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Sanchez v. Centene Corp.

United States District Court, E.D. Missouri, Eastern Division

August 30, 2019

ISRAEL SANCHEZ, Individually and on Behalf of All Others Similarly Situated, et. al., Plaintiffs,



         This putative class action was filed under the Securities Exchange Act of 1934, as amended by the Private Securities Litigation Reform Act of 1995 (“PSLRA), ” in federal district court in California and transferred to this Court. The case is now before the Court on Defendants' motion (ECF No. 71) to dismiss Plaintiffs' amended consolidated class action complaint (ECF No. 66) for failure to state a claim. Oral argument was held on February 22, 2018. For the reasons set forth below, the motion to dismiss will be granted in part and denied in part.


         Plaintiffs bring this action on behalf of all persons and entities that purchased or acquired Centene Corporation (“Centene”) stock between April 26, 2016, and July 25, 2016 (the “Class Period”). Defendants are Centene and two of its top officers: Michael Neidorff and Jeffrey Schwaneke. For purposes of the motion before the Court, the record establishes the following. Centene sells health insurance. On July 2, 2015, Centene announced its intention to acquire Health Net, Inc., a company that sold health insurance primarily in California and Arizona, for about $6.8 billion. Under the terms of the agreement, upon completion of the merger, Centene shareholders would own approximately 71% of the combined entity, with Health Net shareholders owning approximately 29%. The merger closed on March 24, 2016.

         During the nine months leading up to the merger, Centene conducted due diligence of Health Net's business. In 2014 and throughout 2015, Health Net incurred rising liabilities related to claims for substance-abuse treatment. Health Net began denying such claims and asked California regulators for permission to redesign its policies. In filings with the Securities Exchange Commission (“SEC”) dated September 17, 2015, September 21, 2015, and January 26, 2016, made in anticipation of the merger, Centene added to its valuation of Health Net the following language: “At this time, Centene does not have sufficient information as to the amount, timing and risk of cash flows of all of Health Net's identifiable intangible assets to determine their fair value.”

         On April 26, 2016, (one month after the merger and the start of the Class Period) Centene published a required purchase price accounting (SEC Form 10-Q) listing Health Net's assets and liabilities that Centene acquired. The April 2016 accounting did not include the language that Centene did not have sufficient information regarding Health Net's fair value; but was labeled, “preliminary” and “subject to change.” According to Plaintiffs, the April 2016 statement, using “purchase accounting, ” violated Generally Accepted Accounting Principles (“GAAP”) and SEC regulations, and this resulted in about $300 million of Health Net's liabilities not being reported as of that date.

         Plaintiffs assert in the amended complaint that in this accounting, Defendants made “positive statements about Health Net's business in Arizona and California that omitted the deep flaws and losses on [Health Net's] policies that were known internally at Centene at the time.” Plaintiffs assert that this accounting also omitted the required disclosures of “known trends or uncertainties” and “known uncertainties reasonably likely to have material future effects on the Company's financial condition.” ECF No. 66 ¶ 110.

         Plaintiffs contend that on July 26, 2016, “the truth was revealed” when Defendants disclosed that Health Net's liabilities were $390 million higher than Defendants had represented in April 2016. On that day, in response to this disclosure, Centene's stock price declined by about 8.5%, erasing over $1 billion in shareholder value. The gravamen of the amended complaint is that Defendants knew during the Class Period about this level of Health Net's liabilities, but concealed it, and “Defendants' materially false and misleading statements and omissions artificially inflated the price of Centene common stock and maintained inflation in the stock price. The disclosures on July 26, 2016 revealed the relevant truth and removed the artificial inflation from the stock price.” Id. ¶ 119.

         In the amended complaint, Plaintiffs note the following statements by Centene that Plaintiffs assert were misleading because they omitted Health Net's increased liabilities on its California substance-abuse policies, the measures Health Net was taking to avoid payments to treatment facilities, and the efforts to redesign the flawed policies that were losing money; all matters that were known to Defendants when the statements were made:

1. On April 26, 2016, during a Centene quarterly investor conference call, Neidorff stated that there were “no surprises” during “the regulatory process in California.” Another Centene executive stated that “the exchange business at . . . Health Net has been profitable. The one area of challenge with respect to the exchange business at Health Net has been Arizona, ” and Health Net has pursued “a strategy . . . [t]hat has worked well for them” in California.
2. On May 24, 2016, at a healthcare conference, in response to an analyst's question regarding whether there had been any surprises or challenges associated with the merger, Neidorff responded that everything had gone as “expected” because Centene spent nine months working on the integration before the merger was completed. Neidorff also indicated that Centene had not taken any other action to bring Health Net “up to snuff in [Centene's] accounting and balance sheets.”
3. On June 17, 2016, Schwaneke made statements at an Investor Day event highlighting the adequacy of Centene's medical claims reserves, stating that “[a]s of May 31, 2016, there has been no unfavorable development on the acquired Health Net medical reserves.”[1]

ECF No. 66 ¶¶ 81, 83, 85-88.

         Plaintiffs emphasize that Health Net's liabilities reported by Centene on July 26, 2016, were not due to new information obtained since the April 26, 2016 financial statements. Rather, according to Plaintiffs, Centene knew as of April 26, 2016, about the level of Health Net's liabilities that were due to claims from California substance-abuse treatment centers. ECF No. 66 ¶¶ 66, 109, 112.

