The opinion of the court was delivered by: Dalzell, J.
The plaintiffs in this putative securities class action case sue CardioNet, Inc. ("CardioNet"), and two of its executives for violations of Securities and Exchange Commission Rule 10b-5, among other things. Generally speaking, the plaintiffs contend that the defendants made overly optimistic statements during the proposed class period regarding the company's general prospects and, more specifically, the reimbursement rate that Medicare and Medicaid would pay for CardioNet's main product, which is a wireless heart monitor. As it turned out, Medicare and Medicaid kept the rate stable for some of the class period but eventually reduced it, after which CardioNet's stock price fell.
The defendants move to dismiss the complaint and argue that the plaintiffs have failed to adequately plead that (1) the statements at issue were false or misleading and (2) the defendants made the statements with the requisite scienter, that is, knowingly or recklessly. For the reasons we discuss extensively below, we agree with the defendants, and we will grant their motion to dismiss.
A. Introduction to the Parties
According to the Consolidated Class Action Complaint ("Complaint"),*fn1 CardioNet was formed in 1997 and became a publicly traded company in March of 2008. CardioNet's stock trades on the Nasdaq market under the symbol "BEAT." On March 25, 2008 CardioNet made its initial public offering of 4.5 million shares of common stock, and the company made a secondary offering of five million shares in August of 2008. Id. at ¶¶ 30, 56-58 (explaining that some early investors sold their stake in CardioNet through these offerings). Based on CardioNet's 2009 proxy statement, on March 16, 2009 the company had more than twenty-three million shares outstanding. Id. at ¶ 30.
CardioNet "provides continuous, real-time ambulatory outpatient management solutions for monitoring relevant and timely clinical information regarding an individual's health." Id. at ¶ 2. This matter primarily focuses on Cardionet's Mobile Cardiac Outpatient Telemetry device ("MCOT"), for which CardioNet received FDA approval in 2002. Id. at ¶ 38. According to the Complaint, MCOT incorporates a lightweight patient-worn sensor attached to electrodes that capture two-channel EKG data, measuring electrical activity of the heart and communicating wirelessly with a compact, handheld monitor. The monitor analyzes incoming heartbeat-by-heartbeat information from the sensor on a real-time basis by applying algorithms designed to detect arrhythmias. When the monitor detects an arrhythmic event, it automatically transmits the ECG [also known as "EKG"] to the CardioNet Monitoring Center, even in the absence of symptoms noticed by the patient and without patient involvement.
In contrast to MCOT, the plaintiffs describe another device, the Holter monitor, as a "[t]raditional heart rate monitor" and explain that the data from Holter monitors, which continuously monitor a patient's heartbeats, may be uploaded through the Internet or retrieved at a physician's office. Id. at ¶ 41. Other traditional monitors, called "event monitors," only "intermittently record a patient's heartbeats during cardiac events," and patients must manually activate some event monitors. Id. Data from event monitors is transmitted through the telephone. Id. The MCOT device uploads data wirelessly, and patients wear it continuously for up to twenty-one days. See id. at ¶¶ 41-42.*fn2 MCOT's share of CardioNet's total revenue grew from 79% in the first quarter of 2008 to 86% in the fourth quarter of 2008 and then again to 88% in the first quarter of 2009. Id. at ¶ 47.
Defendant Randy Thurman has been the Chairman of the Board and Chief Executive Officer of CardioNet since February of 2009, but he joined the company in July of 2008 as the Executive Chairman of the Board. Id. at ¶ 26. The other individual defendant, Martin Galvan, was the Chief Financial Officer of CardioNet from September of 2007 until January 15, 2010. Id. at ¶ 27.
Central Laborers' Pension Welfare and Annuity Funds, which is comprised of three separate funds, is the lead plaintiff in this purported class action. See id. at ¶ 23. One of its funds purchased 18,184 shares of CardioNet stock during the proposed class period, which is April 28, 2009 through July 10, 2009. Id. at ¶¶ 23, 29. The other named plaintiff in this case, Dianne Solomon-Shrawder, is an individual who bought 1,000 shares of CardioNet stock during the proposed class period. Id. at ¶ 24.
