City of Livonia Employees' Retirement System v. Almost Family, Inc. et al

Filing 62

MEMORANDUM OPINION by Judge John G. Heyburn, II on 2/9/12; re 41 MOTION TO DISMISS FOR FAILURE TO STATE A CLAIM filed by Almost Family, Inc., C. Steven Guenthner, William B. Yarmuth; the Court will enter an order consistent with this Memorandum Opinion.cc:counsel (DAK)

UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF KENTUCKY
AT LOUISVILLE
CIVIL ACTION NO. 3:10-CV-00520-H

IN RE ALMOST FAMILY, INC.
SECURITIES LITIGATION

MEMORANDUM OPINION
Plaintiffs’ Consolidated Class Complaint alleges that Defendants, Almost Family, Inc.
and its senior executives (“Individual Defendants”) (collectively, “Almost Family”), defrauded
the Proposed Class in violation of federal securities laws. Lead Plaintiff, the Connecticut
Laborers’ Pension Fund, moved for and was granted consolidation of related actions against
Defendants pursuant to § 21D(a)(3)(B) of the Securities Exchange Act of 1934 as amended by
the Private Securities Litigation Reform Act, 15 U.S.C. § 78u-4(a)(3)(B).
Defendants have moved to dismiss on the grounds that Plaintiffs’ Complaint fails to state
a claim. In a recent conference with the Court, the parties thoroughly discussed the pending
motion and re-enforced their best arguments. The analysis that follows focuses upon whether
Plaintiffs’ complaint sufficiently pleads two important elements of such a claim: a material
misrepresentation and loss causation. Plaintiffs must succeed on both elements. After thorough
consideration of the parties’ arguments both made during the conference and presented in their
briefs, the Court concludes that Plaintiffs succeed on neither and will sustain Defendants’ motion
to dismiss.
I.
Almost Family provides in-home health care services to patients participating in the
federal government’s Medicare program. Defendant William Yarmuth has been Chairman of the

board of directors and Chief Executive Officer of Almost Family since 1992. Before that, he
was President and Chief Operating Officer and a director of the company. Defendant C. Steven
Guenthner has been Senior Vice President and Chief Financial Officer of Almost Family since
1992, and he also serves as Corporate Secretary.
Almost Family receives a significant portion of its revenues from Medicare payments and
reimbursements for care of eligible patients as a service provider for Medicare’s Home Health
Care Program (“HHCP”). The HHCP, acting through Home Healthcare Agencies (“HHAs”),
such as Defendants, pays for nurses, home health aides, and therapists to treat homebound
patients. Medicare reimbursements for HHAs like Almost Family depend heavily upon the
number of therapy visits provided to patients within certain periods of time, deemed “episodes.”
This case arises from a change in Medicare regulations pertaining to home health care
services. Prior to 2008, providers of home health care services received larger reimbursement
once a patient received ten or more therapy visits (such as physical or rehabilitative therapy)
during a 60-day treatment episode. In 2008, Medicare modified its payment thresholds to six,
fourteen, and twenty visits. The revised schedule established increases in payments at these
three thresholds, in stark contrast to the one present under the former guidelines.
Prior to 2008, a high percentage of Almost Family’s patients received ten or slightly
more than ten therapy visits within 60-day treatment episodes. For example, almost 25% of
Defendants’ patients received ten therapy visits in 2007. Following the adoption of Medicare’s
new payment schedule, the number of patients receiving ten therapy visits significantly
decreased, and the number of patients receiving visits closer to the new thresholds increased.
Plaintiffs also reference statements of three confidential witnesses from local offices who

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provided anecdotal evidence that superiors directed them to manipulate the number of patient
office visits by wrongfully obtaining medical referrals or providing unnecessary care to patients.1
On April 27, 2010, the Wall Street Journal (“WSJ”) published a story analyzing the
number of home therapy visits provided by several HHAs. The article statistically analyzed
publicly available data from these HHAs, revealing a noticeable difference in the number of
therapy visits provided to patients prior to and after Medicare’s 2008 reimbursement-rate
modifications. The article suggested that HHAs, driven by desire to increase payments from
Medicare, rather than patients’ medical needs, purposefully altered their practices following the
2008 changes. The article did not focus on Almost Family, but mentioned it briefly.
Shortly thereafter, on May 12, 2010, Defendant Guenthner sold 20,000 Almost Family
shares, approximately 12% of his holding. The next day, the United States Senate Finance
Committee announced that it was investigating allegations that Almost Family and others had
abused Medicare’s payment system. On July 1, 2010, the Securities and Exchange Commission
(“SEC”) also announced it would investigate Defendants and others regarding their Medicare
billing practices. As these publications and announcements surfaced, Defendants released
statements and commented on the pending investigations, denying any misconduct and agreeing
to cooperate fully with investigators.
Based on these publications and subsequent comments, which Plaintiffs assert constituted
disclosures of fraud, this action followed.
II.

1

This must involve a complex series of events because Almost Family personnel have no direct ability to
manipulate or increase treatment. Almost Family facilities provide medical care only pursuant to the order of
physicians who are independent of the company.

