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In Re Cigna Corp. Securities Litigation
Citations: 459 F. Supp. 2d 338; 2006 U.S. Dist. LEXIS 59915; 2006 WL 2975386Docket: Civil Action 02-8088
Court: District Court, E.D. Pennsylvania; August 18, 2006; Federal District Court
In the securities fraud class action involving CIGNA Corp., the defendants, including CIGNA and Hewitt Associates LLC, filed a Motion for Summary Judgment, arguing that the Pennsylvania State Employees Retirement System (SERS) could not demonstrate economic loss or loss causation. SERS purchased significant amounts of CIGNA stock before and during the damage period (November 1, 2001, to October 24, 2002) but sold more stock as prices rose during that time. Consequently, SERS's overall trading resulted in a net gain rather than a loss. The defendants requested the court to dismiss SERS's claims based on the assertion that SERS did not suffer damages. However, the court declined to grant summary judgment, citing a lack of authoritative appellate precedent for the defendants' argument and emphasizing the Seventh Amendment right to have a jury determine damages. The court acknowledged that while the defendants' theory might be convincing to a jury, it would allow for further examination of the issues at trial. The procedural history includes SERS's motion to amend its complaint and a previous ruling that allowed additional allegations regarding loss causation. Defendants also noted instances where SERS sold shares for less than their purchase price but maintained that, overall, SERS did not incur a net loss in its CIGNA stock transactions. Defendants argued that the Court should evaluate the Lead Plaintiff's overall economic standing at the end of the class period, rather than focusing on individual transactions, to assess economic loss. The case of Dura Pharmaceuticals established that the Private Securities Litigation Reform Act (PSLRA) requires proof of 'economic loss' and 'loss causation'—a link between misrepresentation and loss. The Supreme Court clarified that an inflated purchase price alone does not equate to economic loss, particularly if shares are sold before the truth is revealed. The Court noted that while Dura Pharmaceuticals supports the Defendants' interpretation of economic loss, applying it to this case may require an unwarranted extension of existing precedent. Consequently, the Court denied the Defendants' Motion to Dismiss without prejudice, allowing for expedited discovery and expert reports regarding economic loss and causation. SERS filed a Revised Consolidated Amended Class Action Complaint on January 9, 2005, and CIGNA subsequently filed a second Motion to Dismiss on February 7, 2006. The Court partially granted and partially denied this motion on March 24, 2006, instructing SERS to submit a new complaint with specified deletions by March 30, 2006. By August 18, 2006, merits discovery was largely concluded. SERS managed its domestic equities portfolio with twenty-three external investment managers, maintaining positions in CIGNA shares across six accounts. The investment managers had varied strategies, including long and short transactions. Disputes surrounding SERS's trading in CIGNA stock primarily arise from factual contentions intermingled with legal arguments, notably regarding the valuation of CIGNA stock purchased prior to the class period. Despite these disputes, the Court can ascertain two fundamental facts for deciding the motion based on financial records and party statements. SERS sold significantly more CIGNA stock during the class period than it purchased, with sales totaling 189,200 shares compared to purchases of 36,800 shares, resulting in a net sale of 152,400 shares. SERS profited from these sales. It specifically identified 5,000 shares purchased in its First Quadrant account, which were still held at the end of the class period, although it is unclear if these shares are included in the Defendants' purchase figures. Additionally, SERS opened and maintained a short position of 3,900 CIGNA shares during this period, leading to a net long position of at least 1,100 shares held at the close of the class period on October 24, 2002. Both SERS and CIGNA presented expert opinions. SERS's experts, Drs. Scott Hakala and Steven Feinstein, and CIGNA's experts, Drs. John Peavy and Bruce Stangle, have differing methodologies regarding damages in securities cases. Dr. Hakala contends that following a decline in CIGNA's stock price, SERS experienced both investment and economic losses related to its transactions during the class period. He emphasizes the importance of matching specific sales with purchases in a consistent economic manner, advocating for matching by account rather than netting across the entire portfolio. He recommends FIFO or specific identification methods for accounting, asserting these reflect economic substance better than LIFO. After applying these matching principles, Dr. Hakala concludes that SERS incurred both investment and economic losses in segregated accounts. Dr. Peavy, representing the Defendants, discusses modern portfolio theory (MPT), which advocates for an investment strategy focused on the performance of an entire portfolio rather than individual securities. MPT emphasizes diversification to manage portfolio risk by limiting exposure to any single security. SERS applies MPT