McLeod v. Innovage Holding Corp.. et al

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IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLORADO
Judge William J. Martínez
Civil Action No. 21-cv-2770-WJM-SKC
EL PASO FIREMEN & POLICEMEN’S PENSION FUND,
SAN ANTONIO FIRE & POLICE PENSION FUND, and
INDIANA PUBLIC RETIREMENT SYSTEM, individually and on behalf of all others
similarly situated,
Plaintiffs,
v.
INNOVAGE HOLDING CORP.,
MAUREEN HEWITT,
BARBARA GUTIERREZ,
J.P. MORGAN SECURITIES LLC,
BARCLAYS CAPITAL INC.,
GOLDMAN SACHS & CO. LLC,
CITIGROUP GLOBAL MARKETS INC.,
ROBERT W. BAIRD & CO. INCORPORATED,
WILLIAM BLAIR & COMPANY, L.L.C.,
PIPER SANDLER & CO.,
CAPITAL ONE SECURITIES, INC.,
LOOP CAPITAL MARKETS LLC,
SIEBERT WILLIAMS SHANK & CO., LLC, and
ROBERTS & RYAN INVESTMENTS, INC.,
Defendants.
ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS’ JOINT
MOTION TO DISMISS AMENDED CLASS ACTION COMPLAINT
This securities fraud action arises out of alleged false and misleading statements
made by Defendant InnovAge Holding Corp. (“InnovAge” or the “Company”) and its
former executives regarding InnovAge’s business practices, the success of its growth
strategy, and the potential impact of audits by government agencies in the highly
regulated Program of All-Inclusive Care for the Elderly (“PACE”) industry. Lead
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Plaintiffs El Paso Fireman & Policemen’s Pension Fund, San Antonio Fire & Police
Pension Fund, and Indiana Public Retirement System (collectively, “Lead Plaintiffs”)
bring this action pursuant to Sections 10(b) and 20(a) of the Securities Exchange Act of
1934, 15 U.S.C. §78j(b) and §78t(a), and Securities and Exchange Commission (“SEC”)
Rule 10b-5, promulgated thereunder by the SEC, 17 C.F.R. §240.10b-5 (the “Exchange
Act”), Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, 15 U.S.C. §§ 77k,
771(a)(2), and 77o (the “Securities Act”), on behalf of themselves and other purchasers
of InnovAge securities. (ECF No. 54.) There are two putative classes in this action: (1)
a class of all purchasers of InnovAge securities between March 4, 2021, and December
22, 2021, for claims brought under the Exchange Act; and (2) a class of all persons who
purchased publicly traded common stock of InnovAge in or traceable to its March 4,
2021, initial public offering (“IPO”).
Currently before the Court is Defendants InnovAge; Maureen Hewitt and Barbara
Gutierrez (together, the “Officer Defendants”); John Ellis Bush, Andrew Cavanna,
Caroline Dechert, Edward Kennedy, Jr., Pavithra Mahesh, Thomas Scully, Marilyn
Tavenner, Sean Traynor, and Richard Zoretic (collectively, the “Director Defendants”);
and Welsh, Carson, Anderson & Stowe (“WCAS”) and Apax Partners, L.P.’s (“Apax”)
(altogether, “Defendants”) Joint Motion and Brief to Dismiss the Amended Class Action
Complaint for Violations of the Federal Securities Laws (“Motion”) pursuant to Federal
Rules of Civil Procedure 8, 9(b), and 12(b)(6). (ECF No. 73.) For the reasons
explained below, the Motion is granted in part and denied in part.
I. BACKGROUND
The following factual summary is drawn from Lead Plaintiffs’ Amended Class
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Action Complaint for Violations of the Federal Securities Laws (“Amended Complaint”)
(ECF No. 54), except where otherwise stated.1 The Court assumes the factual
allegations contained in the Amended Complaint are true for the purpose of deciding the
Motion to Dismiss. See Ridge at Red Hawk, L.L.C. v. Schneider, 493 F.3d 1174, 1177
(10th Cir. 2007).
Lead Plaintiffs are pension funds operated to benefit public employees and
retirees (e.g., firefighters, police officers, and teachers and professors of public schools
and universities) in Texas and Indiana. (¶ 22–24.)2 Lead Plaintiffs purchased InnovAge
common stock at artificially inflated prices in or traceable to the IPO. (¶ 25.)
A. The Parties
InnovAge is a healthcare company focused on PACE services. (¶ 26.) InnovAge
was incorporated as a nonprofit corporation in Colorado from May 2007 until May 2016.
(See id.) In May 2016, it reincorporated as a Delaware for-profit corporation while
maintaining its principal place of business in Colorado. (Id.) InnovAge accomplished
this transition into a for-profit business model with assistance from WCAS, a private
equity firm that bought a $196 million stake in the Company in May 2016. (¶ 27.) In
July 2020, Apax, another private equity firm, and WCAS entered an agreement for Apax
1 Defendants have also filed a separate Request for Judicial Notice in Support of Joint
Motion to Dismiss Amended Class Action Complaint for Violations of the Federal Securities
Laws (“Request for Judicial Notice”). (ECF No. 76.) Lead Plaintiffs filed a response to the
Request for Judicial Notice. (ECF No. 80.) Lead Plaintiffs do not object to the Court taking
judicial notice of the documents submitted by Defendants; however, they urge the Court to resist
Defendants’ attempts to use these documents to dispute well-pleaded facts in the Amended
Complaint. (Id. at 4.) The Court takes notice of these documents pursuant to Federal Rule of
Evidence 201. Fed. R. Evid. 201(c)(2) (“The Court: . . . (2) must take judicial notice if a party
requests it and the court is supplied with the necessary information.”).
2 Citations to paragraph numbers, without more, e.g. (¶__), are to paragraphs in Lead
Plaintiffs’ Amended Complaint. (ECF No. 54.)
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to acquire a 49% stake in the Company and for the two firms to cause InnovAge to
become a public company. (¶ 28.)
Together, WCAS and Apax beneficially own approximately 86% of InnovAge’s
common stock, and therefore, control the vote of all matters subject to shareholder vote,
including all matters relating to the members of the Company’s Board of Directors. (¶¶
29, 378.) Further, in connection with WCAS and Apax’s plan to take InnovAge public,
the Company entered into a Director Nomination Agreement, which provides WCAS
and Apax the right to designate all nominees for election to the Board so long as they
collectively own at least 40% of their original ownership stake. (¶ 30.) The Director
Nomination Agreement also provides that WCAS and Apax retain the right to designate
nominees proportional to their ownership stake, even if they reduce it to less than 40%,
in addition to certain consent rights related to Board composition and size, so long as
they retain at least 5% of their original ownership stakes. (Id.) Lead Plaintiffs,
therefore, allege WCAS and Apax controlled the Company before, during, and after the
IPO. (¶ 31.)
Maureen Hewitt was the President and CEO and a Director of the Company from
2006 to January 1, 2021, when she resigned. (¶ 32.) Hewitt signed or authorized the
signing of the Registration Statement (Form S-1) and Prospectus (“Offering
Documents”) filed with the SEC in connection with the IPO; and the 2021 Annual Report
(Form 10-K) and certifications under Sections 302 and 906 of the Sarbanes–Oxley Act
of 2002, 15 U.S.C. § 7241 and 18 U.S.C. § 1350 (“SOX”), in connection with the 2021
Annual Report and the Quarterly Report (10-Q) in the fourth quarter of 2021 (“Q4 2021
Quarterly Report”), all filed with the SEC. (Id.) Hewitt received over $35 million and an
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award of stock options as compensation in connection with the IPO. (Id.)
Barbara Gutierrez joined InnovAge in 2017 and was the CFO of InnovAge during
all times relevant to this action. (¶ 33.) Gutierrez authorized the signing of the Offering
Documents, the 2021 Annual Report, the Q4 2021 Quarterly Report, and the quarterly
reports for the first three quarters of 2022 (“Q1 2022 Quarterly Report,” “Q2 2022
Quarterly Report,” and “Q3 2022 Quarterly Report,” respectively), all filed with the SEC.
(Id.) Gutierrez received over $7 million and an award of stock options as compensation
in connection with the IPO.” (Id.)
John Ellis “Jeb” Bush, Andrew Cavanna, Caroline Dechert, Edward “Ted”
Kennedy, Jr., Pavithra Mahesh, Thomas Scully, Marilyn Tavenner, Sean Traynor, and
Richard Zoretic are, and were at all relevant times, Directors of InnovAge. (¶¶ 36–44.)
Each “signed a written consent to being named in the Offering Documents as an
individual to become a director of the Company[] and signed or authorized the signing of
the 2021 Annual Report.” (Id.) Several of the Director Defendants received
compensation in connection with the IPO as follows: Bush, $50,000; Kennedy, more
than $731,000; Tavenner, more than $736,000; Zoretic, more than $221,000. (¶¶ 36,
39, 42, 44.)
B. PACE
PACE is a joint Medicare and Medicaid program that provides comprehensive,
community-based medical and social services to certain elderly people. (¶ 72.) Rather
than providers billing Medicare and Medicaid for specific medical services at the time of
service, PACE organizations receive a fixed capitation payment, calculated on a per
member, per month basis. (Id.) PACE participants have access to around-the-clock
medical services. (¶ 76.) PACE capitation payments are pooled, and because that pool
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is used to pay for participant’s medical services, PACE organizations take on the risk
that total medical expenses for participants will exceed the pooled capitation payments.
(¶ 80–81.)
PACE organizations are highly regulated and subject to supervision by both the
Centers for Medicare and Medicaid Services (“CMS”) and State Administering Agencies
(“SAAs”). (¶ 78.) To provide PACE services, PACE programs must be approved by the
state government and have an agreement with CMS and that state’s SAA. (¶ 79.)
To be eligible for enrollment in a PACE program, a participant must be:
1. 55 years of age or older;
2. certified by the SAA to need the level of care required under the state
Medicaid plan for coverage of nursing facility services;
3. reside in the PACE organization’s service area;
4. be able to live in a community setting at the time of enrollment without
jeopardizing his or her health or safety based on criteria set forth in the
program agreement; and
5. meet any additional program-specific eligibility conditions imposed under
the PACE program agreement.
(¶ 82 (citing 42 C.F.R. § 460.150).) CMS describes enrollment in a PACE program as
“an intensive process.” (¶ 83.) During enrollment, the PACE staff must explain to the
potential participant and their representative (if they have one) the program’s
requirements, a list of employees who provide care, and the requirement that the PACE
organization would be the participant’s sole medical provider. (Id.) The potential
participant must sign a release to permit the PACE organization to obtain necessary
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medical, financial, and Medicare-eligibility information. (Id.) And the SAA must assess
the potential participant to ensure a need for the level of care required by the state
Medicaid plan for coverage of nursing facility services. (Id.) Moreover, the PACE
organization must itself assess the potential participant to ensure care in a community
setting is appropriate and that all requirements for PACE eligibility are met. (¶ 84.)
Once enrolled, participants are assigned to an interdisciplinary team (“IDT”)
responsible for assessments, care planning, and care coordination. (¶ 87.) Each IDT
must have a primary care provider to manage a participant’s general health and use of
medical specialists and inpatient care. (¶ 88.) The IDT must continually monitor
assigned participants’ physical and mental health and the effectiveness of their
personalized plan of care. (¶ 89.)
C. PACE Organization Monitoring, Auditing, and Compliance Enforcement
CMS and the SAA are responsible for ensuring that every PACE organization
complies with state and federal law. (¶ 91.) They monitor and evaluate the
organizational structure and policies of each PACE organization. (Id.) There are three
types of audits performed by CMS and the SAA: (1) trial period audits performed
annually during a PACE organization’s initial, three-year trial period; (2) routine audits
performed “as appropriate” (and at least every two years) following the conclusion of the
trial period; and (3) focused audits performed if either CMS or the SAA determines that
additional monitoring or auditing is required to identify noncompliance, operational
deficiencies, or significant audit findings.3 (Id.) On March 30, 2020, at the onset of the
COVID-19 pandemic, CMS issued guidance announcing that it was temporarily shifting
3 Trial period and routine audits are performed jointly by CMS and the SAA, while
focused audits, being ad hoc, may be performed by these agencies independently. (See ¶ 91.)
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its focus from routine audit activities to investigating and resolving instances of
noncompliance putting health or safety of participants at serious risk, and complaints
alleging infection control concerns, including of COVID-19. (¶ 93.)
CMS may also take enforcement action by imposing sanctions on a PACE
organization, including suspending new enrollments or payments or civil money
penalties. (¶¶ 94–95.) CMS will take this step when noncompliance is serious enough
to require immediate enforcement action or when noncompliance fails to resolve after
the PACE organization has been given appropriate notice and an opportunity to cure
the noncompliance. (¶ 94.) CMS decides whether to suspend enrollment of Medicare-
enrolled participants, and the SAA decides whether to suspend enrollment Medicaid-
enrolled participants. (¶ 98.) The ultimate sanction, imposed if the PACE organization
fails to correct deficiencies or comply substantially with the conditions for operating a
PACE program, is termination of the PACE agreement with that organization. (¶ 100.)
D. InnovAge and Its Business Model
InnovAge was founded as a Colorado non-profit in May 2007, a time when PACE
organizations were not permitted to operate as for-profit businesses. (¶¶ 101–04.) In
May 2015, CMS lifted the restriction on for-profit PACE organizations, and in 2016, the
Colorado Attorney General approved InnovAge to operate as a for-profit business. (¶¶
104–15.) On May 13, 2016, the Company completed its controversial conversion into
the first for-profit PACE organization. (¶¶ 105–06.)
Following this conversion, the Company pursued an aggressive strategy to
increase enrollment in its program. (¶¶ 106–07.) Scully told the publication Modern
Healthcare that while WCAS had not set a timeframe for receiving a return on its
investment, he saw sufficient growth potential in the PACE market that taking the
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Company public in as little as four years was not “out of the question.” (¶ 108.) To
accomplish these goals, InnovAge invested millions of dollars in branding and
marketing, including advertisements and videos featuring Susan Sarandon. (¶ 110.)
InnovAge’s approach was a success. Despite average quarterly enrollment
growth of only 2.1% in the industry as a whole, the Company’s enrollment grew 13%
during its first year as a for-profit business. (¶ 111.) In each of the next four years,
InnovAge continued to report outstanding results. (Id.) In 2019, Hewitt reported that its
participant list had grown by 44.3% to 5,900 participants across 16 centers. (¶ 112.) By
May 2019, InnovAge had taken on additional debt in order to pay WCAS a $66.1 million
dividend, and by May 2020 WCAS began to implement an investment exit strategy by
soliciting bids for a full or partial sale through a strategic acquisition or IPO. (¶ 114.) On
July 3, 2020, it was reported that Apax had agreed to purchase a 49% stake in the
Company in a deal that valued it at $950 million. (Id.)
Former employees called the transition to a for-profit model a “turning point” for
the Company, after which increasing enrollment took priority over everything—including
providing quality care for participants. (¶ 116.) According to one former employee,
when the Company was a non-profit, the enrollment and Medicaid eligibility
departments “worked for the operations group,” and when it became a for-profit, they
“answered to the finance and investment group.” (¶ 117.) Seven other former
employees confirmed this account, with another stating that the expectation was to
enroll as many people as possible. (Id.) This expectation was enforced and reinforced
with high monthly quotas and potential bonuses for exceeding the quotas. (¶ 118.)
In an effort to maintain its impressive enrollment growth, the Company began
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targeting “populations of potential participants without regard to eligibility, safety, or the
Company’s capacity to adequately provide them with services.” (¶ 119.) Three former
employees described arrangements between the Company and the Colorado Coalition
for the Homeless whereby InnovAge went to shelters, motels, and other locations to
enroll people experiencing homelessness. (Id.) Enrolling participants without stable
housing not only increases revenue from additional capitation payments, it increases
margins because such participants use fewer services. (See id.) According to Lead
Plaintiffs, this practice was in violation of federal regulations, and when ethical and legal
concerns were raised to the Company’s senior leaders, the concerns were ignored. (¶¶
119–22.)
The Company also engaged in other tactics to drive enrollment and prevent
disenrollment. (¶¶ 124–27.) For instance, “current and former employees explained
that to meet their enrollment quotas, business development employees routinely
misrepresented the level of care the programs could provide to convince seniors to
switch from their existing health plans to InnovAge’s PACE programs.” (¶ 124.)
InnovAge’s efforts to prevent disenrollment included tactics “prohibited by PACE
regulations.” (¶ 125.) Multiple social workers formerly employed by the Company
reported that they were instructed to convince participants not to disenroll and would
receive pressure from their supervisors when they did file disenrollment paperwork after
being instructed to do so by a participant. (Id.) One former employee reported that a
center director offered a cash reward to an employee to keep a participant enrolled.
(Id.)
E. Rapid Growth’s Toll on InnovAge’s Medical Services
The Company’s intense focus on growing enrollment resulted in severe staff
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shortages, high caseloads, scheduling delays, lack of coordination between providers,
insufficient training, substandard medical care, and, ultimately, worse health outcomes
for participants. (¶ 115.) These issues violated PACE regulations and increased the
likelihood that the Company would be subject to enforcement action. (Id.)
The surge in participants was not accompanied by a commensurate increase in
clinical staff. (¶128.) Inadequate staffing led to delays in both primary care InnovAge
would normally provide and outside appointments with specialists the Company
arranges for participants as needed. (¶ 129.) Current and former InnovAge employees
told The Capital Forum that “thousands” of outside referrals to specialists “were
outstanding by more than 180 days.” (Id.) Shelbie Engelking, the ombudsman
established after the Company’s for-profit conversion, told reporters that her office had
gotten numerous complaints about a lack of dental and podiatry services. (¶ 131.)
