Oklahoma Law Enforcement Retirement System v. Adeptus Health Inc. et alMOTION to DismissE.D. Tex.February 5, 2018UNITED STATES DISTRICT COURT EASTERN DISTRICT OF TEXAS SHERMAN DIVISION OKLAHOMA LAW ENFORCEMENT RETIREMENT SYSTEM, ET AL. v. ADEPTUS HEALTH INC., ET AL. CASE NO. 4:17cv449 (Judge Mazzant) THE EXECUTIVE DEFENDANTS’ MOTION TO DISMISS PLAINTIFFS’ CONSOLIDATED CLASS ACTION COMPLAINT Paul R. Bessette Texas Bar No. 02263050 Michael J. Biles Texas Bar No. 24008578 Tyler W. Highful Texas Bar No. 24083176 KING & SPALDING LLP 500 West 2nd St., Suite 1800 Austin, TX 78701-4684 (512) 457-2000 (phone) (512) 457-2100 (fax) Counsel for Defendants Timothy Fielding, Thomas S. Hall, and Graham B. Cherrington Case 4:17-cv-00449-ALM Document 119 Filed 02/05/18 Page 1 of 47 PageID #: 2232 i TABLE OF CONTENTS INTRODUCTION .......................................................................................................... 1 STATEMENT OF THE ISSUES ................................................................................... 4 LEGAL STANDARD ...................................................................................................... 5 BACKGROUND FACTS ................................................................................................ 6 A. Adeptus and the joint-venture business model ................................. 6 B. Outsourcing to McKesson ................................................................... 9 C. Adeptus’s bankruptcy ....................................................................... 10 ARGUMENT ................................................................................................................ 12 I. Each Executive can be held liable only for his own statements. ............... 12 II. Plaintiffs have failed to adequately allege any false or misleading statement or omission. ................................................................................ 13 A. The Executives accurately described patient acuity levels. ............ 14 B. Adeptus’s bad debt reserves and revenue cycle management issues were fully disclosed. ............................................................... 16 C. Adeptus accurately disclosed the terms and nature of the joint ventures to investors. ............................................................... 20 III. The Executives’ statements concerning prospective benefits of the joint venture business model are protected forward-looking statements. ................................................................................................... 24 IV. The Executives’ optimistic statements concerning Adeptus’s business strengths and potential are immaterial puffery. ........................ 29 V. Plaintiffs have failed to raise a strong inference of scienter. ..................... 29 A. The Executives’ stock sales do not raise a “strong inference” of scienter because they were not suspicious in timing or amount. .............................................................................................. 30 B. The “former employee’s” allegations do not contribute to an inference of scienter. ......................................................................... 33 C. Plaintiffs misconstrue the alleged admissions of Adeptus’s management during the bankruptcy. .............................................. 35 D. The Executives’ personal involvement in aspects of Adeptus’s business is not evidence of scienter. ................................................. 37 E. The Executives’ resignations do not contribute to an inference of scienter. ......................................................................... 38 VI. Plaintiffs also fail to plead adequately a claim under any other cause of action. ............................................................................................. 39 CONCLUSION ............................................................................................................. 40 Case 4:17-cv-00449-ALM Document 119 Filed 02/05/18 Page 2 of 47 PageID #: 2233 iii TABLE OF AUTHORITIES Page(s) Cases ABC Arbitrage Plaintiffs Grp. v. Tchuruk, 291 F.3d 336 (5th Cir. 2002) .......................................................................... 5, 6, 34 Abrams v. Baker Hughes, Inc., 292 F.3d 424 (5th Cir. 2002) .................................................................. 5, 19, 29, 38 In re Alamosa Holdings, Inc. Sec. Litig., 382 F. Supp. 2d 832 (N.D. Tex. 2005) .............................................................. 13, 28 In re ArthroCare Corp. Sec. Litig., 726 F. Supp. 2d 696 (W.D. Tex. 2010) ................................................................... 39 Cent. Laborers’ Pension Fund v. Integrated Elec. Servs., Inc., 497 F.3d 546 (5th Cir. 2007) .................................................................................. 34 Ciresi v. Citicorp, 782 F. Supp. 819 (S.D.N.Y. 1991) .......................................................................... 19 Congregation of Ezra Sholom v. Blockbuster, Inc., 504 F. Supp. 2d 151 (N.D. Tex. 2007) .................................................................... 25 Cortina v. Anavex Life Scis. Corp., No. 15-CV-10162 (JMF), 2016 WL 7480415 (S.D.N.Y. Dec. 29, 2016) ................. 12 Denny v. Barber, 576 F.2d 465 (2d Cir. 1978) .................................................................................... 35 Eminence Capital LLC v. Aspeon, Inc. (In re Aspeon, Inc. Sec. Litig.), 168 F. App’x 836 (9th Cir. 2006) ............................................................................ 31 In re Entrust Sec. Litig., No. 2:00–CV–119, 2002 WL 31968321 (E.D. Tex. Sept. 30, 2002) ....................... 13 Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976) ............................................................................................... 29 Fin. Acquisition Partners LP v. Blackwell, 440 F.3d 278 (5th Cir. 2006) .................................................................................... 5 Ind. Elec. Workers’ Pension Trust Fund IBEW v. Shaw Grp., Inc., 537 F.3d 527 (5th Cir. 2008) ........................................................................... passim Case 4:17-cv-00449-ALM Document 119 Filed 02/05/18 Page 3 of 47 PageID #: 2234 iv Izadjoo v. Helix Energy Sols. Grp., Inc., 237 F. Supp. 3d 492 (S.D. Tex. 2017) ..................................................................... 32 Janus Capital Grp., Inc. v. First Derivative Traders, 564 U.S. 135 (2011) ................................................................................................ 12 Kapps v. Torch Offshore, Inc., 379 F.3d 207 (5th Cir. 2004) .................................................................................. 22 Lampkin v. UBS Painewebber, Inc. (In re Enron Corp. Sec., Derivative & “ERISA” Litig.), 238 F. Supp. 3d 799 (S.D. Tex. 2017) ..................................................................... 12 Lasker v. N.Y. Elec. & Gas Corp. 85 F.3d 55 (2d Cir. 1996) ........................................................................................ 29 Local 731 Int’l Bhd. Of Teamsters Excavators & Pavers Pension Trust Fund v. Diodes, Inc., 810 F.3d 951 (5th Cir. 2016) ............................................................................ 30, 37 McNulty v. Kanode, No. A-13-CV-026-LY, 2013 WL 12077503 (W.D. Tex. Nov. 5, 2013) .................... 28 N. Port Firefighters’ Pension—Local Option Plan v. Temple-Inland, Inc., 936 F. Supp. 2d 722 (N.D. Tex. 2013) .................................................................... 28 Nathenson v. Zonagen Inc., 267 F.3d 400 (5th Cir. 2001) ........................................................................ 5, 29, 36 Newby v. Enron Corp., 338 F.3d 467 (5th Cir. 2003) .................................................................................... 5 Owens v. Jastrow, 789 F.3d 529 (5th Cir. 2015) .................................................................................. 35 Pension Fund Grp. v. Tempur-Pedic Int’l, Inc., 614 F. App’x 237 (6th Cir. 2015) ............................................................................ 26 Plotkin v. IP Axess Inc., 407 F.3d 690 (5th Cir. 2005) .................................................................................. 30 Rieckborn v. Jefferies LLC, 81 F. Supp. 3d 902 (N.D. Cal. 2015) ...................................................................... 18 Rosenzweig v. Azurix Corp., 332 F.3d 854 (5th Cir. 2003) ........................................................................... passim Case 4:17-cv-00449-ALM Document 119 Filed 02/05/18 Page 4 of 47 PageID #: 2235 v Santa Fe Indus., Inc. v. Green, 430 U.S. 462 (1977) ................................................................................................ 19 In re Sec. Litig. BMC Software, Inc., 183 F. Supp. 2d 860 (S.D. Tex. 2001) ..................................................................... 37 Southland Sec. Corp. v. INSpire Ins. Sols., Inc., 365 F.3d 353 (5th Cir. 2004) ........................................................................... passim Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007) .................................................................................... 29, 33, 36 Williams v. WMX Tech., Inc., 112 F.3d 175 (5th Cir. 1997) .................................................................................. 13 Rules and Statutes 15 U.S.C. § 77o ............................................................................................................. 40 15 U.S.C. § 78t ............................................................................................................. 40 15 U.S.C. § 78u–4 .................................................................................................... 5, 29 15 U.S.C. § 78u-5 ................................................................................................... 25, 26 DEL. CODE ANN. Tit.8, § 151(a) (2018) ........................................................................ 32 Exchange Act Section 21E(i)(1) ................................................................................... 24 FED. R. CIV. P. 9(b) ..................................................................................................... 4, 5 FED. R. CIV. P. 12(b)(6) ................................................................................................. 40 Private Securities Litigation Reform Act ............................................................ passim Securities Exchange Act Section 10(b)................................................................. passim Securities Exchange Act Section 20(a).................................................................... 4, 40 Securities Exchange Act Secton 21E .......................................................................... 25 Case 4:17-cv-00449-ALM Document 119 Filed 02/05/18 Page 5 of 47 PageID #: 2236 1 INTRODUCTION Healthcare is a competitive industry with a regulatory framework of labyrinthine requirements where dramatic shifts and sudden reversals are the norm. Adeptus Health, Inc. (“Adeptus” or the “Company”), a new company with an untested business model, is emblematic of the risks and pitfalls of this rapidly changing industry. This securities-fraud class action is an attempt by Plaintiffs to hold, inter alia, former management1 responsible for the materialization of certain business risks that Adeptus had warned investors about. After an initial public offering in June 2014, Adeptus grew quickly through the construction of numerous freestanding emergency rooms (“FERs”) and hospitals. It entered into various joint ventures (“JVs”) with established healthcare systems in Colorado, Arizona, Texas, Ohio, and Louisiana, growing its operations and increasing its revenue from $55 million in 2011 to over $420 million in 2015. As Adeptus rapidly expanded its territory as a leader in the new free-standing- emergency-room market, its stock price increased dramatically. But as Adeptus repeatedly warned, it faced many risks and challenges. Adeptus was rapidly expanding a new and unproven FER business in a highly-regulated field that was in dramatic flux following the enactment of the 1 Former management refers to Defendants Tom Hall, former Chairman of the Board and Chief Executive Officer from March 2012 to November 8, 2016; Timothy Fielding, former Chief Financial Officer from January 2013 to July 28, 2016 (although he actually joined Adeptus in March 2013); and Graham Cherrington, former Chief Operating Officer from May 2012 until December 2, 2016 (also collectively referred to in the Complaint and in this Motion as the “Executive Defendants” or “Executives”). Compl. ¶¶34–36. Case 4:17-cv-00449-ALM Document 119 Filed 02/05/18 Page 6 of 47 PageID #: 2237 2 Patient Protection and Affordable Care Act. Adeptus warned that it was highly dependent on collections from third-party payors such as insurance companies and government agencies. And it warned that its joint venture growth strategy required large amounts of working capital. In a convergence of bad fortune, these risks materialized in 2016. Adeptus faced a slow-down in business due to competition while simultaneously suffering a reduction in cash flow due to revenue collection errors by McKesson Corporation (“McKesson”), to which Adeptus had outsourced its medical billing and revenue collection in 2015. These factors, combined with the capital intensive nature of Adeptus’s growth strategy, created a short-term liquidity crisis that ultimately resulted in Adeptus’s bankruptcy filing in 2017. Plaintiffs now challenge a number of the Executives’ pre-bankruptcy statements as false or misleading. Specifically, the Executives allegedly misled the market about the degree to which the Company’s patients actually needed emergency care (i.e., patient acuity level), the start-up costs of its JVs, and its collection problems with McKesson. The Complaint is undeniably long and wordy, but it lacks the factual basis to adequately plead the elements of falsity and scienter necessary to state a claim for securities fraud. Plaintiffs attempt to plead falsity using a handful of facts, including a television news exposé, allegations by an unidentified former employee, and a bankruptcy disclosure mischaracterized as an admission. But none of these facts meet the requirements of the Private Securities Litigation Reform Act (“PSLRA”). The supposed bombshell news clip consists of general anecdotal snippets that do not Case 4:17-cv-00449-ALM Document 119 Filed 02/05/18 Page 7 of 47 PageID #: 2238 3 even address, much less show the falsity of, any of the challenged statements. And an honest reading of the bankruptcy disclosure shows that it is neither an admission nor shows falsity. The sole confidential witness is no help either, as the necessary descriptions of job title, tenure, and how this witness supposedly knew first-hand the information alleged are completely lacking. This witness is useless and fails to explain how and when each Executive learned the facts that were supposedly withheld or misstated to investors. Plaintiffs fare no better in their attempt to plead scienter. The Executives’ class period stock sales are not suspicious in timing or amount because they were made solely during public offerings that were disclosed weeks in advance to the public. Moreover, Hall actually purchased $5 million of preferred stock in late 2016, completely negating any inference of scienter that might arise from his prior sales. Plaintiffs also allege generally that the Executives must have known of the undisclosed bad facts based on their positions, but this pleading tactic has been squarely rejected as inadequate by courts in this District and around the country. Finally, Plaintiffs even resort pleading “fraud by hindsight,” alleging that the Executives must have known that Adeptus’s future was bleak when they made statements in 2014 and 2015 because the Company faced a liquidity crisis in late 2016. This is wholly inadequate to plead that any particular statement was false when made, let alone that it was made with scienter. Case 4:17-cv-00449-ALM Document 119 Filed 02/05/18 Page 8 of 47 PageID #: 2239 4 Adeptus’s investors lost money because known risks materialized in a company growing quickly in a rapidly changing industry—not because of any securities fraud. STATEMENT OF THE ISSUES 1. Have Plaintiffs met the heightened pleading requirements under the PSLRA and Federal Rule of Civil Procedure 9(b) for each of the elements of their securities fraud claim under Section 10(b) of the Securities Exchange Act of 1934? a. Have Plaintiffs adequately alleged a false or misleading statement or omission, explained why that statement is false or misleading, and identified a specific factual basis for these allegations? b. Are statements concerning the benefits of the joint venture business model forward-looking statements protected under the PSLRA’s safe- harbor provision? c. Are the Executives’ general optimistic statements immaterial puffery? d. For each alleged misstatement or omission, have Plaintiffs pled with particularity facts that give rise to a strong inference of scienter for each defendant that is at least as strong as any competing inference? 2. Have Plaintiffs sufficiently alleged control person liability under Section 20(a) of the Securities Exchange Act? 3. Have Plaintiffs sufficiently alleged the elements of a securities violation of Section 11 of the Securities Act?2 4. Have Plaintiffs sufficiently alleged control person liability under Section 15 of the Securities Act? 2 The Executives adopt the arguments made in the Directors’ and Underwriters’ Motions to Dismiss with respect to Plaintiffs’ claims under Section 11 of the Securities Act. Case 4:17-cv-00449-ALM Document 119 Filed 02/05/18 Page 9 of 47 PageID #: 2240 5 LEGAL STANDARD To state a claim under Section 10(b) and Rule 10b–5 of the Securities Exchange Act, a plaintiff must show “(1) a misstatement or omission, (2) of a material fact (3) made with scienter (4) on which the plaintiff relied (5) that proximately caused his injury.” Abrams v. Baker Hughes, Inc., 292 F.3d 424, 430 (5th Cir. 2002). A Section 10(b) claim is subject to both Federal Rule of Civil Procedure 9(b)’s requirement that fraud be pled “with particularity” and the PSLRA’s stricter requirements. Id. Congress enacted the PSLRA “in response to an increase in securities fraud lawsuits perceived as frivolous.” Newby v. Enron Corp., 338 F.3d 467, 471 (5th Cir. 2003). The PSLRA requires a complaint to specify each allegedly misleading statement and the reason why it is misleading; if an allegation is made on information and belief, then the complaint must also state with particularity all facts on which the belief is formed. 15 U.S.C. § 78u–4(b)(1). It is insufficient for a plaintiff to merely allege “facts” without providing any underlying support in the form of either confidential witnesses or documentary evidence. See ABC Arbitrage v. Tchuruk, 291 F.3d 336, 350-51, 58 (5th Cir. 2002). The Fifth Circuit has found that the requirements of the PSLRA strengthen those of Rule 9(b), Ind. Elec. Workers’ Pension Tr. Fund IBEW v. Shaw Grp., Inc., 537 F.3d 527, 533 (5th Cir. 2008), and “require[] a plaintiff to specify the statements contended to be fraudulent, identify the speaker, state when and where the statements were made, and explain why the statements were fraudulent,” ABC Arbitrage, 291 F.3d at 350 (citing Nathenson v. Zonagen, Inc., 267 F.3d 400, 412 Case 4:17-cv-00449-ALM Document 119 Filed 02/05/18 Page 10 of 47 PageID #: 2241 6 (5th Cir. 2001)). “A district court must dismiss a securities-fraud claim failing to satisfy either the PSLRA’s pleading requirements or those of Rule 9(b).” Fin. Acquisition Partners LP v. Blackwell, 440 F.3d 278, 287 (5th Cir. 2006) (citing ABC Arbitrage, 291 F.3d at 350). BACKGROUND FACTS A. Adeptus and the joint-venture business model Adeptus was a healthcare company providing emergency medical care through a large network of independent FERs and partnerships with leading healthcare systems. See Ex. 28, 2015 10-K, at 4. The Company was founded in 2002, and focused significantly on providing patient-centered emergency care to rural and suburban communities through FERs. Id. at 5. FERs provide the same level of care as hospital-based emergency rooms, but at standalone facilities open 24 hours a day, seven days a week with on-site, board-certified emergency physicians. Id. Adeptus provided the same quality of care as a traditional emergency room— including a full suite of in-house imaging equipment and an on-site laboratory— with added convenience and reduced wait times. Id. at 5–6. Throughout the putative class period (i.e., June 25, 2014 through March 1, 2017), Adeptus grew rapidly in Texas, Arizona, Colorado, Louisiana, and Ohio. Compl. ¶ 68. Adeptus attributed its success to a number of factors, including very high patient satisfaction, efficient facility design, and an ability to attract and retain high-quality physicians. See Ex. 28, 2015 10-K, at 11–13. But Adeptus also repeatedly disclosed the numerous challenges and risks