In re Hanger Orthopedic Group, Inc. Sec. Lit.

• Decision Date: 28 February 2006
• Docket Number: No. 04-CV-2826 (FB)(RLM).,No. 04-CV-2585 (FB)(RLM).,No. 04-CV-2681 (FB)(RLM).,No. 04-CV-2736 (FB)(RLM).,04-CV-2585 (FB)(RLM).,04-CV-2681 (FB)(RLM).,04-CV-2736 (FB)(RLM).,04-CV-2826 (FB)(RLM).
• Citation: 418 F.Supp.2d 164
• Parties: In re HANGER ORTHOPEDIC GROUP, INC. SECURITIES LITIGATION.
• Court: U.S. District Court — Eastern District of New York

Page 164

418 F.Supp.2d 164

In re HANGER ORTHOPEDIC GROUP, INC. SECURITIES LITIGATION.

No. 04-CV-2585 (FB)(RLM).

No. 04-CV-2681 (FB)(RLM).

No. 04-CV-2736 (FB)(RLM).

No. 04-CV-2826 (FB)(RLM).

United States District Court, E.D. New York.

February 28, 2006.

Samuel H. Rudman, Esq., David A. Rosenfeld, Esq., Mario Alba, Jr., Esq., Lerach, Coughlin, Stoia, Geller, Rudman & Robbins LLP, Melville, NY, Barry Weprin, Esq., Peter Sloane, Esq., Milberg, Weiss, Bershad & Schulman LLP, New York, NY, for the Plaintiffs.

Paul H. Dawes, Esq., Patrick E. Gibbs, Esq., Kalama M. Lui-Kwan, Esq., Latham

& Watkins LLP, Menlo Park, CA, Laurie B. Smilan, Esq., J. Christian Word, Esq., Gregory A. Harris, Esq., Latham & Watkins LLP, Reston, VA, for the Defendants.

MEMORANDUM AND ORDER

BLOCK, Senior District Judge.

In this putative class action, plaintiffs allege that defendant Hanger Orthopedic Group, Inc. ("Hanger") and certain of its officers and directors (collectively, "the individual defendants") violated sections 10(b) and 20(a) of the Securities Exchange Act of 1934 ("the '34 Act"), 15 U.S.C. §§ 78j(b) & 78t(a), and Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder. All defendants move, pursuant to 28 U.S.C. § 1404(a), to transfer the action to the District of Maryland. For the following reasons, the motion is granted.

BACKGROUND

A. Plaintiffs' Claims¹

This action consists of four putative class actions against Hanger and the three individual defendants: Ivan R. Sabel ("Sabel"), Hanger's Chief Executive Officer and Chairman of its Board of Directors; George E. McHenry ("McHenry"), Hanger's Chief Financial Officer and Executive Vice President; and Thomas F. Kirk ("Kirk"), Hanger's President, Chief Operating Officer and one of its Directors. By order dated November 1, 2004, Magistrate Judge Mann consolidated the actions and named Joe Campagnulo, Jr., Les Bronte, Twist Partners, LLP, Ed and Aileen Stiehle, and Thomas Pyles as lead plaintiffs. Although the class has not yet been certified, the lead plaintiffs seek to represent "all those who purchased the securities of Hanger between March 13, 2002 and September 15, 2004 inclusive and who were damaged thereby." CAC ¶ 34.

Hanger is "the world's premier provider of orthotic and prosthetic patientcare services," CAC ¶ 1, meaning, in lay terms, that it designs, makes and fits braces, artificial limbs and other like devices. It owns and operates over 580 patient-care facilities throughout the United States. As with many providers in the health-care industry, its revenues depend largely on payments from either private insurers or government programs such as Medicaid, Medicare and the Veterans Administration.

The CAC alleges that, to inflate its revenues, Hanger engaged in "systematic and flagrant billing fraud at its patient care facilities." CAC ¶ 51. The CAC details the alleged billing fraud (which included forging prescriptions, submitting improper billing codes, back-dating billing documents and billing insurers for items not provided) at a Hanger facility in West Hempstead, New York; it also alleges that similar fraud took place at Hanger facilities in Brooklyn, North Carolina, Colorado, Pennsylvania and California. The CAC alleges that Hanger and the individual defendants "were aware of, or recklessly disregarded," these fraudulent billing practices. CAC ¶ 61.

In essence, the lead plaintiffs claim that defendants' knowledge or reckless disregard of the widespread billing fraud rendered certain statements in Hanger's financial statements and press releases false or misleading. The allegedly false or misleading statements relate principally to (1) statements regarding Hanger's revenues and (2) assurances that the company took steps to prevent billing fraud and ensure compliance with federal, state and local regulations.

B. Facts Relevant to Motion to Transfer²

Hanger is headquartered in Bethesda, Maryland. Kirk and McHenry reside in Maryland, while Sabel resides nearby in Washington, D.C.; all three work out of the company's Bethesda headquarters. According to plaintiffs' counsel, most of the lead plaintiffs reside in Florida; none resides in New York.

All of the financial statements and press releases at issue were prepared in Bethesda by Hanger personnel at the company's headquarters. The financial information contained in those documents was based on the work of Hanger's accounting staff, all of whom are located at the company's headquarters. In addition, most of Hanger's internal auditors and executive managers are either located in Maryland "or frequently available there." McHenry Declaration ¶ 8. In addition, the "vast majority" of the documents on which the statements were based are kept in Maryland, as are Hanger's e-mail servers, electronic databases and central accounting system (known as "OPS"). Id. ¶¶ 6-7.

