Ansfield v. Omnicare, Inc. et al

Filing 141

MEMORANDUM OPINION AND ORDER; 1)Def's 106 Motion to Dismiss is GRANTED; 2)Pla's informal 137 request to "replead" is DENIED; 3)Jacksonville Police and Fire Pension Fund's 108 Motion for Creation of a Subclass is DENIED AS MOOT; 4)Matter is DISMISSED WITH PREJUDICE, and stricken from the Court's active docket. Signed by Judge David L. Bunning on 3/27/2013. (LST)cc: COR

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF KENTUCKY
NORTHERN DIVISION
AT COVINGTON

IN RE OMNICARE, INC.
SECURITIES LITIGATION

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Case No. 11-cv-173-DLB-CJS

District Judge David L. Bunning
Magistrate Judge Candace J. Smith

MEMORANDUM OPINION AND
ORDER

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I.

INTRODUCTION
Plaintiff brings this putative securities fraud class action against Omnicare, Inc. and

certain of its officers. Plaintiff’s allegations are that Omnicare, through executive-level
employees, made materially false statements when it represented that its billing practices
“materially comply with state and federal requirements” despite knowing that three internal
audits revealed Omnicare might have submitted deficient claims for reimbursement to
government programs.1 By Motion to Dismiss, Defendants’ challenge the legal viability of
Plaintiff’s pleading.
The central question is whether executive-level employees’ statements regarding
Omnicare’s legal compliance contained a misrepresentation or omission of material fact
that Omnicare had a duty to disclose, thereby rendering the statements actionable under

1

Plaintiff challenges other representations made by Defendants which are discussed
herein. However, at oral argument, Plaintiff’s counsel agreed that Defendants’ compliance-related
statements are the focus of this action. (See Doc. # 135, at 77-78).

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the Securities Exchange Act. The Sixth Circuit has explicitly held that statements about
“legal compliance” are “soft information” that are not actionable unless the defendants knew
the statements were untruthful. Indiana State Dist. Council of Laborers & Hod Carriers
Pension & Welfare Fund v. Omnicare, Inc., 583 F.3d 935, 945-46 (6th Cir. 2009).
The central question, then, turns on three issues. One, whether the Plaintiff
adequately pled that any of the Defendants had actual knowledge of the audit results. Two,
if so, whether knowledge of the audit results gave Defendants knowledge that their
statements of legal compliance were false. And three, whether Defendants therefore had
a duty to disclose the audit results in light of their statements regarding their belief that
Omnicare’s billing practices “materially comply” with state and federal requirements. For
the reasons considered herein, the Court finds that Plaintiff has failed to plead sufficient
facts to establish that any of the Individual Defendants had actual knowledge of the audit
results, or that any of the Defendants knew that the legal compliance statements were false
when made. Further, Plaintiff has not sufficiently pled that Omnicare had a duty to disclose
the audit results.

Thus, the legal compliance statements are not actionable, and

Defendants’ Motion to Dismiss must therefore be GRANTED.
II.

FACTS
A.

The Parties

Defendant Omnicare, Inc. is a publicly-traded company that provides pharmaceutical
care services to the elderly and serves residents in long-term healthcare facilities in the
United States and Canada. (Doc. # 94, ¶¶ 10, 21). Defendant Gemunder served as
Omnicare’s President, CEO and director from May 20, 1981, until his resignation on August

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2, 2010; Defendant Froesel was Omnicare’s CFO and a Senior Vice-President from March
1996 until November 2009; Defendant Hodges was Omnicare’s Secretary and a Senior
Vice-President from 1994 until she resigned on August 2, 2010; and Defendant Workman
began working at Omnicare in November 2009 and is the current President and CFO.
(Doc. # 94, ¶¶ 11-14).
This proposed class action was filed by Paul Ansfield on August 24, 2011, alleging
claims for violations of § 10(b) and § 20(a) of the Securities Exchange Act of 1934, and
10b-5, a regulation promulgated under § 10(b), on behalf of a proposed class of persons
that purchased Omnicare's common stock between January 10, 2007, and August 5, 2010,
and who were damaged thereby. (Doc. # 1). Jacksonville Police and Fire Pension Fund
(Jacksonville) filed an action asserting the same claims and further asserting partial
corrective disclosures. (Case No. 11-cv-315). On December 15, 2011, this Court granted
Jacksonville and Movant Austin Police Retirement System's Motion to Consolidate this
action with Ansfield's case. (Doc. # 56). Three groups presented Motions for Appointment
as Lead Plaintiff, and, after hearing oral argument, KBC Asset Management N.V. was
appointed as Lead Plaintiff ("Plaintiff") and its choice of lead class counsel was approved
pursuant to the Private Securities Litigation Reform Act ("PSLRA"), 15 U.S.C. § § 78u-4,
et seq. (Doc. # 86).
B.

The Stone Qui Tam Action

Plaintiff's allegations are based in large part on the allegations contained in a qui tam
action filed in the Northern District of Illinois by John Stone, Omnicare’s former Vice
President of Internal Audit. In that action, Stone asserted claims under the False Claims
Act (FCA).

He alleged that Omnicare submitted false claims to the United States
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Government as well as several States, which claims constituted fraud on the Medicare and
Medicaid programs.
Stone’s claims were based on the results of three internal audits that he
performed–two on ancillary-related services and one on newly-acquired pharmacies–which
he alleged demonstrated wide-spread problems in Omnicare’s submission of Medicare and
Medicaid claims. Specifically, Stone alleged that in 2007 Omnicare commissioned him to
perform an audit of 18 of its pharmacy facilities that provided ancillary services (Wave I
audit). He alleges he reviewed 39 claims from each of the 18 pharmacies audited, for each
year between 2000 and 2005 (pre-class period). The results of the audit allegedly revealed
that all 18 pharmacies had submitted numerous claims during the time period to both
Medicare and state Medicaid programs without having the required supply documentation
retained on file by Omnicare, which according to Stone renders them false and nonreimbursable. Stone averred that the error rates were so high that Omnicare knew or
should have known that these “false” claims were being made.
At the direction of management, in 2008 Stone performed a second internal audit
(Wave II audit), to determine if Wave I’s finding of missing documents was a result of
documents being lost. Stone reviewed 30 claims submitted in 2008 from 15 of Omnicare’s
pharmacies. The result of the Wave II audit allegedly provided evidence that claims
continued to be submitted without the required supporting documentation being on file. The
Wave II audit also allegedly revealed that at least two pharmacies billed Medicaid patients
at a higher rate than some non-Medicaid patients.
Stone further alleged that in conducting interviews in conjunction with the Wave II
audit, he learned that certain Omnicare pharmacy facilities engaged in Medicaid fraud with
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respect to Synagis, a pediatric medicine. The FDA-approved label for Synagis instructed
that unused portions of the drug be discarded, but Stone allegedly discovered some
Omnicare pharmacies were stockpiling the undiscarded excess to fill new prescriptions,
and billing Medicaid for the new prescriptions, when in reality they were being filled with the
stockpiled excess.

