Barry J. Kusinitz, Esq. David A. Rosenfeld, Esq. Deborah R. Gross, Esq. Robert M. Rothman, Esq. William R. Grimm, Esq. Edmund Polubinski, III, Esq. Lawrence Portnoy, Esq. Mitchell R. Edwards, Esq. Joseph A. Fonti, Esq.
Joseph N. Laplante, United States District Judge
This is a putative class action by disappointed shareholders of CVS Caremark Corporation, who allege that the company and certain of its officers made a number of fraudulent statements and omissions about the integration of CVS’s retail pharmacy business, and Caremark’s “prescription benefit manager, ” or “PBM, ” business, following the companies’ merger in November 2007. The plaintiffs claim that, as a result of these misstatements and omissions, they purchased CVS Caremark stock at artificially inflated prices, only to see the share price decline by 20 percent on November 5, 2009, when (during the company’s third-quarter earnings call) “investors learned the truth about the company’s failure to integrate the merged-entity, which resulted in the loss of billions of dollars of PBM contracts, and that the CVS Caremark retail-PBM model had failed to gain acceptance in the marketplace.” The plaintiffs seek to recover for their alleged losses under § 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5 of the Securities and Exchange Commission, 17 C.F.R. § 240.10b-5.
In May 2012, following extensive briefing and oral argument, this court granted the defendants’ motion to dismiss the complaint by way of a comprehensive written order. City of Brockton Ret. Sys. v. CVS Caremark Corp., 2012 DNH 106. This court ruled that, aside from an unrealized earnings projection, which was not actionable due to the “safe harbor” for forward-looking statements, 15 U.S.C. § 77z-2(c)(1)(2), the plaintiffs had not plausibly alleged that the claimed misstatements or omissions caused their loss. Id. at 3. This court reasoned that the company’s “loss of billions of dollars of PBM contracts” had been disclosed several months prior to the earnings call, which also did not “disclose” the company’s alleged “failure to integrate the merged-entity” or that the “CVS Caremark retail-PBM model had failed to gain acceptance in the marketplace”--in fact, the company had specifically denied the existence of such problems during the call, and attributed the contract losses to other factors. Id. at 25-27. This court did not reach the defendants’ alternative arguments for dismissal: that the plaintiffs had failed to plead any actionable misstatements or omissions and that the complaint failed to “state with particularity facts giving rise to a strong inference that the defendant[s] acted with the required state of mind, ” as required by the statutory pleading standard, 15 U.S.C. § 78u-4(b)(2).
The plaintiffs appealed this court’s judgment of dismissal to the Court of Appeals, challenging the ruling that they had not plausibly alleged loss causation, but not the ruling that the earnings projection was inactionable. The Court of Appeals agreed with the plaintiffs, in part. Mass. Ret. Sys. v. CVS Caremark Corp., 716 F.3d 229 (1st Cir. 2013). First, the court observed, “the complaint does not allege that [CVS Caremark’s] clients rejected the idea of a combined PBM and retail pharmacy. Therefore, the [plaintiffs] fail to state a claim regarding the business model itself.” Id. at 239. But, the Court of Appeals ruled, the plaintiffs had plausibly alleged that the November 2009 earnings call “revealed to the market that CVS Caremark had problems with service and the integration of its systems, ” even though, again, the company had specifically denied the existence of those problems during the call. Id. at 240. While “[p]erhaps the market did not perceive every detail of CVS Caremark’s struggles” as a result of the earnings call, the court explained, the market “knew enough to drive down the price of CVS Caremark shares by 20%.” Id. (footnote by the court omitted).
The defendants urged, as an alternative basis for affirmance, that the plaintiffs had not alleged any actionable misstatement or omission, but the Court of Appeals declined to address that argument. Id. The court explained that “the parties’ briefing on this issue is abbreviated, so we think it best to allow the district court to consider this argument in the first instance. The same is true for the scienter element of the [plaintiffs’] claims, which was briefed before the district court but not on appeal.” Id. Rather than reversing this court’s dismissal order, then, the Court of Appeals vacated it and remanded the case here “to allow the court to consider alternative grounds for dismissal if it chooses.” Id.
This court subsequently granted (over the plaintiffs’ objection) the defendants’ motion to submit supplemental briefing on their motion to dismiss, Order of July 5, 2013, and the plaintiffs filed a response to the defendants’ supplemental memorandum. After reviewing those materials, this court declines to dismiss the complaint again, for the reasons explained briefly below. This ruling, of course, is without prejudice to the defendants’ renewal of their arguments for dismissal--including their argument that the plaintiffs cannot show loss causation--by way of a properly supported motion for summary judgment.
Actionable misstatements or omissions.
“For a complaint to state a claim for securities fraud under section 10(b) and Rule 10b-5, it must plead, ” among other things, “a material misrepresentation or omission.” ACA Fin. Guar. Corp. v. Advest, Inc., 512 F.3d 46, 58 (1st Cir. 2008). To do so, the complaint must “‘specify each statement alleged to have been misleading [and] the reason or reasons why the statement is misleading.’” Id. (quoting 15 U.S.C. § 78u-4(b)(1) (bracketing by the court)).
The defendants argue that the plaintiffs have failed to meet this standard because they “have not alleged that anyone from CVS Caremark ever said that [it] had no problems with service” or “no problems at all with integration of any of [its] systems following the merger.” In response, the plaintiffs identify several statements to that effect, which the company made to its investors during the time that the plaintiffs held its stock, including, but not limited to:
• a statement by CVS Caremark’s president and CEO, defendant Thomas Ryan, in October 2008 that the company’s PBM business “will continue to gain share because . . . [w]e have excellent service”;
• a statement by CVS Caremark’s executive vice president and CFO, David Rickard, in March 2009 that “we have done the things strategically that needed to be done to make this merger successful”;
• statements by Ryan in January 2009 denying that the company had lowered prices for some of its PBM customers “because of a lack of service, ” or that the company had “an issue with [its computer] systems”;
• a statement by Ryan in August 2009 that the company’s PBM clients “love our integrated proactive ...