IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION
United States Courts
Southern NTER Dof Texas
AUG 2 6 2003
Mkh d N. MMIby. Clerk of Goth
In
re
§
DYNACQ INTERNATIONAL, INC .
§
SECURITIES LITIGATION §
JACK D .
HAMILTON ,
et al .,
§
Plaintiffs,
§
§
§
v.
§
DYNACQ INTERNATIONAL, INC .,
et al .,
Defendants .
CIVIL ACTION NO . H-02-0377
(Consolidated with H-02-0489,
H-02-0590, H-02-1090, and
H-02-1104 )
§
§
§
§
MEMORANDUM AND ORDER
Pending before the court are the Motion to Dismiss (Docke t
Entry No . 35) filed by defendant, Dynacq International, Inc .
("Dynacq"), and the Motion to Dismiss (Docket Entry No . 36) filed
by Chiu Moon Chan, Ella Chan, and Philip S . Chan (the "Individual
Defendants") .' Also pending are the Motion for Relief from the
Automatic Discovery Stay ; or in the Alternative Motion to Enjoin
State Action (Docket Entry No . 37), and the Motion to Strik e
Exhibit "A" to Dynacq International, Inc .'s Motion to
Dismis s
(Docket Entry No . 42) filed by Cedric C . Jimerson and Jack D .
Hamilton ("Lead Plaintiffs") . For the reasons stated below, th e
'Hereinafter, Dynacq and the Individual Defendants will be referred
to collectively as "Defendants ."
Motions to Dismiss will be granted, the Motion for Relief from the
Automatic Discovery Stay will be denied, and the Motion to Strike
will be granted .
I.
Factual Backgroun d
Lead Plaintiffs bring this action against Defendants on behalf
of themselves and all persons who purchased Dynacq common stock
between November 30, 2000, and January 16, 2002 (the "class
period") . Lead Plaintiffs allege that Defendants violated
§§ 10 (b) , 20(a), and 20A of the Securities Exchange Act of 1934 .
(Consolidated Amended Complaint, Docket Entry No . 28 ¶ 1)2 Lead
Plaintiffs allege that during the class period Defendants
artificially inflated the price of Dynacq's stock by making a
number of false and misleading public statements relating to
Dynacq's financial and operational success . ¶¶ 2-3 . Lead
Plaintiffs also allege that during the class period Dynacq's top
executives engaged in illegal insider trading .
¶
3 . Lead
Plaintiffs allege that in January of 2002 Defendants' misconduct
was exposed and Dynacq's stock price collapsed, causing Lead
Plaintiffs and others who purchased stock during the class period
tens of millions of dollars in damages . ¶ 5 .
Dynacq owns and operates a healthcare delivery system that
includes outpatient surgical centers and a hospital and provide s
2Hereinafter, all references to the Consolidated Amended Complaint
will be to the paragraph number only .
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physician management services and home infusion therapy . ¶ 2 .
During the class period Chiu Moon Chan ("Chiu Chan") was Dynacq's
CEO and board chairman . Chiu Chan was also a member of Dynacq's
"leadership team," "the small insular group of senior officers who
personally guided Dynacq's business affairs on a daily basis ."
¶ 9 (a) . During the class period Ella Chan, Chiu Chan' s wife, owned
either directly or indirectly more than
65% of Dynacq's stock, but
apparently held no other position with Dynacq . ¶ 9(b) . During the
class period Philip S . Chan was Dynacq's CFO, Vice-President of
Finance, and Treasurer . Philip Chan was also a member of Dynacq's
"leadership team ." ¶ 9(c) . Lead Plaintiffs allege that Chiu Chan
and Philip Chan were Dynacq's top executives who, along with Ella
Chan, ran Dynacq as "hands-on" managers . Chiu Chan was involved in
every facet of Dynacq's business . ¶ 10 .
Lead Plaintiffs allege that during the class period Defendants
made a number of false and misleading representations that caused
Dynacq's common stock to trade at artificially elevated levels .
Most of these alleged misrepresentations fall into four general
categories :
(1) statements that Dynacq's facilities, services,
doctors, and healthcare delivery model were of high
quality, when they were not ;
(2) overstatements or misstatements of Dynacq's
earnings, revenues, and financial performance in
general ; '
'Also falling loosely into both the first and second categories are
statements attributing Dynacq's financial success to its hig h
(continued . . . )
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3
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(3) statements that Dynacq was in compliance with
applicable healthcare laws, when it was not ; and
(4) statements by securities analysts relating to
Dynacq's performance and stock value .
Lead Plaintiffs have also set forth a number of alleged
misrepresentations that do not fall into any of these categories .
As will be discussed in more detail below, Lead Plaintiffs hav e
alleged facts relating only to the falsity of statements falling
into the four enumerated categories . With respect to the
statements not falling into any of those categories, Lead
Plaintiffs have alleged no facts to demonstrate that they were
false or misleading .
II .
Lead Plaintiffs' Allegation s
Lead Plaintiffs allege that on its website Dynacq described
its "healthcare delivery model" in very favorable terms and
emphasized the quality of its facilities and doctors and the
professionalism of its support staff . Specifically, with respect
to the Vista Medical Center Hospital ("VMCH"), Dynacq stated on its
website tha t
This is the flagship of the Dynacq system . Designed and
built by management, VMCH is the model of surgical
efficiency and patient care on which Dynacq's future
facilities will be based . This compact prototype offers
large, well-equipped operating rooms utilized by top
surgeons and experienced staff, and is a healthfu l
3( . . .continued)
quality healthcare services, when, according to Lead Plaintiffs,
Dynacq's success was actually due to improper cost-cutting
measures, delivery of low-quality healthcare services, and
falsification of its financial results .
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4
patient environment where personal attention is the order
of the day .
VMCH focuses on specialized surgical procedures without
the stress and disruptions of large general hospitals .
This atmosphere fosters patient well being and fast
recovery, as well as optimal use of expensive facilities
and surgeons' valuable time . The hospital is part of
Dynacq's central campus which is also home to Vista
Ambulatory Surgical Center and a professional building
housing physicians, ancillary services and corporate
headquarters .
¶ 24 .
On November 30, 2000, Dynacq announced its 2000 year-en d
results in a press release that stated net income of $5,858,406, o r
$ .22 per share, and a 61% increase in revenues to $26,032,411 . The
press release quoted Chiu Chan, in relevant part, as follows :
Much of our success is not only providing care with
compassion and understanding, but also allowing our
service areas access to high quality, cost-effective and
personalized care . [Our] management team is dedicated to
these principals [sic] and to having positive relations
with our medical staff .
Management is actively pursuing plans to replicate this
successful concept in both Texas as well as the national
markets .
¶ 34 (alteration in original) .
Also on November 30, 2000, Dynacq filed with the SEC its Form
10-K, which stated "[t]he healthcare industry is highly regulate d
at the federal and state levels . The Company believes its busines s
is in material compliance with applicable law ." ¶ 35 .
On December 30, 2000, after Dynacq signed a letter of inten t
to acquire Surgi+Group, Inc ., Chiu Chan commented tha t
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Surgi+Group has the corporate development and operating
expertise with for-profit surgery centers to fast-track
Dynacq's ambitious expansion plans . The pipeline of
high-quality, surgery center acquisition and start-up
leads gained as a result of this merger will
significantly expedite Dynacq's expansion into other
markets .
¶ 37 .
On January 5, 2001, Taglich Brothers, Inc . issued an analys t
report recommending the purchase of Dynacq stock as a "Speculativ e
Buy," and stating tha t
Dynacq is undervalued relative to the companies in the
Hospital Industry within the Healthcare sector . . . . In
our view, a fair valuation for these shares should emerge
as the Company leverages their resources by creating new
integrated medical facilities . "
¶ 38 (alteration in original) .
On January 16, 2001, Dynacq announced its first quarter ne t
income as $2,372,119, or $0 .09 per share, on revenue of $8,904,528 .
¶ 39 . Dynacq
issued a press release
that quoted Chiu Chan a s
follows :
.
Once again .
. our management has demonstrated the
phenomenal success of this remarkable model for the
delivery of affordable healthcare .
.
.
. With the
extraordinary cooperation of our medical staff and the
confidence of our patients, we continue to meet the
challenge of providing exemplary care with compassion and
understanding . We have unquestionably proven, again, the
significance of our model for the delivery of cost
effective, high quality, personalized medical care .
The press release went on to state that Dynacq "specialized in
creating quality and efficient community-based, one stop healthcare
resource centers designed to meet the needs of physicians and their
patients ." ¶ 39 .
