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Schuh v. HCA Holdings, Inc.

United States District Court, M.D. Tennessee, Nashville Division

September 22, 2014

KARSTEN SCHUH, Individually and on Behalf of All Others Similarly Situated, Plaintiff,
v.
HCA HOLDINGS, INC., et al., Defendants.

MEMORANDUM

KEVIN H. SHARP, District Judge.

This matter is before the Court on the Lead Plaintiff New England Teamsters & Trucking Industry Pension Fund's ("Pension Fund's") Motion for Class Certification. (Docket No. 159). The Court heard oral arguments on the Motion on August 7, 2014. Having considered those arguments, as well as the arguments raised in the extensive briefing that has been submitted (Docket Nos. 159-1, 198, 235 & 247), the Court will grant the motion for class certification but place temporal limits on the class period.

I. BACKGROUND

The factual allegations underlying this dispute are discussed in some detail in this Court's prior opinion resolving the HCA Defendant's Motion to Dismiss, Schuh v. HCA Holdings, Inc., 947 F.Supp.2d 882 (M.D. Tenn. 2013), familiarity with which is assumed. The Court will summarize some of the pertinent factual allegations and the parties' respective positions in order to place the present arguments in context.

This case is a consolidation of three securities actions brought on behalf of all persons who acquired common stock of HCA Holdings, Inc. ("HCA") "traceable to" an allegedly false and misleading Registration Statement and Prospectus ("Registration Statement") issued in connection with HCA's March 9, 2011, initial public offering ("IPO"). The IPO involved the sale of more than $4.3 billion shares of HCA common stock. Defendants include HCA, its directors who signed the Registration Statement, the investment banks which underwrote the IPO, and Hercules Holdings II, LLC, the controlling shareholder of HCA.

In early 2011, HCA filed a Registration Statement with the Securities and Exchange Commission ("SEC") in connection with the planned stock sale. On March 9, 2011, the SEC declared effective HCA's Registration Statement for its initial public offering of 145.1 million shares of stock at $30 per share.

According to Plaintiff, the Registration Statement was false and misleading because it omitted certain material facts. That document allegedly failed to disclose (among other things[1]) that HCA (1) was experiencing and would continue to experience a decline in high margin components of Medicare Revenue, including cardiology revenue; (2) was experiencing declining Medicaid Revenues per admission; and (3) had violated Generally Accepted Accounting Principles ("GAAP") by improperly accounting for its reorganization transactions.

In moving to certify a class, Plaintiff focuses on HCA's high margin cardiology procedures which Plaintiff claims "accounted for about 25% of Medicare inpatient revenue and was one of HCA's most highly profitable segments." (Docket No. 235 at 4). It contends that revenues from the cardiology procedures line were declining in the quarters immediately prior to the IPO. Plaintiff also asserts HCA knew about the decline, and knew that the decline was likely to continue "[a]s a result of HCA's internal reporting, its own internal investigation, and the DOJ investigation of cardiac billing practices." (Id.).

According to Plaintiff, HCA's own investigation showed that unnecessary cardiac procedures were being routinely performed. In fact, "[b]y the fall of 2010, HCA had uncovered evidence showing that cardiologists at several of its hospitals in Florida were unable to justify many of the procedures they were performing, '" and, at one Florida hospital, "about half the procedures, or 1, 200, were determined to have been done on patients without significant heart disease." (Id.) (citations omitted). Internal documents allegedly painted an equally dismal projection, so much so, that in October 2010 Defendants "internally lowered HCA's 2011 EBITDA[2] growth targets by almost 60%." (Docket No. 235 at 7). The DOJ investigation expanded to include at least 10 HCA hospitals.

In response to the Motion to Certify, HCA argues that "[p]rior to the IPO, HCA was not a typical private company." (Docket No. 198 at 3). While the "IPO signaled HCA's reemergence as a public company after nearly four and a half years of being closely held by a limited group of investors and management, " it issued public debt in 2006 and 2010, and registered its common shared with the SEC in April 2008. (Id.). By registering its shares, HCA subjected itself to the reporting requirements of the Exchange Act, and "HCA filed annual and quarterly reports on Forms 10-K and 10-Q, as well as Form 8-Ks announcing major events (e.g., the issuance of new debt)." (Id.). HCA also held quarterly earnings calls and, during some of those calls, made detailed disclosure regarding its Medicaid and Medicare revenues, thereby disclosing some of the facts (including declines in the last quarter of 2010 and the first quarter of 2011) about which "Plaintiff now complains HCA failed to tell investors." (Id. at 4).

Defendant further notes that this case primarily concerns healthcare services provided by HCA and reimbursed by the government through its Medicare and Medicaid programs. Such "programs are highly regulated and require providers such as HCA to report a variety of data to the Centers on Medicare & Medicaid Services (CMS') and the National Cardiovascular Data Registry (NCDR')." (Id.). As a consequence, even before the IPO, "voluminous data regarding the services at issue was publicly available from federal and private data sources." Id.

After the IPO, on July 25, 2011, HCA reported its results for the second quarter of 2011, announcing that total revenues and same facility equivalent admissions for the second quarter of 2011 had increased 4% and 1.9%, respectively, compared to the second quarter of 2010. It also reported, however, that HCA had experienced an unexpected "shift in service mix from more complex surgical cases to less acute medical cases, ' which resulted in lower than anticipated revenue growth and earnings over the same quarter in 2010.'" (Id. at 9, citation to SEC filings omitted). On September 12, 2011, HCA again reported on its second quarter results, explaining, among other things, that "Medicare revenue growth in particular fell short of expectations and was inconsistent with historical trends, '" and that while "[o]verall demand for cardiovascular services has been declining about 3% per year for several years[, it] [a]ppears to be an acceleration of this negative trend nationally that impacted HCA markets in Q2 2011.'" ( Id., citation to SEC filings omitted).

