Community Health's Response to Tenet Lawsuit

8/7/2019 Community Health's Response to Tenet Lawsuit

1/31

DAL:798618.1

UNITED STATES DISTRICT COURTNORTHERN DISTRICT OF TEXAS

TENET HEALTHCARE CORPORATION,

Plaintiff,

v.

COMMUNITY HEALTH SYSTEMS, INC.,WAYNE T. SMITH, and W. LARRY CASH,

Defendants.

Case No. 11-CV-00732-M (BL)

MEMORANDUM OF LAW IN SUPPORT OF MOTION TO DISMISS

Dennis N. Ryan (Bar No. 17470700)Gerald C. Conley (Bar No. 04664200)ANDREWS KURTH LLP1717 Main StreetSuite 3700Dallas, Texas 75201Telephone: (214) 659-4400Facsmile: (214) 659-4401

Peter Duffy Doyle (pro hac vice motion pending)Lee Ann Stevenson (pro hac vice motion pending)KIRKLAND & ELLIS LLP

Citigroup Center601 Lexington AvenueNew York, New York 10022Telephone: (212) 446-4800Facsimile: (212) 446-4900

Attorneys for Defendants

Case 3:11-cv-00732-M Document 6 Filed 04/19/11 Page 1 of 31 PageID 85


2/31

iDAL:798618.1

TABLE OF CONTENTS

Page

INTRODUCTION ...........................................................................................................................1STATEMENT OF MATERIAL FACTS.........................................................................................3ARGUMENT...................................................................................................................................6 I. TENETS CLAIMS MUST BE DISMISSED BECAUSE CHS HAS MOVED TO

AN ALL-CASH OFFER TO ACQUIRE TENET...............................................................8A. The Alleged Misrepresentations Are Not Material Because CHSs Offer Is

All Cash. ..................................................................................................................8B. Tenets Section 10(b) Claim Is Mooted by the All-Cash Offer.............................10

II. AS AN INDEPENDENT GROUND, TENETS CLAIMS FAIL BECAUSETHEY ARE NOT SEEKING THE DISCLOSURE OF FACTS...................................11 A. Section 14(a) Does Not Require CHS to Disclose Tenets Self-Serving

Allegations or to Speculate About Uncharged Misconduct or PotentialLiability..................................................................................................................11

B. Defendants Statements Are Neither Misstatements Nor OmissionsActionable Under Rule 10b-5. ...............................................................................14

III. TENET DOES NOT HAVE STANDING TO BRING A SECURITIES CLAIMAGAINST CHS. ................................................................................................................16 A. Tenet Does Not Have Standing to Seek Injunctive Relief Under

Section 10(b)..........................................................................................................16B.

Section 14(a) Can Be Used Only by Stockholders With Voting Rights................18

IV. THE ALLEGED MISREPRESENTATIONS ARE IMMATERIAL UNDER

SECTION 14(A). ...............................................................................................................19V. TENETS 10(B) CLAIM MUST BE DISMISSED BECAUSE IT HAS NOT

ADEQUATELY ALLEGED SCIENTER. .........................................................................21 VI. TENET HAS FAILED TO STATE A CLAIM FOR CONTROL-PERSON

LIABILITY........................................................................................................................23 CONCLUSION..............................................................................................................................24



3/31

iiDAL:798618.1

TABLE OF AUTHORITIES

Page

Cases

7547 Corp. v. Parker & Parsley Dev. Partners, L.P.,38 F.3d 211 (5th Cir. 1994)....................................................................................................... 18

Abrams v. Baker Hughes, Inc.,292 F.3d 424 (5th Cir. 2002)............................................................................................... 16, 22

Advanced Res. Intl., Inc. v. Tri-Star Petroleum Co.,4 F.3d 327 (4th Cir. 1993)......................................................................................................... 17

Amalgamated Clothing & Textile Workers Union v. J.P. Stevens & Co.,475 F. Supp. 328 (S.D.N.Y. 1979) ...................................................................................... 12, 14

Ashcroft v. Iqbal,129 S. Ct. 1937 (2009) ................................................................................................................ 6

Ballan v. Winfred Am. Educ. Corp.,720 F. Supp 241 (E.D.N.Y. 1989)....................................................................................... 14, 15

Beebe v. Pac. Realty Trust,578 F. Supp. 1128 (D. Or. 1984)................................................................................................. 9

Bell Atl. Corp. v. Twombly,550 U.S. 544 (2007) .................................................................................................................... 6

Blue Chip Stamps v. Manor Drug Stores,421 U.S. 723 (1975) .................................................................................................................. 17

Bolger v. First State Fin. Servs.,759 F. Supp. 182 (D.N.J. 1991) ................................................................................................ 21

Bruce H. Tuchman et al. v. DSC Commcns Corp. et al.,14 F.3d 1061 (5th Cir. 1994)..................................................................................................... 22

Brunig v. Clark,560 F.3d 292 (5th Cir. 2009)....................................................................................................... 7

City of Clinton, Ark. v. Pilgrims Pride Corp.,632 F.3d 148 (5th Cir. 2010)....................................................................................................... 6

Copperweld Corp. v. Imetal,403 F. Supp. 579 (W.D. Pa. 1975) .............................................................................................. 9

Davis v. Davis,526 F.2d 1286 (5th Cir. 1976)................................................................................................... 17

Diceon Elecs., Inc. v. Calvary Partners, L.P.,772 F. Supp. 859 (D. Del. 1991) ............................................................................................... 19

Flaherty & Crumrine Preferred Income Fund, Inc. v. TXU Corp. ,565 F.3d 200 (5th Cir. 2009)................................................................................................. 7, 21



4/31


(continued)

Page

DAL:798618.1

iii

GAF Corp. v. Heyman,724 F.2d 727 (2d Cir. 1983) ...................................................................................................... 14

GAF Corp. v. Milstein,324 F. Supp. 1062 (S.D.N.Y.), affd in relevant part, 453 F.2d 709 (2d Cir. 1971),cert. denied, 406 U.S. 910 (1972) ............................................................................................. 18

Gen. Elec. by Levit v. Cathcart,980 F.2d 927 (3d Cir. 1992) .......................................................................................... 13, 20, 21

Goldstein v. MCI WorldCom,340 F.3d 238 (5th Cir. 2003)............................................................................................... 22, 23

Harris v. City of Houston,151 F.3d 186 (5th Cir. 1998)..................................................................................................... 10

Hulliung v. Bolen,548 F. Supp. 2d 336 (N.D. Tex. 2008)........................................................................................ 7

Hundahl v. United Benefit Life Ins. Co.,465 F. Supp. 1349 (N.D. Tex. 1979)................................................................................... 15, 17

In re Affiliated Comp. Serv. Derivative Litig.,540 F. Supp. 2d 695 (N.D. Tex. 2007)...................................................................................... 19

In re Browning-Ferris Indus., Inc. Sholder Derivative Litig.,830 F. Supp. 361 (S.D. Tex. 1993) ..................................................................................... 20, 21

