In re Arthrocare Corporation Securities Litigation (726 F. Supp. 2d 696, 2010)

ORDER

SAM SPARKS, District Judge.

BE IT REMEMBERED on June 18, 2010, the Court held a hearing in the above-styled cause, and the parties appeared through counsel. Pending before the Court were Defendant ArthroCare Corporation’s (“ArthroCare”) Motion to Dismiss [# 166] and the appendix thereto [# 167], Lead Plaintiff DeKalb County Pension Fund’s (“Plaintiff’) response [# 186], and ArthroCare’s reply [# 194]; Defendant David Applegate’s (“Apple-gate”) Motion to Dismiss [# 168], Plaintiffs memorandum in opposition [# 184], and Applegate’s reply [# 193]; Defendant John T. Raffle’s (“Raffle”) Motion to Dismiss [# 170], Plaintiffs memorandum in opposition [# 182], and Raffle’s reply [# 198]; Defendant Michael Baker’s (“Baker”) Motion to Dismiss [# 172], Plaintiffs response thereto [# 188], and Baker’s reply [# 196]; Defendant Michael Gluk’s (“Gluk”) Motion to Dismiss [# 169], Plaintiffs response thereto [# 180], and Gluk’s reply [# 195]; Defendant PriceWaterhouseCooper’s (“PwC”) Motion to Dismiss [# 171], Plaintiffs response thereto [# 190], and PwC’s reply [# 192]; and Plaintiffs Motion for Leave to File a SurReply to Baker’s Motion to Dismiss [#200]. Because there has been no response to Plaintiffs Motion for Leave to File a Sur-Reply to Baker’s Motion to Dismiss [#200], the Court assumes it is unopposed and hereby GRANTS the motion. Thereafter, considering all the foregoing documents, the case file as a whole, the applicable law, and the arguments of counsel at the hearing, the Court enters the following opinion and orders.

Background

1. General Allegations

This is a consolidated securities class action suit against ArthroCare, an Austin-based public company that develops, manufactures, and markets minimally invasive surgical products. Also named as defendants are various former executives of ArthroCare — Michael Baker, Michael Gluk, John Raffle, and David Applegate —and ArthroCare’s auditor, PwC. The case arises from ArthroCare’s November 18, 2009 restatement (the “Restatement”), in which it restated its earnings from 2004 through the first quarter of 2008, and made numerous admissions of wrongdoing and lack of internal controls. CCAC [# 139] at ¶ 8. The Court appointed Plaintiff as lead plaintiff in this case on December 9, 2008. See Dec. 10, 2008 Order [# 99],

Plaintiff brings suit on behalf of all persons or entities who purchased common stock in ArthroCare between May 10, 2005 and February 18, 2009 (the “Class Period”). CCAC at ¶ 1. Plaintiff alleges ArthroCare and the Individual Defendants made public statements during the Class period — -including statements to investors during earnings conference calls, in press releases, and in filings with the Securities and Exchange Commission (“SEC”) — that were materially false and misleading with respect to the true nature of ArthroCare’s affairs, and failed to disclose a number of fraudulent and improper practices within the company (of which the Individual Defendants were aware). Id. at ¶ 2. Therefore, Plaintiff seeks to hold ArthroCare and the Individual Defendants liable for violations of § 10(b) of the Securities and Exchange Act and Rule 10b-5 promulgated thereunder. Id. at ¶¶ 546-57. Plaintiff also alleges the Control Person Defendants had direct control over the activities or public statements of ArthroCare and participated in the improper activities and fraudulent statements in question, and are therefore liable as “control persons” under § 20(a) of the Securities and Exchange Act. Id. at ¶¶ 3; 570-74. Finally, Plaintiff alleges PwC’s statements accompanying several of ArthroCare’s public filings during the Class Period were materially false and misleading, and PwC was either aware of this or severely reckless in not being aware, and is therefore liable under § 10(b) of the Securities and Exchange Act and Rule 10b-5. Id. at ¶¶ 4; 558-69.

II. Improper Practices

The principal fraudulent and improper practices complained of by Plaintiff can be divided into two main areas: (a) insurance billing and healthcare compliance, and (b) accounting and internal controls.

A. Insurance and Healthcare Compliance

i. DiscoCare

ArthroCare has three core business units: Sports Medicine, Ear Nose Throat, and Spine. Id. at ¶ 28. In 2000, ArthroCare’s Spine division began manufacturing and marketing “Spine Wands”: surgical devices that use ArthroCare’s patented technology to remove disc tissue in herniated discs (a procedure that is commonly referred to as a “PDD,” or Percutaneous Disc Decompression). Id. at ¶¶ 29-30. In or around 2004, insurance companies became reluctant to reimburse for PDD procedures because they questioned the effectiveness of the procedure and generally characterized it as experimental, and thus non-reimbursable. Id. at ¶ 32. These reimbursement issues concerned physicians, and Spine Wand sales flattened in 2004 and 2005. Id. at ¶ 39.

However, in 2005 ArthroCare became aware of a promising solution to the reimbursement problem, which had been developed by Palm Beach Lakes Surgery Center (“PBLSC”), ArthroCare’s largest customer for Spine Wands. PBLSC had begun pursuing reimbursement for Spine Wands not through healthcare insurance companies, but through liability claims to casualty insurers. Specifically, PBLSC had developed a network of personal injury lawyers willing to refer their clients to PBLSC for PDD procedures; in turn, PBLSC would receive a “Letter of Protection” (“LOP”) from the law firm, which promised payment upon settlement of the personal injury claim. Id. at ¶ 40. PBLSC would perform the PDD and then provide medical records and billing information to the lawyers, who would use it in a settlement demand letter to the casualty insurer. Id.

ArthroCare began to employ this business model to boost sales of Spine Wands. Id. at ¶ 41. In late 2005, DiscoCare, Inc. (“DiscoCare”) was formed as a distributor exclusively for ArthroCare Spine Wands. Id. at ¶ 41. DiscoCare was substantially intertwined with PBLSC and ArthroCarefor instance, Dr. Jonathon Cutler, a partner and physician at PBLSC, was the owner of DiscoCare; ArthroCare’s Florida subsidiary (DRS) shared a fax number with DiscoCare (which ArthroCare executives later claimed was a “mistake” on the DiscoCare website); DiscoCare’s functional address was the same as PBLSC’s; and Denker, a former sales executive of ArthroCare in the Spine division, was the “Director” of DiscoCare and ran its daily operations. Id. at ¶42. However, ArthroCare officially referred to DiscoCare as a “third party biller” for Spine Wands, and claimed it was a wholly separate entity from ArthroCare. Id. at ¶ 42.