Shortly after the update, on October 1, 2011, BARRON'S published an article in which the authors questioned HCA's accounting for the 2006 recapitalization and the 2010 reorganization, and opined that HCA utilized "pooling-of-interest" accounting instead of the "purchase method" of accounting for those "combined business" transactions. By October 3, 2011, HCA's stock had declined to $18.81, a decline of 38% from the IPO offering price. This lawsuit followed.

The Pension Fund purchased 55, 175 shares of HCA stock between March 9, 2011 and July 25, 2011 as part of a portfolio managed by Victory Capital Management ("Victory"). Plaintiff moves the Court to certify a class consisting of "[a]ll persons who acquired the common stock of HCA Holdings, Inc. (HCA' or the Company') traceable to the Registration Statement and Prospectus (collectively the Registration Statement') utilized in connection with HCA's March 9, 2011 initial public offering (IPO') and were damaged thereby[.]" (Docket No. 159-1 at 1).

II. LEGAL ANALYSIS

Rule 23 of the Federal Rules of Civil Procedure sets forth a two-step process to determine the propriety of maintaining a class action. First, a party seeking class certification must meet the four requirements under Rule 23(a): numerosity, commonality, typicality, and adequacy of representation. Fed.R.Civ.P. 23(a). Second, after satisfying Rule 23(a), a party must show that it falls within one of Rule 23(b)'s three categories. Here, the Pension Fund seeks certification under Rule 23(b)(3), which allows a court to certify a class only after finding that "questions of law or fact common to class members predominate over any questions affecting only individual members, and that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy." Fed.R.Civ.P. 23(b)(3).

A district court has broad discretion to certify a class, but it must "rigorous[ly] analy[ze]" whether Rule 23's elements are met. Reeb v. Ohio Dep't of Rehab., 435 F.3d 639, 644 (6th Cir. 2006). While a court may generally accept a complaint's allegations as true, it may sometimes need to "probe behind the pleadings'" before deciding the certification issue. Pilgrim v. Universal Health Card, LLC, 660 F.3d 943, 949 (6th Cir. 2011) (quoting Gen. Tel. Co. v. Falcon, 457 U.S. 147, 161 (1982)). Moreover, "rigorous analysis" may well "entail some overlap with the merits of the plaintiff's underlying claim." Wal-Mart Stores, Inc. v. Dukes, 131S.Ct. 2541, 2551 (2011).

HCA argues that class certification in this action is inappropriate for three reasons. First, the Pension Fund cannot show that common questions of law or fact will predominate over individual issues as required by Rule 23(b). Second, the Pension fund is subject to a unique defense that renders it inadequate and atypical under Rule 23(a). Third, the proposed class definition is impermissibly overbroad. The Court considers the arguments in turn.

A. Common Issues and Predominance

As noted, Plaintiff's claims are brought under Sections 11, 12(a)(2) and 15 of the Securities Act of 1933. Section 11 prohibits misstatements and omissions in a Registration Statement, that is, the document filed with the SEC in order to register securities for sale to the public. 15 U.S.C. § 77k. "Sections 12 and 15 are essentially derivative of Section 11 claims, " New Jersey Carpenters Health Fund v. Rali Series 2006-QO1 Trust 477 F.Appx. 809, 812-813 (2nd Cir. 2012), because Section 12 prohibits oral misstatements and omissions, or misstatements and omissions in the prospectus which is a part of the Registration Statement, 15 U.S.C. § 77l(a)(2), while Section 15, in turn, provides secondary liability for persons who control others, 15 U.S.C. § 77o.

"Sections 11 and 12 both impose a duty to disclose additional facts when a statement of material fact made by the issuer is misleading, and they both impose liability for failing to fulfill that duty of disclosure, as well as for misstating a material fact." J&R Mktg., SEP v. Gen. Motors Corp., 549 F.3d 384, 390 (6th Cir. 2008). Even though Section 11 (and derivatively Section 12) "provide purchasers with a form of strict liability for material misstatements or omissions, ... it also affords certain affirmative defenses[:]

Section 11 absolves defendants of liability for misstatements or omissions if "it is proved that at the time of such acquisition [the purchaser] knew of such untruth or omission." 15 U.S.C. § 77k(a). A plaintiff's knowledge is therefore an affirmative defense under Section 11. In re Initial Pub. Offering Sec. Litig., 483 F.3d 70, 73 n. 1 (2nd Cir. 2006). Section 12(a)(2) similarly imposes liability for untruths or omissions only where the purchaser did not know "of such untruth of omission." 15 U.S.C. § 771(a)(2).

Fed. Hous. Finan. Agency v. UBS Am.'s Inc., 2013 WL 3284118, at *13 (S.D.N.Y. June 28, 2013).

The Pension Fund argues that trial of this case "will focus almost entirely on common issues, including evidence of the Registration Statement's failure to disclose facts relating to high margin components of HCA's cardiology business line." (Docket No. 235 at 4). More specifically, whether HCA was aware prior to the March 9, 2011 IPO that its cardiology product line had experienced significant declines in 2010 and the first two months of ...


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