Morse v. McWhorter (200 F. Supp. 2d 853, 2000)

MEMORANDUM

HIGGINS, District Judge.

By order (Docket Entry No. 101) entered February 10, 1998, this action was referred to the Magistrate Judge for consideration and submission of proposed findings of fact and recommendation for disposition. In his Report and Recommendation (filed July 1, 1998; Docket Entry No. 157), the Magistrate Judge recommended that the plaintiffs' motion (filed April 2, 1998; Docket Entry No. 131) to take judicial notice be denied; the motion (filed January 9, 1998; Docket Entry No. 90) to dismiss of defendant Richard L. Scott be granted; the motion (filed January 8, 1998; Docket Entry No. 75) to dismiss of defendant David T. Vanderwa-ter be granted; the motion (filed January 8, 1998; Docket Entry No. 83) to dismiss of defendants Columbia/HCA Healthcare Corporation; Thomas F. Frist, Jr., R. Clayton McWhorter, Carl E. Reichardt, Magdalena Averhoff, T. Michael Long, and Donald S. MacNaughton be granted, their motion (Docket Entry No. 83) to strike be denied as moot and their motion (Docket Entry No. 86) to take judicial notice of exhibits submitted in support of their motion to dismiss and strike be granted.

Before the Court are the plaintiffs’ objections (filed July 7, 1998; Docket Entry No. 161) to the Report and Recommendation and motion for de novo determination; the defendants’ responses (filed August 31, 1998; Docket Entry Nos. 165-167) and motions for de novo determination.

The Court has jurisdiction over this matter under 15 U.S.C. § 77(v) and 15 U.S.C. § 78aa.

For the reasons set forth below, the plaintiffs’ objections to the Magistrate Judge’s conclusions (Docket Entry No. 161) are sustained in part and overruled in part. Accordingly, the conclusions of the Report and Recommendation will be adopted as modified and the defendants’ motions to dismiss will be granted.

I.

Members of the proposed class of plaintiffs were owners of common stock of defendant, Columbia/HCA Healthcare Corporation, who acquired the stock from April 9, 1994, to September 9, 1997. Columbia/HCA is a publicly owned corporation and is one of the largest healthcare providers in the United States. The individual defendants in this action, Drs. Frist and Averhoff, and Messrs. Scott, Vande-water, McWhorter, Long, MacNaughton and Reichardt, were officers and/or board members of Columbia/HCA during the proposed class period.

The plaintiffs claim that the defendants violated the following securities laws:

(1) Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, prohibiting fraudulent, material misstatements or omissions in connection with the sale or purchase of a security;

(2) Section 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78t(a), providing liability of controlling persons;

(3) Section 11 of the Securities Act of 1933, 15 U.S.C. § 77k, prohibiting material misstatements or omissions in registration statements;

(4) Section 12(2) of the Securities Act of 1933, 15 U.S.C. § 77/(2), providing for liability for making a securities offering “by means of a prospectus or oral communication, which includes an untrue statement of material fact or omits to state a material fact necessary in order to make the statements ... not misleading”; and

(5) Section 14 of the Securities Exchange Act of 1934, 15 U.S.C. § 78n, prohibiting material misstatements or omissions in proxy statements.

The plaintiffs’ claims arise out of statements, corporate reports and public filings that they claim are false or misleading. The plaintiffs contend that during the proposed class period, the defendants engaged in improper business practices which caused Columbia’s revenues to be artificially inflated and either omitted or misrepresented this information to the plaintiffs in corporate statements, reports and filings.

In the motion (Docket Entry No. 83) to dismiss the plaintiffs’ amended complaint or in the alternative, to strike portions of the amended complaint, the defendants asserted that:

(1) the plaintiffs’ Rule 10b-5 claims must fail because (a) the alleged misstatements and omissions were not actionable; (b) the plaintiffs failed to satisfy the pleading requirements for fraud under Rule 9(b) of the Federal Rules of Civil Procedure and the Private Securities Litigation Reform Act of 1995 with respect to the defendants’ scienter; (3) as to Dr. Frist, Messrs. McWhorter, Reichardt, Long and McNaughton and Dr. Averhoff, the amended complaint failed to adequately tie them, as outside directors, to the alleged false and misleading statements or alleged business practices;

(2) because the plaintiffs’ Rule 10b-5 claims must fail, the plaintiffs’ claims under Section 20 of the 1934 Act, 15 U.S.C. § 78t(a), must also fail;

(3) the plaintiffs’ claims under Section 11 and 12 of the 1933 Act, 15 U.S.C. §§ 77k(a) and 77Z, and Section 14 of the 1934 Act, 15 U.S.C. § 77n, must fail because the alleged misstatements upon which these claims are based are true; and

(4) in the alternative, the allegations of the plaintiffs in ¶¶ 48-57 and ¶ 80 should be stricken because they are immaterial to any of the plaintiffs’ claims.

In his motion (Docket Entry No. 75) to dismiss, Mr. Vanderwater, in large part, adopted the arguments of these defendants. In addition, he notes he did not sign any documents filed with the SEC.

Mr. Scott essentially also adopted the assertions of the other defendants. Richard L. Scott’s motion (Docket Entry No. 90) to dismiss.

II.

On a motion to dismiss under Rule 12(b)(6) of the Federal Rules of Civil Procedure, “well pleaded facts” set forth in the complaint must be accepted by the Court as true. Morgan v. Church’s Fried Chicken, 829 F.2d 10, 12 (6th Cir.1987). The Court’s duty in reviewing a motion to dismiss is to determine the legal sufficiency of the complaint. In re Sirrom Capital Corp. Sec. Litig., 84 F.Supp.2d 933, 937 (M.D.Tenn.1999)(citing City of Toledo v. Beazer Materials and Serv., Inc., 833 F.Supp. 646, 650 (N.D.Ohio 1993)). The Court may only grant a motion to dismiss if “it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.” Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 102, 2 L.Ed.2d 80, 84 (1957)(footnote omitted). As the function of the Court considering a motion to dismiss is to “to test whether, as a matter of law, the plaintiff is entitled to legal relief even if everything alleged in the Complaint is true,” the Court must consider the allegations in the complaint in the light most favorable to the party opposing the motion. In re Sirrom Capital Corp. Sec. Litig., 84 F.Supp.2d 933, 937 (M.D.Tenn.1999).

A. Rule 10b-5 Claim

The Sixth Circuit has found that in order to state a claim, under Rule 10b-5 “a plaintiff must allege, in connection with the purchase or sale of securities, the misstatement or omissions of a material fact, made with scienter, upon which the plaintiff justifiably relied and which proximately caused the plaintiffs injury.” In re Comshare Sec. Litig., 183 F.3d 542, 548 (6th Cir.1999)(citing Aschinger v. Columbus Showcase Co., 934 F.2d 1402, 1409 (6th Cir.1991)).

