St. Clair County Employees' Retirement System v. Acadia Healthcare Company, Inc.

IN THE UNITED STATES DISTRICT COURT FOR THE

MIDDLE DISTRICT OF TENNESSEE

NASHVILLE DIVISION

ST. CLAIR COUNTY EMPLOYEES’ )

RETIREMENT SYSTEM, Individually )

and on Behalf of All Others Similar, )

)

Plaintiff, ) NO. 3:18-cv-00988

)

v. ) JUDGE CAMPBELL

) MAGISTRATE JUDGE NEWBERN

ACADIA HEALTHCARE COMPANY, )

INC., et al., )

)

Defendants. )

MEMORANDUM

Pending before the Court is Defendants’ Motion to Dismiss (Doc. No. 40). Plaintiffs filed

a Response in Opposition (Doc. No. 47), and Defendants filed a Reply (Doc. No. 50). For the

reasons set forth more fully below, Defendants’ Motion will be DENIED.

I. FACTUAL BACKGROUND & PROCEDURAL HISTORY

Lead Plaintiffs, New York Hotel Trades Council and Hotel Association of New York City,

Inc. Pension Fund and the Chicago Laborers’ Pension Fund, filed this securities fraud class action

on behalf of purchasers of Acadia Healthcare Company, Inc. (“Acadia”) securities between April

30, 2014 and November 15, 2018 (the proposed class period), against Acadia, Joey A. Jacobs,

former Chairman of Acadia’s Board of Directors and its Chief Executive Officer; Brent Turner,

Acadia’s President; and David Duckworth, Acadia’s Chief Financial Officer, alleging violations

of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”), 15

U.S.C. §§ 78j(b), 78t(a) and Securities and Exchange Commission (SEC) Rule 10b–5, 17 CFR §

240.10b–5. (Doc. No. 39). On May 31, 2019, Defendants filed the pending motion to dismiss

pursuant Rule 12(b)(6) for failure to state claim. (Doc. No. 40).

Acadia is a for-profit healthcare company that operates inpatient psychiatric facilities,

residential treatment centers, and other facilities providing outpatient behavioral healthcare

services in the United States, the United Kingdom (“U.K.”) and Puerto Rico. (Doc. No. 39 ¶¶ 2,

28). The Consolidated Complaint (“Complaint”), filed on April 1, 2019, alleges that, throughout

and before the Class Period, Defendants engaged in a scheme to defraud and mislead investors

concerning patient care, staffing levels, and legal compliance issues, as well as Acadia’s U.K.

operations.

Plaintiffs allege that Defendants falsely represented that Acadia provided high-quality

services, adequately staffed its facilities, and complied with applicable laws and regulations. (Doc.

No. 39 ¶¶ 111-157). It was quality care, Defendants repeatedly emphasized, that drove new

patients to Acadia facilities, created the demand necessary to grow its existing facilities, and was

key to improving the performance and operations at the facilities Acadia acquired to fuel its

growth. (Doc. No. 39 ¶¶ 42-45, 112-113). In reality, Acadia achieved growth by inadequately

staffing facilities and cutting costs to extract higher profits at the expense of patient care and safety,

and ran facilities rife with violence, sexual assault, and counter-therapeutic policies and practices.

(Doc. No. 39 ¶¶ 47-60, 61-84, 185-186).

Additionally, Plaintiffs allege Defendants falsely represented that Acadia’s $2.2 billion

acquisition of The Priory Group, the U.K.’s largest chain of behavioral health centers, would

contribute to positive financial growth. (Doc. No. 39 ¶¶ 91-108). Defendants repeatedly assured

investors throughout 2017 that Acadia was on track to meet its financial targets and that the

Company would experience margin improvement in the U.K. when, in fact, Acadia was not on

track to meets its U.K. financial targets because of weakened patient census and increased labor

costs that Defendants concealed. (Doc. No. 39 ¶¶ 158-178, 180-183).

