In re Cigna Corp. Securities Litigation

• Citation: 459 F.Supp.2d 338
• Decision Date: 18 August 2006
• Docket Number: Civil Action No. 02-8088.
• Parties: In re CIGNA CORP. SECURITIES LITIGATION.
• Court: United States District Courts. 3th Circuit. United States District Court (Eastern District of Pennsylvania)

459 F.Supp.2d 338

In re CIGNA CORP. SECURITIES LITIGATION.

Civil Action No. 02-8088.

United States District Court, E.D. Pennsylvania.

August 18, 2006.

Carole A. Broderick, Berger & Montague, P.C., Philadelphia, PA, for Pennsylvania State Employees Retirement System.

Alexander R. Sussman, David M. Morris, Fried Frank Harris Shriver & Jacobson LLP, New York City, John G. Harkins, Jr., Harkins Cunningham, Philadelphia, PA, for Cigna Corp., H. Edward Hanway and James G. Stewart.

Robert L. Ebby, Hangley Aronchick Segal and Pudlin, Philadelphia, PA, for Hewitt Associates LLC.

MEMORANDUM REGARDING ECONOMIC LOSS

BAYLSON, District Judge.

Defendants in this class action securities fraud case assert that the Lead Plaintiff, Pennsylvania Employees Retirement System ("SERS") will be unable to prove economic loss and loss causation, and have filed a Motion for Summary Judgment seeking to dismiss SERS's claims on that ground. In a nutshell, the facts show that SERS purchased, through investment advisors, large quantities of CIGNA common stock both before and during the alleged class damage period¹ (November 1, 2001 to October 24, 2002, inclusive), but also sold larger quantities of CIGNA stock, as the price was rising, during the damage period. Overall, comparing all CIGNA stock owned by SERS at the beginning of the class period and the sales made during the class period to the diminution in value which CIGNA stock suffered as a result of the decline in price as of the end of the damage period, SERS gained more than it lost. Thus, in purely economic terms and from a cumulative point of view, SERS did not suffer a loss on its investment in CIGNA stock. Defendants ask the Court to accept this simple concept and rule, as a matter of law, that SERS must be dismissed as a plaintiff in this case because it cannot recover damages.

The Court finds that, in the absence of an authoritative appellate precedent supporting Defendants position, existing principles of law for calculating damages in securities cases, as well as the fundamental Seventh Amendment constitutional right to have a jury determine damages, foreclose the possibility of summary judgment. However, because Defendants' contentions are grounded in a theory which a jury might find persuasive, the Court's ruling is without prejudice to further exploration of the parties' contentions at trial.

I. Background

This case has a long and complicated background which need not be repeated here. See In re Cigna Securities Litigation, 2005 WL 3536212 (E.D.Pa. Dec. 23, 2005). The Court will, however, briefly review the procedural history leading to the instant motion.

On July 29, 2005, SERS filed a Motion to Amend its Complaint and, on August 12, 2005, Defendants filed a Cross-Motion to Dismiss all of SERS's claims for lack of economic loss and loss causation, based primarily on the recent United States Supreme Court decision in Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336, 125 S.Ct. 1627, 161 L.Ed.2d 577 (2005). Following argument, the Court issued an Order on November 23, 2005 in which it: (1) allowed the Complaint to be amended to add paragraphs 247-250, which assert allegations under the category of "loss causation"; (2) agreed to consider the pending Defendants' Motion to Dismiss as a motion under F.R. Civ. P. 12(b)(6) to dismiss paragraphs 247-250; and (3) allowed the parties to file additional briefing on the issue of loss causation.

Concerning the Motion to Dismiss, Defendants acknowledged that, comparing specific CIGNA stock trades by SERS, there were some instances in which SERS sold some shares at prices lower than the price at which it bought the same shares. Defendants contended, however, that on an overall or cumulative basis — i.e., for all transactions during the damage period — SERS did not have a net loss in its trading in CIGNA stock, and thus, under Dura Pharmaceuticals, SERS could not sufficiently plead economic loss and loss causation. Stated slightly differently, Defendants asserted that, as a matter of common sense and realistic economic impact, the Court must look at the Lead Plaintiffs overall economic standing as of the end of the class period, rather than at particular, isolated individual transactions that occurred during the class period, to determine if there is a demonstrated economic loss.