Several former employees reported that InnovAge’s cost-cutting measures even
impacted its ability to provide prescription medications to participants on time. (Id.)
Delays in services can have serious adverse effects on participants’ health. (Id.) These
are but a few examples of the impact lack of staffing had on participants’ care outlined
in the Amended Complaint. (See ¶¶ 132–36.)
The issues created by staff shortages were only exacerbated by the COVID-19
pandemic. (¶ 137.) When the pandemic forced the Company to close its centers, home
care services became increasingly important. (Id.) One former employee said that
InnovAge staff were supposed to call participants at least once a week to check in and
ensure they had sufficient food and medication and were not experiencing any
symptoms of COVID-19. (¶ 138.) According to that employee, however, InnovAge
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failed to do this and, as a result, one participant had died alone on the floor only to be
found a day or two later. (Id.) Even in the face of the additional challenges of providing
home care services during the pandemic, the Company’s senior management resisted
increasing staff. (¶¶ 139–41.)
F. Audits and Complaints About Substandard Care
InnovAge’s substandard care had been revealed years prior to the IPO by
internal and external audits, complaints from participants and their families, and
concerns raised by employees. (¶ 142.)
A 2016 internal audit of the Sacramento, California, center found that InnovAge
had failed to make hundreds of specialist appointments, and the delay in care had led to
worsening, chronic, and acute medical outcomes. (¶¶ 143–44.) Another internal audit
of the same center found “1,000 outstanding orders,” including “many” that were more
than a year outstanding. (¶ 145.) The internal audit found this situation carried “an
‘extreme’ risk level.” (Id.) The results of the 2017 audit were provided to senior
management, including Hewitt. (¶ 146.) Hewitt refused a former Regional Executive for
California’s “repeate[d]” requests to pause enrollment so that InnovAge could “build a
better network.” (¶ 149.) CMS audits from 2017 to 2019 also identified multiple issues
requiring corrective or immediate corrective action. (¶¶ 150–54.)
Similar issues were present at the Company’s Colorado centers. (¶ 155.) In
2017, a CMS audit found several issues requiring immediate action, including failures to
provide care and services according to participants’ care plans and develop care plans
for new participants within 30 days. (¶ 156.) A 2019 audit by the Colorado Department
of Public Health & Environment (“CDPHE”) found InnovAge had failed to properly
document participants’ medication and treatments. (¶ 158.) And a 2021 audit by the
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Colorado Department of Health Care Policy and Financing resulted in it requiring
InnovAge to enter a corrective action plan. (¶ 159.) Colorado regulators had also
identified issues with the Company’s home care services and documentation of adverse
health events. (¶¶ 161–62.) Company employees expressed their concerns about the
substandard care participants were receiving. (¶¶ 163–64, 166–67.)
In November of 2020, InnovAge executives held a conference call with
approximately 40 doctors and nurse practitioners. (¶ 167.) During the call Hewitt
denied knowledge of the care issues identified by audits and employee complaints. (Id.)
G. Allegedly False and Misleading Statements Prior to the IPO
Lead Plaintiffs allege the Offering Documents contained twelve materially false
and misleading statements. (¶ 241.)
1. The Patient-Centered Care Statement
The Offering Documents contain the following statement, referred to by the
parties as the “Patient-Centered Care Statement”:
Our patient-centered care delivery approach meaningfully
improves the quality of care our participants receive, while
keeping them in their homes for as long as safely possible
and reducing over-utilization of high-cost care settings such
as hospitals and nursing homes.
(¶ 241(a).)
Lead Plaintiffs allege this statement was false and misleading because InnovAge
failed to provide all services determined necessary by the IDT, ensure access to
specialists, and failed to manage participants’ medical situations and use to specialists.
(¶ 242(a).) Further, this statement was allegedly false because InnovAge failed to
disclose that it had been providing substandard care for years, as revealed by internal
and external audits, complaints from participants and their families, and concerns raised
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by employees. (Id.) Defendants allegedly knew that CMS and SSAs would audit and
monitor InnovAge and were thus aware of the risk of monetary penalties and
suspension of enrollment. (Id.)
2. The Individualized and Coordinated Care Statement
The Offering Documents contain the following statement, referred to by the
parties as the “Individualized and Coordinated Care Statement”:
Our IDTs develop an individualized care plan specific to the
needs of each participant. Our high touch model involves
daily interaction with our participants across multiple
settings. This enables us to not only deliver coordinated,
high quality care, but also to identify and proactively manage
changes to each participant’s conditions[.]
(¶ 241(b).)
Lead Plaintiffs allege this statement was false and misleading because the
Company later admitted that it had not standardized the process of its IDTs planning
and coordinating care and failed to ensure care was scheduled in a timely manner. (¶
242(b).) They also allege the statement was false and misleading because CMS audits
revealed numerous failures to properly reevaluate care plans, timely process requests
for services, and document changes to care plans when made. (Id.) Further, they
allege the statement fails to disclose the repeated failures in these area that were
occurring and fails to disclose the risk these issues posed due to the expected audits by
CMS and SSAs. (Id.)
3. The Standardized and Well-Staffed Operations Statement
The Offering Documents contain the following statement, referred to by the
parties as the “Standardized and Well-Staffed Operations Statement”:
We have standardized and streamlined our operations
across markets and have invested meaningfully in the
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corporate infrastructure needed to drive participant
satisfaction, manage healthcare costs and improve clinical
outcomes at scale. Because of our scale, we have been
able to invest in dedicated, well-staffed teams for all of our
corporate and market-level functions. As a result, our
physicians can focus on providing care and are not as
burdened with additional administrative demands.
(¶ 241(c).)
Lead Plaintiffs allege this statement was false and misleading because the
Company later admitted that it had not standardized its process for IDTs to plan and
coordinate care. (¶ 242(c).) Further, they allege it was misleading because the
substandard care delivered by InnovAge at the Colorado and California centers had led
to worse outcomes for patients, and the Company refused to invest in the staff and
other resources necessary to provide adequate care “at scale.” (Id.) Lead Plaintiffs
allege the statement was false and misleading because an audit had found that
InnovAge had failed to ensure proper staffing levels, which affected 100% of
participants reviewed. (Id.) And they allege the statement is false and misleading
because it failed to disclose the audit risks presented by its failure to properly staff its
centers. (Id.)
4. The Robust Compliance Statement
The Offering Documents contain the following statement, referred to by the
parties as the “Robust Compliance Statement”:
[W]e have a robust compliance infrastructure and team.
(¶ 241(d).)
Lead Plaintiffs allege this statement was false and misleading because InnovAge
“failed to recognize and process complaints as grievances.” (¶ 242(d).) Further,
Defendants allegedly failed to disclose that audits had revealed “repeated and
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significant deficiencies that were not remediated,” that Defendants and senior
management “directed” staff to conceal evidence from auditors, that Defendants denied
repeated requests from employees to invest in necessary staff, and the audit risk
associated with these facts. (Id.)
5. The Successful Medical Risk Management Statement
The Offering Documents contain the following statement, referred to by the
parties as the “Successful Medical Risk Management Statement”:
We have a long track record of successfully managing
medical risk, driven by the strength of our operational
playbook as well as our risk pool[.]
(¶ 241(e).)
Lead Plaintiffs allege this statement was false and misleading because the
Company later admitted that it had not standardized its process for IDTs to plan and
coordinate care. (¶ 242(e).) Further, they allege Defendants failed to disclose that
audits had revealed that its care model had caused participants to experience worse
health outcomes because they were not receiving or receiving delayed specialist care,
medical providers were carrying increased caseloads due to understaffing, staff were
undertrained, and many participants did not have a primary care provider. (Id.)
6. The COVID Continuity of Care Statement
The Offering Documents contain the following statement, referred to by the
parties as the “COVID Continuity of Care Statement”:
[W]e have transitioned much of our care to in-home and
telehealth services, while increasing participant visit volume
and maintaining continuity of care.
(¶ 241(f).)
Lead Plaintiffs allege this statement was false and misleading because the
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Company later admitted that it had failed to maintain its home care network and
reliability and efficiency of participant transportation, and telephonic channel response
times. (¶ 242(f).) They further allege Defendants failed to disclose the lack of
investment in staff that led to these issues. (Id.)
7. The Technology Statement
The Offering Documents contain the following statement, referred to by the
parties as the “Technology Statement”:
Our technology suite supports our ability to deliver
consistent, high-quality care to our participants at scale.
(¶ 241(g).)
Lead Plaintiffs allege this statement was false and misleading because the
Company later admitted that it had failed to properly document participants’ medical
records. (¶ 242(g).) They further allege this statement is false and misleading because
it failed to disclose these facts and the audit risk they created or that Defendants
expected to be audited by federal and state regulators. (Id.)
8. The Home Care Statement
The Offering Documents contain the following statement, referred to by the
parties as the “Home Care Statement”:
Our in-home care capabilities enable our participants to live
safely in their homes and avoid nursing homes to the extent
safely possible. We directly deliver or manage all skilled and
unskilled care a participant may require to live independently
at home.
(¶ 241(h).)
Lead Plaintiffs allege this statement was false and misleading because InnovAge
later admitted that it had failed to sufficiently strengthen its home care network and
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reliability, ensure coordination with outside providers was timely, ensure the reliability of
the transportation provided to participants, and ensure timely telephonic responses. (¶
242(h).) Further, Defendants allegedly failed to disclose this information and the
associated audit risks. (Id.)
9. The Expansion Model Statement
The Offering Documents contain the following statement, referred to by the
parties as the “Expansion Model Statement”:
The fundamental aspects of our expansion playbook include
. . . a disciplined approach to site selection, a targeted sales
and marketing approach, a concerted effort to recruit and
develop talent, scalable underlying clinical technology and
an efficient, uniform operating model.
(¶ 241(i).)
Lead Plaintiffs allege this statement was false and misleading because Gutierrez
later admitted that the Company needed a “transformation” before it could be “well
positioned for scalable and sustainable growth for the long term.” (¶ 242(i).) Further,
CEO Blair allegedly admitted that InnovAge had not had the “near-term operational
execution” and “mid- to long-term capability development” necessary for scalable and
sustainable long-term growth. (Id.) Lead Plaintiffs also allege the statement’s failure to
disclose that audits had revealed InnovAge was providing substandard care and the
associated audit risks render it false and misleading. (Id.)
10. The Scalability Statement
The Offering Documents contain the following statement, referred to by the
parties as the “Scalability Statement”:
We have demonstrated an ability to scale successfully[.]
(¶ 241(j).)
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Lead Plaintiffs allege this statement was false and misleading for the same
reasons as the Expansion Model Statement. (¶ 242(j).)
11. The Virtuous Cycle Statement
The Offering Documents contain the following statement, referred to by the
parties as the “Virtuous Cycle Statement”:
[W]e have demonstrated our ability to reduce avoidable
utilization of high-cost care settings, such as hospitals and
nursing homes. As a result, we create a surplus that can be
used to invest in refining our care model and providing even
greater social supports for our participants. These
investments further improve participants’ experiences and
health outcomes, which we believe will result in more
savings that will drive our profitable growth. The virtuous
cycle we have created enables us to consistently deliver
high-quality care, achieve high participant satisfaction and
retention, and attract new participants.
(¶ 241(k).)
Lead Plaintiffs allege this statement was false and misleading for the same
reasons as the Expansion Model Statement and the Scalability Statement. (¶ 242(k).)
12. The Government Relationships Statement
The Offering Documents contain the following statement, referred to by the
parties as the “Government Relationships Statement”:
We have developed strong relationships with Medicare and
Medicaid agencies through our participation in PACE[.]
(¶ 241(l).)
Lead Plaintiffs allege this statement was false and misleading because
Defendants failed to disclose that audits identified repeated, significant deficiencies that
were not remedied, Defendants and other senior leaders at the Company directed staff
to conceal evidence from auditors, Defendants had denied repeated requests from
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employees to increase staffing levels, and the Company expected to be audited, leading
to an increased chance of sanctions. (¶ 242(l).)
13. Omission of Required Disclosures
In addition to these twelve allegedly false and misleading statements, Lead
Plaintiffs allege the Offering Documents were false and misleading because they failed
to disclose information required to be disclosed by Items 303 and 105 of Regulation S-
K. (¶¶ 243–44.) Item 303 requires a description of “any known trends or uncertainties
that have had or that are reasonably likely to have a material favorable or unfavorable
impact on net sales or revenues or income from continuing operations.” 17 C.F.R. §
229.303(b)(2)(ii). And Item 105 requires “a discussion of the material factors that make
an investment in the registrant or offering speculative or risky.” 17 C.F.R. § 229.105.
Lead Plaintiffs allege that in “negligent violation of Item 303 and Item 105, the Offering
Documents failed to disclose that the Company’s enrollment growth strategy presented
a significant uncertainty, and made investment in InnovAge risky.” (¶ 245.)
H. Allegedly False and Misleading Statements After the IPO
Lead Plaintiffs also allege Defendants made multiple false and misleading
statements after the March 2021 IPO. (¶¶ 246–261.)
1. Q3 2021
Lead Plaintiffs allege Defendants made nine false and misleading statements
during the third quarter of 2021.
a. May 10, 2021 Press Release
On May 10, 2021, InnovAge filed a Form 8-K with the SEC and issued a press
release titled “InnovAge Announces Financial Results for the Fiscal Third Quarter
Ended March 31, 2021.” (¶ 246.) Gutierrez signed the Form 8-K. (Id.) The press
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release contained the following statement, quoting Hewitt:
We are seeing multiple growth drivers from our multi-faceted
strategy coming from organic growth, and de novo locations
in existing and new states.
(Id.) Lead Plaintiffs allege this statement was false and misleading because the
Company’s rapid growth had exacerbated “systemic deficiencies” in InnovAge’s medical
services, the growth was not “organic” because it was driven by enrolling ineligible
participants who lacked stable housing, and federal and state regulators had begun or
were scheduled to begin audits that would uncover deficiencies and “would limit
InnovAge’s ability to expand” to new locations. (¶ 247.)
b. May 10, 2021 Earnings Call
Also on May 10, 2021, Hewitt and Gutierrez held a conference call to discuss the
Company’s third quarter results. (¶ 248.) During her opening remarks, Hewitt made the
following statement:
[InnovAge’s] organic growth [is] driven by increasing
participant enrollment and capacity within existing centers.
(¶ 248(a).) Lead Plaintiffs allege this statement was false and misleading because
Hewitt had refused to increase the “capacity within existing centers” necessary to
provide participants with adequate care. (Id.) Further, Hewitt’s statement failed to
disclose that audits had revealed InnovAge’s substandard care and the audit risks
associated with that substandard care. (Id.)
Later in the earnings call, in response to an analyst’s question that Lead Plaintiffs
describe as relating to “challenges with recruitment and retention of clinical staff,” Hewitt
responded with the following statement:
InnovAge has done an excellent job of really ensuring that
we’ve kept our turnover rates down [and has been] very
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successful as compared to other long-term care
organizational results as well[.]
(¶ 248(b).) Lead Plaintiffs allege this statement was false and misleading because an
audit revealed the Company had failed to maintain proper staffing levels, which affected
100% of the participants reviewed. (Id.) They further allege this statement was false
and misleading because InnovAge later admitted that it had failed to fill “critical
personnel gaps at each of the centers.” (Id.) Lead Plaintiffs also allege this statement
was false and misleading because it failed to disclose persistent issues with
understaffing, the impact of understaffing on participant health, and the regulatory risk
associated with these facts. (Id.)
c. May 11, 2021 Quarterly Report
On May 11, 2021, InnovAge filed its quarterly report for the third quarter with the
SEC on Form 10-Q, which was signed by Hewitt and Gutierrez. (¶ 250.) Lead Plaintiffs
allege the Q3 2021 Quarterly Report contains seven false and misleading statements.
(Id.) The first three statements are repetitions of the Patient-Centered Care Statement,
Individualized and Coordinated Care Statement, and COVID Continuity of Care
Statement contained in the Offering Documents. (¶ 250(a).)
(i) The Fully Staffed Statement
The Q3 2021 Quarterly Report contains the following statement, referred to by
the parties as the “Fully Staffed Statement”:
Our internal care delivery costs remained largely the same
as we remained fully staffed to execute on our participants’
care plans, albeit through a different mix of care settings.
(¶ 250(b).) Lead Plaintiffs allege this statement was false and misleading because an
audit had found that InnovAge “failed to ensure proper staffing levels,” which impacted
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100% of participants reviewed. (¶ 251(b).) And they allege the statement is false and
misleading because it failed to disclose the audit risks presented by its failure to
properly staff its centers. (Id.)
(ii) The Deficient Participant Assessments and Care Plans
Statement
The Q3 2021 Quarterly Report contains the following statement, referred to by
the parties as the “Deficient Participant Assessments and Care Plans Statement”:
PACE regulators require that new participants be assessed
within a period of 30 days from enrollment to our programs
and for us to provide them a personalized care plan.
Recently, we became aware that certain of our centers failed
to timely complete a portion of these new participant
assessments and care plans. We are working diligently to
remedy this issue. Failure to conduct assessments or
produce care plans within the required period of time may
subject us to suspension of new enrollment or restrict
enrollment at the affected centers and other centers in the
affected state.
(¶ 250(c).) Lead Plaintiffs allege this statement was false and misleading because
Defendants failed to disclose the substandard care revealed by audits and the risk that
future audits would result in penalties from regulators. (¶ 251(c).)