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On February 1, 2001, Dynacq announced that the State of Texas
had approved its plan to expand Dynacq's Ambulatory Surgical Care
("ASC") facility . Dynacq issued a press release stating that its
plans for expansion had been approved and that the expansion would
include an additional operating room and recovery stations and
would result in a 33% increase in surgical capacity . The press
release also stated that Dynacq's contractor had obtained all
necessary permits and had estimated project completion by May 1,
2001 . According to the press release "[t]his renovation is
designed to enhance the company's commitment to the delivery of
quality and efficient healthcare and exceeds the requirements of
the Texas Department of Health for like facilities ." The press
release also stated that the project would not interfere with
current operations, and that construction costs would be paid out
of existing earnings without incurring debt . ¶ 41 . The press
release quoted Chiu Chan as follows .
This is but the first of many steps we are taking towards
implementing our plan to expand our ability to provide
exemplary and cost efficient healthcare through
controlled and well managed growth . The company is
continuing efforts to penetrate the area and national
medical markets and propagate its very successful model
for creating quality and efficient community-based, one
stop healthcare resource centers designed to meet the
needs of physicians and their patients .
41 .
On February 27, 2001, Dynacq announced a stock split through
a 100% stock dividend on all issued common shares . Chiu Cha n
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stated that he was very excited about the "tremendous success of
the company," and that he believed the company's approach to growth
was in the best interest of the company and its shareholders . Chiu
Chan described the stock split as a reward to shareholders and a
demonstration of the company's intent to strengthen its commitment
to increase stock value and encourage wider distribution of Dynacq
stock . 1 42 .
On April 16, 2001, Dynacq announced a 111% "record-setting "
income increase in the first half of 2001 to $4,788,338, or $0 .1 7
per share, on revenue of $18,691,939 . In the press releas e
announcing those results
Chiu Chan was quoted as stating, alon g
with a number of other self-congratulatory statements, tha t
"[Dynacq's management team] [has] again demonstrated the succes s
that comes from their commitment to working our plan of controlle d
growth while maintaining the integrity of our remarkable model for
the delivery of affordable healthcare ." Chiu Chan also predicted,
based upon Dynacq's current and future business expansion, that
more earnings records would be broken in the near future . ¶ 43 .
In a May 1, 2001, report Taglich Brothers rated Dynacq's stoc k
a "Buy ." The report explained that Dynacq's steadily increasing
revenues and earnings evidenced that the company was operating
efficiently . The report also stated that Taglich Brothers expected
the company to remain successful . The report also stated that
Dynacq had been efficiently managing its growth and that furthe r
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increases in revenues and earnings were expected . Finally, th e
report opined that Dynacq's stock was undervalued given the
expected earnings growth . ¶ 45 .
On July 2, 2001, Dynacq announced in a press release tha t
FORTUNE SMALL BUSINESS MAGAZINE had ranked Dynacq as one of the top
performing companies in the United States . Among a number of selfcongratulatory comments in the press release Chiu Chan attributed
Dynacq's high rank to "consistent growth in size, revenues and []
profitability through the successful model that delivers quality
and cost efficient healthcare
.
.
." ¶ 47 (alteration i n
original) . Chiu Chan also expressed pride in the company an d
gratitude for the congratulations offered by the publisher o f
FORTUNE SMALL BUSINESS MAGAZINE .
In a July 16, 2001, press release Dynacq announced a 70 %
increase in net income to $2,782,617, or $0 .20 per share, o n
revenue of $12,788,986 . The press release quoted Chiu Chan a s
follows :
. . . We enjoy the success that comes from [Dynacq's
management team's] implementation of our model for the
delivery of affordable healthcare . As I predicted in
April of this year, we have provided our shareholders
with a new record in earnings and we are very excited
about it . We fully intend to repeat this pattern .
¶ 49 .
On July 25, 2001, Chiu Chan state d
Our company's inclusion in the Russell 2000 and Russell
3000 again demonstrates the success that comes from
management's commitment to our controlled growth pla n
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while maintaining the integrity of our remarkable model
for the delivery of affordable healthcare .
¶ 51 .
On July 31, 2001, Taglich Brothers again recommended Dynacq's
stock as a "Buy ." As with previous Taglich Brothers' reports, the
July 31, 2001, report opined that Dynacq's efficient operation and
management of its growth was evidenced by its steadily increasing
earnings and revenues . The report predicted future growth and
increases in revenues and earnings, and opined that Dynacq was
undervalued based upon those expected increases .
In a September 19, 2001, press release announcing a stock buyback program Dynacq confirmed that Dynacq expected to earn $0 .19
per share in the fourth quarter of 2001 . ¶ 54 .
In an October 3, 2001, press release Dynacq announced that i t
had been favorably recognized by MotleyFool .com, an online
investment publication . The press release stated that Dynacq had
been recognized not only by MotleyFool .com, but also by the FORTUNE
SMALL BUSINESS MAGAZINE and THE HOUSTON CHRONICLE . The press release went
on to quote Chiu Chan as saying he was pleased by the recognition
and that such recognition is a reward for the "success generated by
all the hard work and effort put forth by our management team ."
¶ 55 .
On October 18, 2001, in a press release announcing Dynacq's
retention of Schey Advertising/Public Relations to promote its
stock, Chiu Chan was quoted as saying that "Dynacq Internationa l
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develops, owns and manages state-of-the-art surgical hospital s
designed for greater efficiency and cost containment to meet th e
needs of physicians and their patients ." ¶ 56 .
An October 31, 2001, press release announcing the appointmen t
of Sarah C . Garving as Executive Vice-President and Chief Operatin g
Officer stated that "Dynacq International Inc . specialized in
developing, owning and operating community-based surgical hospitals
designed to meet the needs of premier surgeons and their patients ."
¶ 56 .
In a November 8, 2001, press release announcing increase d
surgical capacity at the VMCH Chiu Chan was quoted as saying that
the new facilities had been approved by the Texas Department of
Health and placed into service, and that construction costs were
paid out of earnings with no debt incurred . Chiu Chan explained
that "[c]ompletion of this important construction project is
further confirmation of our focus on same-store growth," and that
"[i]naguration of the new surgical facilities
goal of doubling our surgical capacity .
.
.
.
. completes the
." Chiu Chan was also
quoted as stating that "[b]y associating with premier surgeons and
excellent patient care, we will achieve the full potential of each
of our surgical hospitals ." The press release went on to state
that "Dynacq International specializes in developing, owning and
operating community-based surgical facilities designed to meet the
needs of leading surgeons and their patients ." ¶ 58 .
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In a November 27, 2001, article Dow JONES reported that
Dynacq's share price had hit a 52-week high, and attributed the
price increase to recent expansions in Dynacq's business and strong
earnings performance . The article also quoted one of
Taglich Brothers' analysts as recommending that investors buy
Dynacq's stock, and that he expected Dynacq to report earnings of
$0 .18 per share for the fourth quarter of 2001 and $0 .71 for the
year . The article also reported the Taglich Brothers' analyst as
projecting earnings at $0 .89 per share for 2002 and a stock price
of $30 per share within a year and a half . ¶ 59 .
Dynacq announced its 2001 year-end results on November 27,
2001, as an 89% increase in net income to $11,060,808, or $0 .76 per
share, on revenue of $43,803,619 . Chiu Chan stated in a press
release that he was proud of the results achieved, and attributed
the company's success to "management's successful strategy of samestore growth and targeted expansion ." ¶ 60 .
In its November 27, 2001, Form 10-K, Dynacq set forth the
details of its 2001 net income and revenues and compared its 2001
results to those of 1999 and 2000 . ¶ 61 .
Taglich Brothers issued a report on December 11, 2001 ,
recommending Dynacq stock as a "Buy," and, as in previous reports,
noting that Dynacq had grown significantly, managed its growth
wisely, and experienced notable increases in both revenues and
earnings . The report also predicted further acquisitions, growth,
and financial success . $ 62 .
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On January 14, 2002, Dynacq reported a 42% increase in net
income of $3,377,615, or $0 .23 per share, on revenues o f
$13,854,531 . In the press release reporting those results Chiu
Chan was quoted as saying that the company had reduced its accounts
receivable collection time by more than 20% . 1 65 .
As explained above, most of the foregoing statements fall int o
four general categories :
(1) statements that Dynacq's facilities, services,
doctors, and healthcare delivery model were of high
quality, when they were not ;
(2) overstatements or misstatements of Dynacq's
earnings, revenues, and financial performance in
general ;
(3) statements that Dynacq was in compliance with
applicable healthcare laws, when it was not ; and
(4) statements by securities analysts relating t o
Dynacq's performance and stock value .
For the convenience of the parties, the court has included th e
following chart listing in chronological order the alleged
misrepresentations, the paragraph of the Consolidated Amende d
Complaint where the statement is alleged, and an "X" below each
category into which each statement falls, if at all .