Two pharmacy managers from an Omnicare Nevada Pharmacy

allegedly confirmed their pharmacy intentionally stockpiled excess Synagis and billed all
payors for prescriptions filled with the stockpiled excess, including Nevada Medicaid.
In his federal court action, Stone alleged that Omnicare attempted to conceal the
ongoing fraud by repaying Medicare for the “false” claims uncovered in the Wave I audit,
without further examining other claims even though the likelihood was great that there were
other incidents of fraud since the audit covered such a small sampling of claims. Stone
asserted that at the time of the reimbursement, Omnicare was aware that the results of the
Wave II audit showed continuing fraud, but it did not attempt to reimburse for the fraud
uncovered in the Wave II audit.
Stone also asserted that in 2008 he was directed to perform an audit of newlyacquired pharmacies to determine whether they were in compliance with Medicare and
Medicaid regulations (the pharmacy audit). Stone asserted that the pharmacy audit
revealed the pharmacies were in violation of numerous statutory and regulatory
requirements involving order processing and control test failures.
On June 11, 2010, the Illinois District Court ordered that Stone’s qui tam action be
unsealed upon its granting of the United States’ and Named States’ notice of election to
decline intervention in the matter. Stone chose to continue to pursue his claims. The
Illinois District Court has dismissed Stone’s FCA claims on three occasions, twice without
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prejudice. In the most recent dismissal with prejudice, the Illinois District Court noted that
Stone’s assertions that unidentified pharmacy staff members confirmed that claims were
regularly submitted without required documentation and that pharmacy managers did not
care what documents were being submitted to the government health programs “as likely
evinces negligence as it does actual knowledge, deliberate ignorance or recklessness."
United States ex rel. John Stone, 1:09-cv-04319 (N.D. Ill. Nov. 20, 2012). That court
dismissed all claims except Stone's claim for retaliatory discharge, finding Stone had not
alleged the required mental state for a claim under the False Claims Act.
Thus, there has been no actual finding that Omnicare’s submission of some claims
for payment without having on file the required supporting documentation or that its billing
for stockpiled Synagis constituted fraud against Medicare or Medicaid. Nor has Plaintiff
made any allegations here that any regulatory action has been initiated against Omnicare
for this conduct.
C.

The Consolidated Amended Complaint

On May 11, 2012, Plaintiff filed a Consolidated Amended Complaint ("Complaint")
alleging Defendants made false and misleading statements arising under Section 10(b) of
the Securities Exchange Act and Rule 10b-5 promulgated thereunder. (Doc. # 94).
Specifically, Plaintiff alleges that Defendants made the following false and misleading
statements or omissions:
1)
Omnicare falsely represented in its SEC filings that it was in material
compliance with all state and federal regulations as well as its own codes of conduct;
2)
Omnicare’s statements describing the risks that would befall the company if
it were found to have violated certain regulations were also misleading because it knew at
the time it made the statements that it was not in compliance with regulations;
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3)
Omnicare falsely represented that its issues with Medicare and Medicaid
compliance had been resolved, which scheme began on January 10, 2007, with
Gemunder’s statement at the JP Morgan Healthcare Conference that proclaimed the
Company’s “goal is to comply with all laws and regulations,” and it was getting its regulatory
issues behind it;
4)
Omnicare issued false financial results during the class period on its 10-K and
10-Q filings with the SEC and falsely reported artificially inflated financial data in its
quarterly earnings conference calls and at investor conferences by including proceeds of
the company’s fraudulent Medicare and Medicaid submissions in its calculations;
5)
Omnicare made material misrepresentations and/or omissions by attributing
its success to legitimate business factors while omitting the effect of its fraudulent
submissions to Medicare and Medicaid; and
6)
Defendants Gemunder, Froesel and Workman knowingly signed false
Sarbanes-Oxley (“SOX”) certifications during the class period certifying that the SEC filings
contained accurate statements of material fact and fairly presented in all material respects
the financial condition of the company.
Plaintiff alleges that as a result of the misrepresentations, Omnicare was able to
conceal from investors its alleged fraudulent scheme, which, according to Plaintiff,
artificially inflated Omnicare’s stock price by misrepresenting the company’s financial
results and business practices, until the scheme was revealed to the market when the
Stone qui tam action was disclosed in Omnicare’s Form 10-Q filed on August 5, 2010.
Defendants filed a Motion to Dismiss the Consolidated Amended Complaint (Doc. # 106),
which has been fully briefed. In addition, Jacksonville has filed a Motion for Creation of a
Subclass (Doc. # 108), which is also ripe.
On February 14, 2013, this matter came before the Court for an Oral Argument on
Defendants’ Motion to Dismiss and Jacksonville’s Motion for Creation of a Subclass.
Plaintiff having raised a new argument during Oral Argument regarding non-party
employees’ knowledge of the audit results being imputed to Defendant Omnicare, the Court
permitted the parties an opportunity to submit additional briefing on the issue, which briefing
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has now been filed. (Doc. # 136, 137). The Court having heard from the parties by way
of oral argument and briefing, the matters are now ripe for a decision.
III.

ANALYSIS
A.

Plaintiff’s Claim under 10(b) and 10b-5 is Dismissed

Section 10(b) and Rule 10b-5 prohibit “fraudulent, material misstatements or
omissions in connection with the sale or purchase of a security.” Louisiana Sch. Emp. Ret.
Sys. v. Ernst & Young, LLP, 622 F.3d 471, 478 (6th Cir. 2010)(quoting Frank v. Dana
Corp., 547 F.3d 564, 569 (6th Cir. 2008)). The elements of this cause of action are: “1) a
material misrepresentation or omission by the defendant; 2) scienter; 3) a connection
between the misrepresentation or omission and the purchase or sale of a security;
4) reliance upon the misrepresentation or omission; 5) economic loss; and 6) loss
causation.” Hod Carriers, 583 F.3d at 942; see also Dura Pharm., Inc. v. Broudo, 544 U.S.
336, 341-42 (2005) (citations omitted).
Section 10(b) claims sound in fraud, and therefore the strict pleading requirements
of Federal Rule of Civil Procedure 9(b) apply. Hod Carriers, 583 F.3d at 942. In addition,
the PSLRA created an even heightened pleading standard for securities fraud cases. Id.;
see also Amgen Inc. v. Connecticut Ret. Plans & Trust Funds, __ U.S. __, 2013 WL
691001, at *12 (Feb. 27, 2013). Specifically, Rule 9(b) requires “[a] plaintiff's complaint
must ‘(1) specify the statements that the plaintiff contends were fraudulent, (2) identify the
speaker, (3) state where and when the statements were made, and (4) explain why the
statements were fraudulent.’” Louisiana Sch. Emp. Ret. Sys., 622 F.3d at 478 (quoting
Dana Corp., 547 F.3d at 570). In addition, “[t]he PSLRA ‘requires plaintiffs to state with

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particularity both the facts constituting the alleged violation, and the facts evidencing
scienter, i.e., the defendant's intention to deceive, manipulate, or defraud.’” Id. (quoting
Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 313 (2007)). If a plaintiff does
not meet this requirement, the PSLRA provides that a court shall, on any defendant’s
motion, dismiss the complaint. See 15 U.S.C. § 78u-4(b)(3).
Defendants argue the Complaint should be dismissed because Plaintiff failed to
satisfy the reasonable investigation requirement of Rule 11 of the Federal Rules of Civil
Procedure and the strict pleading requirements of the PSLRA and Rule 9(b). In addition,
Defendants assert that Plaintiff has failed to adequately plead three required elements of
the claim; specifically, a material misstatement or omission, scienter and/or loss causation.
The failure to adequately plead any one of these elements is fatal to Plaintiff’s cause of
action.
For the following reasons, the Court concludes that Plaintiff’s investigation complied
with the requirements of Rule 11. Nevertheless, the Complaint is dismissed with prejudice
because Plaintiff has failed to plead an actionable misrepresentation or omission and has
therefore failed to plead a prima facie claim under Section 10(b) and Rule 10b-5. This
failure being dispositive, Defendants’ alternative grounds for dismissal, i.e. failure to plead
scienter or loss causation, need not be considered.
1.