1. Actionable Statements or Omissions

The plaintiffs contend that the defendants were required to disclose that Columbia’s revenues and earning were illegally inflated and that they failed to do so in violation of Rule 10b-5. The Magistrate Judge concluded that the plaintiffs’ claim must fail because they could not establish that .the defendants had a duty to make such disclosures.

It is a violation of Rule 10b-5 to “omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading .... ” 17 C.F.R. § 240.10b-5(b). Accordingly, there must be a duty to disclose on the part of a defendant before he or she can be found to violate Rule 10b-5 on the basis of nondisclosure. Basic, Inc. v. Levinson, 485 U.S. 224, 239 n. 17, 108 S.Ct. 978, 987 n. 17, 99 L.Ed.2d 194, 213 n. 17 (1988)(“Silence, absent a duty to disclose, is not misleading under Rule 10b-5.”). The duty to disclose does not arise simply because information at issue is material. Murphy v. Sofamor Danek Group, Inc., 123 F.3d 394, 400 (6th Cir.1997) (citations omitted).

The plaintiffs first allege that Columbia stated in its 10-Q forms “in the substance” that Columbia’s legitimate business practices were the basis for its revenues and earnings growth, when the revenues and growth were actually based on the company’s “improper procedures.” Plaintiffs’ memorandum (Docket Entry No. 162) at 18. Second, the plaintiffs rely on the statement in Columbia’s 10-K forms that the government was investigating Columbia’s procedures for preparing Medicare cost reports, but that “[management believes that any claims in this regard, if asserted, would not have a material adverse effect on the Company’s financial position or results of operation.” Id. at 17. The plaintiffs also base their claims on statements in the 10-K forms that, even if the government audit changed the amount Columbia initially anticipated being reimbursed for Medicare and Medicaid charges, “[m]anagement believes” that any adjustment to the reimbursements would not have a “ ‘material adverse effect on the Company’s results of operations or financial position.’ ” Id. at 17. Next, the plaintiffs contend that Columbia’s 10-K forms were misleading because they stated that Columbia operated various facilities and provided services which were “an integral component of the Company’s strategy to develop a comprehensive health care network in each of its target markets,” while failing to disclose that Columbia artificially inflated revenues.' Id. at 19-20. Finally, the plaintiffs contend that the defendants falsely stated that the company was in compliance with the Stark Laws. Id. at 25.

The Magistrate Judge found that the statements at issue were not actionable because the “[plaintiffs’ claim of inflated revenues is not hard information, but is controlled by the issue of the legality of Columbia’s business practices.” Report and Recommendation (Docket Entry No. 157) at 46. In reaching his conclusion, the Magistrate Judge relied on the opinion of the Sixth Circuit in Sofamor Danek, 123 F.3d 394. In that case, the plaintiffs asserted that the defendant, a manufacturer of medical devices, made misleading and incomplete statements to the. public in violation of Rule 10b-5 that attributed its increased revenues to legitimate business practices and market conditions when, in fact, the increases were also partially attributable to the company’s unlawful promotion of certain products and other improper practices. Id. at 400.

The Sixth Circuit found that:

[t]he proposition that the company was engaging in illegal promotion of its products .... is not a proposition that can fairly be said to fall into the category of “hard” information. Hard information “is typically historical information or other factual information that is objectively verifiable.... Such information is to be contrasted with “soft” information, which includes predictions and matters of opinion.”

Id. at 401 (citing Lewis v. Chrysler Corp., 949 F.2d 644, 652 (3rd Cir.1991)(emphasis added)). As soft information “ ‘must be disclosed only if ... virtually as certain as hard facts,’ ” the Court found that Sofamor Danek was not required to disclose that the company was engaged in illegal activities. Id. at 402 (quoting Starkman v. Marathon Oil Co., 772 F.2d 231, 241 (6th Cir.), cert. denied, 475 U.S. 1015, 106 S.Ct. 1195, 89 L.Ed.2d 310 (1986)).

a. Columbia’s 10-K forms

Columbia states in its 10-K forms that the government was investigating Columbia’s procedures for preparing Medicare cost reports, but that “[mjanagement believes that any claims in this regard, if asserted, would not have a material adverse effect on the Company’s financial position or results of operation.” The 10-K forms also state that “[mjanagement believes” that any adjustment to the reimbursements would not have a ‘“material adverse effect on the Company’s results of operations or financial position.’” These are statements of opinion. Amended complaint (Docket Entry No. 73) at 17. The Magistrate Judge concluded that the plaintiffs cannot sustain their Rule 10b-5 claims based on these alleged misrepresentations by the defendants because, under Sofa-mor, “ ‘any opinions expressed by Columbia are not actionable.’ ” Report and Recommendation (Docket Entry No. 157) at 50.

The plaintiffs contend that the Magistrate Judge failed to recognize that a securities fraud action may be based on opinion information if the defendant does not believe the information to be correct. They rely on Virginia Bankshares, Inc. v. Sandberg, in which the Supreme Court of the United States considered whether statements of reasons, opinion or belief are actionable under Section 14(a) of the Securities Exchange Act of 1934. Virginia Bankshares, 501 U.S. 1083, 111 S.Ct. 2749, 115 L.Ed.2d 929 (1991). The Supreme Court held that “proof of mere disbelief or belief undisclosed should not suffice for liability under § 14(a).” Id., 501 U.S. at 1096, 111 S.Ct. at 2760, 115 L.Ed.2d at 947.

The Magistrate Judge expressly stated that “the Sixth Circuit has interpreted [Virginia Bankshares] v. Sandberg to mean that the opinion is actionable ‘if the speaker does not believe the opinion and the opinion is not [factually well grounded.]’ ” Report and Recommendation (Docket Entry No. 157) at 50 (quoting Mayer v. Mylod, 988 F.2d 635, 639 (6th Cir.1993)).

The Court agrees with the Magistrate Judge that the plaintiffs cannot sustain their Rule 10b-5 claims based on these statements. Accordingly, the Court shall affirm the Magistrate Judge’s determination with respect to these statements and shall dismiss the plaintiffs’ claims based upon them.

The Magistrate Judge was also correct in his determination that Columbia’s opinion as to whether its business practices were legal is “soft information,” and was not required to be disclosed. Accordingly, the plaintiffs’ claims as to the defendants’ opinion that they were in compliance with the Stark Laws is not actionable and shall be dismissed.

b. Columbia’s 10-Q forms

The remaining statements upon which the plaintiffs base their claims are from Columbia’s. 10-Q forms. Generally, the plaintiffs assert that these statements misled the public into believing that Columbia’s revenue and earnings were based on the . defendants’ business practices and were legitimate, when in actuality, they were based upon improper practices. The Magistrate Judge recommended that the Court grant the defendants’ motion to dismiss with respect to these statements. He found that the defendants did not have a duty to disclose the alleged illegality of their business practices because such information is soft information.

