Indiana State Dist. Council of Laborer v. Omnicare

• Decision Date: 21 October 2009
• Docket Number: No. 07-6379.,07-6379.
• Citation: 583 F.3d 935
• Parties: INDIANA STATE DISTRICT COUNCIL OF LABORERS AND HOD CARRIERS PENSION AND WELFARE FUND, On Behalf of Itself and All Others Similarly Situated, et al., Plaintiffs-Appellants, Alaska Electrical Pension Fund, On Behalf of Itself and All Others Similarly Situated, Intervenor-Appellant, v. OMNICARE, INC.; Joel F. Gemunder; David W. Froesel, Jr.; Cheryl D. Hodges; Edward L. Hutton; and Sandra E. Laney, Defendants-Appellees.
• Court: U.S. Court of Appeals — Sixth Circuit

583 F.3d 935

INDIANA STATE DISTRICT COUNCIL OF LABORERS AND HOD CARRIERS PENSION AND WELFARE FUND, On Behalf of Itself and All Others Similarly Situated, et al., Plaintiffs-Appellants Alaska Electrical Pension Fund, On Behalf of Itself and All Others Similarly Situated, Intervenor-Appellant, v. OMNICARE, INC.; Joel F. Gemunder; David W. Froesel, Jr.; Cheryl D. Hodges; Edward L. Hutton; and Sandra E. Laney, Defendants-Appellees.

No. 07-6379.

United States Court of Appeals, Sixth Circuit.

Argued: September 18, 2008.

Decided and Filed: October 21, 2009.

ARGUED:

Eric Alan Isaacson, Coughlin Stoia Geller Rudman & Robbins LLP, San Francisco, California, for Appellants. Harvey Kurzweil, Dewey & LeBoeuf LLP, New York, New York, for Appellees.

ON BRIEF:

Eric Alan Isaacson, Henry Rosen, Jennifer L. Gmitro, Shirley H. Huang, Coughlin Stoia Geller Rudman & Robbins LLP, San Francisco, California, Kevin L. Murphy, Graydon Head & Ritchey, LLP, Fort Mitchell, Kentucky, for Appellants. Harvey Kurzweil, William T. Conway III, Richard W. Reinthaler, James P. Smith III, Dewey & LeBoeuf LLP, New York, New York, John E. Schreiber, Dewey & LeBoeuf LLP, Los Angeles, California, Douglas R. Dennis, Stephen M. Gracey, Frost Brown Todd LLC, Cincinnati, Ohio, William T. Robinson III, Frost Brown Todd LLC, Florence, Kentucky, for Appellees.

Before: DAUGHTREY and GILMAN, Circuit Judges; MILLS, District Judge.^*

OPINION

RICHARD MILLS, District Judge.

Seizing on a few vague statements from management, the plaintiffs try to turn bad corporate news into a securities class action.

Because the Private Securities Litigation Reform Act ("PSLRA") forbids such alchemy, we generally affirm the district court's dismissal, although we reverse its disposition regarding the claims brought under the Securities Act of 1933, 15 U.S.C. § 77k.

I. BACKGROUND

A. General Information

Defendant Omnicare, Inc. is the nation's largest provider of pharmaceutical care for the elderly, handling medication distribution for nearly 1.5 million patients across most states and in Canada. Reflecting the size of its operations, Omnicare's pharmacy services generated $5.3 billion in net sales in 2005 alone.¹

The plaintiff class (Plaintiffs) consists of Omnicare investors who purchased securities between August 3, 2005, and July 27, 2006. The Laborers Council was selected as lead plaintiff under the PSLRA. See § 21D(a)(3)(B), 15 U.S.C. § 78u-4(a)(3)(B). It purchased Omnicare securities throughout December 2005 and January 2006, and sold all of them at the end of January 2006.

Also implicated in this case are several individual defendants. Three of these defendants are officers of Omnicare: CEO, President, and Director Joel Gemunder, CFO and Senior Vice President David Froesel, and Secretary and Senior Vice President Cheryl Hodges. The remaining individual defendants are board members: Chairman Edward Hutton and Director Sandra Laney.

Plaintiffs allege that the defendants committed fraud in violation of § 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78j, as well as Rule 10b-5, 17 C.F.R. 240.10b-5. Plaintiffs also allege liability for Gemunder, Froesel, and Hodges under § 20(a), 15 U.S.C. § 78t(a), and liability for all defendants under § 11 of the Securities Act of 1933 ("SA"), 15 U.S.C. § 77k.

The parties pull four sets of § 10(b) fraud claims out of Plaintiffs' sprawling and repetitive First Amended Consolidated Complaint. Briefly, these claims concern misleading statements or omissions relating to: (1) Medicare Part D preparedness, (2) a contract dispute with United Health Group (UHG), (3) violations of Generally Accepted Accounting Principles (GAAP), and (4) the legality of Omnicare's alleged drug recycling program and drug substitution program. The claim under § 11 also relates to the alleged GAAP violations. We summarize each set of claims in turn.

