Norfolk Appellate Brief v25 FINAL (CORRECTED) · 16-6059 IN THE UNITED STATES COURT OF APPEALS FOR...

16-6059

IN THE UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT

__________________

NORFOLK COUNTY RETIREMENT SYSTEM, individually and on behalf of all others similarly situated,

Plaintiff,

NEW YORK CITY EMPLOYEES’ RETIREMENT SYSTEM, TEACHERS’ RETIREMENT SYSTEM

OF THE CITY OF NEW YORK, NEW YORK CITY FIRE DEPARTMENT PENSION FUND, NEW

YORK CITY POLICE PENSION FUND, AND TEACHERS’ RETIREMENT SYSTEM OF THE CITY

OF NEW YORK VARIABLE ANNUITY PROGRAM, Plaintiffs-Appellants,

v.

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

__________________

APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE MIDDLE DISTRICT OF TENNESSEE

No. 11-cv-00433 __________________

BRIEF OF DEFENDANTS-APPELLEES __________________

Steven A. Riley Milton S. McGee, III RILEY, WARNOCK & JACOBSON, PLC 1906 West End Avenue Nashville, TN 37203 Telephone: (615) 320-3700 Facsimile (615) 320-3737 [email protected]

Gary A. Orseck Michael L. Waldman Matthew M. Madden Daniel N. Lerman ROBBINS, RUSSELL, ENGLERT, ORSECK, UNTEREINER & SAUBER LLP 1801 K Street, N.W., Suite 411L Washington, DC 20006 Telephone: (202) 775-4500 Facsimile: (202) 775-4510 [email protected]

Case: 16-6059 Document: 41 Filed: 12/07/2016 Page: 1

CORPORATE DISCLOSURE STATEMENT

Pursuant to Sixth Circuit Rule 26.1, Appellees Community Health Systems,

Inc., Wayne T. Smith, and W. Larry Cash, make the following disclosure:

Appellee Community Health Systems, Inc. is a publicly held corporation. It

does not have a corporate parent and no publicly traded company currently owns

10% or more of its stock. Appellees Wayne T. Smith and W. Larry Cash are

individuals.

No publicly owned corporation, not a party to the appeal, has a financial

interest in the outcome of this litigation.


ii

TABLE OF CONTENTS

Page

TABLE OF AUTHORITIES ................................................................................... iv

STATEMENT REGARDING ORAL ARGUMENT ............................................... 1

PRELIMINARY STATEMENT ............................................................................... 1

STATEMENT OF THE CASE .................................................................................. 3

A. Background .................................................................................................. 3

1. Admission Of Patients Through The Emergency Department ............ 3

2. The Tenet Complaint And Government Investigation ......................... 4

B. The Allegations In The Amended Complaint ............................................. 6

1. Plaintiff’s Admission-Criteria Allegations .......................................... 6

2. Plaintiff’s Misstatement Allegations .................................................... 8

(a) Statements made before the Tenet Complaint. .............................. 8

(b) Statements made after The Tenet Complaint. ............................... 8

C. The District Court’s Dismissal Of The Amended Complaint ..................... 9

SUMMARY OF ARGUMENT ............................................................................... 12

ARGUMENT ........................................................................................................... 17

I. PLAINTIFF FAILED TO PLEAD LOSS CAUSATION WITH RESPECT TO THE CLAIM BASED UPON STATEMENTS MADE BEFORE THE TENET COMPLAINT ............................................................ 18

A. The District Court Correctly Held That The Tenet Complaint Is Not A Corrective Disclosure Because It Did Not “Reveal The Truth” Of Any Prior Misstatement ............................................................................. 19

1. The Tenet Complaint Merely Alleged Fraud ..................................... 19

2. The District Court Did Not Alter The Pleading Standard .................. 23


TABLE OF CONTENTS—Cont’d Page

iii

3. The District Court Did Not “Ignore” Context Or “Overlook” Post-Tenet Corrective Disclosures ..................................................... 30

B. The Tenet Complaint Is Not A Corrective Disclosure Because It Disclosed Already-Public Information ...................................................... 39

1. The Tenet Complaint Repackaged Already-Public Information ....... 40

2. The Same Allegations Against CHSI Were Made In Another Lawsuit Before The Tenet Complaint ................................................ 42

II. PLAINTIFF FAILED TO PLEAD LOSS CAUSATION WITH RESPECT TO THE STATEMENTS MADE AFTER THE TENET COMPLAINT ................................................................................................... 45

III. PLAINTIFF DID NOT (AND CANNOT) PLEAD LOSS CAUSATION UNDER A “MATERIALIZATION OF THE RISK” THEORY ..................... 48

IV. THE TWO-YEAR STATUTE OF LIMITATIONS BARS PLAINTIFF’S CLAIM REGARDING STATEMENTS MADE AFTER THE TENET COMPLAINT ............................................................................. 52

A. The Post-April 11 Claim Does Not “Relate Back” to the Filing of the Initial Complaint .................................................................................. 52

B. The Two-Year Statute of Limitations Has Expired—And Plaintiff Did Not Argue Otherwise Below .............................................................. 55

V. THE DISTRICT COURT DID NOT ABUSE ITS DISCRETION BY DISMISSING THE COMPLAINT WITH PREJUDICE ................................. 57

CONCLUSION ........................................................................................................ 58

ADDENDUM .......................................................................................................... 60


iv

TABLE OF AUTHORITIES

Page(s) Cases

Alexander v. United States, 103 F.3d 128 (6th Cir. 1996) ................................................................................ 49

Bonanno v. Cellular Biomedicine Grp., Inc., No. 15-01795, 2016 WL 2937483 (N.D. Cal. May 20, 2016) ............................. 21

Bovee v. Coopers & Lybrand C.P.A., 272 F.3d 356 (6th Cir. 2001) ................................................................................ 51

Brown v. Ambow Educ. Holding Ltd., No. 12-5062, 2014 WL 523166 (C.D. Cal. Feb. 6, 2014) .................................... 21

Caplin v. Trans1, Inc., 973 F. Supp. 2d 596 (E.D.N.C. 2013) ..................................................... 21, 30, 50

Chamberlain v. Reddy Ice Holdings, Inc., 757 F. Supp. 2d 683 (E.D. Mich. 2010) ............................................................... 29

City of Austin Police Ret. Sys. v. ITT Educ. Servs., Inc., 388 F. Supp. 2d 932 (S.D. Ind. 2005) .................................................................. 21

Cliff v. Hyman Lippitt, P.C., No. 05-72221, 2005 WL 3556201 (E.D. Mich. Dec. 29, 2005) .......................... 49

Cliff v. Payco Gen. Am. Credits, Inc., 363 F.3d 1113 (11th Cir. 2004) ............................................................................ 54

CNH Am. LLC v. UAW, 645 F.3d 785 (6th Cir. 2011) ................................................................................ 57

Curry v. Yelp, Inc., No. 14-03547, 2015 WL 1849037 (N.D. Cal. April 21, 2015) ............................ 21

Dura Pharm., Inc. v. Broudo, 544 U.S. 336 (2005) .......................................................................... 17, 19, 30, 32

Durand v. Hanover Ins. Grp., Inc., 806 F.3d 367 (6th Cir. 2015) ................................................................................ 55


TABLE OF AUTHORITIES—Cont’d Page(s)

v

Durham v. Whitney Info. Network, Inc., No. 06-00687, 2009 WL 3783375 (M.D. Fla. Nov. 10, 2009) ............................ 21

FindWhat Inv’r Grp. v. FindWhat.com, 658 F.3d 1282 (11th Cir. 2011) ............................................................... 13, 17, 19

Guyan Int’l, Inc. v. Prof’l Benefits Adm’rs, Inc., 689 F.3d 793 (6th Cir. 2012) ......................................................................... 31, 48

Halliburton Co. v. Erica P. John Fund, Inc., 134 S. Ct. 2398 (2014) ......................................................................................... 44

Hancock v. Urban Outfitters, Inc., 830 F.3d 511 (D.C. Cir. 2016) ............................................................................. 57

Hayward v. Cleveland Clinic Found., 759 F.3d 601 (6th Cir. 2014) ................................................................................ 56

In re Almost Family, Inc. Sec. Litig., No. 10-520, 2012 WL 443461 (W.D. Ky. Feb. 10, 2012) ........................... passim

In re America Serv. Grp., Inc., No. 06-0323, 2009 WL 1348163 (M.D. Tenn. March 31, 2009) ............ 26, 27, 29

In re Avista Corp. Sec. Litig., 415 F. Supp. 2d 1214 (E.D. Wash. 2005) ............................................................ 21

In re Citigroup, Inc. Sec. Litig., 330 F. Supp. 2d 367 (S.D.N.Y. 2004) .................................................................... 7

In re Daou Sys., Inc., 411 F.3d 1006 (9th Cir. 2005) ....................................................................... 26, 38

In re Dell Inc. Sec. Litig., 591 F. Supp. 2d 877 (W.D. Tex. 2008) ............................................. 21, 38, 48, 49

In re GeoPharma, Inc. Sec. Litig., 399 F. Supp. 2d 432 (S.D.N.Y. 2005) .................................................................. 26



vi

In re Hansen Nat. Corp. Sec. Litig., 527 F. Supp. 2d 1142 (C.D. Cal. 2007) ................................................................ 21

In re Herbalife, Ltd. Sec. Litig., No. 14-2850, 2015 WL 1245191 (C.D. Cal. March 16, 2015) ..................... 21, 45

In re IPO Sec. Litig., 399 F. Supp. 2d 298 (S.D.N.Y. 2005) .................................................................. 51

In re IPO Sec. Litig., 544 F. Supp. 2d 277 (S.D.N.Y. 2008) .................................................................. 26

In re KBC Asset Mgmt., 572 F. App’x 356 (6th Cir. 2014) ................................................................. passim

In re Miller Energy Res. Sec. Litig., No. 11-386, 2014 WL 415730 (E.D. Tenn. Feb. 4, 2014) ................................... 29

In re Omnicom Grp., Inc. Sec. Litig., 597 F.3d 501 (2d Cir. 2010) ......................................................................... passim

In re St. Paul Travelers Sec. Litig. II, No. 04-4697, 2007 WL 1589524 (D. Minn. June 1, 2007) .................................. 55

In re Unumprovident Corp. Sec. Litig., 396 F. Supp. 2d 858 (E.D. Tenn. 2005) ............................................................... 29

In re Vivendi Universal, S.A. Sec. Litig., 634 F. Supp. 2d 352 (S.D.N.Y. 2009) .................................................................. 25

In re Williams Sec. Litig., 496 F. Supp. 2d 1195 (N.D. Okla. 2007) ............................................................. 27

Janbay v. Canadian Solar, Inc., No. 10-4430, 2012 WL 1080306 (S.D.N.Y. Mar. 30, 2012) .................. 21, 32, 48

Katyle v. Penn Nat’l Gaming, Inc., 637 F.3d 462 (4th Cir. 2011) ................................................................................ 39



vii

Loos v. Immersion Corp., 762 F.3d 880 (9th Cir. 2014) ......................................................................... 20, 21

Massachusetts Ret. Sys. v. CVS Caremark Corp., 716 F.3d 229 (1st Cir. 2013) ................................................................................ 38

Mauss v. Nuvavsive, Inc., No. 13-2005, 2014 WL 6980441 (S.D. Cal. Dec. 9, 2014) ........................... 21, 50

Merck & Co., Inc. v. Reynolds, 559 U.S. 633 (2010) ............................................................................................. 52

Metzler Inv. GMBH v. Corinthian Colls., Inc., 540 F.3d 1049 (9th Cir. 2008) .............................................................................. 28

Meyer v. Greene, 710 F.3d 1189 (11th Cir. 2013) .................................................................... passim

Ohio Police & Fire Pension Fund v. Standard & Poor’s Fin. Servs. LLC, 700 F.3d 829 (6th Cir. 2012) ......................................................................... 16, 57

Ohio Pub. Emps. Ret. Sys. v. Fed. Home Loan Mortg. Corp., 830 F.3d 376 (6th Cir. 2016) ........................................................................ passim

Oregon Pub. Emp. Ret. Fund v. Apollo Grp. Inc., 774 F.3d 598 (9th Cir. 2014) ................................................................................ 28

Public Emps.’ Ret. Sys. of Miss. v. Amedisys, Inc., 769 F.3d 313 (5th Cir. 2014) ........................................................................ passim

Rose v. Hartford Underwriters Ins. Co., 203 F.3d 417 (6th Cir. 2000) ................................................................................ 58