3

Section 10(b) of the Securities Exchange Act and Rule 10b-5, promulgated thereunder,
prohibit fraudulent, material misrepresentations in relation to the sale or purchase of securities.
Indiana State Dist. Council of Laborers and Hod Carriers Pension and Welfare Fund v.
Omnicare, Inc., 583 F.3d 935, 942 (6th Cir. 2009) (internal quotation marks and citations
omitted). To succeed on a private cause of action for violations thereof, a plaintiff must prove
six elements: “(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.” Id.
(quoting Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, 552 U.S. 148, 157 (2008).
Defendants argue that Plaintiffs’ claims should be dismissed for failure to adequately
plead materiality, scienter, reliance, economic loss, and loss causation. A Rule 12(b)(6) motion
to dismiss will be granted if it appears beyond doubt that the claimant can prove no set of facts
supporting its claim which would entitle it to relief. See H.J. Inc. v. Nw. Bell Tel. Co., 492 U.S.
229, 249-50 (1989). Satisfying this standard “requires more than bare assertions of legal
conclusions.” In re Humana, Inc. Sec. Litig., No. 3:08-CV-00162-JHM, 2009 WL 1767193, at
*6 (W.D. Ky. June 23, 2009). When considering a Rule 12(b)(6) motion to dismiss, the Court
assumes as true all well-pleaded facts within the complaint and draws all reasonable inferences
in the favor of the non-moving party. In re Sofamor Danek Group, Inc., 123 F.3d 394, 400 (6th
Cir. 1997). In the sections that follow, the Court will focus its analysis on whether Plaintiffs
have inadequately pled materiality and loss causation.

4

III.
To recover under Section 10(b) and Rule 10b-5, “a plaintiff must show both an omission
or misstatement and its materiality.” Omnicare, 583 F.3d at 943. “Materiality can be
established by proof of a substantial likelihood that the disclosure of the omitted fact would have
been viewed by the reasonable investor as having significantly altered the total mix of
information made available.” Id. (internal quotations marks and citation omitted). After all,
“[w]hen a company chooses to speak, it must ‘provide complete and non-misleading
information.’” Id. (citation omitted). Nonetheless, “liability does not attach to mere corporate
puffery or statements of corporate optimism.” Id. (citation omitted).
A.
The Sixth Circuit discussed the materiality requirement thoroughly in In re Sofamor
Danek Group, Inc., 123 F.3d 394. This analysis answers important questions for our case and it
serves as a basis for this Court’s consideration.
Sofamor was a medical technology manufacturing company which generated substantial
portions of its revenues by providing a spinal fusion device to surgeons who used it in a manner
unapproved by the Food and Drug Administration (the “FDA”). Id. at 397-98. Plaintiffs alleged
that Sofamor’s reported earnings and statements were “misleading because they attributed the
company’s success to such things as increased sales volume without properly explaining how the
sales were being achieved.” Id. at 400. Plaintiffs argued that Sofamor did not disclose that its
success was due to the promotion of its spinal fusion device for purposes not approved by the
FDA. In fact, the defendants expressly disavowed any knowledge of wrongful promotion and
“downplayed any positive financial effects from loaner sales” related to these devices. Id.

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(internal quotation marks omitted).
The Sixth Circuit observed that the “sales and earnings data publicly reported by
Sofamor Danek” were “‘hard’ numbers, the accuracy of which ha[d] never been challenged by
the plaintiffs.” Id. As the court explained, “[i]t is clear that a violation of federal securities law
cannot be premised upon a company’s disclosure of accurate historical data.” Id. at n. 3.
Furthermore, the plaintiffs had never “pointed to any affirmative misstatement in the company’s
explanations of the numbers.” Id. at 401. As to the hard numbers, this presents exactly the
circumstance as Almost Family’s earnings figures in our case.
The Sixth Circuit also discussed the difference between so-called “hard” facts and “soft”
information for purposes of disclosure in the context of analyzing materiality. “‘[S]oft’
information, which includes predictions and matters of opinion . . .” must only be disclosed if it
is “virtually as certain as hard facts.” Id. (quoting Starkman v. Marathon Oil Co., 772 F.2d 231,
241 (6th Cir. 1985)). The court concluded that whether Sofamor’s promotion techniques were
“legal” was a matter of opinion and thus constituted “soft” information. Id. Sofamor was not
required to disclose a particular prediction or opinion about possible FDA regulation or action
beyond providing notification to their investors that the risk existed. Id.
The Sixth Circuit has continued to apply the “hard” and “soft” information distinction,
holding that “statements regarding ‘legal compliance’ are not actionable because companies
have no duty to opine about the legality of their own actions.” Omnicare, 583 F.3d at 945. See
also Zaluski v. United Am. Healthcare Corp., 527 F.3d 564, 572 (6th Cir. 2008). Consequently,
as a general rule a defendant has no liability under Section 10(b) or Rule 10b-5 for making
“general statements that it complied with state law and regulations and had a policy of

