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February 2, 1999


The opinion of the court was delivered by: Padova, District Judge.


This case arises out of the acquisition by Aetna, Inc. ("Aetna") of U.S. Healthcare ("USHC") in a transaction first announced on April 1, 1996, consummated on July 19, 1996, and valued at $8.9 billion. Before the Court are two Motions to Dismiss Plaintiffs' Consolidated and Amended Class Action Complaint ("Amended Complaint"), one filed by Defendants Aetna, Ronald E. Compton ("Compton"), and Richard L. Huber ("Huber") and the other filed by Defendant Leonard Abramson ("Abramson").*fn1 For the reasons set forth below, the Court will grant in part and deny in part the Motion to Dismiss of Defendants Aetna, Compton, and Huber and will grant the Motion to Dismiss of Defendant Abramson.


The action is brought on behalf of (1) all persons who bought on the open market the common stock of Aetna between March 6, 1997 and 7:00 am (EDT) on September 29, 1997, inclusive ("the class period") and (2) two subclasses of persons who purchased Aetna common stock contemporaneously with the sales of such stock by Defendants Abramson and Compton. Plaintiffs' claims arise under Section 10(b), Section 20(a), and Section 20A(a) of the Securities and Exchange Act of 1934 ("Exchange Act"), 15 U.S.C.A. §§ 78j(b), 78t(a), and 78t-1(a) (West 1997), and Rule 10b-5, promulgated thereunder, 17 C.F.R. § 240.10b-5 (1999).

The essence of Plaintiffs' case is that (1) Defendants falsely represented that Aetna was successfully integrating Aetna's operations with the operations of USHC following their merger and (2) Aetna issued false and misleading financial statements for the first and second quarters of 1997. In particular, Plaintiffs have alleged that after the merger of Aetna and USHC, the following problems associated with the integration of the operations of Aetna and USHC existed:

  • Because the computer systems used by Aetna and
  USHC were incompatible, the conversion of Aetna's
  contracts and claims adjudication and reimbursement
  payment systems from its computer system

  to USHC's more advanced system was plagued with
  difficulties (Am.Compl. at ¶¶ 54-56);
  • In early 1997, tens of thousand of electronically
  filed claims were lost in what Aetna employees
  called a computerized black hole (Id. at ¶¶ 57-60);
  • The integration of the Aetna and USHC computer
  systems was severely complicated by the fact that
  in the spring of 1997, Aetna changed patient
  identification numbers and reimbursement codes
  without alerting or giving new numbers and codes to
  provider billing personnel (Id. at ¶¶ 61-62);
  • Consolidation of claims service centers and
  reduction of workforce compounded the computer
  systems' problems because Aetna had insufficient
  employees to handle the unpaid claims (Id. at ¶¶
  63-65); and
  • Aetna experienced serious difficulties in
  negotiating pre-existing and new provider contracts
  on more favorable terms (Id. at ¶ 66).
  Plaintiffs further allege that after concealing its
  integration and financial problems, Aetna announced, before
  the opening of the market on September 29, 1997, that its
  third quarter earnings would be 25% below analysts' estimates
  and that it would increase its medical claims reserves by
  $75-105 million because of problems associated with the
  merger. According to Plaintiffs, the price of Aetna's common
  stock fell that day as a result of Aetna's announcement and
  closed down $9.50 per share at $81.00 per share. Before the
  September 29 announcement, Defendant Abramson sold 1,350,000
  shares of Aetna common stock for total proceeds of
  approximately $129,000,000, and Defendant Compton sold 90,000
  shares of Aetna common stock for total proceeds of
  approximately $8,500,000.

Plaintiffs' Amended Complaint contains the following claims: First Claim (violation of Section 10(b) and Rule 10b-5 against all Defendants); Second Claim (violation of Section 20(a) against the individual Defendants); Third Claim (violation of Section 20A(a) against Defendant Abramson); and Fourth Claim (violation of Section 20A(a) against Defendant Compton).


A claim may be dismissed under Rule 12(b)(6) of the Federal Rules of Civil Procedure only if the plaintiff can prove no set of facts in support of the claim that would entitle her to relief. ALA, Inc. v. CCAIR, Inc., 29 F.3d 855, 859 (3d Cir. 1994). The reviewing court must consider only those facts alleged in the complaint and accept all of the allegations as true. Id.; see also Rocks v. Philadelphia, 868 F.2d 644, 645 (3d Cir. 1989) (holding that in deciding a motion to dismiss for failure to state a claim, the court must "accept as true all allegations in the complaint and all reasonable inferences that can be drawn therefrom, and view them in the light most favorable to the nonmoving party").