it faced, including an uncertain regulatory environment, reliance on third-party payors, and reliance on Case 4:17-cv-00449-ALM Document 119 Filed 02/05/18 Page 11 of 47 PageID #: 2242 7 capital expenditures for growth.3 Adeptus raised funds through an initial public offering and three secondary offerings. Compl. ¶ 343. The specifics of these offerings are covered in detail in the Underwriter’s Motion to Dismiss, which is incorporated here by reference. During and after its IPO, Adeptus made clear that it was focused on expansion and explained that its growth strategy was to both increase the concentration of its facilities in existing markets (referred to as “clustering”) and expand into new markets. Ex. 8, 2014 10-K, at 11–12. Because almost every state requires emergency rooms to be affiliated with a full-service hospital, Adeptus planned to pursue this expansion using JVs with existing hospitals. Id.; Compl. ¶ 42. Joint ventures would allow Adeptus to (1) expand into states where regulations prohibit FERs; (2) accept payment from Medicare, Medicaid, and TRICARE; and (3) benefit from their JV partners’ well-known brands in new markets, among other benefits. Compl. ¶¶ 63–64. Each of the JVs was structured similarly. The partner hospital would own a bare majority stake (51%) in the venture, which would allow Adeptus to participate in the partner’s contracts with third-party payors. Id. ¶ 64; Ex. 21, Q3 2015 Earnings Call at 9. Adeptus would also be paid to manage and staff the JV facilities. Compl. ¶ 64. Where Adeptus contributed existing facilities to the JV, it also secured the right to all revenue from the JV until a certain preference level was met (a “waterfall”). Id. From late 2014 until late 2016, Adeptus aggressively pursued its growth 3 Attached as Exhibit 48 is a list of relevant risk factors Adeptus provided to investors in its SEC filings. Case 4:17-cv-00449-ALM Document 119 Filed 02/05/18 Page 12 of 47 PageID #: 2243 8 strategy through, inter alia, announcing JVs with Dignity Health of Arizona, University of Colorado Health, Ochsner Health System in Louisiana, Mount Carmel Health System in Ohio, and Texas Health Resources in Dallas-Fort Worth. Id. ¶¶ 65, 68. Adeptus built several JV hospitals and continued to build FERs in its existing and new markets at a breakneck pace. Ex. 27, Q4 2015 Earnings Call, at 8–9. In fact, between 2012 and mid-2016, Adeptus expanded from 12 facilities to 92 facilities—a growth rate of nearly 700%. Ex. 32, Bank of American Merrill Lynch Health Care Conf., at 2. Adeptus’s aggressive growth strategy was risky—and it repeatedly discussed these risks throughout the putative class period. The Company’s SEC filings disclosed that “growth” and “expansion into new markets” were central to the Company’s profitability. See, e.g., Ex. 8, 2014 10-K, at 26–33. Among other risks attributable to rapid growth, Adeptus explained that, by clustering facilities, it all but guaranteed that new FERs would poach volume from existing locations. See, e.g., Ex. 32, Bank of America Merrill Lynch Health Care Conf., at 5. Investors were also warned that JV projects took longer to get to market than FERs and were more expensive. See, e.g., Ex. 21, Q3 2015 Earnings Call, at 4–5; Ex. 27, Q4 2015 Earnings Call, at 6, 13, 15–16. In presentations and earnings calls, the Executives repeatedly explained that Adeptus’s new hospitals lose money for at least a year after opening, creating a drag Case 4:17-cv-00449-ALM Document 119 Filed 02/05/18 Page 13 of 47 PageID #: 2244 9 on the Company’s earnings and cash flow.4 Indeed, Adeptus specifically disclosed the risk that opening costs for new facilities would negatively affect the Company’s overall profitability.5 Although Adeptus’s long-term prospects were promising, investors were fully informed that the Company faced significant short-term risks until its new facilities became profitable. B. Outsourcing to McKesson Adeptus handled its own coding, billing, and collections work internally through October 2015. See Ex. 43, Bankruptcy Disclosure Statement, at 28. At that time, the U.S. Department of Health and Human Services mandated that entities covered by the Health Insurance Portability and Accountability Act begin using the International Classification of Diseases, Tenth Revision (“ICD-10”), which required Adeptus to use significantly more medical billing codes than it had before. See Ex. 28, 2015 10-K, at 40. To ensure compliance, Adeptus retained an affiliate of the McKesson Corporation, a leading provider of medical billing services, to handle all coding, billing, and revenue collection. See Ex. 43, Bankruptcy Disclosure 4 See, e.g., Ex. 23, Stephens Inc. Fall Investment Conf., at 10 (explaining that new hospitals “will lose money for at least a year while they’re ramping” and “be a drag on earnings”); Ex. 26, Piper Jaffray Health Care Conf., at 7 (“[W]e project that over the first year, [the hospitals will] probably lose money.”); Ex. 27, Q4 2015 Earnings Call, at 6 (“[W]e’ve said all along that we model these hospitals to turn positive in terms of cash flow after a one-year period . . . .”); Ex. 35, Q2 2016 Earnings Call, at 8 (“You do have to remember that as we go through the openings of these hospitals that it is a drain and then we come out the other side [] generating the cash.”). 5 See, e.g., Ex. 1, Prospectus (June 25, 2014), at 22 (“Facilities we open in new markets . . . may have higher . . . operating costs than facilities we open in existing markets, thereby affecting our overall profitability.”); id. at 23 (“Out results . . . may continue to be, significantly impacted by . . . preopening costs . . . .”); Ex. 8, 2014 10- K, at 27–28 (same); Ex. 28, 2015 10-K, at 27–28 (same). Case 4:17-cv-00449-ALM Document 119 Filed 02/05/18 Page 14 of 47 PageID #: 2245 10 Statement, at 28. As it turned out, McKesson ultimately failed to properly manage these business functions. Id. For example, collection of accounts receivable within 90-days fell from approximately 87% to 74% from October 2015 to September 2016, leading to a significant loss of revenue. Id. Adeptus hired additional third party service providers to resubmit previously denied claims and to collect from patients, but it had to write off $27 million of accounts receivable from 2015 to 2016. Id. at 28–29.6 Adeptus subsequently reported that it believed it had significant litigation claims against McKesson related to that company’s various failures. Id. Adeptus had repeatedly warned investors about the McKesson transition and the revenue collection risks. Specifically, Adeptus warned that “We depend on payments from a variety of third-party payors. If these payments are significantly delayed, are reduced or eliminated our revenue and profitability could decrease.” Ex. 8, 2014 10-K, at 31 (emphasis in original).7 C. Adeptus’s bankruptcy Adeptus filed a voluntary bankruptcy petition on April 19, 2017. Compl. ¶ 21. The Company provided three primary reasons for its financial distress. First, McKesson’s failures to properly manage Adeptus’s medical billing, collections, and 6 The JVs also wrote off $54.9 million. Id. 7 See also id. at 31–32 (“The amount that our facilities receive in payment for their services may be adversely affected by factors we do not control . . . . The reimbursement process is complex and can involve lengthy delays . . . . Retroactive adjustments may change amounts realized from third-party payors. Delays and uncertainties in the reimbursement process may adversely affect accounts receivable . . . . “); Ex. 28, 2015 10-K, at 32 (“Failure to timely or accurately bill for our services could have a negative impact on our net revenues, bad debt expense and cash flow.” (emphasis in original)). Case 4:17-cv-00449-ALM Document 119 Filed 02/05/18 Page 15 of 47 PageID #: 2246 11 revenue management led to a significant decrease in cash collected. See Ex. 43, Bankruptcy Disclosure Statement, at 27–29. Second, Adeptus faced a recent sharp increase in competition among freestanding emergency rooms, hospital emergency rooms, and urgent care clinics, which led to a decline in patient volume, a drop in revenue, and the closure of six facilities in Texas and Colorado. Id. at 29. Both of these factors combined to seriously diminish Adeptus’s cash flows. Third, the capital requirements of Adeptus’s rapid expansion strained both its credit and cash flow. Id. at 28. Adeptus also acknowledged and disclosed this issue during the putative class period.8 In response to its cash flow issues, Adeptus had already announced plans to move away from its capital-intensive expansion strategy. See, e.g., Ex. 37, Morgan Stanley Healthcare Conf., at 6; Ex. 38, Q3 2016 Earnings Call, at 5–6. But the various factors restricting cash flows eventually overtook Adeptus’s ability to pare back its working capital requirements, and Adeptus faced a liquidity crisis, leading to the bankruptcy and then this lawsuit. 8 For example, Hall explained that costs associated with changing the Colorado FERs over to be part of the JV “added to some cash flow requirements.” Ex. 30, Q1 2016 Earnings Call, at 8–9. And, in response to questions about cash flow guidance, Fielding explained that “one of the issues that we have on the JV with DFW is the fact that when you start a JV, you still incur that upfront cost of the fixed cost associated with those facilities, but you’ve got a lag of the revenue because it basically starts over.” Ex. 35, Q2 2016 Earnings Call, at 9. Case 4:17-cv-00449-ALM Document 119 Filed 02/05/18 Page 16 of 47 PageID #: 2247 12 ARGUMENT I. Each Executive can be held liable only for his own statements. The Supreme Court has “restrict[ed] liability under a § 10(b) private right of action to a person or entity with ultimate authority over a false statement . . . .” Lampkin v. UBS Painewebber, Inc. (In re Enron Corp. Sec., Derivative & “ERISA” Litig.), 238 F. Supp. 3d 799, 823 (S.D. Tex. 2017) (citing Janus Capital Grp., Inc. v. First Derivative Traders, 564 U.S. 135, 137–38 (2011)). Under Janus, a person cannot be held liable for statements made by or attributed to another person. See Janus, 564 U.S. at 142–43 (“[A]ttribution within a statement or implicit from surrounding circumstances is strong evidence that a statement was made by—and only by—the party to whom it is attributed.” (emphasis added)).9 The Complaint attributes statements made during investor calls to either Hall (see, e.g., Compl. ¶ 268) or Fielding (see, e.g., id. ¶¶ 282, 284). No statement is attributed to Cherrington. Plaintiffs allege no facts suggesting that any person other than the speaker is responsible for these remarks. Therefore, Hall is responsible only for his statements, Fielding is responsible only for his statements, and Cherrington cannot be held liable for any statement made on the investor calls.10 9 See also Cortina v. Anavex Life Scis. Corp., No. 15-CV-10162 (JMF), 2016 WL 7480415, at *4 (S.D.N.Y. Dec. 29, 2016) (“[T]he law is clear that a defendant may be held liable under Rule 10b-5(b) only if it ‘made’ the statement itself.” (collecting cases)). 