IN RE eHEALTH INC. SECURITIES LITIGATION

Background

Chicago & Vicinity Laborers’ District Council Pension Fund filed a proposed securities class action on behalf of people and entities that purchased or otherwise acquired eHealth common stock between March 19, 2018, and July 23, 2020. The plaintiff alleged that eHealth, Scott N. Flanders, Derek N. Yung, and David K. Francis violated Section 10(b) of the Securities Exchange Act, Securities and Exchange Commission Rule 10b-5, and Section 20(a) by making misleading statements during earnings calls.

The challenged statements concerned whether eHealth’s commission receivables had additional associated costs. The plaintiff alleged that eHealth had to incur customer-care and other operating expenses to retain members and receive expected commissions, but that Flanders and Yung created the impression that the commissions were “cash to be collected free of additional charge.” The plaintiff claimed that these statements inflated eHealth’s stock price and that investors suffered losses after the market learned more about eHealth’s financial condition.

The defendants moved for judgment on the pleadings under Federal Rule of Civil Procedure 12(c). For this type of motion, the court generally accepts the complaint’s factual allegations as true and asks whether the moving party is entitled to judgment as a matter of law. Securities-fraud complaints must also meet heightened requirements under Rule 9(b) and the Private Securities Litigation Reform Act.

Documents Considered by the Court

The court ruled that the transcripts of the April 26, 2018, and February 20, 2020, earnings calls, the Muddy Waters report, and eHealth’s 2017 and 2018 annual filings were incorporated into the complaint by reference because the complaint relied on them extensively. The court also took judicial notice of eHealth’s publicly filed press releases and quarterly filing for the limited purpose of determining what eHealth disclosed to the market. The court did not incorporate the press releases by reference because the complaint’s generic references to press releases were insufficient for that purpose.

Claims Against eHealth, Flanders, and Yung

The court held that the plaintiff adequately alleged misleading and material statements. It rejected the argument that the statements necessarily referred only to accounting treatment under Accounting Standard Codification 606. Considering the allegations in the plaintiff’s favor, the court could not conclude as a matter of law that a reasonable investor would understand the statements as addressing only revenue-recognition mechanics rather than actual operating costs.

The court also held that the plaintiff adequately pleaded scienter, which means the required state of mind for securities fraud. Considering the allegations as a whole, the court found a strong inference of deliberate recklessness. The allegations included the magnitude of the alleged retention-related costs, the individual defendants’ alleged involvement in eHealth’s management and operations, and the danger that the challenged statements would mislead investors.

The court nevertheless held that the plaintiff failed to adequately plead loss causation—the required connection between the alleged misstatements and the investors’ losses. The plaintiff relied on the April 8, 2020, Muddy Waters report and eHealth’s later second-quarter 2020 earnings announcement as corrective disclosures. The court held that the Muddy Waters report did not qualify because it was issued by a short-seller with a financial incentive for the stock price to decline, had no identified author, appeared to rely only on public information, and included disclaimers about the information’s accuracy and completeness.

The court also held that the second-quarter earnings announcement was not adequately alleged to have revealed the concealed retention-related costs. The statement about increasing focus on member retention was a forward-looking statement of intent, not a plausible admission that eHealth had previously concealed those costs. Because the plaintiff failed to plead loss causation, the court dismissed the Section 10(b) claims against eHealth, Flanders, and Yung. The related Section 20(a) claims also failed because they depended on an underlying securities-law violation.

The court granted leave to amend those claims because additional facts could potentially cure the loss-causation deficiency. The court stated that any amended complaint had to be filed within 28 days of the order.

Claims Against Francis

Francis argued that the Section 10(b) claims against him failed because he did not make any of the remaining challenged statements. Under the Supreme Court’s rule concerning who “makes” a statement, liability generally attaches to the person or entity with ultimate authority over the statement’s content and whether and how it is communicated.

The court held that the challenged statements were extemporaneous oral responses delivered by Flanders and Yung during earnings calls. Francis did not deliver those statements, and the plaintiff’s allegations that he controlled other company communications did not give him ultimate authority over the oral statements of the other officers. The court therefore dismissed the Section 10(b) claims against Francis. His Section 20(a) claim also failed because there was no adequately pleaded underlying securities-law violation. The court denied leave to amend Francis’s claims, concluding that additional allegations could not cure the defects.

Disposition

Judge Jon S. Tigar granted the motions for judgment on the pleadings. The claims against eHealth, Yung, and Flanders were dismissed with leave to amend, solely to cure the identified deficiencies. The claims against Francis were dismissed with prejudice.