6

complying with the law.” Omnicare, 583 F.3d at 945. Where a plaintiff alleges that a
defendant’s claim of legal compliance “was made with knowledge of its falsity,” yet offers “few
factual allegations” in support of its claim, materiality is insufficiently pled. Id. at 945-46.
B.
Plaintiffs’ allegations here track those found insufficient in Sofamor. Plaintiffs point to
the following statements containing material misrepresentations: (1) a total of fifteen quarterly
and annual financial reports submitted by Defendants to the SEC during the Class Period
affirming that Defendants were abiding by securities laws and Medicare regulations; and (2) a
series of statements issued by Individual Defendants following publication of the WSJ article
and news of investigations into Defendants.2
The Court will discuss each of these assertions and place each within the context of the
relevant case law. In the Court’s view, Plaintiffs either refuse to acknowledge the “hadd/soft”
information distinction or fail to explain how the cited statements constitute hard information.
1.
To the extent Defendants’ quarterly and annual financials merely reported on the
financial condition of Almost Family, they constitute “hard” information because they contain
“factual information that is objectively verifiable.” Sofamor, 123 F.3d at 401 (quoting Garcia v.
Cordova, 930 F.2d 826, 830 (10th Cir.). Plaintiffs do not specifically allege that the financials
themselves were substantively inaccurate.3 Consistent with the Sixth Circuit’s explanation in
2

In support of these allegations, Plaintiffs rely heavily on the report of Dr. Dove, an expert consultant hired
by Plaintiffs to perform statistical analyses on data of Almost Family’s therapy visits before and after the 2008
Medicare reimbursement amendments.
3

Plaintiffs contend that their allegations challenge the accuracy of the data within Almost Family’s financial
reportings, but the Amended Complaint fails to do so. Rather, Plaintiffs merely argue that Defendants “materially
overstated financial results, such as income and revenue figures,” yet provide no support by way of specific factual

7

Sofamor, such “hard” information, when accurate, cannot serve as the premise for a violation of
federal securities law. Thus, Plaintiffs have not established that Defendants’ quarterly and
annual financial reportings constitute material misrepresentations.
Plaintiffs also allege that the Individual Defendants’ signatures on Almost Family’s SEC
filings, certifying that, to their knowledge, their reports and filings did not contain untrue
statements or omissions of material facts, constitute material misrepresentations. This argument
is merely an attempted “end run” around the “hard/soft” information distinction. The
certifications assert nothing more than Individual Defendants’ beliefs that their financial reports
were accurate and the opinion that their actions in no way violated federal securities laws or
other regulations governing Almost Family. Under Sofamor, these statements constitute “soft”
information. For this reason, the Court concludes that none of the certifications constitute
material misrepresentations.
2.
Next, Plaintiffs allege that following publication of the WSJ article, Defendant Guenthner
denied that Almost Family had violated Medicare billing regulations. Guenthner explained that
Medicare had created incentives for HHAs to alter their practices by creating a monetary bonus
for patients reaching ten visits. In turn, Guenthner suggested that this encouraged HHAs to seek
out patients with specific types of injuries.
Plaintiffs fail to allege how this statement was materially misleading, stating only that

allegations. The factual allegations of the Amended Complaint focus only on the ways in which Almost Family
generated revenues and reimbursements, not that the actual data they reported was false. This demonstrates the
distinction between “soft” and “hard” information– the latter, when accurate, cannot serve as the basis of a securities
fraud cause of action. The Court thus analyzes Plaintiffs’ allegations as “soft” information for the purposes of
pleading a material misrepresentation.