Dura Pharmaceuticals specifically held that the fundamental requirements of the Private Securities Litigation Reform Act of 1995, 15 U.S.C. § 78u-4(b) ("PSLRA"), included pleading "economic loss, 15 U.S.C. § 78u-4(b)(4); and 'loss causation,' i.e., a causal connection between the material misrepresentation and the loss." 125 S.Ct. at 1631 (emphasis in original). The Supreme Court held an inflated purchase price "will not itself constitute or proximately cause the relevant economic loss," and explained that "any logical link between the inflated share purchase price and any later economic loss is not invariably strong. Shares are normally purchased with an eye toward a later sale. But if, say, the purchaser sells the shares quickly before the relevant truth begins to leak out, the misrepresentation will not have led to any loss." Id. at 1631.

After noting that there were substantial issues of fact raised by the parties, this Court stated that "although Dura Pharmaceuticals contains language that supports the Defendants' interpretation of the requirement of economic loss in the PSLRA, the Defendants' legal position as applied to the facts of this case may require an extension of Dura Pharmaceuticals that is not required by either Supreme Court or Third Circuit precedent." December 23, 2005 Mem. at 27. Accordingly, the Court concluded that, because the issues of economic loss and loss causation were so fundamental to the situation of SERS as the Lead Plaintiff, the Court would deny Defendants' Motion to Dismiss without prejudice and allow for expedited discovery and expert reports on that issue, after which either or both parties could bring a dispositive motion.²

Plaintiff filed the Revised Consolidated Amended Class Action Complaint on January 9, 2005 (Doc. No. 138). On February 7, 2006, CIGNA brought its second Motion to Dismiss. In an opinion dated March 24, 2006, the Court granted the motion in part and denied the motion in part. The Court directed SERS to file a new Revised Consolidated Amended Class Action Complaint ("the Complaint"), making the deletions specified in the Court's March 24 Memorandum and not making any additions. SERS filed the Complaint on March 30, 2006.³ Merits discovery has generally concluded as of August 18, 2006.

II. Summary of Relevant Facts, Expert Reports, and the Parties' Briefing

A. SERS's Trading in CIGNA Stock

The following background information is essentially undisputed. SERS managed its domestic equities portfolio by using twenty-three external investment managers. Each investment manager was charged with investing the funds allocated to it in accordance with parameters established by agreement with SERS, including performance measures appropriate to the investment manager. During the class period, SERS had positions in CIGNA shares in six different investment advisor accounts: Iridian, First Quadrant, Standish Mellon, Twin Capital, Martingale, and J.P. Morgan. Several of the investment managers (First Quadrant, Indian, and Martingale) engaged in only long transactions, one (Standish Mellon) engaged in only short selling, and the others had both long and short transactions. At any given time during the class period, as reflected by transaction records, one or more of the investment managers might be buying CIGNA stock, while others were selling, selling short, or purchasing to cover short sales. See Defs' and Pl's Statements of Disputed and Undisputed Facts at ¶¶ 12-28.

While there are some disputes about SERS's trading in CIGNA stock, many of those disputes are based upon the intermingling of factual contentions and legal arguments. One important dispute is over how to value SERS's CIGNA stock purchased before the start of the class period. The Court recognizes that there do remain some purely factual disputes about SERS's trading in CIGNA stock; however, both financial records and statements of the parties make it possible for the Court to make two basic factual determinations for the purposes of deciding this motion.

The first determination is that SERS sold more CIGNA stock during the class period than it bought during the class period. Much of the stock sold was owned at the beginning of the class period. Relevant financial records establish that SERS sold a total of 189,200 shares of CIGNA stock during the class period but purchased only 36,800 CIGNA shares during the same period. In total, therefore, during the class period, SERS sold 152,400 more shares than it purchased.⁴ See, inter alia, Defs' Mot. for Summ. J., Ex. 2 (SERS Transaction Report produced by Mark McGrath); id. at Ex. 3 (Certification of Harold Dunbar, former Chief Counsel of SERS); Declaration of Dr. Bruce Stangle at ¶ 7 and Ex. 1; Pl's Resp. Ex. A (Supplemental Declaration of Todd Albaugh). And, as noted above, SERS profited from those sales.

The second determination is that SERS has specifically identified 5,000 shares of Cigna stock purchased in its First Quadrant account during the class period and still held at the end of the class period. Defendants do not dispute the purchase but the record is not clear as to whether these shares are included in the Defendants' 36,800 number of shares purchased. In addition, SERS opened a 3,900 CIGNA share short position in its Standish Mellon account during the class period and maintained this short position until after the end of the class period. Therefore, at the very least, SERS had a net long position of 1,100 CIGNA shares purchased during the class period and held at the end of the class period. Accordingly, it is a correct statement that SERS held CIGNA shares on the close of...