10 For the same reasons, no Defendant can be held liable for analysts’ statements. Case 4:17-cv-00449-ALM Document 119 Filed 02/05/18 Page 17 of 47 PageID #: 2248 13 II. Plaintiffs have failed to adequately allege any false or misleading statement or omission. Plaintiffs’ prolix complaint alleges false or misleading statements on more than 25 different occasions, employing the type of lengthy block quotations that have been heavily criticized by courts. Rather than identify the specific facts that are false or misleading, Plaintiffs leave it up to Defendants and the Court to wade through long quotes and speculate about the precise statements that are at issue. This is improper. See, e.g., Williams v. WMX Tech., Inc., 112 F.3d 175, 178 (5th Cir. 1997) (“A complaint can be long-winded, even prolix, without pleading with particularity. Indeed, such a garrulous style is not an uncommon mask for an absence of detail.”).11 Parsing these copious quotations, Plaintiffs’ allegations can be logically categorized into the following misstatement “buckets”: (1) patient acuity level; (2) bad debt, reserves, and revenue collection issues; and (3) the Company’s JV strategy. To establish the falsity of these statements, Plaintiffs rely on anecdotal information, hindsight, and misconstrued post-bankruptcy statements rather than documentary evidence or first-hand knowledge. These sources do not provide an adequate factual foundation for a well-pleaded securities fraud claim. 11 See also In re Alamosa Holdings, Inc. Sec. Litig., 382 F. Supp. 2d 832, 858 (N.D. Tex. 2005) (“The Court will not waste its resources attempting to construe which statements are actionable and why each is actionable.”); In re Entrust Sec. Litig., No. 2:00–CV–119, 2002 WL 31968321, at *3 (E.D. Tex. Sept. 30, 2002) (“The ‘false and misleading statements’ are sometimes entire block quotes from conference calls or analysts’ reports. Some portions of the block quotes are in bold print or italicized, but the [complaint] makes no attempt to attribute any significance to bold print or italics.”). Case 4:17-cv-00449-ALM Document 119 Filed 02/05/18 Page 18 of 47 PageID #: 2249 14 A. The Executives accurately described patient acuity levels. A key facet of Adeptus’s business model was to focus on patients in need of emergency care, i.e., high-acuity patients. See Ex. 8, 2014 10-K, at 6, 19. Plaintiffs allege that the Executives overstated patient acuity levels, omitted to disclose that low acuity patients hampered Adeptus’s ability to collect payments from insurers, and omitted to describe what Plaintiffs describe as a pattern of over-billing. Compl. ¶¶ 50–62. As an initial matter, Plaintiffs admit that trained medical staff—not any Executive—determined the acuity level based on the patient’s conditions as measured by the American College of Emergency Physicians. Id. ¶ 52. There are no facts suggesting that any Executive had any involvement in determining patient acuity or pressured medical staff at emergency rooms to inflate patient acuity.12 Some of the challenged statements about patient acuity levels were made on investor conference calls, and included statements that the average acuity of 12 Nor could Adeptus control patient acuity by refusing to treat low-acuity patients. As Adeptus explained to investors, many of its facilities were required by the Emergency Medical Treatment and Labor Act or similar state laws to evaluate all patients for emergent conditions and, if any appeared, to treat the patient until no longer emergent. See, e.g., Ex. 8, 2014 10-K at 46. At the same time, state and federal laws did not require third party payors to reimburse for emergency room services where a patient was in fact low acuity. See id. at 47. Adeptus disclosed the tension between the care it was legally obligated to provide and potential revenue it could collect. See also Ex. 28, 2015 10-K at 46–47; Compl. ¶ 230 (noting that the distinction between FERs and urgent care clinics “does not stop patients seeking non-emergency treatment . . . from vising an [FER] and becoming outraged when their bill is higher . . . .”). Case 4:17-cv-00449-ALM Document 119 Filed 02/05/18 Page 19 of 47 PageID #: 2250 15 Adeptus’s patients was rising over time. Id. ¶¶ 222–52.13 For example, Hall stated that “we are seeing higher levels of acuity. . . . About 93% of our patients are Level III, IV, and V . . . Our average acuity level is actually higher than the hospitals with our partners.” Id. ¶ 241. Plaintiffs fail to allege any specific facts showing that these statements are false or misleading. Instead, they simply claim that Adeptus had a “practice of over-billing low-acuity patients.” Id. ¶ 98. This does not show the that Hall’s statements were false, and is itself just a conclusion based on one Colorado news segment that consisted of (1) several anecdotes of allegedly low- acuity patients receiving care at Adeptus’s FERs and receiving bills for thousands of dollars; and (2) generalized statements by insurance companies that a large percentage of customers who go to emergency rooms could be treated in urgent care clinics. Id. ¶¶ 98–100.14 The Complaint is devoid of any factual allegation that contradicts any of the Executives’ statements about acuity levels. Plaintiffs cannot just rely on anecdotal information and broad industry statistics to plead the falsity of specific statements about patient acuity levels. Id. Plaintiffs’ “facts,” even if presumed to be true, do not contradict the Executives’ actual statements. For example, it could 13 Plaintiffs also allege these and other misstatements were contained in Adeptus’s offering documents during the class period. These alleged misstatements and omissions are addressed at length in the Director Defendants’ Motion to Dismiss, which the Executives adopt by reference in its entirety. 14 For the reasons discussed, infra § VB, the Court should discount completely the confidential witness’s allegation that an internal Adeptus analysis revealed that 60% of its patients “could have been treated in urgent care.” Compl. ¶¶ 12, 62. In any event, this allegation does not contract the Executives’ statements. As Plaintiffs admit, they candidly disclosed that “Adeptus had previously treated a significant volume of urgent care patients . . . .” Id. ¶ 251. Case 4:17-cv-00449-ALM Document 119 Filed 02/05/18 Page 20 of 47 PageID #: 2251 16 simultaneously be true that Adeptus saw several low-acuity patients where the patient only needed urgent care, and that 93% of Adeptus’s patients had acuity levels 3, 4, and 5, with an average acuity score of 3.6, as Hall stated. Cf. id. ¶¶ 101, 244. For this reason, and for all of the additional reasons described in the Directors’ Motion to Dismiss, Plaintiffs have failed to allege any false or misleading statement concerning patient-acuity levels. B. Adeptus’s bad debt reserves and revenue cycle management issues were fully disclosed. Beginning on October 1, 2015, medical providers in the United States were required to classify all medical care using ICD-10. See Ex. 28, 2015 10-K, at 40. This classification system, which is crucial to a provider’s ability to receive payments from insurers, consisted of significantly more medical codes than the prior version. See id. at 40. Faced with this explosion in complexity, Adeptus chose to outsource its medical billing and collections to McKesson, a leading provider of medical billing services. Id.; Compl ¶ 81. In hindsight, this was a mistake. Once Adeptus outsourced these functions to McKesson, it lost control over them and became substantially reliant upon McKesson for their completion. Adeptus repeatedly disclosed the substantial risks it faced in billing and collections from third-party payors. See, e.g. Ex. 8, 2014 10-K, at 31–32; Ex. 28, 2015 10-K, at 31–33. In February 2016, Adeptus announced that it had an internal control deficiency in its financial statements as a result of its inability to provide documentation to its auditor confirming that McKesson had proper internal controls Case 4:17-cv-00449-ALM Document 119 Filed 02/05/18 Page 21 of 47 PageID #: 2252 17 in place. See Ex. 28, 2015 10-K, at 62. Management explained that such testing was impossible given how recently Adeptus had outsourced this function to McKesson. Id. Thus, investors were informed that Adeptus was not only reliant on McKesson to accurately bill and collect payments from insurers, but also that Adeptus could not verify that McKesson had adequate internal controls and processes in place. By the end of the second quarter of 2016, Adeptus had publicly disclosed certain negative financial metrics that were the result of transitioning its billing and collections processes to McKesson, including its provision for bad debt. See Ex. 35, Q2 2016 Earnings Call, at 3. Adeptus opined that this was the result of normal growing pains, and that the Company remained optimistic about the benefits of switching to McKesson. Id. When it became apparent that the problems were more serious, Adeptus timely updated investors. See Ex. 38, Q3 2016 Earnings Call, at 3. Plaintiffs allege that these and other similar statements were false or misleading when made, but they offer only two facts to show falsity. Compl. ¶¶ 267–68. First, Adeptus’s new management announced post-bankruptcy that the Company would write off $27 million of accounts receivable from 2015 and 2016 due to the mistakes McKesson made in revenue collection. Id. at ¶ 91. McKesson’s mistakes were certainly a significant contributor to Adeptus’s bankruptcy and greatly impacted the Company’s cash receipts, but an accounts receivable write-off announced in post-class period filings says nothing about whether Adeptus’s prior statements were false when made. Writing off bad-debt is not the same as restating Case 4:17-cv-00449-ALM Document 119 Filed 02/05/18 Page 22 of 47 PageID #: 2253 18 prior financials; while a restatement is an admission that prior financials were incorrect, a write-off simply reflects changed circumstances. For this reason, “[c]ourts have held that