(iii) Additional Statement Related to Government Relationships
The Q3 2021 Quarterly Report contains the following statement:
Maintaining, supporting and growing these relationships
[with government payors], particularly as we enter new
geographies, is critical to our long-term success. Our model
is aligned with the interests of our government payors, as we
drive better health outcomes for participants at lower costs
and enhance participant satisfaction.
(¶ 250(d).) Lead Plaintiffs allege this statement is false and misleading for the same
reasons as the Robust Compliance Statement. (¶ 251(d).)
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(iv) Sarbanes–Oxley Act Certification
The Q3 2021 Quarterly Report contains the following statement:
[The Q3 2021 Quarterly Report] does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made[] not misleading
with respect to the period covered by this report [and] the
financial statements, and other financial information included
in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this
report.
(¶ 250(e).) Lead Plaintiffs allege this statement, made pursuant to Section 302 of SOX,
is false and misleading because the Q3 2021 Quarterly Report contained “numerous
false and misleading statements and omitted material facts,” as outlined earlier in the
Amended Complaint. (¶ 251(e).)
2. Q4 2021
Lead Plaintiffs allege Defendants made fifteen false and misleading statements
during the fourth quarter of 2021.
a. September 21, 2021 Press Release
On September 21, 2021, InnovAge filed a Form 8-K with the SEC and issued a
press release titled “InnovAge Announces Financial Results for the Fiscal Year and
Fourth Quarter Ended June 30, 2021.” (¶ 252.) Gutierrez signed the Form 8-K. (Id.)
The press release contained the following statement, quoting Hewitt:
[W]e continue to execute on our multi-faceted strategy of
organic growth, de novo locations in existing and new states,
and acquisitions.
(Id.) Lead Plaintiffs allege this statement was false and misleading for the same
reasons as the statement in the May 10, 2021 Press Release. (¶ 253.)
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b. September 21, 2021 Earnings Call
Also on September 21, 2021, Hewitt and Gutierrez held a conference call to
discuss the Company’s third quarter results. (¶ 254.) During this earnings call, Hewitt
provided updates on several aspects of the Company’s business. (Id.) With respect to
employee turnover and staffing, Hewitt made the following statement:
[A]pproximately 1200 of [the Company’s approximately
1800] employees are clinical professionals and interact with
our participants on a regular basis. . . . [M]anaging turnover
and retention is challenging for all healthcare organizations,
due to the limited supply of workers and the competitive
environment in which we operate. . . . That being said, we
continue to address staffing needs of the business by
proactively utilizing strategies to minimize the impact on our
business and to sourcing talent that varies by location and
position.
(¶ 254(a).) Lead Plaintiffs allege this statement was false and misleading for the same
reasons as Hewitt’s statement in response to the analyst’s question during the May 10,
2021 earnings call. (¶ 255(a).)
Hewitt then offered the following statement on the status of audits in Sacramento
and Colorado:
[A]udits are a regular occurrence in our industry. . . . We
have and continue to work collaboratively with regulators as
we seek to constantly improve our processes and outcomes
to better serve our participants and their families. . . . [W]e
do not have the outcome of the Colorado [audit and] can’t
give you any guidance around Colorado at this time[.] [A]s
soon as we know and there may be a question too, that
maybe there’s some relationship between Sacramento and
Colorado . . . we don’t have any knowledge that those two
things are related.
(¶ 254(b).) Lead Plaintiffs allege this statement was false and misleading because
Hewitt’s statement did not disclose that CMS had suspended most trial period and
routine audits at that time due to the COVID-19 pandemic, instead focusing on audits
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related to the spread of infectious diseases or “instances of noncompliance where the
health and/or safety of beneficiaries are at serious risk.” (¶ 255(b).) They further allege
this statement was false and misleading because it did not disclose that: (1) the
Company had already received the preliminary findings for all of the audits, which had
all resulted in substantially the same findings; (2) the Company had already informed
clinical staff of at least a dozen areas of improvement in Colorado centers, citing the
results of CMS audits; (3) InnovAge informed staff in a training call that “California and
Colorado pretty much have the same areas of opportunities”; (4) CMS conducts focused
audits only under certain circumstances; and (5) CMS had suspended most audits,
other than focused audits due to the COVID-19 pandemic. (Id.)
c. September 22, 2021 Annual Report
On September 22, 2021, InnovAge filed its annual report with the SEC on Form
10-K, which was signed by Hewitt, Gutierrez, and the Officer Defendants. (¶ 256.)
Lead Plaintiffs allege the 2021 Annual Report contains twelve false and misleading
statements. (Id.) The first eleven statements are repetitions of the Patient-Centered
Care Statement, Standardized and Well-Staffed Operations Statement, Robust
Compliance Statement, Successful Management of Medical Risk Statement, COVID
Continuity of Care Statement, Technology Statement, Home Care Statement, Scalability
Statement, Virtuous Cycle Statement, and Government Relationship Statement
contained in the Offering Documents, and the Deficient Participant Assessments
Statement and Care Plan Statement contained in the Q3 2021 Quarterly Report. (¶
256(a).) The twelfth statement is a repetition of the SOX certification included in the Q3
2021 Quarterly Report.
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3. Q1 2022
Lead Plaintiffs allege Defendants made five false and misleading statements
during the first quarter of 2022.
a. November 9, 2021, Earnings Call
On November 9, 2021, Hewitt and Gutierrez held a conference call to discuss the
Company’s first quarter results. (¶ 259.) During this earnings call, Hewitt addressed
several aspects of the Company’s business. (Id.) With respect to staffing shortages,
Hewitt made the following statement:
[I]t is no secret that the healthcare sector has historically
faced a shortage of licensed practical nurses, registered
nurses, certified nursing assistants, and other frontline
healthcare workers like drivers, and the COVID pandemic
has not helped the situation. The historical shortage of
healthcare workers has long required us to think outside the
box to fill our recruiting needs, and that adaptability is a
strength that we continue to use as we grow our
business. . . . We are also continuing to evaluate our
recruiting competitiveness on an ongoing basis. We are
experiencing longer lead times for recruiting new talent. . . .
Our top priority is ensuring that we are appropriately staffed
to care for our participants. In markets where recruitment
has been slower than anticipated, we have been able to
supplement with temporary labor in order to maintain
appropriate staffing levels.
(¶ 259(a).) Lead Plaintiffs allege this statement was false and misleading for the same
reasons as Hewitt’s statements during the September 21, 2021 earnings call regarding
the Sacramento and Colorado audits. (¶ 260(a).)
Hewitt also provided an update on the status of audits in Sacramento and New
Mexico and made the following statement:
For context, there were less than 200 participants in our
Sacramento center as of the beginning of this month. . . .
Finally, we will begin a routine audit in New Mexico that will
be handled remotely.
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(¶ 260(b).) Lead Plaintiffs allege this statement was false and misleading for the same
reasons as Hewitts statements during the September 21, 2021 earnings call regarding
the Sacramento and Colorado audits. (¶ 260(b).) Additionally, they assert this
statement was false and misleading because a report published two days later revealed
that the New Mexico audit had “already been going on for several weeks.” (Id.)
Later in the earnings call, Hewitt responded to an analyst’s question about CMS’s
referral of the Colorado audit to its Division of Compliance and Enforcement. (¶ 259(c).)
In response, Hewitt made the following statement:
[Referral is] not unusual [and the] Colorado [audit] is a little
bit different than [the] Sacramento [audit].
(Id.) Lead Plaintiffs allege this statement was false and misleading because CMS’s
public Audit Manual explains that referrals are made either when deficiencies are
serious enough to merit immediate escalation or remain unresolved after the PACE
organization has been given notice and an opportunity to correct the deficiencies. (¶
260(c).) Therefore, the referral represented a significant risk that InnovAge would face
financial penalties or an enrollment pause. (See id.)
b. November 9, 2021 Quarterly Report
On November 9, 2021, InnovAge filed its Q1 2022 Quarterly report with the SEC
on Form 10-Q, which was signed by Hewitt and Gutierrez. (¶ 261.) Lead Plaintiffs
allege the 2021 Annual Report contains two false and misleading statements. (Id.) The
first statement was a repetition of the Government Relationship Statement. (¶ 261(a).)
And the second statement was a repetition of the SOX certification included in the Q3
2021 Quarterly Report and 2021 Annual Report. (¶ 261(b).)
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I. Impact on InnovAge’s Stock Price
During the September 21, 2021 earnings call, Hewitt disclosed that on
“September 17, we were notified the CMS has determined to freeze new enrollments at
our Sacramento center based on deficiencies detected in the audit.” (¶ 284.) She
noted that the “freeze will remain in effect until we correct th[e] deficiencies [identified by
CMS] and we are working on developing a corrective action plan to submit to CMS.”
(Id.) She further disclosed that its Colorado centers had been “the subject of three
audits over the last several months conducted by the state and CMS,” that the state
audit had “completed the onsite audit work on July 22” and given the Company
“preliminary findings at that time,” that “CMS completed their audit work in Colorado on
July 8,” and that the Company anticipated receiving CMS’s report in “early 2022.” (Id.)
The price of InnovAge’s common stock declined over 24% from $11.65 to $8.75 on
September 22, 2021, and fell another nearly 23% to $6.76 the next day. (¶ 285.)
On December 23, 2021, InnovAge filed a Form 8-K with the SEC, signed by
Gutierrez. (¶ 287.) The filing disclosed,
On December 22, 2021[,] InnovAge was notified that CMS
had determined to suspend new enrollments at the
Company’s Colorado centers based on deficiencies detected
in an audit that was conducted earlier this year, the final
results of which have not yet been disclosed to the
Company.
(Id.) As a result of the enrollment freeze, InnovAge withdrew its guidance for fiscal year
2022. (Id.) The market’s reaction to this news was harsh. (¶ 288.) The Company’s
common stock price plummeted by almost 36% from $8.25 to $5.31 on December 23,
2021, with record high volume of more than 14 million shares. (¶ 289.) The price at the
end of trading on December 23, 2021, represented a decline of more than 54% from the
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price at the end of trading on September 22, 2021. (See ¶¶ 285, 289.)
J. Patrick Blair’s Statements
On January 3, 2022, Hewitt announced her resignation, effective January 1,
2022. (¶ 231.) The Board appointed Patrick Blair as President and CEO, effective
immediately. (Id.) The early months of Blair’s tenure included numerous disclosures;
those most relevant to the Motion occurred on May 10, 2022. On that date, Blair and
Gutierrez hosted an earnings call with investors, during which Blair stated that the
Company was undertaking a “significant transformation” to achieve “near-term
operational execution and mid- to long-term capability development,” which he
described as “the core drivers of horizons necessary to comprehensively remediate the
deficiencies identified in our recent audits” and the “foundational building blocks to
ensure we’re well positioned for scalable, sustainable long-term growth.” (¶ 235.)
He acknowledged that the audits had found “gaps in [the Company’s]
performance when compared against regulatory and [its] own expectations.” (¶ 236.)
With those gaps in mind, he announced eight “initiatives” that were “intended to support
the remediation of audit identified deficiencies, and earn back the trust of all
stakeholders.” (Id.) Those initiatives were:
(1)“filling critical personnel gaps at each of the centers,”
adding that “it all begins here”; (2) “standardizing the process
of our interdisciplinary care teams who plan and coordinate
and deliver care”; (3) “strengthening our home care network
and reliability”; (4) “improving timeliness of scheduling and
coordinating care with providers outside the centers”; (5)
“improving our telephonic channel response times and
closing critical communication loops”; (6) “improving the
efficiency and reliability of transportation for our participants”;
(7) “standardizing our wound care program across the
enterprise”; and (8) “reducing documentation outside of the
EMR.”
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(Id.) During the call, in response to an analyst’s question, Blair identified the following
“root causes” for the deficiencies found in the audits:
[1] “ensuring our medical records are documented with all
the required data elements”; [2] “ensuring that our care plans
are complete and kept timely, a lot about training and people
in process”; [3] “making sure that [the interdisciplinary] team
is each day capturing input from all other team members.
Whenever that information is available, it is been
documented in the EMR or in other tools that feed the EMR”;
[4] “making sure that our service orders are being scheduled
on a timely basis”; and [5] “making sure that when a
participant or a caregiver requests a service that we are
identifying that appropriately, and we are documenting it.”
(¶ 239.)
II. LEGAL STANDARD
A. Rule 12(b)(6) Standard
Under Federal Rule of Civil Procedure 12(b)(6), a party may move to dismiss a
claim in a complaint for “failure to state a claim upon which relief can be granted.” In
reviewing a motion to dismiss under Rule 12(b)(6), the Court will “assume the truth of
the plaintiff’s well-pleaded factual allegations and view them in the light most favorable
to the plaintiff.” Ridge at Red Hawk, L.L.C., 493 F.3d at 1177. “[T]o withstand a motion
to dismiss, a complaint must contain enough allegations of fact ‘to state a claim to relief
that is plausible on its face.’” Robbins v. Okla., 519 F.3d 1242, 1247 (10th Cir. 2008)
(quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007) (“Twombly”)). This
means that “[t]he burden is on the plaintiff to frame a ‘complaint with enough factual
matter (taken as true) to suggest’ that he or she is entitled to relief. ‘Factual allegations
must be enough to raise a right to relief above the speculative level.’” Id. (quoting
Twombly, 550 U.S. at 545 & 556). A plaintiff “does not need detailed factual
allegations” but must plead more than merely “labels and conclusions” or “a formulaic
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recitation of the elements of a cause of action.” Id. “[A] well-pleaded complaint may
proceed even if it strikes a savvy judge that actual proof of those facts is improbable,
and that a recovery is very remote and unlikely.” Ridge at Red Hawk, L.L.C., 493 F.3d
at 1177 (quoting Twombly, 550 U.S. at 556).
B. Sections 11,12(a), and 15 of the Securities Act
To plead a claim under Section 11 of the Securities Act, a plaintiff must allege
that (1) “any part of the registration statement . . . contained an untrue statement of
material fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading”; (2) the plaintiff acquired the
security that the registration statement concerned; (3) the defendant is one of the five
types of defendants identified by statute; and (4) damages.4 15 U.S.C. § 77k(a), (e).
Section 12(a) provides that any person who “offers or sell a security . . . by
means of a prospectus or oral communication, which includes an untrue statement of a
material fact or omits to state a material fact necessary in order to make the statements,
in the light of the circumstances under which they were made, not misleading . . . shall
be liable . . . to the person purchasing the security.” Id. § 77l(a)(2). Therefore, to plead
a claim under Section 12(a), a plaintiff must allege that (1) the defendant offered or sold
a security; (2) by means of a prospectus of oral communication that contained a
material false or misleading statement or omitted information necessary to make the
statement not misleading; (3) the plaintiff purchased the security; and (4) damages. Id.
4 The categories relevant to resolution of the Motion are: “(1) every person who signed
the registration statement; (2) every person who was a director of (or person performing similar
functions) or partner in the issuer at the time of the filing of the part of the registration statement
with respect to which his liability is asserted; (3) every person who, with his consent, is named in
the registration statement as being or about to become a director, person performing similar
functions, or partner.”
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§ 77l(a)(2), (b).
Section 15 provides that “[e]very person who, by or through stock ownership,
agency, or otherwise, or who, pursuant to or in connection with an agreement or
understanding with one or more other persons by or through stock ownership, agency,
or otherwise, controls any person liable under sections 77k or 77l of [Title15] shall also
be liable jointly and severally with and to the same extent as such controlled person
. . . , unless the controlling person had no knowledge of or reasonable ground to believe
in the existence of the facts by reason of which the liability of the controlled person is
alleged to exist.” 15 U.S.C. § 77o.
C. Section 10(b), PSLRA, and Section 20(a)
“Section 10(b) of the Securities Exchange Act of 1934 . . . prohibits making any
material misstatement or omission in connection with the purchase or sale of any
security.” Haliburton Co. v. Erica P. John Fund, Inc., 573 U.S. 258, 267 (2014). While
not explicit in the statute, the courts have “long recognized” an implied private cause of
action to enforce Section 10(b) and its implementing regulations. Id.
While complaints in civil actions usually require a “short and plain statement of
the claim showing that the pleader is entitled to relief,” Fed. R. Civ. P. 8(a), a plaintiff
alleging a Section 10(b) claim bears a “heavy burden at the pleading stage,” In re Level
3 Commc’ns, Inc. Sec. Litig., 667 F.3d 1331, 1333 (10th Cir. 2012). A Section 10(b)
complaint must allege that
(1) the defendant made an untrue or misleading statement of
material fact, or failed to state a material fact necessary to
make statements not misleading; (2) the statement
complained of was made in connection with the purchase or
sale of securities; (3) the defendant acted with scienter, that
is, with intent to defraud or recklessness; (4) the plaintiff
relied on the misleading statements; and (5) the plaintiff
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suffered damages as a result of his reliance.
Adams v. Kinder-Morgan, Inc., 340 F.3d 1083, 1095 (10th Cir. 2003).
The Private Securities Litigation Reform Act of 1995 (“PSLRA”) raised the
pleading standard on the first and third elements of a federal securities fraud claim,
namely, falsity and scienter, beyond what had been required by Rule 8(a) or Rule 9(b).5
Hogan v. Pilgrim’s Pride Corp., 2018 WL 1316979, at *4 (D. Colo. Mar. 14, 2018);
Adams, 340 F.3d at 1096 (recognizing the PSLRA pleading requirements for state of
mind are more stringent than rule 9(b), so the “PSLRA supersedes [the] part of Rule
9(b)” allowing for general allegations of state of mind).