Salvation Army v. Dep’t of Cmty. Affairs of N.J., 919 F.2d 183 (3d Cir. 1990) ................................................................................. 49

Sapssov v. Health Mgmt. Assocs., Inc., 608 F. App’x 855 (11th Cir. 2015) ............................................................... passim



viii

Sapssov v. Health Mgmt. Assocs., Inc., 22 F. Supp. 3d 1210 (M.D. Fla. 2014) .................................................... 10, 20, 50

United Food & Commercial Workers Union, Local 1099 v. Sw. Ohio Reg’l Transit Auth., 163 F.3d 341 (6th Cir. 1998) ................................................................................ 39

United States ex rel. Bledsoe v. Cmty. Health Sys., Inc., 501 F.3d 493 (6th Cir. 2007) ......................................................................... 16, 53

Weiner v. Klais & Co., 108 F.3d 86 (6th Cir. 1997) .................................................................................. 51

Winslow v. BancorpSouth, Inc., No. 10-463, 2011 WL 7090820 (M.D. Tenn. April 26, 2011) ............................. 29

Yuhasz v. Brush Wellman, Inc., 341 F.3d 559 (6th Cir. 2003) ................................................................................ 57

Zundel v. Holder, 687 F.3d 271 (6th Cir. 2012) ................................................................................ 53

Statute, Regulation, and Regulatory Authority

28 U.S.C. § 1658(b)(1)............................................................................................. 52

3Centers for Medicare and Medicaid Services, Medicare Program: Hospital Outpatient Prospective Payment and Ambulatory Surgical Center Payment Systems and Quality Reporting Programs 78 Fed. Reg. 27,486 (May 10, 2013) ...................................................................... 4

Centers for Medicare and Medicaid Services, Medicare Benefit Policy Manual .................................................................................................................... 4

Other Authorities

Community Health Systems Inc. to Pay $98.15 Million to Resolve False Claims Act Allegations (Aug. 4, 2014) .................................................................. 6



ix

Community Health Systems, Inc., Form 10-K (Dec. 31, 2008) .............................. 51

Community Health Systems, Inc., Form 8-K (April 18, 2011), Ex. 99.1 ................ 41


STATEMENT REGARDING ORAL ARGUMENT

Appellees submit that the appeal can be resolved without oral argument.

PRELIMINARY STATEMENT

Plaintiff alleged two securities-fraud claims in its Amended Complaint,

which the district court correctly dismissed with prejudice. First, Plaintiff alleged

that (a) Defendants—Community Health Systems, Inc. (“CHSI”), CEO Wayne

Smith, and CFO Larry Cash—made material misrepresentations about CHSI’s

business practices, and (b) those statements were revealed to be false when a

competitor, Tenet Healthcare Corporation, filed a lawsuit against CHSI in April

2011 (the “Tenet Complaint”). The district court held that the Tenet Complaint

was not a corrective disclosure, and that Plaintiff therefore failed to allege loss

causation.

Second, Plaintiff alleged that, after the Tenet Complaint, Defendants made a

second set of misrepresentations—this time about the merits of the Tenet

Complaint and the anticipated effect of changing admissions criteria at CHSI-

affiliated hospitals. These statements, Plaintiff alleged, were revealed to be false

when CHSI issued its October 2011 earnings report. The district court held that

Plaintiff’s second claim was barred by the two-year statute of limitations and did

not relate back to Plaintiff’s Initial Complaint.


2

Instead of attacking the trial court’s reasons for granting dismissal or

renewing the arguments it unsuccessfully made below, Plaintiff devotes the bulk of

its brief on appeal to entirely new arguments, and even entirely new factual

allegations. Thus, Plaintiff argued below that there were only two corrective

disclosures; here it argues there were ten. Plaintiff argued below that the October

2011 report corrected statements that Defendants made after the Tenet Complaint

was filed; here it argues that the report corrected statements made before that

filing. Plaintiff argued below that it pleaded loss causation under a corrective-

disclosure theory; here it argues that it could have pleaded loss causation under a

materialization-of-the-risk theory. Plaintiff effectively conceded below that its

second claim, based upon statements made after April 2011, falls outside the

statute of limitations (but relates back to the Initial Complaint); here it argues that

the claim falls within the limitations period. And while Plaintiff failed to ask the

district court for leave to amend, it argues here that this Court should grant it leave

to do so.

This Court should not entertain Plaintiff’s new arguments, which are in any

event unavailing. The Tenet Complaint is not a corrective disclosure because, as

the district court correctly held, mere allegations in a lawsuit cannot “reveal” the

“truth” of any underlying fraud. The additional corrective disclosures invoked by

Plaintiff on appeal do nothing to alter that fact. And the Tenet Complaint also fails


3

for the independent reason that it did not disclose (as a corrective disclosure must)

new information to the market.

The district court also correctly held that Plaintiff could not resurrect its

time-barred second claim, based upon statements made after the Tenet Complaint,

because the Initial Complaint did not provide Defendants with notice of the nature

and scope of that claim. And the October 2011 report, which Plaintiff contends

revealed the truth of the second alleged fraud, is not a corrective disclosure

because it, too, revealed nothing new to the market.

The pleading requirements for loss causation are critical to “ensur[ing] that

the federal securities laws do not become a system of investor insurance that

reimburses investors for any decline in the value of their investments.” Meyer v.

Greene, 710 F.3d 1189, 1196 (11th Cir. 2013) (internal quotation marks omitted).

This Court should affirm the district court’s dismissal of the Amended Complaint.

STATEMENT OF THE CASE

A. Background

1. Admission Of Patients Through The Emergency Department

When an individual arrives at a hospital’s emergency department (“ED”), a

physician must decide whether the person should be (1) admitted as an inpatient,

(2) discharged, or (3) placed under “observation” as an outpatient. Contrary to

Plaintiff’s suggestion (at 8) that observation patients are merely “seen,” and not

given “treatment,” at many hospitals (including all CHSI-affiliated hospitals),


4

inpatients and observation patients are placed on nursing units together and receive

virtually identical attention.

Although the Centers for Medicare and Medicaid Services (“CMS”) has

taken a shifting approach to observation, one factor has remained constant: “[T]he

decision to admit a patient is a complex medical judgment which can be made only

after the physician has considered a number of factors, including the patient’s

medical history and current medical needs [and] the types of facilities available to

inpatients and to outpatients.” CMS, Medicare Benefit Policy Manual, Ch. 1, § 10.

Thus, while CMS offers some limited guidance to providers, it “rel[ies] on the

physician to use his or her clinical judgment and evaluation of the patient’s needs

to make the determination.” 78 Fed. Reg. 27,486, 27,645 (May 10, 2013).

2. The Tenet Complaint And Government Investigation

On April 11, 2011, Tenet Healthcare Corporation sued CHSI in an attempt

to thwart a hostile takeover bid by CHSI. Tenet Complaint, R. 83-3. The Tenet

Complaint—which was dismissed for lack of standing—claimed that CHSI’s stock

price was inflated because CHSI-affiliated hospitals’ admissions policies caused

the hospitals to bill Medicare for inappropriate admissions. On the day the Tenet

Complaint was filed, CHSI’s stock dropped in value. But the available evidence


5

shows that the decline was due to the failed merger, not the allegations made in the

Tenet Complaint.1

In May 2011, less than a month after Tenet filed its complaint, class-action

plaintiffs repackaged the same allegations into their own lawsuit. Plaintiff filed an

Initial Consolidated Class Action Complaint on July 13, 2012 (“Initial Complaint,”

or “IC”) (R. 70), and an Amended Complaint on October 5, 2015 (R. 167,

hereinafter “FAC”).2 The Amended Complaint likewise parrots the Tenet

Complaint, citing it no fewer than eighty times.

Shortly after the Tenet Complaint was filed, the Department of Health and

Human Services’ Office of Inspector General (“OIG”) announced an investigation,

overseen by the Department of Justice, into some ED admissions practices at CHSI

affiliates. The parties resolved the investigation and announced a settlement

payment of $98 million on August 4, 2014. The settlement agreement made clear

that the “claims resolved by [that] agreement are allegations only and there has

1 On December 9, 2010, the day before CHSI announced its proposed acquisition of Tenet, CHSI’s stock closed at $31.64. The stock price rose steadily from there in anticipation of the merger, until it fell suddenly on April 11, 2011, the day the Tenet Complaint was filed. The next day, CHSI resumed trading at $31.48—the same price as immediately before the acquisition announcement. Thus, as the district court observed, “the market reaction” to the Tenet Complaint “was just as likely (if not more likely) due to the proposed takeover [by CHSI] being thwarted” by the filing of the Tenet Complaint. Opinion, R. 248, PageID# 8069. 2 Both filed under seal.


6

been no determination of liability.” DOJ Press Release, Community Health

Systems Inc. to Pay $98.15 Million to Resolve False Claims Act Allegations (Aug.

4, 2014), http://goo.gl/GQ5oO0.

B. The Allegations In The Amended Complaint

Filed in 2015, the Amended Complaint, which is the subject of this appeal,

asserted a claim against all Defendants for violations of Section 10(b) of the

Securities Exchange Act and Rule 10b-5, and a “controlling person” claim against

Defendants Cash and Smith under Section 20(a). As discussed below, the 2012

Initial Complaint had alleged that CHSI made material misstatements before the

Tenet Complaint, and asserted a class period from July 27, 2006, though April 8,

2011 (the Friday before the Tenet Complaint was filed). The Amended Complaint

alleged an additional fraud based on statements made after the Tenet Complaint,

and extended “the class period from April 8 through October 26, 2011” (when

CHSI announced its third-quarter earnings). Appellants’ Br. (“Br.”) 17.

1. Plaintiff’s Admission-Criteria Allegations

Plaintiff alleged that Defendants tried to boost revenues by “aggressive

admission” practices that encouraged hospitals to improperly admit Medicare

patients as inpatients. FAC ¶ 4. One of its chief complaints was that Defendants

developed their own “Blue Book” admission guidelines (titled “CHS Clinical

Guidelines for Inpatient Care”), rather than using an external tool such as InterQual


7

(which could be purchased at considerable expense from a third party), in an effort

to “trigger the medical staff to admit patients who otherwise could have been

placed into observation.” Id. ¶ 26; id. ¶¶ 24-35. The predominant theme of

Plaintiff’s appeal, too, is that “CHS admitted that it used the Blue Book”

(Br. 10)—and that its use of the Blue Book, rather than InterQual, was inherently

suspect (id. at 8-9).

Federal regulations, however, require only that hospitals adopt some

screening criteria to enable staff to review the appropriateness of medical

treatment, not any particular tool. See 42 C.F.R. § 482.30. As Plaintiff

acknowledges, fully 25% of all hospitals in the United States chose not to use

“third-party admissions criteria.” FAC ¶ 27. And the extensive discovery in this

case—which included dozens of depositions and millions of pages of documents

(Br. 18)—produced no evidence that physicians at CHSI-affiliated hospitals

actually admitted patients when they believed it was not medically necessary to do

so. See also In re Citigroup, Inc. Sec. Litig., 330 F. Supp. 2d 367, 377 (S.D.N.Y.

2004) (“The securities laws were not designed to provide an umbrella cause of

action for the review of management practices.”).


8

2. Plaintiff’s Misstatement Allegations

Plaintiff alleged two categories of misrepresentations in the Amended

Complaint. Each set allegedly constituted a separate fraud that was revealed to the

market through separate corrective disclosures.

(a) Statements made before the Tenet Complaint. Plaintiff alleged that,

before Tenet filed its lawsuit on April 11, 2011, Defendants committed fraud by

touting CHSI’s “operating strategies,” “operating efficiencies,” and “growth

strategies.” FAC ¶¶ 8, 268. According to Plaintiff’s theory, those and similar

statements were materially misleading because Defendants failed also to state that

CHSI affiliates used “admissions criteria that were unsustainable and a substantial

Medicare compliance risk.” Id. ¶¶ 8, 268; see id. ¶¶ 268-419. Plaintiff alleged that

those statements were revealed to be misleading when the Tenet Complaint was

filed.

(b) Statements made after The Tenet Complaint. Plaintiff’s second

fraud theory relies on a series of alleged misstatements that Defendants made after

the Tenet Complaint. Specifically, Plaintiff alleged that Defendants falsely stated

that “Tenet’s lawsuit has no merit,” FAC ¶ 438(a), and that use of InterQual rather

than the Blue Book “would not have any impact on CHS’s admissions,” id. ¶ 455.

Those statements, Plaintiff says, were proven false when the Company’s October

26, 2011, earnings report showed a reduction in admissions.