         The amended complaint also includes a section entitled, “Additional Allegations of Defendants' Scienter, ” that points to evidence of Defendants' admissions that they had knowledge during the due diligence period of Health Net's rising substance-abuse treatment liabilities and its efforts to control these costs. ECF No. 66 ¶¶ 112-14. The amended complaint has two counts: Count I against all Defendants claims violations of §10(b) of the Exchange Act and SEC Rule 10b-5 by making false statements Defendants knew were misleading; and Count II against Centene officers Neidorff and Schwaneke for violations of §20(a) of the Act (control-person liability). Plaintiffs seek “all damages and other remedies available under the Exchange Act.” ECF No. 66 ¶ 150(b).


         In support of their motion to dismiss, Defendants argue that Plaintiffs have failed to plead facts showing that the “Preliminary Estimates” of April 26, 2016, were false at the time they were made, by not alleging “any facts that would show Defendants knew- or even could have known-the precise value of the liabilities created by [Health Net's insurance products] until Centene had completed a full valuation of those liabilities post-closing [of the merger].” ECF No. 72 at 17. Defendants note that Plaintiffs cite no internal report or confidential witness showing that Defendants knew the true value of Health Net on April 26, 2016. Defendants argue that the post-merger valuation provided new information on which Centene based its “Updated Estimates” of July 26, 2016. Defendants rely heavily on Elam v. Neidorff, 544 F.3d 921 (8th Cir. 2008), in which the Eighth Circuit affirmed the dismissal of a securities fraud complaint because the plaintiffs failed to allege information that the defendant, an officer of a company, knew at the time he projected the company's quarterly earnings that indicated the projections were wrong.

         Defendants also argue that the Preliminary Estimates were not statements of fact, but rather of opinion that were not subjectively false. ECF No. 72 at 18. Defendants state that Plaintiffs do not allege any facts that show that Defendants did not sincerely believe the Preliminary Estimates. Defendants highlight the fact that they advised investors that the Preliminary Estimates were subject to change. Defendants also argue that Plaintiffs have not adequately alleged that Defendants' accounting for the Health Net acquisition violated GAAP, and further, that pleading a GAAP violation is not enough to state a securities fraud claim. Id. at 19-22. Defendants argue that the April 26, 2016, SEC Form10-Q did not violate SEC regulations because Centene's purchase price accounting estimates “were a mere accounting adjustment that had no impact on Centene's present or future income statement.” Id. at 20.

         Turning to the above-described oral statements made by Defendants in April, May, and June 2016, Defendants argue that the April 26, 2016 statement that Health Net has “pursued a strategy . . . that's worked well for them” in California is taken out of context, and is a “vague, soft, puffing statement” that is immaterial and not actionable under the law. Id. at 23-24. Defendants state that “many of the facts Plaintiff claims Defendants omitted” had been public before the merger, such as “the remedial measures that Health Net took to avoid payments to substance-abuse treatment facilities.” Id. at 24-25. Defendants rely on media reports published between January and June 2016, which publicize how Health Net was investigating treatment centers for potential fraud and treatment centers' claims that Health Net was improperly withholding claims payments. See ECF Nos. 73-10 to 73-12.

         Defendants argue that Plaintiffs fail to explain how the May 24, 2016, statement that Centene conducted due diligence was rendered false or misleading by the omitted matters. Defendants contend that Centene did conduct due diligence and that Plaintiffs fail to allege facts demonstrating Centene knew, by May 24, 2016, that its previously-disclosed Heath Net liabilities estimates were inaccurate, and therefore, would have needed adjustment by that time. ECF No. 72 at 25. Similarly, Defendants argue that Plaintiffs have failed to allege any facts demonstrating that Centene knew the Preliminary Estimates were not accurate as of May 31, 2016 - the date referenced in Schwaneke's comment at the June 17, 2016, Investor Day event. According to Defendants, Plaintiffs ignore the cautionary language following Schwaneke's allegedly misleading comment, which states that the comment “[did] not take into account any potential adjustment in the second quarter.” ECF No. 73-7 at 8. Defendants argue that this cautionary language is sufficient to make any alleged misrepresentation or omission immaterial as a matter of law. ECF No. 72 at 26.

         Defendants then argue that even if Plaintiffs have alleged any actionable misstatement or omission, the complaint should still be dismissed because Plaintiffs fail to plead the required strong inference of scienter. Defendants contend that Plaintiffs have failed to show concrete and personal benefit to the individual Defendants resulting from the alleged fraud; and that Plaintiffs' speculation that Defendants were motivated to conceal the truth from California regulators while seeking approval for the merger is implausible because (1) the merger was completed a month before the Class Period began, and (2) Plaintiffs have failed to show how misleading investors could have increased the likelihood of regulatory approval. Id. at 27-27. Further, Defendants argue that Plaintiffs' theory of scienter is not “cogent” and less compelling than obvious competing inferences of nonfraudulent intent. Defendants argue that Plaintiffs do not and cannot “explain why Defendants would intentionally acquire a flawed company, briefly conceal those flaws from investors but then voluntarily disclose them-all without personally profiting from the alleged scheme.” Id. at 28-29. Lastly, Defendants argue that, because Plaintiffs have failed to alleged a primary violation under §10(b) and Rule 10b-5, the complaint also fails to state claims for control-person liability under §20(a). Id. at 30.

         In response, Plaintiffs argue that the complaint adequately alleges false and misleading statements and omissions. Specifically, Plaintiffs cite Defendants' oral statements on April 26, May 24, and June 17, 2016; as well as the accounting statements. Plaintiffs also argue that the complaint adequately alleges scienter. ECF No. 77 at 16-31. Plaintiffs contend that Defendants' admissions that they knew, during the due diligence period, about Health Net's rising liabilities and the effort to control costs, raise a strong inference of scienter. Id. at 28. Plaintiffs distinguish Elam, 544 F.3d 921, ...

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