The PSLRA requires that a plaintiff plead falsity by specifying each allegedly
misleading statement, the reason why the statement is misleading, and, if made on
information and belief, all facts on which that belief is formed. Adams, 340 F.3d at
1095. For scienter, the complaint must state with particularity, for each act or omission,
facts giving rise to a strong inference that the defendant acted with an intent to defraud
or recklessness. Id. at 1095–96, 1105.
Section 20(a) mirrors Section 15 of the Securities Act, providing liability for
control persons for underlying violations of “any provision” of the Exchange Act. 15
U.S.C. § 78t(a).
D. Items 303 and 105
Item 303 of Regulation S–K
requires disclosure in offering documents of, among other
5 Prior to the passage of the PSLRA, Rule 9(b) governed securities fraud claims and
required that “circumstances constituting fraud . . . be stated with particularity. Malice, intent,
knowledge and other condition of mind may be averred generally.” Adams, 340 F.3d at 1095
(quoting Fed. R. Civ. P. 9(b)).
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things . . . any known trends or uncertainties that have had
or that the registrant reasonably expects will have a material
favorable or unfavorable impact on net sales or revenues or
income from continuing operations. In interpreting the scope
of Item 303, courts have relied on guidance from the SEC,
which explains that a duty to disclose arises where a trend,
demand, commitment, event or uncertainty is both [1]
presently known to management and [2] reasonably likely to
have material effects on the registrant's financial condition or
results of operations.
Ind. Pub. Ret. Sys. v. Pluralsight, Inc., 45 F.4th 1236,1269 (2022) (internal quotations
and citations omitted) (alterations in original). “Item 105 requires that offering
documents contain ‘under the caption “Risk Factors” a discussion of the material factors
that make an investment in the registrant or offering speculative or risky.’” Id. at 1270
(quoting 17 C.F.R. § 229.105(a)).
III. ANALYSIS
Defendants argue that the Amended Complaint fails to adequately plead (1) any
of the identified statements were materially false or misleading; (2) any identifiable
material omissions that render the statements false or misleading; (3) any failure to
comply with SOX or Items 303 and 105 of Regulation S-K; (4) scienter; and (5) control
liability. (ECF No. 73 at 18–54.) Therefore, they move the Court to dismiss the
Amended Complaint in its entirety with prejudice. (Id. at 54.)
A. Allegations Relying on Confidential Witnesses
The Amended Complaint includes numerous allegations based on information
provided by six confidential former employees (“FEs”) and investigative reports from the
Capitol Forum. (See generally ECF No. 54.) Defendants challenge reliance on these
sources under Adams, 340 F.3d 1083.
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1. Former Employees
“The rule in this circuit is that a plaintiff is not required to disclose the source of all
of the information underlying the complaint.” Sorkin, LLC v. Fischer Imaging Corp.,
2005 WL 1459735, at *6 (D. Colo. June 21, 2005). The weight given to allegations
supported by confidential sources depends on whether the allegations include certain
indicia of reliability:
[Such] allegations may be objectively verifiable by the
defendant without the necessity of the plaintiff divulging how
he or she acquired such information. Examples may include
allegations of specific contract terms, the financial result of a
transaction, or specific prevailing market conditions.
Allegations of facts such as these ordinarily will not require
the plaintiff to disclose how he or she learned such
information before a court may give weight to the substantive
allegations of fraud.
Adams, 340 F.3d at 1102. The Tenth Circuit emphasized that the “case-by-case
approach” it adopted under the PSLRA’s pleading requirements still “heighten[s] the
standard for pleading securities fraud.” Id. at 1103. Therefore, “the facts alleged in an
information and belief complaint[6] will usually have to be particularly detailed,
numerous, plausible, or objectively verifiable by the defendant before they will support a
reasonable belief that the defendant’s statements were false or misleading.” Id.
Defendants argue that the information provided by the confidential employees is
unreliable for several reasons. Chief among these is that five of the six individuals (FEs
6 The Amended Complaint does not contain the phrase “information and belief”;
however, the Court is thoroughly convinced that Adams’s analysis applies in this instance. Lead
Plaintiffs tacitly concede as much by arguing the Amended Complaint passes muster under
Adams without disclaiming its applicability. (See ECF No. 79 at 27–30.) Moreover, the
introduction of the Amended Complaint clearly states that the allegations contained therein “are
based upon the investigation undertaken by Lead Counsel.” (ECF No. 54 at 7.) Complaints
that “refe[r] to the investigation of their counsel as the basis for [its] allegations . . . [are] treat[ed]
. . . as having been made on information and belief.” Adams, 340 F.3d at 1098.
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1–3, 5–6) were employed prior to the class period and the sixth’s (FE 4) dates of
employment are unknown. (ECF No. 73 at 31 (citing ¶¶ 66–71).) They assert this
“alone render[s] the confidential witnesses unreliable.” (Id. (citing Lewis v. YRC
Worldwide Inc., 2020 WL 1493915, at *7 (N.D.N.Y. Mar. 27, 2020)).) Lead Plaintiffs
respond that “the Class Period begins on the day of the offering when the Offering
Documents were filed. Thus, to establish the falsity of the Offering Documents,
Plaintiffs must rely, at least in part, on events preceding the Class Period.” (ECF No.79
at 29 (citing In re Tufin Software Techs. Ltd. Sec. Litig., 2022 WL 596861, at *7–8
(S.D.N.Y. Feb 25, 2022)).)
The facts of Adams are critical for parsing the question presented by Defendants’
argument. Adams is an Exchange Act case; therefore, the Tenth Circuit interpreted and
applied the section of the PSLRA that applies to claims brought under that Act. 340
F.3d at 1086, 1094–1105. As the Court explains below, see infra Part III.B, the section
of the PSLRA that applies to claims under the Securities Act does not include the
language imposing what the Tenth Circuit has described as a “heighten[ed] pleading
standard” for pleading “an information and belief complaint.” Adams, 340 F.3d at 1103
(applying 15 U.S.C. § 78u–4(b)(1) rather than 15 U.S.C. § 77z-1). Adams’s limitations
on the weight to be given allegations based on confidential witnesses is expressly
premised on the language of a statute that applies only to Lead Plaintiffs’ Exchange Act
claims. Id. (“In sum, in this Circuit we will apply a common-sense, case-by-case
approach in determining whether a plaintiff has alleged securities fraud with the
particularity required by § 78u–4(b)(1) . . . .”).
As for the Exchange Act claims to which Adams clearly applies, the Tenth Circuit
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has clearly eschewed per se rules like the one Defendants urge regarding confidential
former employees whose employment ended before the class period. The touchstone
of sufficient information and belief pleading via confidential witnesses is a wholistic
review of the allegations’ reliability. See id., 340 F.3d at 1102–03. Defendants have
identified no authority in the Tenth Circuit to support their argument, and the Court is not
convinced by the reasoning of Lewis, which discusses a case that is not binding on this
Court. Lewis, 2020 WL 1493915 at *7 (distinguishing In re Scholastic Corp. Sec. Litig.,
252 F.3d 63, 72 (2d Cir. 2001)). The Court will therefore decline to follow Lewis.
The Amended Complaint describes FE 1 as a social worker employed at the
Company’s San Bernadino Center for between five and six months in 2019. (¶ 66.) FE
1 generally describes the medical services available to participants at that center in the
spring of 2019 as “inadequate.” (¶ 153.) Specifically, FE 1 reports that there was only
one pharmacist on staff for 800 patients, and that he or she sent an e-mail “notifying
executives that InnovAge’s practices were leading to high employee turnover and poor
patient outcomes” on August 9, 2019.7 (¶¶ 153–54.) The Court concludes these are
specific statements are independently verifiable and can be relied upon without
disclosing the identity of FE 1. Presumably, the Company has access to business
records that can: (1) confirm or refute the allegation that there was only one pharmacist
for 800 patients in spring 2019; and (2) locate the e-mail FE 1 allegedly sent to four of
its executives. Therefore, the Court concludes the allegations based on information
from FE 1 can be relied upon with respect to the Exchange Act claims.
7 This e-mail was allegedly sent to “Defendant Hewitt; Maria Lozzano, Chief Operating
Officer of Western Regional Operations; Claudia Estrada, Regional Director of the San
Bernardino Clinic; and Cheryl Rice, Chief Operating Officer, Western Region.” (¶ 154.)
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The Amended Complaint identifies FE 2 by job title, dates of employment, and
manager. (¶ 67.) It contains specific allegations that thousands of orders for medical
care for participants were never completed (¶ 164), CMO Melissa Welch received e-
mails tracking the number of outstanding orders (id.), and Hewitt and other executives
held a conference call in November 2020 (¶ 167). These facts can be independently
verified by the Company without disclosing FE 2’s identity. Therefore, the Court
concludes the allegations based on information from FE 2 can be relied upon with
respect to the Exchange Act claims.
FE 3 is identified by job title, center location, and dates of employment. (¶ 68.)
The Court finds it difficult to conclude that this information will not be enough for the
Company to identify FE 3. The allegations relying on FE 3 specifically reference a 2016
internal audit and its findings (¶ 144), “thousands of physician orders for medically
necessary services” that were allegedly not carried out at a specific location (¶ 147),
and a specific executive’s repeated requests to pause enrollment (id.). Even if the
Company were not likely to identify FE 3 from the allegations in the Amended
Complaint, it could independently verify these allegations. Therefore, these allegations
can be considered for the Exchange Act claims.
The Amended Complaint alleges that FE 4 was “an InnovAge Center Director,”
who “reported to Regional Vice President of Operations Brad Alley.” (¶ 69.) The
Amended Complaint alleges based on information from FE 4 that CDPHE came onsite
to conduct an audit of InnovAge’s Denver location, after which the Company “sent a
cease-and-desist letter claiming that CDPHE didn’t have authority to conduct an audit.”
(¶ 165.) Given these objectively precise allegations, the Court easily concludes the
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allegations based on information from FE 4 can be relied upon with respect to the
Exchange Act claims.
FE 5 is described by job title, dates of employment, supervisor, and at least one
job duty. (¶ 70.) Other than that, the Amended Complaint contains only a quote that for
senior leadership, the “census [was] king.” (¶ 116.) This allegation cannot be
independently verified without identifying FE 5 and cannot be relied upon with respect to
the Exchange Act claims.
The Amended Complaint alleges that FE 6 “worked for InnovAge as a physician
in the Thornton, Colorado Center from July 2014 to December 2020.” (¶ 71.) FE 6 is
the basis for the allegation that the Company’s Denver center was enrolling participants
without stable housing who were “being put up by the Denver Housing Coalition at the
Western Motor Inn and other hotels in Aurora and Commerce City, Colorado.” (¶ 119.)
FE 6 is also the basis for the allegation that physicians were informed by e-mail of new
enrollments and not involved in the decision whether to enroll new participants. (¶ 122.)
And FE 6 is the basis for the allegation that physicians at the Thornton, Colorado,
center had approximately double the National PACE Association’s recommended case
load. (¶ 183.) Each of these are independently verifiable without identifying FE 6.
Therefore, the Court concludes the allegations based on information from FE 6 can be
relied upon with respect to the Exchange Act claims.
The Court rejects Defendants’ assertion that allegations based on the FEs must
be ignored because they are “low-level” or “locally sited” or their specific responsibilities
are not pleaded with particularity. (ECF No. 73 at 31.) They offer no legal authority for
this position, which they spend merely two sentences arguing. (Id.)
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With respect to whether the Court’s parsing of allegations based on confidential
former employees applies to Lead Plaintiffs’ Securities Act claims, the Court is
compelled, in part, by the reasoning in Tufin. In that case, the court credited
confidential statements for the purposes of a motion to dismiss because the confidential
witnesses were employed “during the operative period” prior to the IPO spawned the
claim. Tufin, 2022 WL 596861, at *8. Here, Lead Plaintiffs allege that the undisclosed
risks “materialized” over a period of years prior to the IPO. (See generally ECF No. 54.)
Moreover, Defendants cite no case supporting the proposition that the Court
should apply the rigorous pleading requirements of Section 78u-4(b)(1) to a claim
brought under the Securities Act. Therefore, the Court will consider allegations based
on the statements of the FEs for purposes of Lead Plaintiffs’ Securities Act claims.
2. Capitol Forum Articles
Defendants argue that for “the same reasons, Plaintiffs cannot rely on
confidential current or former employee statements in the Capitol Forum articles quoted
in the Amended Complaint.” (ECF No. 73 at 31 (citing In re Optionable Sec. Litig., 577
F. Supp. 2d 681, 690 (S.D.N.Y. 2008)).) Defendants argue that “[t]he allegations lack
sufficient particularity to assess the witnesses’ bases of knowledge, access to
information, reliability, or even the time period about which they are talking—let alone
how they support the allegation that the challenged statements were false or misleading
at the time they were made.” (Id. at 32.)
Using the standards set out above, the Court concludes that most of the
anonymous statements contained in the Capitol Forum articles cannot be used with
respect to the Exchange Act claims. The exceptions are the following statements,
which the Court finds have the requisite indicia of reliability to be relied upon in the
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manner intended by the Tenth Circuit in Adams: (1) the statements attributed to
ombudsman Shelbie Engelking8 (¶ 131); (2) the statements purportedly contained in an
April 2021 e-mail from the director of the Pueblo, Colorado, center (¶ 191); (3) the
statements Welch9 allegedly made during Zoom meetings and conference calls (¶¶ 201,
203); (4) the statements describing “management’s operational goals” during a
September 10, 2021 training call with Company staff (¶ 208–09); and (5) the statement
attributed to “a spokesperson” for the New Mexico Human Services Department
regarding the timing of that department’s audit (¶ 221).
As for all other allegations of anonymous statements contained in reporting by
the Capitol Forum, the Court finds that they do not meet the standards set forth in
Adams, because they give little information about the source of the statements and are
not independently verifiable by Defendants. In arriving at this determination the Court
notes that it has reviewed every paragraph referencing the Capitol Forum, wherein
(other than the exceptions noted above) the sources are variously described as
“[f]ormer employees,” “former social workers,” “other current and former employees,” “a
former senior medical employee,” “a former vice president,” “[o]ther current employees,”
and “the owner of one assisted living facility that contracted with InnovAge,” among
other similarly vague descriptions. (E.g., ¶¶ 118, 125, 129, 139, 141, 192, 205.)
To the extent paragraphs containing references to the Capitol Forum’s
investigatory journalism do not rely on anonymous statements, the Court will treat them
8 These statements from a March 2021 Capitol Forum article are, of course, not even
anonymous; however, the Court lists them specifically for clarity.
9 Like the Engelking statements, these statements are specifically attributed, though the
source(s) of the information is apparently anonymous. (See ¶¶ 201, 203.)
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as it would any other allegation in a complaint. Conclusory statements are not entitled
to the assumption of truth; however, well pleaded factual assertions are so entitled.
(See ECF No. 73 (quoting Optionable, 577 F. Supp. 2d at 690 (“[A]rticles should be
credited only to the extent that other factual allegations [based on anonymous sources]
would be—if they are sufficiently particular and detailed to indicate their reliability.”)
(alteration by the Court)).)
The Court also reiterates that the pleading standard announced by Adams
applies only to Exchange Act claims. See supra, Part III.B.1.
B. Material False or Misleading Statements
The PSLRA imposes “specific and more stringent pleading requirements on
complaints alleging securities fraud under Section 10(b).” In re Crocs, Inc. Sec. Litig.,
774 F. Supp. 2d 1122, 1139 (D. Colo. 2011). With respect to claims under the
Exchange Act, the PSLRA requires that
[i]n any private action arising under this chapter in which the
plaintiff alleges that the defendant—
(A) made an untrue statement of material fact; or
(B) omitted to state a material fact necessary in order
to make the statements made, in the light of the
circumstances in which they were made, not
misleading;
the complaint shall specify each statement alleged to have
been misleading, the reason or reasons why the statement is
misleading, and, if an allegation regarding the statement or
omission is made on information and belief, the complaint
shall state with particularity all facts on which that belief is
formed.
15 U.S.C. § 78u–4(b)(1). A court must then evaluate whether “the facts alleged in a
complaint . . . , taken as a whole, . . . support a reasonable belief that the defendant’s
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statements identified by the plaintiff were false or misleading.” Adams, 340 F.3d at
1099. In applying this standard, the Tenth Circuit has directed courts to evaluate six
factors:
(1) the level of detail provided by the facts stated in a
complaint; (2) the number of facts provided; (3) the
coherence and plausibility of the facts when considered
together; (4) whether the source of the plaintiff’s knowledge
about a stated fact is disclosed; (5) the reliability of the
sources from which the facts were obtained; and (6) any
other indicia of how strongly the facts support the conclusion
that a reasonable person would believe that the defendant’s
statements were misleading.
Id. After considering these enumerated factors and “measuring the nature of the facts
alleged against these indicia, [if] a reasonable person would believe that the defendant’s
statements were false or misleading, the plaintiff has sufficiently pled with particularity
facts supporting his belief in the misleading nature of the defendant’s statements.” Id.
With respect to claims under the Securities Act, while the PSLRA still imposes
certain requirements, it does not impose the particularity requirements that apply to
claims under the Exchange Act. In re Thornburg Mortg., Inc. Sec. Litig., 695 F. Supp.
2d 1165, 1190 (D.N.M. 2010) (PLSRA’s heightened pleading standard does not apply to
Securities Act claims); Rombach v. Chang, 355 F.3d 164, 170 (2d Cir. 2004) (same);
see 15 U.S.C. 77z-1. Despite this oddity, the lowerr pleading standard applicable to
Securities Act claims makes no difference in this action, because all statements the
Court has found not to be actionable have been rejected for reasons other than the
insufficiency of the material allegations with respect to falsity.