The relationship between DiscoCare, ArthroCare, PBLSC, and personal injury lawyers became known as the “DiscoCare Model.” Id. at ¶ 43. The model essentially worked as follows: physicians or surgical centers certified to perform PDDs would enter into relationships with personal injury lawyers whereby the lawyers would refer their personal injury clients to the physician and provide the physician with an LOP. Id. In turn, the physician would perform the PDD using Spine Wands from DiscoCare, which they got in exchange for the LOP (in lieu of paying for the Wand themselves). Once the physician performed the PDD procedure, the physician would provide medical records and bills to the lawyers to use in a settlement demand letter to the casualty insurer. Once the insurer settled, the lawyers, the physician, ArthroCare, and DiscoCare would be paid out of the settlement proceeds. Id. 'By using the DiscoCare Model, ArthroCare was able to vastly increase the number of physicians and facilities using Spine Wands. Id. at ¶ 46.

One of the keys to the DiscoCare Model was grossly inflated prices. First, Disco-Care/ArthroCare grossly inflated the price of the Spine Wands sold through the DiscoCare Model: specifically, ArthroCare received $7,500 for a Spine Wand used in the DiscoCare Model versus a maximum of $1,400 for the same Spine Wand used in traditional PDD procedures. Id. at ¶ 56. ArthroCare also apparently realized that if the physicians changed the CPT codes for the PDD procedure, they could vastly increase their charges for the procedure itself. Id. at ¶ 48. Thus, under the DiscoCare Model, ArthroCare advised physicians to use CPT code 63056, which corresponds to an “open microdiscectomy” — a far more invasive and complicated procedure than a PDD procedure. Id. at ¶ 51. This practice is referred to as “upcoding.” Because the microdiscectomy is performed with an incision, ArthroCare began advising physicians the PDD procedure should be performed with the use of a small incision (instead of through a needle), ostensibly to reduce the risk of infection. Id. at ¶ 52.

Plaintiff also claims ArthroCare improperly recognized revenue on sales to DiscoCare, which was a “straw man.” Specifically, Plaintiff alleges that when ArthroCare sold Spine Wands to Disco-Care, the Wands stayed in ArthroCare’s warehouse inventory until DiscoCare had an order from a doctor. DiscoCare would then provide the Wand to the doctor at no charge, and DiscoCare was not obligated to pay ArthroCare for the Wand until the personal injury lawsuit was resolved and it had collected on its LOP; otherwise, DiscoCare was not obligated to pay for the product. Id. at ¶¶ 72, 346. Notwithstanding these details, ArthroCare recognized revenue on sales to DiscoCare immediately upon the sales, while the products were still in its inventory, as if DiscoCare were a third-party customer purchasing products for resale. Id. at ¶¶ 73, 346.

As a result of the DiscoCare Model and the upcoding involved, Plaintiff claims the Spine division became ArthroCare’s highest growth division. Id. at ¶ 70. But the revenue for the Spine division was artificially inflated through (1) ArthroCare’s collusion with lawyers and doctors to create “an illicit market” for the Spine Wands; (2) the grossly inflated price of the Spine Wands and the PDD procedure charged to casualty insurers; and (3) the fact ArthroCare immediately recognized revenue on sales to DiscoCare, a “straw man.” Id. at ¶ 72. According to Plaintiff, ArthroCare had essentially transformed a poorly selling $1,400 product into a $7,500 receivable to a personal injury attorney, paid for with an LOP, as part of a system to up-charge for minor procedures and defraud casualty insurers.

ii. DRS

In 2007, ArthroCare expanded the DiscoCare Model to its Sports Medicine division by forming a wholly-owned subsidiary called DRS. Id. at ¶ 81. Defendant Raffle, the VP of Strategic Business Units for ArthroCare, was also the President, Treasurer and Sole Director of DRS. Id. DRS shared the same fax number as DiscoCare, and although the DRS website claimed it was based in Sanford, Florida, it was actually housed in the Austin, Texas offices of ArthroCare. Id. at ¶282. Before 2008 (when ArthroCare began to face questions from the media about DRS), ArthroCare had never mentioned DRS in any public filings or conference calls, and the DRS website and promotional materials made absolutely no mention it was owned by ArthroCare. Id. at ¶ 287. The purported function of DRS, according to ArthroCare, was to specialize in medical device reimbursement, and work directly with insurance groups on ArthroCare’s behalf. Id. at ¶ 81. The DRS model consisted of four steps: (1) the customer ordered the device through DRS and was billed at the facility’s negotiated price; (2) the customer completed the procedure using the ArthroCare device and sent all insurance paperwork to DRS; (3) DRS submitted the bill to the insurance company for reimbursement; and (4) the customer received a rebate quarterly for all products successfully reimbursed. Id. at ¶ 81.

However, DRS used various improper practices to increase revenue. First, DRS improperly double-billed insurance companies by unbundling the cost of the medical device used from the reimbursement amount for the procedure, which is not allowed for disposable medical devices. Id. at ¶¶ 83-84. Under this unbundling scheme, doctors did not have to pay for ArthroCare’s disposable medical devices out of the reimbursement proceeds they received from insurance companies; instead, DRS was claiming that amount from insurers separately. Id. at ¶ 85. Secondly, ArthroCare increased the prices of the medical devices sold by DRS by 100% or more. DRS would allow the doctor to use the device for free, the doctor would sign a receipt for the device and send the receipt to DRS, and DRS would get reimbursed by the insurance company for the marked-up price. Id. at ¶ 86. Third, DRS employees were coaching physicians to falsely claim they had performed procedures at hospitals or surgery centers rather than at the doctor’s office because reimbursements are higher for procedures performed at hospitals and surgery centers. Id. at ¶ 87. Finally, ArthroCare improperly recognized revenue on sales made by DRS: ArthroCare billed DRS as if it were a separate entity (although it was a subsidiary) and immediately recognized revenue on sales made by DRS, despite the fact the sales were contingent in nature, as DRS was paid by the insurers, not the doctors performing the procedures, and those payments were not guaranteed. Id. at ¶ 88.

B. Revenue Recognition Practices

The other major scheme Plaintiff alleges ArthroCare engaged in was a scheme to improperly recognize revenue on products sold to distributors and customers by, for instance, (1) improperly allowing returns and exchanges contrary to company policy; (2) shipping non-conforming goods; (3) splitting a single purchase order into multiple smaller orders for the specific purpose of recognizing revenue in multiple periods; (4) selling to customers without sufficient evidence collectability was reasonably assured; and (5) shipping products in advance of the due dates identified in purchase orders.