However, the plaintiffs are not basing their remaining Rule 10b-5 claims on the fact that the defendants failed to state whether their business practices were legal, Rather, the plaintiffs contend that the defendants were simply required to disclose that the allegedly illegal business practices existed as this is “ ‘historical information or other factual information that is objectively verifiable.’ ” Sofamor Danek, 123 F.3d at 401 (quoting Garcia v. Cordova, 930 F.2d 826, 830 (10th Cir.1991)). Because the Court must consider all of the plaintiffs’ factual allegations admitted on a motion to dismiss, it is immaterial at this point whether the defendants actually engaged in such business practices. Instead, the question is whether it is substantially likely that the alleged omissions would have been significant to a reasonable investor in his or her decision to invest in Columbia’s stock. In re Craftmatic Sec. Litig., 890 F.2d at 639 (citing TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449, 96 S.Ct. 2126, 2132, 48 L.Ed.2d 757, 765 (1976)). There is no question that the basis for Columbia’s revenues satisfies this inquiry. Accordingly, the Court finds that the defendants’ motion to dismiss must be denied on this ground in the face of the plaintiffs’ allegations regarding Columbia’s failure to disclose that it engaged in improper business practices.

2. Pleading Requirements

a. sufficient facts

The defendants contend that the plaintiffs have not satisfied the pleading requirements with respect to the remaining statements concerning the company’s business practices because the plaintiffs have provided no facts supporting their contention that the statements were false or misleading. Id. at 15. The Magistrate Judge found that the plaintiffs’ claims should be dismissed on this basis.

Pleading requirements for fraud are found under Rule 9(b) of the Federal Rules of Civil Procedure. Rule 9(b) states that “in all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity.” Moreover, the Sixth Circuit has found that:

Rule 9(b) requires plaintiffs at a minimum “to allege the time, place and contents of the misrepresentation(s) upon which [they] relied.” Bender v. Southland Corporation, 749 F.2d 1205, 1216 (6th Cir.1984) (citations omitted). “A complaint should not be dismissed ‘unless it appears beyond doubt that plaintiff can prove no set of facts in support of his claim which would entitle him to relief.’” Michaels Building Company v. Ameritrust Company, N.A., 848 F.2d 674, 679 (6th Cir.1988) (citation omitted). In Michaels, this court noted that Rule 9(b) must be read in conjunction with Rule 8, which calls for short, concise statements. Id. As such, “the purpose undergirding the particularity requirement of Rule 9(b) is to provide a defendant fair notice of the substance of a plaintiffs claim in order that the defendant may prepare a responsive pleading.” Id.

American Town Ctr. v. Hall 83 Assoc., 912 F.2d 104, 109 (6th Cir.1990).

In addition, under the PSLRA, a plaintiff alleging securities fraud must specify each alleged misstatement and explain the reason it is misleading. 15 U.S.C. § 78u-4(b)(1)(B). When the plaintiff alleges a misstatement or omission based on information and belief, “the complaint shall state with particularity all facts on which that belief is formed.” Id. In other words, “the law now requires a plaintiff to draw a specific nexus between the allegedly fraudulent statements and the facts upon which the allegation of fraud is dependent, or, at least, a clear statement of why and how the plaintiff has reached the conclusion that a particular statement is fraudulent.” Havenick v. Network Exp., Inc., 981 F.Supp. 480, 526 (E.D.Mich.1997). If the plaintiff fails to satisfy this requirement, the Court shall dismiss the plaintiffs complaint on a motion of the defendant to dismiss. Id. (citing 15 U.S.C. .§ 78u-4(b)(3)(A)(if the requirements of § 78u-4(b)(1) are not met, the complaint must be dismissed)).

The defendants contend that the plaintiffs’ amended complaint should be dismissed because the plaintiffs did not state with particularity sufficient facts upon which their information and belief that the defendants engaged in improper practices was formed. The plaintiffs argue that their allegations of improper business practices are supported by the fact that three employees of Columbia were indicted for Medicare fraud and other offenses relating to Medicare fraud, the Wall Street Journal and New York Times published articles reporting the government raids on the Columbia facilities and alleging the possibility of fraud, and the fact that several high-level officers of Columbia resigned during the time of the government investigation. Memorandum in response (Docket Entry No. 96) at 16.

Taking the allegations in the amended complaint in the light most favorable to the plaintiffs, the Court finds that the plaintiffs have stated sufficient facts under the PLSRA, 15 U.S.C. § 78u-4(b)(1)(B) and Rule 9(b). Accordingly, the Court will deny the defendants’ motions to dismiss on this basis.

b. scienter

The defendants further aver that the plaintiffs have not satisfied the pleading requirements with respect to the defendants’ scienter, and therefore, the plaintiffs’ 10b-5 claims should be dismissed under the PSLRA. The PSLRA requires that, “the complaint shall, with respect to each act or omission alleged to violate this title, state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” 15 U.S.C. § 78u-4(b)(2). If the complaint fails to satisfy this requirement, the Court shall dismiss the plaintiffs complaint on a motion of the defendant to dismiss. 15 U.S.C. § 78u-4(b)(3).

The Magistrate Judge concluded that the defendants’ motions to dismiss should be granted because the plaintiffs failed to satisfy the heightened pleading requirements of the PSLRA with respect to the defendants’ scienter. In reaching his conclusion, the Magistrate Judge, specifically adopted the opinion of the district court in In re Comshare Inc., Sec. Litig., No. 96-73711-DT, 1997 WL 1091468 (E.D.Mich. Sept.18, 1997), interpreting the scienter requirements of the PSLRA. The Magistrate Judge concluded that “ ‘[i]t is not enough to allege recklessness, or motive and opportunity, in order to establish a defendant’s scienter in a securities fraud case,’ ” but that the “ ‘[pjlaintiffs must plead specific facts that create a strong inference of knowing misrepresentation on the part of the defendants.’ ” Report and Recommendation (Docket Entry No. 157) at 38 (quoting In re Comshare Inc. Sec. Litig., 1997 WL 1091468 at *6).

Since the time the Report and Recommendation was filed, the United States Court of Appeals for the Sixth Circuit reviewed the district court’s opinion in In re Comshare Inc. Securities Litigation, 183 F.3d at 542. The Sixth Circuit addressed “whether, under the heightened pleading standards set forth in the Private Securities Litigation Reform Act of 1995, 15 U.S.C. § 78u—4(b)(2) (1998), a plaintiff alleging securities fraud in violation of the Securities and Exchange Act may survive a motion to dismiss by alleging facts giving rise to a strong inference of recklessness or of motive and opportunity.” Id. at 545. The Court of Appeals stated “we hold that plaintiffs may meet PSLRA pleading requirements by alleging facts that give rise to a strong inference of reckless behavior but not by alleging facts that illustrate nothing more than a defendant’s motive and opportunity to commit fraud.” Id. at 551 (citations omitted).

