Hill v. Gozani
2011 U.S. App. LEXIS 5653
| 1st Cir. | 2011Background
- Hill, NECA-IBEW Pension Fund, Southwest Carpenters Pension Trust, and Anima S.G.R.P.A. sued NeuroMetrix, Inc. and officers under §10(b)/Rule 10b-5 and §20(a) for securities fraud stemming from NC-Stat device billing and reimbursement practices.
- Plaintiffs alleged NeuroMetrix promoted NC-Stat with neurology CPT codes to obtain higher reimbursements, knowing these codes were unsustainable and that insurers might deny coverage.
- Internal reimbursement experts allegedly advised using alternative codes or seeking a new device-specific CPT code; executives allegedly ignored or undermined these opinions.
- Allegations included kickbacks/intangible incentives, misleading disclosures in multiple SEC filings, and a fall in stock price once reimbursement issues materialized.
- District court dismissed the complaint under Rule 12(b)(6) and Rule 9(b)/PSLRA pleading standards, finding no actionable misstatements and insufficient scienter.
- The First Circuit affirmed, holding the district court properly dismissed the 10b-5 claims and derivative §20(a) claims.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether misstatements/omissions were actionable under 10b-5. | Anima contends omissions about reimbursement risk and expert opinions were material and misleading. | NeuroMetrix asserts disclosures adequately warned of risk and properly omitted disputed internal opinions. | No actionable misstatements; disclosures not misleading. |
| Materiality of omissions about reimbursement risks. | Omitted expert opinions and fraud concerns were material to investors’ decisions. | Omissions were not required disclosures; total mix not skewed; risks disclosed were adequate. | Omissions not material. |
| Adequacy of PSLRA Rule 9(b) pleading standards. | Complaint aggregates misstatements and relies on statements of belief; sufficient particularity exists. | Complaint lacked specifics tying misstatements to scienter; insufficient facts under PSLRA. | Standards satisfied; district court properly dismissed on pleading grounds. |
| Scienter and loss causation adequately pled. | Alleged internal disagreements and expert warnings show strong inference of intent. | No cogent, strong inference; internal disagreement insufficient to satisfy PSLRA. | Not adequately pled; claims fail for lack of strong inference. |
| Derivative §20(a) claims properly dismissed. | Control defendants are liable for underlying §10(b) violations. | Because §10(b) claims fail, §20(a) claims must fail. | Derivative claims affirmed as failing with the underlying claims. |
Key Cases Cited
- ACA Fin. Guar. Corp. v. Advest, Inc., 512 F.3d 46 (1st Cir. 2008) (pleading standards under PSLRA require cogent allegations of scienter)
- Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (U.S. 1975) (private securities actions to deter fraud; standards for reliance)
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (U.S. 2007) (strong inference of scienter required by PSLRA)
- Dura Pharm., Inc. v. Broudo, 544 U.S. 336 (U.S. 2005) (elements of a 10b-5 claim; loss causation standards)
- Backman v. Polaroid Corp., 910 F.2d 10 (1st Cir. 1990) (disclosure of material risk; completeness limits)
- Cooperman v. Individual, Inc., 171 F.3d 43 (1st Cir. 1999) (board-level disagreement and disclosure duties; not all conflicts must be disclosed)
- Lormand v. U.S. Unwired, Inc., 565 F.3d 228 (5th Cir. 2009) (duty to disclose known risks where management knew of disastrous effects)
- Cabletron Sys., Inc. v. Computer Associates Int'l, Inc., 311 F.3d 11 (1st Cir. 2002) (factors suggesting disclosure duties in evolving risk scenarios)
- Milton v. Van Dorn Co., 961 F.2d 965 (5th Cir. 1992) (risk disclosure balancing when assessing materiality)
- SEC v. Texas Gulf Sulphur Co., 401 F.2d 833 (2d Cir. 1968) (materiality standard for omissions)