Oklahoma Law Enforcement Retirement System v. Adeptus Health Inc. et al

MOTION to Dismiss

E.D. Tex.February 5, 2018

UNITED STATES DISTRICT COURT EASTERN DISTRICT OF TEXAS SHERMAN DIVISION OKLAHOMA LAW ENFORCEMENT RETIREMENT SYSTEM, Individually And On Behalf Of All Others Similarly Situated, Plaintiff, vs. ADEPTUS HEALTH INC., et al., Defendants. Case No. 4:17-cv-00449-ALM Judge Amos L. Mazzant, III UNDERWRITER DEFENDANTS’ MOTION TO DISMISS THE CONSOLIDATED CLASS ACTION COMPLAINT AND BRIEF IN SUPPORT Case 4:17-cv-00449-ALM Document 121 Filed 02/05/18 Page 1 of 40 PageID #: 2305 TABLE OF CONTENTS INTRODUCTION ...........................................................................................................................1 STATEMENT OF ISSUES TO BE DECIDED BY THE COURT ................................................5 FACTUAL BACKGROUND ..........................................................................................................5 I. Adeptus’s Offerings .............................................................................................................6 A. The June 2014 Initial Public Offering .....................................................................6 B. The May 2015 Offering ...........................................................................................6 C. The July 2015 Offering ............................................................................................6 D. The June 2016 Offering ...........................................................................................7 II. The Alleged Misstatements and Omissions in the Offering Documents .............................7 III. The Market Learns of Various Financial and Operational Problems at Adeptus More Than a Year Before Plaintiffs Filed Suit ......................................................8 A. November 17, 2015 News Story Allegedly Revealing Overbilling for Low-Acuity Patients ...........................................................................................8 B. November 1, 2016 Announcement of Revenue Collection and JV Issues Impacting Liquidity .......................................................................................8 IV. Adeptus Files a Chapter 11 Petition .....................................................................................9 V. Earlier Complaints by Different Shareholders Asserting Different Allegations .........................................................................................................................10 A. OLERS Filed a Complaint that Challenged Only the July 2015 Offering and Was Voluntarily Dismissed ..............................................................10 B. After Voluntarily Dismissing, Laborers Filed a Complaint in December 2016 but Lacked Standing to Assert Securities Act Claims ....................................................................................................................10 VI. The Current Plaintiffs Filed a Complaint for the First Time in November 2017 Asserting New Allegations and Theories of Liability ..............................................11 ARGUMENT .................................................................................................................................11 I. Most of the Securities Act Claims Should Be Dismissed for Lack of Standing .............................................................................................................................11 A. Plaintiffs Lack Standing to Assert Securities Act Claims Based on the IPO ...................................................................................................................13 B. Plaintiffs Lack Standing to Assert Securities Act Claims Based on the May 2015 Offering...........................................................................................14 C. The July 2015 and June 2016 Offering Claims of Aftermarket Purchasers Should Be Dismissed for Lack of Standing .........................................15 II. The Securities Act Claims Are Time-Barred .....................................................................16 UNDERWRITER DEFENDANTS’ MOTION TO DISMISS Page i Case 4:17-cv-00449-ALM Document 121 Filed 02/05/18 Page 2 of 40 PageID #: 2306 A. Plaintiffs’ Claims Based On the IPO Are Barred By the Statute of Repose ....................................................................................................................16 B. All of Plaintiffs’ Securities Act Claims Are Time-Barred By the One-Year Statute of Limitations ............................................................................20 1. Plaintiffs’ “Patient Acuity” (and Related “Bad Debt”) Claims Are Time-Barred ............................................................................21 2. Plaintiffs’ “Joint Venture” Claims Are Time-Barred ................................22 3. Plaintiffs’ “Internal Control” (and Related “Bad Debt”) Claims Are Time-Barred ............................................................................22 4. American Pipe Does Not Toll the Statute of Limitations for Plaintiffs’ Securities Act Claims ................................................................24 5. Plaintiffs Cannot Rely on Relation Back to Circumvent the Statute of Limitations .................................................................................26 III. The Underwriter Defendants Are Exempt From Liability for Plaintiffs’ Claims Based on Alleged Misstatements About Bad Debt ...............................................27 CONCLUSION ..............................................................................................................................30 UNDERWRITER DEFENDANTS’ MOTION TO DISMISS Page ii Case 4:17-cv-00449-ALM Document 121 Filed 02/05/18 Page 3 of 40 PageID #: 2307 TABLE OF AUTHORITIES Page(s) Cases In re Alamosa Holdings, Inc., 382 F. Supp. 2d 832 (N.D. Tex. 2005) ..............................................................................13, 20 In re Alcatel Sec. Litig., 382 F. Supp. 2d 513 (S.D.N.Y. 2005) ......................................................................................27 In re AOL Time Warner, Inc. Sec. & ERISA Litig., 381 F. Supp. 2d 192 (S.D.N.Y. 2004) ......................................................................................14 In re Ariad Pharm., Inc. Sec. Litig., 842 F.3d 744 (1st Cir. 2016) ....................................................................................................15 Bridges v. Dep’t of Md. State Police, 441 F.3d 197 (4th Cir. 2006) ...................................................................................................18 In re Broderbund/Learning Co. Sec. Litig., 294 F.3d 1201 (9th Cir. 2002) .................................................................................................14 Caldwell v. Berlind, 543 F. App’x 37 (2d Cir. 2013) ...............................................................................................27 In re Century Aluminum Co. Sec. Litig., 729 F.3d 1104 (9th Cir. 2013) .................................................................................................15 In re Colonial Ltd. P’ship Litig., 854 F. Supp. 64 (D. Conn. 1994) .............................................................................................25 Congregation of Ezra Sholom v. Blockbuster, Inc., 504 F. Supp. 2d 151 (N.D. Tex. 2007) ........................................................................12, 13, 15 In re Countrywide Fin. Corp. Sec. Litig., 588 F. Supp. 2d 1132 (C.D. Cal. 2008) .............................................................................29, 30 In re Crazy Eddie Sec. Litig., 747 F. Supp. 850 (E.D.N.Y. 1990) ..........................................................................................26 CTS Corp. v. Waldburger, 134 S. Ct. 2175 (2014) .............................................................................................................16 Dusek v. JPMorgan Chase & Co., 832 F.3d 1243 (11th Cir. 2016) ...............................................................................................17 UNDERWRITER DEFENDANTS’ MOTION TO DISMISS Page iii Case 4:17-cv-00449-ALM Document 121 Filed 02/05/18 Page 4 of 40 PageID #: 2308 In re Dynegy, Inc. Sec. Litig., 339 F. Supp. 2d 804 (S.D. Tex. 2004) .....................................................................................19 Elgendy v. City of New York, 2000 WL 1119080 (S.D.N.Y. Aug. 7, 2000) ...........................................................................19 In re Enron Corp. Sec., Derivative & ERISA Litig., 235 F. Supp. 2d 549 (S.D. Tex. 2002) .....................................................................................28 In re Enron Corp. Sec. Derivative and ERISA Litig., 310 F. Supp. 2d 819 (S.D. Tex. 2004) .....................................................................................16 EPCO Carbon Dioxide Prods., Inc. v. JP Morgan Chase Bank, NA, 467 F.3d 466 (5th Cir. 2006) ...................................................................................................30 Feyko v. Yuhe Int’l, Inc., 2013 WL 816409 (C.D. Cal. Mar. 5, 2013) .......................................................................28, 29 Fin. Acquisitions Partners LP v. Blackwell, 440 F.3d 278 (5th Cir. 2006) .....................................................................................................6 In re Franklin Bank Corp. Sec. Litig., 782 F. Supp. 2d 364 (S.D. Tex. 2011) .....................................................................................20 In re Franklin Savings Corp., 385 F.3d 1279 (10th Cir. 2004) ...............................................................................................25 Friedman v. JP Morgan Chase & Co., 2016 WL 2903273 (S.D.N.Y. May 18, 2016), aff’d, 2017 WL 1495935 (2d Cir. Apr. 26, 2017) ...................................................................................................................27 Goff v. United States, 659 F.2d 560 (5th Cir. 1981) ...................................................................................................25 Guajardo v. Freddie Records, Inc., 2015 WL 5674826 (S.D. Tex. Sept. 25, 2015) ........................................................................19 Hall v. Variable Annuity Life Ins. Co., 727 F.3d 372 (5th Cir. 2013) ...................................................................................................24 In re IndyMac Mortg.-Backed Sec. Litig., 718 F. Supp. 2d 495 (S.D.N.Y. 2010) ......................................................................................25 In re IndyMac Mortg.