In re United Operating, LLC,540 F.3d 351 (5th Cir. 2008)....................................................................................................... 7

John Labatt Ltd. v. Onex Corp,890 F. Supp. 235 (S.D.N.Y. 1995) ...................................................................................... 17, 18

Klamberg v. Roth,473 F. Supp. 544 (S.D.N.Y. 1979) ............................................................................................ 15

Little v. KPMG LLP,575 F.3d 533 (5th Cir. 2009)....................................................................................................... 7

Lovelace v. Software Spectrum, Inc.,78 F.3d 1015 (5th Cir. 1996)....................................................................................................... 3

Magruder v. Halliburton Co., and Lesar,No. 3:05-CV-1156-M, 2009 WL 854656 (N.D. Tex. Mar. 31, 2009) ...................................... 22

Melder v. Morris,27 F.3d 1097 (5th Cir. 1994)............................................................................................... 22, 23

Morris v. Bush,No. 98-CV-2452-G, 1999 WL 417928 (N.D. Tex. June 22, 1999) .......................................... 18



5/31


(continued)

Page

DAL:798618.1

iv

Nathanson v. Zonagen Inc.,267 F.3d 400 (5th Cir. 2001)............................................................................................... 21, 22

Norris v. Hearst Trust,500 F.3d 454 (5th Cir. 2007)....................................................................................................... 3

Plotkin et.al., v. IP Axess Inc., et.al.,407 F.3d 690 (5th Cir. 2005)..................................................................................................... 22

Prettner v. Aston,339 F. Supp. 273 (D. Del. 1972) ............................................................................................... 13

R2 Invs. LDC v. Phillips,401 F.3d 638 (5th Cir. 2005)....................................................................................................... 7

Raab v. Gen. Physics Corp.,

4 F.3d 286 (4th Cir. 1993)......................................................................................................... 16Rosenzweig v. Azurix Corp., et al.,

332 F.3d 854 (5th Cir. 2003)..................................................................................................... 16

Salomon Bros. Mun. Partners Fund, Inc. v. Thornton,410 F. Supp. 2d 330 (S.D.N.Y. 2006)....................................................................................... 19

SEC v. Gann,565 F.3d 932 (5th Cir. 2009)............................................................................................... 17, 21

Smallwood v. Pearl Brewing Co.,489 F.2d 579 (5th Cir. 1974)....................................................................................................... 7

Southland Sec. Corp. v. INSpire Ins. Solutions, Inc.,365 F.3d 353 (5th Cir. 2004)..................................................................................................... 23

Studebaker Corp. v. Gittlin,360 F.2d 692 (2d Cir. 1966) ...................................................................................................... 19

TSC Indus., Inc. v. Northway, Inc.,426 U.S. 438 (1976) .................................................................................................................. 19

US v. Matthews,787 F.2d 38 (2d Cir. 1986) ........................................................................................................ 20

Virginia Bankshares, Inc. v. Sandberg,501 U.S. 1083 (1991) ................................................................................................................ 19

Statutes

Private Securities Litigation Reform Act, 15 U.S.C. 78u-4(b)(2) ....................................... 22, 23

Securities Exchange Act 10(b), 15 U.S.C. 78j(b)............................................................... passim

Securities Exchange Act 14(a), 15 U.S.C. 78n(a)............................................................... passim

Securities Exchange Act 20, 15 U.S.C. 78t ........................................................................ 6, 23



6/31


7/31

1DAL:798618.1

INTRODUCTION

Tenet and CHS healthcare companies with medical staffs comprising thousands of

doctors are engaged in a vigorous proxy campaign to determine the future Board of Directors

of Tenet. In a misguided effort to score points in this contest for corporate control, Tenet has

filed this lawsuit attacking the ethics and professional judgment of 15,000 attending physicians,

who make the decision whether to admit patients at CHS-affiliated hospitals.

Tenet launches this assault by twisting and bending the federal securities laws beyond

recognition. Tenet tests our judicial system by wielding Rule 14a-9 and Rule 10b-5 as swords to

attack and injure a business rival, and not as shields to protect investors. Defendants move

before Tenet has even served its summons and complaint because the complaint is facially

defective and must be dismissed as a matter of law.

This lawsuit is only the latest maneuver in the scorched-earth campaign that Tenets

Board and management are waging against CHS and Tenets own shareholders. Last November,

CHS made an offer to Tenets Board to buy all the outstanding shares of Tenet. Tenets Board

flatly rejected the offer without engaging in any negotiation with CHS. Tenets Board then

adopted a poison pill with extreme conditions, and it delayed until November 2011 Tenets

annual shareholder meeting, which historically had been held each May. This served to postpone

any shareholder vote and extended by half a year the term of its current Board. Now it has filed

this lawsuit asking for injunctive and declaratory relief that is extraordinary and unnecessary.

The simple fact is that there is nothing to enjoin, and Tenet is overreaching in an effort to

influence the pending proxy contest. The legally and factually baseless allegations in the

complaint prove only that Tenets Board and management are pursuing their personal agendas

and not the best interests of Tenets shareholders.



8/31

DAL:798618.1

2

Any thin reed that Tenet imagined it might have had under the federal securities

laws snapped on April 18, 2011, when CHS announced its all-cash offer as consideration for

Tenet shares. The only tenuous connection to the securities laws identified in the complaint is

allegedly the CHS stock portion of CHSs original and now superseded offer. Now that the

stock component has been eliminated, so has Tenets pretext for alleging a securities law

violation. For this reason alone, Tenets claim must be dismissed.

Tenets complaint has further fatal flaws. Tenet is not seeking to compel CHS to disclose

facts, but instead is attempting to compel CHS to confess some sort of culpability, which is

illogical and without basis under the securities laws. In addition, the alleged misstatements and

omissions concern judgment calls by the roughly 15,000 physicians practicing at CHS hospitals,

which is not material to the proxy contest concerning the election ofTenets directors.

Furthermore, Tenet lacks standing to bring a claim for injunctive relief under Rules 10b-5

or 14a-9 because such a remedy may not be sought by corporations on behalf of their

shareholders on the facts presented here. Lastly, Tenets claim under Section 10(b) must be

dismissed because Plaintiff has failed to plead scienter.

In sum, this lawsuit hijacks the federal securities laws to serve the ulterior motives of

Tenets Board and management. The complaint is improper, without substance on its face, and

must be dismissed.1

1 Discovery in this case is stayed while this dispositive motion is pending. 15 U.S.C. 78u-4(b)(3)(B);In re EnronCorp. Securities, 535 F.3d 325, 337 (5th Cir. 2008). Defendants respectfully request that the stay remain inplace because Plaintiff cannot satisfy its burden of showing cause for lifting the stay. Furthermore, discoverywould be expensive, burdensome and, given the fatal flaws in the complaint, unnecessary.