9

C. The District Court’s Dismissal Of The Amended Complaint

On June 16, 2016, Chief Judge Sharp issued a 44-page decision dismissing

the Amended Complaint with prejudice. Opinion, R. 248, PageID# 8031-8074.

With respect to Plaintiff’s first claim, based on statements made before the

Tenet Complaint, the district court found that the Amended Complaint adequately

alleged falsity, materiality, and scienter. The court rejected Defendants’ arguments

that the alleged misstatements are not actionable as a matter of law because

(1) companies have no duty to opine on the legality of their own actions, and (2)

the alleged misstatements are nonactionable “puffery” relating to CHSI’s “business

strategies” and the like.

The court held, however, that Plaintiff failed to allege the loss-causation

element, because the Tenet Complaint is not a “corrective disclosure.” A plaintiff

can allege loss causation, the court explained, “either by alleging (a) the existence

of cause-in-fact on the ground that the market reacted negatively to a corrective

disclosure of the fraud,” or (b) “that the loss was foreseeable and caused by the

materialization of the risk concealed by the fraudulent statement.” Opinion,

R. 248, PageID# 8063 (internal quotation marks omitted). Here, Plaintiff

proceeded exclusively under the first theory, pegging loss causation to “the fact

that, after the Tenet lawsuit was filed, the value of CHS’s stock dropped.” Id.


10

Citing In re Almost Family, Inc. Securities Litigation, No. 10-520, 2012 WL

443461 (W.D. Ky. Feb. 10, 2012), the district court noted that numerous courts

have held that mere “allegations of fraud do not reveal a previously undisclosed

truth,” and therefore cannot constitute corrective disclosures. Opinion, R. 248,

PageID# 8066. It found particularly instructive the Eleventh Circuit’s decision in

Sapssov v. Health Management Associates, Inc., 608 F. App’x 855 (11th Cir.

2015) (per curiam), aff’g, 22 F. Supp. 3d 1210 (M.D. Fla. 2014), which held that,

as a matter of law, a lawsuit does not constitute a corrective disclosure. Opinion,

R. 248, PageID# 8067 (explaining that the mere “‘filing of a civil complaint

certainly does not establish that the defendant committed or is liable for the

conduct alleged’”) (quoting 22 F. Supp. 3d at 1230).

Sapssov’s holding, Chief Judge Sharp noted, was based on decisions from

other courts of appeals holding that the announcement of a government

investigation likewise does not qualify as a corrective disclosure: “[N]otice of an

investigation no more reveals fraud than a complaint does, and while both may be

‘ominous events,’ neither shows that a company’s previous statements were false.”

Opinion, R. 248, PageID# 8069. Relying on these authorities, the district court

held that the Tenet Complaint is not a corrective disclosure—and that Plaintiff

failed to plead loss causation—because “the Tenet complaint revealed no truths,


11

only allegations, and ‘the market cannot respond to fraud until it has been

revealed.’” Id. (quoting Almost Family, 2012 WL 443461, at *2).

The district court also dismissed Plaintiff’s second claim, regarding CHSI’s

statements made after the Tenet Complaint. Chief Judge Sharp did not address

Defendants’ arguments that Plaintiff failed to allege falsity, materiality, or loss

causation with respect to those statements because, among other things,

(1) statements that Defendants believed the Tenet Complaint was without merit

(and use of InterQual would not affect admissions) are the type of forward-looking

statements and optimistic puffery that courts consistently reject as immaterial, and

(2) the October 2011 earnings report was not a corrective disclosure. Instead, the

district court held that this claim was barred by the two-year statute of limitations

and did not relate back to Plaintiff’s Initial Complaint.

As the district court noted, Plaintiff had filed its Initial Complaint in 2012—

months after the asserted October 2011 corrective disclosure—but did not add that

new claim until it filed the Amended Complaint in 2015, years after the two-year

limitations period had run. Opinion, R. 248, PageID# 8070-8071. Chief Judge

Sharp explained that “the touchstone for relation back is fair notice.” Id. at

PageID# 8072 (internal quotation marks omitted). And here, the Initial Complaint

expressly stated not only that the class period had closed on April 8, 2011 (the

Friday before the Tenet Complaint was filed), but also that the “[t]his class action


12

was precipitated by disclosures made in April 2011 by Tenet.” Id. at PageID#

8073 (internal quotation marks omitted). In contrast, Plaintiff’s new claim “alleges

a different fraud and alleged corrective disclosure that expands the size of the

putative class, extends the class period, and (by Defendants’ calculations) adds

hundreds of millions of dollars in potential damages.” Id. at PageID# 8074. The

Initial Complaint, the court concluded, “hardly gave Defendants notice of the

potential scope of Plaintiff’s expanded claim” made in the Amended Complaint.

Id.

SUMMARY OF ARGUMENT

This Court should affirm the district court’s dismissal of the Amended

Complaint with prejudice.

I. Plaintiff failed to allege loss causation with respect to its first claim

(based on statements made before the Tenet Complaint). That is because the Tenet

Complaint does not constitute a corrective disclosure, for two independent reasons.

First, every court of appeals to address the question agrees with the district

court that an allegation of fraud—including allegations made in a lawsuit—“is

insufficient to constitute a corrective disclosure for purposes of § 10(b).” Meyer,

710 F.3d at 1201. As the district court held, that principle is fatal to Plaintiff’s

allegation that the Tenet Complaint is a corrective disclosure.


13

Plaintiff attacks that principle—and its invocation by the district court—for

requiring “proof” of fraud to plead loss causation. Not so. The principle, which

the district court properly applied here, is that the market meaningfully responds

only to corrective disclosures that actually “reveal a previously concealed truth.”

FindWhat Investor Grp. v. FindWhat.com, 658 F.3d 1282, 1311 n.28 (11th Cir.

2011). And when, as here, the asserted disclosure is a mere allegation, what the

market is responding to is necessarily the risk of fraud—not the revelation of a

truth that corrects a past misstatement.

Plaintiff argues that the district court overlooked several additional

corrective disclosures that provide “corroboration” and “context” for the Tenet

Complaint’s allegations, thus converting that complaint into a valid corrective

disclosure. But the district court did not overlook anything: The Amended

Complaint alleged two corrective disclosures, not the ten that Plaintiff claims for

the first time on appeal. Even if this Court were to consider arguments never

raised below, Plaintiff’s reliance on the newly alleged disclosures is unavailing,

because they are not corrective disclosures. Plaintiff does not (and could not)

plead, as it must, that CHSI’s stock dropped in connection with most of the new

disclosures. And the disclosures cited by Plaintiff are not corrective because they

reveal nothing about the truth or falsity of the statements that Defendants made

before the Tenet Complaint.


14

Second, a corrective disclosure must reveal new information to the market.

As Plaintiff concedes, however, the allegations in the Tenet Complaint were based

on Medicare data that had long been publically available. What is more, months

before the Tenet Complaint, the Reuille qui tam False Claims Act complaint,

which Plaintiff invokes on appeal, made the exact same allegations of improper

admissions practices. Thus, although the district court held otherwise, this Court

can affirm the judgment on the ground that the Tenet Complaint is not a corrective

disclosure, because it merely repackaged already-public information.

II. Plaintiff also failed to allege loss causation with respect to its second

claim (based on Defendants’ statements made after the Tenet Complaint), which

the district court dismissed as untimely. That is because the October 2011 report,

which showed modestly lower earnings and reduced admissions at CHSI-affiliated

hospitals, likewise did not reveal any new information to the market.

Plaintiff alleged that the October 2011 report was corrective because it

implicitly revealed that the Tenet Complaint and the discontinued use of the Blue

Book had led to reduced admissions, thus showing that prior forward-looking

statements by Defendants about the effects of those factors were false. But

Defendants expressly stated, prior to the October 2011 disclosure, that CHSI-

affiliated facilities were seeing an effect from the Tenet Complaint and the changes

in admission criteria. In other words, CHSI had already disclosed the very facts


15

that Plaintiff alleges were first disclosed by the October 2011 report. Thus, while

the district court had no occasion to address the question (given its holding that the

claim was untimely), the fact that the October report did not disclose any new

information to the market provides an independent ground for affirming the district

court’s dismissal of Plaintiff’s second fraud claim.

III. Plaintiff cannot save the Amended Complaint by arguing that it pleaded

loss causation under a materialization-of-the-risk theory. As Plaintiff concedes, it

never advanced that theory below, either in its complaint or in its briefing. It is too

late to do so now.

Plaintiff attempts to excuse that waiver on the ground that this Court’s

decision in Ohio Public Employees Retirement System v. Federal Home Loan

Mortgage Corp. (“FHLMC”), 830 F.3d 376 (6th Cir. 2016), “changed the legal

landscape.” Br. 47. But that case expressly acknowledges that this Court’s

precedents never precluded securities plaintiffs from pleading loss causation under

a materialization-of-the-risk theory. Nor could Plaintiff possibly do so here. That

is because Plaintiff cannot show that the event that caused the stock drop—

presumably the Tenet Complaint, the government investigation, or the earnings

report (Plaintiff’s theory is not entirely clear)—was a “foreseeable materialization

of the risk concealed by the fraudulent statement.” FHLMC, 830 F.3d at 384-85

(internal quotation marks omitted).


16

IV. Plaintiff’s second claim is time barred. The statute of limitations for

securities-fraud claims is two years. Plaintiff was on notice of this claim—which

dramatically expanded the class and identified new alleged misstatements and a

new corrective disclosure—when it filed its Initial Complaint in 2012. Yet it

waited until 2015 to raise the claim in its Amended Complaint. Indeed, Plaintiff

never argued below that its claim was timely—and effectively conceded that it was

not timely, relying solely on a relation-back argument.

The district court correctly held that Plaintiff’s new claim does not relate

back to its Initial Complaint. Relation back is appropriate only if the original

complaint would have placed the defendant on notice of the “nature and scope” of

the plaintiff’s claims. United States ex rel. Bledsoe v. Cmty. Health Sys., Inc., 501

F.3d 493, 516 (6th Cir. 2007) (internal quotation marks omitted). Here, the Initial

Complaint gave Defendants no cause to believe that Plaintiffs would later assert

that post-Tenet statements constituted an independent fraud—much less that the

October 2011 report was a corrective disclosure.

V. Finally, the district court’s decision to dismiss the complaint with

prejudice was not an abuse of discretion. “[I]f a party does not file a motion to

amend or a proposed amended complaint in the district court, it is not an abuse of

discretion for the district court to dismiss the claims with prejudice.” Ohio Police

& Fire Pension Fund v. Standard & Poor’s Fin. Servs. LLC, 700 F.3d 829, 844


17

(6th Cir. 2012) (internal quotation marks omitted). Plaintiff never filed such a

motion. And even if Plaintiff had asked for leave to amend, such amendment

would have been futile because none of Plaintiff’s proposed new claims could

withstand a motion to dismiss.

ARGUMENT

To state a securities-fraud claim under Rule 10b-5, a plaintiff must

adequately plead loss causation. Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 342

(2005). When, as here, a plaintiff relies on the “fraud on the market presumption”

to establish reliance, it typically seeks to meet that burden by identifying a

“corrective disclosure”—a disclosure of information “that reveals to the market the

pertinent truth that was previously concealed or obscured by the company’s fraud.”

FindWhat, 658 F.3d at 1311; see In re KBC Asset Mgmt., 572 F. App’x 356, 360

(6th Cir. 2014) (a “corrective disclosure reveals the fraud to the public”) (internal

quotation marks omitted). The plaintiff also must allege that the stock price

dropped because of the corrective disclosure’s revelation of the previously

concealed truth, and not as a result of other causes. FindWhat, 658 F.3d at 1311.

In this case, Plaintiff identified two corrective disclosures of two alleged

frauds: (1) the April 11, 2011, Tenet Complaint, which Plaintiff alleged corrected

false or misleading statements that CHSI made before that complaint, and (2) the

October 26, 2011, earnings report, which Plaintiff alleged corrected false or


18

misleading statements that CHSI made after the Tenet Complaint. Because neither

of those alleged disclosures qualifies as a corrective disclosure, Plaintiff failed to

plead loss causation with respect to either claim. And because Plaintiff chose not

to plead or argue below for loss causation under a materialization-of-the-risk

theory (which is inapplicable here in any event), it cannot do so now. The district

court also correctly held that Plaintiff’s post-Tenet claim is barred by the statute of

limitations and does not relate back to the Initial Complaint. For these and other

reasons set forth below, the judgment of dismissal should be affirmed.3

I. PLAINTIFF FAILED TO PLEAD LOSS CAUSATION WITH RESPECT TO THE CLAIM BASED UPON STATEMENTS MADE BEFORE THE TENET COMPLAINT

The district court correctly held that the Tenet Complaint is not a corrective

disclosure because the mere allegation of fraud—which is all a lawsuit is—cannot,

as a matter of law, “reveal” a concealed “truth.” The Tenet Complaint also is not a

corrective disclosure for an independent reason: It did not reveal any new

information to the market.