claims based on misstated bad debt reserves are insufficiently alleged where they: (i) do not identify any specific accounts that were in jeopardy when the alleged misrepresentations were made, (ii) do not identify any specific accounts in existence at the time the alleged misrepresentations were made that were ultimately rendered uncollectible, and (iii) fail to provide ‘details about . . . when and to what level the allowance should have been changed.’” Rieckborn v. Jefferies LLC, 81 F. Supp. 3d 902, 922 (N.D. Cal. 2015) (collecting cases). Without such specificity, “[t]here is no standard of comparison to what the correct numbers would have been.” Ind. Elec., 537 F.3d at 536. Plaintiffs provide none of the specificity necessary to show falsity. The second fact Plaintiffs point to is the alleged “smoking gun” statement that Adeptus made during its 2017 bankruptcy: “[a]fter retaining McKesson in [October] 2015, [Adeptus’s] management learned that key aspects of its revenue cycle management process were not being performed.” Compl. ¶ 125. Not only is this not an admission of anything, Plaintiffs’ spin is not even a fair characterization of the statement. The date in that sentence simply refers to when McKesson got hired, not to when former management learned of the problems with McKesson’s performance. Plaintiffs try to twist the statement into an admission that former management knew about the problems right away. See, e.g., id. ¶¶ 90, 125, 128. This a blatant mischaracterization, and also defies basic logic—How could former Case 4:17-cv-00449-ALM Document 119 Filed 02/05/18 Page 23 of 47 PageID #: 2254 19 management learn of the problems as soon as McKesson began its work? Adeptus’s management, both before and during bankruptcy, consistently and in good-faith described its current knowledge about revenue collection and the McKesson transition. As new information became available, Adeptus provided updates to investors. See, e.g., Ex. 35, Q2 2016 Earnings Call, at 3. The fact that Adeptus discovered problems with McKesson after-the-fact does not mean that the Executives’ earlier statements were false or misleading. Moreover, the Executives never said that no problems existed with the transition.15 Plaintiffs lack any factual basis for alleging the falsity of—much less a strong inference of scienter regarding—statements related to bad debt reserves and revenue management. Finally, “the claim that defendants did not plan their [bad debt] reserves properly16 is essentially a claim that defendants mismanaged the Company. Even if well-pled, allegations of mismanagement are not actionable under . . . federal securities laws.” Ciresi v. Citicorp, 782 F. Supp. 819, 821 (S.D.N.Y. 1991) (citing Santa Fe Indus., Inc. v. Green, 430 U.S. 462, 476 (1977)), aff’d 956 F.2d 1161 (2d Cir. 1992).17 15 To the contrary, Adeptus disclosed that it had a material weakness due to its inability to rely on McKesson’s internal controls for coding and billing. See Ex. 27, Q4 2015 Earnings Call, at 4. Adeptus also disclosed that the transition to McKesson had led to a delay in collection of its accounts receivable. See Ex. 30, Q1 2016 Earnings Call, at 4. 16 E.g., Compl. ¶¶ 61, 276, 279. 17 See also Abrams, 292 F.3d at 433 (“[T]he nature of the accounting problems at [Defendant] that lead to the restatement, i.e. uncollectible accounts receivable . . . , can easily arise from negligence, oversight or simple mismanagement, none of which give rise to the standard necessary to support a securities fraud action.”). Case 4:17-cv-00449-ALM Document 119 Filed 02/05/18 Page 24 of 47 PageID #: 2255 20 C. Adeptus accurately disclosed the terms and nature of the joint ventures to investors. Throughout the putative class period, Adeptus publicly disclosed its intention to grow its business through a series of JVs that included the opening of hospitals and free-standing emergency rooms in Arizona, Colorado, Texas, and elsewhere. See, e.g., Ex. 8, 2014 10-K, at 11–12. Plaintiffs allege that the Executives misrepresented the economics, risks, and potential benefits of the JV model in a laundry list of statements consisting of lengthy excerpts from Adeptus’s earnings calls. See, e.g., Compl. ¶¶143–252. These alleged misstatements concerning Adeptus’s JV strategy fall into two broad buckets—statements about their potential benefits, and statements about cost sharing. The statements about potential benefits are all protected forward-looking statements as discussed in Section III. The statements about cost sharing, that Adeptus would split the initial expenditures equally with its partners, were accurate. Plaintiffs allege that investors were surprised when they learned from new management that Adeptus was actually fronting 100% of the initial costs for each of its JVs, and therefore the Executives’ statements about cost sharing were false. Compl. ¶¶ 71, 76–77, 110. But no reasonable investor could have been surprised by new management’s 2016 comments about cost sharing. On August 13, 2015, Adeptus publicly disclosed a copy of its joint venture agreement with UCHealth Partners LLC as an exhibit to its second quarter 2015 10-Q SEC filing. See Ex. 20, Q2 2015 10-Q/A at Ex. 10.4, Ex. A. This exhibit plainly disclosed the following contract term: Case 4:17-cv-00449-ALM Document 119 Filed 02/05/18 Page 25 of 47 PageID #: 2256 21 Funding of Company Facilities: The Members acknowledge and agree that it is their mutual intent that Company Facilities will be funded using combinations of real estate and equipment leases and that the funds necessary for start- up expenses and working capital will be provided by Adeptus, or an Affiliate of Adeptus, through capital contributions or under the Line of Credit Agreement, thereby minimizing the need for Additional Capital Contributions from the Members. Id. (emphasis added). Accordingly, Adeptus booked its portion of the initial JV expenditures as losses under the line item “equity in earnings (loss) of unconsolidated joint ventures” in its financial statements, which Adeptus explained in its financial statements and on earnings calls. See, e.g., Ex. 28, 2015 10-K, at 56; Ex. 17, Q2 2015 Earnings Call, at 3. In addition, Adeptus’s financial statements accurately disclosed the economics of the JVs, including the cash flow impact. As Adeptus explained, when the JV opened a new facility, Adeptus provided the cash needed for pre-opening costs, including payroll and vendor payments. See Ex. 40, Q3 2016 10-Q, at 19. Adeptus’s half of these costs was booked as a loss on its financial statements, while the other half constituted a loan to the partnership booked as an account receivable. Id. Importantly, Adeptus repeatedly disclosed to investors its (1) total accounts receivable, (2) total actual cash position, and (3) cash outflows. See, e.g., Ex. 28, 2015 10-K, at 82, 86; Ex. 14, Q1 2015 10-Q, at 5, 9. Plaintiffs’ real gripe is not that the Executives misrepresented how much of the initial costs Adeptus was responsible for (it is undisputed that it was only ever responsible for the portion equal to its ownership interest), but rather that Adeptus Case 4:17-cv-00449-ALM Document 119 Filed 02/05/18 Page 26 of 47 PageID #: 2257 22 did not disclose timely that it advanced the remaining half of the opening costs to its partners in the form of a loan to the partnership. This argument fails for two reasons. First, these loans were disclosed on Adeptus’s financial statements, as an increase in the Company’s accounts receivables. See, e.g., Ex. 28, 2015 10-K, at 82 (reporting that “other receivables and current assets” increased substantially from 2014 to 2015). The line of credit for working capital was specifically disclosed in the UCHealth Partners LLC joint venture agreement filed as an exhibit to Adeptus’s 10-Q on August 13, 2015. See Ex. 20, Q2 2015 10-Q/A at Ex. 10.4, Ex. A. Second, Adeptus was under no obligation to disclose these loans. It is well- settled law that a disclosure is only required when there is either an affirmative legal duty to disclose the information or if the absence of the information renders a prior statement misleading by omission. Kapps v. Torch Offshore, Inc., 379 F.3d 207, 211 n.5 (5th Cir. 2004). Here, Plaintiffs have not alleged that Adeptus violated GAAP, for instance, by not breaking out its accounts receivable line item to show exactly how much was owed by the JVs. Nor have Plaintiffs alleged that this level of detail was required by any SEC disclosure obligation.18 But even if Adeptus never disclosed the loans to the partnerships for half the start-up costs, this would not render the challenged statements misleading. Plaintiffs contend that new management’s discussion of the cash flows contradicts 18 Plaintiffs’ conclusory allegation that Item 303 required disclosure, should be rejected for the reasons explained in the Directors’ Motion to Dismiss, which is incorporated by reference herein. Case 4:17-cv-00449-ALM Document 119 Filed 02/05/18 Page 27 of 47 PageID #: 2258 23 what the Executives told them. See, e.g., Compl. ¶ 77. The key distinction—which Plaintiffs miss entirely—is that new management was discussing initial cash outflows, while the Executives’ prior statements concerned the underlying economics of the joint venture. For example, while quoting the statement that Adeptus “share[d] the pre-opening,” i.e. id. ¶ 7, the Complaint omits the immediately preceding sentence: “[T]he $900,000 that you see on the income statement is reflective of some of the revenue that’s associated with the joint venture as well, so it’s not apples-to-apples.” See Ex. 7, Q4 2014 Earnings Call, at 10. The challenged remark was plainly directed to the JVs’ underlying economics, not specific cash flows, which at the time the statements were made was not a significant concern for Adeptus. See id. at 12. By contrast, when the Executives discussed the impact that JVs would have on cash flow, they were clear that hospitals would not “turn positive in terms of cash flow” for at least a year. Ex. 27, Q4 2015 Earnings Call, at 6; see also Ex. 35, Q2 2016 Earnings Call, at 8.19 Plaintiffs have thus failed to plead that these statements were false or misleading when made. 20 19 These disclosures belie Plaintiffs’ breathless claims that the Executives misled investors about the initial profitability of the JVs. Compare Compl. ¶¶ 126, 134, 181 with supra n.4 & n.5. 