9/31

DAL:798618.1

3

STATEMENT OF MATERIAL FACTS

Community Health Systems, Inc. (CHS) is a publicly traded company which, through

its subsidiaries, owns and operates more than 130 hospitals in 29 states, providing a broad range

of healthcare services to its patients.2 (Compl. 33.) Wayne T. Smith has been the Chairman

and Chief Executive Officer of CHS since 1997. (Id. 34.) W. Larry Cash is a member of the

Board of Directors of CHS and has been the Chief Financial Officer of CHS since 1997. (Id.

35.) Tenet Healthcare Corporation (Tenet) is a healthcare services company with operations

in 11 states. (Id. 32.)

On November 12, 2010, CHS made an offer to Tenets President and Chief Executive

Officer, Trevor Fetter, and the Tenet Board of Directors to acquire all of the outstanding shares

of Tenet for $6.00 per share $5.00 in cash and $1.00 in CHS stock. (Id. 2, 115; Appendix

003-028.) On December 6, 2010, Tenet flatly rejected CHSs offer without engaging in any

negotiation with CHS and two days later sent a letter to CHS purporting to explain why it had

done so. (Compl. 116; Appendix 029-038.)3 In the letter, despite including five pages of

objections to the offer, Tenet never mentioned as a basis for rejecting the offer any of the

allegations that now underlie the complaint about CHSs admissions or billing practices or the

impact those practices might have on CHSs financial condition. (Appendix 029-038.)

On December 9, 2010, CHS announced in a press release the offer it had made to acquire

Tenets outstanding shares for $6.00 per share ($5.00 in cash and $1.00 in CHS stock).

2 CHS strenuously denies the allegations in the complaint, but for purposes of a motion to dismiss the court mustassume that they are truthful. At the appropriate time, CHS will defend itself against these baseless allegations.

3 In deciding a motion to dismiss, a court may take judicial notice of matters of public record, including publicfilings made with the Securities and Exchange Commission. See Lovelace v. Software Spectrum, Inc., 78 F.3d1015, 1018 (5th Cir. 1996) (allowing courts to take judicial notice of the contents of documents filed with theSEC); see also Norris v. Hearst Trust, 500 F.3d 454, 461 n. 9 (5th Cir. 2007) ([I]t is clearly proper in decidinga 12(b)(6) motion to take judicial notice of matters of public record.).



10/31

DAL:798618.1

4

(Appendix 003-028.) The offer price represented a premium of 40% to Tenets closing stock

price on the last trading day prior to the announcement of the offer. (Appendix 003-028.) In its

press release, CHS explained several of the financial and strategic reasons why it believed the

offer was compelling:

CHS believes the complementary fit of the two companies, the geographicproximity of their facilities, and the ability to enhance the operating efficienciesand best practices of a combined organization would enable it to provide evenhigher quality care for patients and broader and more effective services to thecommunities it serves.

(Appendix 003-028.)

That same day, Tenet announced in a press release that it had rejected the offer.

(Appendix 029-038.) Again, Tenet did not identify any of the allegations in the complaint

concerning CHSs admissions or billing practices as reasons for rejecting the offer. (Appendix

029-038.)

On December 20, 2010, CHS issued a press release announcing its intention to nominate

a full slate of directors for election at Tenets 2011 annual shareholder meeting:

It is unfortunate that Tenets Board of Directors has rejected our proposal andrefused to sit down with us to discuss our premium offer. We believe Tenetshareholders would be best served by a Board focused on maximizing shareholdervalue, and we intend to propose directors who will look out for the interests ofTenet shareholders.

(Appendix 052-057.)

On January 7, 2011, Tenets Board announced that it had adopted a shareholder rights

plan, or poison pill, with an aggressive and unwarranted 4.9% trigger that was intended to act

as a deterrent to any person acquiring beneficial ownership of [Tenets] outstanding common

stock without the approval of [Tenets] Board. (Appendix 058-166.) At the same time, Tenets

Board announced that it had amended Tenets bylaws to remove the requirement that the annual

meeting be held no later than 210 days after the close of each fiscal year, which would have



11/31

DAL:798618.1

5

required Tenet to hold its annual meeting by July 29, 2011.4 (Id.) After amending that

restriction, Tenets Board moved the 2011 annual meeting to November 3, 2011 i.e., Tenet

will hold its annual meeting 18 months after its previous annual meeting. (Id.)

On January 14, 2011, CHS issued a press release announcing ten director candidates and

four alternate candidates that CHS intends to nominate for the ten-member Board at Tenets

2011 annual meeting. (Compl. 122; Appendix 167-175.) CHS also provided a summary of the

work and education experience of each of these highly qualified independent candidates.

(Appendix 167-175.) As explained in the press release, none of these candidates has a pre-

existing relationship with CHS, nor do any of the nominees have any voting agreement with

CHS or any obligation to support any proposed acquisition of Tenet. (Id.) Rather, if elected as

Tenet directors, the ten candidates would owe fiduciary duties to Tenet shareholders. (Appendix

167-175.)

On April 11, 2011, Plaintiff filed this lawsuit against CHS and Messrs. Smith and Cash.

While Plaintiff claims that CHS has violated the federal securities laws, when reading the

complaint one is hard-pressed to determine how the securities laws are more than tangentially

implicated by Plaintiffs allegations, which center on how 15,000 attending physicians decide

whether to admit, and how to treat, patients at CHS hospitals. (Appendix 186-224.) As the

complaint alleges, at the center of this litigation is an issue that hospitals and medical staff deal

with every day: how a patient is appropriately treated at a hospital, and to the extent that patient

is covered by Medicare, how that treatment should be billed to Medicare. (Compl. 7.)

Plaintiff then attempts to cast these professional misconduct allegations as securities law

violations by claiming that failing to disclose this alleged conduct constitutes material

4 Since 2004, Tenet has held its annual meeting in May of each year. (Appendix 039-051.)



12/31

DAL:798618.1

6

misrepresentations and omissions in proxy solicitation materials and in other public filings and

public statements. (Compl. 182-204.) In addition, Plaintiff alleges that Messrs. Smith and

Cash acted as controlling persons of CHS and as such are liable under Section 20(a) of the

Securities Exchange Act of 1934. (Compl. 205-208.)

Following the filing of the complaint, on April 18, 2011, CHS announced that it had

changed its offer from its initial cash-and-stock offer to an all-cash offer. (Appendix 176-182.)

Because Plaintiff lacks standing and has failed to state a claim, Defendants now move to

dismiss the complaint under Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6).

ARGUMENT

Although Defendants dispute virtually all the factual allegations in the complaint, for

purposes of this motion CHS recognizes that well-pleaded facts are viewed in the light most

favorable to the plaintiff in deciding a motion to dismiss. City of Clinton, Ark. v. Pilgrims

Pride Corp., 632 F.3d 148, 152 (5th Cir. 2010). Nevertheless, a plaintiff must allege facts that

support the elements of the cause of action, and a court will not accept as true threadbare

recitals of the elements of a cause of action, supported by mere conclusory statements. Id. at

152-3 (quotingAshcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009)).

