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, 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 Director Defendants’ Motion to Dismiss the Consolidated Class Action Complaint Case 4:17-cv-00449-ALM Document 123 Filed 02/05/18 Page 1 of 51 PageID #: 3578 i TABLE OF CONTENTS Introduction ......................................................................................................................................1 Statement of the Issues.....................................................................................................................3 Argument and Authorities................................................................................................................4 I. Plaintiffs’ burdens in pleading a Section 11 claim. .............................................................4 A. Allegations of untrue or misleading statements .......................................................5 B. Allegations of omissions ..........................................................................................6 C. Any alleged misstatement or omission must also be material .................................8 II. Plaintiffs allege no material misrepresentation related to the acuity of Adeptus patients .................................................................................................................................9 A. Plaintiffs point to no acuity-related statement in the Offering Documents that was false or misleading .....................................................................................9 i. Adeptus’s high-acuity treatment capabilities and experience ....................10 ii. The difference between Adeptus’s facilities and other care options .........12 iii. Adeptus’s treatment of emergent patients..................................................14 B. The CAC pleads no actionable acuity-related omission—there was no “widespread practice of overcharging low-acuity patients ....................................14 III. Plaintiffs allege no material misrepresentation with respect to Adeptus’s JVs .................17 A. The Offering Documents’ statements concerning Adeptus’s JVs were truthful....................................................................................................................20 i. The statements concerning Adeptus’s entry into and expansion through its JVs were accurate ....................................................................20 ii. The statements concerning Adeptus’s share of the Arizona JV’s losses and debt were accurate ....................................................................22 B. Plaintiffs allege no omission of any material fact concerning Adeptus’s JVs from the Offering Documents .........................................................................24 i. The Offering Documents disclosed the impact of the JVs on the company’s profitability and cash flow, and related risks ..........................24 ii. Adeptus had no obligation to disclose details of the partners’ respective obligations, or of individual JVs’ results ..................................28 IV. Plaintiffs allege no material misrepresentation related to Adeptus’s internal controls ...............................................................................................................................31 A. Adeptus disclosed in the June 2016 Offering Documents the only material internal controls weakness at that time ..................................................................32 B. Adeptus’s identification of additional internal controls weaknesses at year- end 2016 does not demonstrate that those weaknesses existed or were known at the time of the June 2016 Offering ........................................................35 Case 4:17-cv-00449-ALM Document 123 Filed 02/05/18 Page 2 of 51 PageID #: 3579 ii V. Plaintiffs allege no material misrepresentation related to Adeptus’s liquidity, cash flow, or financial performance ...........................................................................................37 A. There are no well-pleaded allegations that Adeptus’s bad debt estimates were misleading or false when made .....................................................................38 B. The CAC’s liquidity-related claims should also be dismissed ..............................40 Conclusion .....................................................................................................................................40 Case 4:17-cv-00449-ALM Document 123 Filed 02/05/18 Page 3 of 51 PageID #: 3580 iii TABLE OF AUTHORITIES CASES Abrams v. Baker Hughes Inc., 292 F.3d 424 (5th Cir. 2002) .....................................................................................................5 Ashcroft v. Iqbal, 556 U.S. 662 (2009) ...............................................................................................................4, 5 Basic Inc. v. Levinson, 485 U.S. 224 (1988) ...............................................................................................................6, 8 Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) ...............................................................................................................4, 5 City of Roseville Emps.’ Ret. Sys. v. Horizon Lines, Inc., 686 F. Supp. 2d 404, 420 (D. Del. 2009) .................................................................................37 C.D.T.S. v. UBS AG, No 12 CIV. 4924 KBF, 2013 WL 6576031 (S.D.N.Y. Dec. 13, 2013) ...................................37 Dobina v. Weatherford Int’l Ltd., 909 F. Supp. 2d 228 (S.D.N.Y. 2012)......................................................................................37 Fine v. Am. Solar King Corp., 919 F.2d 290 (5th Cir. 1990) ...................................................................................................39 Hall v. Children’s Place Retail Stores, Inc., 580 F. Supp. 2d 212 (S.D.N.Y. 2008)......................................................................................37 Hutchison v. Deutsche Bank Sec. Inc., 647 F.3d 479 (2d Cir. 2011).......................................................................................................7 In re Banco Bradesco S.A. Sec. Litig., --- F.3d ----, No. 1:16-CV-4155-GHW, 2017 WL 4381407 (S.D.N.Y. Sept. 29, 2017) ..................................................................................................................................36 In re CIT Grp. Inc. Sec. Litig., 349 F. Supp. 2d 685 (S.D.N.Y. 2004)......................................................................................39 In re Franklin Bank Corp. Sec. Litig., 782 F. Supp. 2d 364 (S.D. Tex. 2011), ............................................................................. vii, 36 In re IAC/InterActiveCorp Sec. Litig., 695 F. Supp. 2d 109 (S.D.N.Y. 2010)......................................................................................16 Case 4:17-cv-00449-ALM Document 123 Filed 02/05/18 Page 4 of 51 PageID #: 3581 iv In re ITT Educ. Servs., Inc. Sec. & S’holder Derivs. Litig., 859 F. Supp. 2d 572 (S.D.N.Y. 2012)......................................................................................16 In re Lehman Bros. Sec. & ERISA Litig., 903 F. Supp. 2d 152 (S.D.N.Y. 2012)........................................................................................4 In re Magnum Hunter Res. Corp. Sec. Litig., 26 F. Supp. 3d 278 (S.D.N.Y. 2014)........................................................................................37 In re Ply Gem Holdings, Inc. Sec. Litig., 135 F. Supp. 3d 145 (S.D.N.Y. 2015)........................................................................................8 In re Scottish Re Grp. Sec. Litig., 524 F. Supp. 2d 370 (S.D.N.Y. 2007)......................................................................................37 In re Time Warner Inc. Sec. Litig., 9 F.3d 259 (2d Cir. 1993)...........................................................................................................6 In re Velti PLC Sec. Litig., No. 13-CV-03889-WHO, 2015 WL 5736589 (N.D. Cal. Oct. 1, 2015)..................................38 Ind. Pub. Ret. Sys. v. SAIC, Inc., 818 F.3d 85 (2d Cir. 2016).........................................................................................................7 Indiana Elec. Workers’ Pension Tr. Fund IBEW v. Shaw Grp., Inc., 537 F.3d 527 (5th Cir. 2008) ...........................................................................5, 6, 9, 10, 29, 39 Isquith ex rel. Isquith v. Middle S. Utils., Inc., 847 F.2d 186 (5th Cir. 1988) .....................................................................................................6 Kapps v. Torch Offshore, Inc., 379 F.3d 207 (5th Cir. 2004) .....................................................................................6, 8, 29, 31 Krim v. BancTexas Grp. Inc., 989 F.2d 1435 (5th Cir. 1993) ...............................................................................................8, 9 Lovelace v. Software Spectrum, Inc., 78 F.3d 1015 (5th Cir. 1996) .................................................................................................. vii Mallen v. Alphatec Holdings, Inc., 861 F. Supp. 2d 1111 (S.D. Cal. 2012) ....................................................................................19 Medina v. Tremor Video, Inc., 640 F. App’x 45 (2d Cir. 2016) .................................................................................................7 Metzler Inv. GMBH v. Corinthian Colls., Inc., 540 F.3d 1049 (9th Cir. 2008) .................................................................................................16 Case 4:17-cv-00449-ALM Document 123 Filed 02/05/18 Page 5 of 51 PageID #: 3582 v NECA-IBEW Pension Tr. Fund v. Bank of Am. Corp., No. 10 CIV. 440 LAK HBP, 2012 WL 3191860 (S.D.N.Y. Feb. 9, 2012) .............................39 Omnicare, Inc. v. Laborers Dist. Council Constr. Indus. Pension Fund, 135 S. Ct. 1318 (2015) .................................................................................4, 5, 6, 7, 10, 39, 40 R2 Invs. LDC v. Phillips, 401 F.3d 638 (5th Cir. 2005) ...............................................................................................6, 29 Ret. Sys. v. Horizon Lines, Inc., 686 F. Supp. 2d 404 (D. Del. 2009) .........................................................................................37 Rosenzweig v. Azurix Corp., 332 F.3d 854 (5th Cir. 2003) ...........................................................................................5, 9, 21 Rudman v. CHC Group LTD., 217 F. Supp. 3d 718 (S.D.N.Y. 2016)........................................................................................8 Southland Sec. Corp. v. INSpire Ins. Sols., Inc., 365 F.3d 353 (5th Cir. 2004) ...................................................................................................29 Thor Power Tool Co. v. C.I.R., 439 U.S. 522 (1979) .................................................................................................................39 TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438 (1976) ...................................................................................................................8 Tuchman v. DSC Commc’ns Corp., 14 F.3d 1061 (5th Cir. 1994) .....................................................................................................5 STATUTES 15 U.S.C. § 77k ........................................................................................................................4, 5, 6 Case 4:17-cv-00449-ALM Document 123 Filed 02/05/18 Page 6 of 51 PageID #: 3583 vi TABLE OF EXHIBITS This table lists those exhibits included in Defendants’ joint appendix that are cited to in this Motion. For ease of use, those exhibits that constitute Offering Documents are organized by offering, as described in the Consolidated Class Action Complaint (“CAC,” Dkt. No. 108) ¶¶ 344–47. 