Zaluski v. United American Healthcare Corp.
| Citation | 527 F.3d 564 |
| Decision Date | 27 May 2008 |
| Docket Number | No. 07-1298.,07-1298. |
| Parties | Gregory ZALUSKI; William Coleman; Alex Reichman; Richard M. Price; Edward S. Price; Maria Cristina Jones; Edward G. Nolte, Individually and on Behalf of all Others Similarly Situated, Plaintiffs-Appellants, v. UNITED AMERICAN HEALTHCARE CORPORATION; Osbie Howard; William Brooks; Tom Goss; Stephen Harris; Gregory H. Moses, Jr.; William E. Jackson, II, Defendants-Appellees. |
| Court | United States Courts of Appeals. United States Court of Appeals (6th Circuit) |
John M. Lambros, Law Office of John M. Lambros, New York, New York, for Appellants. Laurie J. Michelson, Butzel Long, Detroit, Michigan, Richard E. Zuckerman, Honigman, Miller, Schwartz & Cohn, Detroit, Michigan, for Appellees.
ON BRIEF:
John M. Lambros, Law Office of John M. Lambros, New York, New York, for Appellants. Laurie J. Michelson, David F. DuMouchel, Butzel Long, Detroit, Michigan, Michael Francis Smith, Butzel Long, Washington, D.C., Richard E. Zuckerman, Douglas Cory Salzenstein, Honigman, Miller, Schwartz & Cohn, Detroit, Michigan, Lara Fetsco Phillip, Honigman, Miller, Schwartz & Cohn, Bloomfield Hills, Michigan, for Appellees.
Before: COLE, GIBBONS, and ROGERS, Circuit Judges.
Gregory Zaluski, William Coleman, Alex Reichman, Richard M. Price, Edward S. Price, Maria Cristina Jones, and Edward G. Nolte (collectively, "Plaintiffs") brought this class-action suit against United American Healthcare Corporation ("UAHC"), Osbie Howard, William Brooks, Tom Goss, Stephen Harris, Gregory H. Moses, Jr., and William E. Jackson (collectively, "Defendants"). Plaintiffs allege that Defendants failed to disclose that UAHC was making illegal payments to then-Tennessee Senator John Ford in violation of Section 10(b) of the Securities Exchange Act of 1934 (the "Act"), codified at 15 U.S.C. § 78j, and Rule 10b-5, codified at 17 C.F.R. § 240.10b-5. Plaintiffs also brought claims against the individually named Defendants pursuant to Section 20(a) of the Act of 1934, codified at 15 U.S.C. § 78t(a). The district court granted Defendants' motion, under Federal Rule of Civil Procedure 12(b)(6), to dismiss Plaintiffs' complaint. For the following reasons, we AFFIRM.
Plaintiffs brought this class-action suit on behalf of individuals and entities who purchased UAHC securities during the period from May 26, 2000, through April 22, 2005, to recover damages following the decline in the value of UAHC securities. Plaintiffs allege that the damages result from Defendants' failure to disclose the fact that payments were made to Senator Ford and that these payments violated UAHC's contract with the State of Tennessee.
For purposes of reviewing the district court's grant of Defendants' motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), we accept as true Plaintiffs' allegations. Therefore, the following facts are taken from the complaint:
Omnicare is a wholly owned subsidiary of UAHC. Compl. ¶ 19. UAHC manages the operations of Omnicare. Id. ¶ 20.
TennCare is owned and operated by the State of Tennessee. Id. ¶ 21. TennCare extended health care coverage to uninsured and uninsurable persons who were not eligible for Medicaid. Id. Enrollees are free to choose the [Managed Care Organization ("MCO")] they wish among those available in the area in which they live. Id.
Omnicare provides MCO services to TennCare pursuant to a contract with the State of Tennessee to participate as an MCO in the TennCare program. Id. ¶ 23. The contract is called the Amended and Restated Contractor's Risk Agreement (the "CRA") between the State of Tennessee, d/b/a/ TennCare, and OmniCare. Id.
From 1999 to November 2002, OmniCare represented about 75% of UAHC's revenue and earnings. Id. ¶ 24. Since November 2002, OmniCare (through the CRA) has accounted for nearly one hundred percent (100%) of UAHC's annual revenue and earnings and represents UAHC's primary asset. Id.
John Ford was, during the Class Period, an elected Tennessee State Senator who sat on three legislative committees with TennCare oversight. Id. ¶ 25. UAHC issued a press release on April 15, 2005 admitting to having hired Senator Ford as a consultant since at least 2001. Id. ¶ 27. UAHC has subsequently admitted to making 42 monthly payments to Senator Ford of approximately $10,000 a month for a total of $420,000 — before terminating the contract on March 11, 2005. Id. ¶ 28.