The plaintiffs allege that they bought these shares "at artificially inflated prices" and suffered damages when the stock price later plummeted. Id. at ¶¶ 23-24. The proposed class is "all persons . . . who purchased or otherwise acquired CardioNet's publicly traded securities [during the class period] and were damaged thereby." Id. at ¶ 29.
B. CardioNet's Revenue Streams
When health insurers change the rates that they will pay for the MCOT and related services (the "reimbursement rates"), those changes can have a significant impact on CardioNet's financial health. In the first quarter of 2009, for example, Medicare represented 34% of CardioNet's "payor mix," and commercial payors -- primarily private insurers -- comprised the remaining 66%. Id. at ¶ 47. There are two parts to the reimbursement rate for MCOT:
(1) the "technical component," which is the amount that the MCOT provider -- apparently CardioNet --receives for providing the MCOT service, and (2) the "professional component," which is what doctors are paid for interpreting MCOT reports. Id. at ¶ 48. Effective January 1, 2009, these two components had separate billing codes under the American Medical Association's standard coding system. See id. at ¶¶ 48-49.
The Centers for Medicare and Medicaid Services ("CMS") contracts with Highmark Medicare Services ("Highmark") to set Medicare's reimbursement rate*fn3 for the billing code that covers the technical component for MCOT and a few other competitor devices. On October 31, 2008, Highmark set that rate for MCOT's technical component at $1,123 per service, which became effective on January 1, 2009. Id. at ¶ 3. At that time, CMS also set the rate for the professional component at $25, a decrease from the $30 to $300 that physicians previously received.*fn4 Id. at ¶ 49. Several months later, in the week before May 18, 2009, Highmark announced that the technical fee would remain at $1,123, and CardioNet issued a press release stating that fact on May 18, 2009. Id. at ¶ 88. But on July 12, 2009, CardioNet issued another press release stating that it had learned two days before that Highmark reduced the technical rate to $754. Id. at ¶ 99.
Earlier, on January 5, 2009, Highmark issued a Medical Policy Bulletin revision that stated that systems like MCOT were "'not indicated in all patients with arrhythmias' and should be used 'only in circumstances where traditional Holter monitoring or cardiac event recording is not expected to provide adequate information or has been unrevealing.'" Id. at ¶ 50. Highmark issued another Bulletin on April 13, 2009 that imposed additional restrictions on coverage for MCOT. See id. at ¶¶ 51-52. The plaintiffs claim that this revision "was a strong statement with respect to the limitations of when the MCOT system should and should not be utilized." Id. at ¶ 52.
Commercial payors also set their own reimbursement rates. Those rates "may be pegged in some fashion to a rate set for Medicare, and may be determined either with manufacturer input or as a result of discussions and negotiations between medical service providers and commercial payors." Id. at ¶ 54. CardioNet lowered its guidance on June 30, 2009 due to "'lower than anticipated commercial reimbursement rates.'" Id. at ¶ 93. The plaintiffs do not state any particular facts regarding what commercial payor rates were reduced, how CardioNet learned about those reductions, or whether CardioNet knew or had any particular warning of those reductions before June 30, 2009.