8

“the statements falsely represented that Almost Family sought out patients that required specific
numbers of visits when, in fact, Almost Family did not discriminate between patients based on
their required levels of treatment.” A careful reading of Guenthner’s statement reveals it to be a
reflection and opinion about the possible impact of Medicare’s reimbursement amendments on
HHAs, and their perhaps unintended consequences. However, it is a far cry to deem these
comments as material misrepresentations sufficient to sustain a cause of action for securities
fraud.
3.
In addition, Plaintiffs allege that Chairman Yarmuth offered comments following the
publication of the WSJ article that constituted material misrepresentations. During a public
conference call with analysts, Yarmuth stated:
So we were taking care of a lot of different people in 2008 than we
were taking care of in 2007 who had different medical conditions
and different clinical needs and different needs to have levels of
service. And we, as we always do, go about trying to provide the
care that the patient needs based up on their clinical condition. And
I think that in some ways, the industry responded to what the
government wanted the industry to do, and I think there are people
that are being cared for now that maybe weren’t being cared for
before, and that’s a good thing. And there’s more people that are
being cared for now than there were before, and that’s a good
thing. And I think the narrow focus on the ten visits doesn’t really
get to the point of why the reimbursement system was changed.
And clearly, once again in this article between 2007 and 2008 for
us, we took care of a lot of different types of patients.
So I think there were some implications in the article that were not
necessarily – that weren’t necessarily true, and I think if you really look at
the article, you’ll see that what happened has happened over the history of
healthcare, Medicare healthcare as we’ve observed. The federal
government decides that they want – they create the reimbursement
system to achieve certain objectives, and providers typically respond to
those objectives that the government creates the reimbursement system
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for; i.e., DRG. When the hospitals put the DRG system back in the 80s,
length of stays declined, and that’s pretty simple. And I think really what
we did in this article, I don’t think that the article said this, but I think our
position is the government wanted to create a greater distribution of care
across a broader base of people who are in need, and the industry
responded.
According to Plaintiffs, Yarmuth falsely represented that (1) the WSJ article had “serious flaws”
and contained “implications that weren’t necessarily true;” and that (2) Almost Family accepted
different types of patients in 2008 than in 2007 and that its treatment was based on “trying to
provide the care that the patient needs based on their clinical condition.”
Although the Court cannot determine whether these statements were false, it can
determine that if false, they were not material. In context, Yarmuth’s comments amount to mere
opinions and reflections on the WSJ article itself and the Medicare reimbursement scheme. They
do not assert any “soft” information that could reasonably be read as facts. Yarmuth was
justifying and defending the legality of Almost Family’s actions following the Medicare
amendments. His comments were an attempt to explain how the contrasting data from 2007 and
2008 could be explained independent of any wrongdoing. Thus, Yarmuth’s comments were
aimed at defending the legality of Almost Family’s practices and constituted “soft” information.
4.
On May 13, 2010, Almost Family issued a press release, announcing its receipt of an
inquiry letter from the Senate Finance Committee. Defendants explained that, in light of the
WSJ article, the Senate Finance Committee requested information relating to Almost Family’s
operations. The press release quoted Yarmuth saying: “We intend to fully cooperate with the
Committee’s request for information. Our . . . mission calls for our caregivers to provide care
based solely on patients’ needs and clinical conditions and we are confident that when our data is
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thoroughly reviewed, it will provide a much clearer picture than was portrayed in the [WSJ]
article.” Plaintiffs cite the press release as an additional material misrepresentation, primarily
pointing to Yarmuth’s quoted response.
Reading his comment in context of the entire press release, it is unmistakable that
Yarmuth was simply defending the company’s actions as lawful and compliant with regulations.
Because the WSJ suggested that HHAs may not have been providing care based upon patient
needs, which would run afoul Medicare regulations, Yarmuth’s defense of the company’s
position was an opinion in light of the Senate Finance Committee’s pending inquiry. Placed in
the appropriate context, Yarmuth’s comments do not amount to material misrepresentations.
5.
Finally, Plaintiffs allege that Yarmuth’s remarks during a May 18, 2010 conference
presentation constitute material misrepresentations. Yarmuth remarked on a number of issues
relating to Almost Family’s strategy, success, and management. Yarmuth claimed that Almost
Family’s strategy was to “educat[e] and train[] [their] clinicians,” and he attributed the
company’s success to strong senior management, some of which had worked together for
decades. Yarmuth also praised Almost Family’s geographic concentration of operations.
Plaintiffs argue that these comments constitute material misrepresentations because Almost
Family’s growth was substantially due to its scheme to manipulate Medicare’s reimbursement
system, rather than the explanations offered by Yarmuth.
To establish these statements as material misrepresentations, Plaintiffs must allege facts
showing them to be false, not merely incomplete, information. It is true, of course, that Almost
Family’s success could be attributed to several factors, and Plaintiffs have offered no evidence

11

suggesting that the factors discussed by Yarmuth were farcical. Absent specifically alleging that
the statements made by Yarmuth were false, Plaintiffs cannot successfully assert them to be
material misrepresentations.
Upon reviewing each of the foregoing statements, the Court concludes that each
constitutes soft information, which under current case law, cannot form the basis of a Section
10(b) and Rule 10b-5 claim. To hold otherwise would dramatically expand the scope of general
comments upon which companies could be liable under our securities laws.
IV.
The Court’s inquiry does not end here. Plaintiffs say that their Complaint can survive
because they allege that the Individual Defendants actually knew that their statements about
legal compliance were false. Under this argument, the “soft” information distinction cannot
absolve Defendants’ statements from liability.
Plaintiffs are correct that a corporate officer must disclose even so-called “soft”
information where a defendant’s “knowledge of the illegality of [] allegedly unlawful conduct”
imposes this duty of disclosure. Chamberlain v. Reddy Ice Holdings, Inc., 757 F. Supp. 2d 683,
708 (E.D. Mich. 2010).4 “Sufficient allegations of such ‘knowledge’ render [sic] ‘soft’
information more in the nature of a hard, objectively verifiable fact,” and therefore subject to
disclosure. Id. Plaintiffs rely upon four written statements of Almost Family employees to show
precisely such knowledge.
A.
To invoke the duty of disclosure, a complaint must “adequately allege[] that the
4

This formulation of the “soft” information requirement is consistent with the Sixth Circuit’s more general
statement. See Omnicare, 583 F.3d at 945-946.

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defendants knew of the illegal nature of their conduct at the time they made the allegedly
material misstatement . . . .” Id. at 707. Therefore, “[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, there is nothing further to disclose.” Kushner v.
Beverly Enters., Inc., 317 F.3d 820, 831 (8th Cir. 2003). Any 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.
(citation omitted).
The Sixth Circuit illustrated the duty to disclose “soft” information in Zaluski v. United
American Healthcare Corporation. 527 F.3d at 573. Relying on City of Monroe Employees
Retirement System, the Circuit explained that a company has a duty to speak truthfully when its
statements contradict information it possesses, such as those within its internal reports. Id.
(citing City of Monroe Emps. Ret. Sys. v. Bridgestone Corp., 399 F.3d 651, 672 (6th Cir. 2005)).
City of Monroe involved allegations of securities fraud against a tire manufacturer regarding the
safety of its products. 399 F.3d at 658. Despite internal documents revealing firsthand
knowledge of safety risks associated with its tires, the company and its executives, in several
comments and press releases, continued to positively remark on the quality and safety of its
products, and suppressed news of governmental investigations. Zaluski, 527 F.3d at 573. “The
Court reasoned that, given that the [defendant’s] press release was issued in response to several
consumer lawsuits alleging product defects . . . , ‘[a] reasonable juror could . . . conclude that the
statement, without some qualification or accompanying disclosure of the numerous pieces of
evidence that tended to cut the other way, was a misrepresentation.’” Id. (citation omitted)