1. Offering Documents Statements
Defendants argue “[e]ach of the [Offering Documents] statements is either not
false or misleading, or is immaterial as a matter of law.” (ECF No. 73 at 20.)
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a. Materiality
Defendants argue each challenged statement in the Offering Documents other
than the COVID Continuity of Care Statement is an immaterial, optimistic statement
about the Company’s business that is not actionable. (Id. at 20–23.) They argue such
statements are immaterial because a reasonable investor would not consider them
important in determining whether to buy or sell the Company’s stock. (Id. at 20–21
(quoting Employees’ Ret. Sys. of R.I. v. Williams Cos., 889 F.3d 1153, 1167 (10th Cir.
2018).)
Defendants argue the Second Circuit has addressed (and found not actionable)
statements “similar to the Patient-Centered Care, Individualized and Coordinated Care,
Expansion Model, Standardized and Well-Staffed Operations, Robust Compliance,
Successful Medical Risk Management, Home Care, and Scalability Statements.” (Id. at
21.) In Local 134 IBEW Joint Pension Trust of Chicago v. JP Morgan Chase Co., 553
F.3d 187 (2d Cir. 2009), the Second Circuit reasoned that JP Morgan Chase’s
statements
regarding its “highly disciplined” risk management and its
standard-setting reputation for integrity. Plaintiffs point to
statements such as the assertion that JPMC had “‘risk
management processes [that] are highly disciplined and
designed to preserve the integrity of the risk management
process,’; that it “‘set the standard’ for ‘integrity,’”; and that it
would “‘continue to reposition and strengthen [its] franchises
with a focus on financial discipline’” . . . [were] no more than
“puffery” which does not give rise to securities violations.
Id. at 205–206 (citations omitted) (first and second alteration in original). The Second
Circuit further explained that such statements did not and could not “amount to a
guarantee that its choices would prevent failures in its risk management practices.” Id.
at 206.
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The Tenth Circuit has also recognized that puffery is not actionable because no
reasonable investor would rely upon vague, optimistic statements. Pluralsight, 45 F.4th
at 1249. The Tenth Circuit has recently had occasion to reiterate the distinction
between material misstatements and mere puffery. In Pluralsight, the Tenth Circuit
described its opinion in Level 3 as “instructive,” explaining that in Level 3 “broad claims”
about a company’s integration efforts following recent acquisitions were puffery, but
statements about “objectively verifiable matters of fact” were “potentially actionable.” Id.
(quoting Level 3, 667 F.3d at 1340). “Saying that a project is ‘progressing well’ is likely
not actionable, but saying it is ‘90% done’ potentially is.” Id. Defendants rely upon
Pluralsight to argue that various of the other statements in the Offering Documents are
“too vague to convey any specific level of care or to offer assurances that InnovAge
perfectly manages medical risk in every instance.” (ECF No. 73 at 22–23.)
Lead Plaintiffs respond that each challenged statement in the Offering
Documents is a concrete and specific statement describing “InnovAge’s care delivery,
compliance, and growth practices.” (ECF No. 79 at 31 (citing Karimi v. Deutsche Bank
Aktiengellschaft, 607 F. Supp. 3d 381, 393 (S.D.N.Y. 2022)).) They distinguish the
statements in the Offering Documents from those in JP Morgan Chase, which they
describe as involving “abstract notions of ethics, responsibility, or integrity.” (Id. at 32.)
Instead, they assert the statements in the Offering Documents describe “specific
practices,” which they juxtapose with the Company’s actual practices. (Id. (citing
Freudenberg v. E*TRADE Fin. Corp., 712 F. Supp. 2d 171, 189–90 (S.D.N.Y. 2010)).)
The Court has carefully considered each of the challenged statements in the
Offering Documents and found that the following statements are not actionable:
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• The Patient-Centered Care Statement, which describes the Company’s
approach to care delivery and the impact of its care on patients in vague
and general terms such as “meaningfu[l] improve[ment],” “as long as
safely possible,” and “reducing over-utilization of high-cost care settings”
(¶ 241(a));
• The Standardized and Well-Staffed Operations Statement, which
describes InnovAge’s operations as “standardized and streamlined” and
speaks of “meaningfu[l]” investment in corporate infrastructure that allows
physicians to focus on caring for patients (¶ 241(c));
• The Robust Compliance Statement, which—at the risk of stating the
obvious—describes InnovAge’s compliance infrastructure and team as
“robust” (¶ 241(d));
• The Successful Medical Risk Management Statement, which describes
the Company’s “long track record of successfully managing medical risk”
and the reasons for that “success”10 (¶ 241(e));
• The Technology Statement, which describes the Company’s use of
electronic recordkeeping to “support” its care delivery (¶ 241(g));
• The Expansion Model Statement, which describes various aspects of
InnovAge’s expansion strategy as “disciplined,” “targeted,” “concerted,”
“scalable,” “efficient," and “uniform” (¶ 241(i));
• The Scalability Statement, which describes InnovAge as having a
10 This statement is unlike the post-offering statements concerning the Company’s rapid
growth, which attribute that growth to a specific source. See infra, Part III.B.2.b.i. While
“growth” is a concrete concept capable of objective verification, in the Court’s view “success” is
a vague and subjective term.
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“demonstrated ability” to “scale successfully” (¶ 241(j));
• The Virtuous Cycle Statement, which describes the Company’s ability to
avoid unnecessary utilization of high-cost care, reinvest savings into its
business to “further improve participants’ experiences and health
outcomes,” and “drive profitable growth” by “consistently deliver[ing] high-
quality care, achieve high participant satisfaction and retention, and attract
new participants” (¶ 241(k)); and
• The Government Relations Statement, which describes the Company’s
relationships with “Medicare and Medicaid agencies” as “strong” (¶ 241(l)).
None of these statements “cross the line from corporate optimism and puffery to
objectively verifiable matters of fact.” Level 3, 667 F.3d at 1340. Unlike the statements
in Level 3 that the Tenth Circuit held were material, none of them use specific words
capable of falsification. In Level 3, the defendants had represented that the “majority” of
work had been completed, which was “ahead of plan” and “under budget”; that “85%,
90%” of certain efforts were “done”; and a “majority” or “most” of certain other efforts
were “complete.” Id. Each of these statements can be proven wrong or in conflict with
reality at the time they were made: “most” and the “majority” mean more than 50%,
specific percentages like 85% or 90% are self-evidently verifiable, and being “ahead of
plan” and “under budget” are objectively verifiable when compared with a specific plan
and budget.
In comparison, the statements the Court concludes are vague or puffery, do not
contain words with similarly concrete and specific meanings. Rather, they represent
information in subjective terms incapable of verification or falsification. In the Court’s
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view, there is no plainly obvious and objective meaning of the terms or phrases
“meaningfully improve[d]” quality of care, “over utilization of high-cost care,”
“streamlined” operations, “robust” compliance measures, “disciplin[e],” “efficien[cy],”
“succes[s],” “improve[d] . . . experiences and health outcomes,” or “high participant
satisfaction and retention.” And, therefore, unlike the statements in Level 3, these
statements do not “cross the line” from optimism and puffery to material statements. As
such, each of these statements is not actionable.
b. Adequacy of Allegations that Statements Were False or Misleading
Defendants challenge the three remaining statements11 as inadequately pleaded,
specifically with respect to being false or misleading when made. (ECF No. 73 at 23–
29.) They address these statements together. (Id. at 24–27.) In Defendants’ view,
statements made by Blair that seem to undercut the Individualized and Coordinated
Care, COVID Continuity of Care, and Home Care Statements were not an admission
that InnovAge had failed to do what it represented to investors, rather they only
announced initiatives intended to strengthen and improve the Company’s business. (Id.
at 24.) They argue such initiatives do “not make these statements false when made
over a year earlier.” (Id. (citing Jiajia Luo v. Sogou, Inc., 465 F. Supp. 3d 393, 412
(S.D.N.Y. 2020)).)
They further argue that “the [challenged] statements accurately describe the way
InnovAge has designed its business to operate.” (Id. at 25.) Moreover, they argue that
to find these statements material, the Court must conclude a reasonable investor would
take these statements as assurances that the Company would “perfectly execute all of
11 Specifically, those statements are the Individualized and Coordinated Care, COVID
Continuity of Care, and Home Care Statements.
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its business practices, particularly when disclosures revealed InnovAge had previously
been found to have violated PACE regulations and warned of the potential for future
such findings.” (Id. (citing Singh v. Cigna Corp., 918 F.3d 57, 64 (2d Cir. 2019)).)
Defendants compare this action to Ong v. Chipotle Mexican Grill, Inc., 294 F. Supp. 3d
199 (S.D.N.Y. 2018), where the court dismissed a claim of securities fraud alleging that
the following statement was false and misleading:
[Chipotle’s] quality assurance department establishes and
monitors our quality and food safety programs for our supply
chain. Our training and risk management departments
develop and implement operating standards for food quality,
preparation, cleanliness and safety in the restaurants.
(ECF No. 73 at 25 (quoting Ong, 294 F. Supp. 3d at 219).) The plaintiffs in that case
alleged this statement was false and misleading because Chipotle did not “adequately
monitor” its food safety programs, “failed to live up to its own food safety standards,”
ignored internal audit results, and conducting deficient internal audits. (Id. (quoting
Ong, 294 F. Supp. 3d at 219).) The court dismissed the complaint, reasoning that the
plaintiffs did not allege Chipotle failed to undertake the efforts described in the
statement and merely alleged Chipotle failed to do so “adequately.” (Id.) Defendants
cite Nardy v. Chipotle Mexican Grill, Inc., 2019 WL 3297467 (D. Colo. Mar. 29, 2019)
and Crocs as similar cases supporting dismissal. (ECF No. 73 at 26.)
Defendants also urge that the Individualized and Coordinated Care and COVID
Continuity of Care Statements are not adequately alleged as false and misleading by
omission because: (1) the allegations rest on InnovAge’s failure to disclose audit results
that were publicly available (2) the Amended Complaint fails to “adequately allege a
nexus between the omitted information and challenged statements”; and (3) the
allegations do not satisfy the PSLRA’s heightened pleading standard because they rely
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on confidential witnesses and the Capitol Forum articles. (ECF No. 73 at 29–32.) The
second and third of these arguments rely entirely on other arguments the Court has
already discussed. (Id. at 30–32; see supra, Parts III.B.1.a, III.A.)
Lead Plaintiffs argue that “[o]nce Defendants chose to tout InnovAge’s execution
of its care model in the Offering Documents, they undertook an ‘obligation to speak
truthfully’ and to provide ‘complete and non-misleading information.’” (ECF No. 79 at 20
(quoting Or. Laborers Emp’rs Pension Trust Fund v. Maxar Tech. Inc., 2020 WL
5500458, *10 (D. Colo. Sep. 11, 2020) (emphasis in Maxar)).) Therefore, because the
Company chose to disclose information describing its business practices, it was
obligated to also disclose that it was consistently failing to execute its care model in
compliance with regulatory standards. (Id. (citing Singer v. Reali, 883 F.3d 425, 440
(4th Cir. 2018)).)
Lead Plaintiffs explain that Defendants’ argument that the Amended Complaint
seeks to impose liability for failing to perfectly execute the Company’s business model
misstates their legal theory. They insist that the statements were false and misleading
because they failed to disclose that the Company’s failure to “deliver adequate and
minimally compliant care . . . compromised the Company’s sole source of revenue and
paralyzed its ability to expand.” (Id. at 21.) They argue that the Court should adopt the
reasoning in Meyer v. Jinkosolar Holdings Co., 761 F.3d 245 (2d Cir. 2014), which held
that statements that, while “technically true” can be misleading if they “comfort”
investors that “reasonably effective steps [are] being taken to comply with applicable . . .
regulations” when, in fact, those steps are “failing to prevent substantial violations.” (Id.
at 21–23; Jinkosolar, 761 3d. at 251.)
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With respect to Defendants’ argument that Blair merely announced “new”
initiatives to “strengthen” or “improve” the Company’s practices, rather than admitting
the practices were previously inadequate, Lead Plaintiffs respond that the remarks
made clear that “InnovAge failed to execute the specific practices that the Offering
Documents touted as a ‘proven’ success.” (Id. at 23–24.)
As for Defendants’ argument that certain statements are “not actionable because
the Offering Documents included cautionary disclosures,” Lead Plaintiffs respond that
such disclosures can only protect “forward-looking” statements. (Id. at 24.) They
further argue that the disclosures are not sufficiently specific to “nullify any potentially
misleading effect.” (Id. (quoting SEC v. Mahabub, 343 F. Supp. 1022, 1045 (D. Colo.
2018)).) “Vague disclaimers that a ‘lack of availability of clinical personnel’ affecting ‘all
health care providers’ or that InnovAge ‘might fail to implement its policies’ cannot
sufficiently cure the misinformation conveyed by descriptions of policies and procedures
that InnovAge was then failing to execute in compliance with regulatory standards.” (Id.
at 24–25 (citing Karimi, 2022 WL 2114628, at *10).)
Lead Plaintiffs respond to Defendants’ argument that the Individualized and
Coordinated Care and COVID Continuity of Care Statements are not actionable
because the audit results were public by asserting that the “truth-on-the-market”
defense it evokes is (1) premised on the preexistence of an efficient market in a
company’s stock and (2) “seldom grounds for dismissal at the pleading stage” because
it is fact intense. (ECF No. 34–35.)
Defendants argue in reply that the Court should ignore Lead Plaintiffs’
characterization of certain audit results as a “fac[t] not alleged in the complaint.” (ECF
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No. 83 at 13 n.6 (quoting WJM Revised Practice Standard III.D.1).) And they argue
that, even if the Court accepts that characterization—that the audits’ findings were “at
the time of the IPO”—the Court should find that the results do no “support claims of
company-wide deficiencies.” (Id.) They then recapitulate their arguments about the
“total mix” of information available to the investing public and the pleading requirements
of Adams. (Id. at 14–16.)
After careful consideration, the Court concludes that the Individualized and
Coordinated Care, COVID Continuity of Care, and Home Care Statements are
adequately alleged as false and misleading. Absent a duty to disclose, a corporation is
not required to disclose a fact merely because a reasonable investor would like to know
that fact. Basic Inc. v. Levinson, 485 U.S. 224, 239 n.17 (1988). However, “at the
moment the company chooses to speak, it takes upon itself the obligation to speak
truthfully, and it is the breach of that obligation which forms the basis for the § 10(b)
claim.” In re Vivendi, S.A. Sec. Litig., 838 F.3d 223, 258 (2d Cir. 2016) (emphasis in
original); United States v. Gordon, 710 F.3d 1124, 1142 (10th Cir. 2013) (where a party
“elects to disclose material facts, he must speak fully and truthfully, and provide
complete and non-misleading information” (emphasis in original)).
The properly considered allegations in the Amended Complaint paint a picture of
a business under enormous regulatory risk. Its sole source of revenue was the
capitation payments. These payments came with strings (in the form of strict
regulations and frequent audits) attached, and the potential penalties for failing to
provide adequate care for participants included an involuntary pause of enrollment.
There simply can be no doubt that withholding information concerning facts that could
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literally cap revenue in a business’s largest market (plus an additional market) would
“significantly alte[r] the total mix of information available” to investors. United Food and
Commercial Workers Union Local 880 Pension Fund v. Chesapeake Energy Corp., 774
F.3d 1229, 1238 (10th Cir. 2014) (quoting Slater v. A.G. Edwards & Sons, Inc., 719 F.3d
1190, 1197 (10th Cir. 2013)). Instead of revealing this information, the remaining
challenged Offering Documents statements provide a rosy picture of the Company’s
business model, providing “comfort” to investors in a company at the frontier of for-profit
PACE business. See Jinkosolar, 761 3d. at 251. Searching for ways to increase
margin and pursuing meteoric growth using a theretofore untested business model is
inherently risky—as such, comforting statements to potential investors are especially
noteworthy in this context and therefore in this action.
At this stage, the Court rejects the assertion that the Individualized and
Coordinated Care and COVID Continuity of Care Statements are not actionable
because of publicly available information.12 The Tenth Circuit has explained that “an
omission is material only if disclosure of what is omitted would ‘significantly alter[ ] the
total mix of information available’” to a reasonable investor. United Food, 774 F.3d at
1233, 1238 (quoting Slater v. A.G. Edwards & Sons, Inc., 719 F.3d 1190, 1197 (10th
Cir. 2013) (alteration in original)). “[A] ‘reasonable investor’ is neither an ostrich, hiding
her head in the sand from relevant information, nor a child, unable to understand the
facts and risks of investing.” Id. (quoting Greenhouse v. MCG Capital Corp., 392 F.3d
650, 656–57 (4th Cir. 2004) (alteration in original). Therefore, “[p]ublic documents are
part of that total mix if an investor interested in a particular type of information about a
12 The Court notes Defendants’ argument, though made in challenging falsity, is better
aligned with the Tenth Circuit’s case law considering materiality.
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company would know of the existence of the record and could readily access it.” Id.
(citing United Paperworkers Int’l Union v. Int’l Paper Co., 985 F.2d 1190, 1199 (2d Cir.
1993)).
While this language may prove useful to Defendants at a later stage, such
arguments require an “intensely fact-specific” inquiry that is “rarely an appropriate basis
for dismissing a § 10(b) complaint.” Gelt Trading, Ltd. V. Co-Diagnostics, Inc. 2022 WL
716653, at *5 n.2 (quoting Ganino v. Citizens Utils. Co., 228 F.3d 154, 167 (2d Cir.
