The U.S. Court of Appeals for the Second Circuit (the "Second Circuit") affirmed a lower court's dismissal of a shareholder's lawsuit alleging that a health insurer and its executives misled investors regarding compliance with Medicare regulations.
The plaintiffs alleged that certain statements made by Cigna Corporation ("Cigna") about its regulatory compliance efforts were "materially misleading" and constituted fraud pursuant to the Exchange Act because Cigna was not in compliance with its regulatory requirements at the time the statements were made. The U.S. District Court ruled that the purported misstatements were not materially misleading, and granted Cigna's Motion to Dismiss the case.
The Second Circuit characterized the allegedly misleading statements as "tentative and generic" and a "textbook example of 'puffery.'" The Court also noted that the disclosures at issue included statements that highlighted the complex regulatory environment Cigna was facing. As a result, the Second Circuit concluded, a reasonable investor would not rely on the statements as representations of satisfactory compliance and, therefore, the statements were not materially misleading.
Commentary / Kyle DeYoung
The decision is welcome news for issuers. While the opinion does not break new ground, it may make it more difficult for plaintiffs to rely on general statements about things like reputation, integrity, or compliance efforts to support securities fraud claims. The opinion is also noteworthy for its striking opening paragraph - which will likely soon be one of the most-cited quotes by the securities defense bar:
This case presents us with a creative attempt to recast corporate mismanagement as securities fraud. 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! The problem with this equation, however, is that such generic statements do not invite reasonable reliance. They are not, therefore, materially misleading, and so cannot form the basis of a fraud case.
Singh v. Cigna Corp., No. 170-3484-cv, March 5, 2019.
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