1 Documents that constitute an Offering Document for more than one offering are listed under each pertinent offering. IPO Offering Documents Adeptus Health Inc. Form 424B4 (June 25, 2014) “June 24, 2014 Prospectus” Ex. 1 May 2015 Offering Documents Adeptus Health Inc. Form 424B4 (May 7, 2015) “May 5, 2015 Prospectus” Ex. 15 Adeptus Health Inc. Form 10-K (Feb. 27, 2015) “2014 10-K” Ex. 8 Adeptus Health Inc. Form 8-K (Apr. 21, 2015) “Apr. 21, 2015 8-K” Ex. 10 Adeptus Health Inc. Form 8-K (Apr. 23, 2015) “Apr. 23, 2015 8-K” Ex. 11 Adeptus Health Inc. Form 10-Q (May 1, 2015) “Q1 2015 10-Q” Ex. 14 July 2015 Offering Documents Adeptus Health Inc. Form 424B5 (July 31, 2015) “July 29, 2015 Prospectus” Ex. 19 Adeptus Health Inc. Form 10-K (Feb. 27, 2015) “2014 10-K” Ex. 8 Adeptus Health Inc. Form 8-K (Apr. 21, 2015) “Apr. 21, 2015 8-K” Ex. 10 Adeptus Health Inc. Form 8-K (Apr. 23, 2015) “Apr. 23, 2015 8-K” Ex. 11 Adeptus Health Inc. Form 10-Q (May 1, 2015) “Q1 2015 10-Q” Ex. 14 Adeptus Health Inc. Form 10-Q (July 31, 2015) “Q2 2015 10-Q” Ex. 18 1 See also Ex. 15 (May 5, 2015 Prospectus at 89-90); Ex. 19 (July 29, 2015 Prospectus at S-1, S-89); Ex. 34 (June 2, 2016 Prospectus at S-29, 14). Case 4:17-cv-00449-ALM Document 123 Filed 02/05/18 Page 7 of 51 PageID #: 3584 vii June 2016 Offering Documents Adeptus Health Inc. Form 424B5 (June 3, 2016) “June 2, 2016 Prospectus” Ex. 34 Adeptus Health Inc. Form 10-K (Feb. 27, 2015) “2014 10-K” Ex. 8 Adeptus Health Inc. Form 8-K (Apr. 21, 2015) “Apr. 21, 2015 8-K” Ex. 10 Adeptus Health Inc. Form 10-Q (May 1, 2015) “Q1 2015 10-Q” Ex. 14 Adeptus Health Inc. Form 10-Q (July 31, 2015) “Q2 2015 10-Q” Ex. 18 Adeptus Health Inc. Form 10-Q/A (Aug. 13, 2015) “Q2 2015 10-Q/A” Ex. 20 Adeptus Health Inc. Form 10-Q (Oct. 30, 2015) “Q3 2015 10-Q” Ex. 22 Adeptus Health Inc. Form 10-K (Feb. 29, 2016) “2015 10-K” Ex. 28 Adeptus Health Inc. Form 10-Q (Apr. 29, 2016) “Q1 2016 10-Q” Ex. 31 Adeptus Health Inc. Form 8-K (May 16, 2016) “May 16, 2016 8-K” Ex. 33 Other Exhibits2 Adeptus Health Inc. Form 8-K (Oct. 29, 2014) “Oct. 29, 2014 8-K” Ex. 4 Adeptus Health Inc. Form 10-Q (Nov. 7, 2014) “Q3 2014 10-Q” Ex. 6 KUSA Staff, Patients shocked by freestanding ER bills, 9News.com (Nov. 19, 2015, 10:01 p.m. MDT), http://www.9news.com/article/news/investigations/pati ents-shocked-by-freestanding-er-bills/73-233499383 “Freestanding ER Bills KUSA Story” Ex. 25 KUSA Staff, Buyer Beware: Freestanding emergency rooms, 9News.com (Nov. 17, 2016), http://www.9news.com/article/news/investigations/buy “Buyer Beware KUSA Story” Ex. 24 2 In assessing whether Plaintiffs have met their burden to plead a Section 11 claim, the Court may consider the contents of all documents referenced in the CAC, as well as any additional public disclosure documents that were required to be filed with the SEC. Lovelace v. Software Spectrum, Inc., 78 F.3d 1015, 1018 n.1 (5th Cir. 1996); In re Franklin Bank Corp. Sec. Litig., 782 F. Supp. 2d 364, 385 (S.D. Tex. 2011), aff’d sub nom. Harold Roucher Tr. U/A DTD 9/21/72 v. Nocella, 464 F. App’x 334 (5th Cir. 2012). The parties’ joint appendix includes copies or excerpts of those filings cited in the Motions to Dismiss. Full copies of all Adeptus public filings can be found at sec.gov/edgar by searching ticker ADPT. 3 Referenced in CAC ¶¶ 60, 99. Case 4:17-cv-00449-ALM Document 123 Filed 02/05/18 Page 8 of 51 PageID #: 3585 viii er-beware/buyer-beware-freestanding-emergency- rooms/233489714 Adeptus Health Inc. Form 10-Q (Jul 29, 2016) “Q2 2016 10-Q” Ex. 36 Adeptus Health Inc. Form 10-Q (Nov. 9, 2016) “Q3 2016 10-Q” Ex. 40 Adeptus Health Inc. Form 12b-25 (Mar. 2, 2017) “Mar. 2, 2017 Form 12b-25” Ex. 42 Adeptus Health Inc. Bankruptcy Disclosure Statement (Apr. 19, 2017)5 “Bankr. Disclosure” Ex. 43 Adeptus Health Inc. Bankruptcy First Day Declaration (Apr. 19, 2017)6 “Bankr. First Day Decl.” Ex. 44 4 Referenced in CAC ¶¶ 60, 98, 99. 5 Referenced in CAC ¶¶ 8, 21, 76, 90. 6 Id. Case 4:17-cv-00449-ALM Document 123 Filed 02/05/18 Page 9 of 51 PageID #: 3586 1 INTRODUCTION Section 11 of the Securities Act of 1933 protects investors who are harmed by a material misrepresentation or omission in an issuer’s registration statement; it does not provide post-hoc insurance for investors who wish their investment had performed better. Investments inherently have risks, and there are no guarantees of returns. Adeptus’s7 stock was no different. The company’s IPO and other offerings took place during a time of rapid growth for the company, which had expanded from 14 facilities in 2012, to 32 facilities at the time of its 2014 IPO, to more than 100 facilities by late 2016.8 Adeptus was the market leader throughout this period, larger than any of its freestanding ER competitors, and the business model disclosed in its Offering Documents was focused on continued growth. Adeptus didn’t hide its growth strategy, the risks involved, or the significant capital needed to execute its plan—it highlighted them. Ultimately this growth and the capital it required, when combined with an unexpected reduction in patient volumes and collections challenges related to Adeptus’s switch to an outside collections vendor in October 2015, caused significant strain on Adeptus’s short-term liquidity in late 2016, and the company sought Chapter 11 bankruptcy protection on April 19, 2017.9 The loss in the value of Adeptus’s stock along the way wasn’t what anyone—least of all the Director Defendants10—wanted, but it wasn’t due to any fraud and it doesn’t suggest any violation of the Securities Act. To state a claim under Section 11, Plaintiffs must allege facts showing that Adeptus’s Offering Documents contained a misrepresentation of a material fact, or an omission of a 7 Terms defined in the CAC have the same meaning in this Motion. 8 Ex. 1 (June 24, 2014 Prospectus at 1, 6); Ex. 34 (June 2, 2016 Prospectus at S-1); Ex. 40 (Q3 2016 10-Q at 34). 9 Ex. 43 (Bankr. Disclosure at 27–29) (cited in CAC ¶¶ 8, 21, 76, 90–91); Ex. 44 (Bankr. First Day Decl. ¶¶13, 98, 101) (“In October 2016 . . . it became apparent that [Adeptus was] facing liquidity constraints.”). 10 The “Director Defendants” are Richard Covert, Daniel J. Hosler, Stephen M. Mengert, Steven V. Napolitano, Daniel W. Rosenberg, Gregory W. Scott, Ronald L. Taylor, and Jeffrey S. Vender, each of whom was a member of the Board of Directors of Adeptus Health Inc. at the time of one or more of the offerings. Case 4:17-cv-00449-ALM Document 123 Filed 02/05/18 Page 10 of 51 PageID #: 3587 2 material fact Adeptus had a duty to disclose. Plaintiffs cannot do so here, as the Offering Documents consistently provided fair and accurate disclosures on each of the topics Plaintiffs identify. Instead, Plaintiffs resort to pairing the Offering Documents’ truthful statements with Plaintiffs’ own mischaracterizations, and alleging omissions of information that was disclosed or of purported “facts” that aren’t supported by Plaintiffs’ own allegations. The CAC alleges no misrepresentation or omission from the Offering Documents related to the acuity11 of Adeptus’s patients. Plaintiffs base their claim in part on allegations of a “widespread practice of overcharging low-acuity patients” that finds no support in the CAC. Plaintiffs rely on a local news story describing isolated complaints (none of which were accusations of “overcharging”), that as described below actually disproves Plaintiffs’ contention. Moreover, nothing alleged by Plaintiffs shows that the statements in the Offering Documents concerning the acuity of Adeptus’s patients, or of its capabilities regarding high-acuity patients as compared to others, were inaccurate. The CAC alleges no misrepresentation or omission from the Offering Documents related to Adeptus’s joint ventures. The Offering Documents accurately described the status, operations, and results of Adeptus’s joint venture (“JV”) partnerships, and those partnerships’ financial impact on the company. They also informed investors of the significant capital that would be required from Adeptus to achieve its JV growth plan, and that because of these capital needs and the nature of the business it would take a period of time for any new partnership or facility to become profitable. Plaintiffs’ hindsight aversion to these partnerships does not make any prior statement false or misleading when made. 11 The severity of a healthcare patient’s condition is described as the patient’s “acuity.” CAC ¶ 52. A particular patient’s acuity can be described on a scale of Level 1 through Level 5, with Level 1 being the least severe and level 5 being the most severe. Id. Case 4:17-cv-00449-ALM Document 123 Filed 02/05/18 Page 11 of 51 PageID #: 3588 3 The CAC alleges no misrepresentation or omission from the Offering Documents related to Adeptus’s internal controls. The Offering Documents made fair and accurate disclosures concerning Adeptus’s internal controls consistent with its SEC obligations. Indeed, the June 2016 Offering Documents specifically disclosed to investors a material weakness in the company’s internal controls related to its billing and accounts receivable, and subsequent disclosures kept investors abreast of the company’s progress in addressing collections issues that later developed. The company’s subsequent identification of additional internal control weaknesses in connection with its December 31, 2016 financial reporting, and its determination in 2017 that it needed to write off accounts receivable that it had failed to collect, do not demonstrate that any statement made about its internal controls in prior periods was false or misleading when made. Plaintiffs’ attempts to plead falsity by hindsight are impermissible. And finally, the CAC alleges no misrepresentation or omission from the Offering Documents related to Adeptus’s liquidity, cash flow, or financial performance. Plaintiffs also allege that certain financial metrics in the Offering Documents were misstated, based on these same purported acuity and internal control issues. The CAC’s Section 11 claim with respect to this category of disclosures fails for the same reasons, and also because the allegedly misrepresented financial metrics and liquidity projections are each textbook examples of estimates and other opinions that by law cannot be deemed false or misleading simply because the estimate was later revised or proven incorrect. For these reasons, as well as those set forth in the Underwriter Defendants’ Motion to Dismiss regarding Plaintiffs’ lack of standing and the untimeliness of their Securities Act claims, Plaintiffs’ Section 11 claims against the Director Defendants should be dismissed. STATEMENT OF THE ISSUES The issues to be decided by this Court with respect to the Director Defendants are: (1) Case 4:17-cv-00449-ALM Document 123 Filed 02/05/18 Page 12 of 51 PageID #: 3589 4 whether the CAC adequately alleges a material misrepresentation or omission in the Offering Documents, as to each offering and category of alleged misrepresentations; (2) whether Plaintiffs have standing to pursue their Section 11 claims as to each offering; and (3) whether Plaintiffs’ Section 11 claims are time-barred. The first issue is addressed in this brief; the second and third issues are addressed in Sections I and II of the Underwriter Defendants’ Motion to Dismiss, which Sections the Director Defendants join and incorporate herein by reference. ARGUMENT AND AUTHORITIES I. Plaintiffs’ burdens in pleading a Section 11 claim. Section 11 claims relate solely to statements in a company’s registration statements issued in connection with the offering of new securities. Omnicare, Inc. v. Laborers Dist. Council Constr. Indus. Pension Fund, 135 S. Ct. 1318, 1323 (2015); 15 U.S.C. § 77k (2012). Statements made in other forums, or in other filings that are not incorporated by reference into those registration statements, cannot form the basis of a Section 11 claim. 15 U.S.C. § 77k(a); In re Lehman Bros. Sec. & ERISA Litig., 903 F. Supp. 2d 152, 180 (S.D.N.Y. 2012). To state a claim under Section 11, a plaintiff must sufficiently allege that the registration statement and any incorporated offering documents either (1) “contained an untrue statement of a material fact” or (2) “omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading.” Omnicare, 135 S. Ct. at 1323 (quoting 15 U.S.C. § 77k(a)). This pleading requirement applies to statements of fact as well as statements of opinion. Id. at 1325–26. Though the Court must accept as true all well-pleaded factual allegations, those allegations must show more than just a “possibility” that any defendant acted unlawfully. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). “Where a complaint pleads facts that are ‘merely consistent with’ a defendant’s liability, it ‘stops short of the line between possibility and Case 4:17-cv-00449-ALM Document 123 Filed 02/05/18 Page 13 of 51 PageID #: 3590 5 plausibility of entitlement to relief,’” and must be dismissed. Id. (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 557 (2007). Nor should the Court accept as true any legal conclusions pleaded by Plaintiffs—particularly legal conclusions couched as factual allegations. Id. A complaint “requires more than labels and conclusions” to survive a motion to dismiss. Twombly, 550 U.S. at 555. A. Allegations of untrue or misleading statements. Section 11 permits a securities purchaser to recover damages only if the purchaser shows that a registration statement “contained an untrue statement of material fact.” 15 U.S.C. § 77k(a). For a statement of fact to be untrue or misleading, “it must affirmatively create an impression of a state of affairs that differs in a material way from the one that actually exists.” Indiana Elec. Workers’ Pension Tr. Fund IBEW v. Shaw Grp., Inc., 537 F.3d 527, 541 (5th Cir. 2008) (internal quotation marks omitted). However, companies are “under no duty to cast [their] business in a pejorative, rather than a positive, light.” Rosenzweig v. Azurix Corp., 332 F.3d 854, 869 (5th Cir. 2003); see also Abrams v. Baker Hughes Inc., 292 F.3d 424, 433 (5th Cir. 2002) (“[C]orporate officials need not present an overly gloomy or cautious picture of the company’s current performance.”); Tuchman v. DSC Commc’ns Corp., 14 F.3d 1061, 1069 (5th Cir. 1994) (holding that there is “no duty to employ the adjectorial characterization that the plaintiffs believe is more accurate”) (internal quotation marks omitted). As to statements of opinion or belief, the complaint must plausibly allege that the speaker did not actually hold that professed opinion or belief, or that a statement of pure fact embedded in the opinion statement was untrue. Omnicare, 135 S. Ct. at 1327. “[A] statement of opinion is not misleading just because external facts show the opinion to be incorrect,” and it does not suffice to plead facts showing that the belief or opinion “turned out to be wrong.” Id. at 1325– 28. Regardless of whether the alleged statement is one of fact or opinion, the context in which it Case 4:17-cv-00449-ALM Document 123 Filed 02/05/18 Page 14 of 51 PageID #: 3591 6 was made must be considered in assessing whether it was false or misleading. Isquith ex rel. Isquith v. Middle S. Utils., Inc., 847 F.2d 186, 202 (5th Cir. 1988) (holding “context to be instrumental in determining whether a statement is ‘misleading’ within the meaning of [S]ection 11”). “[A]n investor reads each statement within such a document, whether of fact or of opinion, in light of all its surrounding text, including hedges, disclaimers, and apparently conflicting information.” Omnicare, 135 S. Ct. at 1330. Thus, in ruling on a motion to dismiss the Court must determine whether the alleged statements were “materially misleading when read in the context of the prospectus as a whole.” Kapps v. Torch