To withstand a motion to dismiss under Rule 12(b)(6), the allegations in the complaint

must meet the standard of plausibility. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 564 (2007);

Iqbal, 129 S. Ct. at 1949. A claim is plausible when the plaintiff pleads factual content that

allows the court to draw the reasonable inference that the defendant is liable for the misconduct

alleged. Iqbal, 129 S. Ct. at 1949 (citation omitted). Plausibility requires more than a sheer

possibility that a defendant has acted unlawfully. Id. Rather, factual allegations must be

enough to raise a right to relief above the speculative level. Twombly, 550 U.S. at 555.



13/31

DAL:798618.1

7

Under Article III of the U.S. Constitution and Rule 12(b)(1), a court must dismiss a

complaint for lack of subject-matter jurisdiction if the plaintiff does not have standing to bring

the claims asserted. See In re United Operating, LLC, 540 F.3d 351, 354 (5th Cir. 2008). A

party has standing to sue only if it can prove that it has suffered an injury that is (i) concrete and

particularized and (ii) actual or imminent. Little v. KPMG LLP, 575 F.3d 533, 540 (5th Cir.

2009) (citations omitted). In addition, a party must show that a causal connection exists between

the injury and conduct complained of and that it is likely, as opposed to merely speculative, that

a favorable decision will redress the injury. Id.

To state a claim under Section 14(a) and Rule 14a-9 of the Securities Exchange Act, a

plaintiff must show that (1) defendants misrepresented or omitted a material fact in proxy

solicitation materials; (2) defendants acted at least negligently in distributing the proxy materials;

and (3) the false or misleading proxy statement was an essential link in causing the corporate

action. Hulliung v. Bolen, 548 F. Supp. 2d 336, 339 (N.D. Tex. 2008) (internal citations

omitted).

Under Section 10(b) and Rule 10b-5 of the Securities Exchange Act, a plaintiff must

allege, in connection with purchase or sale of securities, (1) a misstatement or an omission (2)

of a material fact (3) made with scienter (4) on which the plaintiffs relied (5) that proximately

caused the plaintiffs injury. Flaherty & Crumrine Preferred Income Fund, Inc. v. TXU Corp.,

565 F.3d 200, 207 (5th Cir. 2009) (citing R2 Invs. LDC v. Phillips, 401 F.3d 638, 641 (5th Cir.

2005); Smallwood v. Pearl Brewing Co., 489 F.2d 579, 605 (5th Cir. 1974)); see alsoBrunig v.

Clark, 560 F.3d 292, 295-96 (5th Cir. 2009).

Measured by these standards, the allegations are insufficient to show that Tenet has

standing to sue or has stated a claim upon which relief may be granted. Accordingly, for the



14/31

DAL:798618.1

8

reasons discussed below, Defendants ask the Court to dismiss the complaint under Rule 12(b)(6)

and 12(b)(1).

I. TENETS CLAIMS MUST BE DISMISSED BECAUSE CHS HAS MOVED TOAN ALL-CASH OFFER TO ACQUIRE TENET.

Tenets claims under Section 14(a) and 10(b) are premised entirely on the CHS stock

component of CHSs original offer to buy Tenet. (See, e.g., Compl. 5.) Because CHS is now

offering Tenet shareholders 100% cash in exchange for their shares, Tenet fails to state a claim

for violation of the federal securities laws and the complaint must be dismissed in its entirety.

A. The Alleged Misrepresentations Are Not Material Because CHSs Offer IsAll Cash.

Tenets claims are now essentially meaningless because CHSs offer no longer includes

any stock. The allegation that the proxy materials contain misstatements and omit material

information is predicated on the fact that CHSs original offer included CHS stock. Because

CHS is now offering shareholders all cash, Tenets allegations regarding the ethics and

professional judgment of thousands of attending physicians are irrelevant to the election of

Tenets directors.

Tenet argues that CHSs admissions and billing practices are important to Tenets

shareholders because they have caused CHSs current stock price to be artificially inflated,

which affects the value of CHSs offer. (Compl. 133.) In addition, Tenet claims that the

patient admission policies and billing practices of CHS affiliates are important to Tenet

shareholders because the performance of a combined CHS-Tenet entity would depend on

CHSs ability to implement the unsustainable [admissions policies] and avoid prosecution. (Id.

at 137.) And Tenet speculates that the merged corporation would be subject to undisclosed

financial risk (id. at 132), and that it may well be subject to liability and damages of well

over $1 billion for its practices . (Id. at 4.) Yet Tenet shareholders would only have become



15/31

DAL:798618.1

9

exposed to this hypothetical financial risk upon receiving compensation in the form of CHS

shares. Now that the offer to purchase Tenet is all cash, CHSs post-merger financial risk and

liabilities are irrelevant to Tenet shareholders, and any alleged misstatements or omissions in the

proxy materials are immaterial.

A case from the District Court of Oregon is instructive. See Beebe v. Pac. Realty

Trust, 578 F. Supp. 1128, 1148 (D. Or. 1984). InBeebe, the shareholders of a corporation were

presented with an all-cash offer for their shares. Under the merger plan, all shareholders would

be bound by the vote and either all or no shares would be sold. The court concluded that [i]n

this all-cash offer, shareholders would have no further involvement with [the bidder] regardless

of the outcome of the vote. Thus, omissions regarding [the bidders] past acquisition practices

would not be material. Id. A similar conclusion was reached by the court in Copperweld Corp.

v. Imetal, 403 F. Supp. 579, 600 (W.D. Pa. 1975). In that case, the plaintiffs sued under Section

14(e) of the Securities Exchange Act, alleging that the company making a tender offer had

omitted material information about its financial condition. Id. The court held that it was quite

evident that the statutory scheme does not require financials to be provided in a case where

cash is to be exchanged for all shares. Id.

Just like in those cases, Tenets shareholders here stand to receive cash as compensation

in the proposed merger (should it be accepted by the Tenet Board and approved by the

shareholders), which renders the proper valuation of CHS stock irrelevant to Tenet shareholders.

Thus, the allegations in the complaint are insufficient to support a claim that a reasonable Tenet

shareholder would consider the judgment calls of physicians important in deciding how to vote

for the Tenet Board in the proxy contest. For this reason, Counts I and II of the complaint must

be dismissed.



16/31

DAL:798618.1

10

B. Tenets Section 10(b) Claim Is Mooted by the All-Cash Offer.Tenets lone claim under Section 10(b) is moot now that CHSs offer is all cash. Tenets

Section 10(b) claim is premised on the fact that CHSs price for Tenet included CHS stock,

which purportedly had been artificially inflated on account of certain non-disclosures. (Compl.

200; see also Compl. 201 (Tenet and its shareholders have relied upon, and will continue to

rely upon, the artificially inflated market price of CHS stock when determining whether to vote

to elect a slate of directors at Tenets next annual meeting, which slate of directors would vote to

approve a transaction by which CHS would acquire Tenet and Tenets shareholders would

acquire artificially inflated CHS stock.).)