A.  Allegations Made on Information and Belief

The introductory paragraph of Plaintiffs' Amended Complaint reads as follows:

    Plaintiffs, by and through their attorneys,
  allege the following upon information and belief,
  except as to those allegations concerning
  plaintiffs, which allegations are alleged upon
  personal knowledge. Plaintiffs' information and
  belief are based upon, among other things, the
  investigation made by plaintiffs' attorneys, which
  investigation included, without limitation: (a)
  review and analysis of filings made by Aetna, Inc.
  ("Aetna" or the "Company") with the Securities and
  Exchange Commission ("SEC"); (b) review and
  analysis of securities analysts' reports
  concerning Aetna; (c) review and analysis of press
  releases and other publications disseminated by
  defendants; and (d) investigation by plaintiffs'
  counsel of other sources of information regarding
  certain of the events described herein. Further
  facts relating to the securities violations
  alleged herein are exclusively within the control
  of defendants.

In their Motion, Defendants argue that the Amended Complaint must be dismissed because it does not provide the specificity required by the Private Securities Litigation Reform Act of 1995 ("PSLRA"), 15 U.S.C.A. § 78u-4 (West 1997), regarding the foundation of their attorneys' allegations. (Defts.' Mot. at 13.)*fn2 In particular, Defendants maintain that Plaintiffs' failure to identify with any particularity the source of their beliefs warrants the dismissal of the Amended Complaint. The Court agrees.

Under the PSLRA, a complaint "shall 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). The court in In re Health Management Sys. Inc. Sec. Litig., No. 97 Civ. 1865, 1998 WL 283286, at *3 (S.D.N.Y. June 1, 1998), held that an introductory paragraph containing information and belief allegations, strikingly similarly to the one at issue here, did not satisfy the pleading requirements of the PSLRA. Plaintiffs' information and beliefs allegations, like those at issue in Health Management, provide little, if any, specificity about the foundation for their attorneys' allegations. In particular, Plaintiffs' allegations fail to indicate what Securities and Exchange Commission ("SEC") filings and analysts' reports on Aetna that Plaintiffs relied on. Moreover, Plaintiffs fail to identify what "other publications disseminated by defendants" and "other sources of information" were reviewed.

In reaching its decision that Plaintiffs' information and belief allegations are insufficient, the Court has reviewed the relevant legislative history. The Court finds that Congress intended to impose on plaintiffs in securities fraud cases a heightened standard of pleading allegations on information and belief, which can be satisfied by identifying the sources upon which such beliefs are based. In re Silicon Graphics, Inc. Securities Litig., 970 F. Supp. 746 (N.D.Cal. 1997) (information and belief allegations that failed to identify the sources of the information did not satisfy the requirements of the PSLRA). As explained in Silicon Graphics,

    The degree of specificity required by the
  [PSLRA] in cases pled on information of [sic]
  belief was the subject of some debate in Congress.
  Arguing against [the] requirement that plaintiffs
  state with particularity all facts on which their
  beliefs are formed, Representative Bryant
  expressed concern that
    at the beginning of the case plaintiff would
    have to set forth "with specificity all
    information," they have to give all the
    information in advance that forms the basis for
    the allegations of the plaintiff, meaning any
    whistle-blower within a securities firm involved
    would have to be uncovered in the pleadings in
    the very, very beginning.
  141 Cong.Rec. H2848 (Mar. 8, 1995). Representative
  Dingell agreed, noting that "you must literally,
  in your pleadings, include the names of
  confidential informants, employees, competitors,
  Government employees, members of the media, and
  others who have provided information leading to
  the filing of the case." 141 Cong.Rec. H2849 (Mar.
  8, 1995). Despite these concerns, Congress
  rejected Rep. Bryant's proposed amendment, which
  would have permitted plaintiffs to plead simply
  facts that support their beliefs. See 141 Cong.
  Rec. H2848 (Mar. 8, 1995).
    Because Congress does not intend sub silentio to
  enact statutory language that it has earlier
  discarded in favor of other language, the Court
  concludes that plaintiffs must plead the sort of
  information described by Reps. Bryant and Dingell

  meet the requirements of the [PSLRA] as enacted.

Id. at 763-64 (citation and quotation omitted).

    The Court is unpersuaded by Plaintiffs' argument that they
  have alleged facts in their Amended Complaint to support
  their information and belief allegations and so have
  satisfied the requirements of Section 78u-4(b)(1) of the
  PSLRA. With very few exceptions, the "facts" alleged in the
  Amended Complaint are pled on information and belief.
  Essentially, Plaintiffs argue that they can satisfy the
  heightened pleading requirement for information and belief
  allegations by facts alleged on information and belief. If
  the Court were to accept this circular reasoning, the
  statute's requirement that a securities fraud complaint
  "state with particularity all facts on which that belief is
  formed" would be completely eviscerated.