Offshore, Inc., 379 F.3d 207, 211–12 (5th Cir. 2004). B. Allegations of omissions. Although Section 11 liability can also be based on an omission, 15 U.S.C. § 77k(a), “[s]ilence, absent a duty to disclose,” is not actionable under the federal securities laws. Basic Inc. v. Levinson, 485 U.S. 224, 239 n.17 (1988). This is true even where the omitted information is material: “there [is] no duty to disclose…all information material to the offering.” Kapps, 379 F.3d at 212 n.6. Under the securities laws, “a corporation is not required to disclose a fact merely because a reasonable investor would very much like to know that fact.” In re Time Warner Inc. Sec. Litig., 9 F.3d 259, 267 (2d Cir. 1993). Rather, only that material information “necessary to make the statements in the prospectus not misleading” or “required by the securities laws to be included” must be disclosed. Kapps, 379 F.3d at 212 n.6. An omission is only actionable if that omission “affirmatively create[s] an impression of a state of affairs that differs in a material way from the one that actually exists.” Shaw Grp., 537 F.3d at 541. An omission that “adds nothing to the truthfulness or accuracy of the [stated] fact” does not render it misleading. R2 Invs. LDC v. Phillips, 401 F.3d 638, 642 (5th Cir. 2005) (internal quotation marks omitted). Case 4:17-cv-00449-ALM Document 123 Filed 02/05/18 Page 15 of 51 PageID #: 3592 7 To allege a statement of opinion or belief was misleading due to an omission, it is not sufficient to allege a “fact cutting the other way.” Omnicare, 135 S. Ct. at 1329. “Reasonable investors understand that opinions sometimes rest on a weighing of competing facts; indeed, the presence of such facts is one reason why an issuer may frame a statement as an opinion.” Id. The securities laws and rules impose a duty to disclose only as to specified information and only in specified circumstances. For example, the three disclosure obligations on which Plaintiffs primarily rely—Items 303 and 503 of Regulation S-K, and Rule 408 of Regulation C— do not impose any general duty to disclose all categories of material information. Item 303 imposes a duty to disclose known trends, demands, commitments, events, or uncertainties, that will or are likely to cause a material change in liquidity. Thus, the disclosure obligation under Item 303 only exists as to trends the company “actually knows of when it files the relevant report with the SEC.” Ind. Pub. Ret. Sys. v. SAIC, Inc., 818 F.3d 85, 95 (2d Cir. 2016) (emphasis added), cert. denied sub nom. Leidos, Inc. v. Ind. Pub. Ret. Sys., 137 S. Ct. 1395 (2017); see also Management’s Discussion and Analysis of Financial Condition and Results of Operations; Certain Investment Company Disclosures, Securities Act Release, No. 33-6835, 1989 WL 1092885, at *4 (May 18, 1989) (SEC guidance confirming that disclosure is only required where the trend is “presently known to management”). “It is not enough that [management] should have known.” SAIC, 818 F.3d at 95. To allege a Section 11 claim based on an Item 303 omission, Plaintiffs must allege “specific facts from which we could draw ‘the plausible inference’ that [company management] had actual knowledge of the trends or uncertainties at the time the registration statement was issued.” Medina v. Tremor Video, Inc., 640 F. App’x 45, 48 (2d Cir. 2016). Claims under Item 503 are generally treated as merely duplicative of Item 303 claims, Case 4:17-cv-00449-ALM Document 123 Filed 02/05/18 Page 16 of 51 PageID #: 3593 8 particularly where, as here, the plaintiff relies on the same alleged omissions. E.g., Hutchison v. Deutsche Bank Sec. Inc., 647 F.3d 479, 485 n.4 (2d Cir. 2011); In re Ply Gem Holdings, Inc. Sec. Litig., 135 F. Supp. 3d 145, 154 (S.D.N.Y. 2015). Rule 408 of SEC Regulation C does not create additional disclosure obligations beyond those under the Securities Act. See 17 C.F.R. § 230.408 (2017). “This provision imposes the same duty as the Securities Act to disclose information necessary [to] make other disclosures not misleading.” Rudman v. CHC Group LTD., 217 F. Supp. 3d 718, 730 (S.D.N.Y. 2016). C. Any alleged misstatement or omission must also be material. No misrepresentation is actionable under Section 11 unless “the information allegedly omitted or misrepresented in the prospectus was material.” Krim v. BancTexas Grp. Inc., 989 F.2d 1435, 1445 (5th Cir. 1993). Indeed, “many Section 11 cases have been properly dismissed on the pleadings for lack of materiality.” Kapps, 379 F.3d at 216. A misstatement or omission is material if there is a “substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.” Basic, 485 U.S. at 231–32 (quoting TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976)). “[I]f there is a substantial likelihood that a reasonable shareholder would consider [the information] important” in making investment decisions, the information is material. TSC, 426 U.S. at 449. The Fifth Circuit thus “define[s] materiality as a substantial likelihood that a reasonable investor would consider the challenged statements to have significantly altered the total mix of information” in deciding to invest. Kapps, 379 F.3d at 216 (emphasis in original) (alterations omitted). “The ‘total mix’ of information normally includes information that is and has been in the readily available general public domain and facts known or reasonably available to the shareholders.” Id. Thus, “[m]ateriality is not judged in the abstract, but in light of the Case 4:17-cv-00449-ALM Document 123 Filed 02/05/18 Page 17 of 51 PageID #: 3594 9 surrounding circumstances,” asking whether a reasonable investor would have considered the information to be “material in the context of the prospectus as a whole.” Krim, 989 F.2d at 1448. Courts consistently recognize that “generalized, positive statements about the company’s competitive strengths, experienced management, and future prospects are not actionable because they are immaterial.” Rosenzweig, 332 F.3d at 869. Such generalized statements are mere “puffery” on which no reasonable investor would rely and are thus immaterial. Id. at 862. II. Plaintiffs allege no material misrepresentation related to the acuity of Adeptus patients. Plaintiffs claim that acuity-related statements in Adeptus’s Offering Documents were false, but the CAC neither explains how nor alleges any fact contrary to those statements. Plaintiffs also claim that the Offering Documents failed to disclose “widespread overbilling” of low-acuity patients, relying solely on a local television story on freestanding ERs that never said Adeptus’s low-acuity patients were being mislabeled high-acuity for billing purposes, much less on a “widespread” basis. Plaintiffs allege no material misrepresentation or omission of any fact related to Adeptus’s patient-acuity disclosures or billing practices. A. Plaintiffs point to no acuity-related statement in the Offering Documents that was false or misleading. The CAC pleads no facts suggesting any acuity-related statements in the Offering Documents were false or misleading. Plaintiffs point to three categories of acuity-related statements from the Offering Documents and summarily allege they were false: (1) statements regarding Adeptus’s high-acuity treatment capabilities and experience, (2) statements regarding the difference between Adeptus’s facilities and other care options, and (3) statements regarding Adeptus’s treatment of emergent patients. CAC ¶¶ 388–89. The CAC, however, contains no facts or explanation showing why these statements “affirmatively create[d] an impression of a state of affairs that differs in a material way from the one that actually exists” as is required to Case 4:17-cv-00449-ALM Document 123 Filed 02/05/18 Page 18 of 51 PageID #: 3595 10 adequately plead that such statements were false or misleading. Shaw Grp., 537 F.3d at 541. i. Adeptus’s high-acuity treatment capabilities and experience. The first category of alleged misrepresentations related to patient acuity are Adeptus’s statements regarding its ability to treat high-acuity patients and its belief that its “acuity mix” is “comparable” to traditional emergency rooms. In particular, Plaintiffs claim the following statements are misleading: “Our facilities are fully licensed and provide comprehensive, emergency care with an acuity mix that we believe is comparable to hospital-based emergency rooms.” CAC ¶ 388. “We operate at the higher end of the acuity and emergency care spectrum.” Id. With respect to the first statement, the CAC does not dispute that Adeptus provided care to high-acuity patients similar to those treated by hospital-based emergency rooms. The CAC pleads no facts indicating that Adeptus’s acuity mix was meaningfully different from hospital- based emergency rooms. The CAC does not outline the acuity mix of any particular hospital, or hospitals in general, and does not explain how Adeptus’s acuity mix was different, if at all. Moreover, the observation that Adeptus facilities had “an acuity mix that we believe is comparable to hospital-based emergency rooms” is a statement of opinion. To allege that a statement of opinion is false for purposes of Section 11, Plaintiffs must allege either that (1) the speaker did not hold the belief possessed or (2) facts supplied supporting the belief were untrue. Omnicare, 135 S. Ct. at 1327. Plaintiffs have done neither here.12 The second purportedly misleading statement, that Adeptus “operate[s] at the higher end of the acuity and emergency care spectrum,” was presented in the context of the Offering Documents’ description of Adeptus’s freestanding ERs’ capabilities: “We operate at the higher end of the acuity and emergency care spectrum. Our capabilities and offerings differ from other 12 See Executive Defs.’ Mot. to Dismiss at Section II-A. Case 4:17-cv-00449-ALM Document 123 Filed 02/05/18 Page 19 of 51 PageID #: 3596 11 care models as outlined below.”13 In the IPO Offering Documents, this claim is followed immediately by a chart of the “Spectrum of Primary and Emergency Care Services” showing the capabilities and attributes of five care models.14 Three of those care models—“Retail clinic,” “Urgent care,” and “Physician Office”—are shown on the “Low acuity / Primary care” side of the spectrum.15 To the right of those, on the higher end of the spectrum labeled “High acuity / Emergency care,” are “Freestanding ER” and “Hospital ER.”16 Adeptus’s facilities unquestionably operated on the higher end of this spectrum, precisely 13 Ex. 1 (June 24, 2014 Prospectus at 3); Ex. 15 (May 5, 2015 Prospectus at 3); Ex. 19 (July 29, 2015 Prospectus at S-2); Ex. 8 (2014 10-K at 6); Ex. 28 (2015 10-K at 6). 14 Ex. 1 (June 24, 2014 Prospectus at 3). 15 Id. 16 Id. Case 4:17-cv-00449-ALM Document 123 Filed 02/05/18 Page 20 of 51 PageID #: 3597 12 where they are shown on this chart. There is no allegation that Adeptus’s freestanding ERs did not treat high-acuity patients (unlike the three models to its left), or that it for any other reason belonged anywhere else on this spectrum. In later Offering Documents, this purported misstatement was similarly followed by language explaining the middle ground Adeptus occupied between urgent care clinics and hospital ERs: “we offer a dramatically improved patient experience relative to traditional hospital emergency departments by significantly reducing wait times and providing rapid access to Board-certified physicians on-site. We also provide convenient access to critical, high-acuity care as compared with urgent care centers.”17 The KUSA story, which Plaintiffs claim revealed the truth regarding their patient acuity allegations, does not suggest these representations were false or misleading. That story described how a small number of freestanding ER patients had been dissatisfied with the cost of care in general, and facility fees in particular. CAC ¶ 60. Nothing in the story suggested freestanding ERs, including those operated by Adeptus, did not actually treat high-acuity patients or that their ratio of high-acuity to low-acuity patients was any different from hospital-based ERs. ii. The difference between Adeptus’s facilities and other care options. Adeptus’s freestanding ER care model aimed to provide the convenience of walk-in-style urgent care clinics and the emergency care capabilities of traditional ERs.18 Urgent care facilities provide convenient walk-in care, but do not have the capability to treat higher-acuity patients with more severe conditions and are typically only open for limited hours.19 Traditional 17 Ex. 1 (June 24, 2014 Prospectus at 3, 4); Ex. 15 (May 5, 2015 Prospectus at 3); Ex. 19 (July 29, 2015 Prospectus at S-3); Ex. 8 (2014 10-K at 6); Ex. 28 (2015 10-K at 6). 18 Ex. 1 (June 24, 2014 Prospectus at 3); Ex. 15 (May 5, 2015 Prospectus at 3); Ex. 19 (July 29, 2015 Prospectus at S-2); Ex. 8 (2014 10-K at 6); Ex. 28 (2015 10-K at 6). 