3 To state a claim under Section 20(a), Plaintiff must first state a primary violation under Section 10(b)—and then show that, in addition, the individual Defendants are “controlling persons” within the meaning of the Exchange Act. Opinion, R. 248, PageID# 8045 n.4. Because Plaintiff failed to state a direct claim of securities fraud, it necessarily failed to state a claim under Section 20(a).


19

A. The District Court Correctly Held That The Tenet Complaint Is Not A Corrective Disclosure Because It Did Not “Reveal The Truth” Of Any Prior Misstatement

1. The Tenet Complaint Merely Alleged Fraud

Every court of appeals to address the question has held that mere allegations

of fraud do not qualify as a corrective disclosure. The reason for that rule is self-

evident: A corrective disclosure “must reveal a previously concealed truth.”

FindWhat, 658 F.3d at 1311 n.28 (emphases added); see Dura, 544 U.S. at 347

(complaint must allege that share price fell “after the truth became known”). But

allegations made in a lawsuit do not “reveal” any such concealed “truth.” Rather,

they reveal the mere possibility that there was a prior misstatement, which is

insufficient to constitute a corrective disclosure.

The Eleventh Circuit so held in Sapssov. In that case, some of the same

plaintiffs as here alleged that the defendant hospital system had “devised a

corporate policy mandating unnecessary admission of Medicare patients to . . .

boost its financial position and stock price.” 608 F. App’x at 857. They further

alleged (as here) that the hospital system “admitted inpatients, who should have

been admitted for observation.” Id. And the Sapssov plaintiffs—like Plaintiff

here—alleged that the truth was revealed, in part, by a lawsuit (there, brought by a

whistleblower) claiming that the company had engaged in those billing practices.


20

The district court squarely rejected that argument and dismissed the

complaint for failure to plead loss causation. “[T]he allegations in the

[whistleblower] complaint,” the court explained, “do not reveal the falsity of a

prior statement.” 22 F. Supp. at 1231. That is because “[t]he filing of a civil

complaint certainly does not establish that the defendant committed or is liable for

the conduct alleged.” Id. The Eleventh Circuit affirmed, holding that the civil suit

did not constitute a corrective disclosure, “because a civil suit is not proof of

liability.” 608 F. App’x at 863.

Sapssov faithfully applied a line of cases holding that “disclosure of an

investigation, absent an actual revelation of fraud, is not a corrective disclosure.”

Almost Family, 2012 WL 443461, at *13. In Meyer v. Greene, for example, the

Eleventh Circuit rejected the plaintiffs’ allegation that the company’s disclosure of

two SEC investigations qualified as a corrective disclosure, reasoning that “[t]he

announcement of an investigation reveals just that—an investigation—and nothing

more.” 710 F.3d at 1201. Such investigations cannot, as a matter of law, “reveal

to the market that a company’s previous statements were false.” Id.

In Loos v. Immersion Corp., 762 F.3d 880 (9th Cir. 2014), the Ninth Circuit

agreed: “While the disclosure of an investigation is certainly an ominous event, it

simply puts investors on notice of a potential future disclosure of fraudulent

conduct.” Id. at 890. But “the announcement of an investigation does not ‘reveal’


21

fraudulent practices to the market.” Id. Numerous district courts, including within

this Circuit, have reached the same conclusion.4

As the district court recognized, this case is on all fours with Sapssov.

Opinion, R. 248, PageID# 8066-8077. The filing of a “civil suit is not proof of

liability.” Sapssov, 608 F. App’x at 863. Accordingly, “the Tenet complaint

revealed no truths, only allegations.” Opinion, R. 248, PageID# 8069. To be sure,

the market may respond negatively to allegations in a lawsuit (as Plaintiff argues

with respect to the Tenet Complaint), just as it may respond negatively to the

commencement of a government investigation. But “any decline in a corporation’s

share price following the announcement of an investigation”—or lawsuit—“can

only be attributed to market speculation about” either “whether fraud has occurred”

or the impact of any potential future remedial action. Loos, 762 F.3d at 890. As a 4 E.g., Bonanno v. Cellular Biomedicine Grp., Inc., No. 15-01795, 2016 WL 2937483, at *5 (N.D. Cal. May 20, 2016); Curry v. Yelp, Inc., No. 14-03547, 2015 WL 1849037, at * 10 (N.D. Cal. April 21, 2015); In re Herbalife, Ltd. Sec. Litig., No. 14-2850, 2015 WL 1245191, at *6 (C.D. Cal. March 16, 2015); Brown v. Ambow Educ. Holding Ltd., No. 12-5062, 2014 WL 523166, at *10 (C.D. Cal. Feb. 6, 2014); Mauss v. Nuvavsive, Inc., No. 13-2005, 2014 WL 6980441, at *6 (S.D. Cal. Dec. 9, 2014); Caplin v. Trans1, Inc., 973 F. Supp. 2d 596, 610 (E.D.N.C. 2013); Almost Family, 2012 WL 443461, at *13; Janbay v. Canadian Solar, Inc., No. 10-4430, 2012 WL 1080306, at *15 (S.D.N.Y. Mar. 30, 2012); Durham v. Whitney Info. Network, Inc., No. 06-00687, 2009 WL 3783375, at *21 (M.D. Fla. Nov. 10, 2009); In re Dell Inc. Sec. Litig., 591 F. Supp. 2d 877, 910 (W.D. Tex. 2008); In re Hansen Natural Corp. Sec. Litig., 527 F. Supp. 2d 1142, 1162 (C.D. Cal. 2007); City of Austin Police Ret. Sys. v. ITT Educ. Servs., Inc., 388 F. Supp. 2d 932, 942 (S.D. Ind. 2005); In re Avista Corp. Sec. Litig., 415 F. Supp. 2d 1214, 1221 (E.D. Wash. 2005).


22

matter of law, then, the Tenet Complaint is not a corrective disclosure. The district

court correctly held that Plaintiff failed to plead loss causation.

Plaintiff attempts to distinguish Sapssov on the ground that it “involved an

analyst report that ‘repackage[d]’ allegations from a pending whistleblower

lawsuit.” Br. 39. The problem in Sapssov, Plaintiff says, was that the disclosure

there did not reveal “new” facts, while the Tenet Complaint “had both expert

analysis and new facts.” Id. at 38. It is true that Sapssov held that the analyst

report was not a corrective disclosure, in part, because it repackaged already-public

information. But the court did not stop there; it also made clear that the

whistleblower lawsuit was not a corrective disclosure either, “because a civil suit is

not proof of liability”—even though the allegations in that suit were “new.” 608 F.

App’x at 863. The court could scarcely have been clearer.

Equally mistaken is plaintiff’s suggestion (at 38) that a lawsuit is

distinguishable from a government investigation (the type of asserted corrective

disclosure involved in Meyer and Loos) because a lawsuit, but not an investigation,

reveals “new” facts. That misses the point. The reason why the lawsuit in Sapssov

was not a corrective disclosure was because it was a mere allegation. As the

district court correctly observed, “notice of an investigation no more reveals fraud

than a complaint does, and while both may be ‘ominous events,’ neither shows that

a company’s previous statements were false or fraudulent.” Opinion, R. 248,


23

PageID# 8069. That is particularly true with respect to the Tenet suit. After all, it

was filed by a competitor for the express purpose of thwarting CHSI’s hostile

takeover of Tenet. See also note 1, supra. Such self-motivated allegations lack the

objectivity necessary to constitute a corrective disclosure.

Plaintiff likewise tries to distinguish Meyer on the ground that it involved a

short seller’s valuation derived from already-public information. Br. 39. Again,

that is true but irrelevant. The relevant disclosure from Meyer was a different

disclosure entirely—the announcement of SEC investigations into the company,

not the short seller’s report. And, with respect to that disclosure, the court of

appeals squarely held that the “‘disclosure of an investigation, absent an actual

revelation of fraud, is not a corrective disclosure.’” Meyer, 710 F.3d at 1201

(quoting Almost Family, 2012 WL 443461, at *13). The district court faithfully

applied the rule from Sapssov, Meyer, and Loos. And, as we show below, that

rule—universally adopted by the courts of appeals and dozens of lower courts—is

correct.

2. The District Court Did Not Alter The Pleading Standard

a. Unable to distinguish Sapssov, Meyer, or Loos, Plaintiff contends that the

district court’s application of the principle settled in those cases improperly

required it to plead “‘proof’ of fraud or liability”—going so far as to put “proof” in

quotation marks to intimate that the district court expressly required as much at the


24

pleading stage (even though it did not). Br. 5; see id. at 1, 21. That requirement,

Plaintiff says, conflicts with Dura, which did not “set forth any requirements about

the source, form, or precision of a corrective disclosure.” Id. at 35. Rather,

according to Plaintiff, Dura held that plaintiffs can establish loss causation by

citing any corrective disclosure that reveals the “truth” to the market. Id. at 36.5

But that is precisely why the rule applied by the district court—that

allegations do not constitute a corrective disclosure—is the correct rule, and

perfectly consistent with Dura.6 For the market to be responding to a revelation of

the “truth,” the revelation must be a truth, not merely an allegation. Put another

way, “the market cannot respond to fraud until it has been revealed.” Almost

Family, 2012 WL 443461, at *12. If the disclosure is a fact, then what the market

is responding to can be a revelation of the truth. But if the disclosure is an

allegation, then what the market is responding to can only be “a mere risk of

fraud.” Id. Allegations are not revelations of fact.

5 The concurring opinion in Sapssov likewise suggested that Meyer improperly requires a “conclusive finding of fraud.” 608 F. App’x at 864 (Martin, J., concurring). 6 Courts have recognized that Dura left unanswered “the question of whether and to what extent fraud must become known by the market before it can sufficiently be pled as causally related to economic loss.” Almost Family, 2012 WL 443461, at *10. Sapssov, Meyer, and Loos do not conflict with Dura; they interpret Dura.


25

Plaintiff’s complaint that the district court required “proof” of liability also

misses the mark because the district court did not require Plaintiff to prove that any

of Defendants’ alleged statements were false (e.g., by proving that CHSI-affiliated

facilities in fact violated Medicare rules), or to prove that the disclosure caused the

stock drop (e.g., by showing that the drop did not result from other market-wide

forces). The court accepted those allegations as true. What the court did hold is

that a mere allegation cannot be a corrective disclosure for purposes of pleading

the loss-causation element of a fraud claim. That is not a matter of accepting the

plaintiff’s allegations in a complaint as true, but rather of defining a legally

cognizable corrective disclosure.

b. Plaintiff likewise urges this Court to reject the rule adopted in Sapssov,

Meyer, Loos, and similar cases on the ground that it erroneously requires corrective

disclosures to be an “admission of fraud” by the company itself. Br. 5. That is

incorrect. It is true, of course, that “[a] corrective disclosure is traditionally an

admission by the company that one or more of its previous statements were false or

misleading followed by a corrected, truthful and complete version of those

statements.” In re Vivendi Universal, S.A. Sec. Litig., 634 F. Supp. 2d 352, 363-64

(S.D.N.Y. 2009).7 But while the canonical corrective disclosure involves such an

7 In FHLMC this Court suggested that a “corrective disclosure” entails “a defendant’s acknowledgment that it misled investors.” 830 F.3d at 385.


26

admission, “[t]here is no requirement that corrective disclosures emanate from the

company itself, so long as the truth is disclosed in some fashion.” In re IPO Sec.

Litig., 544 F. Supp. 2d 277, 289 (S.D.N.Y. 2008) (emphasis added) (internal

quotation marks omitted).

A corrective disclosure therefore may be an earnings report or other

statement by the company that does not admit fraud, but nevertheless discloses the

truth in some fashion. In In re Daou Systems, Inc., 411 F.3d 1006 (9th Cir. 2005),

for example, the plaintiffs alleged that a company misreported revenue before it

was earned and that the truth of those misstatements was revealed when the

company later reported it dramatically missed its projected earnings. Id. at 1026;

see also In re GeoPharma, Inc. Sec. Litig., 399 F. Supp. 2d 432, 453 (S.D.N.Y.

2005) (company statement correcting prior statement that FDA had granted

approval to market a new drug but not admitting that prior statement was false).