-Backed Sec. Litig., 793 F. Supp. 2d 637 (S.D.N.Y. 2011) ......................................................................................18 In re Initial Pub. Offering Sec. Litig., 358 F. Supp. 2d 189 (S.D.N.Y. 2004) ......................................................................................27 UNDERWRITER DEFENDANTS’ MOTION TO DISMISS Page iv Case 4:17-cv-00449-ALM Document 121 Filed 02/05/18 Page 5 of 40 PageID #: 2309 In re IPO Sec. Litig., 241 F. Supp. 2d 281 (S.D.N.Y. 2003) ......................................................................................13 John Nuveen & Co. v. Sanders, 450 U.S. 1005 (1981) ...............................................................................................................29 Johnson v. CBD Energy Ltd., 2016 WL 3654657 (S.D. Tex. July 6, 2016) ............................................................................15 Jones v. Morton, 195 F.3d 153 (3d Cir. 1999).....................................................................................................19 Krim v. pcOrder.com, Inc., 402 F.3d 489 (5th Cir. 2005) ........................................................................................... passim Kruse v. Wells Fargo Home Mortg., Inc., 2006 WL 1212512 (E.D.N.Y. May 3, 2006) ...........................................................................26 Lewis v. Casey, 518 U.S. 343 (1996) .................................................................................................................12 Lone Star Ladies Inv. Club v. Schlotzsky’s Inc., 238 F.3d 363 (5th Cir. 2001) ...................................................................................................30 Lopez v. Sw. Airlines Co., 2013 WL 12121233 (N.D. Tex. July 10, 2013) .......................................................................20 Lovelace v. Software Spectrum Inc., 78 F.3d 1015 (5th Cir. 1996) .....................................................................................................6 In re Magnum Hunter Res. Corp. Sec. Litig., 26 F. Supp. 3d 278 (S.D.N.Y. 2014), aff’d, 616 F. App’x 442 (2d Cir. 2015) ........................24 In re Magnum Hunter Res. Corp. Sec. Litig., 616 F. App’x 442 (2d Cir. 2015) .............................................................................................25 In re McKesson HBOC, Inc. Sec. Litig., 126 F. Supp. 2d 1248 (N.D. Cal. 2000) ...................................................................................13 Merryman v. J.P. Morgan Chase Bank, N.A., 319 F.R.D. 468 (S.D.N.Y. 2017) .............................................................................................18 Miguel v. Country Funding Corp., 309 F.3d 1161 (9th Cir. 2002) .................................................................................................18 N.J. Carpenters Health Fund v. DLJ Mortg. Capital, Inc., 2010 WL 6508190 (S.D.N.Y. Dec. 15, 2010) .........................................................................25 UNDERWRITER DEFENDANTS’ MOTION TO DISMISS Page v Case 4:17-cv-00449-ALM Document 121 Filed 02/05/18 Page 6 of 40 PageID #: 2310 In re Noah Educ. Holdings, Ltd. Sec. Litig., 2010 WL 1372709 (S.D.N.Y. Mar. 31, 2010) .........................................................................27 Pierce v. Morris, 2006 WL 2370343 (N.D. Tex. Aug. 16, 2006) ........................................................................14 Pinter v. Dahl, 486 U.S. 622 (1988) .................................................................................................................12 Plichta v. Sunpower Corp., 790 F. Supp. 2d 1012 (N.D. Cal. 2011) ...................................................................................14 Police & Fire Ret. Sys. of Detroit v. IndyMac MBS, Inc., 721 F.3d 95 (2d Cir. 2013)...........................................................................................17, 18, 20 In re Puda Coal Sec. Inc. Litig., 2013 WL 5493007 (S.D.N.Y. Oct. 1, 2013) ......................................................................25, 26 Rahr v. Grant Thornton LLP, 142 F. Supp. 2d 793 (N.D. Tex. 2000) ....................................................................................20 Cal. Pub. Emps.’ Ret. Sys. v. ANZ Sec., Inc., 137 S. Ct. 2042 (2017) .......................................................................................................16, 17 Rosenzweig v. Azurix Corp., 332 F.3d 854 (5th Cir. 2003) ...................................................................................................11 Silvercreek Mgmt., Inc. v. Citigroup, Inc., 248 F. Supp. 3d 428 (S.D.N.Y. 2017) ......................................................................................17 SMS Fin., LLC v. ABCO Homes, Inc., 167 F.3d 235 (5th Cir. 1999) ...................................................................................................18 In re Software Toolworks, Inc. Sec. Litig., 50 F.3d 615 (9th Cir. 1994) ...............................................................................................28, 29 Stein v. Regions Morgan Keegan Select High Income Fund, Inc., 821 F.3d 780 (6th Cir. 2016) ...................................................................................................17 Summit Office Park, Inc. v. U.S. Steel Corp., 639 F.2d 1278 (5th Cir. 1981) .................................................................................................20 Taylor v. Bunge Corp., 775 F.2d 617 (5th Cir. 1985) ...................................................................................................24 Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007) ...................................................................................................................6 UNDERWRITER DEFENDANTS’ MOTION TO DISMISS Page vi Case 4:17-cv-00449-ALM Document 121 Filed 02/05/18 Page 7 of 40 PageID #: 2311 Truk Int’l Fund LP v. Wehlmann, 737 F. Supp. 2d 611 (N.D. Tex. 2009), aff’d, 389 F. App’x 354 (5th Cir. 2010) ......................6 Warth v. Seldin, 422 U.S. 490 (1975) .................................................................................................................12 In re WorldCom, Inc. Sec. Litig., 346 F. Supp. 2d 628 (S.D.N.Y. 2004) ......................................................................................28 In re Worlds of Wonder Sec. Litig., 35 F.3d 1407 (9th Cir. 1994) .............................................................................................28, 29 Statutes 15 U.S.C. § 77k ..................................................................................................................13, 14, 28 15 U.S.C. § 77l .............................................................................................................12, 13, 15, 28 15 U.S.C. § 77m .......................................................................................................................16, 20 28 U.S.C. § 2072 ............................................................................................................................17 Other Authorities Fed. R. Civ. P. 15 .....................................................................................................................17, 18 UNDERWRITER DEFENDANTS’ MOTION TO DISMISS Page vii Case 4:17-cv-00449-ALM Document 121 Filed 02/05/18 Page 8 of 40 PageID #: 2312 The Underwriter Defendants,1 sued solely in their capacity as underwriters of common stock offerings conducted by Adeptus Health Inc. (“Adeptus” or the “Company”), file this Motion to Dismiss the Consolidated Class Action Complaint (“Complaint”) and Brief in Support pursuant to Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6).2 INTRODUCTION By statutory design, the Securities Act of 1933 (the “Securities Act”) does not create a guarantee that all public offerings of securities will be successful or profitable or permit claims premised on mere business failure or mismanagement. The Securities Act instead requires Plaintiffs to plead facts showing that the offering documents were themselves materially misleading at the time of each offering. The Securities Act, also by design, has particularly strict standing and timeliness requirements to ensure that only qualifying investors who act diligently can sue. The Complaint fails in all of these respects as to the claims against the Underwriter Defendants. To streamline the briefing, this memorandum addresses the issues of standing, timeliness, and certain other arguments unique to the Underwriter Defendants. The Director Defendants’ motion and brief in support, which the Underwriter Defendants join and incorporate by reference, explains why the Complaint fails to plead an actionable misstatement or omission with respect to the offerings at issue: Adeptus’s June 2014 initial public offering (“IPO”) and its 1 The Underwriter Defendants are Goldman Sachs & Co. LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Evercore Group L.L.C., Morgan Stanley & Co. LLC, Piper Jaffray & Co., RBC Capital Markets, LLC, Dougherty & Company LLC, Deutsche Bank Securities Inc., and BMO Capital Markets Corp. 2 Documents cited as “Ex. __” are attached to the Declaration of Michael J. Biles in Support of Defendants’ Motions to Dismiss Plaintiffs’ Consolidated Class Action Complaint, which the Executive Defendants filed concurrently with their Motion to Dismiss on behalf of all Defendants in accordance with the Court’s February 1, 2018 Order (Dkt. No. 115). Pinpoint citations (e.g., “Ex. __ at __”) are to the original pagination of each exhibit. UNDERWRITER DEFENDANTS’ MOTION TO DISMISS Page 1 Case 4:17-cv-00449-ALM Document 121 Filed 02/05/18 Page 9 of 40 PageID #: 2313 secondary public offerings in May and July of 2015 and June 2016 (collectively, the “Offerings”).3 Falsity/Materiality – Adeptus, an operator of free-standing emergency rooms, was presented to investors as a statutorily designated “emerging growth company”4 in the midst of its rapid expansion in a highly-regulated, capital intensive industry. The disclosures for each Offering clearly set forth the risks of investing in Adeptus, including the risks that the Company might fail to manage its growth, that reimbursement issues could impact its business, and that adverse regulatory changes could compromise its business model. Adeptus did, in fact, expand rapidly, including through joint ventures that allowed it to open even more facilities. The Company’s growth and significant regulatory changes ultimately required it to outsource its billing and collections operations to McKesson, an industry-leading third party, in October 2015 (long after three of the four Offerings at issue were completed). And the Company made clear to investors, including in the June 2016 offering materials, that transitioning to McKesson posed challenges and risks, and also resulted in a material weakness in the Company’s internal financial controls. In late 2016 (many months after the last of the Offerings), McKesson’s billing and collection problems, slowing patient growth seen across the industry, as well as higher than expected costs to fund expansion and operations—all of which investors were repeatedly warned 3 Although the Director Defendants’ motion only purports to address Plaintiffs’ Section 11 claims (because the Director Defendants are not named as defendants on Plaintiffs’ Section 12(a)(2) claims), the same arguments apply to Plaintiffs’ Section 12(a)(2) claims against the Underwriter Defendants. For the avoidance of doubt, the Underwriter Defendants incorporate by reference herein the arguments set forth in the Director Defendants’ motion as to all of Plaintiffs’ Securities Act claims against the Underwriter Defendants. 