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(emphasis added).
The importance of Zaluski and City of Monroe cannot be understated in context of our
case. Both of these cases demonstrate the need for a plaintiff to specifically allege a defendant’s
actual knowledge of fraud or wrongdoing before a duty to disclose “soft” information can be
invoked. More importantly, they provide a clear example of how this pleading requirement can
be satisfied. Plaintiffs present several allegations of knowledge on behalf of Individual
Defendants, primarily through the statements of Vickie LaMarche and Confidential Witnesses 1,
2, and 3 (“CW1", “CW2", and “CW3"). The Court will discuss each.
B.
CW1 asserts that a local office supervisor of Almost Family directed her to manipulate
the number of visits provided to patients and further claims to have been terminated for failing to
comply with this order. According to CW2, Medicare fraud at Almost Family was “definitely
going on” and physical therapists were “pressured” to achieve certain numbers of visits. CW3
similarly alleges that nurses felt “pressured” to manipulate coding and alter treatment plans.
Plaintiffs argue that these allegations corroborate Dr. Dove’s statistical analysis and demonstrate
that Almost Family was manipulating Medicare.
Vickie LaMarche is a former Executive Director of one of Almost Family’s offices. In
April of 2010, she wrote a lengthy letter, addressed to Defendant Yarmuth, offering and
explaining her resignation. The letter focused on a myriad of challenges and frustrations she
faced during her employment. She made general complaints of “unethical behavior bordering on
what could be perceived as illegal business practices.” In one paragraph of her five page letter,
she claimed to have witnessed a fellow employee paying a doctor for medical referrals, forced

14

admissions of patients, and extended periods of time during which patients were being cared for
and were seldomly, if ever, released from care. Like the Confidential Witnesses’ allegations,
LaMarche’s letter focused only on local, intra-office issues in two offices.
Plaintiffs argue that LaMarche’s letter, and statements by CW1, CW2, and CW3,
demonstrate that Medicare fraud was rampant throughout Almost Family and, more importantly,
that Individual Defendants were aware of it. Therefore, concludes Plaintiffs, Individual
Defendants’ actual knowledge that their own statements were false or misleading triggered a
duty of disclosure for their “soft” statements. Defendants counter that none of Plaintiffs’
allegations speak to the actual knowledge of Individual Defendants themselves. Stated another
way, Plaintiffs, at best, have presented facts only alleging the possibility of fraud within Almost
Family– not that Individual Defendants were aware of such behavior.
C.
The Court begins with two premises: (1) the pleadings must pass muster under the
“actual knowledge” standard and (2) the pleadings must comply with heightened standards of the
Private Securities Litigation Reform Act (the “PSLRA”), 15 U.S.C. § 78u-4(b)(1) and Rule 9(b)
of the Federal Rules of Civil Procedure. The strict pleading requirements of the PSLRA require
that a complaint “specify each statement alleged to have been misleading, the reason or reasons
why the statement is misleading, and 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). And, Federal Rule of Civil Procedure 9(b)
additionally requires that allegations of fraud “state with particularity the circumstances
constituting fraud or mistake.” These standards require significant specificity and particularity at

15

the pleading stage.
Perhaps the most obvious way Plaintiffs could adequately allege actual knowledge is by
showing a direct information communicated by or to a defendant. For example, as in Zaluski, a
plaintiff could point to an internal memorandum that circulated to defendants, discussing or
explaining alleged fraud. Similarly, an informant could allege that a defendant acknowledged
fraud to another person. Such an allegation could create a sufficiently strong and direct
inference in support of actual knowledge. Moreover, the specific allegations of a company-wide
policy implementing fraud may suffice to adequately suggest that a defendant would be
directing, if not condoning, such acts.
Here, the Confidential Witnesses’ allegations assert fraud vaguely, but do not present
allegations that reflect on Individual Defendants themselves or their actual knowledge of any
fraud occurring within Almost Family. None of the Confidential Witnesses allege that
Individual Defendants were either aware of (or should have been aware of) or in control of the
supposed conduct. All of the CW allegations fall short of implicating a company-wide
fraudulent scheme, which might impute actual knowledge of Almost Family’s fraud on
Defendants.5 Together, the CW allegations implicate only a few local offices. None makes
mention of such behavior being prevalent throughout the entire company. None suggests the
knowledge of Individual Defendants about these events.

5

Even then, it is unclear whether Plaintiffs’ burden would be met. “Actual knowledge” is required to
trigger a duty of disclosure regarding “soft” information, and Plaintiffs would therefore be required to plead, with
specificity, that such pervasive fraud amounted to actual knowledge on behalf of Defendants. See Zaluski, 527 F.3d
at 572. This issue does not prompt resolution now, however, because Plaintiffs fail even to present such allegations.