A corrective disclosure also can come from a third party, so long as it

likewise discloses the truth. Thus, for example, in In re America Service Group,

Inc., No. 06-0323, 2009 WL 1348163, at *17 (M.D. Tenn. March 31, 2009), which

Plaintiff cites (at 36), the plaintiffs alleged that a company made false statements

about its accounting and medical practices, and that the truth was revealed, in part,

by a series of investigative articles by the New York Times. Those articles reported

facts that were true: the undisputed deaths of two inmates under the company’s


27

care, a state investigation into those deaths which concluded that the company

repeatedly cut patient services, additional government investigations identifying a

pattern of inadequate healthcare, and judicial findings that the company failed to

provide prisoners with necessary medication. Id. at *16-17.

Thus, whether the corrective disclosure comes from the company or a third

party, the common thread is that the disclosure must have “inherent veracity,” In re

Williams Sec. Litig., 496 F. Supp. 2d 1195, 1265 (N.D. Okla. 2007) (internal

quotation marks omitted), such that it actually reveals the truth. And mere

allegations, including allegations in a lawsuit, lack such inherent veracity. As

noted, that is particularly true with respect to the Tenet Complaint, where a

competitor seeking to avoid a takeover alleged that CHSI promoted improper

admissions. Such a lawsuit is a far cry from an earnings report, press release, or

investigative report disclosing objective facts.

c. Plaintiff makes the related argument that the district court’s holding is

inconsistent with the “plausibility” pleading standard. See Br. 24, 27-28. That,

too, is a red herring. We did not argue, and the district court did not hold, that

Plaintiff should have provided additional factual allegations in its complaint, or

should have pleaded those allegations with greater particularity. Rather, the court

held that the alleged corrective disclosure—the Tenet Complaint—fails as a matter


28

of law. No amount of additional factual allegations could convert that defective

allegation into a corrective disclosure.8

d. Tellingly, Plaintiff does not point to a single court of appeals decision

holding that a lawsuit or government investigation, standing alone, constitutes a

corrective disclosure. The cases that Plaintiff cites (at 37 n.18) do not cast any

doubt on Sapssov, Meyer, Loos, or the decision below.

In Public Employees’ Retirement System of Mississippi v. Amedisys, Inc.,

769 F.3d 313, 323 (5th Cir. 2014), for example, the Fifth Circuit agreed that

“commencement of government investigations on suspected fraud do not, standing

alone, amount to a corrective disclosure.” The same goes for Metzler Investment

GMBH v. Corinthian Colleges, Inc., 540 F.3d 1049, 1064 (9th Cir. 2008), which

rejected “the notion that loss causation is pled where a defendant’s disclosure

reveals a ‘risk’ or ‘potential’ for widespread fraudulent conduct”—which is all a

lawsuit reveals. And while Plaintiff cites the concurring opinion in Sapssov, the

majority opinion—which held that a civil lawsuit is not a corrective disclosure—is

fatal to Plaintiff’s claim.

8 Some courts have held that Rule 9(b)’s heightened pleading requirements apply to all elements of a securities-fraud action, including loss causation, while others have held that Rule 8’s “plausibility standard” applies to the loss-causation element. Oregon Pub. Emp. Ret. Fund v. Apollo Grp. Inc., 774 F.3d 598, 604-605 (9th Cir. 2014). This Court has not decided the question, but Plaintiff fails to state a claim under either standard.


29

Plaintiff nevertheless contends that district courts within this Circuit have

“routinely” found that “disclosures can reveal the relevant truth without an express

admission or finding of fraud.” Br. 36. Again, Plaintiff creates a straw man: A

corrective disclosure does not always need to be an admission of fraud. It does,

however, need to reveal a truth as opposed to merely an allegation. Plaintiff also

overplays its hand, since the only district court decision within this Circuit to

squarely address the issue expressly approved the rule—adopted by the district

court here—that “disclosure of an investigation, absent an actual revelation of

fraud, is not a corrective disclosure,” because it reveals only the “risk, a possibility,

that Defendants may have made misrepresentations.” Almost Family, 2012 WL

443461, at *13.9

9 The cases cited by Plaintiff (at 36-37) do not involve disclosures remotely analogous to the filing of a civil lawsuit. America Service, 2009 WL 1348163, at *17, involved disclosures that government investigators had found a pattern of inadequate healthcare. Winslow v. BancorpSouth, Inc., No. 10-463, 2011 WL 7090820, at *11-12 (M.D. Tenn. April 26, 2011), involved a company’s earnings report, press release, and SEC filing. In re Miller Energy Resources Securities Litigation, No. 11-386, 2014 WL 415730, at *21 (E.D. Tenn. Feb. 4, 2014), involved an investigative report and multiple disclosures by the company that it had restated its financials. Chamberlain v. Reddy Ice Holdings, Inc., 757 F. Supp. 2d 683, 717-718 (E.D. Mich. 2010), involved the combination of a government investigation, newspaper article exposing a market-allocation agreement, and the company’s suspension of an officer for violating company policy. And In re Unumprovident Corp. Securities Litigation, 396 F. Supp. 2d 858, 899 (E.D. Tenn. 2005), involved a press release and announcement by the company regarding its financials.


30

That rule makes complete sense. “If the disclosure of a mere risk of

fraud”—which is all a lawsuit is—“was enough to trigger loss causation, a private

cause of action for securities fraud would accrue every time an allegation or rumor

of wrongdoing circulated,” contrary to the purposes of Rule 10b-5. Id.at 12. The

securities laws were not meant “to provide investors with broad insurance against

market losses.” Dura, 544 U.S. at 345. And the loss-causation requirement is a

core component of that principle, because it guards against the use of securities

litigation “as an in terrorem device to force companies to settle claims simply to

avoid the cost and burden of litigation.” Meyer, 710 F.3d at 1196. “[A]llowing a

plaintiff to plead loss causation solely on the basis of an announced

investigation”—or lawsuit—“encourages the precise abusive litigation practices

the securities laws are designed to protect against.” Caplin, 973 F. Supp. 2d at

610.

3. The District Court Did Not “Ignore” Context Or “Overlook” Post-Tenet Corrective Disclosures

Next, Plaintiff contends that the district court erred by ignoring the “context”

of the Tenet Complaint—including CHSI’s “concession[]” that it used the Blue

Book. Br. 30. Relatedly, Plaintiff argues that the lower court “overlooked” a

series of “disclosures by CHS that directly followed, and gave credence to, Tenet’s

claims.” Id. at 39. According to Plaintiff, a lawsuit can constitute a corrective

disclosure when combined with subsequent “corroboration”—such as that


31

provided by the partial disclosures supposedly “overlooked” by the court below.

These arguments are meritless.

a. The district court did not overlook anything. Plaintiff’s Amended

Complaint alleged only two corrective disclosures, one for each of the fraud

claims: the Tenet Complaint, and the October 2011 report. Indeed, in its briefing

below, Plaintiff expressly identified “Corrective Disclosure No. 1: Tenet Action,”

and “Corrective Disclosure No. 2: CHS’ 3Q 2011 Admissions Results.”

Opposition to MTD, R. 189, PageID# 6188, 6193. There was no “Number 3.” Far

from “overlooking” any series of corrective disclosures, the district court properly

focused on the only two corrective disclosures actually alleged by Plaintiff.

Now Plaintiff changes its tune. It argues, for the first time, that there were at

least ten corrective disclosures, not two. See Br. 11-12, 25. “The well-settled rule

is that this court’s function is to review the case presented to the district court,

rather than a better case fashioned after an unfavorable order.” Guyan Int’l, Inc. v.

Prof’l Benefits Adm’rs, Inc., 689 F.3d 793, 799 (6th Cir. 2012) (internal quotation

marks omitted). Here, Plaintiff is not only entirely refashioning its case on appeal

(reason enough to disregard its new theory)—it is effectively amending its

complaint by making new factual allegations for the first time in its appeal brief.

Those new arguments and allegations have been waived.


32

b. In any event, Plaintiff’s eleventh-hour efforts to resuscitate the Tenet

Complaint are unavailing. The courts of appeals have unanimously held that an

investigation or allegation of fraud, “without more, is insufficient to constitute a

corrective disclosure for purposes of § 10(b).” Meyer, 710 F.3d at 1201. Plaintiff

suggests that there is “more” here—the partial corrective disclosures that it raises

for the first time on appeal.

But none of the new partial disclosures are corrective disclosures in their

own right—and so cannot retroactively convert the Tenet Complaint into a

corrective disclosure. To begin with, Plaintiff never alleged that CHSI’s stock

dropped in connection with any of the new corrective disclosures. As this Court

has explained, however, a corrective disclosure must cause a “fall in [the

company’s] share price.” KBC, 572 F. App’x at 360; see Dura, 544 U.S. at 347

(complaint must allege that a company’s “share price fell” after the truth became

known). “Without a corresponding stock price decline, an announcement cannot

establish loss causation.” Janbay, 2012 WL 1080306, at *16. Plaintiff’s failure to

allege any stock drop in connection with the newly asserted corrective disclosures

is therefore fatal to its new-found theory.10

10 Plaintiff’s reliance on the Fifth Circuit’s decision in Amedisys (Br. 41-42), which squarely held that mere allegations of fraud “do not, standing alone, amount to a corrective disclosure” (769 F. 3d at 323), is misplaced. Although the Fifth Circuit went on to opine that a government investigation could constitute a partial


33

What is more, an investigation may only “qualify as a partial corrective

disclosure . . . when the investigation is coupled with a later finding of fraud or

wrongdoing.” Meyer, 710 F.3d at 1201 n.13 (emphasis added). “[W]here, as

here, there is no later finding of wrongdoing, that theory is obviously

inapplicable.” Id. None of the newly raised corrective disclosures remotely

qualifies as a “finding” of wrongdoing. Those overarching flaws—applicable to

each of the newly alleged corrective disclosures—dooms Plaintiff’s theory that

those disclosures retroactively convert the Tenet Complaint into a corrective

disclosure.

c. Careful examination of each of the post-Tenet statements invoked by

Plaintiff further reveals their flaws. Plaintiff claims that, on April 11, 2011 (the

day Tenet filed its complaint), CHSI conceded that it used the Blue Book—and

thus “validated the accuracy of Tenet’s central allegation: CHS used a unique,

home-grown, set of admissions criteria.” Br. 31. Thus, Plaintiff seeks to tie the

market drop on April 11—which Plaintiff previously argued was tied only to the

Tenet Complaint—to that “concession[]” that CHSI used the Blue Book.

disclosure when “viewed together with the totality of the other alleged partial disclosures” (id. at 324), the plaintiffs there alleged that each of the other alleged partial disclosures was accompanied by a significant stock drop. Id. at 318-319. Plaintiff did not do so here.


34

But the fact that CHSI used the Blue Book was no secret—and it certainly

was not the “central allegation” revealed for the first time in the Tenet Complaint.

To the contrary, the Tenet Complaint expressly acknowledged that the Blue Book

was not a secret, because it “was copyrighted in 2000 and is publicly available at

the United States Copyright Office.” Tenet Complaint, R. 83-3, ¶ 10,

PageID# 2552.11 What Tenet alleged (and what Plaintiff alleged) was that the Blue

Book was used by CHSI management to promote improper patient admission.

And Plaintiff does not (nor can it possibly) contend that CHSI made any statement

on April 11 admitting that the Blue Book was used to cause physicians to admit

patients when it was not medically necessary to do so.12 The “concession” cited by

Plaintiff does nothing to confirm the relevant allegations of the Tenet Complaint.

Next, Plaintiff states that, on April 28, 2011, CHSI gave an investor

presentation “denying Tenet’s claims and re-asserting that switching from the Blue

Book would not have a material impact,” and that on May 2, 2011, CHSI claimed

that “InterQual was fairly close to our current Blue Book criteria.” Br. 12, 42

11 See U.S. Copyright Office, Reg. No. TXu000958466, https://goo.gl/OMuubn (registered copyright for CHSI’s “clinical guidelines for inpatient care”). 12 The April 11 “concession” Plaintiff invokes appears to be its allegation that “Cash told Wells Fargo that Blue Book use was discontinued in 25-30 hospitals and CHS ‘planned to convert the remainder of its hospitals’” to a system other than the Blue Book “‘by the end of 2011 without any material negative impact.’” FAC ¶ 423. That is a statement that the Blue Book doesn’t affect admissions, not a statement that it drives improper admissions.