principles in its investment management, focusing on risk control through asset allocation and utilizing external managers. Dr. Peavy notes that SERS typically does not concentrate on individual securities, except in rare cases, such as with CIGNA stock, where attention would be based on aggregate holdings across managers. He critiques Dr. Hakala's methodology for estimating SERS's losses, arguing it misapplies market portfolio theory by mismatching trades across separate accounts and incorrectly referencing FIFO, LIFO, and cost accounting, which are not applicable to equity investments governed by GAAP and FASB standards. Dr. Peavy asserts that Dr. Hakala's use of FIFO and average cost methodologies incorrectly includes unrealized losses from before the class period, inflating loss estimates. He advocates for using the closing market price of CIGNA stock on November 1, 2001, for accurate gain calculations, concluding that SERS actually experienced a gain of approximately $1.9 million during the class period. Dr. Stangle supports this analysis, highlighting that SERS was primarily a net seller of CIGNA shares during the class period, suggesting that any prior purchases not inflated would result in no economic loss if sold at inflated prices. Dr. Stangle concludes that SERS engaged in significant trading of CIGNA stock, selling 189,200 shares while purchasing only 36,800 shares during the class period, resulting in a net sale of 152,400 shares. He opines that it is "highly unlikely" SERS incurred any economic loss from this trading, asserting that profits from sales at inflated prices offset any potential losses from purchases at inflated prices. Dr. Stangle criticizes Dr. Hakala's assertion that SERS was a net purchaser, claiming that Dr. Hakala's conclusions lack factual support and are based on flawed methodology, particularly the use of FIFO accounting, which he believes exaggerates SERS's losses. Instead, Dr. Stangle advocates for LIFO accounting and primarily for fair market value accounting, which he claims indicates an investment gain of nearly two million dollars for SERS in CIGNA. Dr. Feinstein, aligned with Dr. Hakala, emphasizes the importance of matching buy and sell trades in individual accounts. He concludes that SERS suffered an economic loss on CIGNA shares held from the class period, particularly those in the First Quadrant account, despite gains in the Standish Mellon account. Dr. Feinstein criticizes the fair market value accounting method endorsed by Drs. Peavy and Stangle, arguing it is inconsistent with PSLRA litigation requirements and improperly blends shares purchased before and during the class period. He contends that the methodology used by Drs. Peavy and Stangle inaccurately computes economic loss by including irrelevant profits from pre-class period purchases and failing to account for price changes due to alleged misrepresentations. Dr. Feinstein supports FIFO accounting as the appropriate method, countering Drs. Peavy and Stangle's critique of it and asserting its common use in securities cases. He also agrees with Dr. Hakala's cost basis methodology to determine the beginning value of SERS's CIGNA shares. Dr. Feinstein argues against the critiques by Drs. Peavy and Stangle regarding Dr. Hakala's cost basis methodology, claiming their position assumes that losses before the class period were unaffected by alleged misrepresentations, lacking any loss causation analysis or evidence. He disputes Dr. Peavy's endorsement of Modern Portfolio Theory (MPT), asserting that fraud impacting any individual investment reduces the overall portfolio's performance and results in real dollar losses, regardless of diversification. Dr. Feinstein emphasizes that even with MPT, losses from a single security negatively affect the entire diversified portfolio. In the dispute over economic loss, the Defendants argue that SERS should consider all transactions in CIGNA stock during the class period collectively, asserting that SERS's claim of loss in one account contradicts the overall gain across all accounts. They maintain that treating transactions separately contradicts MPT principles and suggest that SERS's overall net selling during a price rise indicates no economic loss. Even if CIGNA's stock was artificially inflated, Defendants claim SERS ultimately benefited financially from the inflated prices. Conversely, SERS argues that Defendants have not proven that SERS lacks evidence of economic loss, highlighting genuine factual disputes related to the inflation of CIGNA's stock price, its removal after the October 24, 2002 press release, and any corrective events prior to that date. SERS insists that the issues at hand involve economic loss and damages, which differ from mere investment loss, as outlined under federal securities laws. SERS challenges the Defendants' arguments regarding its alleged investment gain, asserting that the methodologies employed (MPT, fair market value accounting, and AIMR-PPS) are inappropriate for calculating gain or loss in federal securities litigation. SERS indicates that the Defendants’ offset theory, which involves netting across investment manager accounts, has been consistently rejected by courts and contradicts established law under the PSLRA. SERS claims that accepting the Defendants' motion would require the Court to ignore factual evidence and established legal principles, including: 1. Disregarding SERS's purchase and retention of 5,000 shares of CIGNA stock during the relevant period. 