19 CAC ¶ 52; Ex. 1 (June 24, 2014 Prospectus at 3–4); Ex. 15 (May 5, 2015 Prospectus at 3); Ex. 19 (July 29, 2015 Prospectus at S-3-4); Ex. 8 (2014 10-K at 6); Ex. 28 (2015 10-K at 6). Case 4:17-cv-00449-ALM Document 123 Filed 02/05/18 Page 21 of 51 PageID #: 3598 13 hospital-based ERs do have the capability to treat higher-acuity patients and are typically open 24 hours a day, but often have long wait times.20 Investors knew that Adeptus’s care model would compete with both urgent care facilities for low-acuity patients and hospital-based ERs for high-acuity patients—the Offering Documents specifically disclosed that the company’s facilities “may also compete with urgent care centers and physician owned facilities for lower- acuity cases and with hospitals for higher acuity cases.”21 Just as some people choose to go to a hospital-based ER with symptoms that are not a medical emergency, people may also choose to go to a freestanding ER with symptoms that could have been treated in a lower care setting. Plaintiffs claim that the following statements in the Offering Documents describing how the freestanding ER care model differed from other treatment options were false or misleading: “Our capabilities and offerings differ from other care models as outlined below . . . . We also provide convenient access to critical, high-acuity care as compared with urgent care centers and are open 24 hours a day, seven days a week.” CAC ¶ 388. “Given our 24/7 operating hours and ability to handle high-acuity needs, instead of competing with community medical practices and urgent care clinics, we believe we complement them. Many of our sites work closely with nearby urgent care facilities to ensure the most appropriate patient care for the community.” CAC ¶ 389. There is no explanation in the CAC as to why these statements were not true. There is no allegation that the capabilities and offerings of Adeptus’s freestanding ERs did not, in fact, differ from other care models as the Offering Documents described. Unlike urgent care centers, Adeptus’s freestanding ERs were staffed by physicians 24 hours a day and equipped with specialty equipment such as CT scanners and ultrasounds.22 Unlike hospital- 20 Id. 21 Ex. 1 (June 24, 2014 Prospectus at 25); Ex. 15 (May 5, 2015 Prospectus at 22); Ex. 19 (July 29, 2015 Prospectus at S-26); Ex. 8 (2014 10-K at 30); Ex. 28 (2015 10-K at 30). 22 Ex. 1 (June 24, 2014 Prospectus at 4); Ex. 15 (May 5, 2015 Prospectus at 2); Ex. 19 (July 29, 2015 Prospectus at S-3); Ex. 8 (2014 10-K at 5); Ex. 28 (2015 10-K at 6). Case 4:17-cv-00449-ALM Document 123 Filed 02/05/18 Page 22 of 51 PageID #: 3599 14 attached ERs, Adeptus’s freestanding ERs offered shorter wait times and convenient locations.23 Likewise, there is no allegation that Adeptus did not “provide convenient access to critical, high- acuity care as compared with urgent care centers” or that its facilities were not “open 24 hours a day, seven days a week.” iii. Adeptus’s treatment of emergent patients. The final category of alleged misrepresentations includes two statements from the Offering Documents: “We treat any patient that is emergent, including patients without medical insurance,” and “[t]he Company treats anyone that is emergent.” CAC ¶ 389. There is no allegation that these statements were false. Adeptus was required by law to treat any emergent patient,24 and did so.25 Plaintiffs do not claim otherwise. B. The CAC pleads no actionable acuity-related omission—there was no “widespread practice of overcharging low-acuity patients.” Having nothing even remotely resembling a false statement about patient acuity, Plaintiffs resort to asserting that it was misleading for Adeptus to say anything about acuity while failing to disclose Adeptus’s “widespread practice of overcharging low-acuity patients.” CAC ¶¶ 386, 390, 415, 424. But there are no non-conclusory facts in the CAC to support Plaintiffs’ accusation that such a practice of overcharging even existed. Plaintiffs claim that the KUSA story revealed that Adeptus engaged in “widespread predatory overbilling” of patients, CAC ¶ 60, but neither those words nor anything like them appear in the story. Instead, the story described how a small number of patients at several companies’ ER facilities claimed to have been unexpectedly charged ER prices from a freestanding ER—despite being warned that freestanding ERs were, in fact, emergency rooms 23 Ex. 1 (June 24, 2014 Prospectus at 3); Ex. 15 (May 5, 2015 Prospectus at 3); Ex. 19 (July 29, 2015 Prospectus at S-3); Ex. 8 (2014 10-K at 6); Ex. 28 (2015 10-K at 6). 24 Ex. 1 (June 24, 2014 Prospectus at 35); Ex. 15 (May 5, 2015 Prospectus at 31); Ex. 19 (July 29, 2015 Prospectus at S-35). 25 Ex. 1 (June 24, 2014 Prospectus at 78); Ex. 8 (2014 10-K at 60); Ex. 28 (2015 10-K at 59). Case 4:17-cv-00449-ALM Document 123 Filed 02/05/18 Page 23 of 51 PageID #: 3600 15 and not urgent care facilities.26 In order to maintain the capability to treat high-acuity patients as effectively as low- acuity patients, ERs (whether freestanding or hospital-based) often charge what are known as “facility fees” to support the cost of keeping emergency physicians and equipment on-hand at all times.27 The KUSA story did not claim that such facilities fees were hidden, or a scheme used by Adeptus to inflate bills. Quite the opposite, the story made clear that “it’s now routine for ERs—whether attached to a hospital or not—to charge what’s known as a facility fee to help justify the cost of the equipment and personnel. Those facility fees frequently make up the most expensive part of the bill.”28 Investors also knew that Adeptus charged these facility fees, because the Offering Documents said so: “Consistent with billing practices at all emergency rooms and in light of the fact our facilities are open 24 hours a day, seven days a week and staffed with Board-certified physicians, we bill payors a facility fee.”29 The KUSA story also never claimed that Adeptus miscategorized low-acuity patients as having high-acuity medical issues in order to charge them more. To the contrary, the story explained that freestanding ERs (including but not limited to those operated by Adeptus) were what they purported to be: true emergency rooms, with emergency room equipment and staff that charged all patients emergency room facilities fees30 in order to keep the necessary staff and 26 The story notes that “each time” reporters visited a freestanding ER, employees stated “Welcome to our emergency room,” that “[s]igns noting the buildings were ‘emergency rooms’ were in a number of visible locations,” and that individual employees would personally warn potential patients when they could be served at urgent care clinics. Ex. 24 (Buyer Beware KUSA Story). Despite these warnings, one individual “assumed” his bill would be “a few hundred dollars” and another “never anticipated” the high cost of care. Id. 27 CAC ¶ 39 (“Among other things, FERs, unlike urgent care centers, charge hefty ‘facility fees.’ Traditional hospital-based emergency rooms charge facility fees in order to defray the overhead associated with operating a fully-equipped emergency care center, including 24-hour staffing and special diagnostic equipment.”). 28 Ex. 25 (Freestanding ER Bills KUSA Story). 29 Ex. 1 (June 24, 2014 Prospectus at 76); Ex. 8 (2014 10-K at 16); Ex. 28 (2015 10-K at 16). 30 Ex. 1 (June 24, 2014 Prospectus at 28); Ex. 15 (May 5, 2015 Prospectus at 25); Ex. 19 (July 29, 2015 Prospectus at S-29). Case 4:17-cv-00449-ALM Document 123 Filed 02/05/18 Page 24 of 51 PageID #: 3601 16 equipment on-hand 24 hours a day and seven days a week.31 The story went on to observe that healthcare costs in general can be high and it is difficult for patients to obtain up-front price estimates at almost all healthcare providers.32 The fact that Adeptus’s freestanding ERs were (like other ERs) expensive does not mean Adeptus “overbilled” patients. Moreover, the specific instances of patients being dissatisfied with high bills noted in the story could hardly be considered a “widespread” issue. The KUSA story profiled a handful of patients who described receiving expensive treatment in freestanding ERs operated by Adeptus and other companies. Adeptus’s facilities received approximately 58,000 patient visits in 2012, 77,000 patient visits in 2013, 146,000 patient visits in 2014, and 244,000 patient visits in 2015.33 The handful of patients with complaints noted in the KUSA story legally cannot support Plaintiffs’ claim of a “widespread” issue for Adeptus. See, e.g., Metzler Inv. GMBH v. Corinthian Colls., Inc., 540 F.3d 1049, 1062–65, 1064 n.8 (9th Cir. 2008) (news story discussing financial aid impropriety at one school, and press release referencing high attrition rate generally, does not suggest widespread enrollment and admissions fraud at related schools nationwide); In re ITT Educ. Servs., Inc. Sec. & S’holder Derivs. Litig., 859 F. Supp. 2d 572, 581 (S.D.N.Y. 2012) (holding “allegations of specific instances” insufficient to “establish widespread problems” and to render statements misleading); In re IAC/InterActiveCorp Sec. Litig., 695 F. Supp. 2d 109, 119–20 (S.D.N.Y. 2010) (dismissing claims based on allegations of “widespread” customer dissatisfaction because, while the company “may have faced the occasional disgruntled customer . . . discontent is a fact of life.”). 31 Ex. 25 (Freestanding ER Bills KUSA Story) (“Emergency room medicine is not cheap. . .emergency rooms are staffed 24 hours a day with emergency-medicine physicians, nurses and staff members. They work with expensive equipment that must be capable of handling a wide variety of conditions.”); Ex. 24 (Buyer Beware KUSA Story) (noting that facility fees “justify the 24-hour nature of ERs”). 32 Ex. 24 (Buyer Beware KUSA Story) (“It’s the quandary associated with health care in general. It’s nearly impossible to know what the cost will be before treatment is received.”); Ex. 25 (Freestanding ER Bills KUSA Story). 33 Ex. 28 (2015 10-K at 60). Case 4:17-cv-00449-ALM Document 123 Filed 02/05/18 Page 25 of 51 PageID #: 3602 17 Further, no alleged fact suggests that Adeptus was treating too many low-acuity patients, that payors were refusing reimbursement on that basis, that receivables were being written off for that reason, or that low-acuity patients were impacting the company’s liquidity. The allegations in the CAC from an anonymous former employee, even if credited, similarly fail to suggest the existence of “widespread” overbilling of low-acuity patients.34 That former employee only commented on the percentage of Adeptus patients that “could have been treated in urgent care.” CAC ¶ 62 (emphasis added). He or she provides no information on the acuity level of those patients; even accepting as true that some patients “could have” been treated at an urgent care facility does not render any statement in the Offering Documents misleading. Plaintiffs’ claim that “Adeptus’s practice of overbilling low-acuity patients had a negative effect on payer reimbursement, and thus cash flow” also is not supported by any alleged fact. CAC ¶ 390. This claim presumes that “overbilling” occurred, and that it created a problem that was “widespread” enough to have a material impact on reimbursements—neither of which is even remotely supported by the CAC. Moreover, there is no indication that any of the difficulties the company faced in late 2016 were caused by overbilling patients. III. Plaintiffs allege no material misrepresentation with respect to Adeptus’s JVs. In late 2014, Adeptus announced that it was expanding into the Arizona market through a JV partnership with Dignity Health, one of the nation’s largest health systems.35 It was the first of five such JVs announced over the next two years, including partnerships with entities in Colorado, Louisiana, Ohio, and Texas. CAC ¶ 68. These JVs were part of Adeptus’s plan to “further expand[] [its] leadership in the freestanding emergency room market”—and thereby protect and create value for its shareholders—by pursuing “opportunities to build more facilities 34 For the reasons stated in the Executive Defendants’ Motion to Dismiss at Section V-B, the allegations of this “confidential witness” do not meet the 5th Circuit’s requirements for a well-pleaded allegation. 35 Ex. 4 (Oct. 29, 2014 8-K at Ex. 99.1). Case 4:17-cv-00449-ALM Document 123 Filed 02/05/18 Page 26 of 51 PageID #: 3603 18 in existing and new markets as well as develop new alliances with health systems seeking to enhance their local community presence.”36 The Offering Documents made clear that this expansion required significant capital, and that it would take a significant amount of time for each new facility to become profitable even after opening.37 As a result, investors were well- informed that this growth “present[ed] increased risks,” and would have an impact on the company’s liquidity.38 Because even the first of these JVs was not announced until months after Adeptus’s June 2014 IPO, Plaintiffs do not attempt to (and cannot) state any Section 11 claim with respect to the company’s IPO Offering Documents. See CAC ¶¶ 68, 343–44, 391–99. Plaintiffs do attempt to state a claim with respect to five statements made in relation to Adeptus’s 2015 and 2016 Offerings, contending that each “contained untrue statements of material fact . . . touting the success and profitability of the JV strategy,” and “omitted material facts [about] . . . Adeptus’s funding of 100% of the JV’s working capital and operating losses.” CAC ¶ 376. Those five statements broadly fall into two categories: statements concerning Adeptus’s entry into and expansion through its JV agreements, and statements concerning Adeptus’s share of the Arizona JV’s losses and debt: Statements concerning Adeptus’s entry into and expansion through its JVs: “We also recently expanded into Arizona through a joint venture with Dignity Health, one of the nation's largest health systems, with the opening of a full-service healthcare hospital facility and includes plans for additional access to emergency medical care in the Phoenix area through freestanding emergency departments of the hospital. To improve access to high-quality and convenient emergency medical care in the northern Colorado and Denver metro area, we recently partnered with UCHealth.” CAC ¶ 391 (quoting May 5, 2015 and July 29, 2015 Prospectuses (Exs. 15, 19)). 36 Ex. 1 (June 24, 2014 Prospectus at 6); Ex. 15 (May 5, 2015 Prospectus at 7, 9). 37 Ex. 1 (June 24, 2014 Prospectus at 23–24); Ex. 15 (May 5, 2015 Prospectus at 20–21); Ex. 19 (July 29, 2015 Prospectus at S-24); Ex. 8 (2014 10-K at 28); Ex. 28 (2015 10-K at 28). 