CHS will now pay all cash, with no CHS stock component for Tenets shares. Therefore,

the relief sought by Tenet corrective disclosures regarding the value of CHSs stock has no

effect and is nonsensical in the current proxy contest:

ifTenet shareholders elect the new, independent nominees in November after all

the bad things Tenet has said about CHS and its doctors; and

ifthe newly elected Tenet directors approve an all-cash offer from CHS;

then why would those same Tenet shareholders care one iota about doctor

practices at CHS hospitals?

Where, as here, no order of the court can affect the rights of the parties with regard to the

requested relief, the claims must be dismissed as moot. Harris v. City of Houston, 151 F.3d

186, 189 (5th Cir. 1998) (citations omitted).



17/31

DAL:798618.1

11

II. AS AN INDEPENDENT GROUND, TENETS CLAIMS FAIL BECAUSE THEYARE NOT SEEKING THE DISCLOSURE OF FACTS.

Tenets claims must be dismissed for the additional and independent reason that the

disclosures Tenet is seeking to compel CHS to make are not of facts, but rather of its own self-

serving opinions as to proper and improper medical decisions.

A. Section 14(a) Does Not Require CHS to Disclose Tenets Self-ServingAllegations or to Speculate About Uncharged Misconduct or Potential

Liability.

To state a claim under Rule 14a-9, a plaintiff must adequately allege that material facts

were misstated or omitted from the proxy solicitation materials. And yet at its core, what Tenet

alleges CHS failed to disclose are not facts at all; they are just Tenets litigation theory. Guesses

about what financial impact and potential liability may occur in the future are not facts, and Rule

14a-9 does not require companies to disclose such information or confess to speculative and

uncharged misconduct. In our system, Defendants have a right to trialsbefore we convict and

sentence.

Tenet claims that CHS must disclose the contents of hospital admission policies, its

patient admission rate and observation rate, and how its admissions practices compare to those of

its competitors. Tenet concedes, however, that much or all of that information is already

publicly available. For example, Tenet alleges that CHS policy governing the decision to admit

patients is contained in the Blue Book, which Tenet alleges is publicly available. (Compl. 10

(CHS patient admission criteria called the Blue Book is publicly available.)

(emphasis added).) Lastly, Tenet asserts that statistics regarding CHS hospital admissions and

comparison statistics for non-CHS hospitals are also publicly available. (See id. n. 5 (The

observation data set forth in this complaint were compiled through Avaleres analysis, which,

again, used onlypublicly available data.) (emphasis added).)



18/31

DAL:798618.1

12

In fact, Tenet states in footnote 2 of the complaint that [t]he information set forth in this

complaint is based on public information relating to Medicare patients alone. (See Compl. n.

2) (emphasis added).) Because Tenet already possesses all of the relevant facts underlying

CHSs admissions policies and practices, Tenet can only be asking the Court to order CHS to

disclose the untested and unproven conclusions Tenet has drawn from those facts. According to

Tenet, CHS must accuse itself of maintaining an admission policy and billing practices that

perpetrate an unscrupulous and illegal fraud upon the federal government, numerous state

governments, private insurances companies, and patients (Compl. 1) by obtaining higher and

unwarranted payments. (Compl. 3.) Simply put, that is not what Congress intended to be the

purpose of Section 14(a) or Section 10(b).

Another federal court analyzed a similar allegation in Amalgamated Clothing & Textile

Workers Union v. J.P. Stevens & Co., 475 F. Supp. 328 (S.D.N.Y. 1979) (vacated as moot).

There the plaintiff alleged that Section 14(a) requires a corporation to disclose, in connection

with the election of directors, an alleged corporate policy to violate the federal labor laws. In

rejecting that claim, the court held that the proxy rules cannot be reasonably construed to

require such self-accusation of illegal intentions. Id. at 331. This makes sense. As the court in

Amalgamated concluded, interpreting the proxy rules to require self-accusation of illegal

intentions would make a silly, unworkable rule. It would not promote increased disclosure, but

would serve only to support vexatious litigation and abusive discovery. Id. at 332.

Tenet also alleges that as a result of its admission policies, CHS may well be subject to

liability and damages. (Compl. 4.) But it fails to identify any actual or even threatened

litigation that CHS had an obligation to disclose in connection with the proxy contest. Instead,

Tenet asserts that CHS will have to disclose liability that may arise in the future as a result of the



19/31

DAL:798618.1

13

speculative conclusions that Tenet and its paid consultants have drawn after analyzing publicly

available information about the judgments reached by attending physicians at CHS hospitals.

For example, Tenet speculates that the likelihood of CHSs practices surviving undetected for

several more months is remote because the Department of Justice and Medicare auditors have

devoted increased attention to investigating, auditing, and prosecuting hospitals that are

improperly billing outpatient observation care as inpatient admissions. (Compl. 26.) This is a

curious claim. Tenet makes dramatic allegations that will attract regulators and subpoenas and

then concludes that CHS must now disclose that it will be found liable in all such investigations.

Conjecture does not remotely satisfy the pleading requirements of Twombly. As the Third

Circuit has stated, [w]ide authority establishes that the mere possibility of litigation is not a

material fact requiring disclosure under Section 14(a). Gen. Elec. by Levit v. Cathcart, 980 F.2d

927, 935-36 (3d Cir. 1992); see also Prettner v. Aston, 339 F. Supp. 273, 287 (D. Del. 1972)

(After disclosure of pending or threatened legal proceeding [a]ny statement at that point

regarding the possibility of other proceedings would have been wholly speculative and was not

required.)

Further, as Tenet acknowledges, CHS has disclosed in SEC filings the fact that two

governmental agencies have requested documents related to the admission criteria and billing

practices of CHSs affiliates. (Compl. 114.) In addition, on April 15, 2011, CHS disclosed

that it received a third document subpoena related to this subject. (Appendix 183-185.) CHS has

no obligation or ability to predict the outcome of these inquiries. Nor does it have a duty to

accuse itself of wrongdoing it has not been charged with, because the outcome of [these] legal

proceedings is inevitably uncertain. Ballan v. Winfred Am. Educ. Corp., 720 F. Supp 241, 248



20/31

DAL:798618.1

14

(E.D.N.Y. 1989) (holding that defendant that had disclosed inquiries from a government agency

had no duty to disclose the likelihood of a potential government indictment).

In sum, the SECs proxy disclosure rules only require the disclosure of material facts

not another partys characterization of those facts or conjecture about what liability may result in

the future. Thus, Tenets attempt to compel CHS to confess guilt to uncharged misconduct or to

accuse itself of illegal policies should be rejected, and Counts I and II must be dismissed.

GAF Corp. v. Heyman, 724 F.2d 727, 739 (2d Cir. 1983), quoting Amalgamated, 475 F. Supp. at

331-32.

B.