2. Accepting that gains and losses unrelated to the Defendants' actions are relevant for determining economic loss, contrary to established case law. 3. Allowing economic gains to offset economic losses, which is against legal precedent. 4. Ignoring both parties' expert consensus that quantifying economic loss requires event studies to assess inflation caused by the Defendants' conduct. 5. Making determinations about irrelevant issues regarding investment loss calculation methods (FIFO, LIFO, fair market value accounting, and dividend offsets). In the context of fraud on the market cases, plaintiffs must demonstrate economic loss and loss causation, which entails showing that the purchased securities were worth less than what was paid due to alleged misrepresentations. Courts typically apply an out-of-pocket measure of damages, assessing the difference in fair value attributable to fraudulent conduct. The Third Circuit emphasizes that economic loss should reflect the unrecovered inflation in the purchase price directly linked to the alleged fraud, and if the security's value does not decline as a result of misrepresentation, there can be no economic loss established. Rule 10b-5 and the PSLRA do not specify a particular economic theory or method for quantifying economic loss. Prior to the Dura Pharmaceuticals decision, some lower courts employed a 'transaction-based' methodology, treating each transaction as separate and allowing claims for unprofitable transactions without offsetting gains from profitable ones, thereby rejecting arguments based on net selling. Judge Dalzell, in various rulings, argued against aggregating transactions, asserting that allowing offsets undermines the aim of deterring fraud, consistent with Judge Sneed's views in Green v. Occidental Petroleum Corporation regarding the fairness of compensating losses without recognizing gains from misrepresentation. Conversely, some courts criticized this approach; for instance, in In re Comdisco Securities Litigation, the court found that a plaintiff's use of a FIFO method misleadingly portrayed losses due to prior gains. Similarly, in Arenson v. Broadcom Corp., the court denied claims from plaintiffs who profited from selling shares at inflated prices, emphasizing that damages should account for total inflation losses balanced against gains from sales at inflated prices, as noted in Wool v. Tandem Computers Inc. Judge Scheindlin's opinion in In re eSpeed, Inc. Sec. Litig. also reflects on methodologies for selecting lead plaintiffs in securities litigation. The Court favored one party over another regarding damage calculations related to alleged fraud, determining that the losses claimed by one party were mitigated by high stock price sales not accounted for using the plaintiff's "first-in-first-out" (FIFO) accounting method. In contrast, the selected Lead Plaintiff employed a "last-in-first-out" (LIFO) method, which effectively offset gains from stock sales during the class period, providing a more accurate reflection of true damages. The Court referenced various precedents that favor LIFO over FIFO for damage calculations, noting that the Third Circuit had not previously addressed this issue. The Court raised concerns about adopting a specific theory for summary judgment, highlighting discrepancies in how different cases treated transactions during the class period. For instance, in the Comdisco case, only the cost of shares bought during the class period was deducted from total sales, whereas other cases emphasized the relevance of transactions solely within that period. The claim by FSBA hinged on losses from Schering Plough stock purchases made during the class period, rendering earlier capital gains irrelevant. The Court noted that cases like Comdisco and In re eSpeed interpret "largest financial interest" in lead plaintiff selection, suggesting that this term does not equate to damages. It also emphasized the absence of specific share transactions in those cases, which contrasted with the current case where such evidence exists, supporting the plaintiff's right to recover losses on shares held when prices fell due to alleged fraud. Regarding the implications of Dura Pharmaceuticals, the Supreme Court clarified that securities laws aim to maintain market confidence and deter fraud, allowing private actions only for actual economic losses resulting from misrepresentations, not for general market downturns. Dura Pharmaceuticals rejected the Ninth Circuit's stance that merely showing an inflated purchase price sufficed for pleading, thereby reinforcing the need for a direct link between misrepresentations and economic losses. An inflated purchase price alone does not establish or directly cause economic loss, according to the Court's holding. No appellate court has addressed the implications of Dura Pharmaceuticals on demonstrating economic loss and damages at trial, nor has any court ruled on similar facts regarding summary judgment. In re Sepracor Inc. Securities Litigation rejected the defendants' claim that plaintiffs' profits from other transactions should offset losses revealed by fraud, although it did not cite Dura Pharmaceuticals. The ruling in Dura Pharmaceuticals primarily addressed the adequacy of initial pleadings and