20 Other statements the Complaint cites as misleading investors as to the cash flows of the JVs do not, in fact, relate to JVs at all. Rather, they discuss standalone facilities or overall growth. Compare Compl. ¶¶ 144–45 with Ex. 5, Q3 2014 Earnings Call, at 7–9; also compare Compl. ¶ 186 with Ex. 26, Piper Jaffray Health Care Conf., at 8. Other allegedly misleading statements about JV cash flows are not accurately reflected in the Compl. See, infra, n. 22 (discussing Compl. ¶ 71). Case 4:17-cv-00449-ALM Document 119 Filed 02/05/18 Page 28 of 47 PageID #: 2259 24 III. The Executives’ statements concerning prospective benefits of the joint venture business model are protected forward-looking statements. Adeptus transitioned during the class period from providing care in independent facilities to facilities associated with large hospital networks via JVs. Compl. ¶¶ 66–67. Plaintiffs understood this, and do not dispute that these facilities would benefit Adeptus by, for example, allowing it to expand into states that do not allow FERs. Id. Nor can Plaintiffs dispute that the Executives disclosed this strategy’s risks, including the risk that higher operating costs could prevent the JV facilities from generating profits for the Company. See, e.g., Ex. 1, Prospectus (June 25, 2014), at 22; Ex. 7, Q4 2014 Earnings Call, at 7. Still, Plaintiffs allege that, the Executive’s statements about this strategy’s potential future benefits were misleading because they did not disclose the mechanism by which Adeptus shared operating costs with its JV partners. Compl. ¶¶ 76–77. However, these challenged statements are all forward-looking and protected by the PSLRA safe harbor. “The safe harbor has two independent prongs: one focusing on the defendant’s cautionary statements and the other on the defendant’s state of mind.” Southland Sec. Corp. v. INSpire Ins. Sols., Inc., 365 F.3d 353, 371 (5th Cir. 2004). Under the first prong, a statement is absolutely protected—regardless of the defendant’s state of mind—if it is “identified as a forward-looking statement, and accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially Case 4:17-cv-00449-ALM Document 119 Filed 02/05/18 Page 29 of 47 PageID #: 2260 25 from those in the forward-looking statement.” 15 U.S.C. § 78u-5(c)(1)(A)(i).21 Under the second prong, even if the statement is not accompanied by cautionary language, a forward-looking statement is not actionable unless the plaintiff shows that the statement was made with “actual knowledge” that it was false or misleading at the time it was made (i.e., severe recklessness is insufficient). Id. § 78u-5(c)(1)(B). There can be no doubt that statements about the anticipated benefits of the JV strategy are forward-looking statements under Section 21E(i)(1) of the Exchange Act. Plaintiffs allege as misleading various statements in which the Executives discussed what they “think” (Compl. ¶¶ 143, 183, 196) and “expect” (id. ¶¶ 149, 166) will “probably” (id. ¶ 163) happen. These are textbook examples of forward-looking statements. See Congregation of Ezra Sholom v. Blockbuster, Inc., 504 F. Supp. 2d 151, 163 (N.D. Tex. 2007) (finding that statements were protected by the PSLRA safe harbor when “marked by words such as ‘anticipate,’ ‘expect,’ ‘believe,’ ‘likely,’ etc.”).22 The Executives’ statements also include conditions that any reasonable 21 Similarly, the safe harbor applies to oral forward-looking statements if they are accompanied by an oral statement (1) noting that risk factors may cause actual results may differ materially from those projected, and (2) identifying where those factors may be found in the company’s filings. Southland, 365 F.3d at 372; 15 U.S.C. § 78u-5(c)(2)(B). 22 In some cases, Plaintiffs selectively omitted precatory phrases from Defendants’ actual statements. Compare Ex. 7, Q4 2014 Earnings Call, at 7 with Compl. ¶ 149 (omitting “estimate” and “range”); compare Ex. 17, Q2 2015 Earnings Call, at 3–4 with Compl. ¶ 167 (omitting “[W]e just don’t know until we get some of these [metrics].”); compare Ex. 17, Q2 2015 Earnings Call, at 4 with Compl. ¶ 168 (“It’s way too early yet to give a global view of that”); compare Ex. 21, Q3 2015 Earnings Call, at 10 with Compl. ¶ 177 (omitting immediately following sentence, “And so, financially, we think it’ll be incredibly rewarding.”); compare Ex. 32, Bank of America Merrill Lynch Health Care Conf., at 4 with Compl. ¶ 197 (omitting Case 4:17-cv-00449-ALM Document 119 Filed 02/05/18 Page 30 of 47 PageID #: 2261 26 investor would understand to signal uncertain predictions.23 Similarly, the projections of EBITDA and other metrics (e.g., Compl. ¶¶ 166, 169–70), are not actionable. See, e.g., Pension Fund Grp. v. Tempur-Pedic Int’l, Inc., 614 F. App’x 237, 243–44 (6th Cir. 2015) (holding that management’s financial guidance “falls squarely within” the safe harbor). Further, the forward-looking statements made at Adeptus’s earnings calls and included in its SEC filings were accompanied by meaningful cautionary language. Risk disclosures in prior SEC filings may be incorporated by reference into an oral statement. 15 U.S.C. § 78u-5(c)(2)(B). Here, each of Adeptus’s earnings calls opened with an “oral statement that additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statement is contained in a readily-available [identified] written document or portion thereof.” Id. Specifically, the Executives directed investors to the risk immediately following sentences, “Am I sitting here today and saying our facilities will average 50 or 60 patients a day? No.”). At times, the Complaint does not accurately reflect what was said. Compare Compl. ¶¶ 71, 158 (“We will not have a step back on our EBITDA going forward”) with Ex. 12, Q1 2015 Earnings Call at 4–5 (“But, just for example, if you said the profit was $10 million, what happens on the joint venture is we get the first $10 million of earnings, so we would not have a step back on our EBITDA.”); compare Compl. ¶ 184 (“Defendant Fielding stated, that even though the JV was ‘giving away 50.1%, that the pie is bigger and because we are getting approximately 65% of the pie, then our average profitability per facility would be higher.’”) with Ex. 23, Stephens Inc. Fall Investment Conf. at 8 (“I mean, so, when we did the JV, the thought process was even though we’re giving away 50.1%, that pie is bigger. And because we’re getting approximately 65% of the pie, then our average profitability per facility would be higher.”). 23 See, e.g., Compl. ¶¶ 152, 155, 176 (discussing marginal revenues “once you get above our breakeven”); id. ¶¶ 159, 200 (discussing revenue “if the profit was $10 million . . . ”); id. ¶ 167 (noting that the Arizona JV is a “data point of one”). Case 4:17-cv-00449-ALM Document 119 Filed 02/05/18 Page 31 of 47 PageID #: 2262 27 factors discussed in Adeptus’s SEC filings.24 Adeptus’s SEC filings contain detailed and company-specific risk factors that emphasize that “growth” and “expansion into new markets” were central to its profitability. See Ex. 48, Chart of Relevant Risk Factors. Among other things, each filing explicitly warned investors that “Facilities we open in new markets . . . may have higher . . . operating costs than facilities we open in existing markets, thereby affecting our overall profitability.” Ex. 1, Prospectus (June 25, 2014), at 22; Ex. 8, 2014 10-K, at 27; Ex. 28, 2015 10-K, at 27. The Executives also disclosed that the JV hospitals would bear high opening costs in their earnings calls. See, e.g., Ex. 27, Q4 2015 Earnings Call, at 6, 13, 15– 16. Further, as new JV facilities came on board, the Executives candidly acknowledged that opening costs were to blame for straining cash flow—disclosures the Complaint conspicuously omits. For example, Plaintiffs derisively note that Defendants “attributed the lag in cash flow to . . . ‘some signage that we put up’” (Compl. ¶¶ 193–94), but omit the explanation that this signage was an opening cost for a JV facility. See Ex. 30, Q1 2016 Earnings Call, at 9 (“There was also some signage that we put up when we changed signage for the Colorado facility. So that added to some cash flow requirements.”); also compare Ex. 27, Q4 2015 Earnings Call, at 6 with Compl. ¶ 188 (quoting the statement that the Arizona JV made money, but omitting the sentence that immediately follows: “And so with that being 24 See Ex. 5, Q3 2014 Earnings Call, at 1; Ex. 7, Q4 2014 Earnings Call, at 1; Ex. 12, Q1 2015 Earnings Call, at 1; Ex. 17, Q2 2015 Earnings Call, at 1; Ex. 21, Q3 2015 Earnings Call, at 1; Ex. 27, Q4 2015 Earnings Call, at 1; Ex. 30, Q1 2016 Earnings Call, at 1; Ex. 35, Q2 2016 Earnings Call, at 1; Ex. 38, Q3 2016 Earnings Call, at 1. Case 4:17-cv-00449-ALM Document 119 Filed 02/05/18 Page 32 of 47 PageID #: 2263 28 said, of course, [the] Dallas [JV] did not, to state the obvious.”). These disclosures identify the precise risks that Plaintiffs admit materialized. See, e.g. Compl. ¶ 76 (pointing to bankruptcy disclosure that “it takes ‘more than a year for a hospital to become profitable’”); id. ¶ 146 (alleging failure to disclose the risk of high “operating losses of the JVs”). Investors who read the risk disclosures were told that the operating costs of the JV facilities could threaten the Company’s profitability. That the Executives did not also disclose the confidential contractual terms underlying some of these risks is not fraud.25 Finally, even if the cautionary language and context cited above were deemed insufficient, the forward-looking statements would still be protected by the safe harbor because Plaintiffs have failed to allege that any of the Executives had actual knowledge that these projections were false or misleading when made. See Alamosa Holdings, 382 F. Supp. 2d at 847. Plaintiffs allege that the Executives knew about the JV agreements’ terms and that the JV facilities initially operated at a loss, see, e.g., Compl. ¶ 126, but they do not allege that the Executives “w[ere] certain” that the JV facilities would so impair Adeptus’s cash flow as to cause bankruptcy, see McNulty v. Kanode, No. A-13-CV-026-LY, 2013 WL 12077503, at *7 (W.D. Tex. Nov. 5, 2013) (finding that complaint failed to plead actual knowledge that statements were misleading). 