38 Ex. 1 (June 24, 2014 Prospectus at 8, 21); Ex. 15 (May 5, 2015 Prospectus at 9, 18–21, 26); Ex. 19 (July 29, 2015 Prospectus at S-12, S-22). Case 4:17-cv-00449-ALM Document 123 Filed 02/05/18 Page 27 of 51 PageID #: 3604 19 “Our momentum continued to build during the first quarter. We opened seven new emergency rooms and received Medicare certification for Dignity Health Arizona General Hospital, our joint venture with Dignity Health in Phoenix. Earlier this week, we announced our newest joint venture with University of Colorado Health. We are excited about this new relationship as it allows us to expand access for our patients to one of the premier healthcare systems within the U.S.” CAC ¶ 393 (quoting Apr. 23, 2015 8-K (Ex. 11)).39 “On May 11, 2016, Adeptus Health Inc. entered into a joint venture agreement with Texas Health Resources to increase access to high quality, convenient emergency medical care in the Dallas-Fort Worth area . . . . Pursuant to terms of the joint venture agreement, Adeptus Health will receive quarterly preferred returns up to a specified amount on its investment in joint venture prior to proportionate distributions to partners.’” CAC ¶ 398 (alteration in original) (quoting May 16, 2016 8-K (Ex. 33)). Statements of Adeptus’s share of the Arizona JV’s losses and debt: “Equity in loss of joint venture consists of our 49.9% share of losses generated from our non-controlling equity investment in a hospital facility located in Phoenix, Arizona. Our equity in loss of unconsolidated joint venture was approximately $0.9 million for the year ended December 31, 2014.” CAC ¶ 395 (quoting 2014 10-K (Ex. 8)). “As a result of our strategy of partnering with Dignity Health for Dignity Health Arizona General Hospital, we do not own a controlling interest in this facility. . . . Similar to our consolidated facilities, this joint venture has debts. With respect to this joint venture, these debts are not included in our consolidated financial statements. . . . [T]he total debt on the balance sheet of the joint venture was approximately $0.3 million. Our ownership in this joint venture was 49.9%.” CAC ¶ 396 (alterations in original) (quoting 2014 10-K and Q1 2015 10-Q (Exs. 8, 14)). Each of these allegedly misleading statements was factual and accurate, and did not omit 39 This statement is by law unactionable, and cannot form the basis of any Securities Act claim. Though parts of the April 23, 2015 8-K were incorporated by reference into the May and July 2015 Offering Documents, the portion of that 8-K in which this disclosure is found was explicitly not incorporated. As the 8-K itself stated: “The information in Item 2.02 of this Current Report on Form 8-K, including Exhibit 99.1 hereto, is being furnished and shall not be deemed to be ‘filed’ for purposes of Section 18 of the Securities Exchange Act of 1934 . . . or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing made by the Company under the Securities Act of 1933.” (Ex. 11 at Item 2.02.) The July 2015 Prospectus also stated: “Notwithstanding the foregoing [list of documents incorporated by reference], we are not incorporating by reference information furnished under Items 2.02 and 7.01 of any Current Report on Form 8-K (including any Form 8-K itemized above), including the related exhibits, nor in any documents or other information that is deemed to have been ‘furnished’ to and not ‘filed’ with the SEC.” (Ex. 19 at S-89.) Because information “furnished” is neither stated inn or incorporated by reference into a registration statement, it is not actionable under the Securities Act. Mallen v. Alphatec Holdings, Inc., 861 F. Supp. 2d 1111, 1131 n.10 (S.D. Cal. 2012) (holding that because the alleged false and misleading statement was in Item 2.02 of Form 8-K which was “expressly excluded from incorporation” in the Prospectus, the alleged misstatement “is not actionable under either § 11 or § 12(a)(2) of the Securities Act”), aff'd sub nom. Fresno Cty. Emps.’ Ret. Ass’n v. Alphatec Holdings, Inc., 607 F. App’x 694 (9th Cir. 2015). In any event, this statement also is not misleading for the reasons stated below. Case 4:17-cv-00449-ALM Document 123 Filed 02/05/18 Page 28 of 51 PageID #: 3605 20 any information necessary to make those disclosures not misleading. A. The Offering Documents’ statements concerning Adeptus’s JVs were truthful. The CAC makes no allegation that any particular statement in any of these Offering Documents was false. Instead, the CAC resorts to pairing the accurate and objective statements in these documents with Plaintiffs’ own mischaracterizations of their contents. Far from “touting the success and profitability of the JV strategy,” CAC ¶ 376, the statements in the 2015 and 2016 Offering Documents concerning Adeptus’s JVs were completely factual and truthful. i. The statements concerning Adeptus’s entry into and expansion through its JVs were accurate. In its April 23, 2015 8-K, Adeptus announced that during the quarter the Arizona JV’s hospital “received Medicare certification,” and that earlier in April 2015 Adeptus had “announced [its] newest joint venture with the University of Colorado.”40 These JVs were also described in the May and July 2015 Prospectuses, which stated that: (1) Adeptus “recently expanded into Arizona through a joint venture with Dignity Health . . . with the opening of a full- service healthcare hospital facility and . . . plans for . . . freestanding emergency medical departments of the hospital,” and (2) “[t]o improve access to high-quality and convenient emergency medical care in northern Colorado and the Denver metro area, we recently partnered with UCHealth.”41 Similarly, in its May 16, 2016 8-K, Adeptus announced that it had entered into a JV agreement with Texas Health Resources, under which Adeptus would “receive quarterly preferred returns up to a specified amount on its investment in [the] joint venture prior to 40 CAC ¶ 393; Ex. 11 (April 23, 2015 8-K at Ex. 99.1). 41 CAC ¶ 391; Ex. 15 (May 5, 2015 Prospectus at 9); Ex. 19 (July 29, 2015 Prospectus at S-12). Case 4:17-cv-00449-ALM Document 123 Filed 02/05/18 Page 29 of 51 PageID #: 3606 21 proportionate distributions to partners.”42 Plaintiffs identify none of these statements as false. Adeptus did expand into the Arizona market through its JV with Dignity Health, allowing for the construction of freestanding ERs in the area, and the Arizona hospital did receive its Medicare certification.43 Adeptus did enter into a JV with UCHealth in April 2015, facilitating its expansion into the Denver area.44 And in May 2016 Adeptus did enter into a JV with Texas Health Resources, expanding access in the Dallas market, and under that agreement the company would receive the preferred returns it described.45 Nor was there anything misleading about Adeptus saying it “expanded into Arizona through a joint venture with Dignity Health,” or that it partnered with UCHealth “[t]o improve access to high-quality and convenient emergency medical care in the northern Colorado and Denver metro area.” CAC ¶ 391. Before entering into the Arizona JV, Adeptus had no facilities in Arizona.46 Less than a year later, it had constructed and opened a hospital and three freestanding ERs in the Phoenix area;47 in the following year the JV had opened another five freestanding ERs, bringing the total number of Adeptus facilities in the area to nine.48 Adeptus had twelve freestanding ERs in Colorado prior to entering into its JV with UCHealth. Entering into that JV gave those facilities and their patients access to the UCHealth system, including 42 CAC ¶398; Ex. 33 (May 16, 2016 8-K at 2). Adeptus also stated that it was “excited about th[e] new relationship” in Colorado,” and that the Arizona hospital’s receipt of Medicare certification—together with the opening of seven new ERs in the Adeptus system—showed its “momentum.” CAC ¶ 393. These sorts of “generalized, positive statements about the company[]” constitute inactionable corporate puffery. Rosenzweig, 332 F.3d at 869. And in any event, there are no facts alleged indicating that even that puffery was false. There is no indication that Adeptus’s management was not “excited” about the new Colorado relationship it was entering into, providing access to the facilities and care of a top local teaching hospital, and ability to itself own and operate full service hospitals through that joint venture. And the addition of Medicare certification for its Arizona joint venture facilities, alongside the addition of seven new ERs in a single quarter and other development announced by the company, certainly showed momentum. 43 Ex. 28 (2015 10-K at 12, 16). 44 Ex. 20 (Q2 2015 10-Q/A at Ex. 10.4) (Operating Agreement of UCHealth Partners LLC)). 45 Ex. 36 (Q2 2016 10-Q at Ex. 10.2 (Operating Agreement of FTH DFW Partners LLC)). 46 Ex. 6 (Q3 2014 10-Q at 10). 47 Ex. 22 (Q3 2015 10-Q at 17). 48 Ex. 40 (Q3 2016 10-Q at 17, 11). Case 4:17-cv-00449-ALM Document 123 Filed 02/05/18 Page 30 of 51 PageID #: 3607 22 UCHealth’s existing hospital.49 Two more Denver-area hospitals, plus additional freestanding ERs, were planned (and soon completed).50 ii. The statements concerning Adeptus’s share of the Arizona JV’s losses and debt were accurate. The disclosed financial metrics for the JVs were also accurate. Plaintiffs complain of the following three metrics related to the Arizona JV: (1) that Adeptus’s “ownership in this [Arizona] joint venture was 49.9%”; (2) that its “[e]quity in loss of [this] joint venture consists of our 49.9% share of losses generated from our non-controlling equity investment,” which “equity in loss of [this] joint venture was approximately $0.9 million for the year ended December 31, 2014”; and (3) that “the total debt on the balance sheet of the [Arizona] joint venture was approximately $0.3 million.” CAC ¶¶ 395–96.51 Plaintiffs allege no facts showing any of these statements were false. Instead, they again pair the truthful information provided in the Offering Documents with their own mischaracterization of those statements, asserting that these statements “communicat[ed] to investors that the Company shares losses and costs with its JV.” CAC ¶ 395. None of these statements, however, said anything about sharing “costs.” If Plaintiffs claim to have been misled on this point, it was not from the Offering Documents. Unlike Plaintiffs’ Exchange Act claims, which rely on a statement on an earnings call that “we do share the pre-opening with our partner,”52 the statements Plaintiffs identify in these Offering Documents simply reported: (1) the size of Adeptus’s equity interest in the Arizona JV, (2) the amount of that JV’s loss attributable to that 49.9% equity interest, and (3) the debt of that JV, all as of December 31, 2014. 49 Ex. 10 (Apr. 21, 2015 8-K at Ex. 99.1); see Ex. 20 (Q2 2015 10-Q/A at Ex. 10.4 (Operating Agreement of UCHealth Partners LLC, dated as of April 20, 2015)). 50 Ex. 15 (May 5, 2015 Prospectus at 6, 19). 51 Quoting Ex. 8 (2014 10-K at 65, 71) and Ex. 14 (Q1 2015 10-Q at 35). 52 See, e.g., CAC ¶¶ 7, 71, 134, 150. For the reasons explained in the Executive Defendants’ Motion, it is true that Dignity Health and other JV partners shared these costs with Adeptus in each of their respective joint ventures. Case 4:17-cv-00449-ALM Document 123 Filed 02/05/18 Page 31 of 51 PageID #: 3608 23 Plaintiffs take particular issue with Adeptus’s reporting of its “equity in loss of joint venture” in this period as $0.9 million, representing 49.9% of the Arizona JV’s loss as of the end of 2014. This number was accurate and was not misleading. Because Adeptus had a significant level of influence over the JV but no controlling interest, under applicable Generally Accepted Accounting Principles, the company accounted for its investment in this JV under the equity method of accounting—meaning that its financial statements would reflect the JV entity’s losses based on Adeptus’s share of the equity in that entity. 53 In reporting its “equity in loss of unconsolidated joint venture,” Adeptus was reporting its equity in the loss sustained by the Arizona joint venture. As the 2014 10-K explained clearly: Equity in loss of unconsolidated joint venture consists of our share of the net loss of our joint venture, which is based on the hospital’s net loss and the percentage of the hospital’s outstanding equity interest owned by us.54 This metric does not purport to portray any payments made or costs incurred by Adeptus, the parent entity that was a partner in the JV. Rather, the number represents—out of the losses incurred by the separate JV entity (of which Adeptus was one partner)—the amount of loss corresponding to Adeptus’s equity interest in the JV.55 The Director Defendants cannot be held liable for what amounts to an allegation that Plaintiffs ignored or did not understand Adeptus’s clear description of what this financial metric represented.56 53 See Ex. 8 (2014 10-K at 91). 54 Ex. 8 (2014 10-K at 62) (emphasis added). At this point in time, the hospital was the only facility this JV was operating. Id. at 24. 55 Similarly, with respect to the JV’s debts, Adeptus disclosed: “these debts are not included in our consolidated financial statements,” that the total debt on the balance sheet of the joint venture was approximately $0.3 million; and “ownership in this joint venture was 49.9%.” CAC ¶ 396; (Ex. 8 (2014 10-K at 71); Ex. 14 (Q1 2015 10-Q at 35)). 