Defendants Statements Are Neither Misstatements Nor OmissionsActionable Under Rule 10b-5.

The essence of Tenets Section 10(b) and Rule 10b-5 claim is that CHS must disclose its

[alleged] practice of systematically admitting, rather that observing, patients in CHS hospitals for

financial, rather than clinical, purposes a practice that Tenet asserts served to overstate

[CHSs] growth statistics, revenues, and profits, and has created a substantial undisclosed

financial and legal liability. (Compl. 1.)5 Fatal to Tenets claim, however, is that what Tenet

asks CHS to disclose is not a fact under federal securities law, but rather the vigorously

disputed litigation theory Tenet trots out here. Tenet is a corporate rival, and its unproven and

unsubstantiated view is based on its analysis and that of its paid and anonymous consultants (the

lone exception being Avalaire, which offers no definite conclusion). Just as CHS is not

obligated to disclose Tenets theories under Section 14(a), CHS is likewise not obligated to make

such an unfounded disclosure under Section 10(b).

5See also, e.g., Compl. at 6 (Tenet brings this action to compel CHS to disclose fully its admissions practicesand the financial and legal risks inherent in them.).



21/31

DAL:798618.1

15

It is well settled that a Rule 10b-5 claim must allege a misstatement or omission of a

materialfact. Hundahl v. United Benefit Life Ins. Co., 465 F. Supp. 1349, 1357, 1364-66 (N.D.

Tex. 1979) (emphasis added) (finding there can be no liability under 10b-5 merely for failing to

draw certain negative conclusions or make derogatory predictions);Ballan, 720 F. Supp. at 248

(Rule 10b-5 speaks of omissions to state a material fact necessary to make the statements

made not misleading. Thus, it is only facts that an issuer of securities and its officers must

disclose.). Id. So long as material facts have been disclosed or are already known in the

marketplace, a securities issuer has no obligation to characterize those facts with pejorative

nouns and adjectives or to verbalize all adverse inferences expressly. Klamberg v. Roth, 473

F. Supp. 544, 551-52 (S.D.N.Y. 1979) (citations omitted). This legal doctrine is no less true with

respect to the derogatory labeling or characterization of managements motives, seeHundahl,

465 F. Supp. at 1365 (10b-5 allegations that would require management to [negatively] label its

decisions are not cognizable under federal law), or to speculation regarding the plausibility or

likelihood of future liabilities. Ballan, 720 F. Supp. at 249 (finding 10b-5 does not require a

companys management to confess guilt to uncharged crimes, or to accuse itself of antisocial or

illegal policies) (citations omitted).

As discussed in detail above, the factual information regarding the professional

judgments by attending physicians at CHS hospitals on whether to admit is publicly available

and cited throughout the complaint. CHS has no obligation to confess falsely to alleged fraud or

other wrongdoing simply because Tenet has accused it of such conduct in the complaint. See id.

(noting that requiring the type of disclosures requested by Plaintiff would not promote increased

disclosure, but would serve only to support vexatious litigation and abusive discovery.) (citation

omitted).



22/31

DAL:798618.1

16

Tenets Rule 10b-5 claim fares no better when the allegations are characterized as

misstatements rather than omissions of fact. CHS has affirmatively represented to Tenet and the

public that a CHS-Tenet merger would benefit patients by improv[ing the] quality of care and

benefit payers and employers by providing cost-efficient healthcare services. (Compl. 2.)

Further, CHS has claimed there is significant synergy potential in its proposed acquisition of

Tenet. (Id.) But these generalized positive statements are simply not actionable as a matter of

law under federal securities law. See Rosenzweig v. Azurix Corp., et al., 332 F.3d 854, 869 (5th

Cir. 2003) (The generalized, positive statements about the companys competitive strengths,

experienced management, and future prospects are not actionable because they are immaterial,

and are certainly not specific enough to perpetrate a fraud on the market.) (quoting Raab v.

Gen. Physics Corp., 4 F.3d 286, 290 (4th Cir. 1993)); see alsoAbrams v. Baker Hughes, Inc.,

292 F.3d 424, 433 (5th Cir. 2002) ([A]s long as public statements are reasonably consistent with

reasonably available data, corporate officials need not present an overly gloomy or cautious

picture of the companys current performance.). CHSs generalized, positive statements

regarding the potential benefits of a CHS-Tenet merger are not the sort of definitive statements

that could reasonably mislead the public and, thus, are not actionable under the federal securities

law.

III. TENET DOES NOT HAVE STANDING TO BRING A SECURITIES CLAIMAGAINST CHS.

A. Tenet Does Not Have Standing to Seek Injunctive Relief Under Section 10(b).Recognizing that securities fraud claims present[] a danger of vexatiousness different in

degree and in kind from that which accompanies litigation in general, the U.S. Supreme Court

held that only apurchaser or seller of securities has standing to bring a private damages action

under Section 10(b) of the Exchange Act. Blue Chip Stamps v. Manor Drug Stores, 421 U.S.



23/31

DAL:798618.1

17

723, 739-50 (1975). The major policy concern underlying this rule is that, in the securities

context, complaints that are very unlikely to succeed on the merits may still have significant

settlement value to plaintiffs. Id. While some courts have applied the same standing

requirements in private actions for injunctive relief, the Fifth Circuit has recognized narrow and

limited exceptions, which do not apply here.

First, the Fifth Circuit recognizes that government entities, such as the SEC, need not be

purchasers or sellers to enjoin parties from violating the securities laws. See, e.g., SEC v. Gann,

565 F.3d 932 (5th Cir. 2009). Obviously, this exception does not apply to Tenet, a private

corporation. Second, the Fifth Circuit also recognizes that corporations have standing to sue to

prevent manipulative schemes by majority shareholders to artificially depress stock prices. See

Davis v. Davis, 526 F.2d 1286, 1290 (5th Cir. 1976);Hundahl, 465 F. Supp. at 1359. Again, this

exception does not apply since CHS is not the majority shareholder of Tenet and Tenet has not

alleged that CHS is attempting to artificially depress Tenets stock price.6

Furthermore, in the situations where it has been specifically addressed, courts have held

that it is inappropriate for a target corporation to bring an action on behalf of its shareholders for

injunctive relief under Section 10(b) against an acquiring entity. See, e.g., John Labatt Ltd. v.

Onex Corp, 890 F. Supp. 235, 247 (S.D.N.Y. 1995). The rationale of allowing a corporation

vicarious standing to sue for injunctions an additional means of disinterested protection of

the market place and of the stockholders best interests is absent where self-interested

management of a target corporation attempt to prevent a merger. GAF Corp. v. Milstein, 324 F.

6 Other Circuits, including the Fourth Circuit in the leading caseAdvanced Res. Intl., Inc. v. Tri-Star Petroleum Co.,4 F.3d 327, 332-33 (4th Cir. 1993), have recognized a third exception to Blue Chips standing requirements, incases where a party claims it would have bought or sold securities but for the deceptive practices. While theFifth Circuit has not addressed the standing of a potential investor or shareholder who would have bought orsold but for the actions of the defendants, this cannot apply to Tenet itself and, therefore cannot serve as a basisfor standing here.



