A. Carl Helwig , on Behalf of Himself v. Vencor, Inc.

1
RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206
ELECTRONIC CITATION: 2000 FED App. 0145P (6th Cir.)
File Name: 00a0145p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
_________________
A. C ARL HELWIG , on Behalf
of Himself and All Others
Similarly Situated; GARY
BARNES; M EREDITH W ILSON
BROWN ; R OBERT BROWN ;
S. KAY LUTES; S YBIL R.
M EISEL; BARBARA E.
S HUSTER,
Plaintiffs-Appellants,
v.
VENCOR, INC.; W. BRUCE
LUNSFORD ; W. EARL R EED ,
III; M ICHAEL R. BARR;
THOMAS T. LADT ; J ILL L.
FORCE ; J AMES H.
GILLENWATER, J R.,
Defendants-Appellees.
;>

1
No. 99-5153
Appeal from the United States District Court
for the Western District of Kentucky at Louisville.
No. 97-00835—Charles R. Simpson, III, Chief District
Judge.
Argued: December 15, 1999

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2 Helwig, et al. v. Vencor, Inc., et al. No. 99-5153
Decided and Filed: April 24, 2000
Before: MERRITT, KENNEDY, and SILER, Circuit
Judges.
_________________
COUNSEL
ARGUED: Arthur R. Miller, HARVARD LAW SCHOOL,
Cambridge, Massachusetts, for Appellants. Gregory P.
Joseph, FRIED, FRANK, HARRIS, SHRIVER &
JACOBSON, New York, New York, for Appellees.
ON BRIEF: Kenneth J. Vianale, MILBERG, WEISS,
BERSHAD, HYNES & LERACH, Boca Raton, Florida, for
Appellants. Gregory P. Joseph, Kirsa Phillips, Rachel S.
Fleishman, FRIED, FRANK, HARRIS, SHRIVER &
JACOBSON, New York, New York, David B. Tachau,
TACHAU, MADDOX, HOVIOUS & DICKENS, Louisville,
Kentucky, for Appellees.
KENNEDY, J., delivered the opinion of the court, in which
SILER, J., joined. MERRITT, J. (pp. 22-26), delivered a
separate dissenting opinion.
_________________
OPINION
_________________
KENNEDY, Circuit Judge. Plaintiffs, A. Carl Helwig, et
al., on behalf of themselves and others similarly situated,
appeal the decision of the district court granting summary
judgment in favor of the defendants, Vencor, Inc., et al., in
this securities fraud action. Plaintiffs contend that the district
court erred in converting defendants’ motion to dismiss into
a motion for summary judgment without providing the
plaintiffs with sufficient notice to defend against a summary
judgment motion. Defendants argue that this court can affirm
the district court’s opinion on summary judgment grounds or
on the grounds that the plaintiffs have failed to state a claim

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26 Helwig, et al. v. Vencor, Inc., et al. No. 99-5153
947 F.2d 841, 848 (7th Cir. 1991). Applying Rubin to this
case, when defendants chose to speak they have a duty to
provide complete and non-misleading information regarding
those statements. Defendants failed to do so. Accordingly,
I would reverse the judgment of the district court, deny
defendants’ motion to dismiss, and remand to the district
court for further proceedings.
The narrow, rigid interpretation our Court has given the
Private Securities Litigation Reform Act makes it now almost
impossible to allege securities fraud successfully. The effect
of the Court’s decision seems to be that no statements about
the future prospects (“forward-looking” statements) of a
company are actionable, no matter how dishonest as long as
they are accompanied by “magic words” disclaiming
knowledge. It makes no difference that insiders are selling
their stock with secret knowledge that the company’s
prospects are bad while saying the opposite to the public. It
reminds me of the rigidity with which the common law courts
came to interpret the old forms of action in the seventeenth
century. Our system of equity or code or notice pleading is
supposed to have changed all that once and for all, but our
Court has returned to it with a vengeance in this case under
the Private Securities Litigation Reform Act.
No. 99-5153 Helwig, et al. v. Vencor, Inc., et al. 3
1These facts are either alleged by the plaintiffs or found in the
documents filed with the defendants’ motion to dismiss. We are required
to accept the plaintiffs’ allegations as true in ruling on a motion to
dismiss. See Mayer v. Mylod, 988 F.2d 635, 638 (6th Cir. 1993). We
also are permitted to consider those facts contained in documents referred
to in the plaintiffs’ complaint and central to the plaintiffs’ claim in ruling
on a motion to dismiss. See Greenberg v. The Life Insurance Company
of Virginia, 177 F.3d 507, 514 (6th Cir. 1999); see also infra note 13.
upon which relief can be granted. While we agree with the
plaintiffs that the district court could not convert the
defendants’ motion to dismiss to a motion for summary
judgment without notice, we also agree with the defendants
and affirm the district court’s dismissal of the action on the
grounds that the plaintiffs have failed to state a claim upon
which relief can be granted.
I. Facts1
Vencor, which is located in Louisville, Kentucky, is a
provider of managed health care services, including long-term
hospitals and nursing homes. On October 22, 1997, prior to
the opening of the stock market, Vencor announced its
earnings results for the third quarter of 1997 and issued a
statement indicating that its expected fourth quarter earnings
would be lower than previously forecast. Vencor stated that
rather than the $0.59-$0.64 earnings per share that it had
forecast, earnings for the fourth quarter of 1997 were
expected to be in the range of $0.40-$0.45 per share. Vencor
explained that the change in projected earnings was due to the
adverse effect of the Balanced Budget Act on Vencor’s
operations. In response to this announcement, the price of
Vencor’s stock fell from a per share price of $42-5/8 on
October 21, 1997 to a per share price of $30 on October 22,
1997. Soon after this development, Vencor announced that
its anticipated sale of one of its divisions would not be
consummated due to the buyer’s unwillingness to purchase
the division for cash. This announcement resulted in a further
drop in the price of Vencor’s stock to a level of $23 per share.