56 That is not to say the full amounts of Adeptus’s expense payments were not reflected in the Offering Documents’ financial statements. Under the terms of the JV agreements, those amounts were owed back to Adeptus by the joint venture, and thus they were among the “Other receivables and current assets” included in Adeptus’s balance sheet and statement of cash flows. See, e.g., Ex. 8 (2014 10-K at 79, 83); Ex. 28 (2015 10-K at 82, 86). Case 4:17-cv-00449-ALM Document 123 Filed 02/05/18 Page 32 of 51 PageID #: 3609 24 B. Plaintiffs allege no omission of any material fact concerning Adeptus’s JVs from the Offering Documents. Plaintiffs also fail to allege any omission from the Offering Documents of any material fact related to Adeptus’s JVs. To the contrary, the Offering Documents fairly disclosed the status and operations of the JVs, as well as the risks inherent in this business growth plan. i. The Offering Documents disclosed the impact of the JVs on the company’s profitability and cash flow, and related risks. Adeptus disclosed precisely what Plaintiffs allege was omitted: that the JVs would be a “drag on the Company’s margins, earnings, and cash flow until they became profitable if ever.” CAC ¶¶ 386, 394, 399. The Offering Documents provided a plain view of the impact that the JVs were having and would have on Adeptus going forward, both though narrative disclosures of that impact and through disclosure of specific financial metrics. The Offering Documents expressly disclosed that Adeptus’s entry into the JVs was for the purpose of, and would precipitate, a significant expansion of Adeptus’s facilities. “[B]uilding strategic alliances with leading health systems” was one of Adeptus’s disclosed “Growth Strategies.”57 The company had already grown from 14 facilities in 2012 to 55 by the end of 2014, and told investors in the Offering Documents that it “intended to continue expanding [its] facility base through new facility openings in new states and markets.”58 In these new markets, and “particularly in states with complex regulatory requirements” like Arizona, which required freestanding ERs to be associated with full-service hospitals within a certain distance, Adeptus looked to create “innovative hospital partnership models, including a hospital 57 Ex. 1 (June 24, 2014 Prospectus at 5); Ex. 15 (May 5, 2015 Prospectus at 5); Ex. 19 (July 29, 2015 Prospectus at S-11); Ex. 8 (2014 10-K at 11–12); Ex. 28 (2015 10-K at 11). 58 Ex. 1 (June 24, 2014 Prospectus at 8); Ex. 15 (May 5, 2015 Prospectus at 9); Ex. 19 (July 29, 2015 Prospectus at S-12); Ex. 8 (2014 10-K at 12); Ex. 28 (2015 10-K at 12). Case 4:17-cv-00449-ALM Document 123 Filed 02/05/18 Page 33 of 51 PageID #: 3610 25 hub and freestanding [ER] satellite model.”59 The Arizona JV, for example, began with the construction of one full-service hospital, and disclosed plans for additional facilities in the near future.60 By the end of 2015, the JV had constructed and was operating five facilities in Arizona;61 by late 2016, eight freestanding facilities were in operation.62 The Colorado JV began in 2015 with fourteen facilities and plans for the addition of two full-service hospitals;63 by late 2016, those hospitals as well as eighteen freestanding facilities were in operation.64 Less than two years after announcing its first JV, Adeptus had nearly doubled its number of facilities, with a total of 97 freestanding facilities and 3 full-service hospitals in operation.65 The Offering Documents expressly disclosed that Adeptus’s expansion through these JVs would require significant capital, both before and after construction. The Offering Documents further made clear that the construction of each new facility was a considerable undertaking, requiring a significant outlay of capital by the company. Each of Adeptus’s freestanding ERs had “six to nine emergency exam rooms . . . includ[ing] two ‘high- acuity’ suites, one ‘child-friendly’ pediatric room , and a specialized obstetrics/gynecology room,” as well as a “laboratory, radiology suite, supply rooms and secured narcotics area,” private offices for each physician, a nurses station, and ambulance bays.66 Hospitals were, of course, even larger.67 The Offering Documents specifically listed “identifying expansion 59 Ex. 1 (June 24, 2014 Prospectus at 8); Ex. 15 (May 5, 2015 Prospectus at 9); Ex. 19 (July 29, 2015 Prospectus at S-12); Ex. 8 (2014 10-K at 12); Ex. 28 (2015 10-K at 12). 60 Ex. 1 (June 24, 2014 Prospectus at 8); Ex. 15 (May 5, 2015 Prospectus at 6); Ex. 19 (July 29, 2015 Prospectus at S-12). 61 Ex. 28 (2015 10-K at 23). 62 Ex. 40 (Q3 2016 10-Q at 20). 63 Ex. 1 (June 24, 2014 Prospectus at 8); Ex. 15 (May 5, 2015 Prospectus at 6); Ex. 19 (July 29, 2015 Prospectus at S-12). 64 Ex. 40 (Q3 2016 10-Q at 20). 65 Id. at 11. 66 Ex. 1 (June 24, 2014 Prospectus at 2, 108); Ex. 15 (May 5, 2015 Prospectus at 2); Ex. 19 (July 29, 2015 Prospectus at S-2); Ex. 8 (2014 10-K at 12–13); Ex. 28 (2015 10-K at 12). 67 Ex. 15 (May 5, 2015 Prospectus at 2, 6) (noting that freestanding ERs range from 6,000 to 7,000 square feet and describing the hospital constructed by the Arizona joint venture as spanning “39,000 square-feet,” with “16 Case 4:17-cv-00449-ALM Document 123 Filed 02/05/18 Page 34 of 51 PageID #: 3611 26 opportunities” and “the costs associated to establish such new facilities” as two of the company’s three primary “capital expenditure requirements.”68 The Offering Documents expressly disclosed that it would take a significant amount of time for each facility to become profitable, even after construction was complete and the facility opened. Even once a facility is opened, due to the nature of the business it takes time for each to become profitable. Patients at emergency clinics, whether covered by private insurance or Medicare, do not pay for the services rendered upon leaving the facility, or even soon thereafter; rather, the bulk of payments are sought from insurers or the government.69 As Adeptus explained in the Offering Documents, “the reimbursement process is complex and can involve lengthy delays.”70 Recouping the considerable initial costs needed to construct, staff, and begin operating each facility necessarily takes a long time, as the company specifically informed investors: We typically incur the most significant portion of opening expenses associated with a given facility within the first few months immediately preceding and following the opening of the facility. A new facility generally takes up to 12 months to achieve a level of operating performance comparable to our similar existing facilities due to lack of market awareness and other factors. We also may incur additional costs in new markets, particularly for contracting, real estate, labor, marketing and regional support, which may impact the profitability of those facilities. Accordingly, the volume and timing of new facility openings may have a meaningful impact on our profitability.71 The Offering Documents expressly disclosed that the company’s growth through the inpatient rooms, two operating rooms . . . , an emergency department, a high-complexity laboratory and a full radiology suite”); Ex. 19 (July 29, 2015 Prospectus at S-9); Ex. 8 (2014 10-K at 91); Ex. 28 (2015 10-K at 23). 68 Ex. 1 (June 24, 2014 Prospectus at 23–24); Ex. 15 (May 5, 2015 Prospectus at 20); Ex. 19 (July 29, 2015 Prospectus at S-25); Ex. 8 (2014 10-K at 28); Ex. 28 (2015 10-K at 29). 69 See Ex. 1 (June 24, 2014 Prospectus at 27–8); Ex. 15 (May 5, 2015 Prospectus at 24); Ex. 19 (July 29, 2015 Prospectus at S-29); Ex. 8 (2014 10-K at 16; 32); Ex. 28 (2015 10-K at 76–77). 70 Ex. 1 (June 24, 2014 Prospectus at 27); Ex. 15 (May 5, 2015 Prospectus at 24); Ex. 19 (July 29, 2015 Prospectus at S-28); Ex. 8 (2014 10-K at 32); Ex. 28 (2015 10-K at 32). 71 Ex. 1 (June 24, 2014 Prospectus at 23); Ex. 15 (May 5, 2015 Prospectus at 20); Ex. 19 (July 29, 2015 Prospectus at S-24); Ex. 8 (2014 10-K at 28); Ex. 28 (2015 10-K at 28) (emphasis added). Case 4:17-cv-00449-ALM Document 123 Filed 02/05/18 Page 35 of 51 PageID #: 3612 27 JVs and otherwise came with a high degree of risk. The company’s Prospectuses and other Offering Documents prominently disclosed that “[a]n investment in our . . . stock involves a high degree of risk.”72 Investors were cautioned to “carefully consider” each of the risks spelled out in the Offering Documents, as well as all other information therein, “before deciding whether to purchase our . . . stock.”73 These risks and the discussion of them, spanning dozens of pages in each set of Offering Documents, included the following directly related to the JVs and their potential impact on the company’s margins, earnings, cash flow, and profitability: “We may enter into partnerships with healthcare providers. If this strategy is not successful, our financial performance could be adversely affected.” “We may require additional capital to fund our expansion, and our ability to obtain such capital could harm our business.” “New facilities, once opened, may not be profitable, and the increases in comparable facility revenue that we have experienced in the past may not be indicative of future results.” “We are required to make capital expenditures, particularly to implement our growth strategy, in order to remain competitive.” “Our long-term success is highly dependent on our ability to identify and secure appropriate sites for our facilities and develop and expand in existing and new markets.” “Our expansion into new markets presents increased risks and may require us to develop new business models.” “We may not be able to successfully implement our growth strategy on a timely basis or at all, which could harm our growth and results of operations.”74 Each of these stated risks was followed by a paragraph or more of explanatory text detailing the issues involved and their potential impact on the company. The Offering Documents also provided investors with financial information reflecting the JVs’ impact on the company. In addition to these narrative disclosures of the 72 Ex. 1 (June 24, 2014 Prospectus at 8, 21); Ex. 15 (May 5, 2015 Prospectus at 18); Ex. 19 (July 29, 2015 Prospectus at S-22). 73 Id. 74 Ex. 1 (June 24, 2014 Prospectus at 8, 21–24, 29); Ex. 15 (May 5, 2015 Prospectus at 19–22, 26); Ex. 19 (July 29, 2015 Prospectus at S-22–25, S-30); Ex. 8 (2014 10-K at 26-29, 33); Ex. 28 (2015 10-K at 26-29, 33). Case 4:17-cv-00449-ALM Document 123 Filed 02/05/18 Page 36 of 51 PageID #: 3613 28 JVs’ impact on the company, the Offering Documents disclosed certain financial results related to the JVs. These included: Summary financial information for the JVs as a whole, including patient services revenues, operating and other expenses, losses or gains, assets, and liabilities.75 The company’s amount of “investment” in the JVs, including the capital contributions Adeptus made in each JV.76 The sums flowing from the JVs to Adeptus, including Adeptus’s share of earnings from the JVs (inclusive of any preferred distribution made to the company pursuant to its JV agreements),77 and management services revenues paid by the JVs to Adeptus in exchange for Adeptus’s day-to-day management of the JVs’ facilities.78 Further financial information related to the JVs was combined with similar information for Adeptus’s other operations. Though these amounts are not limited to the JVs, they include the JVs and thus reflect the JVs’ impact on the company. For example: Adeptus’s “preopening expenses” incurred for new facilities in each period, including the company’s equity share of those expenses for facilities owned by the JVs and facilities owned directly by Adeptus.79 “Other receivables and current assets,” which included the JVs’ share of the preopening expenses (and any other expenses) owed to Adeptus pursuant to the terms of the JV agreements.80 The Offering Documents provided sufficient disclosures to fairly inform investors of the JVs’ role in Adeptus’s growth plan, their impact on the company’s financial position and results, and the risks that came with execution of that plan. ii. Adeptus had no obligation to disclose details of the partners’ respective obligations, or of individual JVs’ results. Adeptus had no obligation to disclose in its Offering Documents additional granular details regarding its JVs, such as how working capital was being funded for each JV, or each 75 See, e.g., Ex. 8 (2014 10-K at 92); Ex. 14 (Q1 2015 10-Q at 17, 29); Ex. 28 (2015 10-K at 60, 97). 76 See, e.g., Ex. 8 (2014 10-K at 83, 90); see Ex. 6 (Q3 2014 10-Q at 24); Ex. 28 (2015 10-K at 82). 77 See, e.g., Ex. 28 (2015 10-K at 63, 65, 86, 97). 78 See, e.g., Ex. 8 (2014 10-K at 62, 64–65, 80); Ex. 28 (2015 10-K at 66). 79 See, e.g., Ex. 8 (2014 10-K at 55, 61); Ex. 28 (2015 10-K at 54, 61). 80 See, e.g., Ex. 8 (2014 10-K at 79, 83); Ex. 28 (2015 10-K at 82, 86). Case 4:17-cv-00449-ALM Document 123 Filed 02/05/18 Page 37 of 51 PageID #: 3614 29 JV’s profits or losses. “To avoid committing [a] misrepresentation, a defendant is not required to disclose all known information, but only information that is necessary to make other statements not misleading.” Kapps, 379 F.3d at 212 n.6 (internal quotation marks omitted). The Offering Documents were not required to include details such as that “Adeptus was funding 100% of the working capital and operating losses of the JVs,” or that “all of the JVs, with the exception of the Colorado JV, were operating at a loss,”81 and their absence from the Offering Documents does not make any statement therein misleading. This information “adds nothing to the truthfulness or accuracy of the [stated] fact[s]” and thus its omission does not render those facts misleading. R2, 401 F.3d at 642; see Shaw Grp., 537 F.3d at 541 (holding that, to be actionable, an alleged omission must “affirmatively create an impression of a state of affairs that differs in a material way from the one that actually exists”). The Offering Documents included financial statements reflecting the impact of Adeptus’s JV- related expenditures on the company, including Adeptus’s capital contributions, pre-opening expenses, and amounts owed to Adeptus for the payment of other expenses. Section III A-ii, supra. Particular terms of the JV agreements, such as which partner was obligated to pay which costs at what times, and whether Adeptus’s partner was making the same payments as Adeptus, simply were not required to be disclosed, or material. Southland Sec. Corp. v. INSpire Ins. Sols., Inc., 365 F.3d 353, 375 n.15 (5th Cir. 2004) (holding that omitting information regarding particular terms of a contract did not render misleading the disclosure of the issuer’s entry into the contract). The Offering Documents’ disclosures about the JVs and their impact on Adeptus are not rendered misleading by any alleged omission of the impact on the other partner.82 81 CAC ¶¶ 394, 399; see also ¶¶ 385–87, 392, 397. 