4 An “emerging growth company,” which is defined in Section 2(a)(19) of the Securities Act as an issuer with less than $1 billion in total annual gross revenues for the most recently completed fiscal year, is permitted to rely on exemptions from specified disclosure requirements applicable to other public companies, including as to the number of years’ worth of audited financial statements to be provided, the requirement to comply with auditor attestation requirements in the assessment of internal controls over financial reporting, and executive compensation. Ex. 1 (June 2014 Prospectus) at 12. Adeptus ceased being an “emerging growth company” on December 31, 2015. Ex. 19 (July 2015 Prospectus) at S-iv, S-13-14, S-46. UNDERWRITER DEFENDANTS’ MOTION TO DISMISS Page 2 Case 4:17-cv-00449-ALM Document 121 Filed 02/05/18 Page 10 of 40 PageID #: 2314 about—converged to create a perfect storm that affected Adeptus’s liquidity, culminating in the Company filing for bankruptcy in April 2017. This was an adverse business and investment outcome, but that does not amount to a federal securities law violation. There are simply no well-pleaded allegations suggesting that the specific business issues that befell Adeptus in late 2016 even existed, and thus could have been disclosed, at the time of the Offerings, although the risks in these areas were certainly spelled out explicitly. Nor do Plaintiffs offer allegations of sham transactions, systemic fraud, government charges, or auditor resignations sometimes seen in connection with securities litigation related to a corporate bankruptcy. Instead, most of Plaintiffs’ Securities Act claims are variations of the hindsight-driven claim that the defendants should have foreseen the coming liquidity crisis (years in advance in some cases) and disclosed it to the market at the time of each Offering. But the Securities Act does not permit claims based on hindsight. For these and other reasons detailed in the Director Defendants’ motion to dismiss, Plaintiffs’ Securities Act claims should be dismissed in their entirety. Here, in fact, the Court need not even reach the question of whether the offering documents were materially misleading because Plaintiffs have not adequately pled standing, timeliness, and other requirements. Standing – Standing to sue under the Securities Act is confined to investors who purchased securities directly in an offering, or, in the case of Section 11, to investors who can actually “trace” their aftermarket purchases back to a specific offering. Here, none of the Plaintiffs purchased stock in Adeptus’s IPO, and the one Plaintiff who claims it can trace its shares back to the IPO has not suffered any legally cognizable injury because it sold all such shares above the IPO price and at a profit. Likewise, none of the Plaintiffs even alleges that it UNDERWRITER DEFENDANTS’ MOTION TO DISMISS Page 3 Case 4:17-cv-00449-ALM Document 121 Filed 02/05/18 Page 11 of 40 PageID #: 2315 purchased any stock in or traceable to the May 2015 offering. Moreover, although Lead Plaintiff Alameda County Employees’ Retirement Association (“ACERA”) and newly-added Plaintiff Miami Firefighters Relief and Pension Fund (“Miami”) allege they purchased shares directly in the July 2015 and June 2016 offerings, respectively, there are no allegations that Plaintiffs (or any putative class members) can trace any of their aftermarket purchases back to those offerings. Based on these standing issues alone, the Court should dismiss all Securities Act claims other than with respect to direct purchasers in the July 2015 and June 2016 offerings. Timeliness – Plaintiffs’ Securities Act claims are time-barred in their entirety. The claims based on the June 2014 IPO are barred by the three-year absolute statute of repose because Plaintiffs did not first assert IPO claims until they filed the Complaint in November 2017. All of the Securities Act claims are barred, moreover, by the one-year statute of limitations because it is clear from the face of the Complaint that the factual bases for those claims were or should have been discovered more than one year before the Complaint was filed. Statutory Exemption – The Underwriter Defendants are also exempt from liability for claims based on Plaintiffs’ allegation that Adeptus’s estimates of “bad debt” (i.e., uncollectible receivables) in its financial statements were too low. These financial statements were audited by a nationally-recognized Big Four accounting firm, and underwriters are entitled to rely on the work done, and opinions expressed, by a company’s outside auditor as a matter of law unless a plaintiff alleges “red flags” that would have rendered such reliance unreasonable. Plaintiffs do not even attempt to do so, which requires dismissal of any Securities Act claims against the Underwriter Defendants that are based on allegedly false or misleading financial statements. * * * UNDERWRITER DEFENDANTS’ MOTION TO DISMISS Page 4 Case 4:17-cv-00449-ALM Document 121 Filed 02/05/18 Page 12 of 40 PageID #: 2316 For these reasons, and for the reasons set forth in the Director Defendants’ motion, which apply with equal force to the Underwriter Defendants, the Court should dismiss all claims against the Underwriter Defendants with prejudice. STATEMENT OF ISSUES TO BE DECIDED BY THE COURT Pursuant to Local Rule CV-7(a)(1), the Underwriter Defendants state that the issues to be decided are whether and to what extent the Complaint adequately states a claim for violations of the Securities Act as to each of the Offerings, including the following sub-issues: (i) whether and to what extent the Complaint adequately alleges that each of the offering documents contained material misstatements or actionable omissions (addressed in the Director Defendants’ motion), (ii) whether Plaintiffs have standing to assert Securities Act claims as to each of the four Offerings, (iii) whether all of Plaintiffs’ Securities Act claims are time-barred, and (iv) whether the Underwriter Defendants are exempt from liability for alleged misstatements regarding bad debt reserves in the expertised portions of the offering documents. FACTUAL BACKGROUND The Securities Act claims are based exclusively on the registration statements and prospectuses for Adeptus’s IPO and its secondary offerings in May 2015, July 2015 and June 2016. Compl. ¶ 343. In addition to those facts set forth in the Director Defendants’ motion, which the Underwriter Defendants’ join and incorporate by reference, the Underwriter Defendants also present the following facts sourced from the Complaint and documents the UNDERWRITER DEFENDANTS’ MOTION TO DISMISS Page 5 Case 4:17-cv-00449-ALM Document 121 Filed 02/05/18 Page 13 of 40 PageID #: 2317 Court may consider on a motion to dismiss, relevant to the additional grounds for dismissal asserted herein.5 I. Adeptus’s Offerings A. The June 2014 Initial Public Offering On June 25, 2014, Adeptus conducted its IPO at a price of $22 per share pursuant to a registration statement and accompanying prospectus (the “IPO Offering Documents”). Compl. ¶¶ 343-44. None of the Plaintiffs alleges that it purchased stock directly in the IPO and, as discussed below, the one Plaintiff that claims it purchased IPO shares in the aftermarket sold all of those shares well above the IPO price of $22—at a $1.7 million profit. Id. ¶¶ 351-52, Ex. B. B. The May 2015 Offering On May 11, 2015, Adeptus conducted a secondary offering pursuant to a May 4, 2015 registration statement and May 5, 2015 prospectus (the “May 2015 Offering Documents”). Id. ¶ 345. None of the Plaintiffs claims to have purchased stock either in the May 2015 offering or traceable to the May 2015 Offering Documents. Id. ¶¶ 351-52. C. The July 2015 Offering On July 29, 2015, Adeptus conducted another secondary public offering pursuant to a July 20, 2015 registration statement and July 29, 2015 prospectus (the “July 2015 Offering Documents”). Id. ¶ 346. Lead Plaintiff ACERA alleges it purchased stock directly in the July 2015 offering, but there is no allegation that any Plaintiff or other shareholder made aftermarket purchases that can be traced back to the July 2015 Offering Documents. Id. ¶¶ 351-52. 5 This factual background is taken from the allegations of the Complaint “as well as other sources courts ordinarily examine when ruling on Rule 12(b)(6) motions to dismiss, in particular, documents incorporated into the complaint by reference, and matters of which a court may take judicial notice,” such as Adeptus’s SEC and bankruptcy filings, “matters of public record,” “and documents that the plaintiffs either possessed or knew about and upon which they relied in bringing the suit.” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322 (2007); Fin. Acquisitions Partners LP v. Blackwell, 440 F.3d 278, 286 (5th Cir. 2006); Lovelace v. Software Spectrum Inc., 78 F.3d 1015, 1018 (5th Cir. 1996); Truk Int’l Fund LP v. Wehlmann, 737 F. Supp. 2d 611, 616 (N.D. Tex. 2009), aff’d, 389 F. App’x 354 (5th Cir. 2010). UNDERWRITER DEFENDANTS’ MOTION TO DISMISS Page 6 Case 4:17-cv-00449-ALM Document 121 Filed 02/05/18 Page 14 of 40 PageID #: 2318 D. The June 2016 Offering On June 8, 2016, Adeptus conducted a third secondary public offering pursuant to a June 2, 2016 prospectus and the July 2015 registration statement (the “June 2016 Offering Documents”). Id. ¶ 347. Only Miami, the named Plaintiff added for the first time in the Complaint, alleges to have purchased any Adeptus shares directly in the June 2016 offering. However, there is no allegation that any Plaintiff or other shareholder made aftermarket purchases that can be traced back to the June 2016 Offering Documents. Id. ¶¶ 351-52. II. The Alleged Misstatements and Omissions in the Offering Documents Plaintiffs generally assert four categories of alleged misstatements and omissions: • Patient Acuity – Plaintiffs claim the offering documents contained actionable omissions or misstatements based on their failure to disclose the allegedly “widespread practice of overcharging low-acuity patients by seeking fees for emergent care . . . , which practice had a negative effect on payer reimbursement, and thus cash flow, liquidity, earnings and net revenue.” Id. ¶¶ 379-90. • Joint Ventures (“JVs”) – Plaintiffs claim the secondary offering documents contained actionable omissions or misstatements based on their failure to disclose that Adeptus was funding 100% of the JVs’ working capital and that those JVs (other than the Colorado JV) were