Plaintiff Performed Sufficient Investigation

Defendants first argue that Plaintiff “lifted” the underlying allegations of fraud from
the Stone Complaint, and that this is insufficient to satisfy the reasonable investigation
requirement of Rule 11 and the strict pleading requirements of the PSLRA and Civil Rule

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9(b).2 This argument, at least with respect to Civil Rule 11, does not warrant a great deal
of attention. Suffice it to say that Plaintiff’s Complaint not only recites allegations from the
Stone Complaint, which is based on Stone’s knowledge of the compliance audits he
performed as Omnicare’s Vice President of Audit, but counsel also reviewed Omnicare’s
SEC filings, transcripts of investor conference calls, analyst reports and interviewed more
than twelve former Omnicare employees. (Doc. # 94, ¶ 1). While not exhaustive, counsel
has performed an independent investigation sufficiently evaluative of the circumstances
relied upon and alleged by Stone. For purposes of the pending motion, Plaintiff’s reliance
on the Stone allegations and other sources satisfies the reasonable investigation
requirement of Rule 11.
2.

Material Misrepresentation and Omissions

Defendants assert that Plaintiff has failed to adequately plead actionable
misstatements or omissions. The PSLRA and Federal Rule of Civil Procedure 9(b) require
the alleged misrepresentations be plead with specificity: “the complaint must ‘(1) specify
the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state
where and when the statements were made, and (4) explain why the statements were
fraudulent.’ ” Hod Carriers, 583 F.3d at 942-43.
To be actionable, the misrepresentation or omission must pertain to material
information that Omnicare had a duty to disclose. Ashland, Inc. v. Oppenheimer & Co.,
Inc., 648 F.3d 461, 468 (6th Cir. 2011) (quoting City of Monroe Emps. Ret. Sys. v.
Bridgestone Corp., 399 F.3d 651, 669 (6th Cir. 2005)). “A misrepresentation or omission

2

Whether the strict pleading requirements of the PSLRA and Rule 9(b) have been met is
discussed supra.

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is material only if there is a substantial likelihood that “a reasonable investor would have
viewed the misrepresentation or omission as “having significantly altered the total mix of
information made available.”’” In re Ford Motor Co. Sec. Litig., Class Action, 381 F.3d 563,
570 (6th Cir. 2004) (quoting In re Sofamor Danek Grp., Inc., 123 F.3d 394, 400 (6th
Cir.1997)); see also Matrixx Initiatives, Inc. v. Siracusano, __ U.S. __, 131 S. Ct. 1309,
1318 (2011) (quoting Basic Inc. v. Levinson, 485 U.S. 224, 231-32 (1988)). In addition,
“[w]hen a company chooses to speak, it must ‘provide complete and non-misleading
information.’” Oppenheimer, 648 F.3d at 468 (quoting Sofamor, 123 F.3d at 400).
Here, Plaintiff asserts six types of false statements that it contends are actionable.
a.

Statements of Legal Compliance and Statements of the
Risks if Found to be in Noncompliance

Plaintiff alleges that in Omnicare’s SEC filings, Defendants made various
misrepresentations concerning the Company’s compliance with applicable law, yet the
internal audits revealed Omnicare was not complying with Medicare and Medicaid
reimbursement regulations. Specifically, Plaintiff claims Omnicare’s Form 10-K filed with
the SEC on March 1, 2007, February 28, 2008, February 26, 2009, and February 25, 2010,
contained materially false and misleading information. (Doc. # 94, ¶¶ 91-95).3 Each of
these SEC filings provided:
Medicare and Medicaid providers and suppliers are subject to inquiries or
audits to evaluate their compliance with requirements and standards set forth
under these government-sponsored programs. These audits and inquiries,

3

In addition, Plaintiff asserts Omnicare’s annual proxy statements filed with the SEC during
the class period, SEC Form DEF14A, referenced the Company was complying with its codes of
conduct, giving the impression that Omnicare had sufficient controls to ensure compliance. Yet,
Omnicare was allegedly submitting claims in violations of Medicare and Medicaid reimbursement
regulations. (Doc. # 94, at ¶¶ 96-100).

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as well as our own internal compliance program, from time-to-time have
identified overpayments and other billing errors resulting in repayment or
self-reporting to the applicable agency. We believe that our billing
practices materially comply with applicable state and federal
requirements. However, the requirements may be interpreted in the future
in a manner inconsistent with our interpretation and application.
***
Although we believe that we are in compliance in all material respects
with federal, state and local laws, failure to comply could subject us to
denial of the right to conduct business, fines, criminal penalties and other
enforcement actions.
(Doc. # 94, ¶¶ 91-94) (emphasis original to Complaint).

Plaintiff contends that the

compliance statements were material misrepresentations because the internal audits
revealed that Omnicare was submitting reimbursement claims without the necessary
supporting documentation on file, pharmacies had billed for stockpiled Synagis, and two
facilities had billed Medicaid patients at a higher rate than non-Medicaid patients.
In their Motion to Dismiss, Defendants argue that these statements are not
actionable for three reasons. First, Defendants assert that the material compliance
statements were not false because Omnicare has not been found to have committed
Medicare and/or Medicaid fraud as alleged in the Stone action. Second, Defendants rely
on Hod Carriers for the proposition that the legal compliance statements are not actionable
because the Defendants did not have actual knowledge of the falsity of the statements at
the time they were made. Finally, Defendants rely on Hod Carriers again in arguing that
even if they had knowledge of the internal audit results, they had no duty to disclose them
because a company never has a duty to accuse itself of criminal wrongdoing.
Plaintiff responds that the material compliance statements are actionable. According
to Plaintiff, these statements were false because internal audits had revealed that