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D.
Vickie LaMarche’s statements are more specific and require further discussion. Her
letter predominantly focuses on the conflict between LaMarche and a fellow colleague, which
eventually erupted in a series of confrontational text messages. Only a small portion of the letter
concerns fraud at two local offices.
LaMarche does not allege that any unethical or illegal behavior is pervasive within
Almost Family and does not suggest that Individual Yarmuth was aware of any problems. The
Court assumes that the letter made its way to Mr. Yarmuth’s desk. However, the Court struggles
to understand how a single letter from a former employee could somehow make Yarmuth aware
that the entire company’s financial results were inaccurate. After all, the crux of Plaintiffs’
allegations are that Almost Family’s financial reportings were fraudulent because of illegal
medical and billing practices. LaMarche’s letter fails to allege that fraud was widespread
throughout the entire company or that such behavior was somehow known by Individual
Defendants.
To allege the receipt of LaMarche’s letter fails to allege with the specificity required by
the PSLRA or the particularity required by Rule 9(b) that Individual Defendants had any actual
knowledge of company-wide fraud. Absent such specificity, Plaintiffs cannot adequately plead
that Individual Defendants were aware that their statements were misleading or false. The Court
concludes that one letter by a former employee, airing her grievances about a handful of other
employees, is insufficient to suggest that the top executives of a company were aware of rampant
fraud. Thus, Defendants’ statements remain “soft” information.

17

V.
The Court next discusses whether Plaintiffs have met their burden regarding loss
causation. In Dura Pharmaceuticals, Inc. v. Broudo, the United States Supreme Court defined
loss causation as “a causal connection between the material misrepresentation and the loss.” 544
U.S. 336, 342 (2005). Relying upon “the common-law roots of the securities fraud action,”
namely tort law, the Supreme Court explained that liability for fraud attaches “when the facts . . .
become generally known and as a result share value depreciates.” Id. at 344 (internal quotation
marks and citation omitted). To sufficiently plead loss causation, a complaint cannot simply
allege that stocks were purchased at an “artificially inflated price.” Durham v. Whitney Info.
Network, Inc., No. 06-CV-00687, 2009 WL 3783375, at *19 (M.D. Fla. Nov. 10, 2009) (quoting
Dura Pharm., 544 U.S. at 347). Rather, it must “demonstrate that the shares fell ‘after the truth
became known’ with respect to the misrepresentations or omissions set forth . . . .” Id. “Stated
another way, plaintiff[s] must establish a connection between a drop in stock price and the
disclosure of the truth about [the Company’s] previous misstatement or omission . . . .” Id.
(quoting In re TECO Energy, Inc. Sec. Litig., No. 8:04-CV-1948-T-27EAJ, 2006 WL 845161, at
*2 (M.D. Fla. Mar. 30, 2006)) (internal quotation marks and brackets omitted).
Although Dura Pharmaceuticals provided significant guidance for evaluating the
sufficiency of loss causation pleadings, its progeny have shown that some novel questions are
largely unanswered. Namely, 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
remains unsettled. Because the case now before the Court demands a direct answer to this
question, the Court has carefully considered this issue and now applies currently available case

18

law.
A.
The Court begins with the basic question of whether a pleading of loss causation must
include the revelation of fraud. Plaintiffs argue that a revelation of fraud is not required to
adequately plead loss causation. Instead, they say that loss causation may either be pled by
showing that losses resulted from the materialization of a risk that was concealed by fraud.6
Although the Court agrees that disclosures, and more particularly, partial disclosures, may
suffice in some cases to establish loss causation, the requirement of revealing fraud is not lost.
“In a typical Rule 10b–5 case, the plaintiff buys stock at a price that he claims was
inflated by misrepresentations by the corporation's management and sells his stock at a loss when
the truth comes out and the price plummets.” Stark Trading v. Falconbridge Ltd., 552 F.3d 568,
571 (7th Cir. 2009) (emphasis added). The Supreme Court has said that a party becomes liable
for its fraud only after the misrepresentation or omission becomes “generally known” and “as a
result share value depreciates.” Dura Pharm., 544 U.S. at 344 (internal quotation marks and
citation omitted).7

Dura Pharmaceuticals further emphasizes securities laws and private

6

Plaintiffs press the Court to adopt rulings by the Second Circuit, as articulated in Lentell v. Merrill Lynch
& Co., which purport to reject the notion that fraud must be revealed to the market before it can be deemed to cause
losses. 396 F.3d 161, 175 (2d Cir. 2005). The Court has carefully considered Lentell and is satisfied that the Second
Circuit seemingly recognizes that, at the very least, fraud must be uncovered, and responded to by the market, before
loss causation can be established. Id. (“There is no allegation that the market reacted negatively to a corrective
disclosure regarding the falsity of [Defendant’s] . . . recommendations.” Id. “These allegations do not amount to a
corrective disclosure . . . because they do not reveal to the market the falsity of the prior recommendations.” Id. at n.
4. (emphasis added). “[Defendant’s] concealed opinions . . . could not have caused a decrease in the value of those
companies before the concealment was made public.” Id.). Although the Second Circuit’s view of loss causation
focuses on “the relationship between the plaintiff’s investment loss and the information misstated or concealed by
the defendant,” its analysis appears to contemporaneously contemplate that such misstatements must be revealed to
and responded to by the market before loss causation can be established. Id. at 174.