25 See N. Port Firefighters’ Pension—Local Option Plan v. Temple-Inland, Inc., 936 F. Supp. 2d 722, 760 (N.D. Tex. 2013) (finding statements within the safe harbor where “[w]hile [defendants’] cautionary statements do not warn against the exact behavior that Plaintiffs complain of, . . . the statements do warn of the root cause” of the drop in stock value). Case 4:17-cv-00449-ALM Document 119 Filed 02/05/18 Page 33 of 47 PageID #: 2264 29 IV. The Executives’ optimistic statements concerning Adeptus’s business strengths and potential are immaterial puffery. “[I]t is well-established that generalized positive statements about a company’s progress are not a basis for liability.” Nathenson, 267 F.3d at 419 (citing Lasker v. N.Y. Elec. & Gas Corp., 85 F.3d 55, 59 (2d Cir. 1996)). This is “because they are immaterial.” Rosenzweig v. Azurix Corp., 332 F.3d 854, 869 (5th Cir. 2003). The Complaint is rife with allegations of immaterial puffery. For example, Plaintiffs complain about the Executives’ statement that “[t]he Company is doing really well,” and their praise for JV partners. See Compl. ¶¶ 178–79, 197; see also id. ¶¶ 159–60, 167–68, 188–89 (noting that management was “bullish”, “excited”, or “pleased” with “really nice performance” that was “above . . . initial expectations”). These and all similar allegations are immaterial as a matter of law. V. Plaintiffs have failed to raise a strong inference of scienter. Scienter is a “‘a mental state embracing intent to deceive, manipulate, or defraud’ . . . or severe recklessness.” Rosenzweig, 332 F.3d at 866 (quoting Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12 (1976)). The PSLRA requires that a complaint “state with particularity facts giving rise to a strong inference that the defendant acted with” scienter and that it do so “with respect to each act or omission alleged” to be false or misleading. 15 U.S.C. § 78u-4(b)(2) (emphasis added). “To qualify as ‘strong’ [for PSLRA purposes,] an inference of scienter must be more than merely plausible or reasonable—it must be cogent and at least as compelling as any opposing inference of nonfraudulent intent.” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 314 (2007). Case 4:17-cv-00449-ALM Document 119 Filed 02/05/18 Page 34 of 47 PageID #: 2265 30 “The PSLRA pleading standard for scienter is especially challenging for plaintiffs.” Plotkin v. IP Axess Inc., 407 F.3d 690, 696 (5th Cir. 2005); see also Rosenzweig, 332 F.3d at 867 (recognizing “the PSLRA’s rigorous pleading standards”). Plaintiffs cannot “rest on the inference that defendants must have been aware of the misstatement based on their positions with the company.” Ind. Elec., 537 F.3d at 535 (quoting Abrams, 292 F.3d at 432). Moreover, the Fifth Circuit “has rejected the ‘group pleading approach to scienter,’ and [therefore] focuses on the state of mind of the corporate officials who make, issue, or approve the statement rather than the ‘collective knowledge of all the corporation’s officers and employees.’” Local 731 Int’l Bhd. of Teamsters Excavators & Pavers Pension Tr. Fund v. Diodes, Inc., 810 F.3d 951, 957 (5th Cir. 2016) (quoting Ind. Elec., 537 F.3d at 533). Plaintiffs have failed to allege that any Executive had a motive to commit securities fraud, or otherwise made a knowing or severely reckless misstatement. Instead, Plaintiffs impermissibly rely on the Executives’ positions, on group pleading, and on accusations of fraud by hindsight. A. The Executives’ stock sales do not raise a “strong inference” of scienter because they were not suspicious in timing or amount. Stock sales, by themselves, do not establish scienter. See Southland, 365 F.3d at 368. Only stock sales that are suspicious in timing or amount may contribute to an inference of scienter. Id. The Executives’ stock sales are not at all suspicious for four reasons. First, Hall’s $5 million purchase of Adeptus preferred stock on November 7, Case 4:17-cv-00449-ALM Document 119 Filed 02/05/18 Page 35 of 47 PageID #: 2266 31 2016 completely negates any inference of scienter against him. Ex. 41, Form 4. Just as Hall was departing Adeptus, and just as Plaintiffs allege that Adeptus was in the midst of a major liquidity crisis, Hall actually purchased a significant amount of Adeptus stock. This is not the action of a fraudster looking to make a quick exit from a company after profiting from stock sales. Indeed, stock purchases by a defendant negate an inference of scienter. See Eminence Capital LLC v. Aspeon, Inc. (In re Aspeon, Inc. Sec. Litig.), 168 F. App’x 836, 840 (9th Cir. 2006) (“The purchase of stock by Aspeon’s CEO tends to negate the inference of scienter.”). Second, all of the stock sales occurred in connection with three different public stock offerings. Compl. ¶¶ 94–96. Each of these offerings was preceded weeks in advance by a prospectus and registration statement that laid out the exact terms of each Executive’s stock sales. See Ex. 13, S-1 Registration Statement (Apr. 27, 2015), at 67–68; Ex. 19, Prospectus (July 29, 2015), at S-72–73; Ex. 34, Prospectus, (June 2, 2016), at S-16–17. Thus, the terms of the stock sales were set ahead of time, with no ability to vary the amount or timing of the sale based on any fraudulent scheme. Third, the timing of the sales negates an inference of suspiciousness. The sales occurred during a period lasting more than a year, and the final stock sale occurred approximately five months before the liquidity crisis that caused the Company’s stock price to decline. See Exs. 45–47, Insider sales information charts and relevant SEC filings; Compl. ¶¶ 92–96, 120. The more time that elapses between a stock sale and the revelation of alleged misstatements, the less these Case 4:17-cv-00449-ALM Document 119 Filed 02/05/18 Page 36 of 47 PageID #: 2267 32 sales may contribute to an inference of scienter.26 The logic of this holding is readily apparent—the more removed a stock sale is from the stock drop, the less likely it is that the sale occurred merely to avoid an anticipated loss or capitalize on inside information. A sale the day before the announcement of bad news is likely to raise eyebrows, while a sale the year before would not. The Fifth Circuit has noted that when an insider sells stock, and then that stock continues to increase in price over time, this indicates that the insider sale was “not unusually prescient.” Southland, 365 F.3d at 369. In this case, the Executives’ first alleged sale was on May 11, 2015, at a price of $63.75 per share. See Exs. 45–47, Insider sales information charts and relevant SEC filings; Ex. 49, Adeptus historical stock price chart. But Adeptus’s stock price continued to rise over the following months, reaching a peak price of over $120 per share. See Ex. 49, Adeptus historical stock price chart. This does not plausibly infer that the Executives knew Adeptus’s stock price was inflated by fraud. Fourth, Defendants Fielding and Cherrington had no control over the timing of their stock sales, as they were made in connection with public equity offerings that were set by Adeptus’s Board. Compl. ¶¶ 92–96; see DEL. CODE ANN. Tit.8, § 151(a) (2018). Without such control, these sales cannot contribute to an inference of scienter, much less the required strong inference. The lack of control means the sales were analogous to stock divestitures made pursuant to a 10(b)(5)-1 trading 26 See, e.g., Southland, 365 F.3d at 369 (holding that stock sales were not suspicious based on their timing); Izadjoo v. Helix Energy Sols. Grp., Inc., 237 F. Supp. 3d 492, 518 (S.D. Tex. 2017) (holding that stock sales five months before a corrective disclosure were not indicative of scienter). Case 4:17-cv-00449-ALM Document 119 Filed 02/05/18 Page 37 of 47 PageID #: 2268 33 plan. Just as sales made under such a trading plan do not contribute to an inference of scienter, the sales by Fielding and Cherrington do not for the same reason. Scienter is typically inferred by large, voluntary divestitures of stock suspiciously timed to preempt the announcement of previously-known bad news. The sales here exhibit none of these classic indicia of suspiciousness, as they were planned (and publicly disclosed) weeks in advance, spread out over more than a year, and concluded months before Adeptus’s liquidity problems arose. Accordingly, the Executives’ stock sales do not contribute to an inference of scienter. B. The “former employee’s” allegations do not contribute to an inference of scienter. Plaintiffs are unable to identify a single internal document available to an Executive that demonstrates that he knew or ignored the falsity of any challenged statement. Plaintiffs instead rely on a former employee, who alleges, inter alia, that the Executives intentionally misled the market concerning the viability of Adeptus’s business model, its monthly financials, and its bad debt assumptions. Compl. ¶ 62. “[C]ourts must discount allegations from confidential sources.” Ind. Elec., 537 F.3d at 535 (discussing Tellabs, 551 U.S. 308). But the Complaint’s allegations fall so far short that they should be given no consideration at all. A confidential witness must be “identified through general descriptions in the complaint with sufficient particularity to support the probability that a person in the position occupied by the source as described would possess the information pleaded to support the allegations of false or misleading statements.” ABC Case 4:17-cv-00449-ALM Document 119 Filed 02/05/18 Page 38 of 47 PageID #: 2269 34 Arbitrage, 291 F.3d at 353. In lieu of names, a complaint should give details such as (1) the person's job description, (2) individual responsibilities, (3) specific employment dates, and (4) where and when the confidential source came to know the information supporting an inference of scienter, such as when a relevant comment was made to the confidential source. See Cent. Laborers’ Pension Fund v. Integrated Elec. Servs., 497 F.3d 546, 552 (5th Cir. 2007); Ind. Elec., 537 F.3d at 538. The Complaint merely identifies its sole confidential witness as “a former member of Adeptus’s Executive Committee.” Compl. ¶ 62. Notably, Plaintiffs do not allege that this former employee was an executive of Adeptus identified in the Company’s SEC filings. See Ex. 9, Proxy (April 14, 2015), at 15–16; Ex. 29, Proxy (April 15, 2016), at 15. Adeptus did not use the term “Executive Committee” in its SEC filings, which further raises ambiguity about this person’s role at the Company. There is no job title or description, and no time period during which the confidential witness is alleged to have worked at Adeptus. Id. Plaintiffs do not even describe how the confidential witness came to learn of the facts underlying his allegations, whether by internal reports, first-hand conversations, or water cooler gossip. In short, the Complaint lacks any factual allegations that would permit the Court to analyze the credibility of the former employee’s personal knowledge. The allegations therefore must be given no weight in the scienter analysis. Case 4:17-cv-00449-ALM Document 119 Filed 02/05/18 Page 