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4 Helwig, et al. v. Vencor, Inc., et al. No. 99-5153
2On May 1, 1998, Vencor reorganized into two public companies,
Vencor and Ventas. On July 27, 1998, plaintiffs filed an amended
complaint against the original defendants as well as Ventas.
3Section 10(b) provides:
It shall be unlawful for any person, directly or indirectly, by the
use of any means or instrumentality of interstate commerce or of
the mails, or of any facility of any national securities exchange
—
(b) To use or employ, in connection with the purchase or sale of
any security registered on a national securities exchange or any
security not so registered, any manipulative or deceptive device
or contrivance in contravention of such rules and regulations as
the Commission may prescribe as necessary or appropriate in the
public interest or for the protection of investors.
15 U.S.C. § 78j(b) (West 1997).
4Section 20(a) provides:
Every person who, directly or indirectly, controls any person
liable under any provision of this chapter or of any rule or
regulation thereunder shall also be liable jointly and severally
with and to the same extent as such controlled person to any
person to whom such controlled person is liable, unless the
controlling person acted in good faith and did not directly or
indirectly induce the act or acts constituting the violation or
cause of action.
15 U.S.C § 78t(a) (West 1997).
5Vencor, Inc. filed a voluntary petition for Chapter 11 bankruptcy on
September 13, 1999. Pursuant to section 362 of the Bankruptcy Code,
this proceeding against Vencor, Inc. has been stayed by the bankruptcy
At the time plaintiffs filed this action, Vencor stock was
trading at less than $25 per share.
On December 24, 1997, plaintiffs filed this class action
against Vencor2 and six of its directors alleging that the
defendants had proffered false and misleading statements,
from February 10, 1997 until October 21, 1997, in violation
of Section 10(b) of the Securities Exchange Act of 1934.3
Plaintiffs also alleged a violation of Section 20(a) of the
Securities Exchange Act of 19344 against each of the
individual defendants.5 Plaintiffs’ complaint sets forth
No. 99-5153 Helwig, et al. v. Vencor, Inc., et al. 25
forward looking statement, then there is no liability as a
matter of law. See 15 U.S.C. § 78u-5(c)(1)(B). Second, even
if actual knowledge of falsity is factually pled, the statutory
safe harbors bars liability of the forward looking statement if
the statement is accompanied by a cautionary statement about
its uncertainty. See 15 U.S.C. § 78u-5(c)(1)(A). With this in
mind, I would find that the “cautionary statement” proffered
by defendants does not meet the criteria set by the statute.
Nowhere in Vencor’s 1997 public disclosures or statements
prior to October 22 ,1997, does Vencor identify important
factors or specifically warn of any negative impact by the
proposed Medicare legislation. Defendants simply continued
to warn that management could not predict whether such
proposals would be adopted or if adopted, what effect, if any,
such proposals would have on its business. In point of fact,
defendants knew that the Medicare legislation was likely to
have a serious adverse effect and should have said so.
Defendants should not be allowed to make exaggerated
earnings projections and then abstractly warn of pending
legislation in Congress claiming that they say they have no
idea how it will affect revenues, while at the same time telling
employees whom they are laying off that “tough times” are
ahead because of certain pending Medicare legislation.
This would not be the first time that this circuit has held
that a defendant could be held liable to investors for failing to
disclose certain material information in connection with a
stock investment. In Rubin v. Schottenstein, Zox & Dunn, 143
F.3d 263 (6th Cir. 1998), we held, en banc, in an opinion
from which Judge Kennedy dissented, that an attorney could
be held liable because he had chosen to speak to investors
about material details of their proposed securities investment
with the issuer without revealing certain additional facts
necessary to make his statement not misleading. See Rubin,
143 F.3d at 267-68. We reasoned that even when a person is
not under an independent duty to provide information, a
person “assumes a duty to provide complete and non-
misleading information with respect to subjects on which he
undertakes to speak.” Id. at 268 (citing Ackerman v, Schartz,

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24 Helwig, et al. v. Vencor, Inc., et al. No. 99-5153
company, defendants Bruce Lunsford, chairman of the board,
CEO, and president of Vencor, and Earl Reed, executive vice
president and CFO, continued to publicly predict rosy
earnings estimates of $2.10 and $2.60 per share for 1997 and
1998 respectively. Am. Compl. ¶ 100. It is ludicrous to think
that by this time Vencor management had no knowledge of
negative implications the Act would have on the future of
Medicare and Medicaid reimbursements. I think that
plaintiffs’ allegations are sufficient to allow them their day in
court.
The law in this area is clear. Rule 10b-5, promulgated
under Section 10(b), states in relevant part: “It shall be
unlawful for any person... to make any untrue statement of a
material fact or omit to state a material fact necessary in order
to make the statements made, in light of the circumstances
under which they were made, not misleading.” 17 C.F.R.
§ 240.10b-5. Plaintiffs allege that defendants did exactly
what Rule 10b-5 forbids. To escape any liability, defendants
and the panel majority hold that their statements regarding
Vencor’s earnings were “forward-looking” statements and
included sufficient cautionary language as to the uncertainty
of those projections, thus triggering the safe harbor provision
of the Private Securities Litigation Reform Act. 15 U.S.C.
§ 78u-5(c). This is wrong.
A forward-looking statement is defined, among other
things, as a statement including a projection of revenues,
income, earnings per share, capital expenditures, dividends,
capital structure, or other financial terms. See 15 U.S.C.
§ 78u-5(i)(1)(A). A company is allowed to make a forward-
looking statement without fear of liability if the statement
does not hold true when the statement is accompanied by
“meaningful cautionary statements identifying important
factors that could cause actual results to differ materially from
those in the forward-looking statement.” 15 U.S.C. § 78u-
5(c)(1). This is the so-called safe harbor provision. The
statutory safe harbor operates in the alternative in two steps.
First, unless a complaint pleads specific facts demonstrating
that defendants have actual knowledge of the falsity of the
No. 99-5153 Helwig, et al. v. Vencor, Inc., et al. 5
court. The remaining defendants include Ventas, Inc., and the following
individuals: W. Bruce Lunsford, President and CEO of Vencor, Inc.,
W. Earl Reed, III, Executive Vice-President and CFO of Vencor, Inc.,
Michael R. Barr, Executive Vice-President, COO and Director of Vencor,
Inc., Thomas T. Ladt, Executive Vice-President of Vencor, Inc., Jill L.
Force, Senior Vice-President, Secretary and General Counsel of Vencor,
Inc, and James H. Gillenwater, Jr., Senior Vice-President of Vencor, Inc.
6There were four provisions in the Administration’s proposal that the
plaintiffs allege would have a negative impact on Vencor’s business.
These were:
a) The Administration’s proposal eliminated all incentive
payments made to hospitals that kept their actual costs below
their TEFRA target, the amount computed pursuant to the Tax
Equity and Fiscal Responsibility Act of 1982.
b) The Administration proposed reductions, beginning in 1998
at the amount of 1.5% below the market basket index, of
Medicare payments to PPS-exempt hospitals such as those
owned by Vencor. Generally, Medicare reimbursements are
based on a fixed payment per patient basis (“PPS”). PPS-
exempt hospitals are entitled to reimbursement on an actual cost
basis linked to the TEFRA target.
c) The Administration proposed caps on increases in TEFRA
target amounts based on the average cost per patient for all long-
term care hospitals.
d) The Administration’s proposal denied all new long-term care
numerous allegations of false and misleading statements made
by the defendants either directly to the public or to the public
through financial analysts. These allegedly false and
misleading statements can be classified as falling into one of
the following categories: 1) statements relating to the effect
of the Balanced Budget Act on Vencor’s earnings; 2)
statements relating to Vencor’s acquisition of TheraTx and
Transitional; and 3) statements relating to the proposed sale
of one of Vencor’s divisions, Behavioral Healthcare (“BHC”),
to Charter Behavioral Health Systems. Plaintiffs’ remaining
allegations concern the individual defendants’ sale of personal
stock.
On February 6, 1997, President Clinton proposed the
Balanced Budget Act. This legislation included numerous
revisions to the Medicare reimbursement laws.6 At the time