operating at a loss. Id. ¶¶ 379-87, 391-99. • Internal Controls – Plaintiffs claim the June 2016 Offering Documents were “materially false and misleading” for purportedly stating “that there were no material weaknesses in Adeptus’s internal controls apart from [a] purely technical control deficiency.” Id. ¶¶ 379-87, 400-03. • Bad Debt – Plaintiffs claim that the audited financial statements incorporated by reference in the offering documents contained estimates of bad (i.e., uncollectable) debt that were false and misleading in light of Adeptus’s alleged practice of overbilling low- acuity patients and its alleged material weaknesses in internal controls over revenue cycle management. Id. ¶¶ 404-09. (This fourth “category” is entirely derivative of the first and third categories.) UNDERWRITER DEFENDANTS’ MOTION TO DISMISS Page 7 Case 4:17-cv-00449-ALM Document 121 Filed 02/05/18 Page 15 of 40 PageID #: 2319 III. The Market Learns of Various Financial and Operational Problems at Adeptus More Than a Year Before Plaintiffs Filed Suit A. November 17, 2015 News Story Allegedly Revealing Overbilling for Low- Acuity Patients On November 17, 2015, an NBC affiliate (“KUSA”) aired a report titled “BuyER Beware.” Compl. ¶ 98. This report discussed stories of allegedly non-emergent patients being treated and being charged emergency room prices. See generally Ex. 24 (Nov. 17, 2015 KUSA article). Plaintiffs allege this report somehow “revealed that Adeptus engaged in widespread predatory overbilling of low-acuity patients, including by charging facility fees that ranged from $700 to more than $6,200 for a single visit.” Compl. ¶ 60; see also id. ¶ 98. From this report, Plaintiffs claim the market “understood that Defendants’ ability to collect on reported revenue was impugned by its practice of overbilling low-acuity patients.” Id. ¶ 304. According to Plaintiffs, the price of Adeptus stock fell by more than 22%, from $59.87 per share to $46.50, in response to this report. Id. ¶ 101. B. November 1, 2016 Announcement of Revenue Collection and JV Issues Impacting Liquidity On November 1, 2016, Adeptus announced it was facing what Plaintiffs call a “stark liquidity crisis” and had obtained what Plaintiffs call “emergency financing.” Compl. ¶ 18. Adeptus pointed to three causes of the liquidity issues. First, it disclosed weaker than expected patient volumes in certain markets during Q3 2016. Ex. 39 (Form 8-K filed Nov. 1, 2016, Ex. 99.1 (“Nov. 1, 2016 Press Release”)) at 2-3. Second, Adeptus cited continuing revenue collection issues associated with its outsourcing of revenue collection processes to McKesson in October 2015, a topic which Adeptus had previously disclosed as a material weakness in its internal controls. Id; see also Compl. ¶¶ 81, 90, 125, 255. Adeptus further disclosed that while it was still pursuing payment of its outstanding accounts receivables, there was risk of write UNDERWRITER DEFENDANTS’ MOTION TO DISMISS Page 8 Case 4:17-cv-00449-ALM Document 121 Filed 02/05/18 Page 16 of 40 PageID #: 2320 downs based on the collection issues and “increased potential for bad debt expense, associated with deficiencies in billing and collections.” Ex. 38 (Nov. 1, 2016 Conference Call Tr.) at 9, 11; Ex. 39 (Nov. 1, 2016 Press Release) at 6.6 Third, Adeptus disclosed higher costs associated with the opening of three hospitals in the second half of the year, as well as the facts that Adeptus had been funding 100% of the working capital needs of the JVs and planned to move to a less capital-intensive model. Ex. 38 (Nov. 1, 2016 Conference Call Tr.) at 2-3, 5-9; Ex. 39 (Nov. 1, 2016 Press Release) at 2-3.7 Plaintiffs allege these disclosures revealed “for the first time, that, contrary to Defendants’ prior statements, the Company had been funding ‘100% of the working capital needs [of] the JV partnerships.’” Compl. ¶ 18. They also allege these disclosures revealed “that the Company was unable to collect reimbursement from payers.” Id. ¶ 308. Adeptus’s stock price “plummeted 72%” following these disclosures “on extremely high volume.” Id. ¶ 309. IV. Adeptus Files a Chapter 11 Petition Adeptus filed a Chapter 11 bankruptcy petition on April 19, 2017. Compl. ¶ 122. Its “first day filings,” including a declaration from its Chief Restructuring Officer, discussed the reasons for the Company’s liquidity crisis and eventual bankruptcy. Id. ¶¶ 122-23; Ex. 44 (Bankr. First Day Decl.) ¶ 13. More specifically, the same three challenges discussed on November 1, 2016 were cited as leading to the bankruptcy: (i) the significant capital outlays associated with expanding the business and funding the working capital of the JVs, (ii) 6 Adeptus’s efforts to collect these outstanding receivables were not fully successful. On March 2, 2017, Adeptus announced that it anticipated results for 2016 would be impacted by, among other items, $67 million in charges related to uncollectible receivables. Compl. ¶¶ 118-19; Ex. 42 (Form 12b-25) at 2. 7 This disclosure regarding Adeptus’s funding of the JVs was consistent with the copy of the operating agreement for the Colorado JV, which Adeptus publicly filed with the SEC in August 2015. Any investor who was interested in the details of that JV could have reviewed the agreement and seen that the members of the JV agreed that “the funds necessary for start-up expenses and working capital will be provided by Adeptus, or an Affiliate of Adeptus.” Ex. 20 (10-Q/A filed Aug. 13, 2015, Ex. 10.4 (Operating Agreement of UCHealth Partners, LLC)) at Ex. A (Initial Strategy Plan). UNDERWRITER DEFENDANTS’ MOTION TO DISMISS Page 9 Case 4:17-cv-00449-ALM Document 121 Filed 02/05/18 Page 17 of 40 PageID #: 2321 challenges with revenue cycle management after hiring McKesson, which had led to write-offs of uncollectible receivables; and (iii) reduced patient volume. Ex. 44 (Bankr. First Day Decl.) ¶¶ 93-100. V. Earlier Complaints by Different Shareholders Asserting Different Allegations The current Complaint, filed on November 21, 2017, was the first complaint filed by Lead Plaintiffs ACERA and Arkansas Teacher Retirement System (“ATRS”), or “additional Plaintiff” Miami. The earlier complaints were filed by different shareholders and largely asserted different claims. A. OLERS Filed a Complaint that Challenged Only the July 2015 Offering and Was Voluntarily Dismissed Oklahoma Law Enforcement Retirement System (“OLERS”) filed a complaint on October 27, 2016 (the “OLERS complaint”). Dkt. No. 1. The only claims asserted under the Securities Act were based on the July 2015 offering, and only the two lead underwriters of that offering were named as defendants. Id. ¶¶ 1, 13. The OLERS complaint asserted Securities Act claims based on alleged misstatements about overbilling and patient acuity, but it did not include any allegations regarding Adeptus’s JVs, internal controls over revenue collection, or bad debt reserves. See generally id. OLERS subsequently voluntarily dismissed its complaint, without prejudice to participating as an unnamed class member. See Dkt. Nos. 97, 101. B. After Voluntarily Dismissing, Laborers Filed a Complaint in December 2016 but Lacked Standing to Assert Securities Act Claims Laborers’ Local 235 Benefit Funds (“Laborers”) filed a complaint on November 16, 2016, which it later voluntarily dismissed without prejudice. Laborers’ Local 235 Benefit Funds v. Adeptus Health Inc., 4:16-cv-00881-ALM (E.D. Tex.) (“Laborers I”), Dkt. Nos. 1, 28, 29. Laborers then filed a new complaint in the Tyler Division on December 22, 2016. Laborers’ Local 235 Benefit Funds v. Adeptus Health Inc., 6:16-cv-01391 (E.D. Tex.) (“Laborers II” and UNDERWRITER DEFENDANTS’ MOTION TO DISMISS Page 10 Case 4:17-cv-00449-ALM Document 121 Filed 02/05/18 Page 18 of 40 PageID #: 2322 collectively with Laborers I, “Laborers”), Dkt. No. 1. Laborers purported to assert Securities Act claims based on all four Offerings, but its sworn certification attached to that complaint reflected that its first purchase of Adeptus stock was not until August 23, 2016. Id., Dkt. No. 1- 2. It accordingly could not have purchased stock in (or traceable to) any of the offerings. The Laborers complaint alleged misstatements regarding patient acuity and alleged overbilling, but it did not include any allegations regarding Adeptus’s JVs, internal controls over revenue cycle management, or bad debt reserves. See generally id., Dkt. No. 1.8 VI. The Current Plaintiffs Filed a Complaint for the First Time in November 2017 Asserting New Allegations and Theories of Liability On November 21, 2017, Plaintiffs ACERA, Miami, and ATRS filed the Consolidated Class Action Complaint, which was the first time they asserted claims in this action. See generally Compl. In addition to being the first complaint filed by these Plaintiffs, this was the first complaint to assert claims under the Securities Act regarding Adeptus’s JVs, internal controls over revenue collection, or bad debt reserves. ARGUMENT I. Most of the Securities Act Claims Should Be Dismissed for Lack of Standing The Securities Act “is concerned with the initial distribution of securities” and its standing provisions are accordingly limited to the “narrow class of persons” who purchased the specific securities that are the “direct subject” of the challenged registration statement and prospectus. Krim v. pcOrder.com, Inc., 402 F.3d 489, 495 (5th Cir. 2005); Rosenzweig v. Azurix Corp., 332 F.3d 854, 861 (5th Cir. 2003). 8 In March and April of 2017, two additional complaints were filed by Winston Kim and Sascha Troll. Kim v. Adeptus Health Inc., 6:17-cv-00150 (E.D. Tex. filed Mar. 10, 2017), Dkt. No. 1; Troll v. Adeptus Health Inc., 6:17- cv-00241 (E.D. Tex. filed Apr. 27, 2017), Dkt. No. 1. Neither complaint asserted claims under the Securities Act or named any of the Underwriter Defendants. Id. UNDERWRITER DEFENDANTS’ MOTION TO DISMISS Page 11 Case 4:17-cv-00449-ALM Document 121 Filed 02/05/18 Page 19 of 40 PageID #: 2323 Standing to bring claims under Section 12(a)(2) is limited to those who purchased directly in the offering. 