35

(internal quotation marks omitted). But those are statements that Plaintiff

previously argued were “false assertions”—and that constituted additional

misstatements made by the Company after the Tenet Complaint. Opposition to

MTD, R. 189, PageID# 6176. Now, Plaintiff relies on those same allegedly false

statements as corrective disclosures that revealed the “truth.” Plaintiff’s theory

contradicts the position it took below and is utterly incoherent.

Plaintiff also cites CHSI’s April 18, 2011, disclosure of a letter it received

from the CtW Investment Group, and CHSI’s April 22, 2011, disclosure that it was

a defendant in the Reuille whistleblower action. Br. 11, 40-41. According to

Plaintiff, the district “court failed to consider these post-Tenet disclosures as

‘context’ validating Tenet’s revelations.” Id. at 41. As discussed below, however,

those disclosures cut against Plaintiff’s loss-causation theory because they show

that the Tenet Complaint did not reveal anything new to the market. In any event,

Plaintiff did not just fail to allege that those were corrective disclosures; it did not

so much as mention them at all. The district court did not “ignore” them—Plaintiff

did.13

Plaintiff also contends that the district court ignored CHSI’s disclosure on

April 15, 2011, that “it received a subpoena” from the OIG. Br. 11, 40. Here 13 Plaintiff argues that CHSI made partial corrective disclosures when it increased its offer for Tenet stock and then withdrew its offer. Br. 12. Plaintiff never attempts to explain how those constitute corrective disclosures.


36

again, however, Plaintiff never alleged in its complaint that CHSI’s stock dropped

as a result of the subpoena. And, of course, every court of appeals has held that the

announcement of a government investigation is not a corrective disclosure. A non-

corrective disclosure such as the OIG subpoena therefore cannot “corroborate” the

Tenet Complaint.14

Indeed, Sapssov rejected the very argument that Plaintiff makes here. In

Sapssov, the plaintiffs alleged that a whistleblower lawsuit, “combined with the

OIG investigation, together provided sufficient evidence of a corrective

disclosure.” 608 F. App’x at 863. Rejecting that argument, the court held that

neither the OIG investigation nor the lawsuit—taken separately or together—

revealed any truth to the market. Id.

That leaves CHSI’s October 2011 report, which stated that admissions at

CHSI-affiliated hospitals were down from the prior year. Br. 12. On appeal,

Plaintiff states that the earnings report “revealed the misleading nature of CHS’

prior representations” made before the Tenet Complaint. Id. at 43. But again, in

its complaint and briefing below, Plaintiff never contended that the October report

corrected the allegedly false statements that CHSI made before the Tenet

Complaint. Rather, Plaintiff argued that it “plead[ed] loss causation by linking the 14 In any event, Plaintiff contends that the subpoena was itself the “result of the Tenet lawsuit.” Br. 42. It cannot therefore independently verify the truth of the allegations in that lawsuit.


37

October 2011 decline to CHS’ misleading statements about (i) the Tenet Action

and (ii) the effects of abandoning the Blue Book” after that action. Opposition to

MTD, R. 189, PageID# 6193. Specifically, Plaintiff alleged that, after the Tenet

Complaint was filed, Defendants “publicly denied” that complaint’s allegations,

and “misrepresented the true impact discontinuing the Blue Book would have on

CHS financial performance.” FAC ¶ 489.

In other words, Plaintiff alleged that CHSI engaged in an entirely new fraud

after the Tenet Complaint—and that that new fraud was revealed when CHSI

announced its third-quarter earnings in October 2011. Plaintiff cannot now claim

that the October report instead corroborated allegations about the earlier alleged

fraud involving statements made before the Tenet Complaint. That is apples and

oranges.

Even if Plaintiff could clear that hurdle, however, there is nothing

“corrective” about the October 2011 earnings report. As discussed below, the

report did not reveal any new information to the market, and therefore cannot

qualify as either a freestanding or partial corrective disclosure. Nor did the report

“reveal some then-undisclosed fact with regard to the specific misrepresentations

alleged in the complaint concerning” the allegedly false statements made before

the Tenet Complaint. In re Omnicom Grp., Inc. Sec. Litig., 597 F.3d 501, 511 (2d

Cir. 2010). All the report disclosed was that “[e]arnings were modestly lower from


38

3Q 2010 while same-store admissions decreased 7.0%.” FAC ¶ 463. “Neither

statement mentions [the alleged pre-Tenet misstatements], much less ‘corrects’ the

misleading aspect of [those] statements.” KBC, 572 F. App’x at 361. Because

there is no connection between the October report and the pre-Tenet statements

involving CHSI’s “business strategy” and the like, the report did not “correct”

anything.

Indeed, “[d]isclosure of financial losses generally—even if those financial

losses are a result of the specific concealed fact—is not sufficient to establish—or

allege—loss causation.” Dell, 591 F. Supp. 2d at 909 (internal quotation marks

omitted). The cases Plaintiff cites (at 43-45) for the proposition that disappointing

earnings results can constitute a partial corrective disclosure are inapposite. In

Daou, for example, the plaintiffs alleged that the company systematically

misreported its earnings—and so its actual earnings were corrective. 411 F.3d at

1017. And in Massachusetts Retirement Systems v. CVS Caremark Corp., 716

F.3d 229, 239 (1st Cir. 2013), the company’s CEO “admitted” in an earnings call

that a corporate merger—previously touted as seamless—had in fact resulted in

“service issues” and other integration problems.15

15 In Amedisys, the court held that a research report, two officer resignations, a newspaper report, several government investigations, when “coupled” with an earnings report can “collectively constitute and culminate in a corrective disclosure.” 769 F.3d at 324. Here, as noted, Plaintiff alleged only two corrective


39

For all of the foregoing reasons, this Court should reject Plaintiff’s attempt

to recast its loss causation theory on appeal by arguing that a series of later

corrective disclosures corroborated the allegations in the Tenet Complaint (or

somehow represented an independent “leakage” of the truth).

B. The Tenet Complaint Is Not A Corrective Disclosure Because It Disclosed Already-Public Information

Even if this Court disagrees with the foregoing, it should affirm on the

alternative ground that the Tenet Complaint is not a corrective disclosure because

it did not reveal any new information to the market.16 That is a sufficient ground

for affirmance even if the “partial corrective disclosures” now alleged by Plaintiff

could somehow “confirm” the allegations made in the Tenet Complaint.

As this Court has made clear, the corrective disclosure “theory only works

when a disclosed fact [is] . . . new to the market.” KBC, 572 F. App’x at 360

(internal quotation marks omitted).17 That rule applies even if the alleged

disclosures (and did not allege that the earnings statement was corrective of any pre-Tenet statements). 16 Plaintiff notes that “CHS did not cross-appeal.” Br. 18. That does not matter. A “prevailing party may, of course, assert in a reviewing court any ground in support of his judgment, whether or not that ground was relied upon or even considered by the trial court.” United Food & Commercial Workers Union, Local 1099 v. Sw. Ohio Reg’l Transit Auth., 163 F.3d 341, 349 n.3 (6th Cir. 1998) (internal quotation marks omitted). CHSI raised this argument below. See Defendants’ MTD, R. 178, PageID# 4949-4950. 17 See also Omnicom, 597 F.3d at 512 (“negative characterization of already-public information” cannot support loss causation); Katyle v. Penn Nat’l Gaming, Inc.,


40

disclosure adds analysis that was not previously available to the market. In Meyer,

for example, the court explained that “expert analysis of the source material that

was previously unavailable to the market” was not a corrective disclosure because

“the information relied upon in forming an opinion was previously known to the

market.” 710 F.3d at 1199 (emphasis added). Thus, the “fact that the sources used

in the alleged disclosure were already public is fatal” to a claim of loss causation.

KBC, 572 F. App’x at 362 (emphasis added) (internal quotation marks omitted).

The Tenet Complaint failed to disclose “new” information to the market, for

two independent reasons.

1. The Tenet Complaint Repackaged Already-Public Information

As Plaintiff alleged, the Tenet Complaint relied exclusively on publicly

“available data from CMS.” FAC ¶ 189. Indeed, the Tenet Complaint itself makes

clear that “[t]he information set forth in [the Tenet] Complaint is based on public

information relating to Medicare patients alone.” Tenet Complaint, R. 83-3, ¶ 4

n.2, PageID# 2549 (emphasis added); see also id. ¶ 19, PageID# 2554-2555; id.

¶ 27, PageID# 2558. That fact, alone, is fatal to Plaintiff’s loss-causation theory.

As the district court observed, Plaintiff alleged that the Tenet Complaint

conducted “‘statistical analyses’” of the data. Opinion, R. 248, PageID# 8065

637 F.3d 462, 473 (4th Cir. 2011) (“Corrective disclosures must present facts to the market that are new.”).


41

(quoting FAC ¶ 190). Quoting the Fifth Circuit’s decision in Amedisys, the district

court therefore suggested that the Medicare data, though “‘technically available to

the public’ may have ‘little to no probative value in its native state.’” Id. (quoting

769 F.3d at 323). Plaintiff’s brief, too, refers to the “two nationally-recognized

experts” whom Tenet hired to perform a “complex multi-variant study.” Br. 9.

But the “statistical analysis” conducted by Tenet’s “experts” was not rocket

science. All Tenet did was present an “observation rate” figure that was “the

number of Medicare outpatient observation claims divided by the sum of Medicare

outpatient observation claims plus Medicare inpatient claims.” Tenet Complaint,

R. 83-3, ¶ 19 n.6, PageID# 2555. Indeed, Plaintiff observes that what “Tenet’s

experts showed” was that the use of observation at a group of hospitals acquired by

CHSI “decreased by 52%.” Br. 10. That simple arithmetic is scarcely an

intellectual feat so complex that only Tenet’s experts could perform it.

To the contrary, it is undisputed that other entities (with their own agendas)

already had performed the very same analysis based on readily available Medicare

data. For example, the CtW Investment Group sent CHSI a letter in September

2010 (before the Tenet Complaint) alleging that “publicly available Medicare data”

revealed “CHS’ corporate strategy to increase ED admissions”—the very same

allegations later made by Tenet. CHSI Form 8-K (April 18, 2011), Ex. 99.1, Letter

from CtW Investment Group, http://goo.gl/MbJJtQ; see Br. 11 (citing CtW letter).


42

The Service Employees International Union (“SEIU”) sent a similar letter making

similar allegations to CHSI at the same time. Orseck Decl., R. 179, PageID# 5581-

5584.

Indeed, Plaintiff concedes that both CtW and SEIU performed a “Medicare

data analysis that reached the same conclusions as Tenet.” Br. 41 (emphasis

added). That shows not only that the “sources used” in the Tenet complaint were

widely available to the market, KBC, 572 F. App’x at 362, but also that other

entities were readily able to rely on those sources to perform the same analysis

performed by Tenet’s “experts.” The fact that Tenet merely repackaged already-

public information is “fatal” to Plaintiff’s claim. Id.18

2. The Same Allegations Against CHSI Were Made In Another Lawsuit Before The Tenet Complaint

The Tenet Complaint fails to qualify as “new” information for a second

reason. As Plaintiff acknowledged in its Initial Complaint, the “same allegations

of improper admissions practices were raised in [a] Qui Tam Action filed on

January 7, 2009 against CHS” and “unsealed on December 27, 2010”—more than

three months before Tenet filed its suit on April 11, 2011. IC ¶ 31 (emphasis

18 The district court noted that the SEIU letter was not publicly disseminated. Opinion, R. 248, PageID# 8065. But we did not cite the SEIU and CtW letters to show that the letters themselves were publicly available. Rather, we cited them to refute Plaintiff’s argument that the publicly available Medicare data were too complex to be understood by anyone other than Tenet’s experts.


43

added). Because the market was already aware of those same allegations of

improper admissions practices made by Tenet, the Tenet Complaint could not

possibly have revealed any new information to the market.

The district court acknowledged that the complaint in the qui tam action,

United States ex rel. Reuille v. Cmty. Health Sys., No. 09-007 (N.D. Ind. 2009),

“raised numerous allegations about improper Medicare billing, including false 23-

hour observation billing and the intentional assignment of inpatient status where

such status was unwarranted”—just like the Tenet Complaint. Opinion, R. 248,

PageID# 8065. But the court nevertheless distinguished Reuille on the ground that

its allegations were “directed a[t] one hospital.” Id.

The Reuille complaint, however, was not so limited. It alleged that

“CHS”—not a single facility—“does not encourage 23 Hour Observation.”

