United States District Court, D. Connecticut
MINOHOR SINGH, Individually and On Behalf of All Others Similarly Situated, Plaintiff,
CIGNA CORP., ET AL., Defendants.
MEMORANDUM OF DECISION GRANTING DEFENDANTS'
MOTION TO DISMISS SECOND AMENDED COMPLAINT [DKT. 66]
VANESSA L. BRYANT UNITED STATES DISTRICT JUDGE.
Lead Plaintiff Minohor Singh (“Proposed Lead
Plaintiff” or “Singh”) brings this action
individually and on behalf of all others similarly
against Defendants Cigna Corp. (“Cigna”), Cigna
Chief Executive Officer David M. Cordani
(“Cordani”), Cigna Chief Financial Officer Thomas
A. McCarthy (“McCarthy”), former HealthSpring CEO
and Chairman of the Board of Directors Herbert A. Fritch
(“Fritch”), and Cigna Medicare Compliance Officer
Richard A. Appel (“Appel”) (collectively,
“Defendants”). The Second Amended Complaint
(“SAC”) alleges violations of sections 10(b) and
20(a) of the Securities Exchange Act of 1934 (the
“Exchange Act” or “Act”), codified
under 15 U.S.C. §§ 78j(b) and 78t(a) respectively,
and Rule 10b-5 promulgated by the Securities Exchange
Commission (“SEC”) under 17 C.F.R. §
240.10b-5, that occurred during the Class Period. Defendants
move to dismiss the case in its entirety for failure to
satisfy Rules 9(b) and 12(b)(6) of the Federal Rules of Civil
Procedure and the Private Securities Litigation Reform Act
(“PSLRA”). For the following reasons, the
Defendants' Motion to Dismiss is GRANTED.
following facts and allegations are taken from the SAC,
exhibits attached to the SAC, the public documents and
filings, or any other document upon which Plaintiff
references and relies.
is a health services organization incorporated in Delaware
that provides medical, dental, disability, life, and accident
insurance both in the United States and internationally.
[Dkt. 57 (Second Am. Compl.) ¶ 37]. In early 2012, Cigna
acquired HealthSpring, a managed health care organization
(“MCO”) focusing primarily on providing Medicare
Advantage and Part D medical insurance plans. See
Id. ¶¶ 50-51, 66. Cigna acquired HealthSpring
for $3.8 billion: its largest ever acquisition. Id.
¶ 62. HealthSpring was one of the largest private
Medicare insurers in the United States as of 2010.
Id. ¶ 57. Its Medicare Advantage and Part D
medical insurance plans are regulated by the Center for
Medicare and Medicaid Services (“CMS”).
Id. The acquisition was intended to create
“synergies” across Cigna's health insurance
offerings and to complement its commercial health business
for those who are current Cigna customers as they transition
to Medicare, id. ¶ 66. Prior to the
acquisition, CMS had never cited or sanctioned HealthSpring
for non- compliance and never prohibited marketing or selling
Medicare policies to new customers. Id. ¶ 60.
One year after the acquisition HealthSpring became
Cigna's largest source of revenue. Id. ¶
68. This growth continued throughout 2013 and 2014.
Id. ¶ 69.
alleges that the 2011 Form 10-K acknowledges Cigna would be
subject to CMS compliance reviews in light of the
HealthSpring acquisition, which could lead to changes in
business practices, fines, penalties, or other sanctions.
Id. ¶ 70. The Defendants' excerpt of the
2011 Form 10-K specifically states the success of the
acquisition “will depend on Cigna's ability to
integrate HealthSpring with its existing businesses and the
performance of the acquired business.” [Dkt. 66-28
(201110-K) at 37]. In addition, the 2011 Form 10-K recognizes
the integration will be complex, costly, time consuming, and
will likely pose various difficulties.Ultimately, “[i]f
Cigna is unable to integrate the HealthSpring business
successfully, or if the acquired business underperforms, it
could have a material adverse effect on Cigna's business,
results of operations and financial conditions.”
January 17, 2013, CMS publicly issued a memorandum to All
Medicare Advantage Organizations, Prescription Drug Sponsors,
Cost Plans, and Medicare-Medicaid Plans regarding the 2014
Application Cycle Past Performance Review Methodology Final.