2000)). Though the district court and Tenth Circuit had the benefit of a full record to
conduct such an inquiry in United Food, at this early pleading stage of this litigation the
Court does not have a similarly developed record before it. United Food, 774 F.3d at
1232, 1234–39.
Therefore, the Court concludes the Individualized and Coordinated Care, COVID
Continuity of Care, and Home Care Statements are adequately pleaded as materially
false and misleading.
c. Items 105 and 303
Defendants argue the Offering Documents fulfilled the disclosure requirements of
Items 105 and 303 of Regulation S-K. (ECF No. 73 at 41.) Together, these regulations
required the Offering Documents to include “a discussion of the material factors that
make an investment in the registrant or offering speculative or risky” and disclose “any
known trends or uncertainties that have had or that the registrant reasonably expects
will have a material favorable or unfavorable impact on net sales or revenues or income
from continuing operations.” 17 C.F.R. §§ 229.105(a), 229.303(b)(2)(ii). Defendants
contend the Offering Documents “were replete with disclosures that precisely
addressed” the risks the Amended Complaint alleges were omitted. For example, the
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Risk Factors section of the Offering Documents contained, among others, the following
disclosures:
• “If we fail to manage our growth effectively, we may be unable to execute
our business plan, maintain high levels of service and participant
satisfaction or adequately address competitive challenges.”
• “We have experienced, and may continue to experience, rapid growth and
organizational change, which has placed, and may continue to place,
significant demands on our management and our operational and financial
resources.”
• “If we fail to effectively manage our anticipated growth and change or fail
to ensure that the level of care and services provided by our employees
complies with regulatory and contractual requirements, the quality of our
services may suffer.”
(ECF No. 74-1 at 11.) The Risk Factors section also contains an extensive discussion
of “[r]isks related to regulation.” (Id. at 15–22.) This section included disclosures that
InnovAge was subject to strict and complex regulation and audits, and that failure to
comply with regulations could result in “enrollment sanctions that may impede [its] ability
to expand.” (Id. at 22; accord id. at 24.) Defendants argue the Risk Factors section
also adequately disclosed “existing and potential staffing challenges.” (ECF No. 73 at
42 (citing ECF No. 74-1 at 9–11).) Finally, Defendants argue that even if required
information was omitted as alleged, the Amended Complaint fails to allege that any of
the omissions were knowing. (Id. at 42–43.)
Lead Plaintiffs argue the disclosures referenced above are “generic” and do not
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comply with Regulation S-K. (ECF No. 79 at 36.) Moreover, they do not disclose—
much less discuss and analyze—the fact that “InnovAge reasonably expected its growth
strategy to have a material and unfavorable effect on revenue.” (Id.) They also argue
that they need only allege that the trends or risks were “presently known to
management,” not any particular individual in management. (Id. at 36–37.) They allege
the Amended Complaint meets this bar, but do not cite to any particular paragraphs—
leaving the task of deciphering this contention to the Court. (See id.)
The Court finds the disclosures are not remotely close to being “generic.” They
identify specific risks and uncertainties, give reasons why the disclosed facts present
risks or uncertainties, and describe the precise sanction that led to the events
underlying this action. The Offering Documents even point out that the Company’s
business is concentrated in Colorado and that it is “particularly susceptible to any . . .
adverse developments in that state.” (ECF No. 74-1 at 10.) The Court, therefore,
concludes the Offering Documents complied with Regulation S-K.13
2. Post-Offering Statements
The Court considers only unique statements in this section of its Order. For any
allegedly false or misleading statements that are merely repetitions of challenged
statements contained in the Offering Documents, the Court does not repeat the analysis
it has just conducted.
13 This ruling is not in conflict with the Court’s ruling on the Individualized and
Coordinated Care, COVID Continuity of Care, and Home Care Statements because the
allegations relating to Regulation S-K focus on the risks and related disclosures stemming from
“the Company’s enrollment growth strategy,” not the quality or nature of care provided. (¶ 331.)
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a. Materiality
(i) Staffing Statement
Defendants argue that “[a]t least one of the 12 Post-Offering Statements[14] Post-
Offering Statements is a nonactionable, ‘general statement of corporate optimism.”
(ECF No. 73 at 32 (quoting Grossman v. Novell, Inc., 120 F.3d 1112, 1119 (10th Cir.
1997)).) Specifically, they argue that Hewitt’s statement during the May 10, 2021
earnings call that InnovAge had kept staff turnover down and was “very successful as
compared to other long-term care organizational results” is not actionable for this
reason. (Id.) The Court agrees. Terms such as “down” and “very successful” are
vague and subjective. Therefore, they are not actionable. See supra, Part III.B.1.a.
(ii) New Mexico Audit Statement
Defendants argue Hewitt’s statement during the November 9, 2021 earnings call
that InnovAge would “begin a routine audit in New Mexico that will be handled remotely”
is not adequately alleged as false because the Amended Complaint does not “explain
why the precise time the audit began is material, nor does it allege the disclosure of the
audit’s nature was inaccurate.” (EFC No. 73 at 39.) They continue that “[s]ince the
duration of any audit is not fixed, there is no reason the precise time it begins would be
material.
Lead Plaintiffs argue that the length of an audit signals its seriousness; therefore,
by suggesting to investors that the audit had not yet begun, Hewitt could avoid
disclosing the seriousness of the audit already underway in New Mexico. (ECF No. 79
14 Defendants identify twelve challenged post-offering statements, (see ECF No. 73-1 at
4–6); though the Court breaks them out somewhat differently in Part I.H, supra, the content of
the statements is the same.
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at 49.) They also point out that in the same Capitol Forum article in which the
spokesperson for the New Mexico Human Services Department confirmed the audit had
begun “weeks” before the November 9, 2021 earnings call, the spokesperson added
that CMS began its previously scheduled routine audit of InnovAge’s Albuquerque
center early “due to what’s being going on in other states” (i.e., Colorado and
California). (Id. (citing ECF No. 74-17 at 2).)
Despite Defendants’ framing of their argument and its location in the Motion
itself, it is really an argument about materiality. Therefore, the Court addresses it under
that framework. The Court finds the Amended Complaint adequately alleges that this
statement was material. Though the Amended Complaint does not contain the
allegation that deficiencies uncovered in other audits affected the New Mexico audit’s
timing, it is contained in an article the Amended Complaint incorporates by reference
and is properly considered. See GFF Corp. v. Associated Wholesale Grocers, Inc., 130
F.3d 1381, 1384 (10th Cir. 1997). The Court is satisfied that disclosing the special
interest displayed by the New Mexico auditors would have significantly altered the total
mix of information available to investors.
b. Adequacy of Allegations that Statements Were False or Misleading
(i) Statements Concerning Organic Growth
Defendants argue that the three statements15 related to “organic growth” that
Lead Plaintiffs challenge are not false and misleading as a matter of law. (ECF No. 73
at 33.) Lead Plaintiffs allege that these statements were false and misleading because
the Company was sustaining its growth by enrolling participants without stable housing,
15 Made in May and September of 2021. See supra, Parts I.H.1, I.H.2.
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which created a regulatory risk that endangered future growth. (Id.; e.g., ¶¶ 246–47,
249(a), 253.) Defendants argue that the “statements accurately disclose that
InnovAge’s growth was due to participant enrollments.” (ECF No. 73 at 33.) They also
repeat their argument that these statements are not actionable because the allegedly
withheld information was “already repeatedly [publicly] disclosed.” (Id. at 34.)
Lead Plaintiffs respond that Hewitt described the Company’s growth as “organic”
in each statement, despite knowing the growth was being driven by “improper
enrollment and disenrollment practices, and a growth strategy that prioritized enrollment
without regard to capacity.” (ECF No. 79 at 38.) Rather than accurately describing the
source of the Company’s growth from increased enrollment, Lead Plaintiffs argue the
statements misled investors by suggesting the Company was simply utilizing excess
capacity in existing and new centers, when in reality, the growth was so significant that
it impaired participants’ quality of care and violated regulations. (Id. at 37–38.) These
facts presented a risk that regulators would pause enrollment—the only method for
InnovAge’s continued growth.
The Court is not persuaded that the description of the enrollment and
disenrollment practices described in the Amended Complaint as “organic” is false or
misleading. Both Hewitt’s specific statements and analyst reactions to the Company’s
December 23, 2021 disclosures evidence that describing the Company’s growth as
“organic” is not a statement about enrollment practices. Hewitt’s statements in the
September 21, 2021 press release identifies three kinds of growth InnovAge was
pursuing: “organic growth, de novo locations in existing and new states, and
acquisitions.” (¶ 252.) A report by an unidentified J.P. Morgan analyst following the
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December 23, 2021 disclosures described those disclosures as “call[ing] into question
the company’s ability to hit its organic and inorganic (both M&A and de novo) growth
targets.” (¶ 288.) While these statements categorize InnovAge’s three growth
strategies slightly differently, it is clear that Hewitt meant “organic growth” to mean
increased enrollment in existing centers, and investors understood her statements in
this way. (See ¶ 271 (quoting an investment analyst describing the Company as having
“substantial capacity to accelerate organic growth in its current centers . . . .”).) All of
this is generally in accord with the Court’s understanding that organic growth describes
growth stemming from a company’s normal business operations and inorganic growth
describes growth from mergers with or acquisitions of other preexisting businesses.
But whether describing the Company’s growth as “organic” is false and
misleading does not decide actionability with respect to all of Hewitt’s statements.
When a company specifically attributes its business performance to a particular source,
but the true source of that performance is something else, that statement is false and
misleading. See Peace Officers’ Annuity and Benefit Fund of Ga. v. DaVita Inc., 372 F.
Supp. 3d 1139, 1151–53 (D. Colo. 2019); SEC v. Woodruff, 778 F. Supp. 2d 1073,
1086–87 (D. Colo. 2011). Only Hewitt’s statements during the opening remarks of the
May 10, 2021 earnings call attributes the Company’s organic growth to a specific
source: “increasing participant enrollment and capacity within existing centers.”
(Compare ¶ 248, with ¶ 246, and ¶ 252.) Therefore, only that statement is potentially
actionable. And because the Amended Complaint contains numerous allegations that
the sources of InnovAge’s impressive growth were actually certain questionable
enrollment practices, the Court concludes the falsity of this statement is sufficiently
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alleged.16 (E.g., ¶¶ 119–20.)
(ii) Staffing Statements
Defendants argue the four post-offering statements “about InnovAge coping with
staffing shortages” are not adequately alleged as false and misleading because the
Company “repeatedly disclosed the fact of staffing shortages in the Offering Documents
and subsequent public filings.” (ECF No. 73 at 34 (citing ¶¶ 248(b)17, 250(b), 254(a),
259(a)).) Given these disclosures, they argue no reasonable investor could understand
the statements “as a guarantee” the Company was maintaining adequate staffing levels.
(Id.) And they more generally argue that the Amended Complaint fails to sufficiently
allege these statements were actually false. (Id. at 34–35.)
Lead Plaintiffs respond that the statements do not need to be interpreted as
guarantees to be false and misleading. (ECF 79 at 40.) And much like the statements
relating to the Company’s growth, they argue these statements are misleading because
thy attributed staffing challenges to the COVID-19 pandemic, rather than their true
sources: “working conditions and growth strategy causing high turnover and an inability
to fill positions.” (Id. 40–41.) They also urge that despite one statement being preceded
by the phrase “I think,” it is not a statement of opinion. (Id. at 42 (citing MHC Mut.
Conversion Fund, L.P. v. Sandler O'Neill & Partners, L.P., 761 F.3d 1109, 1120 (10th
Cir. 2014)).)
The Court concludes these statements are adequately alleged as false and
16 To the extent the disclosures discussed in Part III.B.1.c, supra, may render these
statements immaterial, a ruling to that effect is premature. See supra, Part III.B.1.b.
17 The Court has already found this statement is immaterial, see supra, Part III.B.2.a.i.,
and so addresses it no further.
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misleading. The statements represent that InnovAge was: (1) “fully” (i.e., appropriately)
staffed to execute participant care plans; (2) experiencing staffing issues due to a
competitive environment typical of “all healthcare organizations”; and (3) facing staffing
challenges as a result of a shortage of qualified healthcare workers due to historical
trends and the pandemic but had supplemented with “temporary labor in order to
maintain appropriate staffing levels.” (¶¶ 250(b), 254(a), 259(a).) These statements are
not guarantees, but they convey present information (over the course of several
months) about the Company’s staffing situation in a labor-intensive industry and the
reasons for that staffing situation. These statements contradict the allegations in the
Amended Complaint setting out the real reasons for InnovAge’s challenges staying
appropriately staffed: poor working conditions and rapid enrollment growth beyond
capacity. (E.g., ¶ 260.) And to the extent these statements simply leave out information
previously disclosed, they are comforting statements like those discussed in Part
III.B.1.b.
(iii) Deficient Participant Assessments and Care Plans
Statement
With respect to the statement concerning failures at certain centers to complete
the required participant assessments and care plans contained in the Q3 2021
Quarterly Report, Defendants argue only that the Company previously disclosed
“historical audit deficiencies and the potential for future audits.” (ECF No. 73 at 35–36.)
The Court rejects this argument, as it goes to materiality, and not the truthfulness of the
statement. See supra, Part III.B.1.b n.11. This argument is also better left for a later
stage of these proceedings upon a more complete factual record.
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(iv) Government Payors Statement
Defendants challenge the adequacy of the allegation that the statements in the
Q3 2021 Quarterly report that ““[m]aintaining, supporting and growing these
relationships [with government payors] . . . is critical to our long-term success and ‘[o]ur
model is aligned with the interests of our government payors’ are false and misleading
because InnovAge ‘failed to recognize and process complaints as grievances.’” (ECF
No. 73 at 36 (quoting ¶¶ 250(d), 251(d)) (alterations in original).) According to
Defendants, recognizing and processing complaints as grievances “has nothing to do
with the subject of the statements.” (Id.)
Lead Plaintiffs argue that the statement that the Company’s model was “aligned
with the interests” of the government payors, “conveyed that InnovAge took reasonably
effective steps to comply with its contractual and regulatory obligations, and was
forthcoming, transparent, and honest in its dealings with regulators—the Company’s
only customers and source of 99% of the Company’s revenue.” (ECF No.79 at 43.)
The Court agrees. The Amended Complaint contains numerous facts alleging an
uncooperative—and even obstructionist—relationship with government payors. (E.g.,
¶¶ 165, 190, 192–94.) Therefore, the Court concludes this statement is adequately
alleged to be false and misleading.
(v) September Audit Statements
Defendants argue that Hewitt’s statements concerning ongoing audits during the
September 21, 2021 earnings call were not false and misleading for five reasons: (1)
the Capitol Forum article reporting that CMS had found similar results to those found in
Colorado during an earlier audit of the Company’s operations in California is unreliable
because the article does not sufficiently identify its source; (2) the Amended Complaint
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does not allege that audits are an uncommon occurrence, and CMS’s pause in trial and
routine audits was public information; (3) the fact that there were preliminary findings in
Colorado similar to the Sacramento audit does not render the statement that no
immediate corrective actions were identified false; (4) the Company was under no
obligation to disclose preliminary audit findings that were subject to change; and (5) the
Amended Complaint does not allege that Hewitt’s statement that the Sacramento and
Colorado audits were “different” was false. (ECF No.73 at 36–38.)
Lead Plaintiffs respond: (1) the Capitol Forum article can be relied upon; (2) the
mere public availability of information about CMS’s modified audit practices on its
website is insufficient to require dismissal at this stage; (3) the Company was in
possession of preliminary results from the Colorado audit, which were substantially the
same as the findings from the Sacramento audit that were negatively received by
analysts; (4) it was misleading for Hewitt to reassure investors that they did not know
the results of the Colorado audit when they were in possession of the preliminary
results; and (5) Hewitt’s technically true statements that the two audits were “different” is
still misleading to investors based on the context of the analysts’ questions that
prompted the statements. (ECF No. 79 at 45–47.)
With respect to the reliability of allegations premised on the Capital Forum article,
the Court has already determined that the allegation related to Hewitt’s September
statements is sufficiently pleaded. See supra, Part III.A.2. Consistent with its other
rulings in this Order, the Court will not find these statements to be not actionable as a
matter of law simply because contradictory information was elsewhere available without
the benefit of a full record. See, e.g., supra, Part III.B.1.b. Nor does the Court agree
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that the Amended Complaint must allege that audits were uncommon for Hewitt’s
statements to be actionable.
The Court concludes, however, that Lead Plaintiffs have not sufficiently alleged
that the statement that no immediate corrective actions had been yet identified was
false. The Court does not reach this conclusion based on Defendants’ cited authority
that “a company need not disclose all communications with a regulator even where the
regulator has notified the company about its operation’s deficiencies.” Singh v. Cigna
Corp., 277 F. Supp. 3d 291, 311 (D. Conn. 2017). The paragraph from which that
statement is taken repeatedly cites Christine Asia Co. v. Alibaba Grp. Holding Ltd., 192
F. Supp. 3d 456 (S.D.N.Y. 2016), vacated and remanded by, 718 F. App’x 20 (2d Cir.
2017). Singh, 277 F. Supp. 3d at 311. In fact, Singh cites Alibaba for the proposition
quoted by Defendants and the Court above. Id.