According to Plaintiff, ArthroCare frequently engaged in quarter-end transactions with some of its largest distributors — Borrachia and SOTA, among others — that were structured to manipulate yearly earnings, in order to meet (but not exceed) announced targets. Id. at ¶ 90. Several confidential sources claim ArthroCare typically received large orders from Borrachia, SOTA, or DiscoCare on the last day of the quarter. See, e.g. id. at ¶ 92. Once ArthroCare hit its quarterly targets, ArthroCare management would direct employees to stop entering or post-date these orders (and therefore move them to the following quarter), essentially telling them “when to cut it off.” Id. at ¶¶ 93, 94, 98. ArthroCare supplemented this with a very “loose” return policy, permitting large returns freely once the new quarter started. Id. at ¶¶ 100-01. Borrachia and SOTA were apparently told that if they took non-conforming products they could return them in the following quarter in exchange for the ones they really wanted. Id. at ¶ 101. In this way, the distributors placed huge orders at the quarter’s end, and freely returned anything they did not want before the invoice was due. Id. at ¶ 106. Confidential witnesses cited by Plaintiff believe these were “false orders” submitted solely to meet quarter-end goals. Id. at ¶ 113.

III. The Restatement

In December 2007, ArthroCare began to face increasing questions in the media about its close relationship with DiscoCare and the legitimacy of that business. See id. at ¶¶ 260-267. For instance, on December 11, 2007, the New York Post ran an article questioning whether ArthroCare had a relationship with DiscoCare unbeknownst to the investing public. Id. at ¶ 260. Similar articles were also published on December 14, December 17, December 20, and December 27. Id. at ¶¶ 261-67. In January 2008, ArthroCare responded by announcing it had bought DiscoCare for $25 million (from Dr. Cutler). Id. at ¶ 268.

However, questions continued and soon began to center around DRS as well, which appeared to be offering the same billing/coding facilitation for the Sports Medicine division as DiscoCare did for the Spine division. See, e.g. id. at ¶ 282. The media also uncovered, among other things, ArthroCare sales training documents that clearly showed the manner in which ArthroCare had coached doctors on how to code for PDD procedures, and DRS documents with various inaccuracies (such as one that claimed DRS had been a “national provider” for “more than 10 years,” when it was undisputed DRS was actually established in 2007). Id. at ¶ 283. The media barrage continued through the spring of 2008. Id. at ¶¶ 286-304.

On May 30, 2008, PwC’s general counsel’s office received a series of anonymous faxes which contained substantially the same allegations as the press reports, specifically focusing on the “accounting for and disclosure regarding transactions involving DiscoCare and other distributors as well as alleged insurance practices and related healthcare regulatory compliance issues.” Id. at ¶ 324 (quoting the Restatement). ArthroCare claims that in response to these faxes and following discussions with PwC, it began a “reassessment” of the accounting for its relationship with DiscoCare and other customers. Id.

Following the reassessment, ArthroCare announced on July 21, 2008 that it would be restating financial results from the third quarter of 2006 through the first quarter of 2008 due to material errors, and would also be reviewing internal controls. Id. at ¶ 305. The press release admitted “the relationship between [ArthroCare] and DiscoCare during the periods being restated was a sales agent relationship, rather than that of a typical distributor,” and that the sales price of products sold to Borrachia, SOTA, and Clinical Technology, Inc. “cannot be considered fixed or determinable upon shipment by ArthroCare during the period being restated.” Id. ArthroCare stated it would be accounting for those sales using a “sell-through” revenue recognition method rather than a “sell-in” method. Id. On July 24, 2008, ArthroCare issued a press release stating the SEC was conducting an informal inquiry into accounting matters at ArthroCare. Id. at ¶ 307.

On December 19, 2008, ArthroCare revealed the Restatement would be much larger in size and scope than previously indicated. Id. at ¶ 312. ArthroCare conceded it had identified accounting errors and irregularities, and the transactions that were improperly accounted for were “primarily quarter-end transactions and were frequently structured in an effort to meet revenue forecasts.” Id. at ¶ 312. ArthroCare stated the errors identified principally involved “the timing of revenue recognition, including reductions in revenue due to customer return rights that previously should have prevented revenue from being recognized upon shipment, inability to demonstrate collectability of customers’ orders upon shipment, and product shipments in advance of requested delivery dates.” Id. ArthroCare also stated:

Facts identified in the Review indicate that actions employed by senior sales management, including [Raffle] and [Applegate], primarily led to the accounting errors and possible irregularities now being considered as part of the Company’s restatement. Those actions included failing to communicate and/or withholding key information and practices bearing on revenue recognition and other accounting issues to [the accounting staff or PwC].

Id.

Also in the December 19 announcement, ArthroCare announced the resignation of Defendant Gluk as CFO, and the resignation of Defendants Raffle and Applegate from their respective positions. Id. at ¶¶ 21-22. It also announced it had “discontinued the practice of providing devices at no charge in exchange for a letter of protection in personal injury cases,” that it was eliminating DiscoCare, “which primarily focused on the letter of protection aspect of the business,” and that it had begun the process of closing DiscoCare’s facility in Florida. Id.

On February 18, 2009, ArthroCare again expanded the scope of the previously-announced Restatement, and announced the resignation of Defendant Baker as CEO. Id. at ¶ 316. ArthroCare stated it had found evidence the Spine division had engaged in and caused others to engage in improper practices by: (1) “seeking separate reimbursement from insurers for [ArthroCare] products in connection with procedures which were contractually reimbursed on a global basis [i.e., unbundling];” (2) “making inaccurate statements in claims submitted to insurers regarding the place where particular procedures were performed;” (3) “providing physicians and insurers with descriptions of [ArthroCare] technologies which had the effect of circumventing payor policies that did not cover such technologies;” and (4) “recommending and advocating to physicians the use of a [CPT] code to identify [Spine Wand] technology that was not approved by the American Medical Association and may not have properly described the procedure that was performed.” Id. ArthroCare admitted these practices may have been going on since at least 2006.

Also in the February 18 announcement, ArthroCare admitted it was under investigation by U.S. Attorney’s offices in South Carolina and Florida in connection with DiscoCare, and revealed the SEC investigation had been upgraded from informal to formal. Id. at ¶ 512.