15 U.S.C. § 77l(a)(2) (providing liability “to the person purchasing such security from him”); Pinter v. Dahl, 486 U.S. 622, 644 n.21 (1988) (“[A] buyer cannot recover against his seller’s seller.”); Congregation of Ezra Sholom v. Blockbuster, Inc., 504 F. Supp. 2d 151, 159 (N.D. Tex. 2007) (“[S]ection 12(a)(2) standing is . . . limited to shareholders who acquired securities directly in the . . . offering.”). Claims under Section 11 may be brought only by persons who purchased directly in an offering or aftermarket purchasers who can “trace” their shares “for which damages are claimed to the specific registration statement at issue.” Krim, 402 F.3d at 495-96. As the Fifth Circuit has recognized, it is “virtually impossible” for plaintiffs to meet this tracing requirement when shares from multiple registration statements have been issued. Id. at 492, 496-502 (holding plaintiffs had not shown standing despite “nearly 100%” probability that plaintiffs’ shares were offering shares). That is because shares are generally held in street name in a fungible, intermingled mass, leaving no way to determine if specific shares were issued pursuant to a specific registration statement. Id. Standing also requires a plaintiff to allege that it has suffered an injury that requires redress. See Warth v. Seldin, 422 U.S. 490, 502 (1975). In the class action context, it is insufficient to allege “that injury has been suffered by other, unidentified members of the [putative] class.” Id. Rather, if the named plaintiffs in a putative class action do not have standing to sue on behalf of themselves, the class complaint must be dismissed for lack of standing. See Lewis v. Casey, 518 U.S. 343, 357 (1996); Blockbuster, 504 F. Supp. 2d at 160. UNDERWRITER DEFENDANTS’ MOTION TO DISMISS Page 12 Case 4:17-cv-00449-ALM Document 121 Filed 02/05/18 Page 20 of 40 PageID #: 2324 Applying these principles here requires dismissal of Plaintiffs’ claims with respect to the IPO and May 2015 offering in their entirety and aftermarket purchaser claims with respect to the July 2015 and June 2016 offerings. A. Plaintiffs Lack Standing to Assert Securities Act Claims Based on the IPO As explained above, Section 12(a)(2) standing is limited to shareholders who acquired securities directly in the offering. See Blockbuster, 504 F. Supp. 2d at 159. None of the Plaintiffs alleges that it purchased stock directly in the IPO. Compl. ¶¶ 351-52.9 Plaintiffs’ Section 12(a)(2) claim with respect to the IPO must accordingly be dismissed. Section 11 standing is limited to persons who purchased directly in an offering or aftermarket purchasers who can “trace” their shares to the offering. Krim, 402 F.3d at 495-96. None of the Plaintiffs alleges that it purchased stock directly in the IPO, and only ACERA claims to have purchased shares “traceable to the IPO” by virtue of having purchased 30,846 shares on the open market after the IPO, but before the May 2015 secondary offering. Compl. ¶ 351. However, ACERA has no Section 11 claim as a matter of law because it did not suffer any Section 11 damages.10 Under Section 11’s statutory damages formula, “a plaintiff who sells a security above its offering price has no cognizable damages.” In re IPO Sec. Litig., 241 F. Supp. 9 Plaintiffs’ sworn certifications attached to the Complaint also establish that they did not purchase stock on the day of the June 25, 2014 IPO at the offering price of $22. Compare Compl. Exs. B and C with id. ¶ 343. 10 ACERA’s claims also fail for lack of causation. Patient acuity is the sole category of misrepresentation or omission alleged with respect to the IPO Offering Documents, and ACERA sold any IPO stock before the first alleged corrective disclosure in November 2015 when the market first learned of any purported overbilling issues. As a result, to the extent ACERA suffered any Section 11 damages (which it did not), those losses were necessarily caused by something other than the alleged material misstatements/omissions in the IPO Offering Documents concerning patient acuity. See 15 U.S.C. § 77k(e); 15 U.S.C. § 77l(b); In re Alamosa Holdings, Inc., 382 F. Supp. 2d 832, 865 (N.D. Tex. 2005) (“[A]s a general rule price decline before disclosure [of the truth] may not be charged to defendants.”); In re McKesson HBOC, Inc. Sec. Litig., 126 F. Supp. 2d 1248, 1262 (N.D. Cal. 2000) (“[T]he Section 11 defendants have an absolute ‘negative causation’ defense pursuant to Section 11(e) for any HBOC shareholders who disposed of their shares prior to the corrective disclosure.”). Indeed, no investors have losses caused by any alleged misstatements in the IPO Offering Documents regarding patient acuity because Adeptus’s stock price far exceeded the IPO price of $22 even after the November 2015 KUSA report that Plaintiffs allege revealed widespread overbilling of low-acuity patients. Compl. ¶¶ 60, 98 (discussing KUSA report); id. ¶ 304 (alleging stock price declined to $46.50 after KUSA report). UNDERWRITER DEFENDANTS’ MOTION TO DISMISS Page 13 Case 4:17-cv-00449-ALM Document 121 Filed 02/05/18 Page 21 of 40 PageID #: 2325 2d 281, 351 (S.D.N.Y. 2003); see 15 U.S.C. § 77k(e). Here, as reflected in ACERA’s sworn certification attached to the Complaint, the 30,846 shares that it purchased and claims are traceable to the IPO were all sold at prices above the IPO price of $22 for a profit exceeding $1.7 million. Compl. Ex. B (reflecting sale of 30,846 shares between April and June 2015).11 Thus, ACERA—the only plaintiff alleged to have purchased IPO shares—lacks standing to assert its Section 11 claim as to the IPO. See, e.g., Pierce v. Morris, 2006 WL 2370343, at *5 (N.D. Tex. Aug. 16, 2006) (dismissing Section 11 claim on standing grounds based on lack of damages under the statutory formula).12 Accordingly, all of Plaintiffs’ Securities Act claims with respect to the IPO should be dismissed for lack of standing. B. Plaintiffs Lack Standing to Assert Securities Act Claims Based on the May 2015 Offering Plaintiffs do not allege that they purchased stock in the May 2015 offering. Compl. ¶¶ 351-52. Indeed, their sworn certifications attached to the Complaint establish that they did not purchase stock on the day of the May 11, 2015 offering at the offering price of $63.75. Compare id. Exs. B and C with id. ¶ 343. Plaintiffs also do not allege they purchased stock traceable to the May 2015 offering. Id. ¶¶ 351-52. Nor could they because, at the time that they purchased their shares, IPO shares and May 2015 offering shares were comingled in the trading market. Krim, 402 F.3d at 496-502. Accordingly, all of Plaintiffs’ Securities Act claims with respect to the May 2015 offering should be dismissed for lack of standing. 11 ACERA’s next purchases in July 2015 occurred after the May 2015 offering, and ACERA does not (and cannot) allege that such shares were traceable to the IPO. Compl. ¶ 351. 12 See also In re Broderbund/Learning Co. Sec. Litig., 294 F.3d 1201, 1202-05 (9th Cir. 2002); Plichta v. Sunpower Corp., 790 F. Supp. 2d 1012, 1023 (N.D. Cal. 2011); In re AOL Time Warner, Inc. Sec. & ERISA Litig., 381 F. Supp. 2d 192, 245-47 (S.D.N.Y. 2004). UNDERWRITER DEFENDANTS’ MOTION TO DISMISS Page 14 Case 4:17-cv-00449-ALM Document 121 Filed 02/05/18 Page 22 of 40 PageID #: 2326 C. The July 2015 and June 2016 Offering Claims of Aftermarket Purchasers Should Be Dismissed for Lack of Standing Plaintiffs ACERA and Miami allege they purchased shares directly in the July 2015 and June 2016 offerings, respectively. Compl. ¶¶ 351-52. But to the extent they purport to bring Securities Act claims with respect to the shares they (or any putative class members) purchased in the aftermarket following the July 2015 and June 2016 offerings, those claims must be dismissed. Any Section 12 claims asserted by Plaintiffs with respect to the shares they purchased in the aftermarket should be dismissed for lack of standing as a matter of law. 15 U.S.C. § 77l(a)(2); Blockbuster, 504 F. Supp. 2d at 159 (standing to bring Section 12(a)(2) claims limited to investors who acquired securities directly in the offering). Any Section 11 claims asserted by Plaintiffs with respect to their aftermarket purchases should also be dismissed for lack of any allegation, much less a plausible one, that such stock purchases are traceable to the July 2015 and June 2016 offerings. After the Supreme Court’s decisions in Iqbal and Twombly, it is insufficient for a plaintiff merely to allege in a boilerplate fashion that it purchased shares pursuant to or traceable to a secondary offering. E.g., Johnson v. CBD Energy Ltd., 2016 WL 3654657, at *4-5 (S.D. Tex. July 6, 2016) (discussing case law); In re Ariad Pharm., Inc. Sec. Litig., 842 F.3d 744, 755-56 (1st Cir. 2016); In re Century Aluminum Co. Sec. Litig., 729 F.3d 1104, 1105-09 (9th Cir. 2013). As those courts have explained, such an allegation is a formulaic recitation of a legal element and insufficient to meet the plausibility standard given the virtual impossibility of tracing once shares from different offerings are intermingled in the market. Here, even that legally deficient allegation is absent. There is no allegation that Plaintiffs or any other shareholder purchased shares in the aftermarket that are traceable to the July 2015 or June 2016 secondary offerings. See Compl. ¶¶ 351-52, 412-19. UNDERWRITER DEFENDANTS’ MOTION TO DISMISS Page 15 Case 4:17-cv-00449-ALM Document 121 Filed 02/05/18 Page 23 of 40 PageID #: 2327 Nor is there any plausible allegation of how an aftermarket purchaser could conceivably trace its shares to a secondary offering in light of the Fifth Circuit’s holding and analysis in Krim. 402 F.3d at 496-502.13 Absent a plausible allegation that Plaintiffs’ aftermarket purchases are traceable to the July 2015 and June 2016 secondary offerings, any Section 11 claims based on their aftermarket purchases should be dismissed. II. The Securities Act Claims Are Time-Barred The Securities Act claims should also be dismissed because they are time-barred. The claims based on the IPO are barred as a threshold matter by the statute of repose, and all of the Securities Act claims are barred by the statute of limitations. A. Plaintiffs’ Claims Based On the IPO Are Barred By the Statute of Repose Section 13 of the Securities Act provides that no action to enforce a liability under Sections 11 or 12(a)(2) may be brought “more than three years after the security was bona fide offered to the public.” 15 U.S.C. § 77m. The clear and singular purpose of this statutory provision is “to offer defendants full and final security after three years.” Cal. Pub. Emps.’ Ret. Sys. v. ANZ Sec., Inc., 137 S. Ct. 2042, 2052 (2017) (“CalPERS”). As the Supreme Court recently confirmed, this statute of repose is “absolute,” “admits of no exception,” and “forecloses the extension of the statutory period based on equitable principles.” Id. at 2051-52 (“American Pipe tolling . . . does not apply to the 3-year bar mandated in § 13.”); see also CTS Corp. v. Waldburger, 134 S. Ct. 2175, 2182-83 (2014) (statutes of repose, which “put[] an outer limit on the right to bring a civil action,” “‘will not be tolled for any reason’”); In re Enron Corp. Sec. Derivative and ERISA Litig., 310 F. Supp. 2d 819, 856 (S.D. Tex. 2004) (same). 