Morse v. McWhorter

• Decision Date: 28 July 2000
• Docket Number: No. 97-CV-0370.,97-CV-0370.
• Citation: 200 F.Supp.2d 853
• Parties: Sidney MORSE, et al. v. R. Clayton MCWHORTER, et al.
• Court: U.S. District Court — Middle District of Tennessee

200 F.Supp.2d 853

Sidney MORSE, et al. v. R. Clayton MCWHORTER, et al.

No. 97-CV-0370.

United States District Court, M.D. Tennessee, Nashville Division.

July 28, 2000.

Report and Recommendation Corrected as of July 13, 1998.

Order Denying Motion to Amend October 6, 2000.

COPYRIGHT MATERIAL OMITTED

Paul Kent Bramlett, Bramlett Law Offices, Nashville, TN, George Edward Barrett, Barrett, Johnston & Parsley, Nashville TN, Stuart D. Wechsler, Robert I. Harwood, Samuel K. Rosen, Daniella Quitt, Wechsler, Harwood, Halebian & Feffer, LLP, New York City, Scott W. Fisher, Noah Silverman, Bruce E. Gerstein, Barry S. Taus, Garwin, Bronzaft, Gerstein & Fisher, LLP, New York City, Louis R. Lucas, Lucas & Thompson, Memphis, TN, Karen L. Morris, Liam G. B. Murphy, Abraham Rappaport, Irving Morris, Wilmington, DE, for plaintiffs.

Steven Allen Riley, Bowen, Riley, Warnock & Jacobson, Nashville, TN, Paul H. Dawes, Latham & Watkins, Washington, DC, William J. Meeske, Latham & Watkins, Los Angeles, CA, for defendants.

John D. Kitch, Nashville, TN, David D. Aufhauser, Dennis M. Black, Williams & Connolly, Washington, DC, for Richard L. Scott.

James Galloway Thomas, Neal & Harwell, Nashville, TN, for David T. Vandewater.

MEMORANDUM

HIGGINS, District Judge.

By order (Docket Entry No. 101) entered February 10, 1998, this action was referred to the Magistrate Judge for consideration and submission of proposed findings of fact and recommendation for disposition. In his Report and Recommendation (filed July 1, 1998; Docket Entry No. 157), the Magistrate Judge recommended that the plaintiffs' motion (filed April 2, 1998; Docket Entry No. 131) to take judicial notice be denied; the motion (filed January 9, 1998; Docket Entry No. 90) to dismiss of defendant Richard L. Scott be granted; the motion (filed January 8, 1998; Docket Entry No. 75) to dismiss of defendant David T. Vanderwater be granted; the motion (filed January 8, 1998; Docket Entry No. 83) to dismiss of defendants Columbia/HCA HealthCare Corporation;¹ Thomas F. Frist, Jr., R. Clayton McWhorter, Carl E. Reichardt, Magdalena Averhoff, T. Michael Long, and Donald S. MacNaughton be granted, their motion (Docket Entry No. 83) to strike be denied as moot and their motion (Docket Entry No. 86) to take judicial notice of exhibits submitted in support of their motion to dismiss and strike be granted.

Before the Court are the plaintiffs' objections (filed July 7, 1998; Docket Entry No. 161) to the Report and Recommendation and motion for de novo determination; the defendants' responses (filed August 31, 1998; Docket Entry Nos. 165-167) and motions for de novo determination.

The Court has jurisdiction over this matter under 15 U.S.C. § 77(v) and 15 U.S.C. § 78aa.

For the reasons set forth below, the plaintiffs' objections to the Magistrate Judge's conclusions (Docket Entry No. 161) are sustained in part and overruled in part. Accordingly, the conclusions of the Report and Recommendation will be adopted as modified and the defendants' motions to dismiss will be granted.

I.

Members of the proposed class of plaintiffs were owners of common stock of defendant, Columbia/HCA HealthCare Corporation, who acquired the stock from April 9, 1994, to September 9, 1997. Columbia/HCA is a publicly owned corporation and is one of the largest healthcare providers in the United States. The individual defendants in this action, Drs. Frist and Averhoff, and Messrs. Scott, Vandewater, McWhorter, Long, MacNaughton and Reichardt, were officers and/or board members of Columbia/HCA during the proposed class period.

The plaintiffs claim that the defendants violated the following securities laws:

(1) Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, prohibiting fraudulent, material misstatements or omissions in connection with the sale or purchase of a security;

(2) Section 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78t(a), providing liability of controlling persons;

(3) Section 11 of the Securities Act of 1933, 15 U.S.C. § 77k, prohibiting material misstatements or omissions in registration statements;

(4) Section 12(2) of the Securities Act of 1933, 15 U.S.C. § 77l(2), providing for liability for making a securities offering "by means of a prospectus or oral communication, which includes an untrue statement of material fact or omits to state a material fact necessary in order to make the statements... not misleading"; and

(5) Section 14 of the Securities Exchange Act of 1934, 15 U.S.C. § 78n, prohibiting material misstatements or omissions in proxy statements.