24/31

DAL:798618.1

18

Supp. 1062, 1072-73 (S.D.N.Y.), affd in relevant part, 453 F.2d 709, 721-22 (2d Cir. 1971),

cert. denied, 406 U.S. 910 (1972). Where parties are fighting for control and the corporations

own interests are not at stake, no hearing is needed to invoke the therapeutic rule that a conflict

of interest will not be sanctioned by according to the management a standing to sue under Rule

10b-5. Id. Holding otherwise would provide entrenched management with an improper

weapon with which to thwart legitimate takeover attempts. Labatt, 890 F. Supp. at 247. This is

precisely the situation presented here: Tenets management and Board have brought this suit to

protect themselves, not Tenets shareholders or market participants generally. Because Tenet has

not suffered and will not suffer any injury as a result of the alleged misstatements or omissions,

Tenet lacks standing to bring this claim and it must be dismissed.

B. Section 14(a) Can Be Used Only by Stockholders With Voting Rights.Tenet, independent of its shareholders, has sued CHS for alleged violations of Section

14(a). But the Fifth Circuit has interpreted Section 14(a) as only protecting shareholders with

voting rights. 7547 Corp. v. Parker & Parsley Dev. Partners, L.P., 38 F.3d 211, 229-31 (5th Cir.

1994) (We view section 14(a) as protecting only interest-holders with voting rights.);Morris v.

Bush, No. 98-CV-2452-G, 1999 WL 417928, at *2 (N.D. Tex. June 22, 1999) ([T]he defendants

are correct in arguing that 14(a) of the Exchange Act only protects interest-holders with voting

rights and that a person who is not entitled to vote lacks standing to maintain an action under

14(a) . . . .). Private causes of action under Section 14(a) are intended to protect the voting

process for stockholders; they are not intended to open a Pandoras box by extending [the] right

[to sue] to any person potentially injured by a proxy statement . . . . 7547 Corp., 38 F.3d at 230

(holding that limited partners without voting rights lacked standing under Section 14(a)). While

the court in Parkerdid not directly address whether corporations that are not stockholders may

nevertheless bring suit under Section 14(a) if they are the target of an acquisition, cases in other



25/31

DAL:798618.1

19

jurisdictions have held they may not. See, e.g., Diceon Elecs., Inc. v. Calvary Partners, L.P.,

772 F. Supp. 859, 868-69 (D. Del. 1991) (concluding that a corporation lacks standing to sue

for damages under 14(a)).7 Consequently, Tenet does not have standing to bring any claims

under Section 14(a).

IV. THE ALLEGED MISREPRESENTATIONS ARE IMMATERIAL UNDERSECTION 14(A).

To support its claims under Section 14(a), Tenet alleges that CHS made a number of

statements in its proxy solicitation materials that were false and misleading because they failed to

disclose allegedly improper admission practices. (Compl. 127-181.) But the alleged

misstatements and omissions are only actionable if they are material to the subject of the proxy

contest at issue: here, the election of directors to the Tenet Board. For purposes of Section 14(a),

a fact is material if there is a substantial likelihood that a reasonable shareholder would consider

it important in deciding how to vote. TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449

(1976); see also In re Affiliated Comp. Serv. Derivative Litig., 540 F. Supp. 2d 695, 703 (N.D.

Tex. 2007) (J. Lynn).

CHS has not made a tender offer to the Tenet shareholders, and Tenet shareholders are

not being asked to vote on a proposed merger with CHS at the annual meeting in November. At

that meeting, Tenet shareholders will vote only on the election of directors to the Tenet Board.

CHS provided a summary of the work and education experience of each of its candidates and

confirmed that the nominees have no pre-existing relationship with CHS and no obligation or

agreement to support the proposed merger with CHS. (Appendix 167-175.) None of the

7But see Salomon Bros. Mun. Partners Fund, Inc. v. Thornton, 410 F. Supp. 2d 330, 334 (S.D.N.Y. 2006) (statingthat the Second Circuit in Studebaker Corp. v. Gittlin, 360 F.2d 692, 695 (2d Cir. 1966), held that a corporationcould bring suit under Section 14(a)). The court in Thornton, however, noted that Studebakermay no longer bevalid after the Supreme Courts decision in Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083 (1991).



26/31

DAL:798618.1

20

information relating to the proposed directors is being challenged by Tenet. And there is no

allegation in the complaint, or elsewhere, that any of the proposed Board candidates are anything

other than highly qualified and independent, or that any false statements or omissions have been

made by CHS about them.

Materiality depends on context. Material statements in proxy materials during the

election of directors are those that concern nominees themselves. In re Browning-Ferris Indus.,

Inc. Sholder Derivative Litig., 830 F. Supp. 361, 367 (S.D. Tex. 1993) (citing Gen. Electric Co.

by Levit v. Cathcart, 980 F.2d 927, 937 (3d Cir. 1992)). Yet Tenets complaint is focused far

away. Indeed, the complaint never identifies or discusses the independent nominees to Tenets

Board. Instead, Tenet focuses on judgment calls by physicians, as reflected by suspect data

sampling and comparison.

But a party nominating directors does not have to disclose allegations of wrongdoing

against itself in proxy materials. For example, inIn re Browning-Ferris,the court dismissed the

claim that environmental lawsuits and proceedings pending against the nominating corporation

should have been disclosed in proxy solicitations issued in connection with the election of

directors. 830 F. Supp. at 367. The court stated that such disclosures might be relevant if the

allegations involved the director nominees directly. Id. But because there was no allegation of

any relationship between the pending lawsuits or proceedings and the director nominees, the

court held that they were not material omissions under Section 14(a). Id. (citing US v. Matthews,

787 F.2d 38, 48 (2d Cir. 1986)). The Browning-Ferris court relied on General Elec., a Third

Circuit decision holding that information about alleged wrongdoing need only be disclosed if it

involved the nominated directors, not the company putting the directors forward for election.

980 F.2d at 937. Likewise, inBolger v. First State Fin. Servs., a federal district court held that a



27/31

DAL:798618.1

21

company has no duty to disclose to shareholders unsubstantiated allegations or legal theories

as to how a given transaction violated the law in a proxy statement filed in connection with the

election of directors. 759 F. Supp. 182, 194 (D.N.J. 1991) (citations omitted). Thus, the key

issue in proxy materials for the election of directors is the nominees themselves. In re

Browning-Ferris Indus., Inc., 830 F. Supp. at 367.8

In sum, CHS has no duty to disclose information about its own business operations or

performance, and Tenet has failed to identify any misstatement or omission relating to the

nominated directors who will be voted on at Tenets 2011 annual meeting. As a result, Counts I

and II of the complaint should be dismissed.