Finally, on November 18, 2009, ArthroCare released the Restatement. Id. at ¶ 318. The Restatement reduced total revenue for the years 2007, 2006, 2005 and 2004 by approximately 12.4%, 7.3%, 4%, and 1%, respectively, and decreased net income in 2007 by 98.9% (from $43.2 million to $0.4 million), in 2006 by 12.6% (from $31.7 million to $27.7 million), and in 2005 by approximately 19%. Id. at ¶¶ 319, 8. According to the Restatement, ArthroCare’s internal review had focused on two areas: accounting issues and internal controls, and insurance billing and healthcare compliance issues. Id. at ¶ 324. With respect to “healthcare compliance,” ArthroCare admitted it had uncovered numerous issues including, inter alia, (1) billing and coding “inaccuracies” by DRS and Disco-Care in bills submitted to insurance companies; (2) improperly advising healthcare providers to upcode CPT codes in ways not approved by the American Medical Association which may have been improper; and (3) improperly providing “free goods, services, or inappropriate discounts to customers in connection with their use of [ArthroCare’s] products,” which may have occurred since 2006. Id.

With respect to accounting issues, ArthroCare admitted the review had uncovered numerous GAAP violations:

... [that] included, but were not limited to: deviating from existing revenue recognition policies developed for sales to a particular distributor; requesting or allowing returns and exchanges contrary to our policy; encouraging distributors to place orders while knowing of the distributor’s heightened inventory level; shipping nonconforming goods; splitting a single purchase order into multiple smaller purchase orders for the specific purpose of recognizing revenue in multiple periods; selling to customers without sufficient evidence that collectability of the related receivable was reasonably assured; and shipping product in advanee of due dates identified in our purchase orders.

Id. at ¶ 325. The Restatement continued, “A former executive of ours had responsibility for sales and revenue in each of our business units and was involved in the majority of transactions that were identified in the Review.” Id. The Restatement indicated sales personnel involved in the transactions at issue, and even a former executive officer, had failed to communicate information and practices bearing on revenue recognition to ArthroCare’s finance personnel and/or PwC, and in at least one instance affirmative misrepresentations were made by a former executive officer to ArthroCare’s Vice President of Finance. Id.

The Restatement also admitted ArthroCare had-improperly and in violation of GAAP-recorded revenue on sales of devices to DiscoCare and DRS, and had improperly accounted for the acquisition of DiscoCare by not recognizing a loss of approximately $25 million as of the acquisition date (but rather allocating the purchase price to acquired assets and goodwill). Id. at ¶¶225, 326. ArthroCare acknowledged its internal controls were not effective during the time period in question. Id. at ¶ 327.

On the day of the Restatement (February 18, 2009) ArthroCare’s stock price closed at $4.50 per share, down from a high during the Class Period of $65.70 (on November 1, 2007). Id. at ¶ 8.

Analysis

I. Defendant Michael Baker’s Motion to Dismiss [# 172] and Defendant Michael Gluk’s Motion to Dismiss [# 169]

Baker alleges the CCAC fails to adequately plead falsity and scienter, and thus the claims asserted against Baker under § 10(b) and Rule 10b-5 should be dismissed. Gluk asserts, similarly, that the CCAC fails to adequately plead scienter and loss causation, and thus should be dismissed. The Court will consider these contentions in turn.

A. Legal Standard for Dismissal

To state a cause of action under § 10(b) and Rule 10b-5, a plaintiff must allege “(1) a misstatement or omission, (2) of a material fact (3) made with scienter (4) on which the plaintiff relied (5) that proximately caused his injury.” Abrams v. Baker Hughes, Inc., 292 F.3d 424, 430 (5th Cir.2002); Rosenzweig v. Azurix Corp., 332 F.3d 854, 865 (5th Cir.2003). A § 10(b) claim is subject to both Federal Rule of Civil Procedure 9(b)’s requirement that fraud be pled “with particularity and the requirements of the PSLRA. Abrams, 292 F.3d at 430.

The PSLRA “was enacted in response to an increase in securities fraud lawsuits perceived as frivolous.” Newby v. Enron Corp., 338 F.3d 467, 471 (5th Cir.2003). The PSLRA enhanced the particularity requirements for pleading fraud under Rule 9(b) in two ways. Indiana Elec. Workers’ Pension Trust Fund IBEW v. Shaw Group, Inc., 537 F.3d 527, 533 (5th Cir. 2008). First, plaintiffs must “specify each statement alleged to have been misleading, [and] the reason or reasons why the statement is misleading[,]” 15 U.S.C. § 78u-4(b)(1)(B), and secondly, for “each act or omission alleged” to be false or misleading, plaintiffs must “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). The Fifth Circuit has found the requirements of the PSLRA comport with those of Federal Rule of Civil Procedure 9(b), which “requires a plaintiff to specify the statements contended to be fraudulent, identify the speaker, state when and where the statements were made, and explain why the statements were fraudulent.” ABC Arbitrage Plaintiffs Group v. Tchuruk, 291 F.3d 336, 350 (5th Cir.2002). In short, “the who, what, when, and where must be laid out before access to the discovery process is granted.” Id. A district court must dismiss a securities fraud claim failing to satisfy either the PSLRA’s pleading requirements or those of Rule 9(b). Fin. Acquisition Partners LP v. Blackwell, 440 F.3d 278, 286 (5th Cir.2006) (internal quotes omitted).

B. Falsity

First, Baker claims Plaintiff has failed to identify each specific statement it claims was false and explain why it was false when made — in other words, it has failed to set out the specific misrepresentations or omissions made by the Individual Defendants. Again, under the PSLRA and Rule 9(b)’s heightened pleading instructions, any private securities complaint alleging the defendant made a false or misleading statement must specify each statement alleged to have been false or misleading and the reason or reasons why the statement was false or misleading when it was made. 15 U.S.C. § 78u-4(b)(1). If an allegation regarding the statement or omission is made on information and belief, “the complaint shall state with particularity all facts on which that belief is formed.” Id.

Baker (adopting the argument of ArthroCare in its motion to dismiss) complains the CCAC simply sets forth block quotes from over 100 pages of ArthroCare’s various press releases or investor calls, but does not identify which statements in the block quotes are allegedly false, or why the statement was false when made — it simply lumps together all the statements in a release or call and asserts they were all false when made. See Baker’s Mot. Dismiss at 7-8; Arthro.’s Mot. Dismiss at 5-7. ArthroCare acknowledges the Restatement may be sufficient to show the restated financial information was false when published; however, it claims the Restatement does not establish the falsity of any other statements (such as non-financial information). Arthro.’s Mot. Dismiss at 7. Because the block quotes include information that was not changed by the Restatement, ArthroCare claims Plaintiff cannot simply rely on the Restatement as a whole to establish every public statement by ArthroCare was false. Id.