Accordingly, although , the Magistrate Judge correctly reviewed the plaintiffs’ pleading insofar as he found that pleading “motive and opportunity” alone was insufficient to establish scienter, the determination that evidence of the defendants’ recklessness was insufficient has since been overturned. The Court will, therefore, review the plaintiffs’ pleadings under the requirement set forth by the Sixth Circuit in In re Comshare that the “plaintiffs may continue to survive dismissal by pleading facts that give rise to a ‘strong inference of recklessness’ of the kind required for securities fraud liability.” In re Comshare Inc. Sec. Litig., 183 F.3d at 552-53.

Recklessness, in this context, has been defined as “a mental state embracing intent to deceive, manipulate, or defraud.” Mansbach v. Prescott, Ball & Turben, 598 F.2d 1017, 1023 n. 19 (6th Cir.1979). Recklessness is “understood as a mental state apart from negligence and akin to conscious disregard.” In re Comshare Inc. Sec. Litig., 183 F.3d at 550. It is an “ ‘extreme departure from the standards of ordinary care[] [by omitting information] which presents a danger of misleading buyers or sellers that is either known to the defendant or so obvious that the actor must have been aware of it.’ ” United States v. DeSantis, 134 F.3d 760, 764 (6th Cir.1998) (quoting Sanders v. John Nuveen & Co., 554 F.2d 790, 793 (7th Cir.1977)).

The plaintiffs contend that “the Individual Defendants intentionally encouraged or recklessly acquiesced in Columbia’s violations of Medicare and Medicade rules and regulations, as well as other federal and state laws, through a variety of illegal mechanisms ... to increase Columbia’s revenues and profits.” Amended complaint (Docket Entry 73) at 13. Specifically, the plaintiffs state that the revenues and earnings from Columbia’s hospitals were so much greater than those of other hospitals it was clear that Columbia’s revenues and earnings were artificially inflated. They assert that the defendants intentionally and recklessly ignored this red flag.

Presuming that the defendants failed to investigate the positive performance of the company, the Court finds that this failure does not constitute a strong inference of recklessness. See Novak v. Kasaks, 216 F.3d 300, 309 (2nd Cir.2000)(citing Chill v. General Elec. Co., 101 F.3d 263, 269-70 (2nd Cir.1996) for the proposition that “the failure of a parent company to interpret extraordinary positive performance by its subsidiary — specifically the ‘unprecedented and dramatically increasing profitability’ of a particular form of trading — as a sign of problems and thus to investigate further does not amount to recklessness under the securities laws”). Accordingly, this assertion does not satisfy the scienter requirement under the PSLRA.

The plaintiffs further assert that, not only did the defendants ignore red flags indicating that Columbia was engaging in illegal methods of raising revenue, the defendants “perpetuated a management philosophy that provided strong incentives for employees throughout the Company to commit fraud.” Amended complaint (Docket Entry No. 73) at 13. They assert that the defendants created “a system of cash bonuses — as high as 50% of base pay — to encourage employees to meet annual growth targets. Those targets, set by defendants at 15% to 20% — three times the industry standard of 5% — were far in excess of anything that could be achieved legally.” Id. The plaintiffs next contend that “Columbia also sent out ‘revenue enhancement’ teams who were expert in analyzing ways in which hospitals could improperly employ methods to boost revenues.” Id. at 15.

The Court finds that, even if the defendants aggressively pushed employees to increase company revenues, this does not constitute a strong inference of recklessness. Otherwise, all incentives by corporate management to increase revenue at any company could be construed as reckless and could implicate management in a violation of Rule 10b-5. Accordingly, this assertion does not satisfy the scienter requirement under the PSLRA.

The plaintiffs next contend that the fact that five of the individual defendants disposed of at least 12 million shares of their personally owned stock is evidence that they intentionally caused Columbia’s revenues to be inflated so that they would profit more from the sale of Columbia stock. Amended complaint (Docket Entry No. 73) at 28.

The Court first notes that insider trading is not considered evidence of fraudulent intent. Rather, it is “a classic example of the ‘motive and opportunity’ test, which this Court has held no longer suffices to allege scienter in the wake of the PSLRA.” In re Credit Acceptance Corp. Sec. Litig., 50 F.Supp.2d 662, 676 (E.D.Mich.1999).

Additionally, the Magistrate Judge correctly determined that the plaintiffs’ allegations of intent were undermined by the fact that the defendants who did sell portions of their holdings of Columbia stock also retained substantial holdings of the stock. “Many courts have held that the inference of scienter is weak where an officer sells only a small fraction of the shares owned.” Id. at 677 (citing Marksman Partners, L.P. v. Chantal Pharm., 927 F.Supp. 1297, 1312 (C.D.Cal.1996); Acito v. IMCERA Group, Inc., 47 F.3d 47, 54 (2nd Cir.1995); Glenayre Tech. Sec. Litig., 982 F.Supp. 294, 299 (S.D.N.Y.1997); and Havenick, 981 F.Supp. at 528).

The Magistrate Judge also correctly found that because other defendants retained their holdings, the allegations of insider trading did not give rise to a “strong inference” of intent. See In re Apple Computer Sec. Litig., 886 F.2d 1109, 1117-19 (9th Cir.1989); Acito, 47 F.3d at 54 (citing In re Cypress Semiconductor Sec. Litig., Fed. Sec. L. Rep. (CCH) 20 ¶ 97,060 at 84-697, 1992 WL 294927 (N.D.Cal.1992) for the proposition “that the plaintiffs’ claims that defendants artificially inflated the company’s share price so that they could sell their stock at a huge profit was underminded by the fact that one of the four defendants did not sell his stock during the class period”); In re Glenayre Tech. Sec. Litig., 982 F.Supp. 294, 299 (S.D.N.Y.1997).

The plaintiffs next contend that “the individual defendants had a clear motive to inflate the financial performance of the Company to enhance their compensation.” Amended complaint (Docket Entry No. 73) at 28-29. Again, this is not evidence of fraudulent intent as the Court has defined it under the PSLRA, but is evidence of motive and opportunity which does not satisfy the scienter requirement. Furthermore, fraud cannot not be predicated on incentive compensation because if it could, “virtually every company in the United States that experiences a downturn in stock prices could be forced to defend securities fraud actions.” Acito, 47 F.3d at 54.

Finally, the plaintiffs contend that the defendants’ use of company stock to make acquisitions during this time is evidence of the defendants’ motive to artificially inflate stock prices. Amended complaint (Docket Entry No. 73) at 29. As previously stated, evidence of motive is insufficient to establish scienter under the PSLRA. Moreover, as the Magistrate Judge appropriately determined, such motivation is insufficient to establish scienter. See In re Health Mgt., Inc. Sec. Litig., 970 F.Supp. 192, 203-04 (E.D.N.Y.1997).