7

Without a revelation, one can only assume that other factors or speculation about unrevealed matters have
caused the decline in stock value (such as external business conditions) Id. at 344-45.

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securities fraud actions are intended to “maintain public confidence” in the market by protecting
investors “against those economic losses that misrepresentations actually cause.” Id. at 345
(citation omitted) (emphasis added). To achieve this goal, private actions must be based upon
actual fraud or wrongdoing and can ripen only after a defendant’s misrepresentation or omission
becomes generally known to the market. Otherwise, such lawsuits will serve as no more than
“broad insurance against market losses.” Id. The Court’s first and most difficult question to
answer is when such truth surfaces.
This is a challenging task.
The Court looks to post-Dura Pharmaceuticals circuit court analyses for guidance. The
Court finds only one unpublished case in which the Sixth Circuit has extensively reflected on
Dura Pharmaceuticals and applied its loss causation principles. D.E.&J. Limited Partnership v.
Conaway, 133 F. App’x 994, 1000 (6th Cir. 2005). There, investors brought putative securities
fraud class actions against senior executives of Kmart Corporation, alleging that the company’s
brief financial success following the appointment of new leadership was attributable to
accounting fraud. Id. at 996. Among other maneuvers, the accused Kmart executives concealed
the company’s financial difficulties by reporting rebates in its interim financial statements that
the company had hoped to earn by the end of year. Id. The complaint alleged that Kmart’s fraud
was revealed, and the market negatively responded, when the company announced that it had
filed for reorganization under Chapter 11 and when it restated its financial statements. Id. at
1000. The Sixth Circuit held that neither of these allegations identified specific economic loss or
the causal connection between such a loss and the company’s misrepresentation. Id. Relying on
the loss causation analysis set forth in Dura Pharmaceuticals, the court concluded that the

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plaintiffs had “done nothing more than note that a stock price dropped after a bankruptcy
announcement, never alleging that the market’s acknowledgment of prior misrepresentations
caused that drop.” Id.
More recently, other circuits have adopted similar views of Dura Pharmaceuticals’ loss
causation principles. In Metzler v. Corinthian Colleges, plaintiffs alleged that Corinthian
colleges were “pervaded by fraudulent practices designed to maximize the amount of federal
Title IV funding– a major source of Corinthian’s revenue– that those schools receive[d].” 540
F.3d 1049, 1055 (9th Cir. 2008). These practices included, among others: “falsifying financial
aid applications to obtain federal funds and increase federal award entitlements; encouraging
students to falsify federal student aid forms themselves; manipulating student enrollment by
counting students not yet enrolled (referred to in the [Complaint] as “false starts”); [and]
manipulating or falsifying student grades to maintain federal funding eligibility.” Id. at 1062.
Guided by Dura Pharmaceuticals, the Ninth Circuit held that while plaintiffs are “not required
to show that a misrepresentation was the sole reason for the investment’s decline in value in
order to establish loss causation,” they “must, however, set forth allegations that if assumed true,
are sufficient to provide the defendant with some indication that the drop in defendant’s stock
price was causally related to [the defendant’s] financial misstatement[s].” Id. at 1062 (emphasis
in original) (citation, internal quotation marks, and brackets omitted). Thus, for example, a
plaintiff does not adequately plead loss causation for the drop in defendant’s in a defendant’s
stock that occurs prior to the actual revelation of fraud. Id. (quoting In re Daou Systems, 411
F.3d 1006, 1027 (9th Cir. 2005) (emphasis added)).
Similarly, in In re Daou, the Ninth Circuit carefully delineated “between losses caused

21

after the company’s conduct was revealed, and losses suffered before the revelation,” confirming
“that the complaint must allege that the practices [] the plaintiff contends are fraudulent were
revealed to the market and caused the resulting loss.” 411 F.3d at 1063 (emphasis added).
Citing similar holdings by the Fourth and Seventh Circuits, the Ninth Circuit concluded that
disclosure of fraud should “reveal widespread financial aid manipulation,” which could be
accomplished by a single or multiple disclosures. Id. at 1063. In any event, loss causation is not
sufficiently pled “where a defendant’s disclosure reveals a ‘risk’ or ‘potential’ for widespread
fraudulent conduct.” Id. at 1064.
Relying on these circuit court analyses, this Court concludes that Plaintiffs must show
some revelation of Defendants’ fraud– that they performed unnecessary procedures or provided
unnecessary services to patients which ultimately inflated their earnings and stock value– in
order to satisfy the pleading requirements of loss causation. The disclosures must amount to
more than revelations of possible risks that Defendants were engaged in such prohibited
practices.
Requiring that fraud be revealed or disclosed to the market in order to adequately plead
loss causation is both sensible and efficient. If the purpose of the loss causation requirement is
to ensure that an investor’s loss is actually caused by a defendant’s fraud, and not an unrelated
circumstance in the market, then a plaintiff cannot satisfy her pleading requirements while the
fraud remains concealed from the market. Stated another way, the market cannot respond to
fraud until it has been revealed. If the disclosure of a mere risk of fraud 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.