Overstatements ,
Quality of
Healthcare
delivery
model, staff
facilities,
services,
doctors
Document
Dynacq's
Websit e
24
X
November 30 ,
2000, Press
Releas e
34
X
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misstatements o f
Earning s
(attributing
earnings to
high-quality
facilities and
services)
X
-13-
Complianc e
with
applicable
healthcare
laws
Valuatio n
of
Dynacq' s
stoc k
Overstatements ,
Document
¶
November 30 ,
2000, Form
10- K
35
December 20 ,
2000 ,
Comments re :
Letter o f
Inten t
37
Quality of
Healthcare
delivery
model, staff
facilities,
services,
doctors
misstatements o f
Earning s
(attributing
earnings to
high-quality
facilities and
services)
Complianc e
with
applicable
healthcare
laws
Valuatio n
of
Dynacq' s
stoc k
X
January 5 ,
2001 ,
Taglich
Brother s
Repor t
38
X
January 16 ,
2001, Pres s
Releas e
Regarding
39
X
41
X
X
Firs t
Quarter 200 1
Result s
February 1 ,
2001, Pres s
Release
Regardin g
AS C
Expansio n
February 27 ,
2001 ,
Announcement
42
Regardin g
Stock Spli t
April 16 ,
2001, Pres s
Release
Regardin g
43
X
X
First-Hal f
2001 Result s
May 1, 2001 ,
Taglic h
Brothers
Analys t
Repor t
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45
fj
X
-14-
X
Overstatements ,
Document
Quality of
misstatements o f
Healthcare
Earning s
¶
delivery
model, staff
facilities,
services,
doctors
(attributing
earnings to
high-quality
facilities and
services)
47
X
X
49
X
X
51
X
x
Complianc e
with
applicable
healthcare
laws
Valuatio n
of
Dynacq' s
stoc k
July 2 ,
2001,
Pres s
Releas e
regarding
Fortun e
Ratin g
July 16 ,
2001, Pres s
Releas e
Regarding
Thir d
Quarter 200 1
Result s
July 25 ,
2001, Pres s
Releas e
Regarding
Dynacq's
Addition t o
the Russel l
2000 an d
3000 Stoc k
Indice s
July 31 ,
2001 ,
Taglic h
Brothers
Analys t
Repor t
52
X
54
X
55
X
Septembe r
19, 2001 ,
Pres s
Release
Regarding
Stoc k
Buy Bac k
October 3 ,
2001, Pres s
Release
Regardin g
MotleyFool .
n
cor
n :/files / m&o/02 -0377
fj
-is-
X
Overstatements ,
Document
Quality of
misstatements o f
Healthcare
Earning s
¶
delivery
model, staff
facilities,
services,
doctors
(attributing
earnings to
high-quality
facilities and
services)
56
X
56
X
58
X
Complianc e
with
applicable
healthcare
laws
valuatio n
of
Dynacq' s
stoc k
October 18 ,
2001, Pres s
Releas e
Regarding
Retention o f
Sche y
Advertisin g
October 31 ,
2001, Pres s
Release
Announcing
New CE O
November 8 ,
2001, Pres s
Releas e
Regardin g
Increased
Capacity a t
Vist a
Medica l
Cente r
Hospita l
November 27 ,
2001 ,
Favorable
59
X
60
X
61
X
62
X
X
Dow Jone s
Articl e
November 27 ,
2001, Pres s
Release
Regarding
2001 Year End Result s
November 27 ,
2001, Form
10- K
December 11 ,
2001 ,
Taglich
Brother s
Repor t
n :/files / m&o/02 -0377
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-
1
6
-
X
Overstatements ,
Document
¶
January 14 ,
2002, Pres s
Releas e
Regarding
First Quarter 200 2
Result s
65
Quality of
Healthcare
delivery
model, staff
facilities,
services,
doctors
misstatements o f
Earning s
(attributing
earnings to
high-quality
facilities and
services)
Complianc e
with
applicable
healthcare
laws
Valuation
of
Dynacq' s
stoc k
X
Lead Plaintiffs allege that Dynacq's stock continued to trad e
at artificially inflated prices until January 16, 2002, when a n
article published by TheStreet .com exposed to the market a numbe r
of facts, which the article categorized as "distress signals ." The
article first noted that Taglich Brothers, the only firm coverin g
Dynacq's stock, was being paid by Dynacq for its coverage . Th e
article also claimed that Dynacq's allowance for doubtful account s
was far below the level used by Dynacq's rivals . According to th e
article, Dynacq's CFO, Philip Chan, was not capable of answerin g
any questions about the allowance for doubtful accounts .
In
support of this statement, the article reprinted a transcript of a
conference call in which Philip Chan seemed somewhat confused by
questions pertaining to the allowance for doubtful account s
reported in Dynacq's Form 10-K . ¶ 67 . Lead Plaintiffs allege tha t
after TheStreet .com published its article Dynacq's stock price fel l
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by over 50%, from $24 .45 per share on January 16, 2002,4 to $12 .26
per share on January 17, 2002 . ¶ 68 .
On January 23, 2002, the WALL STREET JOURNAL reported that
Dynacq's "top insiders" had sold shares in advance of the stock
price decrease without disclosing those sales . ¶ 69 . The WALL
STREET JOURNAL also reported that the United States Department of
Health and Human Services ("DOHHS") had issued a report to Dynacq
stating that the VMCH had not been "maintained in a manner that the
safety and well-being of patients was assured
.
.
." ¶ 69 . Lea d
Plaintiffs allege that thereafter Dynacq's stock fell to $10 per
share on January 29, 2002, and to $6 per share on February 4, 2002 .
III .
Legal Analysi s
A . Legal Standard s
1.
Standard of Review on Motion to Dismis s
A Rule 12 (b) (6) motion to dismiss should not be granted unles s
it appears beyond doubt that the plaintiff can prove no set o f
facts that would entitle them to relief .
S . Ct . 99, 102
(1957) .
Conley v . Gibson , 78
In considering a motion to dismiss the
court must accept all of the factual allegations in the complaint
as true, but conclusory allegations and legal conclusions will not
suffice to prevent a motion to dismiss .
Tuchman v . DS C
4The Consolidated Amended Complaint alleges this date as
January 16, 2001 , not 2002 , which the court believes to be a
typographical error .
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Communications Corp . , 14 F . 3d
1061, 1067 (5th Cir . 1994) . In
addition to the facts alleged in the complaint, documents attached
to or incorporated into the complaint, and matters of which the
court takes judicial notice, the court may also consider the
contents of relevant public disclosure documents that are required
to be and actually are filed with the SEC .
Lovelace v . Software
Spectrum, Inc . , 78 F .3d 1015, 1017-18 (5th Cir . 1996) .
Allegations of securities fraud must satisfy the requirement s
set forth in Federal Rule of Civil Procedure 9(b), which state s
[i] n all averments of fraud or mistake, the circumstances
constituting fraud or mistake shall be stated with
particularity . Malice, intent, knowledge, and other
condition of mind of a person may be averred generally .
Tuchman , 14 F .3d at 1068 .
The Private Securities Litigation Reform Act, 15 U . S . C . § 78u-
4(b)(1), also requires that allegations of securities fraud b e
pleaded with particularity . To avoid dismissal for not complyin g
with both Rule 9(b) and the PSLRA a plaintiff mus t
1 . specify each statement alleged to have been
misleading, i .e ., contended to be fraudulent ;
2 . identify the speaker ;
3 . state when and where the statement was made ;
4 . plead with particularity the contents of the false
representations ;
5 . plead with particularity what the person making the
misrepresentation obtained thereby ; and
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6 . explain the reason or reasons why the statement is
misleading, i .e ., why the statement is fraudulent .
Goldstein v . MCI Worldcom , -F .3d-, 2003 WL 21738963 at *4 (5th Cir .
2003) . If the plaintiff fails to comply with the PSLRA's pleading
requirements "the court
shall , on the motion of any defendant,
dismiss the complaint ." 15 U .S .C . § 78u-4 (b) (3) (A)
(emphasis
added) .
2 .
Securities Frau d
Lead Plaintiffs have alleged violations of § 10(b) of th e
Exchange Act, 15 U .S .C . § 78j(b), and of Rule 10b-5, 17 C .F .R .
§ 240 .10b-5 . Lead Plaintiffs also seek to hold the Individua l
Defendants liable under § 20(a) of the Exchange Act, 15 U .S .C .
§ 78t(a) (control person liability), and under § 20A of th e
Exchange Act, 15 U .S .C . § 78t -1 (a) (liability for insider trading) .
a . § 10 ( b) and Rule 10b- 5
In order to state a claim for securities fraud under Section
10(b) of the Securities Exchange Act and SEC Rule 10b-5 Lea d
Plaintiffs must allege "in connection with the purchase or sale o f
securities, `(1) a misstatement or omission (2) of a material fac t
(3) made with scienter (4) on which plaintiffs relied (5) that
proximately caused [the plaintiffs'] injury .'"
Nathenson v .
Zonagen, Inc . , 267 F .3d 400, 406-07 (5th Cir . 2001) (alteration in
original) .
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-20-
b . § 20 (a )
20 (a ) of the Exchange Act, 15 U .S . C . § 78t (a) , provides tha t
[e] very 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 . . .