On February 17, 2009, CardioNet issued a press release in which it reported revenue of $34.4 million in the fourth quarter of 2008 (a 43.8% increase over the fourth quarter of 2007) and full-year revenue of $120.5 million for 2008 (a 65% increase over 2007). Id. at ¶ 60. The company also reported on its successful IPO and secondary offering and stated that its earnings per diluted share for the full year and fourth quarter of 2008 increased over comparable data for 2007. Id. The press release included a lengthy quote from Thurman in which he discussed the new AMA billing codes for MCOT and related reimbursement rates, new contracts with payors, additions to the management team, and other developments. See id. at ¶ 61. Thurman stated that the demand for CardioNet's outpatient cardiac services was growing "'at greater than 40% per year'" and that "'[e]very indication is that CardioNet is positioned for years of exceptional growth.'" Id.*fn5
In that press release, CardioNet also provided guidance for the company's future, including (1) "[r]evenue of $170 to $175 million for 2009, representing 40% growth over 2008," (2) "[e]arnings of $0.69 to $0.73 per diluted share for 2009, representing 76% to 87% growth over 2008," (3) "[r]evenue growth of at least 50% for 2010 (at least $255 to $262.5 million)," (4) "[e]arnings growth of 100% for 2010 ($1.38 to $1.46 per diluted share)," and (5) "[e]arnings that could reach $2.00 per diluted share by 2011." Id. at ¶ 63. See also id. at ¶ 62 (quoting Thurman at length). In a conference call with analysts on the day CardioNet issued this press release, Thurman and Galvan reiterated the information about the company's 2008 results and guidance for 2009 through 2011. See id. at ¶ 64.
CardioNet's stock closed on February 17, 2009 at $22.22 per share, and the next day the closing price rose to $25.00 per share. Id. at ¶ 66. According to the Complaint, "CardioNet's immediate and long-term guidance surprised but impressed analysts," especially as it was unusual at that time for companies to provide three years of guidance. Id. At a conference on March 17, 2009, Thurman and Galvan again gave the guidance CardioNet had announced a month earlier, and Thurman stated that the guidance "assumed 'about a 5% decline in reimbursement every year.'" Id. at ¶ 67.
D. Negative Analyst Report from Jefferies & Co.
Despite CardioNet's glowing predictions for its continued growth, on April 24, 2009 an analyst at Jefferies & Company, Inc. ("Jefferies"), Brian Kennedy, initiated coverage of CardioNet with a negative report about the company's prospects ("Kennedy Report"). Id. at ¶ 68. Kennedy gave CardioNet an "'underperform'" rating and, according to the Complaint, claimed that he and his colleagues had done "an extensive investigation" that revealed that "a significant reimbursement rate cut by Highmark was imminent." Id. at ¶ 4. See also id. at ¶ 68.
The Kennedy Report did not, however, actually claim that the rate cut would be "imminent", but rather stated that Jefferies's "checks indicate that the technical fee is now under review" and that Highmark would lower the fee "by at least $200, a decision that should be announced shortly and implemented around midyear." Kennedy Report, Compl. Ex. 1 at 1. The report predicted that the Medicare reimbursement rate was "at risk of being cut in a matter of weeks."*fn6 Id. at 2. According to the Kennedy Report, most of the physicians and industry experts with whom Jefferies spoke suggested that the technical fee would be between $700 and $1,000. Id. at 6. Jefferies believed that Highmark would "'revisit'" the technical fee because, inter alia, CMS had recently reduced the professional component fee from $128 to $25, which "'sent a clear signal to Highmark that it's been overvaluing the service.'" Compl. at ¶ 69. The Kennedy Report predicted that CMS would cut the rate, even if Highmark did not recommend that it do so. Id. The report noted that other analysts had positive ratings for CardioNet but stated that Jefferies took a different position due to its concerns about changes to the reimbursement rate. Id. at ¶ 71. The Kennedy Report set a price target of $17.00 per share, and the day that Jefferies published the report CardioNet's common stock fell by 13% and closed at $19.94, down $2.97 per share. Id. at ¶ 72.
E. CardioNet's Reaction to the Kennedy Report
Four days after the Kennedy Report came out, CardioNet issued a press release in response to it.*fn7 The release "stated that after frequent communications with its two main reimbursement entities, CardioNet had not been notified of any proposed adjustment downward of its reimbursement rates" and that CardioNet "believed the Jefferies analyst's reference to such an imminent decrease in the reimbursement rate was 'not based on any indication or suggestions provided by Highmark Medicare Services or CMS.'" Id. at ¶ 8. CardioNet also claimed that reimbursement rates would normally change "only 'after a substantial amount of interaction and dialogue with our organization.'" Id.