For the above reasons, the Court will dismiss Plaintiffs' Amended Complaint for failure to comply with the pleading requirements of the PSLRA. In amending their Amended Complaint, Plaintiffs must state with particularity the sources of the facts that they allege on information and belief.

Although the Court will dismiss the Amended Complaint for failure to comply with the PSLRA's information and belief pleading standard, the Court will address Defendants' other challenges to the sufficiency of the Amended Complaint.

B.  Section 10(b) of the Exchange Act

Plaintiffs assert a securities fraud claim against all Defendants under Section 10(b) and Rule 10b-5. Section 10(b) prohibits the "use or employ[ment], in connection with the purchase or sale of any security, . . . [of] any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe." 15 U.S.C. § 78j(b). Rule 10b-5 makes it illegal "[t]o make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading . . . in connection with the purchase or sale of any security." 17 C.F.R. § 240.10b-5(b).

To state a claim under Section 10(b) and Rule 10b-5, Plaintiffs must establish the following: (1) that Defendants made a materially false or misleading statement or omitted to state a material fact necessary to make a statement not misleading; (2) that Defendants acted with scienter; and (3) that Plaintiffs' reliance on Defendants' misstatement caused them injury. In re Burlington Coat Factory Securities Litig., 114 F.3d 1410, 1417 (3d Cir. 1997). Because a claim under Section 10(b) and Rule 10b-5 is a claim for fraud, Plaintiffs must also satisfy the heightened pleading standard of Rule 9(b) of the Federal Rules of Civil procedure. Id. at 1417-18. Rule 9(b) provides that "[i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." Fed.R.Civ.P. 9(b).

The PSLRA imposes additional pleading requirements for the elements of a securities fraud claim. Under the PSLRA, a complaint must specify "each statement alleged to have been misleading" and "the reason or reasons why the statement is misleading." 15 U.S.C. § 78u-4(b)(1). A complaint also must "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2). Failure to satisfy these pleading requirements results in dismissal. 15 U.S.C. § 78u-4(b)(3).

Defendants seek the dismissal of Plaintiffs' 10-b(5) claims on the following grounds: (1) that the purported misrepresentations and omissions fail to state a claim for securities fraud; (2) that Plaintiffs' allegations are inactionable because they amount to nothing more than mismanagement claims; (3) that Plaintiffs have failed to meet the heightened requirements of the PSLRA for pleading scienter; (4) that Plaintiffs have failed to plead sufficient facts to attribute analysts' statements to Defendants; and (5) that Plaintiffs' accounting allegations fail to state a fraud claim.*fn3 In addition, Defendant Abramson argues that the alleged misleading statements and omissions cannot be attributed to him under the "group published information" presumption. The Court will address each of these arguments in turn.

1. The Alleged Misleading Statements

"[T]he first step for a Rule 10b-5 plaintiff is to establish that defendant made a materially false or misleading statement or omitted to state a material fact necessary to make a statement not misleading." In re Burlington Coat Factory Securities Litig., 114 F.3d at 1417. Plaintiffs' 10b-5 claims are based on alleged materially misleading statements contained in four different press releases issued by Aetna in 1997 on March 6, May 6, July 25, and August 5.*fn4

a. March 6, 1997 Press Release

On March 6, 1997, Aetna issued a press release announcing that Joseph T. Sebastianelli was named President of Aetna. Plaintiffs allege that the following statement made by Compton, then Chairman of the Aetna Board, contained in the March 6 release was misleading and actionable under the securities laws:

  Joe has done a great job leading the rapid and
  successful integration of the health business and
  creating a winning strategy for the health business
  going forward. Decisions have been made and
  implemented quickly, and the business is on track
  to meet all the objectives that were set at the
  time of the merger.

(Am.Compl. at ¶ 49, emphasis added by Plaintiffs.)

Plaintiffs allege that by issuing this press release, "defendants represented that, as of March 6, 1997, the Aetna-USHC health business had already been `successfully integrated' and that `a winning strategy for the health business going forward' was in place." (Id. at ¶ 50.) Plaintiffs further allege that Defendants, by stating that "the business is on track to meet all objectives that were set at the time of the merger," adopted and reaffirmed the statements previously issued in the June 13, 1996 Joint Proxy Statement by Aetna and USHC, including, inter alia, the representations that:

  • The annual increase in operating income is
  expected to be approximately $300 million (after
  tax) per year, and to be achieved ...

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