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6 Helwig, et al. v. Vencor, Inc., et al. No. 99-5153
hospitals any exemption from Medicare PPS.
7Of the four provisions of the Administration’s proposal only two
were enacted. The enacted legislation included the following provisions:
a) The legislation retained incentive payments for hospitals that
keep their actual costs below TEFRA targets, setting them at the
lesser of either: (1) 15% of the difference between the TEFRA
target and operating costs, or (2) 2% of the TEFRA target.
b) The legislation reduced Medicare payments to PPS-exempt
hospitals at the rate of 0% in 1998 and according to a sliding
scale based on a comparison of the hospital’s actual costs to its
target for 1999-2002.
c) The legislation capped TEFRA limits at 75%.
plaintiffs initiated this lawsuit, Vencor was the nation’s
largest operator of long-term hospitals and the second largest
operator of nursing homes. Medicare reimbursement made up
a significant portion of Vencor’s revenue. Prior to the
proposal of this specific legislation, the President had initiated
a number of unsuccessful attempts to institute Medicare
reform. The Balanced Budget Act was signed into law on
August 5, 1997. During the six months that the legislation
was before Congress, changes were made to the
Administration’s proposal and the enacted legislation differed
in many ways from the proposed legislation.7
While this proposed legislation was being debated in
Congress, Vencor received reports on the progress of the
legislation from its lobbyists in Washington, D.C. In late
April and early May, Thomas Schumann, Vice-President and
Director of Vencor’s Reimbursement Department, directed
his employees to prepare detailed cost analyses of the
Balanced Budget Act. Although some of these analyses
focused on the effects the Act would have on specific
departments of Vencor, defendant Reed and Richard
Lechleiter, Vice-President for Finance and Corporate
Controller, directed that analyses be done studying all
possible effects of the Act on Vencor’s revenues and earnings.
At the end of July, around the time that the Act was passed,
Vencor issued an internal memorandum setting forth the
impact of the new legislation on its finances.
No. 99-5153 Helwig, et al. v. Vencor, Inc., et al. 23
officer, and James Gillenwater, senior vice president of the
company, gave a presentation to approximately one hundred
Transitional employees. At that meeting, Barr gave
Transitional employees notice that they would be laid off in
sixty days. Barr went on to tell the employees that there were
“tough times coming in the industry because of likely
cutbacks in Medicare” and that “they would have been laid
off anyway because the proposed Medicare regulations were
going to make it difficult for Vencor to make money and stay
profitable.” Am. Compl. ¶ 72.
A month later, on July 25, 1997, Vencor filed its second
quarter 10-Q with the SEC. Even though defendants had just
told employees they were laying off that “tough times” were
ahead and that it would be difficult to stay profitable, in their
report to the SEC, defendants continued to indicate that
Vencor’s business would not be adversely affected by any
pending legislation. Amazingly, defendants made these
“predictions” even after the Balanced Budget Act had already
passed both the House and the Senate a full month earlier and
when it was certain the proposals would be implemented. In
their second quarter 10-Q, defendants did issue a general
warning that Congress was considering various proposals that
could reduce expenditures under certain governmental health
and welfare programs such as Medicare and Medicaid, but
unequivocally stated that it could not predict the impact of
this legislation. As plaintiffs allege, defendants went on to
selectively warn of proposed Health Care Financing
Administration regulations, but made absolutely no specific
mention of the passage or impact of the Balanced Budget Act.
Plaintiffs assert that Vencor’s 1997 second quarter 10-Q was
misleading as to the negative impact caused by the passage of
the Balanced Budget Act.
Moreover, even after the Balanced Budget Act had been
signed into law on August 5, 1997, plaintiffs allege that
defendants continued to issue the same earnings forecasts to
the marketplace as they had earlier. On September 25, 1997,
seven weeks after the Act was signed into law and six months
after Vencor began analyzing the Act’s effect on the

