Appeal from the United States District Court for the Northern District of Illinois, Eastern Division.
Nos. 93 C 1970, 93 C 1978, 93 C 1995, 93 C 2102, 93 C 2110, 93 C 2111 and 93 C 2295--Paul E. Plunkett, Judge.
Before CUMMINGS, COFFEY and RIPPLE, Circuit Judges.
In this securities-fraud class action, plaintiffs, purchasers of HealthCare Compare Corporation's ("HealthCare") common stock, claim they were defrauded when a company press release expressing discomfort with analysts' high revenue and earnings estimates caused HealthCare's stock to decline more than 30 percent in one day. Plaintiffs claim that HealthCare knew the analysts' estimates were too high well before issuing the press release, and before making earlier public statements of comfort with the estimates. Plaintiffs' complaint survived a motion to dismiss in the district court, but we agreed to hear this interlocutory appeal pursuant to 28 U.S.C. sec. 1292(b) and now reverse.
HealthCare is an independent provider of medical utilization review and preferred provider organization services. Medical utilization review is a system of monitoring the medical necessity and appropriateness of certain health care services prescribed for participants in health care and medical plans. In connection with preferred provider organizations, HealthCare is retained by payors of health care benefits and medical costs to design, structure, negotiate, and manage a network of medical providers and arrange for discounted health care costs with providers of health services. HealthCare's common stock is publicly traded on the NASDAQ market (National Association of Securities Dealers Automated Quotation System). Its revenues consist of fees for cost management services provided under contracts and fixed monthly charges for each participant in client-sponsored health care plans, excluding covered dependents.
The present controversy concerns three different forward-looking statements made by HealthCare early in 1993. The statements form the basis of plaintiffs' securities fraud claim. The first statements, made on February 2 and 9, were public statements of comfort with the range of analysts' estimates at the time for fiscal 1993 revenues and earnings, the earnings estimates ranging from $1.20 to $1.25 per share. The second statement consisted of field sales and year-end revenue estimates in a February 24 internal memorandum. The memorandum was compiled by Joseph Whitters, HealthCare's Chief Financial Officer, and was sent to Chief Executive Officer James Smith. The third statement was a March 30 press release indicating that HealthCare was "uncomfortable" with earlier analysts' estimates of year-end revenues and earnings that exceeded $160 million and $1.10 per share. The announcement in effect revised the prior February comfort statements of 40 percent growth down to a projected 30 percent growth rate for the calendar year. On the next trading day, HealthCare's stock declined $5 5/8, closing at $12 7/8--a drop of more than 30 percent. The first complaint was filed by plaintiffs within 24 hours. *fn1
Plaintiffs assert that the positive public representations about HealthCare's business prospects for Fiscal 1993 prior to March 30 were made even though HealthCare had information demonstrating that it would not meet the $1.20-$1.25 earnings projections. They assert that HealthCare knew it would not meet earnings projections because of lower-than-expected insurance plan enrollments at year-end 1992.
HealthCare's knowledge of adverse developments in the business was confirmed, plaintiffs argue, by the February 24 internal memorandum in which Whitters reported a revised revenue forecast. Specifically, the memorandum shows a reduction in 1993 revenues from $172,456,000 (estimated as of September 28, 1992) to $154,350,000 as of February 24, 1993. When HealthCare made its March 30 public announcement, the revised downward projection was attributed to a decrease in enrollments in previously announced contracts with The Federal Employees Health Benefit Plan (FEHBP) and other third-party contracts.
Plaintiffs filed a class action in district court alleging securities fraud against HealthCare and its officers, Whitters and Smith. The class consists of persons who purchased HealthCare's common stock from February 2, 1993 through and including March 30, 1993.
Plaintiffs claimed that they were defrauded when the price of HealthCare's stock declined after the March 30 press release. Following the entry of a Pretrial Order consolidating plaintiffs' individual actions, plaintiffs filed an Amended Consolidated Complaint. The district judge, upon defendants' motion, dismissed the complaint on June 1, 1994 for failure to meet the particularity requirement of Fed. R. Civ. P. 9(b) and for failure to state a claim under Securities Exchange Commission Rule 10b-5. Plaintiffs were given leave to file an amended complaint, which they did, for the first time incorporating allegations based on the February 24 internal memorandum. On February 13, 1995, the district court issued an order upholding the allegations pled in the Second Amended Complaint, and on March 10 Judge Plunkett certified the order for interlocutory appeal. We later granted defendants' petition for permission to appeal the interlocutory order of February 13 pursuant to 28 U.S.C. sec. 1292(b).
Whether the district court correctly refused to dismiss the complaint is a question of law that we review de novo. Motions to dismiss that test the legal sufficiency of a complaint are granted when the plaintiff "can prove no set of facts" entitling it to relief. Conley v. Gibson, 355 U.S. 41, 45-46. In reviewing a motion to dismiss, all facts alleged in the complaint and any inferences reasonably drawn therefrom must be viewed ...