[Dkt. 66-7 (Mot. Dismiss Ex. 6 (CMS Mem.)]. This memorandum
documents the review methodology used by CMS “to
evaluate the performance of all Medicare contractors”
and to “identify organizations with performance so
impaired that CMS would prohibit the organization from
further expanding its Medicare operations.”
Id. at 1. It applies to an organization's
application to offer Medicare benefits under a new contract
or in an expanded service area, and CMS may deny the
application if the past performance is out of compliance
pursuant to the methodology. Id. at 1. CMS
identified 11 performance categories for which
“negative performance points” may be assigned,
including a category for Compliance Letters and a category
for Enforcement Actions. Id. at 6. “The number of
potential negative performance points corresponds to the risk
to the program and our beneficiaries from deficient
performance in that particular area.” Id.
Pursuant to this memorandum, CMS Groups Directors will notify
the affected organizations during the application review
process if they will receive a Notice of Intent to Deny, so
that they may proactively withdraw applications. Id.
memorandum includes a chart and describes in detail the
differences between compliance letters:
Compliance Letter Type
Rationale for Weight
Notice of Non-Compliance
Mildest type of letter. Does not
contain specific language regarding
further compliance escalation or
other consequences should the
Formal communication that describes
the consequences of continued noncompliance;
weighted 3 times greater
than notices of non-compliance.
Warning Letter with a
The matter is serious enough to
warrant a written response from the
organization but not significant
enough to warrant a CAP.
CAP - Ad hoc compliance
Ad hoc CAPs represent the most
serious form of compliance notice.
Rated at twice the weight of warning
letters because the issuance of this
type of letter indicates continuing
and/or severe, systemic problems.
Id. at 7. The memorandum details that CMS calculates
a total Compliance Letter score and then ranks the contracts
in descending; the contracts in the 90thpercentile
receive an additional 2 negative performance points in the
Compliance Letter category. Id. at 8.
respect to CAPs, the memorandum states that ad hoc CAPs are
“relatively rare and are typically issued only when
other forms of interventions have failed to correct a problem
and/or the problem was especially egregious, ” noting
as well that “[r]eceiving more than one such CAP during
a performance period is a powerful indication of ongoing
performance problems.” Id. at 9. CAPs with
Beneficiary Impact are defined as those “related,
directly or indirectly, to a beneficiary's experience
with the services and protections the contracting
organization is required to provide. . . .”
Id. Examples include “proper administration of
the organization's beneficiary call center, ” as
well as the following:
4RX data submissions to CMS, enrollment and disenrollment
processing, application of correct low income subsidy (LIS)
status for plan members, volume of member complaints logged
into CMS' Complaints Tracking Module (CTM), failure to
provide appropriate Part D drugs, failure to apply safety
edits when processing claims, processing of member appeals
and grievances, marketing abuses, overall failure to
appropriately administer the Part D benefit, execution of
benefit coverage determinations, and formulary
Id. CAPs that are not a “significant threat to
beneficiaries (and therefore [present] no beneficiary impact
as defined here)” include “late reporting of
financial information to CMS.” Id.
CMS applies immediate sanctions, contracts under immediate
sanction but released before the end of the end of the
performance period receive 3 negative performance points.
Id. at 12. Sanctions still in place at the end of
the performance period yield 4 negative performance points,
bringing the possible total to 7 negative performance points
for immediate sanctions in the Enforcement Action category.
February 27, 2014, the first day of the Class Period, Cigna
filed its 2013 Form 10-K. [Dkt. 57 ¶ 119]. The 2013 Form
10-K states, “We have established policies and
procedures to comply with applicable requirements.”
Id. ¶ 120. Under the “Medicare
Regulations” section, Cigna recognized the right to
obtain payment, enroll and retain members as well as the
marketing and sales activities are heavily regulated by CMS,
but Cigna “expect[s] to continue to allocate
significant resources to [its] compliance, ethics and fraud,
waste and abuse programs to comply with the laws and
regulations governing Medicare Advantage and prescription
drug plan programs.” Id. ¶ 121.