Plaintiff responds that in cases such as this one — where there is a major restatement spanning a long period of time, multiple federal investigations, and resignations of all the individual defendants from the company — other district courts have found a company’s restatement is a sufficient basis for pleading its public filings from the relevant period were false when made. See, e.g. In re Atlas Air Worldwide Holdings, Inc. Sec. Litig., 324 F.Supp.2d 474, 486 (S.D.N.Y.2004) (“Although a restatement is not an admission of wrongdoing, the mere fact that financial results were restated is sufficient basis for pleading that those statements were false when made.”); Kaltman v. Key Energy Servs., Inc., 447 F.Supp.2d 648, 658 (W.D.Tex. 2006) (finding the plaintiff had sufficiently pled falsity because the company’s “announcement of the need to restate its earnings constitutes an admission that its pub-lie filings are false.”). The Court agrees with Plaintiff the Restatement may show the falsity of prior information, even non-financial information. Although ArthroCare ignores this fact, much of the Restatement actually does deal with non-financial information — it goes far beyond simply adjusting the relevant earnings numbers. For instance, although Baker repeatedly stated publically that ArthroCare “do[es] not tell [physicians providing PDDs] how to code,” see, e.g. CCAC at ¶ 275, this statement was specifically acknowledged to be incorrect in February 2009, when ArthroCare admitted its Spine division had engaged in “recommending and advocating to physicians the use of a [CPT] code to identify [the Spine Wand] technology that was not approved by the American Medical Association and may not have properly described the procedure that was performed.” Id. at ¶ 316.

Thus, it appears to the Court there is no question Plaintiff has successfully plead falsity in the CCAC, as the sweeping Restatement filed by ArthroCare operates as an admission its public filings from 2004 through the first quarter of 2008 were false in many material respects. Plaintiff has specifically identified all of Baker’s and Gluk’s statements during the Class Period which it claims were false or misleading, and has alleged they were false or misleading when made and the reasons therefor. See CCAC at 4A-158 (section entitled “The False Statements Made During the Class Period”).

The Court acknowledges the point made by Mr. Brownlie at the hearing, that in the section of the CCAC entitled “The False Statements Made During the Class Period,” Plaintiff has simply copied the text of various of ArthroCare’s public filings and press releases and set them forth in lengthy block quotes, without identifying particular statements as false or misleading, or stating the reasons for the falsity of those statements. But the reason for this is relatively simple: most of Plaintiffs falsity allegations are centered around the major allegation that the Individual Defendants failed to disclose and omitted certain material information in public filings and press releases from the first quarter of 2005 through the first quarter of 2008. Because much of the CCAC necessarily rests on the fact Baker and Gluk omitted crucial information, it is logical that in many instances Plaintiff set forth the relevant portions of a press release or investor call in toto, in order to give an idea of what was said and, just as importantly, what was omitted. Plaintiff does not appear to be hiding behind the lengthy block quotes to avoid making itself abundantly clear on the issue of falsity (which would be improper); instead, it uses the block quotes to put its allegations of material omissions in context.

Furthermore, in the portions of the CCAC in which Plaintiff makes allegations about affirmative misrepresentations (as opposed to omissions), Plaintiff clearly sets forth the false statements and the reasons why such statements were false when made. See, e.g. CCAC at ¶ 261 (“When questioned about this potential relationship [between DiscoCare and ArthroCare], Baker responded with the following statement quoted in the article, ‘[t]his information stems from rumors being spread by hedge funds that have neither ArthroCare’s shareholders’ or patients’ best interests at heart.’ This statement by Baker was false. As alleged below, the Restatement revealed that at this point in time DiscoCare was in fact ArthroCare’s undisclosed sales agent with substantial ties to ArthroCare, and rather than being ‘rumors,’ the information in the article Baker was referring to has been shown to be true.”). Thus, although Mr. Brownlie’s point is well taken, the Court finds falsity is sufficiently alleged in the CCAC, and DENIES Baker’s motion to dismiss on this ground.

C. Scienter

Secondly, both Baker and Gluk argue the facts pled in the CCAC do not give rise to a strong inference of scienter on his part, as is required by the PSLRA. The Court does not fully agree.

Section 10(b) and Rule 10b-5 require proof the defendant acted with “scienter” — i.e., “a mental state embracing intent to deceive, manipulate, or defraud.” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 319, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007). Both intent and “severe recklessness” are sufficient to satisfy the substantive scienter requirement. Nathenson v. Zonagen, Inc., 267 F.3d 400, 407-08 (5th Cir.2001). Severe recklessness is not mere negligence, but is “limited to those highly unreasonable omissions or misrepresentations that involve not merely simple or even inexcusable negligence, but an extreme departure from the standards of ordinary care, and present a danger of misleading ... which is either known to the defendant or is so obvious that the defendant must have been aware of it.” Id. at 408. Under the PSLRA, a complaint must “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind” in order to avoid dismissal. 15 U.S.C. § 78u-4(b)(2) (emphasis added); Tellabs, 551 U.S. at 313, 127 S.Ct. 2499.

The Supreme Court has detailed a three-step process for reviewing allegations of scienter on a motion to dismiss pursuant to the PSLRA. See Indiana Elec. Workers’ Pension Trust Fund IBEW v. Shaw Group, Inc., 537 F.3d 527, 533 (5th Cir.2008) (citing Tellabs, 551 U.S. at 322-23, 127 S.Ct. 2499). First, the facts alleged in the complaint are to be taken as true. Id. Second, those facts must be considered holistically, rather than in isolation, to determine whether scienter has been properly pled, as the proper inquiry “is whether all of the facts alleged, taken collectively, give rise to a strong inference of scienter, not whether any individual allegation, scrutinized in isolation, meets that standard.” Tellabs, 551 U.S. at 322-23, 127 S.Ct. 2499. Finally, in determining whether the pleaded facts give rise to a “strong” inference of scienter, the court must take into account plausible opposing inferences. Indiana Elec., 537 F.3d at 533 (citing Tellabs, 551 U.S. at 323, 127 S.Ct. 2499). “[T]o qualify as ‘strong’... an inference of scienter must be more than merely plausible or reasonable — it must be cogent and at least as compelling as any opposing inference of nonfraudulent intent.” Tellabs, 551 U.S. at 314, 127 S.Ct. 2499. The inference of scienter need not be irrefutable, but it must be strong in light of other explanations. Id.