Defendants’ fraud was revealed through a series of partial disclosures. The first occurred

on October 24, 2017, when Acadia revealed that deteriorating performance in the U.K. had caused

the Company to miss its 3Q17 revenue and earnings targets and substantially reduce its guidance

for the remainder of the year, causing Acadia’s stock price to drop 30%. (Doc. No. 39 ¶¶ 8, 180-

81, 183-184). The second occurred on October 11, 2018, when Aurelius Value published a report

and released a video documenting systemic patient abuse and neglect at dozens of Acadia facilities

caused primarily by understaffing. (Doc. No. 39 ¶¶ 9, 185). The report included an analysis of

Centers for Medicare and Medicaid Services inspection reports from 2013 to 2018 for 31 of the 40

acute inpatient U.S. hospitals listed on Acadia’s website. (Doc. No. 39 ¶ 10). The analysis found

that federal inspectors uncovered staffing deficiencies at over 90% of these 31 Acadia hospitals,

including repeated violations for insufficient nurses or qualified practitioners on hand. (Doc. No.

39 ¶ 10). Of these 28 hospitals with staffing deficiencies, 89% of those facilities were also cited

by inspectors for patient care and safety deficiencies. (Doc. No. 39 ¶ 10). Following this news,

Acadia’s stock price declined by more than 11%. (Doc. No. 39 ¶¶ 10, 189).

Finally, on November 16, 2018, Seeking Alpha published an article entitled, “Acadia

Healthcare: Very Scary Findings From A 14-Month Investigation,” which revealed that the

Company’s rapid growth, as well as its revenue and margin increases, were attributed to cost-

cutting and “reducing the quality of care.” (Doc. No. 39 ¶¶ 11, 190). The article highlighted severe

problems at seven of Acadia’s facilities (facilities that were also featured in the October 2018

Aurelius Value report) and reported that, “due to the number of suicides at some of their facilities,

Acadia’s ability to accept certain patients has been restricted by state-level governments.” (Doc.

No. 39 ¶¶ 11, 190). On this news, Acadia’s stock price declined by 26%. (Doc. No. 39 ¶¶ 11, 192).

II. STANDARDS OF REVIEW

A. Rule 12(b)(6)

Federal Rule of Civil Procedure 12(b)(6), permits dismissal of a complaint for failure to

state a claim upon which relief can be granted. For purposes of a motion to dismiss, a court must

take all of the factual allegations in the complaint as true. Ashcroft v. Iqbal, 556 U.S. 662 (2009).

To survive a motion to dismiss, a complaint must contain sufficient factual allegations, accepted

as true, to state a claim for relief that is plausible on its face. Id. at 678. A claim has facial

plausibility when the plaintiff pleads facts that allow the court to draw the reasonable inference

that the defendant is liable for the misconduct alleged. Id. In reviewing a motion to dismiss, the

Court construes the complaint in the light most favorable to the plaintiff, accepts its allegations as

true, and draws all reasonable inferences in favor of the plaintiff. Directv, Inc. v. Treesh, 487 F.3d

471, 476 (6th Cir. 2007). Thus, dismissal is appropriate only if “it appears beyond doubt that the

plaintiff can prove no set of facts in support of his claim which would entitle him to relief.”

Guzman v. U.S. Dep't of Children’s Servs., 679 F.3d 425, 429 (6th Cir. 2012).

B. Securities Fraud Pleading Standards

Plaintiffs' securities-fraud claims implicate the heightened pleading standards of Federal

Rule of Civil Procedure 9(b). See Dougherty v. Esperion Therapeutics, Inc., 905 F.3d 971, 978

(6th Cir. 2018). Accordingly, their complaint must “(1) specify the statements that the plaintiff

contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were

made, and (4) explain why the statements were fraudulent.” Id. (citations and internal quotation

marks omitted).

The Private Securities Litigation Reform Act (PSLRA) imposes two additional pleading

requirements. See id. (citing 15 U.S.C. § 78u-4(b)(1), (b)(2)). “Plaintiffs' complaint must specify

each statement alleged to have been misleading along with the reason or reasons why the statement

is misleading and state with particularity facts giving rise to a strong inference that the defendant

acted with the required state of mind.” Id. (citations and internal quotation marks omitted).