Acknowledging that the Federal Government prioritizes the
prosecution of health care fraud and abuse, Cigna further
stated in the “Federal Audits of Government Sponsored
Health Care Programs” section that “[t]he
regulations and contractual requirements in this area are
complex, are frequently modified, and are subject to
administrative discretion. We expect to continue to allocate
significant resources to comply with these regulations and
requirements and to maintain audit readiness.”
Id. ¶ 122. Cordani certified that based on his
knowledge the 2013 Form 10-K did not contain “any
untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
report. . . .” Id. ¶ 123. McCarthy signed
a similar Sarbanes-Oxley Act (“SOX”)
certification of compliance. Id. ¶ 124.
2013 Form 10-K also contains a Risk Factor section, an
excerpt of which is submitted as an exhibit to the
Defendants' Motion to Dismiss. See [Dkt. 66-3 (Mot. Dismiss
Ex. 2, 2013 Form 10-K) at 18]. This section documents
“risks related to litigation, regulatory audits and
investigations” and states that such regulatory audits
or agency reviews could lead to “changes to or
clarifications of [Cigna's] business practices,
retroactive adjustments to certain premiums, significant
fines, penalties, civil liabilities, criminal liabilities or
other sanctions, including restrictions on [Cigna's]
ability to operate, that could have a material adverse effect
on [Cigna's] business, results of operation, financial
condition, and liquidity.” See Id. at 19. With
respect to risks involving Medicare participation, Cigna also
acknowledges that failure to comply with CMS and state
governmental contractual requirements can lead to
“fines or penalties that could impact [Cigna's]
profitability. See Id. at 20. Failure to comply with
state and federal health care laws and regulations can result
in “fines, limits on expansion, restrictions or
exclusions from programs or other agreements with federal or
state governmental agencies that could adversely impact
[Cigna's] business, cash flows, financial condition and
results of operation.” See Id. at 20-21.
alleges that CMS “cited” Cigna in April 2014
“for misleading advertising in October and November
2013 relating to its Florida MA and PDP offerings, ”
although the type of compliance letter is not specified.
[Dkt. 57 ¶ 117]. Later that year in October 2014, CMS
issued two separate notices of non-compliance “for
failure to provide required medical records and improper
payments to approximately 410 non-eligible medical service
October 2014, CMS's Medicare Parts C and D Oversight and
Enforcement Group (“MOEG”) published its 2013
Part C and Part D Program Annual Audit and Enforcement
Report. [Dkt. 66-6 (Mot. Dismiss Ex. 5, 2013 Audit Report)].
This annual audit publication is designed to “provide a
brief overview of the Part C and Part D program audit and
enforcement processes, a current and projected snapshot of
the program audit landscape, a summary of the program audit
and enforcement activities in 2013, and other highlights and
noteworthy developments in MOEG's operations since the
issuance of our 2012 annual report.” Id. at
3-4. The private companies that contract with CMS to provide
health and prescription drug benefits to Medicare
beneficiaries, i.e. “sponsors, ” can be audited
by MOEG through this program. See Id. at 7. MOEG
chooses certain sponsors based on “data-driven risk
assessment, ” which “generate[s] a risk score and
subsequent ranking for all sponsors. . . .”
Id. Both low and high ranking sponsors can be
chosen, and MOEG reserves resources to conduct Ad Hoc audits
and audits based on referrals. Id. MOEG's goal
for this program since its inception in 2010 is to
“audit every sponsor in the Part C and Part D programs
within a reasonable time period.” Id. at 11.
Cigna was not listed as an audited sponsor for 2013.
alleges that in December 2014, Cigna received five separate
notices of non-compliance for improper pharmacy coverage.
[Dkt. 57 ¶ 117]. Defendants submitted two warning
letters from December 2014 pertaining to the failure of Cigna
Healthcare of Arizona, Inc. and Bravo Health Pennsylvania,
Inc. to comply with Medicare Part D in administering Cialis
coverage contracts. See [Dkt. 66-16 (Mot. Dismiss
Ex. 15, Cigna of Ariz. Warning Letter); Dkt. 66-17 (Mot.
