Med. Props. Tr. v. Viceroy Research

• Docket Number: 2:23-cv-00408-RDP
• Decision Date: 30 June 2023
• Parties: MEDICAL PROPERTIES TRUST, INC., Plaintiff, v. VICEROY RESEARCH, et al., Defendants.
• Court: U.S. District Court — Northern District of Alabama

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MEDICAL PROPERTIES TRUST, INC., Plaintiff, v. VICEROY RESEARCH, et al., Defendants.

No. 2:23-cv-00408-RDP

United States District Court, N.D. Alabama, Southern Division

June 30, 2023

AMENDED MEMORANDUM OPINION

R. DAVID PROCTOR, UNITED STATES DISTRICT JUDGE

I. Introduction

This action is before the court on Defendants Viceroy Research (“Viceroy”) and Fraser Perring's 12(b)(2) Motion to Dismiss (Doc. # 16) and 12(b)(6) Motion to Dismiss. (Doc. # 17). Defendants' Motions have been fully briefed (Docs. # 16, 34, 40 and 17, 33, 39, respectively) and are ripe for review. After careful review, and for the reasons discussed below, Defendants' 12(b)(2) Motion (Doc. # 16) and 12(b)(6) Motion (Doc. # 17) are due to be denied.

II. Background

This case arises out of Defendants Viceroy, Perring, Gabriel Bernarde, and Aidan Lau's (collectively “Defendants” or “Individual Defendants” when referencing Perring, Bernarde, and Lau) alleged efforts to manipulate Plaintiff Medical Properties Trust's (“Plaintiff” or “MPT”) stock price in order to profit on its short position. On March 30, 2023, Plaintiff filed this action alleging defamation and other state law claims.

A. MPT's Business Practices

Plaintiff MPT is a real estate investment trust (“REIT”) that acquires, develops, and invests in healthcare facilities. (Doc. # 1 ¶ 10). MPT has long been one of Alabama's largest and most prominent publicly traded companies, and its largest REIT. (Id. ¶ 1). MPT acquires and develops healthcare facilities to lease out to operating companies under long-term net leases, which require tenants to bear most of the costs associated with the properties. (Id. ¶ 20). A typical lease provides for a term of at least 15 years with a series of short renewal options. (Id. ¶ 22). MPT's business model is centered around steady, long-term returns for its investors. (Id. ¶ 24). To that end, MPT underwrites real estate investments that are attractive to hospital operators, so that if one operator must break its lease, a replacement operator will soon assume the lease. (Id.).

Among the characteristics MPT looks for in evaluating hospital real estate are: (1) good physical quality reflecting a history of maintenance and improvements; (2) location in a strong market, with measurable patient demand growth, sustainable reimbursement sources, and features that attract a dedicated workforce; (3) a geographic environment in which the operator is likely to hold a strong competitive position; and (4) facility-level operations with strong EBITDARM (earnings before interest, taxes, depreciation, amortization, rent, and management fees) coverage of lease payments.

(Id.). MPT reasons that a medical facility meeting these criteria is likely to reflect a true “community need,” meaning its success is not dependent on a given operator. (Id.).

For example, in 2016 and 2018, MPT purchased nine Massachusetts hospitals from hospital operator Steward Health Care System for approximately $1.3 billion. (Id. ¶ 25). In 2022, private equity firm Macquarie Asset Management entered into a joint venture with MPT for eight of those Massachusetts hospitals, which had a total valuation of about $1.7 billion, an increase in value over the purchase price of some $400 million. In the interim, those hospitals had yielded about $475 million in income for MPT. (Id.). This is MPT's bread and butter: invest in an attractive facility, generate income from that facility, then sell the facility for a profit.

MPT currently has investments in 444 facilities, the vast majority of which are leased to 55 tenants. (Id. ¶ 26). Its revenues exceeded $1.5 billion in 2022, making it “one of the largest REITS in the healthcare sector and among the largest publicly traded companies in Alabama, where the majority of its employees are located.” (Id.). MPT has retained PricewaterhouseCoopers (“PwC”) as its independent auditor since 2008. (Id. ¶ 28). Every year since 2008, “PwC has issued an unqualified opinion that MPT's financial statements ‘present fairly, in all material respects, the financial position of' the Company and ‘the results of its operations and its cash flows' for the relevant periods in conformity with generally accepted accounting principles.” (Id. ¶ 29).

