Norfolk County Retirement System v. Community Health Systems, Inc.
877 F.3d 687
| 6th Cir. | 2017Background
- Community Health Systems (Community), a large for-profit hospital operator, allegedly used an internally developed 'Blue Book' and software (Pro-MED) to direct higher inpatient admissions, increasing Medicare reimbursements and revenue while publicly attributing results to operational "synergies."
- Tenet sued Community in April 2011, filing a complaint that included expert analyses concluding Community systematically admitted patients as inpatients in clinically improper ways, inflating revenues and creating legal exposure.
- On the day Tenet filed, Community denied the allegations publicly, but CFO Larry Cash acknowledged that Community used the Blue Book; Community stock fell ~35% that day. Later admissions and a Q3 2011 earnings release admitting admissions declines tied to phasing out the Blue Book precipitated further decline (~11%), with total shareholder losses exceeding $891 million.
- Plaintiffs (shareholders) filed securities-fraud class actions alleging defendants made false/misleading statements and omitted material facts about the Blue Book’s role; after consolidation and amendment, the district court dismissed for lack of causation and timeliness as to certain allegations; plaintiffs appealed.
- The Sixth Circuit accepted plaintiffs’ allegations as true for pleading-stage review, held the amended complaint related back to the original filing under Fed. R. Civ. P. 15(c), and found plaintiffs plausibly alleged corrective disclosures that caused market losses.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Timeliness (relation back under Rule 15(c)) | Amended allegations (post-Tenet lulling statements and later admissions) arise from same fraud and thus relate back to the timely consolidated complaint | Amended allegations are new and untimely because filed more than two years after discovery | Related back: amended complaint alleges same general conduct and wrong; timely under Rule 15(c) |
| Causation (corrective disclosure) | Tenet complaint + Cash’s admission and later Company admissions disclosed previously concealed fraud, causing stock drops | A complaint only asserts allegations, not truth; market would not treat Tenet complaint as corrective disclosure | Plaintiffs plausibly alleged corrective disclosures: Tenet complaint included expert analyses and Cash’s admission made the information credible, supporting causation at pleading stage |
| Sufficiency of scienter allegations | Timing of insiders’ stock sales and internal warnings support a strong inference of intent to deceive | Defendants contested scienter but court accepted plaintiffs’ scienter showing | Court found plaintiffs sufficiently alleged scienter (strong inference) at pleading stage |
| Scope of disclosure required (newness of information) | Expert analyses revealed clinically improper admissions beyond public knowledge; Blue Book’s role was concealed despite theoretical public availability | Community argued Blue Book/copyright availability and other private complaints made the information public already | Court held it was plausible the market first learned the material facts from Tenet’s complaint and related admissions; availability alone did not defeat novelty at pleading stage |
Key Cases Cited
- Merck & Co. v. Reynolds, 559 U.S. 633 (Establishes when statute of limitations accrues on discovery of securities fraud)
- Dura Pharm., Inc. v. Broudo, 544 U.S. 336 (Pleading standard for loss causation requires alleging a causal connection between fraud and economic loss)
- Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27 (Scienter pleading requires a strong inference of fraudulent intent)
- Durand v. Hanover Ins. Grp., 806 F.3d 367 (6th Cir.) (Rule 15(c) relation-back standard: same general conduct and wrong)
- Ohio Public Emps. Ret. Sys. v. Fed. Home Loan Mortg. Corp., 830 F.3d 376 (6th Cir.) (discussion of market reaction and corrective disclosures)
- FindWhat Inv’r Grp. v. FindWhat.com, 658 F.3d 1282 (11th Cir.) (sources of corrective disclosures can include analysts and news reports)
- Pub. Emps. Ret. Sys. of Miss. v. Amedisys, Inc., 769 F.3d 313 (5th Cir.) (evaluating whether disclosures conveyed new, market-moving information)
- Lloyd v. CVB Fin. Corp., 811 F.3d 1200 (9th Cir.) (an admission plus announcement can constitute corrective disclosure)
- Robbins v. Koger Props., Inc., 116 F.3d 1441 (11th Cir.) (timing and immediacy of market reaction can support pleading loss causation)