Dismiss Ex. 16, Bravo Warning Letter)].
also refers to Cigna's Code of Ethics and Principles of
Conduct (“Code of Ethics”), published in December
2014. Id. ¶ 127. McCarthy is cited in the Code
of Ethics as saying it is important to do things “the
right way, ” which includes reporting financial results
fairly and accurately. Id. ¶ 128. This is
because “shareholders who invest in us expect it, as do
the analysts who follow us” and accordingly
“it's so important for every employee on the global
Cigna team to handle[, ] maintain, and report on this
information in compliance with all laws and
regulations.” Id. The Code of Ethics also
includes a statement from Fritch acknowledging the
responsibility to act with integrity, including under
circumstances dealing with government officials. Id.
¶ 129. Proposed Lead Plaintiff believes these statements
were materially false and misleading when made because
Defendants knew about the notices of non-compliance, such
non-compliance constituted a “serious threat to the
health and safety” of Medicare patients and showed a
lack of integrity in dealing with government officials, and
CMS's notices would have a material impact on Cigna if
left unaddressed. Id. ¶ 130.
2014 Form 10-K filed on February 26, 2015, contains the same
compliance statements as those from the 2013 Form 10-K set forth
in the “Medicare Regulations” and “Federal
Audits of Government Sponsored Health Care Programs”
sections. Id. ¶¶ 133-34. It does not contain the
statement from 2013: “We have established policies and
procedures to comply with applicable requirements.”
Id. ¶ 120. The 2014 Form 10-K does include the
same language from the risk factor section as those alleged
in the 2013 Form 10-K above. Compare [Dkt. 66-2 at
18]; with [Dkt. 66-3 at 18]. Both Cordani and
McCarthy issued certifications substantially similar to that
which is stated above. Id. ¶ 135.
lists several compliance letters sent over the course of
2015, which are alleged to be addressed to Appel as the
Medicare Compliance Officer and establish violations that
later became the basis for the sanctions. See [Dkt.
57 ¶¶ 115-18]. In February 2015, Cigna “was
cited” for “inadequate claims processing systems
that ‘were not accurately configured to capture and
track the [maximum-out-of-pocket] amounts and ensure
appropriate payment, ” although the type of compliance
letter is not specified. Id. ¶ 117. The next
month Cigna received five separate notices of non-compliance
“for failure to provide required certifications and
failure to send members required timely explanations of
benefits.” Id. In April 2015, Cigna received
two notices “for wrongly discontinuing coverage for 433
members and improper denial of prescription coverage for more
than 1, 700 claims.” Id. In May, Cigna
received two separate notices of non-compliance “for
inaccurately describing benefits and failing to inform more
than 500 physicians of their appeal rights who had been
terminated by HealthSpring.” Id. Then in June
2015, Cigna received at least 21 separate notices or warning
letters “for failing to add a requisite class of
pharmaceuticals to its plan formulary and for failure to meet
call center timeliness requirements.” Id. In
July, CMS then sent Cigna at least 20 notices of
non-compliance, warning letters, and a Corrective Action Plan
Request “for failure to timely process enrollment
applications, double billing, submission of incorrect and
unreadable data for audit purposes, failure to submit
required plans to regulatory agencies, untimely processing of
approximately 1, 600 appeals or redetermination requests,
improper and untimely call center service, and failure to
maintain an adequate network.” Id. The SAC
does not specify to what topic the Corrective Action Plan
pertains. Cigna “was cited” in August 2015
“for failure to comply with pharmacy formulary
submission and review requirements, ” but the type of
compliance letter is unspecified. Id. In October
2015, Cigna “was cited” for “directing
customer coverage determination requests to a voicemail
October 13, 2015, CMS published its 2014 Part C and Part D
Program Audit and Enforcement Report. [Dkt. 66-5 (Mot.
Dismiss Ex. 4, 2014 Audit Report)]. Cigna was not listed as
an audited sponsor for 2014.
states that in December 2015, Cigna received 16 notices of
non-compliance or warning letters “for improper and
untimely call center service and failure to ensure the
accurate entry of Notice of Change/Evidence of Coverage
January 22, 2016, Cigna filed a Form 8-K disclosing that the
day prior CMS informed the company in a letter (“CMS
Letter”) that it would impose intermediate sanctions
suspending the enrollment of Medicare beneficiaries and the
marketing to new Medicare beneficiaries effective at 11:59
p.m. on January 21, 2016. Id. ¶ 101; [Dkt. 57-2
(Am. Compl. Ex. B., CMS Letter) at 1]. Cigna announced that
the sanctions were imposed on account of operative
deficiencies relating to its Parts C and D appeals and
grievances, Part D formulary and benefit administration, and
compliance program. [Dkt. 57 ¶ 102]. The Form 8-K states
that “Cigna is working to resolve these matters as
quickly as possible and is cooperating fully with CMS on its
review.” Id. ¶ 139; [Dkt. 66-9 (Mot.