82 For this same reason, Adeptus cannot be held liable for its alleged failure to disclose the risks that its joint venture partners faced under these arrangements. It is not true that “the JV strategy required Adeptus to absorb 100% of the risk that the strategy would fail, while the JV partners bore none of the risk,” (CAC ¶¶ 394, 399, 386), Case 4:17-cv-00449-ALM Document 123 Filed 02/05/18 Page 38 of 51 PageID #: 3615 30 Moreover, investors were aware of Adeptus’s funding obligations as to the Colorado JV, as a copy of this agreement was included as an attachment to an August 2015 filing—well before the June 2016 offering.83 The disclosure of this arrangement for the Colorado JV—the one JV that Plaintiffs now contend was successful—further belies Plaintiffs’ argument that the presence of this cost-funding structure in any other JV was a material fact that Adeptus had a duty to disclose, lest investors be misled on strength of any particular JV or the JV model. Disclosure of individual JVs’ profits or losses also was not required. The Offering Documents accurately disclosed the profitability of the JVs as a whole. The May 2015 Offering Documents, reporting on the time period in which Arizona was Adeptus’s only JV, disclosed that the “net loss” of its “investee” was $1.803 million as of the end of 2014 and $1.39 million for the first three months of 2015.84 The July 2015 Offering Documents included the company’s Q2 2015 10-Q—during which period the company entered into the Colorado JV—and showed a net income of $3.027 million for its “investees” during that period.85 This was hardly a surprising swing, given the fact that the Colorado JV began with 12 facilities already in operation,86 and thus was ahead of Arizona’s curve under the company’s description of the life cycle of the JVs and facilities. In future periods, this line would continue, with $5.04 million in net income for the “investees” reflected in the last period within the June 2016 Offering Documents.87 Investors weren’t misled about what was being disclosed; the Offering Documents were always clear that the net income or net loss reported was for the combined JVs. Nor do Plaintiffs but in any event Adeptus’s own risks were disclosed and the relative risks of other partners would not be material to an investment decision in Adeptus stock. 83 Ex. 20 (Q2 2015 10-Q/A at Ex. 10.2, Exhibit A) (“the funds necessary for startup expenses and working capital will be provided by Adeptus”). 84 Ex. 8 (2014 10-K at 92); Ex. 14 (Q1 2015 10-Q at 17). 85 Ex. 18 (Q2 2015 10-Q at 29). 86 Ex. 10 (Apr. 21, 2015 8-K at Ex. 99.1). 87 Ex. 31 (Q1 2016 10-Q at 18). Case 4:17-cv-00449-ALM Document 123 Filed 02/05/18 Page 39 of 51 PageID #: 3616 31 allege any facts showing that disclosure on a more granular level was required. Individual JV- level income or loss is neither a known trend, demand, commitment, event, or uncertainty under Item 303, nor a risk under Item 503. It is merely more detail from within a broader metric that the company did disclose. Omitting this detail that is subsumed within Adeptus’s broader disclosure did not make that disclosure misleading. Kapps, 379 F.3d at 211–12 (holding that issuer’s statement that the price of natural gas “increased by approximately 133% between February 1999 and June 6, 2001”—the day prior to the IPO—was not rendered misleading by the undisclosed “fact that there had been an approximately 60% drop in the price of natural gas” during the last five and one-third months before the IPO). IV. Plaintiffs allege no material misrepresentation related to Adeptus’s internal controls. The Offering Documents consistently and accurately disclosed Adeptus’s assessment of its internal controls over financial reporting. Plaintiffs do not claim otherwise as to the IPO, the May 2015 offering, or the July 2015 offering, but do allege that the June 2016 Offering Documents omitted “internal control failures” related to Adeptus’s “controls over revenue cycle management that were resulting in denied claims, ‘short’ payments, and, ultimately, significant loss of revenue.” CAC ¶ 403. This claim is an impermissible attempt to plead falsity by hindsight. The June 2016 Offering Documents disclosed the only material internal controls weakness identified as of the date of that Offering. The CAC contains no facts plausibly supporting Plaintiffs’ contention that any other weakness existed or was known by management at the time of the June 2016 Offering. Instead, the timeline reflected in Plaintiffs’ allegations and in the underlying disclosures demonstrates that Adeptus timely disclosed material weaknesses in its internal controls, and kept investors abreast of those issues as they developed—including the disclosure of significant Case 4:17-cv-00449-ALM Document 123 Filed 02/05/18 Page 40 of 51 PageID #: 3617 32 collections issues in November 2016, an anticipated write-off of receivables in early 2017, and bankruptcy disclosures summarizing those issues. Plaintiffs’ mischaracterization of these later disclosures does not show that any facts existed at the time of the June 2016 Offering that would render any statements in that offering false. A. Adeptus disclosed in the June 2016 Offering Documents the only material internal controls weakness at that time. A company’s internal controls must be assessed at yearly intervals: SEC rules “require management to annually evaluate whether [its internal controls over financial reporting] is effective at providing reasonable assurance,” and that the issuer reports “management’s assessment of the effectiveness of the company’s [internal control over financial reporting] as of the end of the company’s most recent fiscal year.”88 As part of its year-end 2015 financial reporting process, Adeptus disclosed that its assessment of internal controls revealed a “material weakness in [Adeptus’s] internal control over financial reporting [related to] revenue billing transactions and related accounts receivable,” and explained that as a result “there [was] reasonable possibility that a material misstatement could occur in revenue and related receivables.”89 That weakness was related to the billing and collections work performed by a third-party, McKesson, to which Adeptus had outsourced that function on October 1, 2015, in an effort to ensure compliance with the new and more complex “ICD-10” nationwide billing classification requirements that took effect that same day.90 88 SEC Interpretative Release Nos. 33–8810; 34–55929, at 2, 39 (June 20, 2007), https://www.sec.gov/rules/interp/2007/33-8810.pdf; Management’s Report on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports, Release Nos. 33-8238; 34-47986; IC- 26068 (June 5, 2003), https://www.sec.gov/rules/final/33-8238.htm. Quarterly evaluations of internal control over financial reporting” are not required to be “as extensive as the annual evaluation”; quarterly evaluations are limited to “any change in the company's internal control over financial reporting that occurred during a fiscal quarter that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting”; they do not include evaluation of the effectiveness of previously-existing controls. Id. 89 Ex. 28 (2015 10-K at 47, 62, 111). 90 Ex. 28 (2015 10-K at 15, 23, 39–40, 47). Case 4:17-cv-00449-ALM Document 123 Filed 02/05/18 Page 41 of 51 PageID #: 3618 33 Two months later, in its Q1 2016 10-Q—also a June 2016 Offering Document—the company disclosed that it was “engaged in the implementation of remediation efforts . . . designed both to address the identified weakness [from its 2015 10-K] and to enhance [its] overall financial reporting control environment.”91 In connection with that same quarter’s earnings release, Adeptus informed investors on its quarterly investor call that it was experiencing some slowdown in collections related to its recent outsourcing to McKesson: “[W]e are in the early phase of McKesson performing our coding and collection processes, which led to an increase in DSO [Days Sales Outstanding] for the quarter, which we expect to decrease in future quarters. . . . All of our bills are going out on a timely basis. But there was a transition when we first converted those guys over, so that [caused] an increase in our DSO.” CAC ¶¶ 261–62. The June 2, 2016 Prospectus expressly disclosed this material weakness that had been identified by the company. Adeptus explained that it “did not maintain effective internal control over financial reporting as of December 31, 2015 because of a material weakness” related to “revenue billing transactions and related accounts receivable performed by a third-party service provider on [its] behalf.”92 It also incorporated by reference the company’s prior 10-K and 10-Q providing further information on the material weakness and risks associated therewith.93 After the June 2016 Offering, Adeptus continued to update investors on its attempts to address this internal controls weakness and to disclose additional collections issues as they arose. On the quarterly investor call that followed the June 2016 Offering—which was held on July 21, 2016—Adeptus provided this update on the billing issue, still believing the slowdown to stem from growing pains with the third-party transition: “While a portion of the increase [in DSO] is 91 Ex. 31 (Q1 2016 10-Q at 42). 92 Ex. 34 (June 2, 2016 Prospectus, at S-29). 93 Id.; Ex. 28 (2015 10-K at 15, 23, 39–40, 47); Ex. 31 (Q1 2016 10-Q at 42). Case 4:17-cv-00449-ALM Document 123 Filed 02/05/18 Page 42 of 51 PageID #: 3619 34 due to increased payment plans the remainder is due to our new third-party revenue companies experiencing growing pains. They are working quickly to optimize their systems and adjust their staffing levels.” CAC ¶ 267. Adeptus disclosed further developments on its November 1, 2016 investor call, informing investors that its issues with collection of receivables had worsened. Specifically, the company disclosed that it was having liquidity issues and that “‘collection issues associated with our third party billing agent’ contributed to the Company’s troubling financial condition.” CAC ¶¶ 112– 13. The company told investors that management now “believe[s] we have a solid grasp on the issues and an achievable plan for overcoming the challenges we are facing.” CAC ¶ 268. The company’s Q3 2016 10-Q, filed days later, detailed that plan: “We have added additional internal and external resources to aid in bringing down our DSO metric, shortening our revenue and cash conversion cycle, and enhancing our ability to receive the appropriate level of reimbursement from payors with a view to restoring our historical cash collection percentage levels.”94 Plaintiffs contend that Adeptus’s management knew at the time of the June 2016 Offering that these billing issues were due to more than just growing pains, and that they included additional material internal controls weaknesses in the company’s revenue cycle beyond those disclosed in the June 2016 Offering Documents. They base this supposition on a statement made in Adeptus’s bankruptcy disclosures that “[a]fter retaining McKesson in 2015, [Adeptus’s] management learned that key aspects of its revenue cycle management process were not being performed.” CAC ¶¶ 14, 90, 125, 128.95 Plaintiffs’ tortured reading of this sentence is that management learned of these issues in 2015, but that is not what it says. The sentence Plaintiffs quote does not say when after the 2015 McKesson retention Adeptus’s management learned of 94 Ex. 40 (Q3 2016 10-Q at 50). 