The plaintiffs' claims arise out of statements, corporate reports and public filings that they claim are false or misleading. The plaintiffs contend that during the proposed class period, the defendants engaged in improper business practices which caused Columbia's revenues to be artificially inflated and either omitted or misrepresented this information to the plaintiffs in corporate statements, reports and filings.

In the motion (Docket Entry No. 83) to dismiss the plaintiffs' amended complaint or in the alternative, to strike portions of the amended complaint, the defendants asserted that:

(1) the plaintiffs' Rule 10b-5 claims must fail because (a) the alleged misstatements and omissions were not actionable; (b) the plaintiffs failed to satisfy the pleading requirements for fraud under Rule 9(b) of the Federal Rules of Civil Procedure and the Private Securities Litigation Reform Act of 1995 with respect to the defendants' scienter; (3) as to Dr. Frist, Messrs. McWhorter, Reichardt, Long and McNaughton and Dr. Averhoff, the amended complaint failed to adequately tie them, as outside directors, to the alleged false and misleading statements or alleged business practices;

(2) because the plaintiffs' Rule 10b-5 claims must fail, the plaintiffs' claims under Section 20 of the 1934 Act, 15 U.S.C. § 78t(a), must also fail;

(3) the plaintiffs' claims under Section 11 and 12 of the 1933 Act, 15 U.S.C. §§ 77k(a) and 77l, and Section 14 of the 1934 Act, 15 U.S.C. § 77n, must fail because the alleged misstatements upon which these claims are based are true; and

(4) in the alternative, the allegations of the plaintiffs in ¶¶ 48-57 and ¶ 80 should be stricken because they are immaterial to any of the plaintiffs' claims.

In his motion (Docket Entry No. 75) to dismiss, Mr. Vanderwater, in large part, adopted the arguments of these defendants. In addition, he notes he did not sign any documents filed with the SEC.

Mr. Scott essentially also adopted the assertions of the other defendants. Richard L. Scott's motion (Docket Entry No. 90) to dismiss.

II.

On a motion to dismiss under Rule 12(b)(6) of the Federal Rules of Civil Procedure, "well pleaded facts" set forth in the complaint must be accepted by the Court as true. Morgan v. Church's Fried Chicken, 829 F.2d 10, 12 (6th Cir.1987). The Court's duty in reviewing a motion to dismiss is to determine the legal sufficiency of the complaint. In re Sirrom Capital Corp. Sec. Litig., 84 F.Supp.2d 933, 937 (M.D.Tenn.1999)(citing City of Toledo v. Beazer Materials and Serv., Inc., 833 F.Supp. 646, 650 (N.D.Ohio 1993)). The Court may only grant a motion to dismiss if "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 102, 2 L.Ed.2d 80, 84 (1957)(footnote omitted). As the function of the Court considering a motion to dismiss is to "to test whether, as a matter of law, the plaintiff is entitled to legal relief even if everything alleged in the Complaint is true," the Court must consider the allegations in the complaint in the light most favorable to the party opposing the motion. In re Sirrom Capital Corp. Sec. Litig., 84 F.Supp.2d 933, 937 (M.D.Tenn.1999).

A. Rule 10b-5 Claim

The Sixth Circuit has found that in order to state a claim under Rule 10b-5 "a plaintiff must allege, in connection with the purchase or sale of securities, the misstatement or omissions of a material fact, made with scienter, upon which the plaintiff justifiably relied and which proximately caused the plaintiff's injury." In re Comshare Sec. Litig., 183 F.3d 542, 548 (6th Cir.1999)(citing Aschinger v. Columbus Showcase Co., 934 F.2d 1402, 1409 (6th Cir.1991)).

1. Actionable Statements or Omissions

The plaintiffs contend that the defendants were required to disclose that Columbia's revenues and earning were illegally inflated and that they failed to do so in violation of Rule 10b-5.² The Magistrate Judge concluded that the plaintiffs' claim must fail because they could not establish that the defendants had a duty to make such disclosures.

It is a violation of Rule 10b-5 to "omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading ...." 17 C.F.R. § 240.10b-5(b). Accordingly, there must be a duty to disclose on the part of a defendant before he or she can be found to violate Rule 10b-5 on the basis of non-disclosure. Basic, Inc. v. Levinson, 485 U.S. 224, 239 n. 17, 108 S.Ct. 978, 987 n. 17, 99 L.Ed.2d 194, 213 n. 17 (1988)("Silence, absent a duty to disclose, is not misleading under Rule 10b-5."). The duty to disclose does not arise simply because information at issue is material. Murphy v. Sofamor Danek Group, Inc., 123 F.3d 394, 400 (6th Cir.1997) (citations omitted).

The plaintiffs first allege that Columbia stated in its 10-Q forms "in the substance" that Columbia's legitimate business practices were the basis for its revenues and earnings growth, when the revenues and growth were actually based on the company's "improper procedures." Plaintiffs' memorandum (Docket Entry No. 162) at 18. Second, the plaintiffs rely on the statement in Columbia's 10-K forms that the government was investigating...