III. ANALYSIS

To state a securities fraud claim under Section 10(b) of the Exchange Act and SEC Rule

10b–5(b), a plaintiff must allege: “(1) a material misrepresentation or omission by the defendant;

(2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale

of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss

causation.” In re Omnicare, Inc. Sec. Litig., 769 F.3d 455, 469 (6th Cir. 2014) (quoting Matrixx,

563 U.S. at 37–38) (internal quotation marks omitted). Even with the heightened pleading

standards applicable to a securities fraud case under Section 10(b), for purposes of ruling on a

motion to dismiss for failure to state a claim, the allegations in the complaint are accepted as true,

and all reasonable inferences are drawn in plaintiff's favor. See Weiner v. Tivity Health, Inc., 365

F. Supp. 3d 900, 908 n. 6 (M.D. Tenn. 2019). Through their pending motion to dismiss, Defendants

challenge the sufficiency of the Complaint’s allegations as to the first and second elements.1

A. Element One: Material Misrepresentation or Omission

“Successfully pleading an actionable material misrepresentation or omission requires a

plaintiff to allege facts demonstrating two things: (1) that a defendant made a statement or omission

that was false or misleading; and (2) that this statement or omission concerned a material fact.” In

re Omnicare, Inc. Sec. Litig., 769 F.3d 455, 470 (6th Cir. 2014).

1 In their Reply, Defendants raised new arguments challenging the sufficiency of Plaintiffs’ scheme

liability allegations. (See Doc. No. 50 at 2-3). Defendants did not raise or articulate any arguments specific

to the scheme liability allegations in their opening brief, (see Doc. No. 41), and the Court declines to

consider the arguments raised for the first time in their Reply in ruling on the pending motion to dismiss.

Defendants argue that the Complaint fails to allege an actionable misstatement or omission

because (1) the challenged forward-looking statements fall within the PSLRA’s Safe Harbor, (2)

the challenged “quality care” statements were not misleading or material, and (3) the challenged

statement regarding substantial compliance with laws and regulations was not misleading.

1. Safe Harbor

“The PSLRA contains a safe-harbor provision for a forward-looking statement whereby a

defendant is liable for such statements only if they were material; if the defendant had actual

knowledge that the statements were false or misleading; and if the defendant did not identify the

statements as forward-looking or insulate them with meaningful cautionary language.” Weiner v.

Tivity Health, Inc., 365 F. Supp. 3d 900, 910 (M.D. Tenn. 2019) (citations and internal quotations

omitted). “[F]or ‘forward-looking statements’ that are accompanied by meaningful cautionary

language, the ... the safe harbor provided for in the PSLRA makes the state of mind irrelevant.” Id.

(quoting Miller v. Champion Enterprises Inc., 346 F.3d 660, 672 (6th Cir. 2003) (citing 15 U.S.C.

§ 78u–5(c)(1)(A)). “A company that chooses to speak, therefore, is protected against failed

projections provided it identifies ‘important factors that could cause actual results to differ

materially from those in the forward-looking statements.’” Id. at 911 (quoting Helwig v. Vencor,

Inc., 251 F.3d 540, 551 (6th Cir. 2001) (quoting 15 U.S.C. § 78u–5(c)(1)(A)(i)). Through their

pending motion, Defendants argue that the challenged statements fall within the safe-harbor

because they are forward-looking, were identified as such, and were accompanied by sufficient

cautionary language. (Doc. No. 41 at 12-16).

Under the PSLRA, a “forward-looking statement” is defined as: “(A) a statement

containing a projection of revenues, income (including income loss), earnings (including earnings

loss) per share, capital expenditures, dividends, capital structure, or other financial items; (B) a

statement of the plans and objectives of management for future operations, including plans or

objectives relating to the products or services of the issuer; (C) a statement of future economic

performance, including any such statement contained in a discussion and analysis of financial

condition by the management or in the results of operations included pursuant to the rules and

regulations of the Commission; [and] (D) any statement of the assumptions underlying or relating

to any statement described in subparagraph (A), (B), or (C)[.]” 15 U.S.C. § 78u–5(i)(1).