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22 Helwig, et al. v. Vencor, Inc., et al. No. 99-5153
_________________
DISSENT
_________________
MERRITT, Circuit Judge, dissenting. The plaintiffs satisfy
the pleading requirements of Rule 9(b) and 15 U.S.C., the
new Private Securities Litigation Act, § 74u-4(b)(1) and (2).
In their seventy-four page complaint, plaintiffs allege with
sufficient specificity (1) statements the defendants made
during the April - October 1997 class period to the investing
public and to financial analysts that the Balanced Budget Act
would have no adverse impact on Vencor’s future earnings
(2) when they well knew that the Act would have a serious
negative effect on earnings.
In cases of securities fraud, plaintiffs need only plead one
material misrepresentation or omission in order for this court
to sustain the complaint. See In re Fidelity/Micron Sec. Litig.,
964 F. Supp. 539, 543 (D. Mass. 1997). In reviewing the
plaintiffs’ complaint and alleged misrepresentations
concerning the Balanced Budget Act, the court errs in its
treatment of so called “forward-looking” statements by the
defendants. The panel majority found that all of the
statements alleged by the plaintiffs relating to the effect of the
Act on the earnings and revenues of Vencor made before the
legislation was signed into law were entitled to safe harbor
protection as “forward-looking” statements. This is an
untenable position because it lets the defendants get away
with talking out of both sides of their mouths saying “yes” to
the investing public and “no” to their own employees.
Plaintiffs plead that defendants knowingly made false and
misleading statements as to expected earnings and revenues
of Vencor. As evidence of defendants’ knowledge, they
allege in their complaint that in June 1997, Vencor was aware
of the probable negative ramifications that the Balanced
Budget Act’s Medicare reforms would have on the company.
Specifically, plaintiffs state that in late June 1997, after
acquiring Transitional Hospitals Corporation, defendants
Michael Barr, executive vice president and chief operating
No. 99-5153 Helwig, et al. v. Vencor, Inc., et al. 7
8This language was found in Vencor’s 1996 Form 10-K filed on
March 27, 1997. Similar warnings can be found in Vencor’s First and
Second Quarter 10-Q.
Over the six months that the Balanced Budget Act was
before Congress, Vencor issued numerous statements about
its financial health. From February 10, 1997 until its
announcement on October 22, 1997 of revised earnings
projections, Vencor stated that it was “comfortable” with a
Fourth Quarter earnings projection of $0.59-$0.64 earnings
per share and a yearly earnings projection of between $2.15
and $2.20 for 1997 and $2.60 and $2.65 for 1998. Vencor’s
positive statements about its earning potential led numerous
financial analysts to recommend Vencor’s stock as a “buy.”
Vencor, however, did note that
the Company cannot predict the content of any healthcare
or budget reform legislation which may be proposed in
Congress or in state legislatures in the future, and
whether such legislation, if any, will be adopted.
Accordingly, the Company is unable to assess the effect
of any such legislation on its business. There can be no
assurance that any such legislation will not have a
material adverse impact on the Company’s future growth,
revenues and income.8
On February 10, 1997, Vencor announced its acquisition of
TheraTx. The press release relaying this information stated
that “[t]he inclusion of TheraTx is expected to be accretive to
earnings based on projected synergies.” At the time of this
acquisition, TheraTx was carrying approximately $25 million
of bad debt from patients who could not pay their bills. On
July 24, 1997, Vencor announced its Second Quarter earnings
and defendant Lunsford stated that Vencor had “successfully
integrated the operations of TheraTx.” TheraTx’s existing
computer system, however, was not fully operational until
March of 1998 due to the need to teach Vencor employees
how to use the system.

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8 Helwig, et al. v. Vencor, Inc., et al. No. 99-5153
On June 20, 1997, Vencor acquired Transitional Hospitals
Corporation, giving Vencor control over 58 of the estimated
109 long-term acute care hospitals in the U.S. In connection
with this acquisition, Vencor announced on June 27, 1997, a
$500 million senior subordinated debt private placement. On
or about July 15, 1997, Vencor announced that it had sold
$750 million of senior notes, scheduled to mature in July of
2007. On October 8, 1997, Vencor initiated an offer to
exchange the senior subordinated notes, issued in July 1997
in the private placement, for publicly registered notes having
identical terms and conditions. The old notes issued in the
private placement provided that if a registration statement was
not filed by September 19, 1997, declared effective by
November 18, 1997, or consummated or not declared a shelf
registration statement effective by December 18, 1997, then
Vencor would have to pay additional interest on the old notes.
On September 16, 1997, Vencor announced a definitive
agreement to sell Behavioral Healthcare Corporation, a
division of Transitional, to a subsidiary of Charter Behavioral
Health Systems. The press release accompanying this
announcement stated that “[t]his transaction, which is subject
to acceptable financing, due diligence by CBHS and certain
regulatory approvals, is expected to close during the fourth
quarter of 1997.” On November 3, 1997, Vencor announced
that it would not be selling BHC due to a failure to agree to
final payment terms.
During the Class Period, the individual defendants sold
portions of their stock holdings in Vencor. Between July and
September, Vencor’s officers and directors sold more than
222,000 shares for proceeds of approximately $9.5 million.
During the month of July, defendant Lunsford sold 50,000
shares realizing proceeds of over $2,137,500, defendant Barr
sold 52,500 shares realizing proceeds of over $2,232,500,
defendant Ladt sold 12,000 shares realizing proceeds of over
$500,000, and defendant Gillenwater sold 4,100 shares
realizing proceeds of over $174,000. On September 18, 1997,
defendant Force sold 17,812 shares realizing proceeds of over
$789,000. Between September 18, 1997 and September 19,
No. 99-5153 Helwig, et al. v. Vencor, Inc., et al. 21
15Plaintiffs allege that defendants Lunsford, Barr, Ladt and
Gillenwater sold stock prior to the enactment of the Balanced Budget Act.
16Plaintiffs allege that defendants Force and Reed sold stock after the
Balanced Budget Act was enacted.
attributing inside information to the defendants concern the
internal memorandum discussing the potential effects of the
Balanced Budget Act. The individual defendants, like the
corporation, did not know whether the Balanced Budget Act
would be passed; thus, they cannot be held liable for actions
alleged to be taken in reliance on the passage of the Balanced
Budget Act. Because the plaintiffs do not allege that the
individual defendants had inside information stating that the
Balanced Budget Act would pass they fail to state a claim
against the individual defendants who sold their stock prior to
the passage of the legislation.15 In addition, the internal
memorandum upon which the plaintiffs rely states that further
study is needed to make an accurate assessment of the effects
of the Act on the corporation. We do not believe that this
memorandum provided those defendants who sold their stock
after the passage of the Act with inside information.16 While
plaintiffs’ allegations may establish motive and opportunity,
they are insufficient to demonstrate a strong inference of the
individual defendant’s use of inside information deceptively.
III. Conclusion
For the foregoing reasons, we find that the plaintiffs’
complaint does not contain sufficient factual allegations to
state a claim under the PSLRA and should be dismissed.

