The opinion of the court was delivered by: Padova, District Judge.
II. LEGAL STANDARD
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").
(Am.Compl. at 1.) By operation of this paragraph, all of the
allegations in the Amended
Complaint, except those specifically concerning the Plaintiffs,
must be read with the prefatory phrase "upon information and
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
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
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
• The annual increase in operating income is
expected to be approximately $300 million (after
tax) per year, and to be achieved within 18 months
of the Merger Date.
• Expense reductions are expected to result from
lowering medical costs and streamlining duplicative
administrative functions. Reductions in
administrative expenses are based on projected
needs for overlapping functions such as information
systems, provider contracting systems and medical
credentialing, finance, accounting and other
administrative functions, particularly in
overlapping markets and the application of existing
Aetna resources in serving U.S. Healthcare
(Id. at ¶¶ 45-46, 50.)
Defendants argue that the statements contained in the March
6 release are not actionable because: (1) the statements are
not material, but rather constitute "puffing" statements
related to Sebastianelli's accomplishments; (2) the prior
statements by Aetna in the June 12, 1996 proxy materials, which
Plaintiffs allege were adopted and re-affirmed
in the March 6 release, were made before the class period and
are therefore immaterial as a matter of law; and (3) to the
extent that the March 6 release adopted and reaffirmed these
earlier statements, under the "bespeaks caution" doctrine, the
cautionary language that accompanied the statements in the
proxy materials renders the alleged omissions and
misrepresentations immaterial as a matter of law.
A statement or omission is material if there is a
"substantial likelihood that, under all the circumstances, the
[statement or omission] would have assumed actual significance
in the deliberations of the reasonable shareholder." TSC
Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449, 96 S.Ct.
2126, 2132, 48 L.Ed.2d 757, (1976). As the Third Circuit has
explained, "the issue is whether there is a substantial
likelihood that the disclosure would have been viewed by the
reasonable investor as having significantly altered the total
mix of information available to that investor." Shapiro v. UJB
Financial Corp., 964 F.2d 272, 280 n. 11 (3d Cir. 1992)
(citation and quotation omitted). "Materiality is a mixed
question of law and fact, and the delicate assessments of the
inferences a reasonable shareholder would draw from a given set
of facts are peculiarly for the trier of fact." TSC Indus.,
Inc. v. Northway, Inc., 426 U.S. at 450, 96 S.Ct. at 2133. The
district court, however, can rule that the allegations are
inactionable as a matter of law "if the alleged
misrepresentations or omissions are so obviously unimportant to
an investor that reasonable minds cannot differ on the question
of materiality." Id.
(i) "Puffing" Statements
"Puffing" statements — that is, vague expressions of
corporate optimism and expectations about a company's prospects
— are not actionable because reasonable investors do not rely
on such statements in making investment decisions. Lasker v.
New York State Elec. & Gas Corp., 85 F.3d 55, 57-58 (2d Cir.
1996). However, "[i]f a statement is material, then it cannot
be puffing." Voit v. Wonderware Corp., 977 F. Supp. 363, 370
(E.D.Pa. 1997) (citing Hoxworth v. Blinder, Robinson & Co.,
903 F.2d 186, 200 (3d Cir. 1990)). Defendants argue that the
statements contained in the press release constitute
generalized statements of optimism, and as such are not
The March 6 release contains statements that clearly were
meant to tout the accomplishments of Sebastianelli
(e.g., "Joe has done a great job"). Although such a statement,
standing alone, would constitute a puffing statement, the
statement about Sebastianelli was tied to the very issue about
which Plaintiffs complain — the integration of Aetna and USHC.
The release describes these efforts as "successful." Plaintiffs
allege that this statement was materially misleading because
the integration was rife with serious problems concerning
computer system incompatibility, "black hole" claims, code
conversion without notification, consolidation of claims
service centers and reduction in workforce, and the negotiation
of provider contracts. (Am.Compl. at ¶¶ 54-66.) In addition,
the release stated that the Aetna was "on track to meet all
objectives that were set at the time of the merger," a
statement concerning the current status of the integration
efforts. Plaintiffs also allege that this statement was false
because Aetna was not on track to meet the objectives set forth
in the proxy materials.
The general rule is that questions of materiality are
fact-sensitive determinations to be made by the trier of fact.