Defendants do not dispute that documents related to the alleged billing fraud are located at the individual facilities, including the West Hempstead facility. In addition, the lead plaintiffs have identified as "key witnesses" Kendall McDaniel, the former office administrator at the West Hempstead facility, who "blew the whistle" on the fraud there; Jerry Ritieni, the former manager of the West Hempstead facility; David Zwicker, the former regional manager of Hanger's New York region; and Michelle Hickman, an office administrator at Hanger's Brooklyn facility. The lead plaintiffs also allude to "others at the West Hempstead and other facilities in New York State that participated in the [billing] fraud." Pls' Mem. of Law at 6.

Defendants aver, and plaintiffs do not dispute, that the West Hempstead facility is only one of almost 600 Hanger facilities nationwide and, during the relevant time period, accounted for "less than 0.5% of the Company's net sales." Lui-Kwan Declaration, Ex. 8. At oral argument, plaintiffs' counsel conceded that to make out their securities-fraud claims, plaintiffs must demonstrate billing fraud on a wider scale; therefore, they intend to offer evidence of billing fraud at other Hanger facilities nationwide. As noted, the CAC alleges that, in addition to New York, such fraud occurred in North Carolina, Colorado, Pennsylvania and California.

ANALYSIS

A. General Principles

"For the convenience of parties and witnesses, in the interest of justice, a district court may transfer any civil action to any other district or division where it might have been brought." 28 U.S.C. § 1404(a). "[M]otions for transfer lie within the broad discretion of the courts and are determined upon notions of convenience and fairness on a case-by-case basis." Publicker Indus., Inc. v. United States (In re Cuyahoga Equip. Corp.), 980 F.2d 110, 117 (2d Cir.1992). Although the Second Circuit has not catalogued all the considerations that should inform the exercise of that discretion, district courts in the circuit "generally consider several factors, including: (1) the convenience of witnesses, (2) the convenience of the parties, (3) the locus of operative facts, (4) the availability of process to compel the attendance of unwilling witnesses, (5) the location of relevant documents and the relative ease of access to sources of proof, (6) the relative means of the parties, (7) the forum's familiarity with the governing law, (8) the weight accorded the plaintiff's choice of forum, and (9) trial efficiency and the interest of justice, based on the totality of the circumstances." Dealtime. com v. McNulty, 123 F.Supp.2d 750, 755 (S.D.N.Y.2000) (collecting cases).³ The party seeking transfer has the burden of making a "clear-cut showing" that transfer is warranted in light of these factors. O'Hopp v. ContiFinancial Corp., 88 F.Supp.2d 31, 34-35 (E.D.N.Y.2000) (citing, inter alia, Factors Etc., Inc. v. Pro Arts, Inc., 579 F.2d 215 (2d Cir.1978)).

There is no per se rule requiring or presumptively favoring the transfer of a securities-fraud action to the district where the issuer is headquartered. See In re Geopharma, Inc. Sec. Litig., 2005 WL 1123883, at *1 (S.D.N.Y. May 11, 2005). Nevertheless, as a practical matter, such transfers are routine. See, e.g., O'Hopp, 88 F.Supp.2d at 38; Blass, 2001 WL 301137, at *5-6; Langley Partners, L.P. v. Tripath Tech., Inc., 2005 WL 2482527 (S.D.N.Y. Oct.6, 2005); In re Stillwater Mining Co. Sec. Litig., 2003 WL 21087953 (S.D.N.Y. May 12, 2003); Greenwood Partners v. New Frontier Media, Inc., 2000 WL 278086 (S.D.N.Y. Mar.14, 2000); Rubinstein v. Skyteller, Inc., 48 F.Supp.2d 315 (S.D.N.Y.1999); In re Nematron Corp. Sec. Litig., 30 F.Supp.2d 397 (S.D.N.Y. 1998); IBJ Schroder Bank & Trust Co. v. Mellon Bank, N.A., 730 F.Supp. 1278 (S.D.N.Y.1990). Since motions to transfer are decided on a case-by-case basis, there is no single explanation for this result; rather, as explained below, several factors usually lean in favor of transfer.

B. Application of the Factors

1. Convenience of Witnesses

The convenience of non-party witnesses is usually the most important factor to consider in deciding whether to depart from the plaintiff's choice of forum. See Viacom Int'l, Inc. v. Melvin Simon Prods., 774 F.Supp. 858, 868 (S.D.N.Y. 1991). Defendants have identified a number of non-party witnesses—including Hanger's non-party officers and management, non-party directors, accounting and billing employees, and internal and outside auditors—who are located in or near the District of Maryland. Maryland would, of course, be the more convenient forum for these witnesses.

Plaintiffs, in turn, have identified as their key non-party witnesses former and current Hanger employees at the West Hempstead facility and elsewhere in New York; New York would obviously be the more convenient forum for these witnesses. As noted, however, plaintiffs' allegations of billing fraud are not limited to New York. The CAC alleges that the fraud was nationwide in scope, occurring at facilities in North Carolina, Colorado, Pennsylvania and California; at oral...