Reuille Complaint ¶ 23, No. 09-007 (Dkt. 1). It further alleged (1) that the “head

of parent company CHS Case Management” had stated that “‘inpatient’ status is

justified by the CHS criteria set, which conflicts with CMS guidelines”; (2) that it

was “CHS policy to appeal denials by Medicare of ‘one day stays’ as inappropriate

‘inpatient’ hospitalizations” rather than place patients in observation; and (3) that

when case managers complained about improper admissions, they were told “that

is how CHS insists it be done.” Id. ¶¶ 23, 25, 27 (emphases added).


44

What is more, the Reuille complaint expressly tied the allegedly improper

admission practices to “CHS medical criteria contained in the corporation’s ‘Blue

Book’” (id. ¶ 24)—which Plaintiff argues was the “centerpiece” of the Tenet

Complaint. Br. 31. Indeed, Plaintiff contends here that the Reuille complaint was

itself a corrective disclosure of the same underlying fraud that they allege here—

effectively conceding that the Tenet Complaint did not reveal new information to

the market. Br. 11. Because the Reuille complaint “existed in publicly accessible

court dockets for three months before [the Tenet Complaint],” Sapssov, 608 F.

App’x at 863, the Tenet Complaint cannot be a “new” revelation of the truth.

The district court suggested that it is “unclear” whether the Reuille

complaint “should be considered publicly available,” because the “‘markets for

some securities are more efficient than the markets for others, and even a single

market can process different kinds of information more or less efficiently.’”

Opinion, R. 248, PageID# 8065-8066 (quoting Halliburton Co. v. Erica P. John

Fund, Inc., 134 S. Ct. 2398, 2409 (2014)). But in order to create the “presumption

of reliance established by the fraud-on-the-market doctrine” in the first place,

Plaintiff itself expressly alleged that “CHS common stock traded in efficient

markets.” FAC ¶ 487. “Having based their claim of reliance on the efficient

market theory, [Plaintiff] must now abide by its consequences.” Meyer, 710 F.3d

at 1198. It “cannot contend that the market is efficient for purposes of reliance and


45

then cast the theory aside when it no longer suits their needs for purposes of loss

causation.” Id. at 1198-99. The market knew about the Reuille action, which

“disclosed” the same allegations as the Tenet Complaint.

***

The district court acknowledged that this argument “has some appeal,” but

held that the question whether the Tenet Complaint was “new” raises a “factual

question.” Opinion, R. 248, PageID# 8064-8065. But as noted, it is undisputed

that the Tenet Complaint relied on publicly available Medicare data. It is

undisputed that others relied on that same data to come to the same conclusions as

did Tenet. And, as Plaintiff itself notes, the Reuille complaint makes the very same

allegations that Tenet made. Courts—including this Court—routinely affirm

dismissals on the ground that the plaintiff failed to allege a corrective disclosure

that revealed “new” information. See KBC, 572 F. App’x at 362; Sapssov, 608 F.

App’x at 863; Meyer, 710 F.3d at 1199-1200; Almost Family, 2012 WL 443461, at

*13; Herbalife, 2015 WL 1245191, at *5. This Court should do so here.

II. PLAINTIFF FAILED TO PLEAD LOSS CAUSATION WITH RESPECT TO THE STATEMENTS MADE AFTER THE TENET COMPLAINT

Plaintiff’s second claim is that CHSI made false statements after the Tenet

Complaint regarding the merits of the Tenet Complaint and the effects of using the

Blue Book—and that those statements were revealed to be false through the


46

October 2011 earnings report. Opposition to MTD, R. 189, PageID# 6193. As we

discuss below, the district court correctly held that those allegations—made for the

first time in Plaintiff’s Amended Complaint—are time barred. See Part IV, infra.

But Plaintiff also fails to state a claim based on those post-Tenet statements

because the October 2011 report does not constitute a corrective disclosure in the

first place. See Defendants’ MTD, R. 178, PageID# 4955-4956 (arguing that

October 2011 report is not a corrective disclosure).19

First, Plaintiff failed to allege that the October 2011 report revealed any new

factual information about the merits of the Tenet Complaint or the financial effect

of discontinuing use of the Blue Book—the topic of the misstatements allegedly

corrected by the October 2011 report. To the contrary, as early as April 28, 2011,

Larry Cash, CHSI’s CFO, acknowledged that CHSI was “seeing some effect” from

reaction to the Tenet Complaint’s allegations. Orseck Decl., R. 179,

PageID# 5621. On July 29, 2011, CHSI announced a 5.6% decline in same-store

admissions attributed in part to “[a] reduction in one-day stays for emergency room

with a corresponding increase in outpatient visits”—including the “removal [from

19 Plaintiff states (at 50) that the district court “recognized that 3Q2011 results were a corrective disclosure of CHS’ post-Tenet denials.” That is untrue. What the district court said on the page cited by Plaintiff was that the complaint “alleges a different fraud and alleged corrective disclosure.” Opinion, R. 248, PageID# 8074 (emphases added). The court did not say that the October 2011 results were a corrective disclosure.


47

the Blue Book] of inpatient criteria to direct chest pain in admissions” and “a

natural reaction to the publicity” relating to the Tenet lawsuit. Id. at PageID#

5590. And, when analysts asked that same day whether CHSI had experienced any

effect from the modification of its admissions criteria, Mr. Cash further stated that

CHSI’s one-day stays were “probably down 15% to 20% year-over-year.” Id. at

PageID #5601.

In other words, before the October 2011 report, CHSI had disclosed the very

facts that Plaintiff alleges were first disclosed by that report, including the potential

effect of the Tenet Complaint and changes in inpatient criteria on admissions. The

October 2011 report therefore is not a corrective disclosure as a matter of law,

because it did not reveal any information that was “new to the market.” KBC, 572

F. App’x at 360 (internal quotation marks omitted).

Second, the October 2011 report is not “corrective” of the alleged

misstatements: It does not even mention the Blue Book or the Tenet Complaint—

much less “correct[]” the supposedly “misleading aspect” of CHSI’s statements

about those topics. Id. at 361; see Omnicom, 597 F.3d at 511 (“[N]one of these

matters even purported to reveal some then-undisclosed fact with regard to the

specific misrepresentations alleged in the complaint.”). Rather, the October 2011

report simply announced “modestly lower” earnings and a decrease in same-

hospital admissions. FAC ¶ 463. “[N]one of these disclosures reveals or


48

specifically corrects any prior fraud or misrepresentation.” Dell, 591 F. Supp. 2d

at 909.

III. PLAINTIFF DID NOT (AND CANNOT) PLEAD LOSS CAUSATION UNDER A “MATERIALIZATION OF THE RISK” THEORY

Plaintiff contends that, even if it failed to allege loss causation under a

corrective-disclosure theory, it can do so by resorting to a materialization-of-the-

risk theory. But as Plaintiff concedes, it “had not advanced this theory” below.

Br. 47. Plaintiff also concedes that it did not allege such a theory in its complaint.

See Br. 58. If “a party fails to raise an issue to the district court, then that party

forfeits the right to have the argument addressed on appeal.” Guyan, 689 F.3d at

799 (internal quotation marks omitted). This Court therefore should reject

Plaintiff’s belated request for a do-over.20

Plaintiff protests that the ordinary pleading and forfeiture rules do not apply

here because “FHLMC changed the legal landscape.” Br. 47. But the

materialization-of-the-risk theory was never foreclosed by this Court’s precedents.

After all, FHLMC expressly acknowledged that this Court’s “prior decisions, both

controlling and unpublished, recognize the viability of alternative theories of loss

causation,” such as the materialization-of-the-risk theory. 830 F.3d at 385.

20 Courts have declined to address materialization-of-the-risk theories not alleged in the complaint. E.g., Janbay, 2012 WL 1080306, at *16 (“The Complaint does not allege that Plaintiffs’ market losses were caused by a materialization of the ‘risk.’”).


49

Other district courts within this Circuit, moreover, have held that plaintiffs

had alleged loss causation under a materialization-of-the-risk theory. E.g., Cliff v.

Hyman Lippitt, P.C., No. 05-72221, 2005 WL 3556201, at *10 (E.D. Mich. Dec.

29, 2005). And a “decisive majority of circuits have also recognized the

alternative theory of materialization of the risk.” FHLMC, 830 F.3d at 384.

Indeed, the district court in this case took it as a given that loss causation could be

pleaded by alleging a foreseeable materialization of the risk. Opinion, R. 248,

PageID# 8063. Plaintiff simply chose not to proceed under that theory.21

And for good reason, since Plaintiff could not have prevailed under a

materialization-of-the-risk theory even if it had advanced such an argument below.

Under a materialization-of-the-risk theory, “a plaintiff must show the concealed

risk somehow materialized . . . in the form of unfavorable developments that

caused the market to drive the share price down.” Dell, 591 F. Supp. 2d at 911

(internal quotation marks omitted). “A misrepresentation is the proximate cause of

an investment loss if the risk that caused the loss was within the zone of risk

21 Plaintiff cites (at 47) Salvation Army v. Department of Community Affairs of New Jersey, 919 F.2d 183, 196 (3d Cir. 1990), but there, unlike here, the appellant placed new emphasis on actual “assertions in the complaint.” Nor is Alexander v. United States, 103 F.3d 128 (6th Cir. 1996), of any help to Plaintiff, as that case involved the avoidance of a “miscarriage of justice” (id. at *1), which this case does not (nor does Plaintiff attempt to show otherwise).


50

concealed by the misrepresentations.” Omnicom, 597 F.3d at 513 (internal

quotation marks omitted).

Plaintiff contends that CHSI’s “hidden admissions practices” put CHSI at

regulatory and financial risk—which materialized, it says, “after Tenet exposed

[CHSI’s] practices,” and “[a]ttention from regulators increased.” Br. 48. It also

suggests that the risk associated with CHSI’s use of the Blue Book materialized

when CHSI announced a decline in admissions in October 2011. Id. at 49. For at

least three reasons, those allegations fail to state a materialization-of-the-risk

claim.

First, relying on the announcement of the OIG investigation (or the Tenet

Complaint) as the “materialized” risk “would create an end-run around the . . .

clear holding in Loos that the announcement of an investigation, without more,

does not establish loss causation.” Mauss, 2014 WL 6980441, at *7. “By defining

the event constituting materialization of a concealed risk as the receipt of a

government subpoena, a creative plaintiff successfully pleads loss causation in

nearly every case in which a company receives a subpoena from a government

agency.” Caplin, 973 F. Supp. 2d at 614 (internal quotation marks omitted); see

Sapssov, 22 F. Supp. 3d at 1231-32. That is exactly what Plaintiff seeks to do here.

Second, to qualify as a “materialized” risk, the event (or facts underlying the

event) that materialized cannot be information already known to the public. See


51

Omnicom, 597 F.3d at 514 (noting that the facts behind an officer’s resignation

“were known a year before the resignation”). As shown above, neither the Tenet

Complaint nor the October 2011 report revealed any new information to the

market.

Third, where “substantial indicia of the risk that materialized are

unambiguously apparent,” plaintiffs face a particularly heavy burden. In re IPO

Sec. Litig., 399 F. Supp. 2d 298, 309 (S.D.N.Y. 2005) (internal quotation marks

omitted); cf. FHLMC, 830 F.3d at 385 (discussing disclosures that show

“assumption of risk”). And here, CHSI expressly warned investors that, “[i]f we

fail to comply with applicable laws and regulations, including fraud and abuse

laws, we could suffer civil or criminal penalties” (CHSI Form 10-K at 27 (Dec. 31,

2008), https://goo.gl/SSTBeF); that “qui tam or ‘whistleblower’ actions initiated

under the civil False Claims Act may be pending” against CHSI (id. at 34); and

that interpretations of Medicare rules “could cause our future financial results to

decline” and “subject our current practices to allegations of impropriety or

illegality or could require us to make changes in our facilities” (id. at 54, 27).22

22 On a motion to dismiss, a court may consider documents that “are referred to in the plaintiff’s complaint and are central to her claim.” Weiner v. Klais & Co., 108 F.3d 86, 89 (6th Cir. 1997). In a securities case, a court may consider the “the full text of the SEC filings, prospectus, analysts’ reports and statements ‘integral to the complaint.’” Bovee v. Coopers & Lybrand C.P.A., 272 F.3d 356, 360 (6th Cir. 2001).


52

Those are precisely the risks that Plaintiff now says “materialized” without

warning.

IV. THE TWO-YEAR STATUTE OF LIMITATIONS BARS PLAINTIFF’S CLAIM REGARDING STATEMENTS MADE AFTER THE TENET COMPLAINT

The district court correctly held that Plaintiff’s claim regarding statements

that CHSI made after the Tenet Complaint do not “relate back” to the filing of

Plaintiff’s Initial Complaint. For that and other reasons, this Court should affirm

the district court’s dismissal of that claim.