A "control person" is one who possesses "directly or indirectly []
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 . § 240 .12b-2 . In
pleading a claim of liability under § 20(a) the requirements o f
Rule 8, not Rule 9(b), apply .
In re Enron Securities, Derivative &
ERISA Litigation , 2003 WL 230688 at *11 (S .D . Tex . 2003) .
Liability under § 20(a) is not available if the plaintiff fails to
plead sufficient facts to support a primary violation of the
securities laws .
Shields v . Cityhurst Bancorp, Inc . , 25 F . 3d 1124,
1132 (2d Cir . 1994) .
c . § 20 A
§ 20A of the Exchange Act, 15 U .S .C . § 78t-l(a), provide s
that
Any person who violates any provision of this chapter or
the rules or regulations thereunder by purchasing or
selling a security while in possession of material,
nonpublic information shall be liable in an action in any
court of competent jurisdiction to any person who,
contemporaneously with the purchase or sale of securities
that is the subject of such violation, has purchased
(where such violation is based on a sale of securities )
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or sold (where such violation is based on a purchase of
securities) securities of the same class .
As with § 20(a), liability under § 20A must be premised upon
a
predicate violation of the securities laws, specifically,
a
violation of the 1934 Exchange Act .
Jackson National Life Ins . Co .
v . Merrill Lynch & Co . , 32 F .3d 697, 704 (2d Cir . 1994) ;
Thornto n
v . Micrografx, Inc . , 878 F . Supp . 931, 938 (N .D . Tex . 1995) .
B . Category by Category Analysis of the Allegedly
Misleading Statement s
1 .
False and
Statements Relating to the Quality of Dynacq ' s Doctors,
Facilities , and Service s
Lead Plaintiffs allege that many of Defendants' statement s
relating to the quality of Dynacq's doctors, facilities, and
services were false and misleading because Dynacq employed doctors
with questionable credentials, understaffed its hospitals, and
failed to maintain its facilities . For example, Lead Plaintiffs
allege that on its website Dynacq made the following statements
with respect to Dynacq's VMCH .
This is the flagship of the Dynacq system . Designed and
built by management, VMCH is the model of surgical
efficiency and patient care on which Dynacq's future
facilities will be based . This compact prototype offers
large, well-equipped operating rooms utilized by top
surgeons and experienced staff, and is a healthful
patient environment where personal attention is the order
of the day .
VMCH focuses on specialized surgical procedures without
the stress and disruptions of large general hospitals .
This atmosphere fosters patient well being and fast
recovery, as well as optimal use of expensive facilities
and surgeons' valuable time . The hospital is part o f
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Dynacq's central campus which is also home to Vista
Ambulatory Surgical Center and a professional building
housing physicians, ancillary services and corporate
headquarters .
¶ 24 . Similarly, in a November 30, 2000, press release Chiu Chan
was quoted as saying tha t
[m]uch of our success is not only providing care with
compassion and understanding, but also allowing our
service areas access to high quality, cost-effective and
personalized care . [Our] management team is dedicated to
these principals [sic] and to having positive relations
with our medical staff .
Management is actively pursuing plans to replicate this
successful concept in both Texas as well as the national
markets .
¶ 34 (alteration in original) . In a January 16, 2001, press
release, Chiu Chan was quoted as saying "we continue to meet the
challenge of providing exemplary care with compassion and
understanding . ¶ 39 . The same press release stated that Dynacq
specialized in creating "quality and efficient community-based, one
stop healthcare resource centers ." Similar statements confirming
and complimenting the quality and efficiency of Dynacq's
facilities, staff, doctors, services and overall healthcare
delivery model appeared in press releases issued on February 1,
2001, ¶ 41 ; April 16, 2001, ¶ 43 ; July 2, 2001, ¶ 47 ; July 16,
2001, ¶ 49 ; July 25, 2001, ¶ 51 ; October 18, 2001, ¶ 56 ;
October 31, 2001, ¶ 56 ; and November 8, 2001, ¶ 58 .
Lead Plaintiffs allege that these statements were false or
misleading because Defendants knew that Dynacq did not provid e
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high-quality or efficient medical services or patient care . Lead
Plaintiffs allege that during the summer of 1999 Dynacq fired its
entire emergency room staff as a cost-cutting measure and never
hired sufficient replacements . Lead Plaintiffs also allege that
the emergency room at VMCH was run by physicians borrowed from
other facilities during the day and by nurses with no supervision
at night . ¶ 25 . Lead Plaintiffs allege that both the emergency
room and the intensive care unit were run without adequate supplies
and equipment and with doctors lacking adequate training and
experience . ¶ 27 . Lead Plaintiffs allege that these conditions
were brought to Defendants' attention in writing on July 30, 1999 ,
September 13, 1999 ,
and October 4, 1999, and orally on August 3 ,
1999 . ¶ 26 .
Lead Plaintiffs also allege that from mid-2000 to October o f
2001 Dynacq had insufficient funds to properly operate VMCH's
emergency room and that the emergency room and intensive care unit
constantly ran out of supplies . Lead Plaintiffs allege that all of
these conditions persisted well into the class period . ¶ 27 . Lead
Plaintiffs also allege that VMCH had black mold growing on its
walls, which was dangerous to patients and in violation of federal
and state law . ¶ 28 . Lead Plaintiffs also allege that Dynacq
hired disreputable doctors with histories of official discipline
and litigation . Lead Plaintiffs further allege that some of
Dynacq's doctors are presently involved in litigation over th e
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quality of their performance, and that Dynacq has been named in a t
least two lawsuits . ¶¶ 29-33 .
Although Lead Plaintiffs have alleged a great many disparagin g
facts with respect to Dynacq's facilities, staff, doctors, and
services, Lead Plaintiffs have failed to comply with Rule 9(b) and
the PSLRA by alleging facts demonstrating how Dynacq's statements
relating to the quality of its services, facilities, doctors, and
healthcare delivery model were false or misleading . For example,
as to the statements made on Dynacq's website, Lead Plaintiffs have
not shown that VMCH was not the "flagship" of the Dynacq system .
To say that a facility is a "flagship" says nothing about the
hospital itself or the services it offers . Lead Plaintiffs hav e
not demonstrated that VMCH was not the "model of surgical
efficiency and patient care on which Dynacq's future facilities
will be based ." Although Lead Plaintiffs have shown that VMCH had
some problems in its management and facilities, this does not mean
that VMCH could not have served as a model on which futur e
facilities could be based . Lead Plaintiffs' allegations regarding
the poor qualifications of some of Dynacq's surgeons do not make
false or misleading Dynacq's statement that its operating rooms
were utilized by "top surgeons ." Lead Plaintiffs have not alleged
that Dynacq employed no top surgeons . Lead Plaintiffs' allegations
regarding the understaffing and improper staffing of VMCH's
emergency room have no bearing on Dynacq's statements relating t o
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the staffing of its operating rooms . Lead Plaintiffs' allegations
relating to the inadequate supplies in VMCH's emergency room and
intensive care unit have no bearing on how well supplied were
VMCH's operating rooms . Lead Plaintiffs have not pleaded facts to
demonstrate that VMCH was not a "healthful patient environment," or
that personal attention was not "the order of the day ." Lead
Plaintiffs' allegations regarding the existence of some mold do not
show that VMCH was not a healthful environment . Lead Plaintiffs
have not alleged that any patients were made ill or were unable to
recuperate because of mold or because of any other alleged
deficiency . Lead Plaintiffs have made no allegations to
demonstrate that VMCH did not "focus[] on specialized surgical
procedures" or to show that VMCH's environment did not "foster
patient well being and fast recovery ." Nor have Lead Plaintiffs
alleged that VMCH did not "optimize" the use of expensive
facilities or surgeons' valuable time .
Similarly, with respect to the statements made in the
November 30, 2000, press release, Lead Plaintiffs' allegations
relating to the various deficiencies in Dynacq's operations do not
demonstrate that Dynacq did not provide "care with compassion and
understanding ." Lead Plaintiffs have not alleged that Dynacq's
patients did not receive the medical care they sought, or that they
were treated without compassion while under Dynacq's care . Nor
have Lead Plaintiffs shown that it was false for Chiu Chan to stat e
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that Dynacq' s service areas were "allow [ed access] to high quality,
cost-effective and personalized care ." Lead Plaintiffs have not
alleged facts to show that Dynacq's management team was not
dedicated to providing high-quality medical services or to having
positive relations with its medical staff . The fact that Dynacq
had some employee and operational difficulties does not mean that
it was unable to provide "high-quality" care . Lead Plaintiffs have
alleged no facts to demonstrate that Dynacq's end-product, medical
services, was deficient . There are no facts alleged to demonstrate
that the under-staffing problems resulted in a patient not being
treated, for example . Again, the existence of some operational
difficulties does not render false all positive statements relating
to Dynacq's healthcare services .