39 of 47 PageID #: 2270 35 C. Plaintiffs misconstrue the alleged admissions of Adeptus’s management during the bankruptcy. Plaintiffs’ scienter theory relies upon post-bankruptcy statements made by new management as specific evidence that former management “knew [the challenged] statements were misleading.” See, e.g., id. ¶ 125. These post- bankruptcy statements were made in April 2017 (id. ¶ 50)—well after the alleged misstatements and omissions in 2015 and 2016 (id. ¶ 50–91)—and “is plainly a hindsight assessment” of former management by new management. See Rosenzweig, 332 F.3d at 867–68; Denny v. Barber, 576 F.2d 465, 470 (2d Cir. 1978) (Friendly, J.) (coining the phrase “fraud by hindsight” and explaining why this is impermissible). Plaintiffs twist new management’s post-bankruptcy statement about McKesson into an “admission” to contend that former management knew of the revenue-cycle-management problems all along. See Compl. ¶¶ 14, 125. But, as explained above, this statement describes the problems in generalized terms and, more importantly, does not state with particularity when and how each Executive learned of the revenue-cycle management problems. See supra § IIB. Nor does it explain how this information rendered any of the Executives’ earlier statements false or misleading. The Court should also disregard this and other “group-pleaded allegations,” because they do not help Plaintiffs “‘distinguish among those they sue and enlighten each defendant as to his or her particular part in the alleged fraud.’” Owens v. Jastrow, 789 F.3d 529, 537–38 (5th Cir. 2015) (quoting Southland, 365 F.3d at 365). Case 4:17-cv-00449-ALM Document 119 Filed 02/05/18 Page 40 of 47 PageID #: 2271 36 Similarly, Plaintiffs’ allegation—“the new top executives that replaced the Executive Defendants . . . recognized that Adeptus ‘needed to deliver more transparent information and results’ going forward,” Compl. ¶ 19—is also “unpersuasive of scienter, as [it does] not show what any particular individual knew [about the revenue-cycle-management problems], or was severely reckless in not knowing, at the time” the challenged statements were made. See Southland, 365 F.3d at 383. The generalized allegation that the Executives became aware of problems with revenue-cycle management after transitioning the Company’s billing to McKesson is also consistent with Fielding’s statement, on July 21, 2016, that “a portion of the increase [in DSO] is due to increased payment plans, the remainder is due to our new third-party revenue cycle [company] (i.e., McKesson) experiencing growing pains.” Compl. ¶ 267. The more common sense and plausible inference is that the Executives became aware of the problems with revenue-cycle management at some point after Adeptus transitioned its billing to McKesson, but believed that these problems could be resolved. See Tellabs, 551 U.S. at 323–24. This is supported by the fact that Adeptus repeatedly and candidly disclosed that it had a material weakness in its internal controls related to McKesson. See, e.g., Ex. 28, 2015 10-K, at 47–48. For example, Adeptus disclosed that it “identified a material weakness in [its] internal control over financial reporting”; specifically, “the Company concluded that it did not have the internal expertise within its current structure to meet the medical record coding and billing compliance requirements under ICD-10. As such, Case 4:17-cv-00449-ALM Document 119 Filed 02/05/18 Page 41 of 47 PageID #: 2272 37 management outsourced these functions to a third-party service provider as of October 1, 2015.” See id. And once the out-sourcing was complete, Adeptus disclosed that it continued to have a material weakness due to its inability to verify the internal controls being utilized internally at McKesson. See Ex. 27, Q4 2015 Earnings Call, at 4. Plaintiffs have failed to plead specific facts supporting an inference that the Executives knew or were reckless in not knowing of McKesson’s problems prior to when those issues were publicly disclosed. D. The Executives’ personal involvement in aspects of Adeptus’s business is not evidence of scienter. It is well-settled that “an officer’s position with a company does not suffice to create an inference of scienter.” Diodes, 810 F.3d at 958 (quoting Nathenson, 267 F.3d at 424). This remains true even when executives are personally involved in an important aspect of the business. See In re Sec. Litig. BMC Software, Inc., 183 F. Supp. 2d 860, 885 (S.D. Tex. 2001) (dismissing a complaint that “only conclusorily alleges that Defendants’ scienter was based on their executive positions, their involvement in day-to-day management of BMC’s business, their access to internal corporate documents, conversations with corporate officers and employees, and their attendance at management and Board meetings”). Having failed to plead facts showing that any Executive had actual knowledge that the challenged statements were false or misleading when made, Plaintiffs also try to downplay the applicable standard when they allege that “Defendants’ failure . . . to discover the falsity of their statements about the most significant issues affecting Adeptus was utterly reckless.” Compl. ¶ 134; see also id. Case 4:17-cv-00449-ALM Document 119 Filed 02/05/18 Page 42 of 47 PageID #: 2273 38 ¶ 124. In the Fifth Circuit, severe recklessness can constitute scienter for purposes of Section 10(b) claims, but only when it is “an extreme departure from the standards of ordinary care.” Rosenzweig, 332 F.3d at 866. Plaintiffs have made no such showing. First, the allegations about patient acuity are primarily anecdotal. See Compl. ¶¶ 98–100. While it is true that Hall and Fielding were involved in the JV strategy and were generally familiar with the Company’s acuity data, it is unreasonable to expect a high-level executive to have detailed knowledge of the medical condition of a particular patient, or whether a patient was charged for having a splinter removed. See, e.g., id. ¶¶ 16, 102, 241–42. Second, the Executives had to rely on McKesson with respect to the revenue- cycle issues because the Company had outsourced its medical-record coding and billing functions to McKesson in October 2015. See Ex. 28, 2015 10-K, at 47–48, 110. And, as previously discussed, Adeptus disclosed issues with McKesson as they arose. E. The Executives’ resignations do not contribute to an inference of scienter. Finally, Plaintiffs point to the Executives’ departures in 2016 as evidence of scienter. Compl. ¶ 136. Courts regularly reject this argument. Executive resignations are generally “unavailing as proof of the commission of fraud.” Southland, 365 F.3d at 383; see also Abrams, 292 F.3d at 434 (executive resignations did not have “any scienter implications”). In one recent case, the court stated that “[t]he resignation of officials is, in and of itself, unavailing as proof of the commission of fraud when no specific evidence indicates the resigning officials Case 4:17-cv-00449-ALM Document 119 Filed 02/05/18 Page 43 of 47 PageID #: 2274 39 or their replacements knew of any accounting irregularities or that such irregularities were the reason for their resignations,” and noted that “[m]ultiple Fifth Circuit decisions suggest resignations have little implication on the scienter analysis.” In re ArthroCare Corp. Sec. Litig., 726 F. Supp. 2d 696, 724–25 (W.D. Tex. 2010). Executives leave positions for many reasons, most often related to the financial and strategic concerns facing the company. Such a change is particularly unsurprising during difficult periods of growth and transition, or in industries with rapidly changing economics and regulations, all of which applied to Adeptus in mid- 2016. Nor is it suspicious that the Company later stated that Cherrington’s departure was “involuntary.” Compl. ¶ 136. Plaintiffs do not allege that the Company or its new management stated or implied that the reason for the Executives’ departures—voluntary or not—had anything to do with alleged wrongdoing. These departures, therefore, do not contribute to an inference of scienter. VI. Plaintiffs also fail to plead adequately a claim under any other cause of action. Plaintiffs also allege that the Executives violated Section 11 of the Securities Act and are liable as control persons for both Section 10(b) and Section 11 violations under Sections 20(a) of the Exchange Act, and Section 15 of the Securities Act respectively. Id. ¶¶ 333–41, 413–19, 431–39. These claims should also be dismissed. With respect to the Section 11 cause of action, Plaintiffs’ allegations fail to Case 4:17-cv-00449-ALM Document 119 Filed 02/05/18 Page 44 of 47 PageID #: 2275 40 state a claim for all of the reasons discussed at length in the Directors’ Motion to Dismiss and the Underwriters’ Motion to Dismiss. For purposes of efficiency, the Executives join in all of those arguments, and incorporate them here by reference. Plaintiffs have also failed to adequately allege claims against the Executives as control persons. Under both Section 20(a) of the Exchange Act and Section 15 of the Securities Act, a plaintiff may only state a claim if they can first establish primary liability under Section 10(b) and Section 11 respectively. See 15 U.S.C. §§ 78t, 77o. For all of the reasons described in the Defendants’ collective Motions to Dismiss, Plaintiffs have failed to state any claim—accordingly, their control person claims must also fail. CONCLUSION For all of the foregoing reasons, and for all of the reasons in Defendants’ Motions to Dismiss, the Complaint should be dismissed under for failing to state a claim. Case 4:17-cv-00449-ALM Document 119 Filed 02/05/18 Page 45 of 47 PageID #: 2276 41 Dated: February 5, 2018 Respectfully submitted, KING & SPALDING LLP /s/ Paul R. Bessette__ Paul R. Bessette Texas Bar No. 02263050 Michael J. Biles Texas Bar No. 24008578 Tyler W. Highful Texas Bar No. 24083176 500 West 2nd St., Suite 1800 Austin, TX 78701-4684 (512) 457-2000 (phone) (512) 457-2100 (fax) pbessette@kslaw.com mbiles@kslaw.com thighful@kslaw.com Counsel for Defendants Timothy Fielding, Thomas S. Hall, and Graham B. Cherrington Case 4:17-cv-00449-ALM Document 119 Filed 02/05/18 Page 46 of 47 PageID #: 2277 42 CERTIFICATE OF SERVICE I certify that on February 5, 2018, all counsel of record who are deemed to have consented to electronic service are being served with a copy of this document via the Court’s CM/ECF Filing System on all parties in this case. /s/Paul R. Bessette__ Paul R. Bessette Case 4:17-cv-00449-ALM Document 119 Filed 02/05/18 Page 47 of 47 PageID #: 2278