Section 4-11 of the CRA prohibits [UAHC] from offering or giving gratuities of any kind to any officials or employees of the State of Tennessee. Id. ¶ 29. Payment of any such gratuity permits TennCare to terminate the CRA. Id. The CRA at section 4-7 also specifically prohibits [UAHC] from either directly or indirectly paying to any officer or employee of the State of Tennessee any wages, compensation, or gifts in exchange for acting as an officer, agent, employee, subcontractor or consultant to OmniCare without approval from TennCare. Id. ¶ 30. [UAHC never] sought or obtained the approval of TennCare to make the admitted payments to Senator John Ford, in direct violation and breach of the CRA. Id. ¶ 31. The CRA also specifically prohibits [UAHC] from using any of the revenue earned from the CRA to pay the expenses of lobbyists. Id. ¶ 33.
Under section 4-2.b. of the CRA, in the event OmniCare ... engages in any act prohibited or restricted by the CRA, TennCare may immediately declare a default and terminate the CRA and may recover actual damages, including incidental or consequential damages, any other remedy at law or equity and all liquidated damages provided for in the CRA. Id. ¶ 34.
The amended and restated CRA signed by OmniCare and submitted to TennCare each year during the Class Period contained material misrepresentations of fact. Id. ¶ 38. The OmniCare payments to Senator Ford demonstrate that OmniCare made a material misrepresentation in breach of the warranties in Section 4-7, 4-11, and 4-12 of the CRA. Id. [T]he 42 payments to Senator Ford subjected OmniCare to penalties of up to $4.2 million. Id. ¶ 41.[T]he payments by OmniCare also subjected the CRA to immediate termination by TennCare, as well as permitted the State of Tennessee to place OmniCare under Administrative Supervision, events that would have a catastrophic impact on UAHC and its share price. Id. ¶ 42.
On April 15, 2005, the Company [issued a press release acknowledging the payments but maintaining that the agreement with Senator Ford was lawful and complied with the provisions of the TennCare contract.] Id. ¶ 106.
On April 20, 2005, the Tennessee Commissioner of Commerce and Insurance ... issued an Order placing OmniCare under Administrative Supervision ... because of violations of the CRA and submission of false information and the making of false statements to TennCare. Id. ¶ 45.
On April 21, 2005, news of the Order caused UAHC's stock price to immediately drop from about $5.50 to $2.11 in heavy trading damaging investors. Id. ¶ 46. On April 21, 2005, the Company issued a press release [acknowledging the Order and stating that UAHC plans on defending against the allegations in the Order]. Id. ¶ 108.
Since then, the Tennessee Legislature, TennCare, and the Tennessee Department of Insurance has been investigating the payments by OmniCare to Senator Ford and hotly debating whether or not to terminate the CRA with OmniCare. Id. ¶ 46.
Despite the alleged breaches listed above, the CRA was renewed later in 2005, the period of Administrative Supervision has expired, and the State of Tennessee has not declared any breach of contract by UAHC.
Plaintiffs allege that UAHC submitted statements to the Securities and Exchange Commission ("SEC") in violation of relevant Generally Accepted Accounting Principles ("GAAP") and that such statements "are presumed to be misleading or inaccurate, despite footnotes and disclosures." Compl. ¶ 47 (citing 17 C.F.R. § 210.4-01(a)(1)). Plaintiffs additionally allege violations of GAAP's Financial Accounting Standards ("FASB's") Nos. 5, 5.10, and 5.38, which require disclosure of contingencies where there is either certain loss or a "reasonable possibility that a loss or an additional loss may have been incurred," as well as disclosure of unasserted claims and assessments where there is a probability that such a claim may be filed. Id. ¶¶ 48-50. Plaintiffs' Complaint continues:
Public disclosure of these payments by OmniCare has resulted in numerous criminal and civil investigations by the U.S. Attorney, the Tennessee Attorney General, TennCare, the Tennessee Department of Insurance and other bodies. Id. ¶ 55. Under the circumstances, as a public company, UAHC knew that its actions would definitely have serious adverse consequences. Id. Due to the failure to accrue for or disclose losses associated with the contract breaches, UAHC presented its financial results and statements which violated GAAP. Id. ¶ 56.
Plaintiffs next allege that statements made by Defendants in SEC Forms 10-K and 10-Q constitute material misrepresentations that are actionable. They allege that the filed forms were "false and misleading for omitting to state that OmniCare had breached the CRA, that the CRA was currently subject to immediate termination by TennCare, and that OmniCare was subject to substantial monetary penalties as a result of its breaches of the CRA." E.g. id. ¶ 97. The 10-Ks were additionally alleged to be misleading:
[The forms] stated that UAHC's operations are subject to substantial regulation by the state and that its license to operate is subject to suspension or revocation if there is a determination that the plans are operating out of compliance with the law, while omitting to state the material facts that OmniCare was currently in violation of Tennessee law; that it was breaching the CRA, that the CRA was subject to immediate termination and OmniCare subject to administrative supervision; and that OmniCare's certificate of authority...
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