Lead Plaintiffs argue that it was false or misleading fo r
Defendants to make positive statements relating to Dynacq's "model"
for the delivery of healthcare services .
( See ,
e .g . , ¶ 47
(alleging that Chiu Chan "attributed Dynacq's rapid growth to the
success of the company's healthcare delivery model) .) Dynacq's
"model" refers to its overall approach to delivering healthcare,
not simply to its staff and facilities . For example, part of
Dynacq's "model" is to focus on only certain types of medical
services, such as surgery . ( See , e .g . , ¶ 24 (noting that Dynacq's
VMCH focuses on specialized surgical procedures without the stress
and disruptions of large general hospitals) .)
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To say that Dynacq' s
healthcare delivery model is "successful" or "high-quality" does
not imply that Dynacq's actual healthcare services are error-free .
Thus, the existence of operational, staffing, or maintenance
difficulties within one of Dynacq's facilities does not make false
or misleading all positive statements about Dynacq's healthcare
delivery model .
In summary, Lead Plaintiffs have failed to plead facts to
demonstrate precisely how the statements alleged in the
Consolidated Amended Complaint relating to the quality of Dynacq's
doctors, facilities, services, or business model were false . Lead
Plaintiffs' allegations of some operational, staffing, and
maintenance problems do not compel the inference that Dynacq did
not offer high-quality medical services . Lead Plaintiffs have not
alleged that none of Dynacq's doctors were "top-notch," or
otherwise well qualified, or that none of Dynacq's services were
high-quality, or that any of Dynacq's patients were mistreated or
unable to recuperate . The court concludes that the existence of
operational difficulties do not render false all positive
statements relating to Dynacq's staff, services, facilities, and
business model s
'To conclude otherwise would mean, for example, that a car
manufacturer could not tout the quality of its vehicles if any one
of the vehicles rolling off its assembly line contained a defect .
The court notes that Lead Plaintiffs have not alleged that Dynacq
stated that none of its doctors had been disciplined, or that none
of its facilities suffered from maintenance difficulties . Suc h
(continued . . . )
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Even if the court were to conclude that the Defendants'
statements relating to the quality of Dynacq's doctors, services,
and facilities were false and misleading, the court nevertheless
concludes that those statements amount to nothing more than
inactionable puffery . Statements that VMCH is the "flagship," tha t
VMCH is the "model of surgical efficiency and patient care," that
VMCH's operating rooms are utilized by "top surgeons," that VMCH is
a "healthful environment," and that VMCH makes "optimal use of
expensive facilities," just to name a few, are not the sort of
factual statements that securities analysts rely upon in pricing a
security . Generalized, positive statements about a company's
competitive strengths, experienced management, or future prospects
are not actionable because they are not material .
Rosenweig v .
Aqurix Corp . , 332 F .3d 854, 869-70 (5th Cir . 2003) (noting that
statements such as "our fundamentals are strong," or that a company
is "making steady progress" are immaterial) . The securities laws
do not require Dynacq to cast its business in a pejorative, rather
than a positive, light .
Id .
at 869 . 6
5( . . .continued)
statements would stand on different ground . A car manufacturer
cannot claim to sell cars with "zero defects" if it knows some of
its cars are defective .
6Similarly, the court concludes that no reasonable investor would
make an investment decision based on statements such as "we
continue to meet the challenge of providing exemplary care with
compassion and understanding," ¶ 39, "this renovation is designed
to enhance the company's commitment to the delivery of quality and
(continued . . . )
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Although the question of materiality is often better addressed
to a jury than to a court in a motion to dismiss, "[w]here a
reasonable investor could not have been swayed by an alleged
misrepresentation
.
.
. a court may determine, as a matter of law,
that the alleged misrepresentation is immaterial ."
Gateway 2000, Inc . , 122 F . 3d
Parnes v .
539, 546 (8th Cir . 1997) . For
example, "some statements are so vague and such obvious hyperbole
that no reasonable investor would rely upon them . `The role of the
materiality requirement is not to attribute to investors a
childlike simplicity but rather to determine whether a reasonable
investor would have considered the omitted information significant
at the time .'"
Id .
at 547 . "Analysts and arbitrageurs rely on
facts in determining the value of a security, not mere expressions
of optimism from company spokesmen ."
Raab v . General Physics
Corp . , 4 F .3d 286, 290 (4th Cir . 1993) . The court concludes that
the statements alleged in ¶¶ 24, 34, 39, 41, 43, 47, 49, 51, 56,
and 58 of the Consolidated Amended Complaint relating to the
quality of Dynacq's doctors, services, facilities, and business
model are not actionable because Lead Plaintiffs have failed to
plead sufficient facts to demonstrate that they are false or
misleading, or that they are material .
'( . . .continued)
efficient healthcare," ¶ 41, or "[Dynacq] owns and manages stateof-the-art surgical hospitals designed for greater efficiency,"
¶ 56 . To the extent that these statements refer to the type or
quality of services Dynacq offers, they are non-factual and vague
and thus are immaterial as a matter of law .
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2.
Statements Relating to Dynaccr's Earning s
Lead Plaintiffs argue that Dynacq overstated its earnings on
a number of occasions . According to Lead Plaintiffs Dynacq did not
provide a sufficient allowance for doubtful accounts, i .e . accounts
about which Dynacq had some doubt that it would receive payment .
According to Lead Plaintiffs Dynacq's failure to make a proper
allowance for doubtful accounts rendered false and misleading all
of Dynacq's statements relating to its financial performance . Lead
Plaintiffs also characterize as false and misleading many of
Dynacq's statements attributing the company's success to its high
quality healthcare services . Lead Plaintiffs allege that such
statements were false and misleading because Dynacq's success was
due not to the quality of the services it offered, but to its
alleged improper cost-cutting measures and accounting fraud .
For example, on November 30, 2000, Dynacq announced its 200 0
year-end results in a press release that stated net income of
$5,858,406, or $ .22 per share, and a 61% increase in revenues to
$26,032,411 .7 The press release quoted Chiu Chan, in relevant
part, as follows :
7Dynacq made similar announcements of net income, income per share,
and overall revenues in press releases issued on January 16, 2001 ,
39 ; April 16, 2001, ¶ 43 ; July 16, 2001, ¶ 49 ; November 27, 2001,
60 ; and January 14, 2002, ¶ 65 . Dynacq also announced its
financial results in its 2001 Form 10-K . ¶ 61 . Statements
relating to Dynacq's financial performance were made by third
parties on May 1, 2001, ¶ 45 ; July 31, 2001, ¶ 52 ; November 27,
2001, ¶ 59 ; and December 11, 2001, ¶ 62 . Dynacq confirmed its
expectations of earnings in a press release on September 19, 2001 .
54 .
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Much of our success is not only providing care with
compassion and understanding, but also allowing our
service areas access to high quality, cost-effective and
personalized care . [Our] management team is dedicated to
these principals [sic] and to having positive relations
with our medical staff .
Management is actively pursuing plans to replicate this
successful concept in both Texas as well as the national
markets . '
¶ 34 (alteration in original) .
Lead Plaintiffs allege that these statements were false an d
misleading because Dynacq's financial success was due not to the
delivery of high-quality healthcare, but to the fact that its
earnings were materially overstated and to Dynacq's delivery of
low-quality healthcare by under-qualified doctors and staff in
poorly equipped and maintained facilities . Lead Plaintiffs allege
that because Dynacq did not provide a sufficient allowance for
doubtful accounts, Defendants were not in compliance with generally
accepted accounting principles ("GAAP") . Lead Plaintiffs allege
that Dynacq's "Days Sales Outstanding" ("DSO")9 was substantially
higher than most hospitals . Lead Plaintiffs also allege tha t
BDynacq made similar statements attributing its success to its
high-quality medical services (as opposed to its allegedly
questionable accounting practices and cost-cutting schemes) on
January 16, 2001, ¶ 39 ; April 16, 2001, ¶ 43 ; July 2, 2001, ¶ 47 ;
July 16, 2001, ¶ 49 ; July 25, 2001, ¶ 51 ; October 3, 2001, ¶ 55 ;
and November 27, 2001, ¶ 60 .
9Days Sales Outstanding is apparently a measure of the level of
outstanding billing as a function of the company's daily sales .
The court gathers that DSO is calculated by dividing the total of
the unpaid billings by the average daily sales .
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Dynacq's financial performance in 2000 was manipulated by
fraudulent overcharges to patients covered by Workers'
Compensation .
Lead Plaintiffs have failed to allege sufficient facts to
comply with the particularity requirements of Rule 9(b) and the
PSLRA . Lead Plaintiffs have alleged that Dynacq was non-compliant
with GAAP because Defendants "did not provide a sufficient
allowance for doubtful accounts to comply with generally accepted
accounting principles .
.