Based on these allegations, the Court finds that the plaintiffs have not alleged a “strong inference” of scienter on the part of the defendants as required to state a cause of action under the PSLRA. Accordingly, on this ground the Court shall grant the motions of the defendants to dismiss Count I of the plaintiffs’ amended complaint alleging liability under Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934.

B. Section 20(a) Claims

As the Court has determined that the plaintiffs’ claims under Rule 10b-5 should be dismissed, in accordance with the Report and Recommendation, the plaintiffs claims under Count II of the amendéd complaint for controlling persons under Section 20(a) of the Securities Exchange Act of 1934 must also fail. Stavroff v. Meyo, No. 95-4118, 1997 WL 720475, *6 (6th Cir., Nov.12, 1997); Jackson Nat'l. Life Ins. Co. v. Merrill Lynch & Co., 32 F.3d 697, 703 (2nd Cir.1994).

C. SEC Filings

In Count III of the amended complaint, the plaintiff, Stephen S. Schuster Profit Sharing Plan, alleges that the defendants violated (1) Section 11 of the 1933 Act, 15 U.S.C. § 77k, prohibiting material misstatements or omissions in registration statements filed with the SEC; Section 12(a)(2) of the 1933 Act, 15 U.S.C. § 771(a)(2), prohibiting making a securities offering “by means of a prospectus or oral communication, which includes an untrue statement of material fact or omits to state a material fact necessary in order to make the statements... not misleading;” and (3) Section 14 of the 1934 Act, 15 U.S.C. § 78n, prohibiting material misstatements or omissions in proxy statements.

The plaintiff alleging these violations received shares of Columbia/HCA stock in exchange for shares of Medical Care of America stock in a merger between Columbia/HCA and Medical Care of America on September 16, 1994. The plaintiff asserts that in connection with the merger, the defendants “caused to be filed” an SEC registration statement, combined with the prospectus and proxy statement, which were provided to Medical Care shareholders. Amended complaint (Docket Entry No. 73) at 35. According to the plaintiff, the filings were materially misleading in that they stated that “ ‘Columbia was in compliance with the Antifraud Amendments’ governing Medicare and Medicade.” Id.

The Magistrate Judge recommended that the Court grant the defendants’ motion to dismiss Count III. First, the Magistrate Judge determined that Messrs. MacNaughton and McWhorter could not be liable for the alleged misrepresentations because they were not members of Columbia’s board of directors at the time of the merger in 1994. The Court agrees with that conclusion and will dismiss the plaintiffs’ claims against Messrs. Mac-Naughton and McWhorter under Sections 11 and 12 of the 1933 Act and Section 14 of the 1934 Act.

Next, the Magistrate Judge found that the plaintiffs’ claims under Sections 11 and 12 of the 1933 Act failed to satisfy the pleading requirements for a claim of fraud under Rule 9(b) of the Federal Rules of Civil Procedure. The plaintiff objects on the basis that the claims under Sections 11 and 12 are not subject to the pleading requirements of Rule 9(b) because establishing liability under these sections does not require proof of fraud.

The Sixth Circuit has not addressed whether claims under Sections 11 and 12 must be pled with particularity under Rule 9(b). Other courts have reached varying conclusions. A number of courts have found that “when claims alleging material misstatement or omission in a registration statement are grounded in fraud, those claims must state with particularity the circumstances constituting the alleged fraud.” In re Sirrom Capital Corp., 84 F.Supp.2d at 938 (citing In re Stac Elec. Sec. Litig., 89 F.3d 1399, 1404-05 (9th Cir.1996); Picard Chem. Inc. Profit Sharing Plan v. Perrigo Co., 940 F.Supp. 1101, 1115 (W.D.Mich.1996); Shapiro v. UJB Fin. Corp., 964 F.2d 272, 288 (3rd Cir.), cert. denied, 506 U.S. 934, 113 S.Ct. 365, 121 L.Ed.2d 278 (1992)). For instance, the United States Court of Appeals for the Ninth Circuit reasoned that “because the same policy considerations apply to Section 11 claims sounding in fraud, we hold that persons making such claims must state with particularity the circumstances constituting the alleged fraud.” In re Stac Elec. Sec. Litig., 89 F.3d at 1405.

In contrast, in cases where the plaintiffs were not alleging fraud in the context of their Section 11 and 12 claims, courts have not required the plaintiffs to comply with the requirements of Rule 9(b). In re Sirrom Capital Corp Sec. Litig., 84 F.Supp.2d at 938. Some courts have gone a step further and stated that, because proof of fraud or mistake is not necessary to sustain a claim under Sections 11 and 12, Rule 9(b) does not apply to those claims. Id. (citing In re Consumers Power Co. Sec. Litig., 105 F.R.D. 583, 594 (E.D.Mich.1985); Ross v. Warner, 480 F.Supp. 268, 273 (S.D.N.Y.1979); In re NationsMart, 130 F.3d 309, 314 (8th Cir.1997), cert. denied, 524 U.S. 927, 118 S.Ct. 2321, 141 L.Ed.2d 696 (1998)). For example, the United States Court of Appeals for the Eighth Circuit concluded that:

“a pleading standard which requires a party to plead particular facts to support a cause of action that does not include fraud or mistake as an element comports neither with the Supreme Court precedent nor with the liberal system of ‘notice pleading’ embodied in the Federal Rules of Civil Procedure.”

Id. at 938, n. 1 (quoting In re NationsMart, 130 F.3d at 314). Even if the plaintiffs had alleged fraud in their claims under Sections 11 and 12, such allegations would be stripped from the claims so that “[t]he allegations of innocent or negligent misrepresentation, which are at the heart of [such claims]” would remain. In re NationsMart, 130 F.3d at 315.

In Count III, the plaintiff does not allege that the defendants fraudulently made material misstatements or omissions, but that the defendants omitted that they engaged in violations of the Antifraud Amendments. Accordingly, the plaintiffs’ claims under Sections 11 and 12 are not grounded upon allegations of fraud. Based on this reasoning, the Court finds that Rule 9(b) is not applicable to the Section 11 and 12 claims and the Court shall deny the defendants’ motions to dismiss these claims on the basis that they are not pled with particularity under Rule 9(b) of the Federal Rules of Civil Procedure.

In order to state a claim under Sections 11 and 12 of the 1933 Act, and under Section 14 of the 1934 Act, the plaintiff must establish that the statement at issue contained a material omission or misrepresentation that the omission or misrepresentation was material. See In re NationsMart, 130 F.3d at 315. The defendants insist that their motion to dismiss with respect to these claims should be granted because the statement upon which the plaintiffs’ claims are based are true in the context from which they were taken. The defendants contend that the statement at issue was taken from the following passage:

Although Columbia exercises care in an effort to structure its arrangements with physicians to comply in all material respects with these laws, and although management of Columbia believes that Columbia is in compliance with the An-tifraud Amendments, there can be no assurance that (i) government officials charged with responsibility for enforcing the prohibitions of the Antifraud Amendments will not assert that Columbia or certain transactions in which it is involved are in violation of the Antifraud Amendments and (ii) such statute will ultimately be interpreted by the courts in a manner consistent with Columbia’s interpretation.

