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IN RE AETNA INC. SECURITIES LITIGATION
February 2, 1999
IN RE AETNA INC. SECURITIES LITIGATION.
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:
• 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 ¶¶
• 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
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
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).
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 ...