." ¶ 36 . Lead Plaintiffs also allege,
for example, that by virtue of Defendants' failure to provide a
sufficient allowance for doubtful accounts "Dynacq's accounts
receivable grew to $8,419,608," which "put Dynacq's DSO at
approximately 90 days, substantially higher than that of most
hospitals and much higher than is likely in Texas ." ¶ 36 . These
allegations do not specify what the proper allowance should have
been, or quantify how Dynacq's allowance for doubtful accounts
deviated from what Lead Plaintiffs would consider a "proper"
allowance . Nor do these allegations explain what impact Dynacq's
insufficient allowance for doubtful accounts had on Dynacq's
overall financial situation . Lead Plaintiffs complain that
Dynacq's earnings were overstated, but do not allege by how much .
Although Lead Plaintiffs cite certain accounting research
bulletins and many accounting standards and principles, ¶¶ 70-74,
Lead Plaintiffs do not explain how those accounting standards ar e
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applicable under the facts alleged or specify how Defendants
deviated from those standards . Lead Plaintiffs do not explain how
much Dynacq's statement of earnings would have been impacted had
Dynacq complied with what Lead Plaintiffs consider the proper
accounting standards . Lead Plaintiffs do not quantify the impact
that ideal compliance with all of the proper accounting principles
would have had on Dynacq's allowance for doubtful accounts .
Lead Plaintiffs allege that Dynacq's allowance for doubtful
accounts is far below that of its "rivals ." ¶ 4 . But Lead
Plaintiffs do not allege any facts from which the court ca n
conclude that Dynacq's allowance for doubtful accounts should be
similar to its "rivals," that Dynacq's accounting practices should
mimic those of its "rivals," or that the "rivals'" accounting
practices were themselves sound . The court is unable to determine
from the allegations in the complaint that Dynacq's allowance for
doubtful accounts was improper in terms of reasonable accounting
practices . Nor can the court determine whether Dynacq's statements
of its revenues and earnings were actually incorrect . For Lead
Plaintiffs to allege that Dynacq's allowance for doubtful accounts
was out of line with some of its competitors does not compel the
conclusion that its earnings were overstated .
Moreover, because Lead Plaintiffs have not quantified what the
proper allowance for doubtful accounts should have been, what the
DSO should have been, or how much Defendants' alleged deviatio n
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from standard accounting practices impacted Dynacq's revenues or
earnings, it is impossible for the court to determine whether
Dynacq's alleged earnings misstatements were material in light of
Dynacq's overall financial position .
See Parnes v . Gateway 2000,
Inc . , 122 F .3d 539, 547 (8th Cir . 1997) (holding that " [a]lleged
misrepresentations may also present or conceal such insignificant
data that, in the total mix of information, it simply would not
matter to a reasonable investor) . The court concludes tha t
collectively these deficiencies in Lead Plaintiffs' Consolidated
Amended Complaint render it insufficient under the PSLRA and Rule
9(b) .
See Shushany v . Allwaste, Inc . , 992 F . 2d 517, 522 (5th Cir .
1993) ;10 Gross v . Summa Four, Inc . , 93 F . 3d 987, 996 (1st Cir . 1996 )
(concluding that a general allegation that certain accounting
practices caused a false report of earnings is not enough to
satisfy Rule 9(b) ; finding fault with the plaintiff's failure to
allege the amount of the putative overstatement or the net effect
that it had on the company's earnings) .
Lead Plaintiffs also allege that Dynacq's financial results
were false and misleading because during the class period Dynac q
'°In Shushany the Fifth Circuit held that the plaintiffs' complaint
did not comply with Rule 9(b) where it failed to identify who made
the alleged accounting adjustments, what adjustments were made, how
those adjustments were improper in terms of reasonable accounting
practices, how the adjustments were incorporated into the
defendant's financial statements, and whether the adjustments were
material in light of the defendant's overall financial position .
The court declined to decide which of these deficiencies alone
might render the complaint insufficient under Rule 9(b), but held
that collectively they did . 992 F .2d at 522 .
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overcharged workers' compensation patients for "cages" used in back
surgeries . These allegations are also insufficient under the PSLRA
and Rule 9(b) . Lead Plaintiffs have not alleged that the workers'
compensation insurance carriers did not know about, or refused to
pay, the alleged "overcharges ." Lead Plaintiffs have not alleged
any facts to demonstrate that the allegedly fraudulent overcharges
were illegal or otherwise improper . While a 300% markup may seem
unfair, absent specific factual allegations relating to the
circumstances surrounding the allegedly improper charges, the cour t
cannot conclude that such overcharges alone caused Dynacq's
financial results to be false or misleading . Moreover, Lead
Plaintiffs have not alleged any specific information about when the
alleged overcharges occurred, how many times such overcharges were
submitted, or who was involved in submitting the charges . Also,
because Lead Plaintiffs have failed to quantify the impact that
these alleged overcharges had on Dynacq's financial results, it is
impossible to determine that the overcharges, even if improper,
would have been material to a reasonable investor . These
allegations are deficient under the PSLRA and Rule 9(b) .
Lead Plaintiffs' allegation that "Dynacq overcharged [patients
covered by Workers' Compensation insurance] for per-hour fees" is
likewise deficient under the PSLRA and Rule 9(b)
Lead Plaintiffs
have given no details regarding when such overcharges occurred, the
quantity of any particular overcharge, or the frequency with which
the alleged overcharges occurred .
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Lead Plaintiffs also allege that is was false and misleading
for Defendants to attribute Dynacq's financial success to its highquality healthcare services and superior model for delivering lowcost healthcare, when, according to Lead Plaintiffs, Dynacq's
financial success was actually due to improper cost-cutting
measures, hiring under-qualified doctors, and falsifying its
financial statements .
See
note 8, su ra . As explained above,
however, Lead Plaintiffs have failed to plead with particularity
facts demonstrating that Dynacq did not deliver at least some highquality health services . Nor have Lead Plaintiffs pleaded that
Dynacq employed no exceptional doctors, or that Dynacq did not
provide low-cost healthcare services . It was therefore not false
or misleading for Dynacq to attribute its financial success to its
ability to deliver high-quality healthcare services . Moreover, as
explained above, Lead Plaintiffs have failed to plead with
particularity exactly how Dynacq's alleged accounting fraud
affected its financial results . Nor have Lead Plaintiffs pleaded
any facts to quantify how Dynacq's alleged insurance fraud affected
Dynacq's financial results . The court is therefore unable to
determine from the facts alleged whether it was false or misleading
for Dynacq to attribute its success to its business performance
without mentioning any of the other factors .
For the reasons stated above, the statements alleged in $$ 34,
39, 43, 45, 47, 49, 51, 52, 54, 55, 59, 60, 61, 62, and 65 relatin g
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to Dynacq's financial results and attributing Dynacq's financia l
success to its delivery of high-quality healthcare services are no t
actionable . Lead Plaintiffs have failed to allege sufficient fact s
to show that the enumerated statements were false or misleading, o r
that they were material .
3 .
Statements Relating to Compliance with Applicable
Healthcare Law s
On November 30, 2000, Dynacq filed with the SEC its Form 10- K
stating that "[t]he healthcare industry is highly regulated at the
federal and state levels . The Company believes its business is in
material compliance with applicable law ." ¶ 35 .11 Lead Plaintiffs
allege that this statement was false and misleading because
Defendants knew their facilities suffered from a mold problem and
because Defendants did not maintain nurses' records as required b y
law .
These allegations do not plead fraud with the particularit y
required by the PSLRA and Rule 9 (b) . The fact that Dynacq had some
mold in its operating rooms for which it was cited in a report by
the Department of Health and Human Services does not mean that
Dynacq was not in "material compliance" with applicable law . To
say that a business is in "material compliance" with the law doe s
"Although Lead Plaintiffs refer at a number of places in the
Consolidated Amended Complaint to the fact that Dynacq was not in
compliance with applicable law, Lead Plaintiffs allege only one
statement wherein Defendants claimed that Dynacq was in compliance
with applicable laws .
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not imply that the business does not have some ongoing difficulties
that need to be addressed . Lead Plaintiffs do not allege that by
virtue of the mold in its operating rooms it was illegal for Dynacq
to continue using the operating rooms . Lead Plaintiffs do not
allege that the Department of Health and Human Services ordered the
facilities to be closed until the mold was remediated, for example .
Lead Plaintiffs have not explained how the various state and
federal laws apply in this case to make it illegal for mold to be
present in an operating room . Lead Plaintiffs have not alleged
precisely the contents of the Department of Health and Human
Services report, or what legal authority the report was relying on,
or what action the report required Dynacq to take . Lead
Plaintiffs' allegations are not sufficient under the PSLRA and Rule
9(b) to support a cause of action for securities fraud .