B. Medicare Part D Preparedness

In 2003, the Medicare Prescription Drug, Improvement and Modernization Act created Medicare Part D, a voluntary prescription drug benefit program for seniors. Under this program, private entities (typically insurance providers) contract with the Centers for Medicare and Medicaid Services ("CMS"), a division of the Department of Health, to offer approved prescription drug plans ("PDP"). Pharmacies such as Omnicare contract with the PDP providers to supply the enrollees with the required prescription drugs. The PDP providers are compensated through a combination of enrollee premiums and reimbursement for the drugs provided (at an 8% mark up) from the CMS.

In late 2005, Omnicare was preparing for the industry's transition to Medicare Part D on January 1, 2006. Plaintiffs aver that Omnicare, on two separate dates, misled the public about its readiness for this transition on several occasions.

First, in an August 3, 2005, press release, Gemunder stated:

There are still many specifics yet to be determined through sub-regulatory guidance by CMS, as well as the approval of specific PDPs by CMS.... All things considered, we see nothing materially adverse about the regulations at this time and believe we are well-positioned to add value under the new Medicare Part D benefit. We will monitor developments and continue to ready our company as the year progresses.

During a conference call on the same day, Gemunder elaborated:

We have been extremely busy in the last couple of months, working with potential PDP's to familiarize them about the specialized services required and the nuances of providing pharmacy services to long-term care residents and negotiating agreements for our participation in their pharmacy networks to serve the long-term care market.... [W]e're pretty confident that we're not going to be hurt by moving into the Part D structure, vis-a-vis where we are now.

Second, Plaintiffs allege that Gemunder made further misleading statements on November 2, 2005. In a press release, Gemunder stated:

"We remain highly focused on the upcoming implementation of the Medicare Drug Benefit. While bringing about sweeping change in our industry, we believe we are well-positioned to add value under the new Medicare Part D benefit.... As the enrollment process begins, we are busy educating our long-term care facility clients and their residents on the availability and implementation of the new drug benefit...."

Gemunder reiterated these points in a conference call that same day:

"So we have been focused this quarter on training and on educating our employees, and seeing to the operational issues, related to the implementation of the new drug benefit. And with the enrollment period beginning November 15th, we have also been heavily been [sic] engaged in educating our long-term care facility clients and their residents, on the availability of the new benefit, as well as working with them on the implementation process...."

Plaintiffs complain that these statements, and others, were misleading because Omnicare failed to sufficiently monitor developments (including performance of a cross-check of their databases against a national database) and neglected to properly educate the drug-plan suppliers on pharmacy care practices. The result was a rocky transition to Part D, costing approximately $9.8 million in overtime and related expenses.

C. UHG Contract Dispute

Next, Plaintiffs assert that Omnicare's positive earnings growth predictions were misleading in light of an undisclosed contract dispute with UHG, a major PDP sponsor. On February 23, 2006, Gemunder commented on the fourth-quarter 2005 results by stating that "as we enter our 25th year as a public company, Omnicare's revenue and earnings growth outlook remains positive given our strong underlying fundamentals and our proven growth strategy." In an April 27, 2006, statement regarding Omnicare's first quarter 2006 results, Gemunder repeated that "Omnicare's revenue and earnings growth outlook remains positive given our strong underlying fundamentals and our proven growth strategy."

Plaintiffs argue that these statements were false and misleading because Gemunder did not disclose a developing dispute with UHG. UHG, a drug-plan supplier responsible for about a third of Omnicare's Part D business, had recently completed a merger with PacifiCare Health Services, Inc. PacifiCare also had a contract with Omnicare, but it was less profitable. Some time in February 2006, UHG informed Omnicare that, as a result of the merger, it would be withdrawing from its original contract and switching to the less favorable PacifiCare agreement. This change reduced Omnicare's profits for the second quarter of 2006.²

Plaintiffs claim that Gemunder's growth predictions were misleading absent a disclosure of this development. The contract dispute was not revealed until May 18, 2006, when Omnicare filed suit against UHG.³ In response to the filing, Omnicare's stock dropped from $54.98 to $50.57.

D. GAAP Violations

From the second quarter of 2005, to the first quarter of 2006, Omnicare reported large, sometimes record, revenues. Commenting on the second quarter revenues, Gemunder stated that "[o]ur sales once again hit record highs, and our operating margins improved on a sequential basis, reflecting the growing benefits of our cost reduction and productivity enhancement initiatives." Hodges added that revenue per patient was up over prior years. Similar sentiments were expressed in relation to later quarters and filings certified by Gemunder and Froesel also reflected this revenue growth.

Plaintiffs allege that these statements were misleading because Omnicare's revenue numbers for 2005 and early 2006 were inflated by non-compliance with GAAP. They allege: (1) improper revenue recognition, (2) overvaluation and improper recognition of receivables, (3) overvaluation of inventories, and (4) the failure to establish, in a timely manner, litigation settlement reserves with respect to several government investigations (discussed below).

E. False...