No direct allegations of fraudulent conduct or intent on the part of Baker are alleged in the CCAC. Instead, Plaintiff relies — as it is permitted to do — on circumstantial allegations. Indiana Elec., 537 F.3d at 535. Although the Court’s “job is not to scrutinize each allegation in isolation but to assess all of the allegations holistically,” Tellabs, Inc., 551 U.S. at 326, 127 S.Ct. 2499, the Court has broken the allegations down into the following categories for convenience of discussion.

i. Red flags in the media

First, Plaintiff argues the “red flags” that began appearing in the media in December 2007 should have put Baker on notice of the alleged fraud; thus, it can be inferred from the fact that he publically continued to deny and downplay the fraud and accounting errors that he either knew he was making misstatements of fact or was severely reckless in making the statements. For instance, a Florida district court, considering whether scienter had been adequately pled where the plaintiffs alleged the individual defendants had been confronted by red flags in the media regarding their improper practices, stated:

[T]he Complaint also alleges that Dunlap and Kersh were confronted by the financial media about improper accounting and financial reporting practices. For example, in June 1997, Barron’s published an article which stated the possibility that Sunbeam was engaging in accounting and inventory fraud. Sunbeam strongly denied these allegations and Dunlap flatly rejected them as propaganda stirred up by “shorts.” These denials indicate that Dunlap and Kersh were either sufficiently familiar with the facts, or severely reckless in not being familiar, to be in a position to issue a denial. As such, Sunbeam’s and Dunlap’s denials demonstrate, at a minimum, extreme recklessness on the part of Kersh and Dunlap.

In re Sunbeam Secs. Litig., 89 F.Supp.2d 1326, 1338 (S.D.Fla.1999) (emphasis added); and see Rehm v. Eagle Fin. Corp., 954 F.Supp. 1246, 1256 (N.D.Ill.1997) (“defendant’s attempts to mollify public doubt about [the corporation’s] financial health by putting an optimistic and reassuring ‘spin’ on otherwise damaging [reports] shows the defendants acted with knowledge[.]”). Likewise, in In re Spear a district court held the defendant CEO should have grown suspicious of earnings and investigated when he was faced with the “significant red flag” of an article critical of accounting irregularities at the company; however, “instead of investigating when confronted with the article’s allegations, [the CEO had] flatly rejected them as ‘malicious comments’ and ‘misstatements, mischaracterizations, and distortions.’” 399 F.Supp.2d 1350, 1358-59 (S.D.Fla.2005). The In re Spear court found the fact the CEO had issued such a denial indicated he was either familiar with the facts or reckless in denying the allegations without sufficient knowledge of the situation. Id. at 1359. This, coupled with motive and opportunity allegations, was sufficient to give rise to a strong inference of the requisite scienter on the part of the CEO. Id. at 1359.

Essentially, the evidence of red flags in this case boils down to the specific assertion that after December 2007, Baker and Gluk were directly confronted by the financial media with evidence of various fraudulent practices at ArthroCare. Nonetheless, Baker continued to reassure investors the reports were lies, rumor-mongering, and propaganda by short sellers for some six months after they were published, and Gluk (by his silence) allowed these misrepresentations. The media reports began with a New York Post article on December 11, 2007, which questioned the relationship between ArthroCare and DiscoCare and detailed the numerous connections between the two companies and the PBLSC. CCAC at ¶ 260. The article discussed the fact that DiscoCare was able to get “upward of 50 percent” approval for procedures using ArthoCare products, whereas medical office staff had a 15 percent approval rate for the same procedures. Id. The article pointed out that according to a help-wanted ad recently listed by ArthroCare, a key aspect of DiscoCare’s business model was “developing a network of personal injury lawyers willing to refer their clients to DiscoCare for treatment under the ‘DiscoCare Model.’ ” Id.

On December 20, 2007, an article (aptly titled “Red Flags at ArthroCare”) discussed in detail the DiscoCare model, alleging it relied upon insurance fraud and upcoding to artificially inflate revenue. Id. at ¶ 265. On December 27, 2007, a Citron article authored by Andrew Left discussed the possible motivation for the “aggressive billing procedures” in ArthroCare’s Spine Division, stated that the “DiscoCare/ArthroCare relationship [is] too close for comfort,” and claimed DiscoCare was “coaching, advocating and incenting [sic] doctors to” commit insurance fraud by upcoding. Id. at 267. The article closed by asking “Is ArthroCare helping to facilitate upcoding and taking on financial risks for doctors — a serious no-no in the healthcare supply market?” Id.

Although these articles alleged in substantial detail many of the fraudulent practices ArthroCare later admitted, Plaintiff allege Baker continued to fraudulently deny the fraud and reassure investors with misrepresentations after the articles began to surface. For instance, in response to the New York Post article, Baker made the statement (which was published in the article): “[t]his information stems from rumors being spread by hedge funds that have neither ArthroCare’s shareholders’ or patients’ best interests at heart.” CCAC at ¶ 261.

Likewise, Baker and Gluk hosted an analyst conference call on January 3, 2008, almost a month after the first reports of fraud surfaced in the media, during which Baker repeatedly referred to DiscoCare as a “third-party” company, and to the Disco-Care model as “a highly disciplined treatment algorithm that we believe is the key to successful authorization!.]” CCAC at ¶ 270. Baker stated that during the acquisition due diligence for DiscoCare they had “found no evidence that PDD is being used overly aggressively or inappropriately by any of our customers who follow the Disco-Care treatment algorithm,” and “Disco-Care does an excellent job of ensuring that the algorithm is followed.” Id. He specifically represented “[DiscoCare] do[es] not code procedures for physicians, hospitals, or other facilities. There are some third-party billing firms who provide these billing services for ... fees, but DiscoCare is not one of them.” Id. He referred to the stories in the media as “rumor-mongering,” stating they were “not true.” Id. When taking questions, he repeated “we don’t code for physicians. We don’t code for facilities.... We don’t code for surgeons____'We don’t code for hospitals. And we don’t tell them how to code ... The surgeon with his facility decides what ... CPT code is appropriate!.]” Id. at ¶ 271. He represented, “The only thing we’re doing now I suppose that is different is that we’re being1 much more systematic in organizing those cases to make sure that the proper diagnostic algorithm is followed!.]” Baker specifically explained the DiscoCare model as follows:

Here is how the model works. When they get preapproval for a case and the case is scheduled, they would then call us and say, we have preapproval for a case. Sell us a wand. And we would sell the wand to DiscoCare at our contract price, and the case would be done, and then DiscoCare would submit the bill for the wand to the insurance company under the preapproval. And then DiscoCare would eventually get paid by the insurance company. And so that — it is as simple as that.

Id.

Plaintiff claims the foregoing were false statements by Baker because DiscoCare did tell health care providers how to code (as ArthroCare later conceded), and Disco-Care was not a third-party company, but was in fact ArthroCare’s undisclosed sales agent with substantial ties to ArthroCare (as ArthroCare later conceded). Plaintiff claims Baker also wholly failed to disclose that the DiscoCare model employed numerous improprieties and improperly advised the use of incorrect CPT codes. Id. at ¶ 277.