V. TENETS 10(B) CLAIM MUST BE DISMISSED BECAUSE IT HAS NOTADEQUATELY ALLEGED SCIENTER.

To state a valid claim for securities fraud under Section 10(b) and Rule 10b-5, a plaintiff

must allege that any misstatement or omission of material fact was made with scienter.

Flaherty & Crumrine, 565 F.3d at 207. Tenets generalized allegations of scienter are

insufficient to withstand a motion to dismiss because Tenet fails to support them with specific

facts that would suggest the alleged misstatements or omissions were made with knowledge of,

or reckless disregard for, the truth. To satisfy the pleading requirement for a Rule 10b-5 claim of

fraud, a plaintiff must allege that a defendant acted with the intent to deceive, manipulate, or

defraud. SEC v. Gann, 565 F.3d 932, 936 (5th Cir. 2009) (citingNathanson v. Zonagen Inc., 267

F.3d 400, 408 (5th Cir. 2001)). The Fifth Circuit has held that a Rule 10b-5 claim, under Rule

8 This conclusion is further supported by Schedule 14A of Regulation S-K, 17 C.F.R. 229.10 et seq. Schedule14A is persuasive authority as to the required scope of disclosure in proxy solicitation materials because itprovides the SECs expert view of the types of information most likely to be matters of concern to shareholdersin a proxy contest. In re Browning-Ferris Indus., Inc., 830 F. Supp. at 366 (quoting General Elec., 980 F.2d at937) (internal citations and quotation marks omitted). And nowhere does Schedule 14A say that a partynominating directors for election must disclose any accusations of wrongdoing that have been leveled against itor that may be asserted in future litigation.



28/31

DAL:798618.1

22

9(b), cannot be satisfied with a general averment that defendants possessed fraudulent intent with

respect to any alleged misstatement or omission. Melder v. Morris, 27 F.3d 1097, 1102 (5th Cir.

1994) (citingBruce H. Tuchman, et al. v. DSC Commcns Corp. et al., 14 F.3d 1061, 1068 (5th

Cir. 1994)). Rather, a plaintiff[] must set forth specific facts supporting an inference of fraud.

Id.

This requirement is consistent with the Private Securities Litigation Reform Act (the

PSLRA), which provides that a plaintiff must state with particularity facts giving rise to a

strong inference that the defendant acted with the requisite state of mind. 15 U.S.C. 78u-

4(b)(2) (emphasis added); see alsoNathanson, 267 F.3d at 406-8. Mere allegations of a

defendants possible motive and opportunity to commit fraud are, by themselves, insufficient to

satisfy the particularity requirement for alleging scienter under Rule 10b-5. Goldstein v. MCI

WorldCom, 340 F.3d 238, 246 (5th Cir. 2003) (noting that allegations of motive and

opportunity, without more, will not fulfill the pleading requirements of the PSLRA.) (quoting

Nathanson, 267 F.3d at 412); Abrams, 292 F.3d at 430 (5th Cir. 2002) (citing Nathanson, 267

F.3d at 410-412); see also Magruder v. Halliburton Co., and Lesar, No. 3:05-CV-1156-M, 2009

WL 854656, at *8 (N.D. Tex. Mar. 31, 2009) (noting that [c]onclusory allegations of scienter

will not survive) (citing Plotkin et.al., v. IP Axess Inc., et.al., 407 F.3d 690, 696 (5th Cir. 2005).

Despite this clear legal mandate, Tenet only alleges in conclusory fashion that

Defendants ... knew or recklessly disregarded that their statements and omissions made to Tenet

and its shareholders were false and misleading. (Compl. 200.) Tenets only support for this

charge is Defendants alleged motive to inflate the market price of CHS stock in order to make

CHSs offer price for Tenet (with consideration consisting partially of CHS stock) appear more

valuable to Tenet and its shareholders. (Id.) So not only has Tenet failed to allege any specific



29/31

DAL:798618.1

23

facts supporting an inference of fraud, Melder, 27 F.3d at 1102 (emphasis in original), it has

compounded that failure by relying on mere allegations of Defendants possible motive to

inflate the market price of CHS stock, Goldstein, 340 F.3d at 246. Tenets allegations of

scienterare thus contrary to the plain requirements of Rule 9(b) and the PSLRA, and therefore

are inadequate to sustain a Rule 10b-5 claim. For this additional and independent reason, Count

III of the complaint should be dismissed.

VI. TENET HAS FAILED TO STATE A CLAIM FOR CONTROL-PERSONLIABILITY.

Section 20(a) of the Securities Exchange Act imposes secondary liability on those who

control primary violators of the Act. 15 U.S.C. 78t(a). It is well established that a plaintiff

cannot state a claim for Section 20(a) control person liability without adequately pleading an

underlying violation of the Exchange Act to serve as its basis. Control person liability is

secondary only and cannot exist in the absence of a primary violation. Southland Sec. Corp. v.

INSpire Ins. Solutions, Inc., 365 F.3d 353, 383 (5th Cir. 2004) (citation omitted). Here, because

Tenets claims for primary violations were not adequately pleaded, Count IV of the complaint

should be dismissed. Id.



30/31

DAL:798618.1

24

CONCLUSION

For the reasons stated above, the Defendants respectfully ask the Court to dismiss the

complaint for lack of subject-matter jurisdiction or, in the alternative, for failure to adequately

allege the asserted claims.

Dated: April 19, 2011/s/ Gerald C. ConleyDennis N. Ryan (Bar No. 17470700)Gerald C. Conley (Bar. No. 04664200)ANDREWS KURTH LLP1717 Main StreetSuite 3700Dallas, Texas 75201Telephone: (214) 659-4400Facsimile: (214) 659-4401

Peter Duffy Doyle (Pro Hac Vice pending)Lee Ann Stevenson (Pro Hac Vice pending)KIRKLAND & ELLIS LLPCitigroup Center601 Lexington AvenueNew York, New York 10022Telephone: (212) 446-4800Facsimile: (212) 446-4900

Attorneys for Defendants



31/31

CERTIFICATE OF SERVICE

I hereby certify that on April 19, 2011, I electronically submitted the foregoing document

with the clerk of the court for the U.S. District Court, Northern District of Texas, using theelectronic case files system of the court. The electronic case files system sent a Notice of

Electronic Filing to the following individuals who have consented in writing to accept thisNotice as service of this document by Electronic means:

(I also sent hard copies as follows.)

Robert C. Walters/Robert B. Krakow VIA HAND DELIVERYGibson, Dunn & Crutcher LLP

2100 McKinney Avenue, Suite 1100

Dallas, Texas 75201-6912

Adam H. Offenhartz VIA CMRRR 7160 9845 9357 1387

Brian M. LutzGibson, Dunn & Crutcher LLP

200 Park Avenue

New York, New York 10166-00193

/s/ Gerald C. Conley


Date post:	08-Apr-2018
Category:	Documents
Upload:	dealbook
View:	222 times
Download:	0 times

Community Health's Response to Tenet Lawsuit

Documents