The plaintiffs aver that after Jefferies published the Kennedy Report, CardioNet stopped speaking with Jefferies's analysts and did not allow them to participate in its conference calls. Id. at ¶ 9. No one from CardioNet ever contacted anyone at Jefferies regarding the Kennedy Report, though at some point CardioNet allowed Jefferies's analysts back on the conference calls but still refused to take questions from them. Id. During this time, the defendants spoke with analysts from other firms.*fn8 The plaintiffs aver that CardioNet's alienation of analysts from Jefferies "was part of the defendants' scheme to prevent the disclosure of accurate information, prevent pointed questioning about CardioNet's relationship with Highmark, and/or conceal the reality of the status of Highmark's reimbursement process and decision." Id. at ¶ 10. But the Complaint includes quotations from question-and-answer sessions during a conference call and at a health care conference, which we describe below, that demonstrate that other analysts stepped into the vacuum that Jefferies's absence (purportedly) created and repeatedly asked CardioNet about the reimbursement issue.
CardioNet's officers also purportedly worked to "discredit" the Kennedy Report in the company's first quarter 2009 press release and earnings call on April 30, 2009 and at the Bank of America Healthcare Conference on May 12, 2009. See, e.g., id. at ¶ 11. We discuss below the specific statements that they made on these occasions, but the plaintiffs stress that at the conference Thurman questioned Kennedy's motives and his "'due diligence'" prior to issuing the report. See id. On May 18, 2009 CardioNet issued a press release stating that the previous week Highmark posted a steady reimbursement rate of $1,123 for MCOT. Id. at ¶ 88.
A confidential informant, identified in the Complaint as "CW1,"*fn9 stated that CardioNet told some "on the Street" that Jefferies (1) never spoke with Highmark and (2) "'like literally made it up.'" Id. at ¶ 12. CardioNet later purportedly claimed that Jefferies misrepresented itself to Highmark.*fn10 Id.
In early June of 2009, Thurman also sent letters to the SEC, Nasdaq, and the Financial Industry Regulatory Authority ("FINRA") "suggesting that the Jefferies report 'may have been part of a plot to enrich CardioNet short sellers betting on a share-price decline.'" Id. at ¶ 14. He also claimed to these institutions that Kennedy or Jefferies was attempting to manipulate CardioNet's stock price and added that the Kennedy Report was inaccurate. This echoed Thurman's claim at the May 12, 2009 conference that CardioNet believed that FINRA and the SEC would investigate the Kennedy Report. See id. at ¶ 86. Thurman did not, however, disclose at that conference that he complained to these regulatory bodies about the report. Id. at ¶ 87(d).
According to the plaintiffs, however, Kennedy did a "thorough investigation" before issuing his report, and he spoke with a "reliable source at Highmark" and others in the field. Id. at ¶ 13. Another confidential informant, identified as "CW2,"*fn11 stated that Kennedy got information from the Vice-President for Clinical Affairs at Highmark, Dr. Andrew Bloschichak, "who is directly responsible for oversight of the reimbursement rate process at Highmark." Id. CW1 also amorphously "explained that [unspecified] information was provided [at some unstated time] to [an unidentified person at] Jefferies by Dr. Bloschichak of Highmark." Id. at ¶ 85(c).
F. Reduction in Reimbursement Rate for MCOT
On June 30, 2009, CardioNet announced that it expected "'lower than anticipated commercial reimbursement rates'" for MCOT and that it was therefore lowering its guidance for 2009 and withdrawing its guidance for 2010 and 2011. Id. at ¶ 16. The company also stated that "'[v]olume growth continues to be significant, but is expected to be somewhat lower than the Company had anticipated.'" Id. at ¶ 93. In a conference call the next day -- in which Jefferies was allegedly not invited to participate -- Thurman said that the reimbursement rate change accounted for 98% of the adjustment to CardioNet's projected revenue for 2009. Id. at ¶ 96. He characterized the "pricing dynamics" as "'unfortunate [but] a mere bump in the road'" and said that CardioNet was "'very enthusiastic about [its] long-term success.'" Id. Thurman also said that "'Medicare reimbursement rates will ...