did not delve into methods for quantifying economic loss. The Supreme Court's discussion did not include Judge Sneed's out-of-pocket damages approach, indicating a lack of endorsement for specific economic loss principles. Dura Pharmaceuticals clarified that it did not consider issues of proximate cause or loss beyond direct investor protection against losses from misrepresentations. Thus, there is no explicit ruling that prevents an investor from recovering losses from identified transactions nor does it consider other trading of the company's stock relevant to such claims. The Court tentatively concludes that Dura Pharmaceuticals does not alter existing laws regarding economic loss and damages in securities cases. The defendants proposed using economic models based on investment theory to measure losses, suggesting netting profits and losses during the class period, which the Court finds questionable, particularly since it involves stock sales prior to the damage period. The Court finds no compelling legal authority to endorse an economic theory or causation analysis that contradicts established damage calculations in fraud on the market cases during summary judgment. It acknowledges sufficient authority for a jury to utilize a transaction-based methodology for calculating economic loss and damages based on adequate evidence, rather than a cumulative approach aggregating gains and losses from various transactions. The determination of damages should be made at trial instead of at the summary judgment stage. Although SERS did not experience an economic loss from its overall transactions in CIGNA stock, this does not warrant summary judgment in favor of CIGNA. The Court emphasizes that if SERS's stock purchases occurred entirely within the class period, the defendants' claims regarding economic loss would be stronger. It rejects the notion of adopting a narrow economic theory based on limited case support as a binding legal principle at this stage. The Court will defer any conclusive rulings on the defendants' arguments until a trial record is established, allowing SERS to present evidence concerning its investments in CIGNA. Most shares sold by SERS during the class period were purchased prior, raising questions about jury instruction on the relevance of these purchases and the treatment of gains from sales during the class period. There is no appellate mandate favoring either FIFO or LIFO methods for jury instruction, and if the jury accepts SERS's transaction-based theory, this distinction may become irrelevant. Lastly, SERS, while maintaining its Lead Plaintiff status, is not acting as a class representative, and granting summary judgment against it would not facilitate the resolution of the litigation, given that other plaintiffs are permitted to continue the case as a class action. Two class representatives have been established, and there is no dispute regarding economic loss, making SERS's motion significant but not crucial to the case's outcome. The case will be tried as a class action, meaning SERS's transactions in CIGNA stock will not considerably influence CIGNA's liability. Granting summary judgment would infringe upon the Plaintiffs' Seventh Amendment right to a jury trial concerning damages. Citing Feltner v. Columbia Pictures Television, Inc., the Court emphasizes that damage assessment traditionally falls within the jury's domain, and any limitation on this right warrants careful scrutiny, as seen in previous cases like Dimick v. Schiedt and Story Parchment Co. v. Paterson Parchment Paper Co. There are material disputes regarding the inflation attributed to alleged fraud and the effects of "corrective events" on CIGNA stock prices. Experts disagree on whether the alleged fraud was the sole cause of the inflation and the impact of earlier corrective events. These disputes are crucial for determining SERS's economic loss, indicating that the complexity of the issues is best left to a jury. The Court concludes that: (1) Dura Pharmaceuticals does not necessitate changes in how economic loss is analyzed; (2) the investment model proposed by Defendants is not suitable for measuring economic loss under federal securities laws; (3) a transaction-based methodology, previously used by courts, remains applicable; (4) SERS has a legitimate claim for economic loss based on specific shares held; (5) material fact disputes render summary judgment inappropriate; and (6) a jury should determine relevant facts for calculating damages. Therefore, the Court denies the Motion for Summary Judgment Based on Lack of Economic Loss without prejudice. An appropriate order will follow. Defendants' Motion for Summary Judgment Based on Lack of Economic Loss is denied without prejudice. The document highlights the "damage period" in securities fraud cases, indicating the timeframe when stock prices are allegedly inflated due to fraudulent statements, ending with corrective disclosures that typically result in price drops. Following a previous memorandum, a revised pretrial scheduling order was issued, directing SERS to file an amended complaint and setting discovery deadlines regarding economic loss. Additionally, SERS has been allowed to include two other proposed class representatives, prompting Defendants to question SERS's status as Lead Plaintiff. A dispute exists regarding the timing of CIGNA shares sold during the class