In re Aetna Inc. Securities Litigation

• Decision Date: 02 February 1999
• Docket Number: No. Civ.A. 1219.,Civ.A. 1219.
• Citation: 34 F.Supp.2d 935
• Parties: In re AETNA INC. SECURITIES LITIGATION.
• Court: U.S. District Court — Eastern District of Pennsylvania

Page 935

34 F.Supp.2d 935

In re AETNA INC. SECURITIES LITIGATION.

No. Civ.A. 1219.

United States District Court, E.D. Pennsylvania.

February 2, 1999.

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MEMORANDUM

PADOVA, District Judge.

This case arises out of the acquisition by Aetna, Inc. ("Aetna") of U.S. Healthcare ("USHC") in a transaction first announced on April 1, 1996, consummated on July 19, 1996, and valued at $8.9 billion. Before the Court are two Motions to Dismiss Plaintiffs' Consolidated and Amended Class Action Complaint ("Amended Complaint"), one filed by Defendants Aetna, Ronald E. Compton ("Compton"), and Richard L. Huber ("Huber") and the other filed by Defendant Leonard Abramson ("Abramson").¹ For the reasons set forth below, the Court will grant in part and deny in part the Motion to Dismiss of Defendants Aetna, Compton, and Huber and will grant the Motion to Dismiss of Defendant Abramson.

I. INTRODUCTION

The action is brought on behalf of (1) all persons who bought on the open market the common stock of Aetna between March 6, 1997 and 7:00 am (EDT) on September 29, 1997, inclusive ("the class period") and (2) two subclasses of persons who purchased Aetna common stock contemporaneously with the sales of such stock by Defendants Abramson and Compton. Plaintiffs' claims arise under Section 10(b), Section 20(a), and Section 20A(a) of the Securities and Exchange Act of 1934 ("Exchange Act"), 15 U.S.C.A. §§ 78j(b), 78t(a), and 78t-1(a) (West 1997), and Rule 10b-5, promulgated thereunder, 17 C.F.R. § 240.10b-5 (1999).

The essence of Plaintiffs' case is that (1) Defendants falsely represented that Aetna was successfully integrating Aetna's operations with the operations of USHC following their merger and (2) Aetna issued false and misleading financial statements for the first and second quarters of 1997. In particular, Plaintiffs have alleged that after the merger of Aetna and USHC, the following problems associated with the integration of the operations of Aetna and USHC existed:

• Because the computer systems used by Aetna and USHC were incompatible, the conversion of Aetna's contracts and claims adjudication and reimbursement payment systems from its computer systems to USHC's more advanced system was plagued with difficulties (Am.Compl. at ¶¶ 54-56);

• In early 1997, tens of thousand of electronically filed claims were lost in what Aetna employees called a computerized black hole (Id. at ¶¶ 57-60);

• The integration of the Aetna and USHC computer systems was severely complicated by the fact that in the spring of 1997, Aetna changed patient identification numbers and reimbursement codes without alerting or giving new numbers and codes to provider billing personnel (Id. at ¶¶ 61-62);

• Consolidation of claims service centers and reduction of workforce compounded the computer systems' problems because Aetna had insufficient employees to handle the unpaid claims (Id. at ¶¶ 63-65); and

• Aetna experienced serious difficulties in negotiating pre-existing and new provider contracts on more favorable terms (Id. at ¶ 66).

Plaintiffs further allege that after concealing its integration and financial problems, Aetna announced, before the opening of the market on September 29, 1997, that its third quarter earnings would be 25% below analysts' estimates and that it would increase its medical claims reserves by $75-105 million because of problems associated with the merger. According to Plaintiffs, the price of Aetna's common stock fell that day as a result of Aetna's announcement and closed down $9.50 per share at $81.00 per share. Before the September 29 announcement, Defendant Abramson sold 1,350,000 shares of Aetna common stock for total proceeds of approximately $129,000,000, and Defendant Compton sold 90,000 shares of Aetna common stock for total proceeds of approximately $8,500,000.

Plaintiffs' Amended Complaint contains the following claims: First Claim (violation of Section 10(b) and Rule 10b-5 against all Defendants); Second Claim (violation of Section 20(a) against the individual Defendants); Third Claim (violation of Section 20A(a) against Defendant Abramson); and Fourth Claim (violation of Section 20A(a) against Defendant Compton).