A little more than two months after Singh, the Second Circuit vacated Alibaba,
finding error in the district court’s reasoning on this very issue. 718 F. App’x at 23
(“Accepting Plaintiffs’ allegations as true, Defendants had a duty to disclose these facts,
in a manner that accurately conveyed the seriousness of the problems Alibaba faced,
so as not to render Defendants’ public disclosures “inaccurate, incomplete, or
misleading.’”) Nevertheless, there is nothing in the Amended Complaint to suggest that
the Company was already aware of “immediate corrective actions” resulting from the
Colorado audit. “Immediate Corrective Action Required” (“ICAR”) is a term of art, (see ¶
150), and there are no allegations that specifically identify what, if any, ICARs were
identified in the preliminary findings of the Colorado audit or the Sacramento audit—to
which Lead Plaintiffs allege the Colorado audit findings were “substantially the same.”
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(¶ 255(b).)
The statement that the Sacramento and Colorado audits were “very different
things” is actionable, despite Defendants’ arguments that the Company was under no
obligation to disclose the audits’ specific preliminary findings. (Id.) Nor is the Court
convinced by Defendants’ argument that the Amended Complaint need specifically
allege that the two audits were not “different.”18 This statement was made in the context
of the Company’s disclosure that its Sacramento center was subject to an involuntary
enrollment freeze, resulting from a regulatory audit. (¶ 284.)
Moreover, during the same earnings call, Hewitt disclosed that the Company was
subject to three ongoing audits in Colorado, the core region of its business. (Id.) She
distinguished the Colorado audits from the Sacramento audit as “very different” and
specifically noted that the freeze was limited to the Sacramento center and did not even
impact other centers in California. (¶¶ 255(b), 286.) These statements together implied
that a freeze of enrollment in Colorado was unlikely, and at least one analyst interpreted
these statements precisely that way. (¶ 288.) Coupled with the allegation that
InnovAge was in possession of preliminary findings that were “substantially the same”
as the findings that resulted in the Sacramento freeze, the Court finds that this
statement is adequately alleged as false and misleading. (¶ 255(b).)
(vi) November Audit Statements
Defendants argue that Hewitt’s statements about the Sacramento and Colorado
audits during the November 9, 2021 earnings call are not adequately alleged as false
and misleading for several reasons. (ECF No. 73 at 38–39.) They argue that the
18 This argument causes the Court to wonder if, in Defendants’ view, the only allegation
that would make this statement false is the allegation that the audits were literally the same.
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Amended Complaint itself undercuts the assertion that Hewitt’s statement that audits
are “not unusual” in the PACE business was false and misleading. (Id. at 38.) The
Amended Complaint “acknowledges that [CMS’s] Oversight and Enforcement Group
‘oversees, coordinates[,] and conducts the audits of all PACE organizations.’” (Id.
(quoting ¶ 260(c)).) They also explain that the statement must be considered in full
context, including the qualifier that a referral is “not an uncommon practice per se” and
that Hewitt did disclose that “further action” due to the referral was “possible.” (Id. at
38–39.) They also point out that CMS’s Audit Guide “describing the potential
significance of a referral to enforcement is publicly available.” (Id. at 39.)
With respect to Hewitt’s statement that the “Colorado [audit] is a little bit different
than Sacramento,” they stress that she prefaced this statement with the phrase “I think.”
(Id.) Therefore, they argue the statement is a nonactionable statement of opinion. (Id.
(citing Hampton v. root9B Techs., Inc., 897 F.3d 1291, 1299 (10th Cir. 2018)).)
Lead Plaintiffs respond that these statements are actionable because they
“misled investors into believing that the deficiencies identified in Sacramento did not
suggest company-wide problems.” (ECF No. 79 at 48.) They argue that Defendants’
reference to the Oversight and Enforcement Group is misdirected because the referral
Hewitt was referencing was to the Division of Compliance and Enforcement, “which is
responsible only for enforcement determinations.” (Id.) They argue referrals to that
division are only made when deficiencies are serious enough to potentially merit an
enforcement action. (Id. (citing ¶ 260(c)).)
As for the statement that the audits were “a little bit different,” they argue that the
Tenth Circuit has held that simply prefacing a statement with “[I] think,” “[I] believe,” or
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“In [my] opinion . . . may usually suggest an opinion follows, [but] it doesn’t guarantee
it.” MHC, 761 F.3d at 1120. Further, the Tenth Circuit has held that even an opinion is
actionable if not consistent with the facts. SEC v. GenAudio Inc., 32 F.4th 902, 924
(10th Cir. 2022) (“[N]o matter how heartfelt their subjective beliefs, corporate executives
. . . cannot make material representations to shareholders in disregard or contravention
of obvious facts, nor can they find absolution in the failures of others to disabuse them
of their magical thinking regarding obvious facts.”).
After considering these arguments, the Court concludes that these statements
are adequately alleged as false and misleading. After Hewitt disclosed that the
Colorado audits had been referred to the Division of Compliance and Enforcement, an
analyst asked whether “there was something that caused it to be referred in the CMS
review.” (ECF No. 74-11 at 21.) Hewitt initially equivocated—saying both that referrals
are “not unusual” and that the Company did not know if “the agencies are intending to
suspend or otherwise curtail o[u]r programs or impose other sanctions.” (Id.) But at the
end of her response to this question, Hewitt said, “I do think Colorado is a little bit
different than Sacramento . . . .” (Id.) This statement can only be understood as a
reassurance that sanctions similar to those imposed on the Sacramento center were
unlikely, and even if this were Hewitt’s honest, personal opinion, it disregards the
obvious and critical fact that the preliminary results of the Colorado centers yielded
similar results as did the audit in Sacramento. See GenAudio Inc., 32 F.4th at 924.
c. Post-Offering Repetitions of Offering Document Statements and
SOX Certifications
Defendants argue that all challenged statements in certain SEC filings that are
repetitions of challenged statements contained in the Offering Documents are not
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actionable for the same reasons as when they were made in the Offering Documents.
(ECF No. 73 at 40.) Of the challenged statements that were repeated post offering, the
Court has found all but the COVID Continuity of Care Statement and the Home Care
Statement to be immaterial. (Compare ¶ 251(a), and ¶ 257(a), and ¶ 261(a), with
supra, Part III.B.1.a.) For the same reasons articulated above, the Court finds the
repetitions of these two statements are actionable, and the other statements it has
already found to be immaterial are not.
C. Argument Specific to the Securities Act
Defendants argue that the Securities Act claims should be dismissed because
they sound in fraud and fail to meet the pleading requirements imposed by Rule 9(b).
(ECF No. 73 at 49–51.) Referencing the same arguments made with respect to
materiality and falsity discussed in Part III.B.1.a and III.B.1.b of this Order, they argue
“the Offering Document Statements are either too vague to be material, or are not false
or misleading.” (Id. at 51.) Though Defendants readily concede that the Tenth Circuit
has not ruled (as some courts have) that Rule 9(b) applies to Securities Act claims
sounding in fraud, (id. at 50), Lead Plaintiffs do not respond to this argument and have,
therefore, waived any opposition they may have to Rule 9(b)’s application.19 (ECF No.
79 at 58–59.)
In any event, the Court has already found that each of the Offering Document
statements are either immaterial or meet the higher pleading standards imposed by the
PSLRA. Therefore, even though the Court applies Rule 9(b) to the Securities Act
19 Lead Plaintiffs only contest the application of Rule 9(b) with respect to their Securities
Act claims against other defendants, whose motion to dismiss will be ruled upon in a separate
Order. (See ECF No. 79 at 58–59.)
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claims against Defendants, as a practical matter it makes no difference here.
Therefore, the Court concludes that Lead Plaintiffs have adequately pleaded Securities
Act claims based on the Individualized and Coordinated Care, COVID Continuity of
Care, and Home Care Statements.
D. Argument Specific to the Exchange Act: Scienter
The only argument Defendants make specific to the Exchange Act claims is that
the Amended Complaint inadequately pleads scienter. (See ECF No. 73 at 43–49.)
To establish scienter, Lead Plaintiffs must “state with particularity facts giving rise
to a strong inference that the defendant acted with the required state of mind.” 15
U.S.C. § 78u-4(b)(2)(A). Scienter in this context requires “a mental state embracing
intent to deceive, manipulate, or defraud, or recklessness.” Adams, 340 F. 3d at 1105
(internal quotation marks omitted). Recklessness is “conduct that is an extreme
departure from the standards of ordinary care, and which presents a danger of
misleading buyers or sellers that is either known to the defendant or is so obvious that
the actor must have been aware of it.” City of Philadelphia v. Fleming Cos., Inc., 264
F.3d 1245, 1258 (10th Cir. 2001) (internal quotation marks omitted).
A court inquires “whether all of the facts alleged, taken collectively, give rise to a
strong inference of scienter, not whether any individual allegation, scrutinized in
isolation, meets that standard.” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S.
308, 323 (2007) (emphasis in original). The court “must take into account plausible
opposing inferences.” Id. However, it will not allow allegations of “fraud by hindsight,”
i.e., “allegations that defendants should have anticipated future events and made
certain disclosures earlier than they did.” City of Philadelphia, 264 F.3d at 1260.
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1. Blair’s May 2022 Comments
Defendants argue Blair’s statements on May 10, 2022, do not give rise to a
strong inference of scienter. (ECF No.73 at 44.) They argue that is because all Blair’s
comments did was “acknowledg[e] deficiencies” and announce efforts to remedy them.
(Id.) Lead Plaintiffs argue that statements acknowledging pre-existing issues support
the inference that an earlier statement was a known material misrepresentation. (ECF
No. 79 at 53 (quoting Pluralsight, 45 F.4th at 1263).)
Tenth Circuit law seemingly supports both views. The Tenth Circuit has very
clearly stated that “the implementation of [a new] policy . . . [is] at most an
acknowledgment that the company identified a better way of doing things moving
forward, not an indicator that fraudulent intent existed at the time the alleged omissions
occurred.” In re Zagg, Inc. Sec. Litig., 797 F.3d 1194, 1205 (10th Cir. 2015). It
reaffirmed this rule in Anderson v. Spirit Aerosystems Holdings, Inc., 827 F.3d 1229,
1248 (10th Cir. 2016). In Pluralsight, however, the Tenth Circuit found that subsequent
statements about sales staffing that contradicted an earlier statement supported the
inference that the earlier statement was a knowing material misrepresentation. 45 F.4th
at 1262–63.
Whatever tension there may be between these cases dissolves upon close
consideration of their precise language and facts. In re Zagg concerned a failure to
disclose that the company’s CEO, who owned an 18.9% share of its stock, had pledged
half of his shares in a personal margin account. 797 F.3d at 1198. This subjected
those shares to potential forced sale (a margin call), should the company’s stock price
fall. Id. After a drop in the company’s share price resulted in two margin calls, both of
which the CEO disclosed, the company instituted a new policy prohibiting officers,
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directors, and 10% shareholders from pledging its securities in margin accounts. Id. at
1199.
In Anderson, the company was behind schedule on an important project and
implemented “a recovery plan” to get the project back on schedule. 827 F.3d at 1247.
In subsequent months, company management made several positive statements about
the early progress of that project. Id. The court held that the implementation of the
recovery plan was not suggestive of scienter with respect to the subsequent statements
because there were no allegations that management knew the recovery plan would be
incapable of success. Id. at 1248. Both of these cases involved management’s
identification and implementation of a “better way of doing things moving forward.” Id.
(quoting In re Zagg, 797 F.3d at 1205).
In contrast, Pluralsight involved no such “better way.” In that case, the CEO of a
company stated the company had “about 250” quota-bearing sales representatives as
of January 16, 2019. 45 F.4th at 1250. On July 31, 2019, he disclosed that the
company was then at approximately 250 sales representatives but was “dozens” short
of that target number at the end of 2018 and beginning of 2019, leading to low sales
numbers as new hires got up to speed. Id. at 1260. When asked why this had not been
disclosed earlier, he stated that the company was still hitting its sales targets. Id. In
January 2020, he disclosed that the company “came out of 2018 going into 2019 with
about 200 quota-bearing sales reps.” Id.
Despite the district court’s conclusion that these subsequent statements were
“nonculpable, hindsight expressions,” the Tenth Circuit concluded they contributed to
scienter. Id. at 1260–63. In so holding, it relied on the following facts: (1) low staffing in
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the first quarter of 2019 could not result in low sales numbers until the second quarter
due to long sales cycles; and (2) the CEO’s repeated representations that the number of
sales representatives was one of two “primary drivers” of the company’s billings growth.
Id. at 1262–63. From this, the court held it was reasonable to infer that the CEO knew
low staffing could impact future performance and hoped that sales performance could
paper over staffing issues until they could be resolved. See id. at 1260–63.
In the Court’s view, Pluralsight is not a case about a “better way” of doing things.
Rather, it is a case about subsequent statements revealing the existence of a problem,
the reasons for not disclosing the problem at an earlier time, and the approximate time
that the problem was likely to have been known. Blair’s statements are not analogous
to those in Pluralsight. While they do identify deficiencies in the Company’s business,
they do not reveal anything about when the deficiencies were known to Hewitt and
Gutierrez or the reasons for the alleged false and misleading prior statements. (See ¶¶
235–39.) Therefore, the Court concludes Blair’s statements do not contribute to
scienter and are at most “an acknowledgment that the company identified a better way
of doing things moving forward.” In re Zagg, 797 F.3d at 1205.
2. Access to Internal Reports
Defendants argue that Hewitt and Gutierrez’s access to certain information as
part of their duties does not support an inference of scienter. First, they argue that the
allegations relating to their duties are “non-particularized.” (ECF No. 73 at 44–45 (citing
Smallen v. Then W. Union Co., 950 F.3d 1297, 1310 (10th Cir. 2020)).) Such
allegations, they assert, are “routine[ly] rejected” by courts. (Id.) Further, they argue
that the allegations attributed to FEs 1–3 are unreliable, either because they too are
generic (FE 3), or because they do not include allegations specifically stating that either
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Hewitt or Gutierrez received the information described in those confidential witnesses’
statements (FEs 1 and 2). (Id. at 45–46.) Finally, they argue a statement attributed
specifically to Maria Zamora (requesting a pause in enrollment) cannot support and
inference of scienter because the Amended Complaint does not allege when the
request occurred or what Zamora said to support the request. (Id. at 46–47.)
Lead Plaintiffs respond that it “is undisputed that Hewitt and other senior
executives like CMO Welch knew about the results of audits and inspections before the
IPO from 2017 to 2020.” (ECF No. 79 at 51.) They argue the Amended Complaint also
alleges that Hewitt and Gutierrez and other senior executives “closely monitored
regulatory audits” and knew that regulators had received various complaints about
staffing levels in InnovAge’s centers. (Id.) In turn, they knew these complaints would
result in audits, yet Hewitt and Gutierrez allegedly sought to downplay the significance
of these audits. (Id. at 51–52.) They argue that these allegations are corroborated by
statements from current and former employees and documentary evidence obtained by
the Capitol Forum. (Id. at 52.) Despite Defendants’ attempts to undermine the reliability
of the allegations based on anonymous sources, Lead Plaintiffs argue these allegations
can be considered for reasons already discussed. (Id. at 53; see also, supra, Part III.A.)
Defendants’ reply points out that “the specific allegations relating to Hewitt and
Gutierrez” are either: (i) from years before the challenged statements; or (ii) too
dissimilar from the allegations in Pluralsight to overcome their otherwise generic
nature.20 (ECF No. 83 at 28.)
The Court has carefully considered these arguments and concludes that some
20 The reply’s other arguments are duplicative of those in the Motion. (See ECF No. 83
at 28–29.)
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allegations are indeed too general to contribute to scienter. Allegations suggesting that
Hewitt and Gutierrez were aware of certain issues years before the challenged
statements were made contribute nothing to Lead Plaintiffs’ desired inference of
scienter. See Anderson, 827 F.3d at 1240 (holding that a meeting that took place
months before the class period began or the challenged statements were made did not
show that defendants “knew during the class period that their [statements] were
inaccurate”). Nor can they be assumed to know certain information just because they
hold senior leadership positions. Smallen, 950 F.3d at 1307–08 (quoting Anderson, 827
F.3d at 1245–46).
Lead Plaintiffs do point to several allegations of specific knowledge Hewitt had
during the class period. They allege that she knew of numerous complaints stemming
from staffing issues at the Thornton, Colorado center that led to surprise audits of all of
the Company’s Colorado centers. (¶¶ 180–82, 201.) Therefore, the Court concludes
Hewitt’s access to the Company’s internal information can contribute to scienter only
with respect to statements concerning the Company’s staffing.
3. Leadership Departures
Defendants urge that the resignations of Hewitt and Welch after enrollment was
suspended at the Company’s Colorado centers does not support an inference of
scienter. (ECF No. 73 at 47.) They argue the departures should be interpreted as
offering nothing toward such an inference unless the Amended Complaint contains
allegations connecting the departure to the fraud. (Id.)
Lead Plaintiffs’ argue the Amended Complaint contains such allegations, stating
that though the Offering Documents hailed Hewitt as a “visionary,” she resigned just one
week after CMS announced its enrollment freeze of the Company’s Colorado centers.
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(ECF No. 79 at 54.) They frame this resignation as following analyst “reports” assailing
“InnovAge management’s lack of ‘credibility.’” (Id. (quoting ¶ 13).) Then “a few months”
after Hewitt’s resignation, Welch also resigned. (Id.)
