On May 22, 2018, Judge Edgardo Ramos of the United States District Court for the Southern District of New York dismissed with prejudice a putative securities fraud class action against pharmacy benefits manager Express Scripts Holding Company (“Express Scripts” or “Company”) and several of its current and former officers.  In re Express Scripts Holding Co. Secs. Litig., No. 1:16-cv-03338 (S.D.N.Y. May 22, 2018).  Plaintiff—a shareholder of Express Scripts—alleged that defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by making affirmative misstatements concerning negotiations to renew the contract with its largest customer, Anthem, Inc. (“Anthem”), allegedly causing Plaintiff to suffer losses when the truth was revealed and Company’s stock price declined.  The Court disagreed, finding that plaintiff failed to plausibly allege that the Company did not believe its statements regarding its relationship with Anthem, and as a result dismissed the second amended complaint with prejudice. 

The Court first considered plaintiff’s allegation that the Company misrepresented on an investor call that it was actively engaged in good-faith discussions with Anthem regarding pricing negotiations related to an existing contract wherein the Company provide pharmacy benefits services to Anthem.  Plaintiff contended the statements to investors were material misstatements because the Company chose to discuss its relationship with Anthem, but failed to disclose that it was refusing to engage in good-faith negotiations with Anthem regarding pricing, which in turn made it less likely that Anthem would renew its contract with the Company after the 10-year term.  The Court noted, however, that it had previously rejected this same argument in dismissing the first amended complaint, and emphasized again that expressions of optimism and other puffery are insufficient to allege an actionable claim.  The Court further found that plaintiff’s second amended complaint did not allege any new facts in support of this argument and, therefore, found that plaintiff failed to state a claim with respect to statements made on the investor calls concerning the relationship between the Company and Anthem and their ongoing negotiations.

The Court then turned to plaintiff’s allegations that defendants repeatedly and consistently accounted for the Anthem contract as if it were “highly probable” that the contract would be renewed for at least five more years, thus inflating the Company’s financial projections.  The SEC requires that companies use generally accepted accounting procedures (“GAAP”) in their filings, and under those procedures a company should account for intangible assets like contracts based on its “useful life.”  The Company had accounted for the “useful life” of its contract with Anthem as being 15 years, because it represented that there was a sufficient basis to conclude the contract would be renewed for at least five years after the initial 10-year term.  Plaintiff argued that GAAP rules required defendants to adjust their estimate because the useful life of the contract changed when the probability of renewal declined as a result of the deterioration of pricing negotiations between the Company and Anthem.  However, the Court found that plaintiff offered no new facts or new arguments to demonstrate that the Company should have revised its accounting treatment earlier than it did, and further, offered no facts that the Company did not believe its accounting treatment was appropriate.  The Court thus found that plaintiff failed to allege claims for securities fraud under Section 10(b), and consequently found that the second amended complaint failed to allege a Section 20(a) claim as well.

The Court then provided additional analysis regarding whether plaintiff had met the pleading requirements of the Private Securities Litigation Reform Act of 1995 (“PSLRA”), which requires a plaintiff to allege facts with particularity that would give rise “to a strong inference that the defendant acted with the required state of mind.”  Plaintiff contended that it had adequately alleged that this standard is met based on the same facts alleged in the first amended complaint that the Court acknowledged demonstrated an “increasingly precarious” relationship between the Company and Anthem, as well as alleged facts that the Company repeatedly refused even to negotiate with Anthem.  But the Court found that like the first amended complaint, plaintiff here “has failed to point to any evidence or that Defendants knew their public statements about renewal (whether embodied in SEC filings or statements made in investor calls) were incorrect.”  Accordingly, plaintiff failed to plead facts that raise a strong inference of scienter.

Finally, the Court denied Plaintiff leave to amend yet again, noting that the Court had already granted Plaintiff leave to amend once and that Plaintiff would not be able to cure the deficiencies identified in the second amended complaint and the previous complaints.