Dismiss Ex. 8, Form 8-K (Jan. 21, 2016)), Item 8.01].
Proposed Lead Plaintiff alleges Cigna failed to acknowledge
the severity of the findings stated in the CMS Letter: that
Cigna's conduct was a “serious threat to the health
and safety of Medicare beneficiaries” and that the
violations resulted in delays, denials and increased costs
regarding medical services and prescription drugs.
Id. ¶ 103; [Dkt. 57-2 at 2].
Letter stems from an audit performed from October 5, 2015, to
October 20, 2015, and it notes that “Cigna has had a
longstanding history of non-compliance with CMS
requirements.” [Dkt. 57-2 at 2]. Specifically,
“Cigna has received numerous notices of non-compliance,
warning letters, and corrective action plans from CMS over
the past several years. Id. A number of these
notices were for the same violations discovered during the
audit, demonstrating that Cigna has not corrected issues of
non-compliance.” Id. Many of these notices of
non-compliance were sent during the Class Period, including a
notice of non-compliance sent as early as 2013. See
Id. at 5. A subsequent warning about continued
non-compliance was sent in 2015. Id. The CMS Letter
also cited the HealthSpring acquisition, which added over one
million beneficiaries to Cigna's operations,
“creat[ed] an organizations structure that is
decentralized and fragmented.” Id. Notably,
the CMS Letter states that on December 9, 2015, CMS met with
Cigna's senior leadership “to discuss the serious
nature of the deficiencies discovered during the
audit.” Id. The breakdown in operations,
according to the CMS Letter, is attributable to the failure
to integrate operations, which leads to inadequate monitoring
and oversight of Part C and D requirements. Id. In
failing to satisfy CMS regulations, Cigna
“substantially failed to provide its enrollees with
services and benefits. . . .” Id. ¶ 139;
[Dkt. 57-2 at 2].
stock fell from $140.13 closing price on Thursday, January
21, 2016, to $137.90 closing price on Friday, January 22,
2016. [Dkt. 57 ¶ 140]. By the end of the next closing
day, Friday, January 25, 2016, Cigna's stock price fell
receiving sanctions, Fritch announced in a media interview
that Cigna had internal quality review processes that
identified some areas prior to the audit findings.
Id. ¶ 114.
29, 2016, Cigna filed a quarterly report, Form 10-Q, for the
quarter ending June 30, 2016. Id. ¶ 143. This
report indicated that Cigna would reduce its 2016 financial
outlook due, in part, to substantial $30 million in costs to
remedy compliance violations related to the CMS sanctions.
Id. Such costs were expected to continue to grow
until sanctions could be remediated, which Cigna acknowledged
may not occur in a “timely and satisfactory manner. . .
.” Id. ¶ 144. Stock price fell from
$135.99 at closing on Thursday, July 29, 2016, to $128.96 at
closing on Friday, June 29, 2016. Id. ¶ 151. By
closing on August 2, 2016 (the third consecutive trading
day), stock price fell to $124.13, representing a drop of
$11.86 per share. Id. ¶ 152.
same day Cigna held an earnings conference call with analysts
where Cordani and McCarthy addressed Cigna's failure to
comply with regulations and the timing and costs for
remedying the violations. Id. ¶ 145. McCarthy
acknowledged the costs were higher than expected and that
they would continue at the same pace until violations were
fully redressed. Id. ¶ 146. Analysts expressed
concern about whether Cigna could resolve the audit issues
prior to the annual enrollment period (“AEP”)
beginning October 15 and ending December 7 each year.
