IN RE TELADOC HEALTH, INC. SECURITIES LITIGATION

Background

Investors brought this proposed securities class action against Teladoc Health, Inc. and four current or former executives: Jason Gorevic, Stephany Verstraete, Mala Murthy, and Richard Napolitano. The investors alleged that statements about Teladoc’s integration of Livongo Health after their merger misled investors and artificially inflated Teladoc’s stock price.

The second amended complaint asserted claims under Section 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5, which prohibit materially misleading statements connected to the purchase or sale of securities. It also asserted control-person liability under Section 20(a), which can impose secondary liability on individuals who control a company responsible for an Exchange Act violation.

The court had previously dismissed the complaint because it did not adequately allege that any statements were materially misleading. The Second Circuit later reversed that ruling as to four statements and sent the case back for the district court to consider whether the complaint adequately pleaded scienter and loss causation. Scienter means a defendant’s fraudulent intent or sufficiently reckless conduct.

Statements at Issue

The four remaining statements concerned Teladoc and Livongo’s integration:

The Second Circuit had concluded that the complaint adequately alleged these statements were misleading. For example, confidential witnesses described incomplete sales-team integration, delays integrating Tableau data systems, and integration problems that had allegedly already materialized when Teladoc described them as potential future difficulties.

Scienter Analysis

The court held that the second amended complaint did not adequately plead scienter for any defendant. A securities-fraud complaint must allege particular facts creating a strong inference that the defendants acted intentionally or with extreme recklessness.

As to Gorevic’s sales-team statements, the complaint did not allege that Gorevic was told about the specific sales-integration problems described by the confidential witnesses. An email discussing overselling remote patient-monitoring capabilities was not sent to Gorevic and did not concern the sales-team integration problems that allegedly made his statements misleading. The court also rejected arguments based on Gorevic’s general awareness of broader integration challenges, his position as chief executive officer, and the knowledge of other executives.

As to Verstraete’s statement about marketing data and technology systems, the complaint did not allege that she had access to information showing that Tableau integration was incomplete. The principal confidential witness on that subject had left Teladoc months before Verstraete made the statement, and the complaint did not allege that the witness had discussed Tableau with Verstraete.

The court also found no adequate scienter allegations concerning the risk warning in Teladoc’s annual report. The complaint did not meaningfully allege that Gorevic, Murthy, or Napolitano knew about the specific sales-team, Tableau, or Salesforce integration problems that the lead plaintiff identified as already having materialized.

The court declined to infer knowledge merely from the importance of the integration to Teladoc’s business. It also stated that the alleged problems were not shown to be so central or specific that knowledge could be inferred under the so-called core-operations theory.

Insider Stock Sales

The lead plaintiff argued that stock sales by Gorevic, Verstraete, and Murthy showed motive and opportunity to commit fraud. The court rejected that argument. It noted that all three executives increased their overall Teladoc stock ownership during the class period. Many sales were made under trading plans adopted before the class period or to cover tax obligations. Gorevic and Verstraete also sold less stock during the class period than during an earlier comparison period. The court therefore found that the sales were not unusual or suspicious enough to support scienter.

Loss Causation and Leave to Amend

Because the complaint did not adequately plead scienter, the court did not decide whether it adequately pleaded loss causation—the required connection between the alleged fraud and the investors’ economic losses. The court also concluded that the complaint did not adequately plead the primary Section 10(b) violation, so it did not plead control-person liability under Section 20(a).

The lead plaintiff asked for permission to file another amended complaint. The court denied that request because the lead plaintiff did not explain how an amendment would cure the defects and did not attach a proposed amended complaint. The court also noted that the lead plaintiff had previously been warned that it likely would not receive another opportunity to amend.

Disposition

Judge Denise Cote granted the defendants’ November 22, 2024 motion to dismiss. The court denied the lead plaintiff’s request for leave to amend, directed the Clerk of Court to enter judgment for the defendants, and ordered the case closed. The opinion does not use the phrase “with prejudice” or “without prejudice.”