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Omnicare submitted improper claims to Medicare and Medicaid for reimbursement.
Plaintiff contends these statements are actionable because it has sufficiently pled
Defendants knew from Stone’s audit results and other sources that the compliance
statements were false when made. Additionally, Plaintiff states that while Omnicare did not
have a duty to accuse itself of wrongdoing, once it made these compliance statements, it
had a duty to speak truthfully on the subject and reveal its unlawful claims submissions.
The Sixth Circuit has squarely addressed the parties’ competing arguments in Hod
Carriers. In that case, plaintiffs sought recovery against Omnicare for, inter alia, assuring
the public on a number of occasions that it was complying with the law. Hod Carriers, 583
F.3d at 941. For example, an Omnicare press release stated that “. . . [t]o the best of our
knowledge, our purchase of pharmaceuticals comply with applicable laws and regulations
and are consistent with Omnicare’s goal of providing appropriate pharmaceutical care costeffectively for the seniors we serve.” Id. The plaintiffs contended that the legal compliance
statements were materially misleading because Omnicare was engaged in two fraudulent
schemes at the time the statements were made: (1) repackaging and reshipping drugs with
varying expiration dates, including some expired drugs; and (2) replacing cheaper doses
of certain medicines with more expensive doses in order to increase revenue. Id. The
plaintiffs argued that Omnicare was liable for its allegedly false legal compliance statements
because it knew they were false when made, and also because once it spoke on the
subject by issuing the legal compliance statements it was obligated to disclose its illegal
conduct to correct the statements. Id.
The Sixth Circuit rejected each of plaintiffs arguments. Id. at 945-47. The Circuit
Court first discussed the legal compliance statement. Relying on the Eighth Circuit’s
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decision in Kushner v. Beverly Enterprises, Inc., 317 F.3d 820 (8th Cir. 2008), the Sixth
Circuit opined that statements of legal compliance, if untrue, are actionable only “where the
complaint ‘adequately pleaded that the defendants knew the statements were untruthful.’”
Id. at 945-46 (quoting Kushner, 317 F.3d at 831). The Circuit Court concluded that the
complaint failed to sufficiently allege the defendants were aware of any wrongdoing, and
the legal compliance statements were, therefore, not actionable. Id. at 946.
The Hod Carriers Court then turned to the separate issue of whether Omnicare had
“a duty to disclose its ‘illegal’ operations based on its ‘legal compliance’ claim.” Id. The
Circuit Court held that Omnicare did not have a duty to disclose the illegal operations
because the materiality of the alleged omissions - the alleged illegal operations - derived
from predictions of whether third parties would seek fines or other sanctions based on a
finding of regulatory violations. Id. at 947. Thus, the Sixth Circuit concluded that where the
materiality of the alleged omission is derived from the consequences of the actions (i.e.,
a finding of illegality and subsequent sanctions), rather than the actions themselves, the
consequences are “soft” information not required to be disclosed. Id. (citing Zaluski v.
United Am. Healthcare Corp., 527 F.3d 564, 575 (6th Cir. 2008)).
Hod Carriers dictates that this Court find the compliance statements at issue here
are not actionable and that Defendants did not have a duty to disclose the alleged Medicare
and Medicaid fraud after making compliance statements. This holding rests on two
conclusions: (1) as in Hod Carriers, the misrepresentations at issue are not actionable
because the Complaint does not allege sufficient facts to establish that the Defendants had
actual knowledge the compliance statements were false when made; and also as in Hod
Carriers, (2) the materiality of the alleged omissions–namely audit results suggesting that
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Omnicare could be found to have committed Medicare and/or Medicaid fraud–requires a
prediction of third parties’ conduct, and thus constitutes “soft”4 information not required to
be disclosed. Each of these conclusions will be addressed in turn.
(1)

No Actual Knowledge of Misrepresentation

As Hod Carriers makes clear, statements of legal compliance are actionable only
“where the complaint ‘adequately pleaded that the defendants knew the statements were
untruthful.” Hod Carriers, 583 F.3d at 945 (quoting Kushner, 317 F.3d at 831); City of
Pontiac, 865 F. Supp. 2d at 822 (quoting Sofamor, 123 F.3d at 401). Judge Heyburn’s
recent decision in In re Almost Family, Inc. Securities Litigation, more fully develops this
rule. Quoting the Eighth Circuit’s decision in Kushner, Judge Heyburn explained that
statements of legal compliance are not actionable “[a]bsent a clear allegation that the
defendants knew of the scheme and its illegal nature at the time they stated the belief
that the company was in compliance with the law . . . .” In re Almost Family, Inc. Sec. Litig.,
No. 3:10-cv-00520-H, 2012 WL 443461 (W.D. Ky. Feb. 10, 2012) (quoting Kushner, 317
F.3d at 831) (emphasis added).

More specifically, the “plaintiff must plead actual

knowledge on behalf of defendants, since ‘[t]he fact that a defendant’s belief or opinion
later “prove[s] to be wrong in hindsight does not render the statements untrue when
made.”’” Id. at *7 (emphasis added; internal citation omitted).

4

When determining if statements are actionable, the Sixth Circuit has applied a “hard” and
“soft” information distinction. Hod Carriers, 583 F.3d at 942. “Hard information is typically historical
information or other factual information that is objectively verifiable.” City of Pontiac Gen. Emps.’
Ret. Sys. v. Stryker Corp., 865 F. Supp. 2d 811, 822 (W.D. Mich. 2012) (quoting Sofamor, 123 F.3d
at 401). “Soft” information, on the other hand, “includes predictions and matters of opinion.” Id.
“Soft” information need only be disclosed if it is “virtually as certain as hard fact.” Id.

15

Plaintiff relies on three types of allegations within the Complaint to demonstrate that
Defendants had actual knowledge that Omnicare knew its legal compliance statements
were false when made: (1) state and federal investigations into Omnicare’s operations,
including settlement agreements between Omnicare and the government; (2) confidential
witness statements that allegedly reveal pervasive fraud; and (3) the allegations made by
Stone in his qui tam action. As discussed below, none of these allegations are sufficient
to find Defendants had actual knowledge that the legal compliance statements were false
when made.
(a)

Individual Defendant’s knowledge

Reviewing Plaintiff’s allegations as to the Individual Defendants, the Court finds
there are insufficient allegations to establish any of them actually knew that Omnicare was
submitting “false” claims for reimbursement as alleged in the Stone action, nor do they
establish any of the Defendants knew that Omnicare’s actions were actually illegal or
fraudulent.

First, Plaintiff’s reliance on government investigations and settlement

agreements does not establish that the Defendants had actual knowledge that Omnicare
was submitting “false” claims for reimbursement. The allegations regarding government
investigations do not contain specific assertions of fact as to when Omnicare or the
Individual Defendants learned of the investigations, what they learned, or how they learned
it.
Even more problematic, to the extent the Complaint reveals the scope of the other
investigations, Plaintiff has not alleged sufficient facts to establish a connection between
what Plaintiff alleges Defendants knew from those other investigation/settlements, and what
was allegedly revealed to the market in this case. See Hod Carriers, 583 F.3d at 946
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(holding that complaint did not plead sufficient “actual knowledge” where there was a
disconnect between what the individual actually knew and what was allegedly revealed to
the market). For example, the Complaint alleges that Omnicare was investigated by the
United States Attorney’s Office for the District of Massachusetts on issues pertaining to
allegations it was interchanging capsules and tablets for certain drugs (Doc. # 94, at ¶ 26);
that Omnicare settled claims that it overcharged for certain drugs (Id. at ¶32); and that
Omnicare settled claims alleging it knowingly submitted claims for reimbursement that
involved kickbacks either to or from Omnicare. (Id. at ¶ 83).
Here, however, the alleged omission is that Omnicare did not disclose it submitted
claims without required documents being on file, billed for stockpiled Synagis, and two of
its pharmacies billed Medicaid at a higher rate than those pharmacies billed non-Medicaid
patients. While Plaintiff did allege Omnicare settled allegations that it submitted false
reimbursement charges to Michigan’s Medicare program, the only specific allegation on this
point is that Omnicare submitted charges for deceased persons. Plaintiff did not allege
specific facts connecting the billing practices at issue in the Michigan settlement to the
allegations it raises here. (Id. at ¶30). Thus, Plaintiff has not alleged sufficient facts
establishing that the prior government investigations or settlements have a similar
connection to the alleged conduct at issue in this litigation.
Likewise, the allegations of the five confidential witnesses referenced in Plaintiff’s
Complaint fail to establish that the Individual Defendant’s had actual knowledge.
Confidential Witnesses one through four provide information regarding purported
irregularities witnessed during their employment. However, none of these confidential
witnesses indicate they actually provided this information to any of the Individual
17

Defendants, which is what is required to establish actual knowledge. See Hod Carriers,
583 F.3d at 946-47 (disregarding allegations of three confidential witnesses who reported
illegal activity within the company because they did not establish any knowledge on the part
of defendants).

