Evanston Police Pension Fund v. McKesson Corporation

Background

The Evanston Police Pension Fund led a class action against McKesson Corporation and two McKesson executives for securities fraud. The Fund alleged that McKesson knew, or was deliberately reckless in failing to know, that a price-fixing conspiracy among generic-drug manufacturers had increased drug prices and McKesson’s profits. According to the allegations, McKesson instead attributed its improved performance to other factors, including supply disruptions, and described the market as competitive.

The court had allowed the case to proceed based on two alleged corrective disclosures: one on January 11, 2016, and two news articles published on November 3, 2016. The court certified a class of people and entities that acquired McKesson common stock from October 24, 2013, through November 3, 2016.

Motion and Legal Standard

McKesson moved for partial summary judgment under Federal Rule of Civil Procedure 56(a). Summary judgment is appropriate when there is no genuine dispute about a material fact and the moving party is entitled to judgment under the law. McKesson argued that the Pension Fund could not prove loss causation for the November 3, 2016 disclosure.

Loss causation is the requirement that the defendant’s alleged fraud proximately cause the investor’s economic loss. The court explained that this is a flexible, context-dependent form of proximate cause. A stock-price decline after a disclosure is not always required, but the plaintiff must connect the loss to the defendant’s alleged misstatement rather than to another event.

Court’s Analysis

The November 3 articles reported that the Justice Department’s investigation of generic-drug manufacturers could lead to criminal charges. The court noted that neither article suggested wrongdoing by McKesson. The court also found that information relevant to the Fund’s theory—that generic-drug price inflation had ended—had already reached the market through McKesson’s statements beginning in the latter half of 2015 and its January 11, 2016 disclosure.

Because the November 3 articles did not provide new information about McKesson’s alleged fraud, the court concluded that there was no proximate causal relationship between that alleged fraud and any shareholder loss on November 3. The court rejected the Fund’s comparison to a case involving an investigation followed by confirmation of the defendant company’s own wrongdoing. Here, later indictments of officials from another drug manufacturer did not confirm wrongdoing by McKesson.

The court further reasoned that the November 3 loss might have occurred even if McKesson had consistently told investors that suppliers were unlawfully inflating prices and that the resulting profits would not last. Thus, the reported investigation and possible indictments could have affected McKesson’s stock for reasons only tangentially related to McKesson’s alleged fraud.

Disposition

The court granted McKesson’s motion for partial summary judgment. It amended the class to include all people and entities that acquired McKesson common stock from October 24, 2013, through January 11, 2016. The court stated that removing the November 3 disclosure did not necessarily foreclose loss causation based on the January 11 disclosure; the Pension Fund could use events and statements around January 11 to try to establish that loss was caused by McKesson’s alleged concealment.