In affirming the dismissal of a class action suit against health services company Cigna, the U.S. Court of Appeals for the Second Circuit took the opportunity to address what it called “a creative attempt to recast corporate mismanagement as securities fraud.”
Second Circuit Judge José Cabranes, writing for the panel, continued: “The attempt relies on a simple equation: first, point to banal and vague corporate statements affirming the importance of regulatory compliance; next, point to significant regulatory violations; and voila, you have alleged a prima facie case of securities fraud!”
There was a problem with such an equation, Cabranes and his fellow panel members, Circuit Judge Robert Sack and District Judge John Koeltl of the Southern District of New York sitting by designation, noted: generic statements such as the ones Cigna made in its public filing “do not invite reasonable reliance.”
“They are not, therefore, materially misleading, and so cannot form the basis of a fraud case,” Cabranes added.
The class action was brought in the wake of the regulatory issues faced by Cigna’s 2012 acquisition of Medicare insurer HealthSpring. The plaintiffs claimed that a series of public filings misstated the company’s success in dealing with the substantial regulatory compliance environment surrounding HealthSpring, which led to regulators shutting down Medicare enrollment in 2016.
The panel backed the decision by U.S. District Judge Vanessa Bryant of the District of Connecticut to dismiss the case for failing to sufficiently allege materially false statements. The language used by Cigna in public filings amounted to puffery and of a sort that a reasonable investor would not rely on.
Rather, the statements reflected for the panel “a company actively working to improve its compliance efforts, rather than one expressing confidence in their complete (or even substantial) effectiveness,” Cabranes wrote.
“If anything, these statements seem to reflect Cigna’s uncertainty as to the very possibility of maintaining adequate compliance mechanism in light of complex and shifting government regulations,” Cabranes wrote.
The class action plaintiffs were represented on appeal by Labaton Sucharow partner David Goldsmith. Cigna was represented by Sidley Austin partner Andrew Stern. Neither responded to a request for comment.