Moreover, these confidential witnesses’ allegations are vague and

implicate only a few of Omnicare’s facilities.
The closest factual allegation in Plaintiff’s Complaint supporting a finding that any
of the confidential witnesses communicated with any of the Individual Defendants is as
follows:
82.

CW5 was Omnicare’s Chief Compliance Officer from before the Class Period
through 2008 when he/she was replaced by James Mathis. CW5 confirmed
the reports of the other confidential witnesses detailed above, and qui tam
relator Stone, stating that he/she had brought compliance related concerns
to the attention of defendant Gemunder and other Omnicare executives.
Specifically, he/she advised counsel that “as you were told by other people,
I did my best to bring it to the head [i.e. Gemunder], but it didn’t work.” CW5
also stated that he/she “did what [he/she] was supposed to do as a Chief
Compliance Officer and a Corporate Officer and [he/she] threw up [his/her]
arms, and said ‘I’m retired and I’m going home.’”

(Doc. # 94, ¶ 82). CW5's purported statement does not provide a sufficient factual basis
to establish Defendants had knowledge of any illegality. Instead, CW5 states he brought
“compliance related concerns” to the attention of Gemunder and other unnamed Omnicare
executives without any indication of what those concerns were. (Id.; emphasis added).
Even assuming the “concerns” were the alleged Medicare and Medicaid fraud, CW5 does
not provide a date on which he asserts he provided this information to Defendant
Gemunder or others or the specifics of what was discussed. As a result, even CW5's
allegations fail to establish that Gemunder or any of the Individual Defendants had actual
knowledge of the alleged improper claims submissions.
18

The crux of Plaintiff’s complaint and argument, however, surrounds Defendants’
alleged knowledge of the results of Stone’s three internal audits, which Stone claimed
demonstrated a “scheme to defraud Medicare and Medicaid” by Omnicare’s submission
of claims that did not comply with laws and regulations of those programs. (Doc. # 94, at
¶38). Plaintiff did not allege any of the Individual Defendants had actual knowledge that
these specific audits were even being performed. Instead, Plaintiff alleges Stone was
instructed to perform the audits by “Omnicare,” “Keefe” (Omnicare’s Chief Operating
Officer), and the “Company.”

There are no allegations that any of the Individual

Defendants, directly or indirectly, ordered Stone to conduct the audits. At best, the Internal
Audit and Compliance Committees were aware of the ongoing audits, but there are no
allegations that any of these Individual Defendants served on any of those committees.
More importantly, there are no specific allegations of fact establishing that any of
these Individual Defendants were informed of the Wave I or Wave II audit results. Instead,
Plaintiff alleged:
46.
Stone presented the results of the Wave I audit to Omnicare’s Internal
Audit and Corporate Compliance Committees. On information and belief,
the information was immediately given to defendants Gemunder, Froesel,
and Hodges and received by defendant Workman when he started at the
Company in November 2009. . . .
...
51.
On information and belief, Stone presented the results of the Wave
II audit to Omnicare’s Internal Audit and Corporate Compliance Committees
and the results were immediately given to defendants Gemunder, Froesel,
and Hodges and received by defendant Workman when he started at the
Company in November 2009. . . .
(Doc. # 94, ¶¶ 46, 51) (emphasis added).

Plaintiff’s allegations that the Individual

Defendants had knowledge of the audit results is solely based “on information and belief,”
without stating with particularity the facts upon which that belief is based.
19

This is

insufficient, as the PSLRA requires that “if an allegation regarding the statement or
omission is made on information and belief, the complaint shall state with particularity all
facts on which that belief is formed.” 15 U.S.C. § 78u-4(b)(1); See also Oppenheimer,
648 F.3d at 469; City of Pontiac, 865 F. Supp. 2d at 820. Here, Plaintiff has failed to set
forth the basis for its belief, and while Plaintiff relies generally on the Stone action for much
of its allegations, the complaints there do not allege Stone directly communicated these
audit results to any of the Individual Defendants.
With respect to the pharmacy audit, the Complaint alleges “on information and belief”
that the results were shared with Froesel and Hodges. (Doc. # 94, ¶ 62). Again, this is
insufficient to establish actual knowledge as to those Defendants. 15 U.S.C. § 78u-4(b)(1).
While the Complaint does allege that Stone directly shared the results of the pharmacy
audit with Gemunder (Doc. # 94, ¶ 193), even this allegation does not establish that he had
actual knowledge of the allegedly fraudulent activity. Specifically, Plaintiff has not alleged
with particularity what the specific results of the pharmacy audit demonstrated or what was
communicated to Gemunder, i.e. how many pharmacies were involved, what specific
irregularities were found, how many actual claims were involved, or how, or what,
information was actually communicated. Thus, Plaintiff has not sufficiently alleged actual
knowledge on the part of any of the Individual Defendants.
Finally, as discussed more fully below, even if the Individual Defendants were
somehow aware these audits were being performed and had been informed of their results,
the Complaint does not allege sufficient facts to support a conclusion that from this
knowledge they knew their legal compliance statements were false.

20

(b) Omnicare’s Knowledge
During oral argument, Plaintiff argued for the first time that the knowledge of Stone
(Omnicare’s former Vice-President of Internal Audit), Patrick Keefe (Omnicare’s Chief
Operating Officer), William Fitzpatrick (Omnicare’s Chief Compliance Officer), as well as
that of the Internal Audit Committee can be imputed to Defendant Omnicare. (Doc. # 135,
137). In its supplemental briefing on the issue, Plaintiff relies on City of Monroe Employees
Retirement System v. Bridgestone Corp., 399 F.3d 651, 688 (6th Cir. 2005); In re National
Century Financial Enterprises, Inc, 846 F. Supp. 2d 828, 874-75 (S.D. Ohio 2012); Kahn
v. Ran, No. 08-cv-14417, 2009 WL 1138504 (E.D. Mich. April 27, 2009); In re Keithley
Instruments, Inc. Securities Litigation, 268 F. Supp. 2d 887, 901-02 (N.D. Ohio 2002), as
well as decisions from outside of this circuit, for the collective proposition that the
knowledge of senior level employees, including non-defendants, may be imputed to a
company. All of the cited cases, however, impute knowledge for purposes of determining
a company’s scienter. Whether a plaintiff has adequately pled scienter, which can include
a finding of recklessness, is a distinct concept from whether the plaintiff has established
that a particular statement constitutes an actionable misrepresentation or omission.
As discussed above, the Sixth Circuit has held that for statements of legal
compliance to be actionable, a plaintiff must establish that defendants had actual
knowledge of their falsity. Hod Carriers, 583 F.3d at 945; Almost Family, 2012 WL
443461, at *7. In arguing that the knowledge of non-defendant executives can be imputed
to Omnicare, Plaintiff fails to cite primary authority where the knowledge of a non-defendant
employee, who did not make the compliance statement, was imputed to the company for