A. The Post-April 11 Claim Does Not “Relate Back” to the Filing of the Initial Complaint

Securities-fraud claims must be filed within “2 years after the discovery of

the facts constituting the violation.” 28 U.S.C. § 1658(b)(1). That limitations

period “begins to run once the plaintiff did discover or a reasonably diligent

plaintiff would have discovered the facts constituting the violation—whichever

comes first.” Merck & Co., Inc. v. Reynolds, 559 U.S. 633, 653 (2010) (internal

quotation marks omitted). Here, Plaintiff was on notice of its new claim (which

was based upon the asserted October 2011 corrective disclosure) long before it

filed its Initial Complaint on July 13, 2012. Yet Plaintiff “waited until the filing of

the First Amended Complaint on October 15, 2015 to raise the claim.” Opinion,

R. 248, PageID# 8070-8071. Plaintiff’s new claim based on statements made after

the Tenet Complaint was thus squarely barred by the statute of limitations.


53

Plaintiff contends that its new claim is nevertheless timely because it relates

back to the Initial Complaint. Br. 49-55. But relation back is appropriate only

where the original complaint would have placed defendant on “notice that he could

be called to answer for the allegations in the amended pleading,” Zundel v. Holder,

687 F.3d 271, 283 (6th Cir. 2012), including notice of the “nature and scope” of

the plaintiff’s claims, Bledsoe, 501 F.3d at 516 (internal quotation marks omitted).

Here, the Initial Complaint provided the opposite of such notice. By

referencing the post-April 11 statements but not charging them, the Initial

Complaint indicated that Plaintiff did not intend to pursue a separate securities-

fraud claim based on those statements. Bledsoe, 501 F.3d at 516 (allowing relation

back only if defendant “shouldn’t have been surprised by the amplification of the

allegations of the original complaint in the amended one”) (internal quotation

marks omitted). The district court thus correctly held that Plaintiff cannot resurrect

its stale claim under a relation-back theory. Opinion, R. 248, PageID# 8072-8074.

Plaintiff protests (at 50) that Chief Judge Sharp overlooked the Initial

Complaint’s citation to the October 2011 earnings report, which Plaintiff alleges

were corrective of the post-April 11 statements. Yet there, too, Plaintiff failed to

provide notice of the “nature and scope” of its claims. Bledsoe, 501 F.3d at 516.

To be sure, Plaintiff cited the October 2011 earnings report in its Initial Complaint.

But it did not (1) allege any corresponding stock drop associated with the earnings


54

report, (2) identify that report as a corrective disclosure, or (3) even mention the

October 26 press release that Plaintiff now alleges closed the class period.23 Only

years later did Plaintiff seek to amend its complaint to allege a distinct fraud, thus

extending the class period, expanding the putative class, and adding hundreds of

millions of dollars of additional damages.24

Plaintiff nonetheless says relation back should be permitted because it was

permitted in other cases, “notwithstanding the increases in defendants’ potential

liability.” Br. 52. But the fact that defendants in other cases had adequate notice

of the “nature and scope” of Plaintiffs’ claims does not mean Defendants in this

case did. Here, Plaintiff affirmatively chose not to state a claim based on these

facts, and so nothing in the Initial Complaint gave Defendants “the essential

information necessary to determine both the subject matter and size of the

prospective litigation.” Cliff v. Payco Gen. Am. Credits, Inc., 363 F.3d 1113,

1132-33 (11th Cir. 2004) (refusing to allow amendment to increase class size).

23 Plaintiff cited only an earnings call that took place the following day. IC ¶ 182. 24 Even if this Court holds that the Amended Complaint relates back to the filing of the Initial Complaint, it should direct the district court to exclude from any putative class any plaintiff who did not “purchase or otherwise acquire the publicly traded securities of CHS from July 27, 2006 through April 8, 2011”—i.e., the class alleged in the Initial Complaint (IC ¶ 2). See Defendants’ MTD, R.178, PageID# 4959.


55

None of the cases cited by Plaintiff permitted the use of relation back to

extend the class period to plead an entirely new claim of securities fraud. In In re

St. Paul Travelers Securities Litigation II, No. 04-4697, 2007 WL 1589524

(D. Minn. June 1, 2007), for example, the Court granted plaintiff leave to amend

the complaint to expand the class period, but only because “the claims of the new

purchasers and the original putative class members consist of identical causes of

action based on the same set of operative facts,” including a statement previously

alleged to be a “truthful” disclosure. Id. at *6 (emphasis added). In other words,

there was no new allegation of fraud, only a new set of plaintiffs (the purchasers in

the later time period). Here, by contrast, Plaintiff seeks to allege a new, distinct

claim of a securities fraud, and “[t]he primary difference” between the complaints

is “substantive,” not merely “temporal.” Id.

B. The Two-Year Statute of Limitations Has Expired—And Plaintiff Did Not Argue Otherwise Below

For the first time on appeal, Plaintiff contends that “The Extended Claim Is

Timely” after all—and that relation back therefore is unnecessary. Br. 55

(emphasis added). Specifically, Plaintiff contends that it “did not discover the

facts supporting scienter for the extended class period until 2015.” Id.

As a general rule, this Court will not “consider issues that were not raised

and passed on below.” Durand v. Hanover Ins. Grp., Inc., 806 F.3d 367, 374 n.2

(6th Cir. 2015). And as the district court observed (and Plaintiff admits), Plaintiff


56

did not argue below that its new claim fell within the limitations period. Opinion,

R. 248, PageID# 8071; Br. 49 n.19 (conceding that Plaintiff “did not brief the

timeliness of a stand-alone claim”).

Indeed, Plaintiff did not just forfeit the argument that its new claim was

timely; it effectively conceded that the claim was not timely. As Plaintiff

acknowledges here (at 49 n.19), Plaintiff’s sole argument below was that its new

claim related back to the Initial Complaint. But relation back is relevant only if the

limitations period expired. Plaintiff’s relation-back argument therefore assumed

that its claim was time barred. Plaintiff does not even attempt to explain how that

possibly constitutes “exceptional circumstances” that would justify this Court’s

review of its forfeited claim. Hayward v. Cleveland Clinic Found., 759 F.3d 601,

615 (6th Cir. 2014).

In any event, Plaintiff’s about-face on appeal does not come close to

satisfying the discovery rule. Plaintiff does not dispute that its Amended

Complaint (filed in 2015) came more than two years after its Initial Complaint

(filed in 2012). Instead, its sole argument is that its Amended Complaint relied, in

part, on documents obtained though discovery in 2015, and that those documents

supported its allegations of scienter as to CHSI’s statements after the Tenet

Complaint. Plaintiff does not (and cannot) argue that it failed to discover, or could

not have discovered, the relevant facts earlier.


57

V. THE DISTRICT COURT DID NOT ABUSE ITS DISCRETION BY DISMISSING THE COMPLAINT WITH PREJUDICE

This Court should affirm the district court’s dismissal of the complaint with

prejudice. The decision to dismiss a complaint with prejudice is reviewed for

abuse of discretion. Ohio Police & Fire, 700 F.3d at 844. There was no abuse of

discretion here, for at least two reasons.

The “default rule” is that “if a party does not file a motion to amend or a

proposed amended complaint in the district court, ‘it is not an abuse of discretion

for the district court to dismiss the claims with prejudice.’” Id. at 844 (quoting

CNH Am. LLC v. UAW, 645 F.3d 785, 795 (6th Cir. 2011)). Although Plaintiff

protests that the case management order allowed it to amend its complaint at any

point until July 15, 2016, that is beside the point. Plaintiff did not seek to amend

its complaint before that deadline. Indeed, it did not bring the issue to the attention

of the district court at any point—either in its opposition to the motion to dismiss

or through a post-judgment motion. In short, Plaintiff is “seeking leave to amend

from the wrong court at the wrong time.” Hancock v. Urban Outfitters, Inc., 830

F.3d 511, 515 (D.C. Cir. 2016).

The district court also did not abuse its discretion because leave to amend

would have been futile in any event. See Yuhasz v. Brush Wellman, Inc., 341 F.3d

559, 569 (6th Cir. 2003). Plaintiff states (at 58) that, if granted leave to amend, it

would include a materialization-of-the-risk claim based on “intervening case law,”


58

and would make better allegations regarding the newly identified partial corrective

disclosures that it raises here as “context” for the Tenet Complaint.

But a “proposed amendment is futile if the amendment could not withstand a

Rule 12(b)(6) motion to dismiss.” Rose v. Hartford Underwriters Ins. Co., 203

F.3d 417, 420 (6th Cir. 2000). And as shown above, Plaintiff’s newly proposed

claims would not survive a motion to dismiss: Plaintiff cannot state a

materialization-of-the-risk claim, and Plaintiff’s “context” theory relies on alleged

disclosures that do nothing to corroborate the allegations in the Tenet Complaint or

establish any other freestanding theory of loss causation. And it is irrelevant that

Plaintiff “took many depositions.” Br. 59. The disputed issue is about loss

causation, which depends on public disclosures, not revelations made in

depositions.

CONCLUSION

This Court should affirm the district court’s dismissal of Plaintiff’s

complaint.


59

Respectfully submitted, s/ Gary A. Orseck

Steven A. Riley Milton S. McGee, III RILEY, WARNOCK & JACOBSON, PLC 1906 West End Avenue Nashville, TN 37203 Telephone: (615) 320-3700 Facsimile (615) 320-3737 [email protected]

Gary A. Orseck Michael L. Waldman Matthew M. Madden Daniel N. Lerman ROBBINS, RUSSELL, ENGLERT, ORSECK, UNTEREINER & SAUBER LLP 1801 K Street, N.W., Suite 411L Washington, DC 20006 Telephone: (202) 775-4500 Facsimile: (202) 775-4510 [email protected]

December 7, 2016


60

ADDENDUM

APPELLEES’ DESIGNATION OF RELEVANT DOCUMENTS

Appellees hereby designate the following district court documents:

Record Entry

Description Page ID #

70 Initial Consolidated Class Action Complaint UNDER SEAL

83-3 Complaint, Tenet Healthcare Corp. v. Community Health Systems, Inc., 11-cv-732 (N.D. Tex.)

2546-2616

167 First Amended and Consolidated Class Action Complaint (“FAC”)

UNDER SEAL

178 Defendants’ Motion to Dismiss the Amended Complaint (“MTD”)

4916-4962

179 Declaration of Gary Orseck in Support of Defendants’ Motion to Dismiss the Amended Complaint

5576-5659

189 Plaintiff’s Opposition to Defendants’ Motion to Dismiss

6155-6200

191 Defendants’ Reply in Support of Motion to Dismiss

6615-6633

248 Opinion Dismissing Amended Complaint (“Opinion”)

8031-8074

249 Order Granting Motion to Dismiss 8075

250 Entry of Judgment 8076

251 Notice of Appeal 8077-8080


CERTIFICATE OF COMPLIANCE

This brief complies with the type-volume limitation set forth in Federal Rule

of Appellate Procedure 32(a)(7)(B) because the brief contains 13,804 words, as

determined by the word-count function of Microsoft Word 2010, excluding the

parts of the brief exempted by Federal Rule of Appellate Procedure 32(a)(7)(b)(iii)

and Sixth Circuit Rule 32(b)(1).

This brief complies with the requirements of Federal Rule of Appellate

Procedure 32(a)(5) because it is written in 14-point Times New Roman font.

Dated: December 7, 2016 s/ Gary A. Orseck Gary A. Orseck

ROBBINS, RUSSELL, ENGLERT, ORSECK, UNTEREINER & SAUBER LLP 1801 K Street, N.W., Suite 411L Washington, DC 20006 Telephone: (202) 775-4500 Facsimile: (202) 775-4510

[email protected] Counsel for Defendants-Appellees Community Health Systems, Inc. et al.


CERTIFICATE OF SERVICE

I hereby certify that on December 7, 2016, I electronically filed the

foregoing brief with the United States Court of Appeals for the Sixth Circuit by

using the CM/ECF system. All participants in this case are registered CM/ECF

users and service will be accomplished by the appellate CM/ECF system.

Dated: December 7, 2016 s/ Gary A. Orseck Gary A. Orseck

ROBBINS, RUSSELL, ENGLERT, ORSECK, UNTEREINER & SAUBER LLP 1801 K Street, N.W., Suite 411L Washington, DC 20006 Telephone: (202) 775-4500 Facsimile: (202) 775-4510

[email protected] Counsel for Defendants-Appellees Community Health Systems, Inc. et al.


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