95 Quoting Ex. 44 (Bankr. First Day Decl. ¶ 98). Case 4:17-cv-00449-ALM Document 123 Filed 02/05/18 Page 43 of 51 PageID #: 3620 35 the issues, but the rest of the statement, read in conjunction with the company’s contemporaneous disclosures, provides the relevant context: To ensure its compliance with ICD-10-CM, and to improve the Debtors’ overall revenue cycle management, the Debtors retained [McKesson] to manage the billing and collection needs for nearly all of the Adeptus Enterprise pursuant to a Master Services Agreement dated July 29, 2015. After retaining McKesson in 2015, the Debtors’ management learned that key aspects of its revenue cycle management process were not being performed. Consequently, the collection of accounts receivable within a 90-day period from the date of service fell from approximately 87% to 74% as of September 30, 2016. To address these shortfalls, the Debtors retained other third party service providers to, among other things, resubmit denied claims and follow up with patients.96 This document Plaintiffs rely on indicates that, upon learning that McKesson was not performing key aspects of the revenue cycle management process, Adeptus retained other third-party service providers to assist McKesson. As described in the company’s November 2016 investor call and Q3 2016 10-Q, these events occurred months after the June 2006 Offering. Contrary to Plaintiffs’ suggestion, this bankruptcy disclosure did not somehow “admit[]” that Adeptus knew of the later identified internal control deficiencies since “at least October 2015.” CAC ¶¶ 14, 125, 128, 254, 377. B. Adeptus’s identification of additional internal controls weaknesses at year- end 2016 does not demonstrate that those weaknesses existed or were known at the time of the June 2016 Offering. Adeptus’s disclosure of additional material internal control weaknesses in connection with its year-end 2016 financial reporting also does not demonstrate that any statement in its June 2016 Offering Documents was misleading. On March 2, 2017—nine months after the June 2016 Offering—Adeptus disclosed that “the Company has identified material weaknesses with respect to internal control over financial reporting in the areas of revenue recognition, accounts receivable, accounting for a contribution to an unconsolidated joint venture, and accounting for 96 Ex. 44 (Bankr. First Day Decl. ¶¶ 97–98). Case 4:17-cv-00449-ALM Document 123 Filed 02/05/18 Page 44 of 51 PageID #: 3621 36 equity in (loss) earnings of unconsolidated joint ventures.” CAC ¶ 118.97 These internal controls weaknesses were identified in relation to the company’s financial reporting for the period ended December 31, 2016.98 The identification and disclosure of these internal control issues for this period does not demonstrate that any of Adeptus’s statements concerning its internal controls in its June 2016 Offering Documents were misleading. See, e.g., In re Franklin, 782 F. Supp. 2d at 407–08 (dismissing Section 11 claim premised on May 5, 2006 offering because later events did not show statements “were untrue as of May 5, 2006”). The facts alleged here are all entirely consistent with what the disclosures show: that new material weaknesses arose and were identified during the year-end 2016 financial reporting process that were not present during the prior year’s assessment. Not only did Adeptus’s CEO and CFO certify following the company’s 2015 assessment that only the one material weakness disclosed in the 2015 10-K had been identified, but its independent public auditor, KPMG, reported the same result following its year-end 2015 audit of the company’s internal controls.99 Nor does the identification of new material weaknesses as of year-end 2016 indicate that Adeptus’s officers’ Sarbanes-Oxley (“SOX”) certifications attached to the 2015 10-K or the Q1 2016 10-Q were misleading or omitted any fact. See CAC ¶ 402. In those SOX certifications, signed by then-CEO Tom Hall and then-CFO Tim Fielding, those officers certified: The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal controls over financial reporting . . . , [a]ll significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information.100 There is no allegation that the evaluation described did not occur, or that it did not result in the 97 Quoting Ex. 42 (Mar. 2, 2017 Form 12b-25 at Part III). 98 Id. at Part III. 99 Ex. 28 (2015 10-K at 80, 81). 100 CAC ¶ 402; Ex. 28 (2015 10-K at Exs. 31.1, 31.2); Ex. 31 (Q1 2016 10-Q at Exs. 31.1, 31.2). Case 4:17-cv-00449-ALM Document 123 Filed 02/05/18 Page 45 of 51 PageID #: 3622 37 conclusion stated in these SOX certifications. Thus there is no allegation that these statements were false. See In re Banco Bradesco S.A. Sec. Litig., --- F.3d ----, No. 1:16-CV-4155-GHW, 2017 WL 4381407, at *32 (S.D.N.Y. Sept. 29, 2017) (granting dismissal of alleged internal controls misstatement claim, in part because “Plaintiff has not alleged that Bradesco management did not, in fact, conduct the evaluations described in those statements . . . or that the Company had identified but not disclosed significant deficiencies or material weaknesses”). Moreover, such certifications are quintessential statements of opinion. See Dobina v. Weatherford Int’l Ltd., 909 F. Supp. 2d 228, 245–46 (S.D.N.Y. 2012); In re Scottish Re Grp. Sec. Litig., 524 F. Supp. 2d 370, 391 (S.D.N.Y. 2007). For SOX certifications to be considered false, Plaintiffs must plead sufficient facts that the officer had contemporaneous knowledge that the financial statements were false. See Hall v. Children’s Place Retail Stores, Inc., 580 F. Supp. 2d 212, 231–32 (S.D.N.Y. 2008). Officers “can only certify the truthfulness of their reports based on the information they know, or of which they should reasonably have been aware at the time.” City of Roseville Emps.’ Ret. Sys. v. Horizon Lines, Inc., 686 F. Supp. 2d 404, 420 (D. Del. 2009) (emphasis added). As discussed in the Executive Defendants’ Motion to Dismiss, there is no well-pleaded allegation that Messrs. Hall or Fielding—or anyone else at Adeptus— was aware of any additional internal controls weakness at the time of the July 2016 Offering.101 V. Plaintiffs allege no material misrepresentation related to Adeptus’s liquidity, cash flow, or financial performance. The final category of alleged misrepresentations is simply a repackaging of the CAC’s 101 Executive Defs.’ Mot. to Dismiss at Section II-B. See also C.D.T.S. v. UBS AG, No 12 CIV. 4924 KBF, 2013 WL 6576031, at *4 (S.D.N.Y. Dec. 13, 2013) (A “later realization that risk controls were not catching certain conduct and could be improved upon” is “insufficient to support an inference of falsity at the time the alleged statements were made.”), aff’d sub nom. Westchester Teamsters Pension Fund v. UBS AG, 604 F. App’x 5 (2d Cir. 2015); see also In re Magnum Hunter Res. Corp. Sec. Litig., 26 F. Supp. 3d 278, 295 (S.D.N.Y. 2014) (“The fact that defendants recognized problems, announced that they were implementing effective controls and procedures, and then recognized more problems does not indicate that their statements were false at the time that they were made.”), aff’d, 616 F. App’x. 442 (2d Cir. 2015). Case 4:17-cv-00449-ALM Document 123 Filed 02/05/18 Page 46 of 51 PageID #: 3623 38 arguments related to acuity, JVs, and internal controls, each discredited above. These allegations fail to state a claim for those same reasons, as well as because the allegedly misrepresented financial metrics and liquidity projections are each textbook examples of estimates and other opinions that by law cannot be deemed false or misleading simply because the estimate was later revised or proven incorrect. A. There are no well-pleaded allegations that Adeptus’s bad debt estimates were misleading or false when made. The CAC’s sole basis for alleging that any financial metric disclosed in Adeptus’s Offering Documents was misstated are allegations that the purported overbilling of low-acuity patients and internal controls weaknesses should have led to larger bad debt reserves, which in turn would have affected the other listed metrics. CAC ¶ 409. This claim is entirely derivative of Plaintiffs’ acuity and internal controls claim and should be dismissed for the same reasons — there is no well-pleaded allegation that Adeptus was overbilling patients with “uncollectible emergency fees billed for non-emergency treatment,” or that at the time of any of the Offerings the company had “massive internal control weaknesses . . . that were resulting in denied claims [and] ‘short’ payments.” See id. Moreover, as Plaintiffs acknowledge, Adeptus’s determination and disclosure of its bad debt was an “estimate” of “potentially uncollectable patient service fees.” CAC ¶ 55 (emphasis added). The Offering Documents were also clear that the financial statements’ provision for bad debt was “estimated uncollectible amounts from insured patients.”102 Accounting estimates like bad debt are not statements of pure fact, but rather of management’s belief about what will or will not be collected in the future, and as such are subject to Omnicare’s pleading requirements. See, e.g., In re Velti PLC Sec. Litig., No. 13-CV- 102 Ex. 1 (June 24, 2014 Prospectus at 81); Ex. 8 (2014 10-K at 62, see also 16, 74, 86); Ex. 28 (2015 10-K at 63, see also 16, 77, 89) (emphasis added to each). Case 4:17-cv-00449-ALM Document 123 Filed 02/05/18 Page 47 of 51 PageID #: 3624 39 03889-WHO, 2015 WL 5736589, at *16, 22-23 (N.D. Cal. Oct. 1, 2015) (analyzing Section 11 claims related to bad debt under Omnicare and granting the defendants’ motion to dismiss).103 The Offering Documents did not hide that Adeptus had potentially uncollectible debt, disclosing a $32.6 million provision for the 2014 fiscal year, a $70.1 million provision for the 2015 fiscal year, and a $27.1 million provision for the first quarter of 2016.104 The CAC does not allege any facts showing that any of these estimates turned out to be incorrect. In any event, such hindsight evaluation is irrelevant to the question at issue in this Section 11 claim of whether the estimates could be actionable under Omnicare. To properly plead that these estimates of Adeptus’s bad debt and other metrics included in the Offering Documents were false, Plaintiffs must allege facts showing that those estimates were not honestly believed when made. Omnicare, 135 S. Ct. at 1327. It is not sufficient to simply allege that the estimate “turned out to be wrong,” or to allege facts “cutting the other way.” Id. at 1325–27, 1329. “[A] statement of opinion is not misleading just because external facts show the opinion to be incorrect.” Id. Section 11’s prohibition on false statements of fact “does not allow investors to second-guess inherently subjective and uncertain assessments.” Id. at 1327.105 That is all Plaintiffs do here, and as such this claim fails. 103 As the Supreme Court and Fifth Circuit have recognized, these types of estimates permit a range of permissible judgments under Generally Accepted Accounting Principles. Thor Power Tool Co. v. C.I.R., 439 U.S. 522, 544 (1979) (“Accountants long have recognized that [GAAP is] far from being a canonical set of rules that will ensure identical accounting treatment of identical transactions. [GAAP], rather, tolerate[s] a range of reasonable treatments, leaving the choice among alternatives to management.”) (internal quotation marks omitted); Shaw Grp., 537 F.3d at 536 (same); Fine v. Am. Solar King Corp., 919 F.2d 290, 297 (5th Cir. 1990) (“GAAP tolerates a wide range of acceptable procedures,” and the inquiry is whether one “has chosen a procedure from within that universe of acceptable practices.”). 104 Ex. 8 (2014 10-K at 54, 64); Ex.28 (2015 10-K at 66); Ex. 31 (Q1 2016 10-Q at 6, 12, 30). 105 See also NECA-IBEW Pension Tr. Fund v. Bank of Am. Corp., No. 10 CIV. 440 LAK HBP, 2012 WL 3191860, at *10 (S.D.N.Y. Feb. 9, 2012) (That “loss reserves turned out to be insufficient some time after they were made does not render those figures false at the time that they were publicly filed with the SEC.”); In re CIT Grp. Inc. Sec. Litig., 349 F. Supp. 2d 685, 690–91 (S.D.N.Y. 2004) (“That defendants . . . decided to revise the amount of loan loss reserves that [they] deemed adequate [just three weeks after their IPO] provides absolutely no reasonable basis for concluding that defendants did not think reserves were adequate at the time the registration statement and prospectus became effective.”). Case 4:17-cv-00449-ALM Document 123 Filed 02/05/18 Page 48 of 51 PageID #: 3625 40 B. The CAC’s liquidity-related claims should also be dismissed. Plaintiffs also take issue with the Offering Documents’ statements concerning Adeptus’s belief that it would be able to meet its liquidity needs for the following year: We believe that cash we expect to generate from operations, the availability of borrowings under the Senior Secured Credit Facility and funds available under the MPT Agreement will be sufficient to meet liquidity requirements . . . for at least 12 months.106 Plaintiffs claim it was misleading to make this statement “without disclosing significant risks to Adeptus’s cash flow and liquidity, including the company’s financing of 100% of the JVs’ working capital and losses, its massive internal control weaknesses over revenue cycle management, and its overbilling of low-acuity patients.” But as discussed above, the CAC pleads no actionable omission regarding these topics. Furthermore, as the Executive Defendants establish in their Motion, there is no creditable allegation that Adeptus management did not honestly believe at the time of any Offering that the company had sufficient liquidity for the following year, as would be required for this statement of belief to be false. Omnicare, 135 S. Ct. at 1325–27. Indeed, the company’s bankruptcy filings (which Plaintiffs reference and rely on in the CAC) indicate that the liquidity crisis only became apparent in October 2016, well after the June 2016 Offering.107 CONCLUSION Plaintiffs identify no false or misleading disclosure in any of the Offering Documents. For this reason and the others discussed above, the claim against the Director Defendants should be dismissed. 106 CAC ¶ 410; Ex. 1 (June 24, 2014 Prospectus at 89); Ex. 8 (2014 10-K at 70); Ex. 28 (2015 10-K at 71). 107 Ex. 44 (Bankr. First Day Decl. at 39) (“In October 2016 . . . it became apparent [Adeptus was] facing liquidity constraints.”). Case 4:17-cv-00449-ALM Document 123 Filed 02/05/18 Page 49 of 51 PageID #: 3626 41 Dated: February 5, 2018 Respectfully submitted, BAKER BOTTS L.L.P. /s/ David D. Sterling David D. Sterling Texas Bar No. 19170000 BAKER BOTTS L.L.P. One Shell Plaza Houston, Texas 77002 Telephone: (713) 229-1234 Facsimile: (713) 229-1522 david.sterling@bakerbotts.com John B. Lawrence Texas Bar No. 24055825 Jessica B. Pulliam Texas Bar No. 24037309 Charles Strecker Texas Bar No. 24066157 Amy Heard Texas Bar No. 24097818 BAKER BOTTS L.L.P. 2001 Ross Avenue Dallas, Texas 75201 Telephone: (214) 953-6500 Facsimile: (214) 661-6503 john.lawrence@bakerbotts.com jessica.pulliam@bakerbotts.com amy.heard@bakerbotts.com Mysha Lubke Texas Bar No. 24083423 BAKER BOTTS L.L.P. 98 San Jacinto Boulevard Austin, Texas 78701 Telephone: (512) 322-2541 Facsimile: (512) 322-2501 mysha.lubke@bakerbotts.com Counsel for Richard Covert, Daniel J. Hosler, Stephen M. Mengert, Steven V. Napolitano, Daniel W. Rosenberg, Gregory W. Scott, Ronald L. Taylor, and Jeffery S. Vender Case 4:17-cv-00449-ALM Document 123 Filed 02/05/18 Page 50 of 51 PageID #: 3627 42 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/ David D. Sterling Case 4:17-cv-00449-ALM Document 123 Filed 02/05/18 Page 51 of 51 PageID #: 3628