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20 Helwig, et al. v. Vencor, Inc., et al. No. 99-5153
3. Proposed Sale of BHC
Plaintiffs allege that defendants made false and misleading
statements in their announcement of the anticipated sale of
BHC to Charter. Plaintiffs contend that defendants made
these statements in an attempt to bolster the price of Vencor
stock and to prime the market for its sale of $750 million in
senior notes. In announcing the “definitive agreement”
between Vencor and Charter, defendants stated that Charter
was to pay $140 million in cash for BHC. Plaintiffs state that
this announcement of a cash sale was designed to alleviate
concerns about the substantial debt Vencor had incurred in its
acquisition of Transitional. On November 3, 1997, Vencor
announced that the sale would not be made because of a
failure to agree to payment terms.
Plaintiffs’ allegations that Vencor’s statements about the
sale were false and misleading is incorrect. Clearly stated in
Vencor’s announcement is that the sale is conditional: “This
transaction, which is subject to acceptable financing, due
diligence by CBHS and certain regulatory approvals, is
expected to close during the fourth quarter.” This alleged
statement which, on its face, is not false does not support
plaintiffs’ claim of fraud. Because Vencor never stated that
the sale had been consummated we find that the statements
associated with this announcement are not false and
misleading.
4. “Controlling Person” Liability and Insider Trading
The plaintiffs bring claims against the individual
defendants both as “controlling persons” of the corporation
and as individual insider traders. Because plaintiffs fail to
state a claim against the corporation they also fail to state a
claim against the individual defendants as “controlling
persons.” See Comshare, 183 F.3d at 554 n.11. In order for
plaintiffs’ claim of insider trading to stand against the
individual defendants, plaintiffs must allege that the
defendants had knowledge of non-public information that
they utilized in a manipulative and deceptive manner. See 15
U.S.C. § 78j(b) (West 1997). Plaintiffs’ only allegations
No. 99-5153 Helwig, et al. v. Vencor, Inc., et al. 9
9Plaintiffs allege that, on September 25, 1997, Bear Sterns issued a
report on Vencor which included an explanation for Reed’s sale of stock.
The report stated that Reed sold the stock to retire a $2 million personal
loan that Reed had obtained to exercise stock options.
1997, defendant Reed sold 69,400 shares realizing proceeds
of over $3,030,580.9
In their complaint, plaintiffs allege that the defendants
made false and misleading statements in relation to Vencor’s
financial activities from February 10, 1997 until October 21,
1997. Plaintiffs contend that these statements were made in
an attempt to elevate the price of Vencor stock. During the
Class Period, the stock price rose from a per share price of
$31 to a high of over $44 per share. After Vencor’s
announcement of lower than expected Fourth Quarter
earnings on October 22, 1997, the stock price fell from $42-
5/8 to $30 per share.
Plaintiffs filed this action in district court on December 24,
1997. On September 10, 1998, defendants filed a motion to
dismiss the complaint pursuant to Fed. R .Civ. P. 9(b) and
12(b)(6) and the Private Securities Litigation Reform Act of
1995, 15 U.S.C §§ 78u-4 & -5. The district court judge sua
sponte converted the motion to dismiss into a motion for
summary judgment. Ruling in favor of the defendants, the
district court dismissed plaintiffs’ complaint with prejudice.
Plaintiffs filed a timely appeal.
II. Discussion
On appeal, plaintiffs argue that the district court erred in
converting the defendants’ motion to dismiss into a summary
judgment motion without giving the plaintiffs sufficient
notice to prepare a defense to a summary judgment motion.
We agree with the plaintiffs that the district court did err.
Rule 12(b) provides that
[i]f, on a motion asserting the defense numbered (6) to
dismiss for failure of the pleading to state a claim upon