period, though it is noted that SERS sold more shares than it purchased. Dr. Hakala defines investment loss as the difference between purchase and sale prices of shares, while economic loss pertains to losses incurred from selling shares at less than inflated prices. The Court adopts "economic loss" terminology for clarity. The excerpt also explains LIFO and FIFO methods for matching stock sales to purchase prices and discusses Modern Portfolio Theory (MPT) in assessing investment risk through the combined expected return and risk profile of a portfolio. Dr. Peavy emphasizes the importance of the total rate of return as a performance measurement statistic. A security's market value, rather than cost basis or book value, is the most accurate measure of investment performance, as recognized by SERS and its auditors in compliance with GAAP. Dr. Hakala's analysis includes various stock prices for CIGNA on November 1, 2001, noting discrepancies between account values and the actual market closing price. Additionally, Dr. Peavy criticizes Dr. Hakala's exclusion of CIGNA's cash dividend payments, which may lead to an understated total rate of return. Dr. Feinstein asserts that his conclusions hold regardless of FIFO or LIFO accounting methods and highlights that the PSLRA mandates a 90-day rule for valuing remaining shares, which Dr. Feinstein finds flawed due to assumptions about netting losses and gains and the inflation of CIGNA's share price prior to the class period. Feinstein also rejects the AIMR-PPS methodology suggested by Peavy and Stangle for calculating damages, arguing it does not reflect actual dollar profit or loss. While defendants critique Dr. Hakala's approach, SERS maintains that any disputes raised do not affect the existence of its inflationary economic loss on shares at the end of the class period. Lastly, Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 prohibit deceptive practices in securities transactions, laying the groundwork for private damages actions similar to common-law tort actions, as established by Supreme Court precedents. A plaintiff must demonstrate that the market reacted negatively to a corrective event or the revelation of concealed risks, as established in cases such as Lentell v. Merrill Lynch and In re Tellium, Inc. Securities Litigation. The requirement for a corrective disclosure is emphasized, as shown in In re Compuware Securities Litigation, where selling shares before the truth emerged negated claims of loss causation. If there is no market correction, losses from alleged misrepresentations can be recouped by reselling the security at the inflated price. The current case differs from Argent, which focused on netting gains against losses post-damage period, whereas the present situation involves transactions with mixed gains and losses during the class period. Judge Pisano's ruling in In re Royal Dutch/Shell Transport Securities Litigation reaffirmed that the standards for pleading economic loss and loss causation in the Third Circuit remain unchanged by Dura Pharmaceuticals, although the implications for proof and measurement at summary judgment were not addressed. The Court also notes that in Sepracor, a different scenario arose regarding offsetting transactions across different types of securities. The Supreme Court’s decision in Dura rejected claims of loss solely based on inflated purchase prices, without ruling on the current situation. Evidence suggests that SERS had minimal input into the CIGNA stock purchases made by its investment managers. The securities laws originated during the 1930s Great Depression to protect individual investors from fraud. Prior to the Private Securities Litigation Reform Act (PSLRA), most securities fraud lawsuits were filed by individual investors claiming stock price inflation due to fraud. Post-PSLRA, larger entities, like retirement and pension funds, have become the primary plaintiffs, with investment decisions made by managers using advanced tools rather than individual stock owners. This shift may not be relevant under the fraud-on-the-market theory and does not affect the ruling on economic loss in summary judgment. Applying a transaction-based approach, the State Employees' Retirement System (SERS) experienced a loss on 5,000 shares bought during the class period, with a net long position of 1,100 shares after accounting for short holdings. SERS's status as a net seller does not negate its claim of loss on specific shares. The ruling emphasizes that if CIGNA engaged in market fraud, it cannot offset SERS's losses by claiming gains from other transactions. The core purpose of securities laws is to deter fraud, making dismissal of SERS's claims at this stage inappropriate. The Court may consider submitting special interrogatories to the jury regarding SERS's economic loss, which would influence potential damages but not liability issues. There may be other class members with similar claims against CIGNA, and the possibility of SERS representing a subclass should be explored. Typically, out-of-pocket loss is the standard for 10b-5 suits, but courts have discretion to assess damages through different methods, including benefit of the bargain or rescission. The Court does not rule out the potential for SERS to seek alternative damages, even if there was no net economic loss in its CIGNA transactions, as supported by prior case law.