B. Short-Selling and Short-and-Distort Campaigns

Taking a short position involves a bet that a stock's price will fall. A trader takes a short position by “selling] a security first with the intention of repurchasing later at a lower price.” James Chen, Short Position: Meaning, Overview, and FAQs, Investopedia (Sept. 12, 2022) https://www.investopedia.com/terms/s/short.asp. Because a stock's price can never fall below $0, the short-seller's potential profit is capped. But, because there is no limit to how high a stock price may rise, short sellers “face unlimited downside risk.” (See id.).

Because the risk inherent in short selling is so high, some short sellers engage in “short-and-distort” campaigns. (Doc. # 1 ¶ 31). That is, they “publish[] ... or otherwise promot[e] false and misleading information about the companies they bet against.” (Id.). Doing so allows short sellers to “drive down those companies' stock prices and generate profit for themselves.” (Id.). The Securities and Exchange Commission has recently proposed a rule designed in part to combat these illegal short-and-distort campaigns. 87 F.R. 14950, 14991-94 (Mar. 16, 2022) (“[I]f short and distort type behavior were to be suspected, then the Commission would be more likely to identify individuals with large short positions and could thus quickly focus any inquiries on entities in an economic position to potentially profit from manipulation.”).

C. Viceroy and the Individual Defendants' Accusations Against MPT

Defendant Viceroy is a financial research firm founded by Fraser Perring, a citizen of the United Kingdom, along with Gabriel Bernarde and Aidan Lau, both Australian citizens. (Id. ¶ 11). On January 26, 2023, Viceroy published a report titled “Medical Properties (dis)Trust,” in which it noted that it had a short position in MPT. (Doc. # 1 ¶ 41). That same day, Viceroy and the Individual Defendants began using their Twitter accounts to promote their report and otherwise criticize MPT. (Id. ¶ 42). Defendants went on to publish 13 more reports on MPT, purportedly consisting of research on MPT's business practices. (Id.). In each of these reports, and in a February 2, 2023 letter Defendants published to Twitter, Viceroy claims to have analyzed and found wanting “the accounting treatment MPT has applied in its financial statements.” (Id. ¶ 43). MPT identifies four categories of misrepresentations that it asserts subject Defendants to liability: (1) false accusations of “round-tripping;” (2) false characterizations of MPT's executive compensation formula; (3) false accusations of lying about dealings with operator-tenant Steward; and (4) false accusations of fraud and criminal activity. (Id. ¶ 45).

1. Round-Tripping

Round-tripping occurs when a party transacts with a counterparty to provide funds with the understanding that the counterparty will later return those funds in a second transaction. (Id. ¶ 46). The original party then records the returned funds as revenue. (Id.). For example, A agrees to sell B a pencil for $1. At the outset, both parties agree that A will later purchase the same pencil from B for the same price at which A sold it. When A re-purchases the pencil from B, B records a $1 revenue infusion despite no additional revenue going into its coffers.

Plaintiff provides several examples of Defendants accusing it of round-tripping. (Id. at ¶¶ 47-54). Among these allegedly “false, misleading, and defamatory” statements were accusations that: (1) MPT's rent was round tripped by fake purchases of massively inflated assets; (2) MPT has engaged in billions of dollars of uncommercial sale-leaseback transactions; (3) MPT appeared to constantly overpay for fire sale assets by as much as 10x, “which in turn allow debt-crippled tenants to meet their financial rent obligations as and when they fall due in the short term;” and (4) MPT paid $27.5 million to build a hospital near Houston, Texas despite the total cost of development and market value being only $9.1 million. (Id.).

2. Executive Compensation

Viceroy also claimed that MPT executives profited under an executive compensation program that “encourage[d] an aggressive, acquire-at-any-cost policy which ultimately align[ed] with a revenue round-tripping model.” (Id. ¶ 55). Viceroy further claimed that, because acquisitions were a factor in its calculation, this compensation structure led MPT management to “consistently scrape[] the bottom of the barrel in its search for new properties and new tenants.” (Id.). MPT alleges that these statements are false, misleading, and defamatory because (1) after total acquisition value reaches a certain threshold (which was well surpassed in 2020 and 2021), executives receive no credit per new acquisition; and (2) poorly performing acquisitions negatively affect other compensation inputs. (Id. ¶ 56-57). So, any conceivable advantage an executive might receive from blindly acquiring unprofitable properties is negated by the harm such a strategy would do to the executive's bottom line.

3. Allegations of Concealment

MPT maintains an extensive business relationship with operator-tenant Steward Healthcare Systems, the largest private physician-led healthcare network in the United States. (Id. ¶ 58). MPT also has a direct equity stake in Steward of just under 10% and has made loans to Steward that MPT deemed beneficial. (Id.). Despite past success in its dealings with Steward, MPT informed its investors on earnings calls that it has sought to diversify its portfolio and...