21

purposes of finding that a corporation had actual knowledge rendering its legal compliance
statement actionable as an alleged misrepresentation.
Nevertheless, even if the Court were inclined to impute to Omnicare the knowledge
of non-defendant employees who Plaintiff has not alleged are in any way responsible for
the compliance statements, the Complaint does not allege sufficient facts to support a
finding that from this knowledge Omnicare knew its legal compliance statements were
false. The legal compliance statements at issue stated:
Medicare and Medicaid providers and suppliers are subject to inquiries or
audits to evaluate their compliance with requirements and standards set forth
under these government-sponsored programs. These audits and inquiries,
as well as our own internal compliance program, from time-to-time have
identified overpayments and other billing errors resulting in repayment or
self-reporting to the applicable agency. We believe that our billing
practices materially comply with applicable state and federal
requirements. However, the requirements may be interpreted in the future
in a manner inconsistent with our interpretation and application.
(Doc. # 94, at ¶¶ 91-94). Thus, the statements acknowledge that audits do “from time-totime” identify billing errors, but that Omnicare believes its billing practices “materially
comply,”–not strictly comply–with the applicable requirements.

Omnicare’s mere

knowledge that some claims were submitted for reimbursement without sufficient
supporting documentation, billed for stockpiled Synagis, or submitted at a higher rate than
non-Medicaid patients does not mean it knew the claims referenced would be found by third
parties to constitute material noncompliance with Medicare and Medicaid laws. See Hod
Carriers, 583 F.3d at 946-47; Zaluski, 527 F.3d at 575; City of Pontiac, 865 F. Supp. 2d at
824-27.

22

City of Pontiac is instructive. There, the plaintiffs alleged Stryker Corporation’s
statement in its SEC filing that it believed its manufacturing and quality control procedures
met the requirements of the Food and Drug Administration’s (FDA) regulations was false
and misleading. Plaintiffs alleged these statements were actionable because, inter alia,
Defendants had knowledge of potential noncompliance based on their prior receipt of an
FDA Form 483 identifying “serious quality control deficiencies.” 865 F. Supp. 2d at 824.
“An FDA Form 483 is issued to firm management at the conclusion of an inspection when
an investigator has observed any conditions that in their judgment may constitute violations
of the Food Drug and Cosmetic Act . . . FDA investigators are trained to ensure that each
observation noted on the FDA Form 483 is clear, specific and significant.” FDA Form 483
Frequently Asked Questions, http://www.fda.gov/ICECI/EnforcementActions/ ucm256377.
htm (last visited March 14, 2013). Form 483 merely notifies the company’s management
of objectionable conditions. Id. It does not constitute a final agency determination of
whether any condition violates the law. Id.
The court in City of Pontiac rejected plaintiffs’ argument, finding Stryker had “no duty
to disclose the . . . Form 483, nor did it render the compliance statement false or
misleading” because the “Form 483 was not the final word on whether the . . . facility was
in compliance with FDA regulations.” Id. at 825. Therefore, the Court held that since the
Form 483 did not constitute a final agency determination, “any information in the Form 483
was ‘soft’ information as to the existence of regulatory violations.” Id. at 826.5

5

Plaintiff cites the Eighth Circuit’s decision in Public Pension Fund Group v. KV
Pharmaceutical Co., 679 F.3d 972 (8th Cir. 2012), for the proposition that facts within a Form 483
can give a defendant knowledge that its statement of legal compliance is false. Plaintiff is correct
that a Form 483 can give a Defendant knowledge in some circumstances according to KV

23

The City of Pontiac court placed significant emphasis on the fact that the Form 483
only disclosed facts that might constitute a violation of law, but did not contain an opinion
of noncompliance. The court makes this point clear in its distinction of Wilkof v. Caraco
Pharmaceutical Laboratories, Ltd., No. 09-12830, 2010 WL 4184465 (E.D. Mich. Oct. 21,
2010). In Wilkof, the defendant corporation had received a warning letter from the FDA,
in addition to multiple Form 483s, prior to making its compliance statement. Unlike a Form
483, an FDA warning letter “communicates the agency’s position” that a violation of
regulatory significance has occurred. (FDA Regulatory Procedures Manual, 4-1-1 Warning
Letter Procedures, http://www.fda.gov/ICECI/ComplianceManuals/Regulatory Procedures
Manual/ucm176870.htm) (last viewed March 14, 2013). The City of Pontiac court found
significant the receipt of the warning letter, not just the Form 483s, prior to the compliance
statement in Wilkof. 865 F. Supp. 2d at 825.
Applying the principles of City of Pontiac, even if the Court accepts Plaintiff’s position
that knowledge of non-defendant employees should be imputed to Omnicare, this still does
not further Plaintiff’s argument that Omnicare had actual knowledge that its legal
compliance claims were false. The only knowledge that would be imputed to Omnicare is
the knowledge that the audits allegedly revealed that there were some claims submitted
to government programs for reimbursement without Omnicare having proper supporting
documentation in its files, that some facilities billed for stockpiled Synagis, and that two
facilities billed Medicaid at a higher rate on some claims than non-Medicaid patients. The

Pharmaceutical, but circumstances require the Form 483 to reveal numerous, severe and pervasive
objectionable conditions. Id. at 982-83. Even if this case were binding on this Court, the audit
results at issue here were of “a small selection” and “a limited sample” as Plaintiff concedes in its
Complaint. (Doc. # 94, at ¶¶ 42, 49).

24

Stone audit results are even “softer” than the Form 483 in City of Pontiac in that they
merely revealed errors from limited internal audits, not findings of irregularity by an agency.
Nor are the audit results like the warning letter in Wilkof because the audit results are not
an opinion from an agency, court or other sanctioning entity about factual findings
amounting to noncompliance. Accordingly, since the audit results are not the final word on
whether Omnicare was in “material” compliance, like City of Pontiac, it is not a basis for
finding Omnicare knew its compliance statements were false when made.
Moreover, and also as in City of Pontiac, the compliance statements at issue here
are couched in terms of a belief: “[w]e believe that our billing practices materially comply
with applicable state and federal requirements,” and “we believe that we are in compliance
in all material respects with federal, state and local laws.” “[A]n expression of opinion [] is
actionable only ‘if the speaker does not believe the opinion and the opinion is not factually
well grounded.’” City of Pontiac, 865 F. Supp. 2d at 824 (citing In re Ford Motor Co. Sec.
Litig. Class Action, 381 F.3d 563, 572 (6th Cir. 2004) (quoting Helwig v. Vencor, Inc., 251
F.3d 540, 562 (6th Cir. 2001), overruled on other grounds by Tellabs, 551 U.S. at 323-24).
As explained above, Plaintiff has failed to allege sufficient facts to show that the claimed
speakers–Gemunder, Froesel, and Workman–did not believe the opinion stated or had
actual knowledge that Omnicare’s legal compliance statements were not true. In addition,
Plaintiff has failed to allege Omnicare knew the opinion of legal compliance was not true;
Plaintiff’s only allegation is based upon the imputed knowledge of the Stone audit results,
which, similar to Form 483 in City of Pontiac, “is ‘soft’ information as to the existence of
regulatory violations.” 865 F. Supp. 2d at 826.