Similarly, on January 23, 2008 an article was published which contained allegations about DRS, stating it was offering the same billing/coding facilitation for the Sports Medicine Division as DiscoCare was offering for the Spine Division, and was run by John Raffle, the Vice President of ArthroCare’s Strategic Business Unit. Id. at ¶ 282. The article pointed out that DRS shared a fax number with DiscoCare and was operated out of the Austin, Texas offices of ArthroCare (although it purported to be located in Sanford, Florida). Id. at ¶ 283. With respect to DiscoCare, the article mentioned documents that clearly set forth the manner in which ArthroCare had coached doctors on how to code for PDD procedures. Id. The article referenced the fact Baker had stated in a January 18, 2008 conference call with Bear Stearns, “We keep scratching our heads, wondering what the next improbable story will be.” Id. Plaintiff claims this statement by Baker was false and misleading when made because the Restatement would later reveal that at this point in time, “DiscoCare was in fact ArthroCare’s undisclosed sales agent with substantial ties to ArthroCare, and rather than being an ‘improbable story,’ the information in the article Baker was referring to has been shown to be true.’ ” Id. at ¶ 284.

A January 24, 2008 article published by Citron stated that despite opportunities to tell the truth, ArthroCare management had continually lied to investors and analysts about key issues. Id. at ¶ 286. The article stated ArthroCare shareholders had never heard of DRS until the day before, and the DRS website and promotional materials went to great lengths to disassociate DRS from ArthroCare, even stating DRS was based in Sanford, Florida. Id. at ¶ 287. The article questioned whether DRS was a third-party biller, and noted that DRS materials stated it had been in business for “over 10 years,” when in reality it was established in 2007. Id. at ¶ 288. The article also discussed the fact that ArthroCare documents indicated ArthroCare had increased the price of its SpineWand from $1,200 to $7,500 without any apparent reason for the significant price increase. Id. at ¶ 289. It noted the same type of activity was then occurring in the Sports Medicine Division, with prices being increased by as much as 100%. Id. The article attached numerous documents presented at an ArthroCare sales meeting (specifically entitled the “Nikki Bryant Training Materials”), which made it clear (1) “ArthroCare does teach doctors how to code-in direct contradiction of CEO Baker’s vehement assertions to the contrary,” (2) “[t]he coding scheme (CEO Baker misleadingly calls it an ‘algorithm’) was established by the Palm Beach Surgical Center,” (3) “[t]he costs associated are so high that the sales rep actually has to carry around a WC authorization because physicians are incredulous at how high the fees are[,]” and (4) “they stress the importance of relationships with personal injury attorneys.” Id. at ¶ 290. According to Citron, the documents showed the law firms were identifying personal injury clients who were candidates for the PDD procedure, and were the ones paying for the Spine Wands. Id. at ¶291. The article noted the fax number listed for DRS on its website had been the same number as Disco-Care’s fax number for months, but had been changed within hours of the article published the previous day, which had pointed this out. Id. The article concluded, “The documents all have one common theme. ArthroCare has now come to the realization that if they can control the billing, they can control the pricing. All of this comes at the expense of insurance companies]]]” Id.

On January 28, 2008, “Seeking Alpha” issued an article entitled “Analysts Continue Defying Logic with ArthroCare Defense,” in which it stated, inter alia, that it was clear the controversy surrounding ArthroCare was not limited to its Spine Division, but had spilled over into the Sports Medicine Division. Id. at ¶ 292. The article stated the proper coding for the PDD procedure appeared to be 62287, and although ArthroCare continued to deny coaching doctors on coding, documents from ArthroCare’s 2007 sales meeting proved otherwise. Id. at ¶293. For instance, one slide from the meeting stated that ArthroCare “look[s] for physicians open to [using code] 63056 and looking for an increase in profitability,” and a document setting forth “frequently asked questions” about DiscoCare spelled out that the sales representative should try to convince doctors not to use a SpineWand they already have in stock because “[i]f they use their wand we can’t create a bill-only form and DiscoCare can’t submit a reimbursement claim.” Id. The January 28 article also discussed the debate over ArthroCare’s DRS subsidiary, and how ArthroCare’s management had gone out of its way to hide it. Id. at ¶ 294. It noted ArthroCare had raised prices on a mature product line by over 100% within a two-month time span, with no plausible justification other than that the business model was put in place to manipulate the insurance system and provide a source for funds for “rebates.” Id.

The CCAC alleges Baker was again confronted with evidence of the previously-undisclosed or downplayed relationship between ArthroCare, DiscoCare, and DRS in a .February 19, 2008 conference call. When asked about the fact DiscoCare and DRS had shared a fax number for some six months before ArthroCare had acquired DiscoCare as a subsidiary, Baker stated “it was just a mistake on the website.” Id. at ¶ 296. When pressed, he continued “The same people developed the website for DRS that developed the website for DiscoCare, and they just put the wrong fax number on it.” Id. Plaintiff alleges these statements made during the February 19 conference call were false and misleading and are an indication of scienter because DiscoCare had in fact been ArthroCare’s undisclosed sales agent, with substantial ties to ArthroCare, and Baker was continuing to cover this up despite the detailed evidence to the contrary that was appearing in the media. Id. at ¶ 297-98. Throughout July of 2008, the media continued to publish articles about the improper practices at ArthroCare, which became súccessively more detailed. See id. at ¶¶ 299-305. ArthroCare did not reveal the truth, even in part, until July 21, 2008. Id. at ¶ 305.

Based on the foregoing, Plaintiff essentially alleges Baker recklessly disregarded blatant evidence of ArthroCare’s accounting irregularities, and particularly the problems with DiscoCare and DRS involving insurance fraud, upcoding, and improper accounting. These irregularities indicated ArthroCare’s financial state-merits were not and could not have been truthful, but Baker continued to defend them stridently and deny the allegations, making material misstatements and omissions in his statements and releases denying the allegations and defending the company. Plaintiff is correct that Baker can be liable for making both misrepresentations and omissions, as long as they were made with scienter. The Fifth Circuit has long recognized that under Rule 10b-5 “a duty to speak the full truth arises when a defendant undertakes a duty to say anything.” Rubinstein v. Collins, 20 F.3d 160, 170 (5th Cir.1994); See also In re Convergent Tech. Sec. Litig., 948 F.2d 507, 512 (9th Cir.1991) (disclosure under Section 10(b) “is measured not by literal truth, but by the ability of the material to accurately inform rather than mislead prospective buyers.”). Thus, where a defendant voluntarily chooses to speak publicly, he or she has a duty to tell the whole truth, and disclose “material, firm-specific adverse facts that affect the validity or plausibility” of his statement or prediction. Id.; Kurtzman v. Compaq Comp. Corp., 2000 WL 34292632 at *22 (S.D.Tex.2000) (holding that because the defendants “voluntarily chose to speak publicly,” they “therefore had a duty to tell the whole truth about [the companyj’s financial condition.”).