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Allowing investors to pursue a claim which essentially eliminates any investment risk
factor–which lies at the heart of these transactions–is not the purpose of Section 10(b) and Rule
10b-5. Investors purchase stocks well aware of, and in fact motivated by, the risks associated
with the market. If no risk existed in these transactions, the market as we know it would cease to
exist. Thus, insuring against the mere risk or possibility of fraud for these investors is a job
outside the purview of securities laws, which are designed not to serve as broad insurance
policies for investors against losses generally, but rather as protection against only those losses
directly attributable to fraud. Perhaps Judge Richard Posner of the Seventh Circuit stated it best:
“No social purpose would be served by encouraging everyone who suffers an investment loss
because of an unanticipated change in market conditions to pick through . . . memoranda with a
fine-tooth comb in the hope of uncovering a misrepresentation.” Bastian v. Petren Res. Corp.,
892 F.2d 680, 685 (7th Cir. 1990). In a nutshell, Judge Posner articulates the practical reason for
the loss causation requirement.
B.
Here, Plaintiffs first argue that the WSJ article constituted a partial disclosure of
Defendants’ misrepresentations. In support of this argument, Plaintiffs cite to In re America
Service Group, Inc., where a New York Times article did suffice as a disclosure of fraud. There,
however, the article revealed the “culprit” behind a scheme investigated by the New York Times.
After a year-long examination, the newspaper presented its findings, which were wholly
unknown to the public, in an article focused solely on the defendant in the case. Based on this
article, the Middle District of Tennessee concluded that plaintiffs sufficiently established a
disclosure for purposes of pleading loss causation.

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The WSJ article here differs dramatically from the New York Times article at issue in the
America Service Group case. First, the WSJ article focuses primarily on another healthcare
company and Defendants are mentioned only once, briefly, throughout the entire text. Second,
the reference to Defendants presents no specific allegation of fraud. The article does not allege
that Defendants falsely reported artificial profits or otherwise communicated prior
misrepresentations. Finally, and perhaps most noteworthy, the article presented no new
information to the market. The article was based on a statistical analysis of financial statements
and records already available to the public.8 For all these reasons, the Court is satisfied that the
WSJ articles does not constitute a disclosure of fraud as articulated in the relevant cases.
Plaintiffs next argue that the Senate Finance Committee press release, announcing the
initiation of an investigation into Almost Family, and the announcement of an SEC inquiry
constituted disclosures of Defendants’ fraud. Both of these announcements cited the WSJ
article, as well as earlier MedPAC findings, as bases for the investigations. However, the press
release made no specific allegation of fraud involving Defendants.9 Similarly, the SEC press
release did not disclose any actual misconduct. Numerous federal district courts have held that a
disclosure of an investigation, absent an actual revelation of fraud, is not a corrective disclosure.
See In re Avista Corp. Sec. Litig., 415 F. Supp. 2d 1214, 1220-21 (E.D. Wash. 2005); In re Dell
Inc., Sec. Litig., 591 F. Supp. 2d 877, 910 (W.D. Tex. 2008); In re Maxim Integrated Prods., Inc.

8

The Court also notes that the price of Defendants’ stock noticeably increased following publication of the
WSJ article, further supporting the position that it did not disclose any fraud to the market.
9

In fact, the Court notes that the Senate Finance Committee recently completed its review of Defendants. In
its September 2011 Report, the Committee concludes that while Defendants appeared to have been “responsive to
the incentive changes “ in the Medicare payment model, such behavior could not be attributed to fraud. That is,
“none of the documents provided to the Committee by Almost Family show that executives ever pushed therapists to
target thresholds or pursue more profitable clinical regimens.”

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Sec. Litig., 639 F. Supp. 2d 1038, 1047 (N.D. Cal. 2009). This Court agrees with that logic as
applied here.
In sum, these three “disclosures” revealed nothing more than a risk, a possibility, that
Defendants may have made misrepresentations. Under the relevant cases, however, these
“disclosures” must have revealed new, unknown information, which would allow the market to
respond to the actual revelation of misconduct. Absent this, these articles and announcement fall
far short of a disclosure of fraud. Because this Court fails to identify any disclosure of fraud on
behalf of Defendants, Plaintiffs have not satisfied their pleadings standards of loss causation.
Without adequately pleading loss causation, Plaintiffs’ Section 10(b) and Rule 10b-5 claim must
fail.
VI.
Plaintiffs also allege that Individual Defendants, Yarmuth and Guenthner, are liable
under Section 20(a) of the Securities and Exchange Act, 15 U.S.C. § 78t(a). “When a primary
violation of securities law is shown,” this provision imposes secondary “joint and several
liability on ‘controlling persons.’” Omnicare, 583 F.3d at 947. Section 20(a) states:
Every person who, directly or indirectly, controls any person liable
under any provision of this chapter or of any rule or regulation
thereunder shall also be liable jointly and severally with and to the
same extent as such controlled person to any person to whom such
controlled person in liable . . . unless the controlling person acted
in good faith and did not directly or indirectly induce the act or
acts constituting the violation or cause of action.
To state a claim under Section 20(a), a complaint must adequately allege that underlying
primary liability exists. Durgin v. Mon, 415 F. App’x 161, 164 (11th Cir. 2011). Having
concluded that Plaintiffs fail to meet the pleading requirements of a Section 10(b) or Rule 10b-5

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claim, their secondary-liability claim must also fail at this stage.
The Court will enter an order consistent with this Memorandum Opinion.

February 9, 2012

cc:

Counsel of Record

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