25

(2)

No Duty to Disclose Alleged Illegal Actions

As in Hod Carriers, Omnicare had no duty to disclose its allegedly deficient claims
submissions based on its statements of “material compliance.” In Hod Carriers, the
plaintiffs argued that once Omnicare made its legal compliance statement, it was obligated
to disclose its illegal drug-handling practices. 583 F.3d at 945. The Sixth Circuit disagreed,
finding not only did the complaint fail to sufficiently allege actual knowledge that the legal
compliance statements were false, but that a generic claim of lawfulness remains “soft,” not
requiring disclosure of allegedly illegal activities because its materiality derives from
predictions of third parties’ actions. Id. at 946-47. Thus, where the allegations refer to the
consequences of the conduct–here, a finding of material noncompliance– the allegations
constitute “soft” information that does not give rise to a duty to disclose. See Zaluski, 527
F.3d at 575. Sofamor explains why this is true: “[i]f the company had publicly opined that
its [conduct] was illegal, and if it had publicly predicted that the [agency] would move
against the company, the . . . prediction would have proved to be flatly erroneous” as no
regulatory action was ever initiated. 123 F.3d. at 402.
Similarly here, any statement predicting that Omnicare’s submission of deficient
claims for reimbursement constituted fraud would have proven to be erroneous; Stone’s
FCA claims have been dismissed, there are no indications of regulatory proceedings being
initiated, nor other legal findings of material noncompliance regarding this conduct. Thus,
Omnicare’s general compliance statements were “soft” information, and Omnicare was not
required to make further disclosure.
Based on the foregoing, Plaintiff has not established that the compliance statements
contained in the SEC filings are actionable. Accordingly, Plaintiff’s claim that Defendants’
26

statements regarding the risks associated with a finding of noncompliance are also
misleading fails, because it is dependent on a finding that the compliance statements are
actionable.
b.

Defendant Gemunder’s January 10, 2007, Statement

Plaintiff alleges that Defendant Gemunder’s January 10, 2007, statement to analysts
at a JP Morgan Healthcare Conference6 that Omnicare’s goal was compliance with all laws
and regulations and that it was getting “these matters” behind them was materially false
and misleading when made.

(Doc. # 94, ¶¶ 88-89).

Specifically, Plaintiff alleges

Gemunder stated:
. . . [W]e operate in a highly regulated industry with a significant amount of
government oversight, and our goal is to comply with all laws and
regulations. As part of the normal course of business, we and our industry
peers, deal with government reviews and inquiries on a regular basis. And
here I’m pleased to report that we are getting these matters behind us.
***
So, to sum it up, 2006 was quite a year with a number of seemingly unrelated
issues affecting our business, but there are two important points I want to
make here. First, despite the incremental costs required, patients continue
to receive the service in pharmaceutical care they need and which they
deserve. And second, we are, and will continue to work through these
issues and believe that they will ultimately be resolved. We do not
believe these issues alter the earnings power of the company, but
rather they temporarily mask it. We believe the fundamentals of our
business and the soundness of our strategy remain in place.
(Id., at ¶ 88). Plaintiff’s Complaint alleges the statement is actionable because Gemunder
knew these statements were false, given his knowledge of ongoing Medicare and Medicaid
fraud. (Id. at ¶ 89).

6

Gemunder’s statement at the JP Morgan Healthcare Conference was referenced in the
Complaint herein and therefore the entire transcript of the statement has been considered by the
Court in adjudicating the Motion to Dismiss. See Tellabs, 551 U.S. 322.

27

The results of the Stone audits cannot be the basis of Gemunder’s knowledge in
January 2007 because they had not yet been performed. Moreover, as discussed above,
there are no particularized factual allegations that demonstrate Gemunder had actual
knowledge of any specific irregularities in Omnicare’s claims practices at the time he made
this statement.
It is also unclear how Gemunder’s knowledge of federal investigations and
settlements would render these statements misleading and false at the time they were
made. A review of the entire paragraph reveals that after Gemunder stated “we are getting
these matters behind us,” he explained how by discussing the October and November 2006
government settlements regarding the various issues. Specifically, he stated:
Now, on top of this transition of Part D, we’ve also been dealing with several
regulatory matters. On this topic, let me first remind you that like most
healthcare services companies, we operate in a highly regulated industry with
a significant amount of government oversight, and our goal is to comply with
all laws and regulations. As part of the normal course of business, we and
our industry peers, deal with government reviews and inquiries on a regular
basis. And here I'm pleased to report that we are getting these matters
behind us. On October 5, we entered into a voluntary settlement with
the State of Michigan to resolve certain billing issues under its
Medicaid program. On November 14, we reached a voluntary civil
settlement with the federal government in certain states related to
generic drug substitution issues. Neither of these settlements includes
any finding of wrongdoing or any admission of liability and both were
fully reserved.
And last, as we’ve already discussed, we’re continuing to work with the
U.S. Attorney’s Office in Massachusetts, which is seeking information
about our relationships with certain manufacturers, pharmaceutical
manufacturers and distributors of pharmaceutical products, and certain
customers as well as information related to contracts with certain companies
we acquired. As always, we are cooperating with the government and there
really is no more to say about any of this except to say that we believe we’ve
complied [with] all applicable laws and regulations in respect to all of these
matters.
28

(Doc. # 117-3, at 4) (emphasis added). Gemunder’s complete statement would seem to
add credence to his statement that Omnicare was getting issues regarding regulatory
matters behind it as it was settling the issues.
Plaintiff argues that Gemunder would have known his statements were false when
made because he was aware of the DOJ’s investigation into Omnicare’s relationships with
pharmaceutical manufacturers and distributers at the time he made his statement.
However, as Plaintiff admits, immediately after stating it was getting regulatory issues
behind them, Gemunder discussed Omnicare was working with the United States
Attorney’s Office (USAO) in Massachusetts on this issue. Gemunder’s statement therefore
cannot be deemed to have been a basis for misleading investors, since at the same time
he made the allegedly misleading statement he discussed the DOJ investigation.
Moreover, his statements are similar to those the Sixth Circuit found in Hod Carriers
were not actionable. 583 F.3d at 943. There, Gemunder stated “Omnicare’s revenue and
earnings growth outlook remains positive given our strong underlying fundamentals and our
proven growth strategy.” Plaintiffs alleged the statement was misleading because he failed
to disclose its contractual dispute with a major prescription drug-plan sponsor. The Court
found Gemunder’s statement to be both forward-looking and corporate puffery that vaguely
predicted positive future results; not a material misstatement or omission. Id.
Similarly here, Gemunder’s statement was “our goal is to comply with all laws and
regulations.” This is the type of corporate puffery one would expect to hear from a
corporate manager; that is, “loosely optimistic statements that are so vague, so lacking in
specificity, or so clearly constituting the opinions of the speaker, that no reasonable investor
could find them important.” Id. at 944.
29

The same is true for Gemunder’s statement that “we are getting these matters
behind us.” If one looks at the entire paragraph, Gemunder made this statement and
immediately began discussing how Omnicare was getting the issues behind it. Specifically
he explained Omnicare was “continuing” to work with the USAO in Massachusetts
regarding an investigation it was conducting and explained the settlements on other
regulatory matters. He did not say all these matters are behind us, but indicated an
ongoing effort toward that end. Again, this was a statement of corporate optimism that
Gemunder believed they were getting the issues resolved. In addition, there are no specific
factual allegations to suggest Gemunder had actual knowledge at the time he made the
statement that the statement was not true.
Plaintiff cites a District of Minnesota case that found statements deemed puffery
were actionable where they were provided in direct response to a financial analyst’s
questions. In re St. Jude Med., Inc. Sec. Litig., 836 F. Supp. 2d 878, 888 (D. Minn. 2011).
Here, while Gemunder was addressing analysts at a conference, he was not responding
to specific questions but was giving a corporate overview of Omnicare’s business.
Moreover, Plaintiff cites no case from the Sixth Circuit, nor did the Court or Defendants find
one, recognizing an exception rendering statements of corporate optimism as being
actionable where made in response to an analyst’s questions.
In sum, Plaintiff has failed to adequately plead that the contested statements were
false, particularly when they are considered in the context of Gemunder’s entire January
10, 2007 statement, nor has Plaintiff sufficiently plead that the contested statements are
the type a reasonable investor would view “as having significantly altered the total mix of
information made available;” thus, they are not actionable. See Hod Carriers, 583 F.3d at
30

943.
c.