Specifically, analysts understood that Cigna's inability
to participate in the AEP could lead to loss of membership
and impact revenue and earnings contributions. See
Id. ¶¶ 149-50.
the Class Period (February 27, 2014 to August 2, 2016),
Cordani sold 668, 529 shares and Fritch sold 455, 180 shares
of Cigna stock. Id. ¶¶ 176. Such sales
sharply contrast with their share sales from February 28,
2012 to January 21, 2014: Cordani sold 137, 621 shares and Fritch
sold 0 shares. Id. Proposed Lead Plaintiff alleges
that the timing of the sales are suspicious given CMS already
provided at least one notice of non-compliance but Cigna had
not yet publicly reported any substantial non-compliance.
See Id. ¶ 180. The stock sales, Proposed Lead
Plaintiff contends, are evidence of scienter. See
Id. ¶ 173.
Lead Plaintiff alleges the market prices of Cigna's
common stock became artificially inflated as a result of
Cigna's material misstatements and omissions.
Id. ¶ 183. This artificial inflation was
partially removed as a result of the stock prices falling
after the filing of the Form 8-K on January 22, 2016, and the
filing of the Form 10-Q on July 29, 2016. Id.
senior executives and/or directors, Cordani, McCarthy, and
Appel are alleged to have obtained confidential and
proprietary information about Cigna's operations,
compliance, information about Cigna's failure to comply
with regulations, including the 75 notices of non-compliance,
and the effects of non-compliance. See Id.
¶¶ 186-87. They took part in drafting, preparing
and/or approving information and reports circulated to the
public, shareholders, and investors, which contained material
misstatements and omissions. Id. ¶ 187. By
acting as senior executives and directors, Cordani, McCarthy
and Appel were “controlling persons” of a
publicly held company who had a duty under the Exchange Act
to disseminate accurate information or correct any incorrect
information. Id. ¶ 188.
Proposed Lead Plaintiff alleges that HealthSpring's
employees had “extensive institutional knowledge”
but nonetheless Defendants “systematically engaged in a
pattern of conduct in the wake of the acquisition that would
lead to the exodus of many of HealthSpring's regulatory
compliance employees, ” which included some
confidential witnesses. Id. ¶ 77. Confidential
witnesses reported that Cigna replaced HealthSpring's
senior leadership team with new senior leadership from Cigna
who were inexperienced with Medicare compliance, id.
¶ 78, and Cigna underpaid its compliance employees
resulting in high turnover, id. ¶ 80. As such,
approximately 90% of the employees brought in were legacy
Cigna employees with little to no experience in CMS
regulations or compliance. Id. ¶ 82. Appel
chose not to seek out legacy HealthSpring employees with
institutional knowledge about compliance. Id. ¶
84. As Medicare Compliance Officer, Appel “was legally
Cigna's most senior officer charged with ensuring
CMS's Medicare regulations were followed” and
therefore was legally responsible for reporting compliance
problems up the chain of senior management, including
Cordani, McCarthy, and Fritch. Id. ¶ 90
(emphasis omitted). Cigna also elected to reduce customer
service staff during this time. Id. ¶ 91.
addition to the turnover from HealthSpring to Cigna
employees, data processing systems failed to properly
integrate patient information stored by the two companies.
Id. ¶ 93. Without a centralized system Cigna
could not quickly and accurately access information necessary
to patient or provider needs. Id. ¶ 95.
HealthSpring's Vice President of Health Services, Claudia
Douds, issued a plan in response to findings from internal
audits that Cigna was out of compliance; despite its
estimated cost of less than $5 million, Cigna rejected the
plan and continued to oust HealthSpring legacy employees with
significant experience. Id. ¶ 98. CMS
sanctioned Cigna for non-compliance in January 2016, by the
next month Cigna had not developed a plan to fully integrate
the system. Id. ¶ 100.
September 6, 2016, CMS published its 2015 Part C and Part D
Program Audit and Enforcement Report. [Dkt. 66-4 (Mot.
Dismiss Ex. 3, 2015 Audit Report)]. Cigna was listed as an
audited sponsor for 2015. It received a worse than average
audit performance with a score of 1.90, wherein the average
was 1.76 and the lower audit score represents better
performance. See Id. at 15. Specifically, Cigna
received a better than average score for Compliance Program
Effectiveness, id. at 16; Part D Coverage
Determinations, Appeals, and Grievances, id. at 18;
and Special Needs Plans Model of Care, id. at 20;
but it received a worse than average score for Part D
Formulary and Benefit Administration, id. ...