Memorandum in support (Docket Entry No. 84) at 33. The defendants assert that the statement that management believes Columbia is in compliance was not false and misleading, especially in light of the warnings that the government could find otherwise.

The Court agrees and finds that the defendants have demonstrated that the plaintiffs can establish no set of facts which will entitle the plaintiffs to relief under Count III of the amended complaint. Accordingly, on this basis, the Court shall grant the defendants’ motions to dismiss with respect to these claims.

III.

The Court has considered the plaintiffs’ amended complaint in the light most favorable to the plaintiffs and the Court affirms the conclusion of the Magistrate Judge that the plaintiffs have not sufficiently alleged scienter as required to sustain their Rule 10b-5 claims. Accordingly, Count I of the amended complaint will be dismissed with prejudice.

The Court further affirms the conclusion of the Magistrate Judge that Count II of the amended complaint alleging violations of Section 20 of the 1934 Act be dismissed.

Finally, the Court affirms the determination of the Magistrate Judge that the statements at issue in Columbia’s SEC registration statement cannot be the basis for claims under Sections 11 and 12 of the Securities Act of 1933 and Section 14 of the Securities Exchange Act of 1934 under Count III of the amended complaint. Accordingly, Count III of the amended complaint will be dismissed with prejudice.

Accordingly, the conclusion of the Report and Recommendation shall be adopted as modified and the amended complaint shall be dismissed in its entirety.

An appropriate order shall be entered.

ORDER

In accordance with the memorandum contemporaneously entered, the Court has independently reviewed the Report and Recommendation of the Magistrate Judge (entered July 1, 1998; Docket Entry No. 157), the plaintiffs’ objections (filed July 7, 1998; Docket Entry No. 161), the defendants’ responses (filed August 31, 1998; Docket Entry Nos. 165-167) and the entire record. The conclusions of the Report and Recommendation of the Magistrate Judge are adopted and approved as modified. The plaintiffs’ objections are sustained in part and overruled in part.

Accordingly, the motion (filed January 9, 1998; Docket Entry No. 90) of defendant Richard L. Scott to dismiss is granted; the motion (filed January 8, 1998; Docket Entry No. 75) of defendant David T. Vander-water to dismiss is granted; the motion (filed January 8, 1998; Docket Entry No. 83) of defendants Columbia/HCA Healthcare Corporation; Thomas F. Frist, Jr.; R. Clayton McWhorter; Carl E. Rei-chardt; Magdalena Averhoff; T. Michael Long and Donald S. MacNaughton to dismiss is granted

This action is dismissed with prejudice.

Therefore, the motion (Docket Entry No. 83) of Columbia/HCA Healthcare Corp., Drs. Frist and Averhoff and Messrs. McWhorter, Reichardt, Long and McNaughton to strike is denied as moot. The plaintiffs’ motions for class certification, (filed February 11, 1998; Docket Entry No. 102) for class certification, to ascertain status of the case (filed February 3, 1999; Docket Entry No. 175), and for case management conference (filed May 25, 1999; Docket Entry No. 177) are moot.

The plaintiffs’ motion for judicial notice (filed July 26, 1999; Docket Entry No. 184) is denied pursuant to Federal Rule of Evidence 201. The plaintiffs’ motion for oral argument (filed July 2, 1998; Docket Entry No. 158) is denied. The defendants’ motion to take judicial notice (filed January 8, 1998; Docket Entry No. 86) is granted.

Entry of this order shall constitute the judgment in this action.

It is so ORDERED.

ORDER

The Court has before it the plaintiffs’ motion (filed August 10, 2000; Docket Entry No. 193) to alter or amend the judgment and for leave to file an amended complaint; memorandum (Docket Entry No. 194) in support and request (Docket Entry No. 195) for oral argument; the responses (filed September 6, 2000; Docket Entry No. 197) of the defendants, Columbia/HCA Healthcare Corporation and the outside directors and the defendants, Mr. Scott (Docket Entry No. 198) and Mr. Vandewater (Docket Entry No. 199) in opposition to the plaintiffs’ motion. The Court also has before it the plaintiffs’ reply memorandum (Docket Entry No. 202) filed September 18, 2000, and the defendants’ sur-reply (Docket Entry No. 205) filed October 4, 2000.

Having carefully considered the submissions of the parties, the Court is satisfied that its original disposition of this matter as reflected in the memorandum (Docket Entry No. 191) and order/judgment (Docket Entry No. 192) entered July 28, 2000, was correct. The plaintiffs have failed to demonstrate an acceptable and legitimate reason to alter or amend the judgment in this action. GenCorp, Inc. v. American Intern. Underwriters, 178 F.3d 804, 834 (6th Cir.1999).

The Court had this matter under advisement for a considerable period of time while it sifted through the extensive briefing on the objections to the Magistrate Judge’s Report and Recommendation. It is true that the plaintiffs submitted various requests for the Court to take judicial notice of first one and then another assertion. However, at no point in time prior to judgment did the plaintiffs ever seek to amend and file a second consolidated amended class action complaint. The course of action the plaintiffs elected to follow was a strategic decision of their own choice. It appears to have had about it a bit of the cat and mouse, i.e., let the Court first sort out the deficiencies in the pleadings and after judgment then seek to amend to patch up the matter and attempt to close the rat holes. The plaintiffs had every opportunity to amend during the pendency of this matter and must accept the consequences of their delay.

Accordingly, the plaintiffs’ motion (Docket Entry No. 193) to alter or amend the judgment and for leave to file a second consolidated amended complaint is denied.

The request (Docket Entry No. 195) for oral argument is likewise denied.

It is so ORDERED.

REPORT AND RECOMMENDATION

HAYNES, United States Magistrate, Judge.

I.INTRODUCTION

This civil action was referred to the" Magistrate Judge by the Honorable Thomas A. Higgins, District Judge, by Order entered February 11, 1998. The Magistrate Judge was directed to prepare proposed findings of facts and recommendations for disposition of the following motions:

1. Defendant Vandewater’s motion to dismiss (Docket Entry No. 75);

2. The defendants’, Columbia/HCA Healthcare Corporation, Thomas F. Frist, Jr., R. Clayton McWhorter, Carl E. Reiehardt, Magdalena Averhoff, T. Michael Long and Donald S. MacNaugh-ton, motion to dismiss and to strike (Docket Entry No. 83);

3. The defendants’, Columbia/HCA Healthcare Corporation, Thomas F. Frist, Jr., R. Clayton McWhorter, Carl E. Reichhardt, Magdalena Averhoff, T. Michael Long and Donald S. MacNaugh-ton, motion to take judicial notice of exhibits submitted in connection with their motion to dismiss and strike (Docket Entry No. 86);

4. The defendants’ motion (filed January 8, 1998; Docket Entry No. 89) for oral argument; and

5. Defendant Richard L. Scott’s motion to dismiss (Docket Entry No. 90).

By agreement of the parties, oral argument in this action and in McCall v. Scott, No. 3:97-0138 was held on March 26, 1998 (Docket Entry No. 63). The parties in this action also submitted post-hearing briefs (Docket Entry Nos. 137 and 138), and the plaintiffs later filed a motion for judicial notice (Docket Entry No. 131).