Lead Plaintiffs' conclusory allegation that Dynacq did not
maintain adequate nurses' records is also insufficient under the
PSLRA and Rule 9 (b) . Lead Plaintiffs have not alleged what record s
should have been kept, what records were not kept, or the time
frame during which proper records were not kept . Lead Plaintiffs'
citations to a number of federal regulations, ¶ 66, also do not
suffice under the PSLRA and Rule 9(b) (or even Rule 8 for that
matter) to state a cause of action for securities fraud . Lead
Plaintiffs have not alleged sufficient facts to demonstrate how any
of the regulations cited in ¶ 66 have been violated .
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4.
Analyst Report s
On January 5, 2001, Taglich Brothers, Inc . issued an analys t
report recommending the purchase of Dynacq stock as a "Speculativ e
Buy," and stating tha t
Dynacq is undervalued relative to the companies in the
Hospital Industry within the Healthcare sector . . . . In
our view, a fair valuation for these shares should emerge
as the Company leverages their resources by creating new
integrated medical facilities ."1 2
¶ 38 . Lead Plaintiffs allege that the report was "based on
conversations with Chiu Chan and Philip Chan ." Lead Plaintiffs
allege that the analyst reports were false and misleading, citing
Dynacq's low quality healthcare services and alleged accounting
fraud . ¶ 40 .
Lead Plaintiffs' allegations are insufficient to demonstrat e
the falsity of the statements appearing in the analyst reports or
of the statements allegedly made by Chiu Chan or Philip Chan to the
author of the report . Lead Plaintiffs have alleged no facts to
demonstrate that the author of the reports did not believe Dynacq's
stock should be rated a "buy," or a "speculative buy ." Because
Lead Plaintiffs have not quantified how any of the facts alleged
impacted Dynacq's financial results, Lead Plaintiffs have failed to
allege facts from which the court can determine that Dynacq was no t
12Taglich Brothers published similar reports on May 1, 2001, ¶ 45 ;
July 31, 2001, ¶ 52 ; and December 11, 2001, ¶ 62, each of which
rated Dynacq's stock a "buy" on the basis of Dynacq's history of
steady growth and expectations of similar performance in the
future .
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undervalued . Nor have Lead Plaintiffs pleaded facts to show that
a fair valuation of Dynacq's stock would not later emerge as stated
in the report . As explained above, Dynacq has not quantified the
impact of the facts it alleges with respect to Dynacq's doctors'
qualifications, the maintenance of Dynacq's facilities, or Dynacq's
insufficient allowance for doubtful accounts . Lead Plaintiffs have
not pleaded facts to show that had the report's author known all of
the facts alleged, he would have come to contrary conclusions . In
fact, Lead Plaintiffs have not alleged that the author of the
reports did not arrive at his conclusions with full knowledge of
the facts alleged in the Consolidated Amended Complaint .
Even if the statements made in the January 5, 2001, report
were false or misleading, Lead Plaintiffs' allegations are not
sufficient under the PSLRA and Rule 9(b) to hold Defendants liable
for those statements . Lead Plaintiffs have not explained what
statements Chiu Chan or Philip Chan made to the author of th e
report . Nor have Lead Plaintiffs alleged sufficient facts to show
that either Chiu Chan or Philip Chan had any control over the
contents of the report such that they should be held liable for any
misstatements made in it .
To hold corporate defendants liable for the statements of
third parties a plaintiff must allege facts suggesting that the
corporation sufficiently entangled itself with the third-party's
statements to render those statements attributable to it .
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Elkind
v . Ligett & Meyers, Inc . , 635 F . 2d
156, 163 (2d Cir .
1980) .
A
defendant may become entangled with the third-party's statements by
reviewing the third-party's statements and making a representation
that the information is true or in accordance with the company's
views . Entanglement may also occur if the company exercises some
measure of control over the content of the statements .
In re
Azurix Corp . Securities Litigation , 198 F . Supp . 2d 862, 886 (S .D .
Tex . 2002) (citing Raab , 4 F .3d at 288),
aff'd , 332 F .3d 854 (5th
Cir . 2003) . Lead Plaintiffs do not allege that any person at
Dynacq reviewed the statements appearing in the Taglich Brothers'
report, or represented that the information appearing in the report
was true . Lead Plaintiffs also do not allege that any person at
Dynacq exercised control over the contents of the report .
Lead Plaintiffs cite the article appearing in TheStreet .com ,
which stated "[t]he only analyst covering [Dynacq], Gary Weber of
Taglich Brothers, rates it a buy . That Dynacq pays Taglich for
that coverage is reason enough to warrant caution : The disclosure
is right there in the fine print of the analyst's report ." ¶ 4 .
This allegation falls far short of demonstrating with any
particularity that any person at Dynacq influenced, controlled, o r
approved of the contents of the report . Moreover, the fact that an
author of an article opines that Dynacq's payment for coverage
"warrants caution" does not mean that Dynacq should be held liable
for the statements appearing in the analyst's report . Lead
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Plaintiffs have cited no authority for the proposition that,
without more, a company's payment for an analyst's coverage of its
stock renders the company liable for statements made in the report .
In a November 27, 2001, article Dow Jones reported tha t
Dynacq's share price had hit a 52-week high and attributed the
price increase to recent expansions in Dynacq's business and strong
earnings performance . The article also quoted one of Taglich
Brothers' analysts as recommending that investors buy Dynacq's
stock, and that he expected Dynacq to report earnings of $0 .18 per
share for the fourth quarter of 2001 and $0 .71 per share for the
year . The article also reported the Taglich Brothers' analyst as
projecting earnings at $0 .89 per share for 2002 and a stock price
of $30 per share within a-year-and-a-half . ¶ 59 . Lead Plaintiffs
allege that these statements were false and misleading . Because
lead Plaintiffs have not alleged facts to suggest that any person
at Dynacq had anything to do with the Dow JONES article, liability
cannot be premised upon the statements appearing in the article .
Raab , 4 F .3d at 288 .
For the reasons stated above, the statements alleged in ¶¶ 38,
45, 52, 59, and 62 are not actionable .
5 .
Statements for Which Lead Plaintiffs Have Alleged No
Facts to Show Falsit y
Lead Plaintiffs have gone to great lengths to allege the
details of many statements and have alleged generally that all o f
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the statements set forth in the Consolidated Amended Complaint are
false and misleading . ¶ 12 . Except for the statements falling
into the above-discussed categories, however, Lead Plaintiffs have
failed to allege any facts to show how these alleged statements
were false or misleading . For illustrative purposes the court will
discuss a few such statements .
On December 30, 2000, after Dynacq signed a letter of inten t
to acquire Surgi+Group, Inc ., Chiu Chan commented tha t
Surgi+Group has the corporate development and operating
expertise with for-profit surgery centers to fast-track
Dynacq's ambitious expansion plans . The pipeline of
high-quality, surgery center acquisition and start-up
leads gained as a result of this merger will
significantly expedite Dynacq's expansion into other
markets .
¶ 37 . Lead Plaintiffs cite the allegations regarding Dynacq's
operational deficiencies, the poor quality of Dynacq's facilities
and services, Dynacq's failure to comply with applicable healthcare
laws, and Dynacq's overstatement of its earnings in support of its
allegation that the December 20, 2000, comments were false when
made . ¶ 40 . Yet, none of these allegations have any bearing on
the content of the statements about the Surgi+Group acquisition .
Lead Plaintiffs have not pleaded any facts relating to
Surgi+Group's corporate development or operating expertise . Lead
Plaintiffs have alleged no facts to demonstrate that a "pipeline"
of leads did not exist, or that such leads would not expedite
Dynacq's expansion into other markets . Lead Plaintiffs have faile d
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to demonstrate that the December 20, 2000, comments were false or
misleading .
On February 1, 2001, Dynacq announced that the State of Texas
had approved its plan to expand Dynacq's Ambulatory Surgical Care
("ASC") facility . Dynacq issued a press release stating that its
plans for expansion had been approved and that the expansion would
include an additional operating room and recovery stations and
would result in a 33% increase in surgical capacity . The press
release also stated that Dynacq's contractor had obtained all
necessary permits and had estimated project completion by May 1,
2001 . According to the press release "[t]his renovation is
designed to enhance the company's commitment to the delivery of
quality and efficient healthcare and exceeds the requirements of
the Texas Department of Health for like facilities ." The press
release also stated that the project would not interfere with
current operations and that construction costs would be paid out of
existing earnings without incurring debt . ¶ 41 . The press release
quoted Chiu Chan as follows :
This is but the first of many steps we are taking towards
implementing our plan to expand our ability to provide
exemplary and cost efficient healthcare through
controlled and well managed growth . The company is
continuing efforts to penetrate the area and national
medical markets and propagate its very successful model
for creating quality and efficient community-based, one
stop healthcare resource centers designed to meet the
needs of physicians and their patients .
41 .