“Executive departures can strengthen an inference of scienter if they are
numerous, uncharacteristic[,] or accompanied by suspicious circumstances.” In re
Molson Coors Beverage Co. Sec. Litig., 2020 WL 13499995, at *11 (D. Colo. Dec. 2,
2020) (Ebel, J.) (citing Rumbaugh v. USANA Health Scis., Inc., 2018 WL 5044240, at *9
(D. Utah Oct. 17, 2018)). Temporal proximity alone is not suspicious. Id. But see In re
Myriad Genetics, Inc., 2021 WL 977770, at *22 (D. Utah Mar. 16, 2021) (finding that a
resignation and demotion lent “very modest scienter support “because they occurred
only days apart and because Capone’s resignation was unusual in that it was effective
immediately with no successor identified”). A resignation that is effective immediately
without a successor in place may be considered “unusual.” See In re Myriad Genetics,
Inc., 2021 WL 977770, at *22.
The balance of in-circuit precedent favors Defendants’ position, which the Court
adopts. But because there is legal authority for the proposition that an immediate
resignation without an evident replacement is “unusual,” the Court finds Hewitt’s
resignation is “very modest” support for scienter. Id. Hewitt’s resignation was not only
effective immediately—it was retroactive when announced. (¶ 231.) And, as the
allegations read, it appears the Board of Directors’ decision to appoint Blair as her
replacement was a reaction to Hewitt’s resignation and not something in place
beforehand. (Id.)
In contrast, the Court finds no allegations other than temporal proximity
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connecting Welch’s resignation to the alleged fraud, and therefore, the Court gives this
allegation no weight as it relates to inferring scienter. In re Molson Coors, 2020 WL
13499995, at *11.
4. Motive
Defendants argue the existence of a motive for the alleged fraud is inadequately
pleaded and, therefore, “counts against [an inference] of scienter.” (ECF No. 73 at 48
(quoting Level 3, 667 F.3d at 1346) (alteration in original).) They argue that the
Amended Complaint’s theory that Hewitt and Gutierrez were motivated to inflate the
price of the Company’s stock because they were paid millions of dollars “in connection
with option cancellations in 2020” is “chronologically flawed.” (Id.) They assert that
almost all of the compensation alleged to have motivated Hewitt and Gutierrez was
earned pre-IPO, “rendering their alleged motive to inflate the stock price implausible.”
(Id. at 48 n.19.) Further, to the extent there is any “additional compensation in 2021,”
they argue it was merely the “type of incentive-based compensation . . . [that] does not
ordinarily indicate scienter.” (Id. at 48 (quoting Level 3, 667 F.3d at 1346) (alteration in
original).)21
Lead Plaintiffs argue that Hewitt and Gutierrez’s “motive to lie” was that they
stood to substantially benefit financially from the sale of their own shares.22 (ECF No.
79 at 55–56.) They concede that these payments were earned as part of a plan set in
motion prior to the IPO, when Apax made its 2020 investment. (Id.) But they
21 Defendants’ remaining argument relates to statements the Court has already
concluded are not actionable. (See ECF No. 73 at 48, 48 n.20.)
22 Technically, they were compensated for the cancellation of their options to purchase
stock at predetermined prices.
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emphasize that the transaction was part of a larger plan/process of taking the company
public, and the value of the Company was necessarily set privately prior to the IPO.
(Id.)
Though Defendants argue Lead Plaintiffs’ “recharacterization” of the allegations
in the Amended Complaint cannot overcome its chronological flaws, the Court
disagrees. The Court assumes the allegations in the Amended Complaint (as the Court
must) that Hewitt and Gutierrez made concerted efforts to grow enrollment aggressively,
even at the cost of participant wellbeing, in order to increase revenue and the
Company’s value. While the Court does not see any allegations regarding the strike
price of Hewitt and Gutierrez’s options, it understands options generally—therefore, it is
obvious that they had a motive to increase the valuation of the Company (whether set
privately or publicly) because the difference between the strike price and the value of
the Company’s shares is their compensation.23
Given that backdrop, the Court finds it entirely reasonable to infer that after
receiving massive compensation by increasing the Company’s valuation, Hewitt and
Gutierrez would have an incentive to conceal in public statements the allegedly
improper methods used to achieve that valuation. Therefore, the Court concludes
Hewitt and Gutierrez’s alleged motive to lie can contribute to an inference of scienter.
5. Audit Results
Defendants argue that the allegations in the Amended Complaint that they
23 The nature of the “Option Cancelation Agreement” that resulted in the payments to
Hewitt and Gutierrez is also described generally in the Company’s Form S-1. (ECF No. 74-1.)
That document explains that the “Cancelation Agreement resulted in the option holders
receiving the same amount of cash that they would have received had they exercised their
options, participated in the repurchase described above[,] and sold their remaining shares.” (Id.
at 31.)
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“repeatedly omitted key information about ongoing audits” and “repeatedly
mischaracterized the nature and severity of the audits” show, at most, that InnovAge
was “overly optimistic,” which is insufficient to establish scienter. (ECF No. 73 at 49
(first quoting ¶ 277; then quoting Anderson, 827 F.3d at 1238).)
Lead Plaintiffs point to allegations that Defendants were in possession of audits
from prior to the IPO that “consistently revealed systemic and pervasive deficiencies
that InnovAge failed to remedy.” (ECF No. 79 at 51.) They also point to allegations that
Hewitt and Gutierrez specifically confirmed that they “closely monitored regulatory
audits, repeatedly detailing the status of audits to analysts and investors.” (Id.)
The Court is not persuaded by the characterization in Lead Plaintiffs’ argument
that Hewitt and Gutierrez personally closely monitored audits in a way similar to the
facts alleged Pluralsight. The Court sees no allegations that they monitored audit
findings more closely than was necessary to make disclosures to investors. (See Id.
(citing ¶¶ 212–13, 217–19, 254, 259, 282.) For this reason, the Court views this case
much more like Level 3 and Anderson than Pluralsight, where the company’s CEO
“repeatedly represented he monitored, and that he regularly reported to investors and
analysts” on a “single objectively verifiable data point that Pluralsight considered part of
its key business metric.” 45 F.4th at 1264. While the Amended Complaint contains
allegations that convincingly convey that the Company’s “census” was the key business
metric, that is not the argument Lead Plaintiffs make. And while the Court can
conceptually connect the dots the Amended Complaint draws—that audit risks present
a risk to the health of the Company’s census—that line of argument presupposes that
Hewitt and Gutierrez knew the audits would result in an enrollment freeze. See
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Anderson, 827 F.3d at 1246. The allegations in the Amended Complaint permit at most
a “weak inference” that that was the case. Therefore, the Court gives these facts no
weight as it relates to an inference of scienter. See Molson Coors, 2020 WL 13499995,
at *11.
6. Holistic Consideration of the Allegations of Scienter
The Court has concluded that the following allegations of scienter are sufficiently
pleaded in the Amended Complaint:
• Hewitt’s knowledge of the complaints that led to the audits of the
Company’s Colorado centers, specifically as this issue related to
statements about the Company’s staffing;
• Hewitt’s unusual departure without a replacement CEO already in place;
and
• Hewitt and Gutierrez’s motivation to lie about the Company’s operations
to attain and maintain a higher valuation.
From these facts, the Court concludes the Amended Complaint permits a strong
inference of scienter only with respect to the post-offering staffing statements discussed
in Part III.B.2.b. That is because these two allegations only permit an inference that
Hewitt and Gutierrez knowingly or recklessly misrepresented material facts to investors
that is “at least as compelling as any nonculpable inference” with respect to those
statements. Pluralsight, 45 F.4th 1236.
Accordingly, with respect to the Exchange Act claims, the Court finds that only
the post-offering staffing statements are adequately alleged.24
24 The Court imputes this mental state to the Company, see Pluralsight, 45 F.4th at
1267–69, which is not challenged by Defendants. (ECF No. 73 at 43–49; ECF No. 83 at 27–
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E. Control Person Liability
Defendants argue the Amended Complaint inadequately pleads control person
liability against the Director Defendants, WCAS, and Apax. (ECF No.73 at 51–54.)
“[T]o state a prima facie case of control person liability, the plaintiff must establish (1) a
primary violation of the securities laws and (2) ‘control’ over the primary violator by the
alleged controlling person.” City of Phila. v. Fleming Cos., 264 F.3d 1245, 1270 (10th
Cir. 2001) (quoting Maher v. Durango Metals, Inc., 144 F.3d 1302, 1305 (10th Cir. 1998)
(alteration in original)). Though Defendants assert the Amended Complaint is deficient
as to both elements, the Court has just determined that the Amended Complaint has
adequately pleaded primary violations of the Securities Act. See supra, Parts III.C and
III.D. To adequately allege the second element, “the plaintiffs must point to facts which
indicate that the defendants had ‘possession, direct or indirect, of the power to direct or
cause the direction of the management and policies of a person, whether through the
ownership of voting securities, by contract, or otherwise.’” Adams, 340 F.3d at 1108
(quoting Maher, 144 F.3d at 1305).
1. Director Defendants
Defendants argue that Lead Plaintiffs “do not allege a single fact to support this
conclusory allegation [that the Director Defendants were involved in the Company’s
everyday business] other than citing their positions, post-public offering, as directors of
InnovAge.” (ECF No. 73 at 51–52.) They point out that mere membership on a
company’s board of directors does not make someone a control person under Tenth
Circuit law. (Id. at 52.) As to the Director Defendants, beyond mere membership,
31.)
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Defendants argue the only allegation is that certain directors signed the Offering
Documents. (Id. (citing ¶¶ 1, 347, 372).) But not only is this fact insufficient to establish
that any director is a control person, they say, it is not even factually accurate. (Id.)
Lead Plaintiffs argue they have adequately pleaded the Director Defendants
were control persons because the Amended Complaint alleges that “they consented to
be named as director nominees in the Offering Documents and were required to
supervise the preparation and dissemination of the Offering Documents and ensure that
they were accurate and complete.” (Id. (citing Correa v. Liberty Oilfield Servs., Inc., 548
F. Supp. 1069, 1084 (D. Colo. 2021)).) They also point out that—specific to Scully—the
Amended Complaint alleges he “was extensively involved in InnovAge’s conversion to a
for-profit company, its growth strategy, and its decision to go public.” (Id. (citing ¶¶ 5–7,
103–05, 107–09, 113–14, 123, 223.)).)
The Court is convinced by Defendants’ arguments—particularly those made in
their reply. “The assertion that a person was a member of a corporation’s board of
directors, without any allegation that the person individually exerted control or influence
over the day-to-day operations of the company, does not suffice to support an allegation
that the person is a control person . . . .” Adams, 340 F.3d at 1108. And as Defendants
point out, “if being a director is not sufficient, then neither is agreeing to become one.”
(ECF No. 83 at 31.)
While the Court acknowledges the decision in Correa, again, as Defendants say,
that case did not cite Adams. Instead, Correa only considers Maher, which sets out the
two elements of control person liability. In contrast, Defendants have specifically
pointed the Court to Adams and the sentence quoted above, which specifically
undercuts the argument that “being named as a Director Nominee or facilitat[ing] the
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IPO process” alone is enough to be subject to joint and several liability under the
securities laws. (ECF No. 79 at 57.) Therefore, the Court concludes Lead Plaintiffs
have failed to adequately allege control person liability against the Director Defendants.
2. WCAS and Apax
Defendants argue that the allegations relating to WCAS and Apax’s ownership of
the Company are factually incorrect. They say
Apax and WCAS are not shareholders of the Company. The
July 2020 agreement to acquire a stake in the company was
entered into by Ignite Aggregator LP, not Defendant Apax.
Ignite GP, Inc., not Defendant Apax, serves as the general
partner of Ignite Aggregator LP. None of Ignite Aggregator
LP’s partnership interests are held by Defendant Apax.
Similarly, the Registration Statement identifies the “WCAS
Investor” as a collective of entities that does not include
WCAS. Moreover, the section of the Registration Statement
titled “Principal Shareholders” explains that a majority of
InnovAge stock is owned by TCO Group Holdings, L.P., to
which Ignite Aggregator LP and the equity holders of TCO
Group Holdings, Inc. previously contributed their entire
equity interests in InnovAge. TCO Group Holdings, L.P. is in
turn controlled by a series of LPs and LLCs, none of which is
named as a defendant. Indeed, the Registration Statement
identifies Ignite Aggregator LP as the “Apax Investor,” and
the “WCAS Investor” is a collective of other entities. Neither
Apax nor WCAS is a shareholder.
(ECF No. 73 at 53.) They further argue that even if WCAS and Apax were
shareholders, the Amended Complaint would not state a claim because neither is a
majority shareholder. (Id.) They explain that a “minority shareholder is not a control
person, even if the shareholder has the power to appoint a minority of directors to the
board, absent an allegation the shareholder actually exercised some day-to-day
control.” (Id.) Nor, they say, is it sufficient to allege that multiple shareholders acting
together collectively controlled a majority of the voting power. (Id. at 54 (quoting In re
Kosmos Energy Ltd. Sec. Litig., 955 F. Supp. 2d 658, 67576 (N.D. Tex. 2013).)
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Lead Plaintiffs respond that the Amended Complaint merely quotes the Offering
Documents’ statement that InnovAge is “controlled” by WCAS and Apax. (ECF No. 79
at 57.) The Offering documents disclose that WCAS and Apax beneficially own 86% of
the Company’s common stock and “together will control the vote of all matters
submitted to a vote of [the Company’s] shareholders.” (Id. (quoting ¶ 378).) They also
note that the Complaint alleges that five of the Company’s board members are WCAS
or Apax “representatives.” (Id. at 58 (citing ¶ 46).)
In their reply, Defendants argue the Offering Documents make clear that neither
WCAS or Apax is one of the “Principal Shareholders” referenced as controlling the
Company. (ECF No. 83 at 32.) They again insist that the Amended Complaint must
allege facts sufficient to infer that WCAS and Apax were involved in the Company’s day-
to-day operations. (Id.)
The central issue at hand is whether WCAS and Apax had “control” over
InnovAge. Adams, 340 F.3d at 1107. “Control” is defined as “the possession, direct or
indirect, of the power to direct or cause the direction of the management and policies of
a person, whether through the ownership of voting securities, by contract, or otherwise.”
17 C.F.R. § 230.405. This definition—which contains no reference to day-to-day
operations—is capacious enough to embrace even the complex ownership structures
employed by well-heeled investors, provided those ownership structures allow for
control. While Adams held that an individual director is not a control person unless they
“individually exerted control or influence over the day-to-day operations of the
company,” this concept does not logically extend to all alleged control persons. Adams,
340 F.3d at 1108.
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What allegations are necessary to plead “control” is a contextual inquiry. The
power possessed by a single director by virtue of his or her position alone is not
remotely comparable to, for example, a shareholder who controls appointment of 51%
of the board and therefore controls 100% of votes taken by the board. While a single
director cannot with his or her individual vote alone necessarily “direct or cause the
direction of the management and policies” of a corporation, he or she might be in a
position to do so if involved in day-to-day operations. And, he or she certainly would be
in such a position if he or she were also the CEO or the CFO of a company sued for
fraudulent financial reporting. See Adams, 340 F.3d at 1108–09.
Importantly, Adams does not even suggest that “control or influence over day-to-
day operations” is necessary to allege control in all contexts; rather that decision’s
analysis demonstrates that the necessary allegations depend on the context of the
alleged fraud and the alleged controller’s role. Id. at 1108–09 (holding CFO was control
person in case where alleged securities fraud “relate[d] specifically to official reports of
the company’s financial performance” despite that merely alleging his position in the
company “would not likely be enough” in other circumstances). Thus, the Court is
thoroughly unconvinced by Defendants’ attempt to narrow the scope of control person
liability by requiring an additional “day-to-day operations” element for finding such
liability, a requirement that the Tenth Circuit did not impose in Adams. The Court will
therefore decline Defendants’ invitation that it do so here.
The context of this case is that 86% of the Company’s voting stock was owned
by TCO Group Holdings, L.P. (“TCO”). (ECF No. 74-1 at 28.) “Voting and dispositive
power with respect to the common stock held by [TCO] is exercised by a committee of
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limited partners.” (Id.) That committee, referred to as the “LP Board” in the S-1, “is to
be comprised of up seven persons.” (Id.) Of these seven people, three were
designated by WCAS and two by Apax. (Id.) Because the LP Board “exercises the
voting and dispositive power [of TCO] by majority vote,” WCAS and Apax acting
together could “cause the direction of the management and policies” of InnovAge
without input from anyone else. (Id.; 17 C.F.R. § 230.405.) Not only that, should either
WCAS or Apax disagree with one another about the direction of the Company, each
wielded veto power. (ECF No. 74-1 at 28 (“The LP Board exercises its voting and
dispositive power by majority vote, so long as one WCAS Designee and one Apax
Designee comprise the majority.”) (emphasis added).) Therefore, the Court without
significant effort concludes the Amended Complaint adequately alleges control person
liability against WCAS and Apax.
IV. CONCLUSION
For the reasons set for above, the Court ORDERS as follows:
1. Defendants’ Joint Motion and Brief to Dismiss Amended Class Action
Complaint for Violations of the Federal Securities Laws (ECF No. 73) is
GRANTED IN PART AND DENIED IN PART as more fully set forth in this
Order;
2. All claims dismissed by this Order are DISMISSED WITHOUT
PREJUDICE; and
3. The parties are DIRECTED to jointly contact United States Magistrate
Judge S. Kato Crews’s chambers by no later than December 27, 2023 to
set a Scheduling Conference or such other proceeding as Judge Crews
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deems appropriate to move this action forward.
Dated this 21st day of December, 2023.
BY THE COURT:
______________________
William J. Martínez
Senior United States District Judge
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