Something Systemic

In Massachusetts Retirement Systems v. CVS Caremark Corp., 2013 WL 2278599 (1st Cir. May 24, 2013), the plaintiffs asserted that the company had failed to disclose integration problems following a merger. The district court dismissed on loss causation grounds, holding that the complaint did not plausibly allege that the company’s statements prior to the stock price decline, which related to lost contracts, revealed the supposed fraud. On appeal, the First Circuit provided guidance on how to evaluate loss causation.

(1) “Mirror-image” disclosure not required – The court found that “a corrective disclosure need not be a ‘mirror-image’ disclosure – a direct admission that a previous statement is untrue.” Although the company did not attribute its lost contracts to integration issues, the company’s statements “plausibly revealed to the market that CVS Caremark had problems with service and the integration of its systems.” In particular, the court noted that the strongly negative analyst and stock price reaction “likely reflected an understanding that something systemic had gone wrong.”

(2) Lost contracts v. reason for lost contracts – The defendants argued that CVS Caremark’s loss of certain clients “was public knowledge” well before the disclosures that led to the stock price decline. The court agreed that the market knew about the lost contracts, but concluded that the core allegation in the complaint was that the disclosures revealed “for the first time the real reason for the loss: the failed integration of CVS and Caremark” and “this new information could plausibly have caused [the plaintiffs] losses.”

(3) Use of analyst reports – To support their assertions about the “meaning” of the company’s disclosures, the plaintiffs relied heavily on analyst reports. The court held that “[w]hen a plaintiff alleges corrective disclosures that are not straightforward admissions of a defendant’s previous misrepresentations, it is appropriate to look for indications of the market’s contemporaneous response to those statements.” In this case, the analyst reports plausibly reflected an understanding that “the merger had failed to produce any value for CVS Caremark” and the reports “should have been considered in deciding the motion to dismiss.”

Holding: Dismissal vacated and case remanded for further proceedings.