13 Plaintiffs appear to acknowledge the impossibility of tracing to a secondary offering, as they made aftermarket purchases following the secondary offerings but do not explicitly claim those purchases were traceable to any of them. UNDERWRITER DEFENDANTS’ MOTION TO DISMISS Page 16 Case 4:17-cv-00449-ALM Document 121 Filed 02/05/18 Page 24 of 40 PageID #: 2328 The IPO took place on June 25, 2014. See Compl. ¶ 49. ACERA, the only Plaintiff who claims to have purchased shares traceable to the IPO Offering Documents, filed the Complaint on November 21, 2017—well over three years after the IPO. Under the Supreme Court’s holding in CalPERS, Plaintiffs’ Securities Act claims based on the IPO are time-barred and must be dismissed. Plaintiffs cannot circumvent the statute of repose by arguing that ACERA’s IPO-based claims in the recently filed Complaint “relate back” to one of the two earlier-filed class complaints asserting Securities Act claims for five independent reasons. First, Rule 15’s “relation back” provision expressly applies only to statutes of limitations—not statutes of repose. See Fed. R. Civ. P. 15(c)(1)(A) (an amendment relates back if “the law that provides the applicable statute of limitations allows relation back” (emphasis added)). This makes good sense. Statutes of repose give a defendant a “substantive right” to be free of liability after a certain period of time has elapsed. See CalPERS, 137 S. Ct. at 2049; Stein v. Regions Morgan Keegan Select High Income Fund, Inc., 821 F.3d 780, 794 (6th Cir. 2016) (“[S]tatutes of repose vest a substantive right in defendants to be free of liability.”); Dusek v. JPMorgan Chase & Co., 832 F.3d 1243, 1248 (11th Cir. 2016) (same); Police & Fire Ret. Sys. of Detroit v. IndyMac MBS, Inc., 721 F.3d 95, 106 (2d Cir. 2013) (“IndyMac III”) (same). Court- made rules, including the Federal Rules of Civil Procedure, cannot legally “abridge, enlarge or modify any substantive right.” 28 U.S.C. § 2072(b); IndyMac III, 721 F.3d at 109. Accordingly, many courts have held that the relation back doctrine does not apply to statutes of repose and cannot shield from dismissal pleadings that are amended to add new parties or new allegations after a repose period has expired. See, e.g., Silvercreek Mgmt., Inc. v. Citigroup, Inc., 248 F. Supp. 3d 428, 451 (S.D.N.Y. 2017) (Section 13’s statute of repose “cannot be circumvented by UNDERWRITER DEFENDANTS’ MOTION TO DISMISS Page 17 Case 4:17-cv-00449-ALM Document 121 Filed 02/05/18 Page 25 of 40 PageID #: 2329 the relation-back doctrine”); In re IndyMac Mortg.-Backed Sec. Litig., 793 F. Supp. 2d 637, 642- 43 (S.D.N.Y. 2011) (“IndyMac II”) (same); Miguel v. Country Funding Corp., 309 F.3d 1161, 1165 (9th Cir. 2002) (relation back would violate the Rules Enabling Act if applied to circumvent statute of repose). Second, even if the relation back doctrine applied to statutes of repose, it is inapplicable here under the plain language of Rule 15 because Plaintiffs’ Complaint is not an “amendment to a pleading.” See Fed. R. Civ. P. 15(c). Plaintiffs had not filed a complaint prior to November 2017 and thus could not amend complaints filed by other shareholders. See Fed. R. Civ. P. 15(a)(1) (“A party may amend its pleading” (emphasis added)); IndyMac III, 721 F.3d at 110 n.18 (expressing “skepticism that proposed intervenors, who were not parties to the proceedings below, may invoke Rule 15(c)(1) to become parties by amending the complaint” filed by a different shareholder); Bridges v. Dep’t of Md. State Police, 441 F.3d 197, 209 (4th Cir. 2006) (“We readily reject the [proposed intervenors]’ first argument that their claims would, if included in an amended complaint, relate back to the date of filing of the original complaint [because] these would-be plaintiffs, as nonparties, could not have moved to amend the plaintiffs’ complaint and get the benefit of any relation back.”). Third, the plain text of Rule 15 also makes clear that relation back does not apply to the addition of a new party unless there was a “mistake concerning the proper party’s identity.” Fed. R. Civ. P. 15(c)(1)(C); SMS Fin., LLC v. ABCO Homes, Inc., 167 F.3d 235, 244-45 (5th Cir. 1999). Rule 15 does not apply here because Plaintiffs have not alleged (nor could they) that their failure to assert their claims during the repose and limitations periods was due to a mistake concerning their identity. See Merryman v. J.P. Morgan Chase Bank, N.A., 319 F.R.D. 468, 473 (S.D.N.Y. 2017) (applying mistake requirement and denying relation back where original named UNDERWRITER DEFENDANTS’ MOTION TO DISMISS Page 18 Case 4:17-cv-00449-ALM Document 121 Filed 02/05/18 Page 26 of 40 PageID #: 2330 plaintiffs in putative class action attempted to cure standing defect by amending complaint to add new named plaintiff); Guajardo v. Freddie Records, Inc., 2015 WL 5674826, at *5 (S.D. Tex. Sept. 25, 2015) (no relation back for “amendments changing the identities of plaintiffs” where there was no “mistake of identity”); In re Dynegy, Inc. Sec. Litig., 339 F. Supp. 2d 804, 842-43 (S.D. Tex. 2004) (same). Fourth, Plaintiffs’ Complaint cannot relate back to the voluntarily dismissed OLERS and Laborers I complaints because they are treated as if they were never filed and thus can no longer be amended. See Jones v. Morton, 195 F.3d 153, 160-61 (3d Cir. 1999) (“[W]hen a complaint (or habeas petition) is dismissed without prejudice, that complaint or petition is treated as if it never existed,” and a subsequently filed complaint or petition “cannot be considered an amendment . . . but must be considered a new action.”); Elgendy v. City of New York, 2000 WL 1119080, at *5 (S.D.N.Y. Aug. 7, 2000) (“Given that the voluntarily dismissed complaint is treated as if it was never filed, and thus not part of the current action, such a pleading does not constitute an ‘original pleading’ for purposes of relation back under Rule 15(c).”). Fifth, relation back cannot save ACERA’s IPO claims here because the named plaintiffs in the earlier-filed complaints either did not assert claims based on the Adeptus IPO or did not have standing to do so. In OLERS, the plaintiff did not assert Securities Act claims based on the IPO, and therefore, ACERA’s IPO claims would not actually relate back to the OLERS complaint, which only sued on the July 2015 offering. Laborers, on the other hand, plainly lacked standing under Fifth Circuit authority to assert Securities Act claims based on the IPO because it did not purchase a single share of Adeptus stock in or traceable to the IPO, having first purchased Adeptus stock in August 2016—over two years after the IPO and after shares from all three secondary offerings were comingled. See supra Factual Background Part V.B; Argument UNDERWRITER DEFENDANTS’ MOTION TO DISMISS Page 19 Case 4:17-cv-00449-ALM Document 121 Filed 02/05/18 Page 27 of 40 PageID #: 2331 Part I at 11-12. Where the only named plaintiff lacked standing to bring certain claims, the court never had jurisdiction, and a new plaintiff cannot “revive” those defective claims while avoiding expiration of the repose period using Rule 15’s “relation back” provisions. See Summit Office Park, Inc. v. U.S. Steel Corp., 639 F.2d 1278, 1282 (5th Cir. 1981) (where original plaintiff “never had standing,” it could not properly amend the complaint to add new plaintiffs); IndyMac III, 721 F.3d at 110-13 & n.18 (“newly asserted claims [must be] independently timely” and cannot relate back where original plaintiff lacked standing); Lopez v. Sw. Airlines Co., 2013 WL 12121233, at *5-7 (N.D. Tex. July 10, 2013) (same). B. All of Plaintiffs’ Securities Act Claims Are Time-Barred By the One-Year Statute of Limitations Under the Securities Act, “[n]o action shall be maintained unless brought within one year after the discovery of the untrue statement or the omission, or after such discovery should have been made by the exercise of reasonable diligence.” 15 U.S.C. § 77m. Courts in this Circuit “apply the doctrine of constructive or inquiry notice” to determine when the limitations period begins to run. In re Franklin Bank Corp. Sec. Litig., 782 F. Supp. 2d 364, 383-84 (S.D. Tex. 2011). Under that standard, the one-year limitations period begins to run when the plaintiff “obtains actual knowledge of the facts giving rise to the action or notice of facts, which in the exercise of reasonable diligence, would have led to such knowledge.” Id. Here, based on the very allegations of their own Complaint, Plaintiffs had knowledge of the facts underlying their Securities Act claims no later than November 1, 2016, yet waited until November 21, 2017— over one year later—to file their Complaint. Their Securities Act claims are thus time-barred and should be dismissed in their entirety. See In re Alamosa Holdings, Inc., 382 F. Supp. 2d 832, 863-64 (N.D. Tex. 2005) (dismissing Securities Act claims when plaintiff filed complaint more than one year after they were on notice of the facts giving rise to the claims); Rahr v. Grant UNDERWRITER DEFENDANTS’ MOTION TO DISMISS Page 20 Case 4:17-cv-00449-ALM Document 121 Filed 02/05/18 Page 28 of 40 PageID #: 2332 Thornton LLP, 142 F. Supp. 2d 793, 796-97 (N.D. Tex. 2000) (dismissal required “when the pleadings disclose facts sufficient to have placed the plaintiff on inquiry notice of the alleged fraud prior to the one-year cutoff” (internal quotations omitted)). 1. Plaintiffs’ “Patient Acuity” (and Related “Bad Debt”) Claims Are Time-Barred Plaintiffs knew or should have known the facts purportedly underlying their patient acuity (and related “bad debt”) claims by November 17, 2015. According to the Complaint, on November 17, 2015, NBC affiliate KUSA published a story titled “BuyER Beware” that was based on “a months’ long investigation” that Plaintiffs claim “revealed” (among other things) that: • “Adeptus engaged in widespread predatory overbilling of low-acuity patients, including by charging facility fees” that can exceed “$6,200 for a single visit”; and • “60 to 70 percent” of a large Colorado-based health insurer’s customers that visit free- standing emergency rooms like those run by Adeptus could be treated in urgent care centers for “approximately $200” while Adeptus’s free-standing emergency rooms “charge[] nearly $2,300—ten times as much—to treat those same conditions.” Compl. ¶ 60; see also id. ¶¶ 98-100. Plaintiffs further allege that from this story “the market understood that Defendants’ ability to collect on reported revenue was impugned by its practice of overbilling low-acuity patients.” Id. ¶ 304. Plaintiffs allege that in response to the airing of KUSA’s story, “Adeptus stock fell by more than 22% on heavy trading volume, from $59.87 per share to $46.50 per share” on the same day. Id. ¶ 100. For the reasons discussed in the Director Defendants’ motion to dismiss, this KUSA story did not actually reveal any “widespread predatory billing of low acuity patients.” But to the extent Plaintiffs seek to bring a claim under the Securities Act under this theory, the Complaint’s own allegations as to this KUSA story’s meaning and impact establish that they failed to do so in a timely manner. If “the market” learned on November 17, 2015 “that Defendants’ ability to UNDERWRITER DEFENDANTS’ MOTION TO DISMISS Page 21 Case 4:17-cv-00449-ALM Document 121 Filed 02/05/18 Page 29 of 40 PageID #: 2333 collect on reported revenue was impugned by its practice of overbilling low-acuity patients,” id. ¶ 304, then Plaintiffs were required to bring this claim within one year of that date—or no later than November 17, 2016. Plaintiffs’ claims related to patient acuity (and their derivative “bad debt” claims) are time-barred. 