Plaintiffs filed this class action under Sections 10(b), 14, and 20(a) of the Securities Exchange Act of 1934 (the “1934 Act”), codified at 15 U.S.C. §§ 78j(b), 78n, and 78t(a),. and Rule 10b-5 promulgated thereunder by the Securities and Exchange Commission (the “SEC”) at 17 C.F.R. §§ 240.10b-5; as well as Sections 11 and 12(b)(2) of the Securities Act of 1933, codified at 15 U.S.C. §§ 77k and 77i(b)(2). The Court’s jurisdiction arises under § 22 of the 1993 Act, 15 U.S.C. § 77(v) and § 27 of the 1934 Act, 15 U.S.C. § 78aa. Plaintiffs, owners of the common stock of defendant Columbia/HCA Healthcare Corporation filed this securities action against defendants: Columbia/HCA Healthcare Corporation, and the following individual defendants, each of whom are or were directors and/or officers of Columbia: Thomas F. Frist, Jr., Richard Scott, David Vandewater, R. Clayton McWhorter, T. Michael Long, and Donald S. MacNaughton. Plaintiffs’ class consists of all persons or entities who acquired Columbia’s common stock from April 9, 1994 to September 9, 1997 (the “Class Period”).

In sum, plaintiffs’ securities claims are that Columbia’s public statements and SEC filings have consistently created a false and misleading impression about its compliance with federal and state laws applicable to its operations. According to plaintiffs, Columbia has actually engaged in illegal billing and reporting of medical treatments and services at its hospitals, home health care and other facilities in violation of the federal medicare and medicaid laws. As a result, Columbia’s reported revenues, earnings, and, stock prices allegedly were artificially and materially inflated. Therefore, Columbia’s corporate reports, public filings and statements gave misleading information to purchasers of Columbia stock. As described in more detail infra, these unlawful practices included: upcoding of patients’ illnesses; inflating cost reports; improperly shifting payments of Columbia’s corporate overhead to Medicare and other government-sponsored programs; impermissibly seeking reimbursements from those programs for acquisitions of hospitals and other health care facilities, including home health care facilities; “unbundling” groups of laboratory tests for separate charges where one flat rate should have been charged; and referring its hospital patients to its home health care facilities so as to increase unlawfully its reimbursements from the government.

As to the individual defendants, plaintiffs contend that as Columbia’s officers and directors, the individual defendants breached their duties to disseminate timely, accurate, and complete information about Columbia’s business operations, financial condition, performance, and future prospects, because such matters materially affect the market price of Columbia’s stock. Further, the defendants are alleged to have breached their duties, to stockholders by engaging in insider trading and failing to monitor the corporation’s practices to detect and avoid such illegal practices.

In earlier proceedings, the Court ordered that the plaintiffs’ stockholder derivative claims be consolidated and transferred to a related action, McCall v. Scott, 3:97-0838 (Docket Entry No.18, Order at p. 4). In addition, pursuant to the Private Securities Litigation Reform Act (PSLRA), the Court appointed lead and liaison counsel for each action. Id. Lead counsel in this action was directed to file an amended complaint with only federal securities claims.

In their motion to dismiss, Columbia and individual defendants argue, in sum: (1) that the amended complaint does not meet the specific factual pleading requirements of the PLSRA, Fed.R.Civ.P 9(b), or prior decisional law under the Securities Acts; (2) that under a recent Sixth Circuit decision, the defendants did not owe a legal duty to disclose its business practices or any opinions about Columbia’s business practices; (3) that the amended compliant fails to state which statements are false or misleading; (4) that the amended complaint fails to inform the outside directors of their individual participation in the alleged scheme of unlawful conduct; (5) that plaintiffs’ reliance on the group pleading doctrine is unjustified without a showing of unlawful conduct or a defendant’s involvement in the unlawful conduct; (6) plaintiffs’ factual allegations do not show that the directors acted with scienter or reek-less intent necessary for securities claims under the PSLRA or prior decisional law; (7) that none of the cited individual defendants was a controlling person for a Section 20(a) claim, and (8) that the factual allegations for plaintiffs’ claims under Sections 11, 12(a) and 14 do not show any violation.

The motions of defendants Scott and Vandewater essentially adopt these contentions (Docket Entry Nos. 75 and 90). Vandewater notes that he was not a signatory to any SEC documents (Docket Entry No. 75, Vandewater Motion at ¶ 3). Scott also contends that without a valid Rule 10b-5 claim, plaintiffs cannot sustain a claim under Section 20(a) of the 1934 Act (Docket Entry No. 90, Scott Motion at ¶ 4).

In response, plaintiffs argue that the federal criminal investigation of Columbia with its issuance of target letters, search warrants and the indictment of three corporate officials presents sufficient facts of Columbia’s systemic fraud in its participation in federal medical care programs (Docket Entry No. 96, Plaintiffs’ Memorandum at pp. 2-3). This fraud includes Columbia’s marketing practices that are set forth in plaintiffs’ amended complaint. Id. at pp. 3-4. Those fraudulent acts rendered the statements in Columbia’s SEC and public statements about its revenues false and misleading, thereby causing artificially high prices for Columbia’s stock and effecting a fraud on the market. Id. Plaintiffs also allege that the defendants’ 10-K reports that the government inquiry regarding Columbia’s billing practices would not have a material adverse financial impact, was a false statement. Id. at p. 10.

Plaintiffs also rely upon their factual allegations regarding Columbia’s marketing practices to provide the requisite factual specificity under the PSLRA, which merely codifies prior decisional law that the amended complaint satisfies. Id. at 14. Plaintiffs further contend that under the “group publication doctrine,” the individual directors can be held liable for documents that they signed, where such documents contained false and/or misleading statements. Finally, plaintiffs contend that the defendants Frist, McWhorter, Long and MacNaughton, who served on Columbia’s Executive and/or Audit Committee, were controlling persons or had a special relationship with Columbia so as to impute to them the violations of Medicare laws by others as well as the alleged false statements in Columbia’s documents. Further, these defendants recklessly failed to be informed about Columbia’s illegal marketing practices. Id. at pp. 20-25.