II. LEGAL STANDARD

A claim may be dismissed under Rule 12(b)(6) of the Federal Rules of Civil Procedure only if the plaintiff can prove no set of facts in support of the claim that would entitle her to relief. ALA, Inc. v. CCAIR, Inc., 29 F.3d 855, 859 (3d Cir.1994). The reviewing court must consider only those facts alleged in the complaint and accept all of the allegations as true. Id.; see also Rocks v. Philadelphia, 868 F.2d 644, 645 (3d Cir.1989) (holding that in deciding a motion to dismiss for failure to state a claim, the court must "accept as true all allegations in the complaint and all reasonable inferences that can be drawn therefrom, and view them in the light most favorable to the nonmoving party").

III. DISCUSSION

A. Allegations Made on Information and Belief

The introductory paragraph of Plaintiffs' Amended Complaint reads as follows:

Plaintiffs, by and through their attorneys, allege the following upon information and belief, except as to those allegations concerning plaintiffs, which allegations are alleged upon personal knowledge. Plaintiffs' information and belief are based upon, among other things, the investigation made by plaintiffs' attorneys, which investigation included, without limitation: (a) review and analysis of filings made by Aetna, Inc. ("Aetna" or the "Company") with the Securities and Exchange Commission ("SEC"); (b) review and analysis of securities analysts' reports concerning Aetna; (c) review and analysis of press releases and other publications disseminated by defendants; and (d) investigation by plaintiffs' counsel of other sources of information regarding certain of the events described herein. Further facts relating to the securities violations alleged herein are exclusively within the control of defendants.

(Am.Compl. at 1.) By operation of this paragraph, all of the allegations in the Amended Complaint, except those specifically concerning the Plaintiffs, must be read with the prefatory phrase "upon information and belief."

In their Motion, Defendants argue that the Amended Complaint must be dismissed because it does not provide the specificity required by the Private Securities Litigation Reform Act of 1995 ("PSLRA"), 15 U.S.C.A. § 78u-4 (West 1997), regarding the foundation of their attorneys' allegations. (Defts.' Mot. at 13.)² In particular, Defendants maintain that Plaintiffs' failure to identify with any particularity the source of their beliefs warrants the dismissal of the Amended Complaint. The Court agrees.

Under the PSLRA, a complaint "shall 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, the complaint shall state with particularity all facts on which that belief is formed." 15 U.S.C. § 78u-4(b)(1). The court in In re Health Management Sys. Inc. Sec. Litig., No. 97 Civ. 1865, 1998 WL 283286, at *3 (S.D.N.Y. June 1, 1998), held that an introductory paragraph containing information and belief allegations, strikingly similarly to the one at issue here, did not satisfy the pleading requirements of the PSLRA. Plaintiffs' information and beliefs allegations, like those at issue in Health Management, provide little, if any, specificity about the foundation for their attorneys' allegations. In particular, Plaintiffs' allegations fail to indicate what Securities and Exchange Commission ("SEC") filings and analysts' reports on Aetna that Plaintiffs relied on. Moreover, Plaintiffs fail to identify what "other publications disseminated by defendants" and "other sources of information" were reviewed.

In reaching its decision that Plaintiffs' information and belief allegations are insufficient, the Court has reviewed the relevant legislative history. The Court finds that Congress intended to impose on plaintiffs in securities fraud cases a heightened standard of pleading allegations on information and belief, which can be satisfied by identifying the sources upon which such beliefs are based. In re Silicon Graphics, Inc. Securities Litig., 970 F.Supp. 746 (N.D.Cal.1997) (information and belief allegations that failed to identify the sources of the information did not satisfy the requirements of the PSLRA). As explained in Silicon Graphics,

The degree of specificity required by the [PSLRA] in cases pled on information of [sic] belief was the subject of some debate in Congress. Arguing against [the] requirement that plaintiffs state with particularity all facts on which their beliefs are formed, Representative Bryant expressed concern that

at the beginning of the case plaintiff would have to set forth "with specificity all information," they have to give all the information in advance that forms the basis for the allegations of the plaintiff, meaning any whistle-blower within a securities firm involved would have to be uncovered in the pleadings in the very, very beginning.

141 Cong.Rec. H2848 (Mar. 8, 1995). Representative Dingell agreed, noting that "you must literally, in your pleadings, include the names of confidential informants, employees, competitors, Government employees, members of the media, and others who have provided information leading to the filing of the case." 141 Cong.Rec. H2849 (Mar. 8, 1995). Despite these concerns, Congress rejected Rep. Bryant's proposed amendment, which would have permitted plaintiffs to plead simply facts that support their beliefs. See 141 Cong. Rec. H2848 (Mar. 8, 1995).

Because Congress does not intend sub silentio to enact statutory language that it has earlier discarded in favor of other language, the Court concludes that plaintiffs...