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10 Helwig, et al. v. Vencor, Inc., et al. No. 99-5153
10In reaching the conclusion that the plaintiffs have failed to state a
claim upon which relief can be granted, we have considered not only
those documents referenced in the plaintiffs’ complaint, but also
documents filed with the SEC. We believe that it is appropriate to take
judicial notice of public documents and that our consideration of these
documents does not require conversion of defendants’ motion to dismiss
to a motion for summary judgment. See Kramer v. Time Warner, Inc.,
937 F.2d 767, 774 (2d Cir. 1991) (holding that the district court did not
err in taking judicial notice of public documents when considering a
motion to dismiss).
which relief can be granted, matters outside the pleading
are presented to and not excluded by the court, the
motion shall be treated as one for summary judgment and
disposed of as provided in Rule 56, and all parties shall
be given reasonable opportunity to present all material
made pertinent to such a motion by Rule 56.
Fed. R. Civ. P. 12(b) (West 2000). Plaintiffs only learned of
the district court’s decision to convert the motion to dismiss
to a motion for summary judgment upon receiving the district
court’s opinion dismissing the plaintiffs’ complaint with
prejudice. Although the district court stated that it was
deciding a motion for summary judgment, the documents
which it relied upon were, for the most part, documents
“referred to in the complaint” and “central to the plaintiffs’
claim.” Defendants submitted authentic copies of these
documents in their entirety to the court. The court’s
consideration of these documents did not require the
conversion of the motion to dismiss into one for summary
judgment. See Greenberg, 177 F.3d at 514 (holding that
when a document is referred to in the plaintiff’s complaint
and is central to the plaintiff’s claim the court may consider
the document in ruling on a motion to dismiss). The reasons
given by the district court for granting summary judgment
were based, in most instances, on plaintiffs’ allegations, these
documents, judicial notice10 and legal analysis which would
support a decision to dismiss a plaintiff’s complaint for
failure to state a claim upon which relief can be granted.
No. 99-5153 Helwig, et al. v. Vencor, Inc., et al. 19
plaintiffs have not established a strong inference that this
statement was false or misleading.
Plaintiffs allege that defendants’ statements about the
acquisition of Transitional were false and misleading.
Plaintiffs, however, do not allege any statements with regard
to this transaction which cannot be classified as forward-
looking statements about “soft” information. Plaintiffs allege
that on or about the last week in June of 1997, defendant Barr
gave Transitional employees notice that they would be laid off
in sixty days and told these employees that they probably
would have been laid off anyway due to the proposed
Medicare regulations. The plaintiffs proffer this statement as
evidence of defendant Barr’s knowledge of the effect of the
Balanced Budget Act on Vencor’s operations. Plaintiffs,
however, fail to connect this statement to any of their
allegations concerning the defendants’ false and misleading
statements. Without alleging a link between this statement
and defendants’ allegedly false and misleading statements, the
plaintiffs have failed to allege sufficient facts establishing a
strong inference of scienter. On its own, this statement is not
actionable because it constitutes defendant Barr’s opinion and
is “soft” information. In the plaintiffs’ other allegations
involving the Transitional acquisition, they contend that the
defendants made false and misleading statements about the
benefit of the Transitional acquisition because they knew that
the Balanced Budget Act would have a negative effect on
Vencor. As stated above, the defendants cannot be held liable
for any statements about the Balanced Budget Act prior to its
enactment. In addition, plaintiffs’ allegations fail because
they allege only motive and opportunity and do not establish
a strong inference of recklessness. Because the plaintiffs have
failed to establish that any of defendants’ statement regarding
either the acquisition of TheraTx or Transitional were false or
misleading the plaintiffs have not stated a claim of fraud.

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18 Helwig, et al. v. Vencor, Inc., et al. No. 99-5153
any of the statements made prior to August 5, 1997 were false
or misleading when made, plaintiffs do not state a claim for
fraud based on their allegations associated with the effect of
the Balanced Budget Act on Vencor’s earnings and revenues.
2. Acquisition of TheraTx and Transitional
Plaintiffs allege that the defendants made false and
misleading statements about the effect that the acquisitions of
TheraTx and Transitional would have on Vencor’s earnings
and revenues. In particular, plaintiffs allege that Vencor’s
statement on February 10, 1997, that the acquisition of
TheraTx would be “accretive to earnings” was false and
misleading. Plaintiffs state that defendants knew that
TheraTx had $25 million in bad debt. Accepting that
defendants knew of this debt, the plaintiffs’ allegation does
not state a claim. Plaintiffs do not allege how the existence of
this bad debt makes Vencor’s statement false and misleading.
In addition, this statement is a prediction or opinion and
constitutes “soft” information. As stated above, “soft”
information statements are not actionable.
Plaintiffs also allege that defendants’ statement on July 24,
1997, that Vencor had successfully integrated TheraTx’s
operations was false and misleading because TheraTx’s
computer system was not fully operational until March 1998.
The plaintiffs’ allegations state that the computer system was
not implemented until all of the Vencor employees were
trained to use it. Plaintiffs’ allegations, however, fail to
establish a strong inference that the defendants’ statements
were false and misleading when made. For this statement to
constitute fraud, the plaintiffs would have to allege facts that
demonstrate that the inability of Vencor to utilize TheraTx’s
computer system until all of its employees were trained in the
new system prevented the integration of TheraTx’s operations
into Vencor, i.e. that this computer problem caused TheraTx’s
operations to be run separately from the rest of Vencor. The
complaint lacks allegations connecting the computer system
to the successful integration of the companies; thus, the
No. 99-5153 Helwig, et al. v. Vencor, Inc., et al. 11
In Briggs v. Ohio Elections Commission, 61 F.3d 487, 493
(6th Cir. 1995) this court held that reversal is required if a
plaintiff is not given notice and a reasonable opportunity to
present evidence after the court has converted a motion to
dismiss to a motion for summary judgment. The district
court, in this case, gave no notice to the plaintiffs. In
Routman v. Automatic Data Processing, Inc., 873 F.2d 970,
972 (6th Cir. 1989), this court held that “where a district court
is contemplating entering sua sponte summary judgment
against one of the parties, that party is entitled to unequivocal
notice of the court’s intentions.” Because the plaintiffs did
not receive “unequivocal notice” of the court’s decision to
convert the defendants’ motion to dismiss into a summary
judgment motion the district court abused its discretion. See
Salehpour v. University of Tennessee, 159 F.3d 199, 203 (6th
Cir. 1998) (holding that a court’s decision to enter summary
judgment sua sponte is reviewed for abuse of discretion). In
addition, the district court abused its discretion when it did
not provide the plaintiffs with a reasonable opportunity to
present evidence to defend against a summary judgment
motion.
Although this court finds that the district court was
incorrect in converting this case without notice to the
plaintiffs, we do not believe that we need to remand this case
to allow the district court to correct this procedural error.
“[A]n appellate court may affirm on any ground supported by
the record, even though the ground relied upon by the lower
court was different from the one chosen by the appellate
panel.” Warda v. Commissioner, 15 F.3d 533, 539 n.6 (6th
Cir. 1994). We find that the dismissal of the complaint
should be affirmed on the grounds that the plaintiffs have not
pled sufficient facts to permit a strong inference that the
defendants engaged in securities fraud.
In 1995, Congress passed the Private Securities Litigation
Reform Act (“PSLRA”) which heightened the pleading
standard in securities litigation. Section 78u-4(b) states:

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12 Helwig, et al. v. Vencor, Inc., et al. No. 99-5153
(b) Requirements for securities fraud actions
(1) Misleading statements and omissions
In any private action arising under this chapter in
which the plaintiff alleges that the defendant —
(A) made an untrue statement of a material fact; or
(B) omitted to state a material fact necessary in order
to make the statements made, in the light of
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.
(2) Required state of mind
In any private action arising under this chapter in which
the plaintiff may recover money damages only on proof
that the defendant acted with a particular state of mind,
the complaint shall, with respect to each act or omission
alleged to violate this chapter, 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)(1) & (2) (West 1997). This Circuit, in In
re Comshare, Inc. Securities Litigation, 183 F.3d 542, 551
(6th Cir. 1999), interpreted this provision of the Act as
requiring plaintiffs to allege facts that give rise to at least a
strong inference of reckless behavior in order to satisfy the
scienter requirement. The Comshare court held that
allegations of fact “that illustrate nothing more than a
defendant’s motive and opportunity to commit fraud” do not
satisfy the pleading requirements of the PSLRA. Id. We find
that the plaintiffs’ complaint does not allege sufficient facts
to establish either (1) the falsity or the misleading
characteristics of the defendants’ statements or, (2) a strong
inference that the defendants had the state of mind required by
the statute.
No. 99-5153 Helwig, et al. v. Vencor, Inc., et al. 17
13Although this document is referenced in the plaintiffs’ complaint,
it could be argued that it has not been formally incorporated into the
complaint. It still is appropriate for this court to consider this document
and the others attached to the defendant’s brief in support of their motion
to dismiss. “When a document is referred to in the complaint and is
central to the plaintiff’s claim . . . the defendant may submit an authentic
copy to the court to be considered on a motion to dismiss, and the court’s
consideration of the document does not require conversion of the motion
to one for summary judgment.” 11 JAMES WM. MOORE ET AL.,
MOORE’S FEDERAL PRACTICE § 56.30[4] (3d ed. 1998); see also
Greenberg, 177 F.3d at 514 (citing this proposition with approval).
Because the documents referred to in this opinion are “central” to the
plaintiffs’ claim this court may consider them in assessing the plaintiffs’
pleadings on a motion to dismiss.
14Plaintiffs also allege that Vencor’s financial department had
undertaken numerous studies to discern the effect of the proposed
legislation on Vencor during the months of April through July. Because
the effect of proposed legislation can be considered a prediction or
opinion the defendants had no duty to disclose these studies. In addition,
if the court makes the assumption that the internal memorandum
promulgated in late July would incorporate any other relevant studies,
there is no allegation that permits a strong inference that any of these
studies produced any “hard” information which should have been
disclosed. Knowledge of the effects of the legislation cannot be imputed
on the defendants. The memorandum does not contain any “hard”
information, but rather, simply warns of the possibility of negative effects.
memorandum13 is included in the exhibits attached to the
defendant’s motion to dismiss and does not support the
plaintiffs’ allegations.14 Although the memorandum
acknowledges that the legislation may have a negative impact
on Vencor, it clearly states that no definite findings have been
made and that further study is required before an accurate
assessment of the effect of this legislation can be made. Even
if plaintiffs’ allegations are accepted as true and this court
assumes that the defendants knew of this document, we do
not believe the facts support a finding that the defendants
knew that any statements about earnings and growth were
false when made, nor that they were reckless. Because the
plaintiffs do not allege any statements after August 5, 1997
that can be attributed to the defendants and plaintiffs do not
allege sufficient facts to establish that the defendants knew

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16 Helwig, et al. v. Vencor, Inc., et al. No. 99-5153
as certain as hard facts.” Id. at 402 (quoting Starkman v.
Marathon Oil Co., 772 F.2d 231, 241 (6th Cir. 1985)).
Although the Sofamor Danek case precedes the adoption of
the PSLRA, we believe that it is appropriate to apply its
holding to this case. In Comshare, this Circuit held that “the
PSLRA did not change the scienter that a plaintiff must prove
to prevail in a securities fraud case but instead changed what
a plaintiff must plead in his complaint in order to survive a
motion to dismiss.” 183 F.3d at 548-49. The Sofamor Danek
court’s interpretation of the substantive law of scienter is not
affected by the PSLRA’s requirements for pleading; thus, its
holding that “soft information” is not actionable continues to
be the law of this Circuit. Because the enactment of the
Balanced Budget Act was uncertain until August 5, 1997
defendants cannot be held responsible for not disclosing
information about the possible effect that this legislation
would have on Vencor’s business. In addition, plaintiffs do
not allege sufficient facts to permit a strong inference that any
of the defendants had actual knowledge that the statements
were false or misleading when made.
The plaintiffs also do not allege sufficient facts to
demonstrate that Vencor made any false or misleading
statements after the enactment of the Act. The pleadings set
forth no statements, after August 5, 1997, which are directly
attributable to any of the defendants. The alleged statements
after the enactment of the Act are all statements made by
financial analysts. The plaintiffs have failed to allege facts
that demonstrate that the defendants took affirmative action
allowing us to attribute these statements to the defendants. In
addition, the plaintiffs have not alleged sufficient facts to
demonstrate that the defendants knew these statements were
false or misleading when made. Plaintiffs allege that the
defendants received an internal memorandum in late July,
after the bill had passed both houses, but prior to receiving the
President’s approval, informing them of the negative effect of
the legislation on Vencor’s earnings and revenues. This
No. 99-5153 Helwig, et al. v. Vencor, Inc., et al. 13
11On or about July 15, 1997, Vencor announced a sale of $750
million of senior notes. The proceeds of this sale were used to replenish
the credit facility which was depleted in connection with Vencor’s $574
million acquisition of Transitional.
The plaintiffs allege that the defendants made numerous
false and misleading statements designed to inflate the price
of Vencor stock. The plaintiffs contend that the defendants
attempted to elevate Vencor’s stock prices in order to ensure
the success of Vencor’s bond offering in July of 1997.11
Plaintiffs also allege that the individual defendants benefitted
from the elevated stock prices through sales of portions of
their personal stock holdings. Plaintiffs allege that the
individual defendants sold more than 222,000 shares of
Vencor stock realizing proceeds of approximately $9.5
million. Each allegedly false or misleading statement made
by the defendants concerned at least one of the following
aspects of Vencor’s business: (1) the effect of the Balanced
Budget Act on Vencor’s revenues and earnings; (2) the effect
of the acquisition of TheraTx and Transitional on Vencor’s
revenues and earnings, (3) the proposed sale of BHC to
Charter. The plaintiffs’ remaining allegations relate to the
sale of the individual defendants’ stock holdings. We believe
that the plaintiffs do not allege sufficient facts to demonstrate
that any of the statements attributable to the defendants were
false or misleading. In addition, we do not believe that the
plaintiffs allege any facts to show that the defendants had the
requisite state of mind. Because the plaintiffs’ complaint
does not allege sufficient facts to state a claim upon which
relief can be granted, we affirm the dismissal of the plaintiffs’
complaint.
Initially, it is necessary to determine which statements,
contained in the complaint, can be attributed to the
defendants. Plaintiffs allege numerous statements made by
financial analysts which they contend are based on
information provided to these analysts by one or more of the
defendants. Relying on In re Syntex Corp. Securities
Litigation, 95 F.3d 922, 934 (9th Cir. 1996) and In re Time
Warner Inc., Securities Litigation, 9 F.3d 259, 265 (2d Cir.