2. Plaintiffs’ “Joint Venture” Claims Are Time-Barred Plaintiffs also knew or should have known of the purported facts underlying their JV claims by no later than November 1, 2016. This is again borne out by the Complaint itself. Plaintiffs allege that on November 1, 2016, management revealed (among other things) that: • “contrary to Defendants’ prior statements, the Company had paid 100% of the working capital and operating losses for its JVs”; and • “the Company’s financing of 100% of the JVs’ working capital and operating losses drained the Company’s cash and dragged down its earnings in prior quarters, leading to the [liquidity] crisis that it then faced.” Compl. ¶¶ 110-11. In response to this disclosure, Plaintiffs allege that “Adeptus stock plummeted 72%, from . . . October 31, 2016 to . . . November 2, 2016, on extremely high volume.” Id. ¶¶ 115, 309; see also id. ¶ 114 (alleging that “[i]nvestors and analysts were stunned by Adeptus’s disclosures” about its financial arrangements with its JVs and the liquidity strain it was causing the Company, citing to one analyst report from November 2, 2016 downgrading Adeptus’s stock). Plaintiffs had one year from the date of Adeptus’s disclosures, or until November 1, 2017, to assert their Securities Act claims based on alleged misstatements and omissions about Adeptus’s JV strategy. Plaintiffs did not, however, file their Complaint until November 21, 2017, by which time the limitations period had already expired. 3. Plaintiffs’ “Internal Control” (and Related “Bad Debt”) Claims Are Time-Barred Plaintiffs likewise knew or should have known the facts underlying their internal control (and related “bad debt”) claims by no later than November 1, 2016. Adeptus disclosed it had a UNDERWRITER DEFENDANTS’ MOTION TO DISMISS Page 22 Case 4:17-cv-00449-ALM Document 121 Filed 02/05/18 Page 30 of 40 PageID #: 2334 material weakness in its internal controls over financial reporting as early as February 2016 and extensively discussed that internal control weakness in the June 2016 Offering Documents. Ex. 28 (2015 10-K) at 47-48, 62, 80-81, 110-11, Ex. 23.1; Ex. 34 (June 2016 Prospectus) at S-29; Ex. 31 (Q1 2016 10-Q) at 42-43. In particular, Adeptus disclosed that (i) the material weakness arose when Adeptus outsourced its billing and revenue collection duties to a third party (McKesson), and (ii) the material weakness in internal controls could result in material misstatements in Adeptus’s consolidated financial statements. See Ex. 28 (2015 10-K) at 47-48, 62, 80-81, 110-11. On November 1, 2016, nearly five months after the June 2016 Offering, the Company disclosed that the issues with billings and collections had worsened in the third quarter of 2016 and that DSO (i.e., the average number of days between rendering of services and collection of payment—a metric that companies use to assess how their accounts receivables are being managed) had increased from 80 days in Q2 to 119 days in Q3. Ex. 38 (Nov. 1, 2016 Conference Call Tr.) at 3. The issues with billings and collections, together with certain other challenges, including declining patient volumes in the third quarter, led management to disclose that: • “the Company was facing a stark liquidity crisis, and that Adeptus had been forced to seek $57.5 million in ‘incremental financing to bolster the [C]ompany’s liquidity position’”; • “the Company’s inability to collect reimbursement from payers precipitated the liquidity crisis”; • “[a]s evidenced by the rising [number of days between the date of service until collection of payment], the transition to McKesson has clearly not gone as planned”; • “‘collection issues associated with [McKesson]’ contributed to the Company’s troubling financial condition”; • “[t]his is not a risk free situation” with respect to the “risk of an AR write-down”; UNDERWRITER DEFENDANTS’ MOTION TO DISMISS Page 23 Case 4:17-cv-00449-ALM Document 121 Filed 02/05/18 Page 31 of 40 PageID #: 2335 • risks to Adeptus’s future results included “delays in conversion of patient receivables into cash, as well as increased potential for bad debt expense, associated with deficiencies in billing and collections related to our services”; and • “as a result of these strains on its liquidity, the Company had only $6.1 million in cash and $15.8 million under its credit facility,” which “had forced” Adeptus “to explore ‘various financing alternatives.’” Compl. ¶¶ 109, 112-13; Ex. 38 (Nov. 1, 2016 Conference Call Tr.) at 2-3, 5-7, 9, 11; Ex. 39 (Nov. 1, 2016 Press Release) at 2-3; see also Compl. ¶ 308. In response to these disclosures, Plaintiffs allege that “Adeptus stock plummeted” on November 2, 2017. Compl. ¶¶ 115, 309. Plaintiffs had one year from November 1, 2016 to file Securities Act claims based on alleged misstatements and omissions about internal controls (and related “bad debt”), but they did not file their Complaint until November 21, 2017—after the limitations period had expired.14 4. American Pipe Does Not Toll the Statute of Limitations for Plaintiffs’ Securities Act Claims Plaintiffs cannot circumvent the one-year limitations period by invoking “American Pipe” tolling. Under American Pipe, “[t]he filing of a class action tolls the running of a statute of limitations for ‘all asserted members of the class.’” Hall v. Variable Annuity Life Ins. Co., 727 F.3d 372, 375 (5th Cir. 2013) (quoting American Pipe & Constr. Co. v. Utah, 414 U.S. 538, 554 (1974)). But American Pipe tolling does not apply where an earlier complaint is voluntarily dismissed because, in those situations, the voluntarily dismissed complaints are treated as if they had never been filed. See, e.g., Taylor v. Bunge Corp., 775 F.2d 617, 619 (5th Cir. 1985) (“[P]laintiff’s voluntary dismissal of his earlier suit . . . did not toll the statute [of limitations].”); 14 On March 2, 2017, nine months after the June 2016 offering, the Company made additional disclosures about its internal control weakness related to billings and collections (as well as some additional internal control issues that are not alleged to have been known about earlier), but these disclosures simply provided additional detail about the issues identified on the November 1, 2016 earnings call and would not delay commencement of the limitations period. See In re Magnum Hunter Res. Corp. Sec. Litig., 26 F. Supp. 3d 278, 302 (S.D.N.Y. 2014), aff’d, 616 F. App’x 442 (2d Cir. 2015) (“Even if plaintiffs were correct that the 2012 disclosures did not include every [internal control] problem that the company ultimately disclosed, the statute of limitations for Securities Act claims is not somehow tolled until the appearance of disclosures that perfectly match the allegations that a plaintiff chooses to include in its complaint.”). UNDERWRITER DEFENDANTS’ MOTION TO DISMISS Page 24 Case 4:17-cv-00449-ALM Document 121 Filed 02/05/18 Page 32 of 40 PageID #: 2336 Goff v. United States, 659 F.2d 560, 562 (5th Cir. 1981) (same); In re IndyMac Mortg.-Backed Sec. Litig., 718 F. Supp. 2d 495, 504-05 (S.D.N.Y. 2010) (“IndyMac I”) (refusing to toll statute of limitations based on filing of an earlier class complaint that was voluntarily dismissed); In re Franklin Savings Corp., 385 F.3d 1279, 1286 (10th Cir. 2004) (same). Plaintiffs therefore cannot rely on either the OLERS complaint or the Laborers I complaint to toll the statute of limitations.15 American Pipe tolling does not apply to either iteration of the Laborers complaint for a second, independent reason: the named plaintiff in Laborers did not purchase shares in or traceable to any of the Offerings and therefore lacked standing to bring Securities Act claims. It is well established that the Securities Act’s statute of limitations is not tolled when the named plaintiff in the earlier-filed complaint lacked standing. See, e.g., In re Magnum Hunter Res. Corp. Sec. Litig., 616 F. App’x 442, 447 (2d Cir. 2015) (subsequent Section 11 plaintiffs could not benefit from “relation back” or “equitable tolling” where “plaintiffs who originally filed suit did not allege stock purchases traceable to any of [the company’s] offerings and, thus, lacked standing”); In re Puda Coal Sec. Inc. Litig., 2013 WL 5493007, at *12-15 (S.D.N.Y. Oct. 1, 2013) (American Pipe tolling inappropriate where named plaintiff in earlier complaints lacked standing to bring Securities Act claims because “if standing does not exist at the outset, it cannot be manufactured through belated intervention”); In re Colonial Ltd. P’ship Litig., 854 F. Supp. 64, 82 (D. Conn. 1994) (“[I]f the original plaintiffs lacked standing to bring their claims in the first place, the filing of a class action complaint does not toll the statute of limitations for other members of the purported class.”); N.J. Carpenters Health Fund v. DLJ Mortg. Capital, Inc., 2010 WL 6508190, at *2 (S.D.N.Y. Dec. 15, 2010) (tolling “should not apply . . . where a 15 The Laborers II complaint filed on December 22, 2016 was itself time-barred because it was filed more than one year after the KUSA report was published and investors were, according to the Complaint, on notice of the “patient acuity” claims. UNDERWRITER DEFENDANTS’ MOTION TO DISMISS Page 25 Case 4:17-cv-00449-ALM Document 121 Filed 02/05/18 Page 33 of 40 PageID #: 2337 Plaintiff lacks standing [because] there is no case”). This determination is backed by sound policy. Any other conclusion would “encourage attempts to circumvent the statute of limitation by filing a lawsuit without an appropriate plaintiff and then searching for one who can later intervene with the benefit of the tolling rule.” Kruse v. Wells Fargo Home Mortg., Inc., 2006 WL 1212512, at *6 (E.D.N.Y. May 3, 2006); see also Puda Coal, 2013 WL 5493007, at *15 (“American Pipe was not intended to incentivize filing lawsuits on behalf of nominal plaintiffs who in fact lack statutory standing to proceed”; a contrary ruling would allow plaintiffs to “effectively hold their place in line by initiating lawsuits in disregard of statutory standing requirements, before then searching for a plaintiff who did have standing to intervene in the action.”); In re Crazy Eddie Sec. Litig., 747 F. Supp. 850, 856 (E.D.N.Y. 1990) (same). 