Recent victories by Lowey’s securities litigation team include a significant Sixth Circuit reversal, which addressed the important legal question of whether the lead plaintiff may sufficiently plead loss causation where the corrective disclosure took the form of a complaint, i.e., a set of allegations which have yet to be proven.

Lowey Dannenberg, on behalf of the New York City Pension Funds, asserted federal securities fraud claims against Community Health Systems, Inc. (“CHS” or the “Company”), one of the largest hospital systems in the United States, in the District Court for the Middle District of Tennessee.  The operative complaint alleges that CHS failed to disclose its use of the Blue Book, a non-industry standard admissions criteria, which improperly boosted inpatient admissions of Medicare patients in CHS’ emergency rooms.  The complaint pled a series of partial corrective disclosures through which CHS’ fraud came to light.  For example, on April 11, 2011, in response to CHS’ hostile take-over bid, Tenet Healthcare Corporation (“Tenet”) filed a lawsuit against CHS, revealing for the first time CHS’ use of the Blue Book and its unsustainable admissions practices.  As a result, CHS’ stock price fell 35%.  Subsequently, despite CHS’ public denials of Tenet’s allegations, on October 26, 2011, when CHS released its third-quarter results, it became clear that the Company’s inpatient admissions dropped significantly after replacing the Blue Book with InterQual – the industry standard.  Upon this news which corroborated Tenet’s allegations, CHS’ share price fell another 11%.

On June 16, 2016, the District Court dismissed the action with prejudice, holding that (i) Tenet’s complaint revealed no truth, only allegations, as a matter of law; and (ii) the extended class period pled does not relate back to the initial complaint because CHS’ post-Tenet conduct in the extended class period constitutes an entirely new securities fraud claim.  Norfolk Cty. Ret. Sys. v. Cmty. Health Sys., Inc., No. 3:11-00433, 2016 WL 4098584 (M.D. Tenn. June 16, 2016), rev’d, 877 F.3d 687 (6th Cir. 2017).  The Lowey team appealed to the Sixth Circuit.

After the parties’ briefing and oral argument, on December 13, 2017, the Sixth Circuit handed a resounding win to the Lowey team, reversing the district court’s dismissal and remanding the case.  Norfolk Cty. Ret. Sys. v. Cmty. Health Sys., Inc., 877 F.3d 687 (6th Cir. 2017).  The Sixth Circuit rejected the defendants’ argument that complaints can reveal only allegations rather than truth as a categorical rule, and also held that the allegations about CHS’ post-Tenet conduct in the extended class period relate back to the initial complaint because they both relate to the same “general conduct.”

On remand, the case is now pending before the U.S. District Judge Waverly D. Crenshaw Jr. of the Middle District of Tennessee.