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14 Helwig, et al. v. Vencor, Inc., et al. No. 99-5153
12As stated above, many of plaintiffs’ allegations of false and
misleading statements cannot be attributed to the defendants. Of the
remaining allegations, only defendants’ statements in Vencor’s press
release announcing acquisition of TheraTx ( Compl. ¶ 32), announcement
of Fourth Quarter 1996 results (Compl. ¶ 41), annual report (Compl.
1993), defendants argue and the district court held that the
financial analysts’ statements cannot be imputed to the
defendants unless the analyst’s report directly attributes the
statements to one or more of the defendants. In In re Time
Warner, the Second Circuit held that Rule 9(b) requires a
plaintiff to identify the speaker of allegedly fraudulent
statements. Id. In reaching this conclusion, the court stated
“[f]ew reporters or analysts would knowingly abet a fraud,
and many will detect and reveal a corporation’s efforts to use
them as a channel for fraudulent statements. . . . Thus, the
opportunity to manipulate stock prices through the planting of
false stories is somewhat limited.” Id. We believe that the
Second Circuit is correct in its holding. Although a
corporation provides analysts with information about the
financial status of the corporation, the analyst does not simply
repeat that information verbatim in his report. Instead, the
analyst does what his job title suggests – he analyzes and
synthesizes the information before reporting it to the public.
We agree with the district court and the Second Circuit and
hold that a corporation cannot be held responsible for
analysts’ statements about the corporation’s financial health
unless the corporation takes more affirmative action than
simply providing information to the analysts. See id.
Because the statements in the complaint by financial analysts
do not satisfy the heightened pleading requirements this court
will analyze the defendants’ motion to dismiss based only on
those statements in the complaint that can be directly
attributed to one or more of the defendants.
1. Statements relating to the Balanced Budget Act
Plaintiffs allege that the defendants made numerous false
and misleading statements about the effect of the Balanced
Budget Act on the financial prospects of Vencor.12 In
No. 99-5153 Helwig, et al. v. Vencor, Inc., et al. 15
¶ 44), 1996 Form 10-K (Compl. ¶ 45), announcement of First Quarter
results (Compl. ¶ 50), First Quarter 10-Q (Compl. ¶¶ 54-56), Courier-
Journal article (Compl. ¶ 59), announcement of acquisition of
Transitional Hospital Corporation (Compl. ¶ 65), Transitional
presentation (Compl. ¶ 72), announcement of sale of notes (Compl. ¶ 76),
announcement of Second Quarter results (Compl. ¶ 78), Second Quarter
10-Q (Compl. ¶ 83), announcement to sell network of hospitals (Compl.
¶ 89), and announcement of agreement to sell BHC (Compl. ¶ 92) should
be considered in assessing plaintiffs’ complaint. Of these statements only
the last two occurred after the enactment of the Balanced Budget Act.
assessing this aspect of the plaintiffs’ complaint, there are two
relevant time periods. The plaintiffs have alleged a Class
Period of February 10, 1997 until October 21, 1997.
Statements made by the defendants during the time period
from February 10, 1997 until August 4, 1997 are not
actionable because the defendants could not know whether
the proposed legislation would be enacted. Although the
plaintiffs could state a claim for statements made after the
enactment of the legislation on August 5, 1997, the plaintiffs
do not allege sufficient facts to demonstrate that the
defendants made any statements after the enactment of the
legislation that were false or misleading.
15 U.S.C. § 78u-5(c) establishes a safe harbor for forward-
looking statements. Statements fall into this safe harbor if
they are identified as forward-looking when made and are
accompanied by cautionary statements. See 15 U.S.C. § 78u-
5(c)(1)(A) (West 1997). Statements also are entitled to this
protection if the plaintiff cannot prove that the speaker had
actual knowledge that the statement was false or misleading
when made. See 15 U.S.C. § 78u-5(c)(1)(B). All of the
statements alleged by the plaintiffs relating to the effect of the
Balanced Budget Act on the earnings and revenues of Vencor
that occurred before the legislation was passed are entitled to
this safe harbor protection. These statements contained “soft
information” concerning potential earnings and projected
growth. See In re Sofamor Danek Group, Inc., 123 F.3d 394,
401 (6th Cir. 1997) (finding that “soft” information “includes
predictions and matters of opinion”). This Circuit has held
that “soft” information “must be disclosed only if . . . virtually

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