U.S. SECURITIES AND EXCHANGE, Washington, D.C., for Amicus Curiae.

Before: MARTIN, Chief Judge; MERRITT, KENNEDY, BOGGS, NORRIS, SUHRHEINRICH, SILER, BATCHELDER, DAUGHTREY, MOORE, COLE, CLAY, and GILMAN, Circuit Judges.

MERRITT, J., delivered the opinion of the court, in which MARTIN, C. J., DAUGHTREY, MOORE, COLE, CLAY, and GILMAN, JJ., joined. KENNEDY, J. (pp. 42-52), delivered a separate dissenting opinion, with BOGGS, NORRIS, SUHRHEINRICH, SILER, and BATCHELDER, JJ., joining in Judge KENNEDY's dissent.

OPINION

MERRITT, Circuit Judge.

The complaint in this securities class action features allegations of insider trading, fraudulent omissions, and inflated stock prices punctured by bad news in the health care industry. The principal issues on appeal arise under the new pleadings standard created by the Private Securities Litigation Reform Act of 1995. As often is the case in suits for securities fraud, we must deal with controverted inferences of knowledge and intent to defraud from facts that give rise to more than one interpretation. How to steer a course between indulging strike suits and predatory allegations on the one hand and deterring meritorious claims on the other: This has been the work of Congress and a number of our sister circuits. The fruit of their efforts has been a statute containing general language at a high level of abstraction, an ambiguous legislative history, and a triparted split among the circuit courts. We conclude that plaintiffs here have stated a claim for securities fraud by creating--in the words of the statute--a "strong inference" that defendants projected financial well-being at a time when they had actual knowledge that their statements were false or misleading, while knowingly omitting material facts that would have tempered their optimism. Accordingly, the judgment of the district court will be REVERSED and the case REMANDED for further proceedings.

An outline of our discussion of the issues is as follows:

I.Facts

II.The Private Securities Litigation Reform Act

A.The Safe Harbor

B.The Pleading Standard III.Plaintiffs' Allegations Concerning the Effect of the Balanced Budget Act

A.Vencor's Forward-Looking Statements

1.Materiality

2.Actual Knowledge of Misleading or False Nature

3.Not Identified as Forward-Looking / Absence of Meaningful Cautionary Statements

B.Sufficiency of Plaintiffs' Complaint

C.Response to the Dissent

IV.Other Claims

A.Vencor's Acquisition of TheraTx

B.Vencor's Acquisition of Transitional Hospitals Corporation

C.Vencor's Proposed Sale of Behavioral Healthcare Corporation

V.Conclusion

I. FACTS

The factual allegations of this case are more fully described in section III of the opinion after a discussion of the pleading standard to be applied under the new Act. We will recite only the most salient details here. At the time of the events in suit, defendant Vencor, a company then traded on the New York Stock Exchange, was said to be the largest full-service long-term health care provider in the United States, focusing on hospital and nursing services. Six of its directors are also named as defendants. Plaintiffs are a class of investors in Vencor. They allege a number of misstatements and material omissions by Vencor calculated to artificially balloon stock prices and defraud purchasers. A divided panel of this court concluded that plaintiffs failed to state a claim. Helwig v. Vencor, Inc., 210 F.3d 612 (6th Cir. 2000). We granted plaintiffs' petition for a rehearing en banc. Helwig v. Vencor, Inc., 222 F.3d 268 (6th Cir. 2000). Because this case is, at root, about sufficiency of pleading, we will examine each of plaintiffs' contentions in turn.

1. The Impact of the Balanced Budget Act--On February 6, 1997, President Clinton proposed the Balanced Budget Act (the "Budget Act"), which featured several Medicare provisions that would substantially affect the health care industry. Separate bills passed the House and Senate on June 25, 1997. This necessitated a conference report, which was filed on July 30. President Clinton signed the bill on August 5. See Balanced Budget Act of 1997, Pub. L. No. 105-33 (1997).

During this half-year of legislative deliberation, the proposed act alarmed sectors of the health care industry because it changed Medicare reimbursement and reduced incentive payments for hospitals that kept actual costs below federal targets. Because Vencor derived significant revenue from Medicare, it too was concerned about several aspects of the proposed act and received regular updates from its lobbyists in Washington, D.C. Plaintiffs claim that the company undertook an analysis of the proposed act as early as April 1997. According to plaintiffs, these cost analyses culminated in July 1997 when Thomas Schumann, vice president and director of Vencor's reimbursement department, circulated an internal memorandum detailing the potential impact of the legislation.

In the meantime--from at least February 10, 1997, until October 21, 1997--defendants maintained that they were "comfortable" with projections of fourth-quarter earnings of $0.59 to $0.64 per share and yearly returns between $2.10 to $2.20 for 1997 and $2.60 to $2.65 for 1998. Such sanguine statements led market analysts to recommend Vencor's stock as a "buy." In its 1996 Form 10-K, filed March 27 1997, the company did acknowledge the looming Budget Act:

[T]he Company cannot predict the content of any healthcare or budget reform legislation which may be proposed in Congress or in state legislatures in the future, and whether such legislation, if any, will be adopted. Accordingly, the Company is unable to assess the effect of any such legislation on its business. There can be no assurance that any such legislation will not have a material adverse impact on the Company's future growth, revenues and income.

Other more cursory warnings later appeared in Vencor's first- and second-quarter 10-Q forms, filed April 23 and July 25 respectively.

On October 22, 1997, Vencor lowered its estimates of fourth-quarter earnings due to "management's recently completed analysis of the Balanced Budget Act of 1997." The stock price dropped from $42-5/8 per share to $30 per share, a nearly thirty percent decline. Soon after, the company announced that an anticipated sale of one of its divisions would not be completed. The stock price fell further to $23 per share. Plaintiffs allege that Vencor knew about the likely adverse impact of the Budget Act before its October announcement but nonetheless made false and misleading earnings statements to boost stock prices.

2. Defendants' Knowledge of the Effect of the Budget Act--In late June 1997, four months before Vencor publicly revealed how the Budget Act would affect its earnings, defendants Michael Barr, executive vice president and chief operating officer of Vencor, and James Gillenwater, senior vice president, met with employees of the newly acquired Transitional Hospitals Corporation. During this presentation, Barr gave the employees notice that they would be laid off in sixty days. Barr's explanation, according to plaintiffs, was that "there were tough times coming in the industry because of the likely cutbacks in Medicare" and that they "would have been laid off anyway because the proposed Medicare regulations were going to make it difficult for Vencor to make money and stay profitable." See Am. Compl. ¶ 72, J.A. 130.

This was nearly a month before Vencor filed its second-quarter 10-Q, in which defendants stated they could not predict whether Medicare reform proposals would be adopted by Congress "or if adopted, what effect, if any, such proposals would have on its business." Also during this time, from July to September 1997, defendant executives sold nearly $9.5 million in stock holdings. Defendant Earl Reed, executive vice president and chief financial officer of Vencor, alone realized more than $3 million in stock sales in September, a sum large enough to elicit inquiries from the financial media.

3. Vencor's Acquisition of TheraTx--On February 10, 1997, Vencor announced a "definitive merger agreement" with TheraTx, another provider specializing in rehabilitation care and occupational health. In a press release, Vencor's chief executive officer, Bruce Lunsford, explained that the acquisition would "be accretive to earnings based on projected synergies." As part of the stock purchase, however, plaintiffs allege that Vencor also acquired $25 million in bad debt and 26 poorly performing nursing homes. Though Lunsford stated that by July 24, 1997, "we successfully...