On March 5, 2019, the United States Court of Appeal for the Second Circuit affirmed the dismissal of a class action claim alleging securities fraud based on purportedly misleading statements made by an Issuer regarding its regulatory compliance efforts. The Second Circuit concluded that the Issuer’s statements were too generic to cause a reasonable investor to rely on them, and rejected the claim as a “creative attempt to recast corporate mismanagement as securities fraud.” Singh v. Cigna Corp., No. 17-3484-cv, 2019 U.S. App. LEXIS 6637 (2d Cir. Mar. 5, 2019).
In early 2012, Cigna Corporation (Cigna or the Company), a health services organization, acquired a regional Medicare insurer, which subjected the Company to strict Medicare regulatory responsibilities. Between 2014 and 2015, Cigna issued several public statements addressing the regulations, including disclosure that it had “established policies and procedures to comply with applicable requirements” and that the Company “expect[ed] to continue to allocate significant resources” towards compliance. Cigna also published a ‘Code of Ethics and Principles of Conduct’ pamphlet (Code of Ethics) affirming the importance of compliance and integrity to the Company. During this same period, however, Cigna received multiple notices from the Centers for Medicare and Medicaid Services (CMS) for a variety of compliance infractions. On January 21, 2016, CMS informed Cigna it would face sanctions for failing to comply with CMS requirements, causing the Company’s stock to fall substantially. Following this drop, a Cigna investor brought a putative class action suit against the Company, claiming that Cigna’s statements regarding its Medicare compliance were materially misleading, constituting fraud under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Securities and Exchange Commission (SEC) Rule 10b-5.
The Second Circuit held that the District Court properly dismissed the claim on the basis that the plaintiffs failed to plausibly allege that there was a material misrepresentation (or omission) under Section 10(b) and Rule 10b-5. An alleged misrepresentation is material only if “there is substantial likelihood that a reasonable person would consider it important in deciding whether to buy or sell shares of stock.” According to the Court, neither Cigna’s Code of Ethics nor its public statements created such reliance.
The Court stated that Cigna’s Code of Ethics was a “textbook example of ‘puffery’,” rendering the statements inactionable. Similarly, Cigna’s generic assertions about its policies and procedures and intention to allocate resources towards compliance would not cause a reasonable investor to view the statements as “alter[ing] the total mix of information made available.” All of the Company’s public statements were also followed by acknowledgments of the complex and evolving nature of the regulatory environment. This lead the Court to conclude that the disclosure actually expressed Cigna’s uncertainty as to its ability to adequately comply with Medicare’s regulatory requirements, rather than suggesting accurate compliance. The Company’s statements, therefore, could not be considered materially misleading.
There has been an uptick in recent years of securities class actions based on corporations’ more general public statements regarding regulatory compliance, as compared to traditional actions which were solely focussed on allegedly misleading financial and accounting disclosure. However, as Singh demonstrates, at least some courts appear to be discouraging this trend. The decision in Singh should offer comfort that corporations’ generic statements about compliance policies and procedures cannot necessarily be recast as specific misrepresentations. Furthermore, the decision supports the notion that corporate mismanagement should not, by itself, give rise to a securities misrepresentation claim.
The author would like to thank Abigail Court, Student-At-Law, for her contribution to this article.