5. Plaintiffs Cannot Rely on Relation Back to Circumvent the Statute of Limitations Plaintiffs also cannot salvage their untimely Complaint through the “relation back” doctrine under Rule 15 of the Federal Rules of Civil Procedure. As discussed above, Plaintiffs’ Complaint cannot relate back to: (i) OLERS and Laborers I because they were voluntarily dismissed, supra Argument Part II.A at 19; or (ii) Laborers I and II because Laborers did not purchase shares in or traceable to any of the four Offerings and therefore lacked standing to bring the Securities Act claims, supra id. at 19-20. Nor can relation back apply where, as here, Plaintiffs’ Complaint is not an “amendment to a pleading,” supra id. at 18, and there was no mistake concerning the identity of the Plaintiffs, supra id. at 18-19. Finally, even if the relation back doctrine applied, it would not apply to Securities Act claims based on alleged misstatements or omissions that were not asserted in the earlier complaints. The OLERS and both Laborers complaints asserted Securities Act claims strictly based on alleged misstatements about patient overbilling and acuity; they did not assert claims UNDERWRITER DEFENDANTS’ MOTION TO DISMISS Page 26 Case 4:17-cv-00449-ALM Document 121 Filed 02/05/18 Page 34 of 40 PageID #: 2338 based on alleged misstatements about Adeptus’s JVs, internal controls over revenue cycle management, or estimates of bad debt and liquidity projections. Several courts have held that relation back does not apply where a later-filed complaint alleges different misrepresentations and omissions than the earlier-filed complaint. See Caldwell v. Berlind, 543 F. App’x 37, 40 (2d Cir. 2013) (no relation back where amended complaint alleged misrepresentations concerning accounting practices but original complaint alleged misrepresentations concerning CDOs and leverage ratio); In re Noah Educ. Holdings, Ltd. Sec. Litig., 2010 WL 1372709, at *9-10 (S.D.N.Y. Mar. 31, 2010) (no relation back where complaints challenged same offering documents under different theories); In re Alcatel Sec. Litig., 382 F. Supp. 2d 513, 527-29 (S.D.N.Y. 2005) (original allegations of misstatements about inventory and consumer demand did not provide adequate notice as to new claims based on alleged misstatements about certain acquisitions); In re Initial Pub. Offering Sec. Litig., 358 F. Supp. 2d 189, 209 (S.D.N.Y. 2004) (newly alleged omissions did not relate back). The same reasoning applies here. Neither of the Laborers complaints nor the OLERS complaint gave Defendants fair notice of the Securities Act claims based upon alleged misstatements about JVs, material weakness over internal controls, and bad debt estimates that Plaintiffs now assert.16 III. The Underwriter Defendants Are Exempt From Liability for Plaintiffs’ Claims Based on Alleged Misstatements About Bad Debt Plaintiffs claim that, as a result of the purported acuity reimbursement and internal control issues discussed above, the reported bad debt reserves (and therefore other financial results) in the offering documents were false or misleading. Compl. ¶¶ 404-09. Even if Plaintiffs had adequately pled that the bad debt reserves were false (and they did not, for the 16 For the same reasons, American Pipe tolling would not apply to Plaintiffs’ “JV,” “internal controls,” or “bad debt” claims. See Friedman v. JP Morgan Chase & Co., 2016 WL 2903273, at *9 (S.D.N.Y. May 18, 2016) (holding that American Pipe tolling only applies to the “exact[] same cause of action” that is asserted in the earlier complaint and “subsequently asserted in the latter action”), aff’d, 2017 WL 1495935 (2d Cir. Apr. 26, 2017). UNDERWRITER DEFENDANTS’ MOTION TO DISMISS Page 27 Case 4:17-cv-00449-ALM Document 121 Filed 02/05/18 Page 35 of 40 PageID #: 2339 reasons set forth in the Director Defendants’ motion, which are fully incorporated by reference herein), the Underwriter Defendants are exempt from liability because they reasonably relied on the expert judgments of Adeptus’s auditors, and Plaintiffs have not pled otherwise. Section 11(b)(3)(C) of the Securities Act permits underwriters to rely on portions of offering materials prepared or audited by experts where they “had no reasonable ground to believe and did not believe . . . that the statements therein were untrue.” See 15 U.S.C. § 77k(b)(3)(C). By virtue of this provision, which is sometimes referred to as the underwriters’ reliance defense, the Underwriter Defendants cannot be held liable for misstatements contained in so-called “expertised” portions of the offering documents in the absence of red flags. See In re Worlds of Wonder Sec. Litig., 35 F.3d 1407, 1421 (9th Cir. 1994); In re Software Toolworks, Inc. Sec. Litig., 50 F.3d 615, 623 (9th Cir. 1994); see also In re Enron Corp. Sec., Derivative & ERISA Litig., 235 F. Supp. 2d 549, 613 (S.D. Tex. 2002) (“[A]n underwriter may rely on the expertised parts of a prospectus, such as financial statements certified by an accountant.”).17 It is well-settled that accountants and auditors are considered “experts”, and that underwriters may rely on audited financial statements and the accounting judgments and opinions of an independent auditor. See In re WorldCom, Inc. Sec. Litig., 346 F. Supp. 2d 628, 664 (S.D.N.Y. 2004) (“[I]t is settled that an accountant qualifies as an expert, and audited financial statements are considered expertised portions of a registration statement.”). Underwriters’ reliance on these statements and expert opinions is per se reasonable as a matter of law unless the underwriter is confronted with red flags calling into question the reliability of financial instruments. See Feyko v. Yuhe Int’l, Inc., 2013 WL 816409, at *8 (C.D. Cal. Mar. 5, 17 Section 12 similarly provides that an underwriter is not liable for a misstatement or omission in a prospectus where “he did not know, and in the exercise of reasonable care could not have known, of such untruth or omission.” 15 U.S.C. § 77l(a)(2). The standard for this defense is “similar, if not identical” to the standard under Section 11(b)(3)(C). Software Toolworks, 50 F.3d at 621. UNDERWRITER DEFENDANTS’ MOTION TO DISMISS Page 28 Case 4:17-cv-00449-ALM Document 121 Filed 02/05/18 Page 36 of 40 PageID #: 2340 2013) (“[U]nderwriters occupy a special place in Section 11 jurisprudence because they are allowed to rely on auditors’ work, absent red flags.”); see also John Nuveen & Co. v. Sanders, 450 U.S. 1005, 1010 (1981) (Powell, J., dissenting from denial of cert.) (the reliance defense “is in the [Securities] Act because, almost by definition, it is reasonable to rely on financial statements certified by public accountants”). Here, the offering documents incorporated, among other things, Adeptus’s consolidated financial statements in reliance on the “authority of [KPMG LLP] as experts in accounting and auditing.” See Ex. 1 (June 2014 Prospectus) at 167; Ex. 15 (May 2015 Prospectus) at 89; Ex. 19 (July 2015 Prospectus) at S-88, 13; Ex. 34 (June 2016 Prospectus) at S-29. These are the very portions of the offering documents that Plaintiffs challenge in their Complaint. See Compl. ¶¶ 404-08. The Ninth Circuit has held that it would be “absurd” to require underwriters, who are not accountants, to identify accounting mistakes when company management and its accountants apply complex accounting rules to a company’s financial statements, such as those Plaintiffs claim were misleading. Worlds of Wonder, 35 F.3d at 1421; Software Toolworks, 50 F.3d at 624 (underwriters’ reliance on auditor reasonable as a matter of law “[g]iven the complexity surrounding software licensing revenue recognition”). Any such requirement would be particularly absurd here because the Complaint alleges no “red flags” that would render the Underwriter Defendants’ reliance on Adeptus’s accounting experts (KPMG) and their expertised statements unreasonable. See Feyko, 2013 WL 816409, at *8 (dismissing Section 11 claims against underwriters where complaint alleged that auditors were experts, but failed to allege “red flags”); In re Countrywide Fin. Corp. Sec. Litig., 588 F. Supp. 2d 1132, 1182 (C.D. Cal. 2008) UNDERWRITER DEFENDANTS’ MOTION TO DISMISS Page 29 Case 4:17-cv-00449-ALM Document 121 Filed 02/05/18 Page 37 of 40 PageID #: 2341 (dismissing Securities Act claims against underwriters where plaintiffs did not allege red flags with respect to audited loan-related balance sheet items). Plaintiffs will likely argue that the underwriters’ reliance defense is inappropriate for resolution on a motion to dismiss.18 However, where, as here, the challenged portions of offering documents are considered expertised, the applicability of the underwriters’ reliance defense is apparent on the face of the complaint, and that defense can thus be properly considered on a motion to dismiss. See Countrywide, 588 F. Supp. 2d at 1174-75 (dismissing Securities Act claims against underwriters where reliance defense appeared on the face of the complaint); cf. EPCO Carbon Dioxide Prods., Inc. v. JP Morgan Chase Bank, NA, 467 F.3d 466, 470 (5th Cir. 2006) (“Although dismissal under rule 12(b)(6) may be appropriate based on a successful affirmative defense, that defense must appear on the face of the complaint.”). Accordingly, because Plaintiffs failed to identify any misrepresentations related to bad debt reserves that do not flow from expertised disclosures, and because they failed to allege any red flags, these claims against the Underwriter Defendants must too be dismissed. CONCLUSION For the foregoing reasons, Plaintiffs’ Securities Act claims should be dismissed in their entirety with prejudice. 18 See, e.g., Lone Star Ladies Inv. Club v. Schlotzsky’s Inc., 238 F.3d 363, 369 (5th Cir. 2001) (Due diligence in response to a Section 11 claim “is an affirmative defense that must be pleaded and proved.”). UNDERWRITER DEFENDANTS’ MOTION TO DISMISS Page 30 Case 4:17-cv-00449-ALM Document 121 Filed 02/05/18 Page 38 of 40 PageID #: 2342 Dated: February 5, 2018 Respectfully submitted, By: /s/ R. Thaddeus Behrens R. Thaddeus Behrens Texas Bar No. 24029440 Daniel H. Gold Texas Bar No. 24053230 Benjamin G. Goodman Texas Bar No. 24091433 HAYNES AND BOONE, LLP 2323 Victory Avenue, Suite 700 Dallas, Texas 75219 Telephone: 214.651.5000 Facsimile: 214.651.5940 Email: thad.behrens@haynesboone.com Email: daniel.gold@haynesboone.com Email: benjamin.goodman@haynesboone.com Adam S. Hakki (admitted pro hac vice) Jeffrey J. Resetarits (admitted pro hac vice) Adam J. Goldstein (admitted pro hac vice) SHEARMAN & STERLING LLP 599 Lexington Avenue New York, New York 10022 Telephone: 212.848.4000 Fax: 212.848.7179 Email: adam.hakki@shearman.com Email: jeffrey.resetarits@shearman.com Email: adam.goldstein@shearman.com Counsel for Defendants Goldman Sachs & Co. LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Evercore Group L.L.C., Morgan Stanley & Co. LLC, Piper Jaffray & Co., RBC Capital Markets, LLC, Dougherty & Company LLC, Deutsche Bank Securities Inc., and BMO Capital Markets Corp. UNDERWRITER DEFENDANTS’ MOTION TO DISMISS Page 31 Case 4:17-cv-00449-ALM Document 121 Filed 02/05/18 Page 39 of 40 PageID #: 2343 CERTIFICATE OF SERVICE I hereby certify that on February 5, 2018, the foregoing document was served on all counsel of record via the Court’s electronic filing system. /s/ R. Thaddeus Behrens R. Thaddeus Behrens UNDERWRITER DEFENDANTS’ MOTION TO DISMISS Page 32 Case 4:17-cv-00449-ALM Document 121 Filed 02/05/18 Page 40 of 40 PageID #: 2344