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From Securities Regulation Daily, March 20, 2017

SCOTUS won’t hear appeal on loss causation standard

By Amanda Maine, J.D.

The Supreme Court denied certiorari to shareholders seeking review and clarification of a circuit split on the issue of loss causation in private securities fraud litigation. The shareholders argued that the Eleventh Circuit, which had upheld a lower court dismissal of their securities fraud claims on loss causation grounds, had based its decision on erroneous legal rules and that the Fifth and Ninth Circuits have reached the opposite conclusion regarding loss causation, necessitating a Supreme Court hearing to resolve the circuit split on the issue (Norfolk County Retirement System v. Health Management Associates, Inc., March 20, 2017).

Loss causation. The shareholders held stock in Health Management Associates (HMA), which operates health care facilities. The shareholders alleged that HMA engaged in Medicare fraud and tied HMA’s share price decline to two corrective disclosures: the announcement of a government investigation of HMA and an analyst report on a former HMA employee’s whistleblowing lawsuit on the company’s Medicare billing practices. The district court held, and the Eleventh Circuit affirmed, that the shareholders had failed to plead loss causation.

First, the government investigation did not show any wrongdoing, so it did not qualify as a corrective disclosure. Second, the whistleblower’s case was not proof of fraud because the mere filing of a civil suit is not proof of liability, and the analyst’s report did not contain information that had not already been assimilated by the market, the lower courts held.

Circuit split. The shareholders’ petition for a writ of certiorari cited two circuit splits. The Eleventh Circuit, noted the petition, prohibits investors from pleading loss causation based on government investigation unless they produce a finding of wrongdoing. The petition contrasted the Eleventh Circuit standard to that of the Fifth and Ninth Circuits, which allow investors to plead loss causation if they allege additional corrective disclosures. It also cited district court opinions in the Second Circuit that allowed investors to plead loss causation based on government investigations standing alone.

There also exists a split between the Eleventh Circuit and the Fifth and Ninth Circuits on whether an investor may plead loss causation based on a report drawn from public sources, with the Eleventh Circuit holding that analyst reports based on public sources cannot be corrective disclosures, and the Fifth and Ninth Circuits holding the opposite, according to the petition. Given these different approaches among the circuits regarding loss causation, the petitioners requested that the Supreme Court grant review to resolve the conflict.

Precedent. The petition also argued that the Eleventh Circuit’s loss causation pleading standard conflicted with Supreme Court precedent on loss causation. The petition cited cases indicating that the disclosure of a government investigation and reports based on public sources can raise a plausible inference of loss causation at the pleading stage, in contrast to the Eleventh Circuit’s "near-prohibition" of these pleadings.

Cert denied. In an order dated March 20, 2017, the Supreme Court denied the shareholders’ petition for a writ of certiorari.

The case is No. 16-685.

Attorneys: David C. Frederick (Kellogg, Huber, Hansen, Todd, Evans & Figel, P.L.L.C.) for Norfolk County Retirement System. Douglas S. Wilens (Robbins Geller Rudman & Dowd LLP) and Jonathan Gardner (Labaton Sucharow LLP) for New England Teamsters & Trucking Industry Pension Fund and Operating Engineers Trust Funds. Irwin Howard Warren (Weil, Gotshal & Manges LLP) for Health Management Associates, Inc.

Companies: Norfolk County Retirement System; New England Teamsters & Trucking Industry Pension Fund; Operating Engineers Trust Funds; Health Management Associates, Inc.

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