TSC Indus., Inc. v. Northway, Inc., 426 U.S. at 450, 96 S.Ct.
at 2133. Alleged misrepresentations are inactionable as a
matter of law only when reasonable minds cannot differ on the
question of materiality. Id. The Court finds that the
representations at issue here cannot be characterized as ones
that would be so obviously unimportant to an investor that
reasonable minds cannot differ on the question of materiality.
Therefore, the Court rejects Defendants' argument that the
statements in the March 6 release are immaterial as a matter of
(ii) Proxy Statements
Defendants correctly point out that statements made before or
after the class period are not actionable and that the proxy
statements were initially made before the commencement of the
class period. Nevertheless,
Defendants' argument that these statements are therefore
immaterial as a matter of law misses the mark. Plaintiffs
allege that the March 6 release adopted and reaffirmed the
earlier proxy statements. In other words, by explicitly
referring to the objectives for the merger that were set forth
in the proxy materials, and by representing that "the business
is on track to meet all the objectives that were set at the
time of the merger," Defendants effectively reissued those
earlier statements in the March 6 release. Consequently, the
statements were made within the class period and are therefore
properly the subject of Plaintiffs' law suit.
(iii) "Bespeaks Caution" Doctrine
Defendants' final argument is that even if the earlier proxy
statements were adopted and reaffirmed in the March 6 release,
the release also adopted and reaffirmed the following
cautionary language that accompanied those statements:
THE ESTIMATES ARE BASED UPON A VARIETY OF
ASSUMPTIONS RELATING TO THE BUSINESS OF U.S.
HEALTHCARE AND AETNA WHICH MAY NOT BE REALIZED AND
ARE SUBJECT TO SIGNIFICANT UNCERTAINTIES AND
CONTINGENCIES, ALL OF WHICH ARE SUBJECT TO
MATERIAL RISKS AND UNCERTAINTIES AND MANY OF WHICH
ARE BEYOND THE CONTROL OF AETNA AND U.S.
HEALTHCARE. ACCORDINGLY, THERE CAN BE NO ASSURANCE
THAT THE ESTIMATED SYNERGIES WILL BE REALIZED, AND
ACTUAL SYNERGIES, IF ANY, MAY VARY MATERIALLY FROM
Defendants argue that under the "bespeaks caution" doctrine,
any alleged misrepresentations or omissions in the proxy
materials were rendered immaterial as a matter of law.
The "bespeaks caution" doctrine serves to neutralize
forward-looking statements concerning forecasts and
projections. As the Third Circuit has explained,
[W]hen an offering document's forecasts, opinions
or projections are accompanied by meaningful
cautionary statements, the forward-looking
statements will not form the basis for a
securities fraud claim . . . In other words,
cautionary language, if sufficient, renders the
alleged omissions or misrepresentations immaterial
as a matter of law.
In re Westinghouse Securities Litig., 90 F.3d 696, 707 (3d Cir.
1996) (quoting In re Donald J. Trump Casino Securities Litig.,
7 F.3d 357, 371-72 (3d Cir. 1993)).
Although the cautionary language contained in the proxy
materials dealt with projections and forecasts about the
proposed merger of Aetna and USHC, at the time that the proxy
statements were adopted and reissued in the March 6 press
release, the merger had already occurred. As such, the press
release referred to matters of present fact — that is, Aetna
was "on track to meet all the objectives" set forth in the
earlier proxy materials. The "bespeaks caution" doctrine does
not apply to presently known facts. Voit v. Wonderware, Corp.,
977 F. Supp. at 371. Therefore, Defendants cannot rely on the
"bespeaks caution" doctrine to neutralize the alleged
misrepresentations set forth in the March 6 release.
For these reasons, the Court finds that Plaintiffs'
allegations regarding misleading statements contained in the
March 6 release are sufficient to support their 10b-5 claim.
b. May 6, 1997 Press Release
In a press release issued on May 6, 1997, Defendant Compton,
Chairman of the Aetna Board, said
Our efforts to reposition Aetna began to pay off
in the first quarter of 1997 . . . . earnings from
all three of our core businesses . . . grew at
double-digit rates from the prior-year quarter. In
addition, our increased cash flow will provide
significant financial flexibility to continuously
increase shareholder value.
Aetna U.S. Healthcare significantly lowered
operating expenses with the improved cost
structure put in place last year.
(Am. Compl. at ¶ 79.) This press release also disclosed the
financial results for the first