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Setting aside any reference
to the quality of Dynacq' s
healthcare services, which the court has addressed above, Lead
Plaintiffs have failed to plead any facts to show that these
statements were false or misleading . Lead Plaintiffs do not allege
that the expansion had not been approved or that the expansion
would not include an additional operating room and recovery
stations . Lead Plaintiffs do not contend that Dynacq's contractor
had not obtained all the necessary permits . Lead Plaintiffs do not
refute that the renovation was
designed to enhance the company's
commitment to the delivery of quality and efficient healthcare or
that the renovation exceeded state requirements for like
facilities . Lead Plaintiffs do not allege that the project would
interfere with current operations or that construction costs would
not be paid out of existing earnings . Lead Plaintiffs do not
contend that Defendants did not have a plan to expand their ability
to provide healthcare through controlled and well-managed growth .
Lead Plaintiffs do not refute that the company had plans t o
penetrate other markets .
On February 27, 2001, Dynacq announced a stock split throug h
a 100% stock dividend on all issued common shares . With respect to
the stock split Chiu Chan stated that he was very excited about the
"tremendous success of the company" and that he believed the
company's approach to growth was in the best interest of the
company and its shareholders . Chiu Chan described the stock spli t
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as a reward to shareholders and a demonstration of the company' s
intent to strengthen its commitment to increase stock value an d
encourage wider distribution of Dynacq stock . ¶ 42 .
Again, aside from any implication that the company 's succes s
was due to the quality of services offered by the company as
opposed to the company's allegedly shoddy business practices, which
the court has addressed above, Lead Plaintiffs have completely
failed to allege any facts to demonstrate that the statements i n
the February 27, 2001, announcement were false . There is no
allegation that Dynacq did not reward its shareholders with a stock
split . Lead Plaintiffs do not allege any facts from which the
court can conclude that Chiu Chan was not "excited" or that Chi u
Chan did not believe the company's approach to growth was in th e
best interest of the company . The statements were not factual i n
nature and cannot be considered false, even in light of Lea d
Plaintiffs' allegations regarding Dynacq's financial an d
operational difficulties .
Lead Plaintiffs allege that in a September 19, 2001, pres s
release announcing a stock buy-back program, Dynacq confirmed that
it expected to earn $0 .19 per share in the fourth quarter of 2001 .
¶ 54 . Lead Plaintiffs do not even allege that these statements
were false . ( See ¶ 57 (alleging that $$ 55-56, but not ¶ 54, wer e
false and misleading) . )
In a November 8, 2001, press release announcing increase d
surgical capacity at VMCH Chiu Chan was quoted as saying that th e
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new facilities had been approved by the Texas Department of Health
and placed into service, and that construction costs were paid out
of earnings with no debt incurred . Chiu Chan explained that
"[c]ompletion of this important construction project is further
confirmation of our focus on same-store growth," and that
"[i]naguration of the new surgical facilities
goal of doubling our surgical capacity .
.
.
.
. completes the
." Chiu Chan was also
quoted as stating that "[b]y associating with premier surgeons and
excellent patient care, we will achieve the full potential of each
of our surgical hospitals ." The press release went on to state
that "Dynacq International specializes in developing, owning and
operating community-based surgical facilities designed to meet the
needs of leading surgeons and their patients ." ¶ 58 .
Again, setting aside the parts of the statement relating t o
quality of healthcare services, or attribution of success to
quality of service, Lead Plaintiffs have alleged no facts to
demonstrate that the foregoing statements were false or misleading .
Lead Plaintiffs do not allege that VMCH did not increase it s
capacity or that the new facilities had not been approved by the
Texas Department of Health . Lead Plaintiffs do not allege that
construction costs were not paid out of earnings . Lead Plaintiffs
do not allege any facts to show that Dynacq was not focused on
"same-store growth . "
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6 .
Summar y
Lead Plaintiffs have not pleaded with particularity facts to
demonstrate that any positive statement relating to Dynacq's
facilities, services, doctors, and staff were false or misleading .
Lead Plaintiffs have not alleged sufficient facts to demonstrate
that any of the positive statements relating to Dynacq's
facilities, services, doctors, and staff were material . Similarly,
Lead Plaintiffs have not pleaded with the requisite particularity
sufficient facts to demonstrate that Defendants' statements
relating to Dynacq's healthcare delivery model were false or
misleading, or that they were material . Lead Plaintiffs have not
pleaded with particularity sufficient facts to demonstrate that
Defendants' statements relating to Dynacq's revenues, earnings, or
financial results in general were false or misleading, or material .
Nor have Lead Plaintiffs pleaded with particularity facts
demonstrating that it was false or misleading for Defendants to
attribute their success to the quality of their healthcare delivery
services . Lead Plaintiffs have not pleaded with particularity
facts demonstrating that it was false or misleading for Defendants
to represent that Dynacq was in compliance with applicable law .
Lead Plaintiffs have failed to plead with particularity facts
demonstrating that any of the analyst reports published by Taglich
Brothers were false or misleading . Nor have Lead Plaintiffs
pleaded facts sufficient to demonstrate that any Defendant was
intertwined with, or exerted any control over, the statements mad e
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in the Taglich Brothers' reports . Nor have Lead Plaintiffs allege d
facts from which the court can conclude that any Defendant wa s
intertwined with, or exerted any control over, the statements made
in the Dow JONES article . Finally, with respect to all of the
statements not falling into these four specific categories, Lead
Plaintiffs have failed to allege any facts to show that they were
either false or misleading .1 3
C . Liability of the Individual Defendant s
1.
Control Person Liabilit y
As explained above, liability under § 20(a) of the Exchange
Act must be premised upon a primary violation of the securities
laws . Because Lead Plaintiffs have failed to plead a violation of
§ 10 (b) or Rule 10b-5, there can be no liability under § 20 (a) .
See Part III .A .l .b .,
2 .
supra .
Liability Premised Upon Insider Tradin g
As with § 20 (a), liability under § 20A must be premised upo n
a primary violation of the securities laws . Since Lead Plaintiff s
have failed to allege a primary violation of the securities laws ,
Lead Plaintiffs' § 20A claims will be dismissed .
See In r e
Microstrategy, Inc . Securities Litigation , 115 F . Supp . 2d 620, 66 2
(E .D . Va . 2000) ; Part III .A .l .c ., su ra .
"Because Lead Plaintiffs have failed to plead facts demonstrating
the existence of any actionable false or misleading or material
statement, the court will not address the parties' other arguments,
such as those concerning scienter .
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D . Motion to Strik e
Lead Plaintiffs have filed a Motion to Strike Exhibit "A" t o
Dynacq International, Inc .'s Motion to Dismiss (Docket Entry
No . 42) . That motion will be granted . The court has not relied on
Exhibit "A" to Dynacq's Motion to Dismiss in deciding any of the
pending motions .
E . Motion for Relief from Automatic Sta y
Lead Plaintiffs have filed a Motion for Relief from the
Automatic Discovery Stay ; or in the Alternative Motion to Enjoin
State Action (Docket Entry No .
37) .
Because the court will dismiss
all of Lead Plaintiffs' claims, their request that the court lift
the discovery stay in this case is moot . Also, because this case
will be dismissed, there is no reason to stay any action currently
pending in state court .
F . Motion to Amend
In the last sentence of their Consolidated Opposition t o
Defendants' Motions to Dismiss, Lead Plaintiffs request that " [i] f
the Court finds plaintiffs allegations to be deficient for any
reason, plaintiffs hereby request leave to amend their Complaint
pursuant to Fed . R . Civ . P .
1 5 (a) to address the Court' s concerns . "
(Docket Entry No . 41 at pp . 36-37) Lead Plaintiffs have not
explained how they would replead the facts of their case if given
the chance, have not proffered a proposed amended complaint, and
have not suggested the existence of any additional facts no t
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initially pleaded that could cure the pleading defects raised by
Defendants . This is Lead Plaintiffs' second opportunity to plead
the facts of this case . Lead Plaintiffs apparently want the court
to point out the deficiencies in the Consolidated Amended Complaint
so that Lead Plaintiffs can tailor their complaint to avoid
dismissal . Lead Plaintiffs' request for leave to amend will be
denied .
See Goldstein , --F .3d--, 2003 WL 21738963 at *14 (denying
a similarly worded request for leave to amend) .
IV .
Conclusion and Orde r
For the reasons stated above, Dynacq's Motion to Dismiss
(Docket Entry No . 35 ) is GRANTED , and the Individual Defendants'
Motion to Dismiss (Docket Entry No . 36)
is GRANTED . Accordingly,
this action is DISMISSED with prejudice .
Lead Plaintiffs' Motion for Relief from the Automatic
Discovery Stay ; or in the Alternative Motion to Enjoin State Action
(Docket Entry No . 37 ) is DENIED .
Lead Plaintiffs' Motion to Strike Exhibit "A" to Dynacq
International, Inc .'s Motion to Dismiss (Docket Entry No . 42) is
GRANTED .
SIGNED at Houston, Texas, on this 25th day of August, 2003 .
41
S I M LAKE
UNITED STATES DISTRICT JUDG E
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