For the reasons set forth below, the Magistrate Judge concludes that the defendants’ motions to dismiss should be granted. First, the plaintiffs’ allegations do not satisfy the heightened pleading requirements of the PSLRA or Fed. R.Civ.9(b). Under the applicable law, plaintiffs’ allegations do not contain specific facts of the individual defendants’ involvement in the alleged illegal billing and reporting nor allegations of specific facts giving rise to a strong inference of a company-wide practice of knowing misrepresentations by the defendants. Second, the predicates for the defendants’ liability are their failures to disclose their business practices in their public filings. Under binding Sixth Circuit precedent, such failures to disclose are not actionable. Without a duty to disclose such practices, Columbia’s public filings were neither false nor misleading. Third, to the extent legal opinions were expressed about the company’s practices, such opinions involve soft information that cannot be the basis for a false or misleading statement under the federal securities laws. The cited corporate statements about the impact of the government inquiry was based upon historical data and is not actionable under the federal securities laws. Without a predicate rule 10b-5 liability, the individual defendants cannot be controlling persons under section 20(a) of the 1934 Act.

II. ANALYSIS OF THE AMENDED COMPLAINT

A. Factual Allegations

1. Columbia’s Market

According to the amended complaint, Columbia is one of the leading providers of health care services in the United States and operates over 340 hospitals, 150 outpatient surgery centers and over 570 home health care centers in 36 states and abroad (Docket Entry No. 73, Amended Complaint at ¶ 10). By 1995, Columbia owned and operated 45% of all for-profit hospitals in the United States. Id. Columbia was approximately three times the size of the second largest for-profit hospital management company in the country. Id. Columbia is the nation’s ninth largest employer with 285,000 employees. Id.

Columbia obtains significant revenues from the Medicare, Medicaid and CHAM-PUS programs of the federal government. Id. at ¶¶ 21, 22 and 23. Medicare is a federally funded health insurance program that provides certain hospital and medical insurance benefits to persons 65 years of age and older, and to the disabled. Id. at ¶ 21. Medicare payments to health care providers fall under one of two parts: Part A, the Basic Plan of hospital insurance that covers the cost of hospital services and related care, Id. at ¶23; or Part B which covers the costs of physicians’ services and numerous medical services that are not covered by Part A. Id. Medicaid is a federal-state program that the states administer to provide hospital benefits to qualifying individuals. Id. CHAMPUS is a health care program that is administered by the Department of Defense for dependents of military personnel. Id. From 1994 to 1996, Columbia received over 40% of its revenues from Medicare and Medicaid. Id. at ¶ 22. Medicare paid Columbia approximately $8 billion and Medicare paid about $1.2 billion for treatment of patients under that program. Id. Columbia is Medicare’s single largest biller. Id.

For billing under these programs, the Health Care Finance Administration (“HCFA”), an agency established in the Department of Health and Human Services (“DHHS”), processes payments under Medicare Part A, Medicaid and CHAMPUS programs. Id. at ¶ 23. Medicare has a “Prospective Payment System” (PPS) under which hospitals file an initial or “as filed” cost report that Medicare utilizes to calculate a hospital’s reimbursement. Id. at ¶ 25. A final settlement in the amount of the “as filed” cost report does not occur until an audit of the cost report is performed and the audit “often occurs several years later.” Id.. Columbia’s cost reports submitted to the federal and state governments exceeded $9 billion annually during the Class Period. Id.

For actual payments under these programs, HCFA makes interim cost-based payments to Columbia facilities for the fiscal year based upon the type of services provided to eligible patients admitted or treated by these facilities and Columbia’s “cost report” for the preceding year. Id. at ¶ 23. Payments for specific diagnoses are based upon the approximately 500 diagnostic related groups (“DRGs”) that are the standardized codes for specific diagnoses, medical procedures, and treatments. Id. In contrast, for services and expenses directly related to care for Medicare patients, Medicare Part B reimburses hospi-tais, hospitals with affiliated home health care agencies (“HHAs”) and free standing HHAs (those not directly affiliated with a hospital) on an actual cost basis with a ceiling. Id. at ¶ 24.

2. The Federal Investigation

Beginning in September 1996 and continuing to the present date, the Federal Bureau of Investigation (“FBI”), the Internal Revenue Service (“IRS”), the Department of Defense (“DOD”), the Office of the Inspector General of the Department of the HHS, and the United States Attorney’s Office for the Middle District of Florida have been conducting a criminal investigation of Columbia’s billing practices. Id. at ¶ 26. On March 19, 1997, a federal search warrant was issued for various records of Columbia’s El Paso, Texas offices. Id.

On March 19, 1997, after the close of trading of the New York Stock Exchange, Columbia issued a press release on the El Paso search warrants. Id. at ¶ 65. Columbia maintained that the federal investigation was limited to its El Paso facilities. Id. According to this press release, Columbia was unaware of the reason for the warrant. Id. On March 20, 1997, The New York Times reported that the search warrants were the result of an investigation by the FBI, IRS, HHS, the Department of Justice, and the DOD. Id. On March 21, 1997, Bloombere Business News reported that Columbia spokesman Jim Prescott stated, “We still think this is confined to El Paso.” Id. at ¶ 67.

After the El Paso searches on March 21st, Columbia’s stock declined to a price of $38.50 per share, that was almost 10% lower than its closing price prior to the search warrant and the disclosures of March 19th and 20th. Id. at ¶ 68.. On March 27, 1997, Columbia filed with the SEC its Form 10-K for its 1996 fiscal year, signed by the Individual Defendants (except Vandewater), but the defendants “provided no additional information concerning the federal investigations”. Id. at ¶ 69. (Emphasis added). In this 10-K report, defendants stated that the “amounts received under Medicare and Medicaid programs are significantly less than the hospital’s customary charges for the services provided.” Id. at ¶69. On April 15, 1997, Scott announced a $1 billion stock repurchase program by Columbia subject to market conditions. Id. at ¶ 70.

In July 1997, FBI Special Agent Joseph L. Ford signed an affidavit, filed in the United States District Court for the Middle District of Florida, for search warrants for relevant documents and other tangible items at various Columbia facilities in several states. Id. at ¶ 27. In paragraph 4 of his affidavit, Ford stated that the federal government had “uncovered a systemic corporate scheme perpetrated by corporate officers and managers of Columbia’s hospitals, HHAS, and other facilities in the State of Tennessee, Florida, Georgia, Texas and elsewhere to defraud Medicare, Medicaid and CHAMPUS.” Id. (Emphasis added.) Paragraph 5 of Ford’s affidavit stated that the criminal investigation of Columbia is ongoing and included allegations of fraud by “Columbia corporate officials in Tennessee”. Id. On July 16, 1997, search warrants were executed at approximately 35 Columbia locations in six states. Id.

A federal grand jury in the Middle District of Florida indicted three of Columb