In the case of Gluk, the CCAC does not allege any specific misstatements or reassurances by him personally after December 2007; instead, it focuses on the fact he was included in the conference calls during that period and yet chose to remain silent while Baker made misrepresentations and omitted material information. Gluk argues the news articles cannot give rise to any inference of scienter on his part because he was “not under a duty to investigate the news articles” or “to respond to every potentially disparaging news story or rebut the musings of the financial press.” Gluk’s Reply at 2 (citing Plumbers and Steamfitters Local 773 Pension Fund v. Can. Imp. Bank of Comm., 694 F.Supp.2d 287, 300-01 (S.D.N.Y.2010)). But, as stated above, the fact Baker and Gluk held conference calls in which they addressed the news reports and denied the veracity of the reports means that there concomitantly arose a duty “to speak the full truth,” and “disclose a ‘mix of information’ that [was] not misleading.” Lormand v. US Unwired, Inc., 565 F.3d 228, 248-49 (5th Cir.2009); Rubinstein, 20 F.3d at 170. In other words, neither Gluk nor Baker was “obligated to respond to every potentially disparaging news story,” but once they did take it upon themselves to respond to the news stories, they were required to speak the full truth and accurately inform, rather than mislead, investors.

Furthermore, the fact Gluk did not personally address the news stories in public does not mean the denials cannot add to an inference of scienter on his part, as he was undisputedly present and had the opportunity to correct Baker at the time Baker was making the inaccurate and misleading statements to the investing public. The situation is analogous to that presented in Barrie v. Intervoice-Brite, Inc., in which the plaintiffs argued that the defendants could be liable for their omission in failing to correct a falsehood because they had silently listened as others made statements that they knew were false. 397 F.3d 249, 262 (5th Cir.2005). Essentially, the plaintiffs argued “that whether a particular statement during a conference call or a road show was uttered by [one individual defendant] or [another], both are liable: one for the utterance, and the other for the omission in failing to correct the falsehood.” Id. The Fifth Circuit agreed, finding fraud is specifically pled with respect to each defendant as long as it is “pled with specificity that one defendant knowingly uttered a false statement and the other defendant knowingly failed to correct it, even if it is not alleged which defendant spoke and which defendant failed to speak[.]” Id. The Barrie court concluded, “a high ranking company official cannot sit quietly at a conference with analysts, knowing that another official is making false statements and hope to escape liability for those statements. If nothing else, the former official is at fault for a material omission in failing to correct such statements in that context.” Id. at 262 (quoting In re SmarTalk Teleservices, Inc. Sec. Litig., 124 F.Supp.2d 527, 543 (S.D.Ohio 2000)).

In this case, because the CCAC sets forth detailed allegations showing that from December 2007 until May 2008 there were substantial red flags which should have alerted the Individual Defendants to the fraud that was later the subject of ArthroCare’s Restatement, the Court finds a compelling inference of scienter is raised on the part of Baker with respect to any misstatements he made after December 2007, most of which are referenced above, and on the part of Gluk for any misstatements made by Baker in his presence which he knowingly failed to correct. The media reports detailed with striking specificity some of the major improprieties at ArthroCare, and were based on publically available information which would have been readily available to Baker and Gluk. Nonetheless, Baker made several specific denials and misrepresentations (which Gluk failed to correct) — most notably, his statements in the January 2008 conference call, in which he (1) repeatedly referred to DiscoCare as a “third-party” company, and to the DiscoCare model as “a highly disciplined treatment algorithm” (although Plaintiff claims DiscoCare did not use any sort of algorithm in obtaining authorizations), (2) stated he had “found no evidence that PDD is being used overly aggressively or inappropriately by any of our customers who follow the DiscoCare treatment algorithm,” (3) stated repeatedly that “[DiscoCare] do[es] not code procedures for physicians, hospitals, or other facilities,’ and (4) specifically represented, “[t]he only thing we’re doing now I suppose that is different is that we’re being much more systematic in organizing those cases to make sure that the proper diagnostic algorithm is followed!.]” Id. at ¶¶ 270-71. Taking the allegations in the CCAC as true, these representations were false and misleading when made. Furthermore, because the material for the allegations had been gleaned by the media from publically available documents, it is simply not plausible to infer that Baker and Gluk reasonably believed their denials and misstatements were true, or acted only negligently with respect to the accuracy of their statements. The only compelling, possible inference is that Baker and Gluk were either aware of the truth and intentionally misled investors (or remained silent while investors were being misled), or were willfully blind and severely reckless in ignoring the truth.

Gluk’s attempt to claim there is a “plausible, nonculpable explanation for any alleged false statements” falls far short of the mark. See Gluk’s Reply at 3-4. He claims he and his staff were “misled by ArthroCare’s sales department,” and that this allegation is supported by the Restatement, which states “[i]n a majority of the transactions reviewed, sales personnel involved in the transactions at issue, including a former executive officer, did not communicate information and practices bearing on revenue recognition, and related matters to our finance personnel” and “[i]n at least one instance, affirmative misrepresentations bearing upon revenue recognition appear to have been made by a former executive officer to our Vice President of Finance.” Id. at 4 (quoting Restatement). But this portion of the Restatement cannot provide a plausible reason for the denials and omissions by the Individual Defendants after December 2007. First, this portion of the Restatement does not deal with the insurance billing and healthcare compliance issues that were the subject of the large majority of the articles, but with the improper accounting practices. Secondly, even if Baker and Gluk were misled at some point by their underlings, it does not explain how they could continue to be misled by “sales personnel” after news articles began surfacing in December 2007, and they were faced squarely with the reports of improper practices at ArthroCare.

At a minimum, Baker’s denials and misrepresentations and Gluk’s acquiescence in them exhibit extreme recklessness on the part of Baker and Gluk. Even if they did somehow manage to remain unaware of any improprieties at ArthroCare before December 2007, the red flags in the media should have led them to investigate discrepancies between the media reports and their own knowledge, and thus are strong indicia they acted with scienter — an “intent to deceive, manipulate, or defraud or that severe recklessness in which the danger of misleading buyers