Omnicare’s Financial Results, Stated Reasons for its
Success and SOX Certifications

Plaintiff asserts that Omnicare made material misrepresentations and/or omissions
by attributing its success to legitimate business factors while omitting the effect of its
fraudulent submissions to Medicare and Medicaid. (Doc. # 94, at ¶¶ 101-134). In addition,
Plaintiff alleges Omnicare’s reported financial numbers are also materially false and
misleading because they improperly include the proceeds of the alleged Medicare and
Medicaid fraud. (Id. at ¶¶ 137-163).
Despite Plaintiff’s assertions, during oral argument Plaintiff conceded that it is not
challenging the accuracy of the numbers. (Doc. # 135, at 77). It also acknowledged that
the success of its financial misrepresentation claims is derivative of this Court finding that
the legal compliance statements are actionable. (Id., at 77-78). Therefore, Plaintiff’s
claims regarding the financial reports fall for the same reasons as its legal compliance
claim; Omnicare’s statements that its billing practices materially comply with state and
federal regulations were “soft” information not requiring further disclosure absent
particularized factual allegations of actual knowledge of illegality or a fraudulent scheme.
Moreover, Omnicare’s financial data was historically accurate, and it was not required to
report that the alleged illegal conduct was a factor in its success. Sofamor, 123 F.3d at 40001; Almost Family, 2012 WL 443461, at ** 3-4.
Similarly, Plaintiff’s allegations that Defendants Gemunder, Froesel, and Workman
made false statements concerning the accuracy of Omnicare’s class period 10-K and 10-Q
filings by executing certifications pursuant to Sections 302 and 902 of the Sarbanes-Oxley
31

Act attesting to the accuracy of the financial reports also fail. Specifically, Plaintiff has not
asserted sufficient facts to demonstrate that the Individual Defendants had actual
knowledge that the company was in violation of any laws or regulations or that there were
any errors in its SEC filings at the time they executed the certifications.
B.

Plaintiff’s Claim Under § 20(a) is Dismissed

Plaintiff also seeks to hold Defendants Gemunder, Froesel, Workman and Hodges
liable as “controlling persons” of Omnicare under § 20(a) of the Securities Exchange Act.
“Controlling person” liability is derivative, and a plaintiff “may hold a defendant liable under
this theory only if the defendant controlled an entity that violated the Securities Act.” D.E.
& J. Ltd. P’ship v. Conaway, 133 F. App’x 994, 1001 (6th Cir. 2005); see also Hod Carriers,
583 F.3d at 947. Thus, the Court having found that Plaintiff has failed to state a claim for
securities fraud, its § 20(a) claim fails as well. D.E. & J. Ltd. P’ship, 133 F. App’x at 1001.
C.

Mandated Rule 11 Review

In addition to raising the standard for pleading scienter, the PSLRA “mandate[s]
imposition of sanctions for frivolous litigation.” Merrill Lynch, Pierce, Fenner & Smith, Inc.
v. Dabit, 547 U.S. 71, 81 (2006). The PSLRA provides:
In any private action arising under this chapter, upon final adjudication of the
action, the court shall include in the record specific findings regarding
compliance by each party and each attorney representing any party with
each requirement of Rule 11(b) of the Federal Rules of Civil Procedure as to
any complaint, responsive pleading, or dispositive motion.
15 U.S.C. § 78u–4(c)(1). The Court has conducted this review and finds the parties and
attorneys have not violated the mandates of Rule 11(b).

32

D.

Plaintiff’s Informal Request to Amend is Denied

In its post-hearing memorandum, Plaintiff requested “leave to
replead” if the Court concludes it has inadequately pled the knowledge of the nondefendant executives. Rules 7 and 15 of the Federal Rules of Civil Procedure require
motions for leave to amend must state with particularity the grounds for seeking an order
granting leave. Plaintiff has not, however, filed a motion for leave to amend. The Sixth
Circuit has held that an informal request contained in a opposition memorandum to a
motion to dismiss is not a substitute for a properly filed motion. See Louisiana Sch. Emp.
Ret. Sys., 622 F.3d at 486 (affirmed district court’s denial of informal request to amend);
PR Diamonds, Inc. v. Chandler, 364 F.3d 671, 698-700 (6th Cir. 2004), abrogated on other
grounds by Frank v. Dana Corp, 646 F.3d 954, 961 (6th Cir. 2011).
Even if Plaintiff had properly filed a motion for leave to amend its Complaint, the
request would be unnecessary because the Court has assumed for purposes of the Motion
to Dismiss that knowledge of the non-defendant executives has been properly pled.
Accordingly, Plaintiff’s informal request to amend will be denied.
E.

Jacksonville’s Motion for Creation of a Subclass is Denied as Moot

After the filing of the Consolidated Amended Complaint, Jacksonville filed a Motion
for Creation of a Subclass (Doc. # 108), asserting that a subclass is necessary to protect
the claims of class members that sold their Omnicare stock after partial disclosures, which
disclosures have not been asserted in the Complaint. Jacksonville argues that without the
creation of the subclass the claims of these members will not be litigated.

33

During oral argument, Jacksonville’s counsel confirmed that its claims are based on
the same material misrepresentations as Plaintiff has alleged. (Doc. # 135, at 86). Thus,
for the reasons stated above, the claims of the members of Jacksonville’s proposed
subclass are also subject to dismissal for failure to adequately plead an actionable
misrepresentation. Accordingly, the Motion to Create a Subclass will be denied as moot.
IV.

CONCLUSION
In summary, Plaintiff has failed to plead sufficient facts to establish an actionable

misstatement or omission. In light of this failure, whether to create a subclass is of no
moment. Accordingly,
IT IS ORDERED that:
1.

Defendants’ Motion to Dismiss (Doc. # 106) is hereby GRANTED;

2

Plaintiff’s informal request to “replead” (Doc. # 137) is hereby DENIED;

3.

Jacksonville Police and Fire Pension Fund’s Motion for Creation of a

Subclass (Doc. # 108) is hereby DENIED AS MOOT; and
4.

This matter is hereby DISMISSED WITH PREJUDICE, and stricken from the

Court’s active docket.
This 27th day of March, 2013.

G:\DATA\Opinions\Covington\2011\11-173 MOO granting MTD and denying mtn for creation of subclass.wpd

34