The challenged statements at issue speak of earnings guidance, plans and objectives of

management for future operations, and statements of future economic performance or are

statements of assumptions underlying or relating to plans for future operations or future

projections. (See Doc. No. 41 at 12-16 and Doc. No. 41-1 (citing Doc. No. 39 ¶¶ 121, 159, 160,

162, 163, 164, 165, 167, 168, 169, 170, 171, 172, 173, 174, 175, 176, 177)). The Court finds that

these statements fall squarely within the PSLRA's definition of forward-looking statements. See

15 U.S.C. § 78u–5(i)(1); see, e.g., Zwick Partners, LP v. Quorum Health Corp., No. 3:16-CV-

02475, 2019 WL 1450546, at *7 (M.D. Tenn. Mar. 29, 2019) (citing Pension Fund Grp. v. Tempur-

Pedic Int'l, Inc., 614 F. App'x 237, 243 (6th Cir. 2015) (concluding that Tempur-Pedic's projection

of between $1.60 and $1.65 billion in net sales and between $3.80 and $3.95 in earnings per diluted

share were squarely within the PSLRA's definition of forward-looking statements); Miller, 346

F.3d at 677 (holding that statements speaking of earnings estimates and enhancement projections

or objectives are “classically forward-looking”)).

Defendants assert that the cautionary language in Acadia’s 2015 Form 10-K, filed on

February 25, 2016, was “undoubtedly meaningful” because it disclosed the exact risk Plaintiffs

allege occurred – weakened patient admissions and increased agency labor costs. (Doc. No. 50 at

7). However, that cautionary language is only meaningful to the extent that such increases in labor

costs and declines in patient volume had not already occurred at the time the respective challenged

forward-looking statements accompanying the cautionary language were made.2 As previously

recognized by this Court, “[i]f a company were to warn of the potential deterioration of one line

of business, when in fact it was established that that line of business had already deteriorated, then

... its cautionary language would be inadequate to meet the safe harbor standard. By analogy, the

safe harbor would not protect from liability a person ‘who warns his hiking companion to walk

slowly because there might be a ditch ahead when he knows with near certainty that the Grand

Canyon lies one foot away.’” Weiner, 365 F. Supp. 3d at 911 (quoting In re Harmon Int'l Indus.

Inc. Sec. Litig., 791 F.3d 90, 102-03 (D.C. Cir. 2015)).

In the present case, the meaningfulness of the cautionary statements in Acadia’s Form 10-

K cannot be determined without a determination of the facts – i.e. whether Acadia’s U.K. Facilities

were already facing increased labor costs and declines in patient volume at the time the respective

challenged forward-looking statements were made. See, e.g., In re Envision Healthcare Corp. Sec.

Litig., No. 3:17-CV-01112, 2019 WL 6168254, at *16 (M.D. Tenn. Nov. 19, 2019). Accordingly,

the Court is unable to determine whether the challenged forward-looking statements were

accompanied by sufficient cautionary statements in ruling on the pending motion to dismiss.

2. Falsity

“The PSLRA mandates that,” in order to survive a motion to dismiss, a plaintiff must

“specify each statement alleged to have been misleading, [and] the reason or reasons why the

statement is misleading.” In re Ford Motor Co. Sec. Litig., 381 F.3d 563, 569 (6th Cir. 2004)

(quoting 15 U.S.C. § 78u–4(b)(1)); see, e.g., In re Omnicare, 769 F.3d at 480 n. 6 (“KBC does not

2 Defendants have not identified specific cautionary statements that accompanied the challenged

forward-looking statements in paragraphs 121, 165, 167, 168, 169, 170, 171, 172, 173, 174, 175, 176, 177

of the Complaint.

need to recite in the Complaint the specific results of the audits, including the percentage of

Omnicare claims audited or the non-compliance rate. Under the PSLRA, it is enough to identify

the misrepresentations (the Form 10–K statements) and explain how they are false or misleading

(they conflict with the results of the audits, which show billing irregularities).”).

“[A] company has a duty to disclose hard information but not soft information unless other

criteria are met.” Weiner v. Tivity Health, Inc., 365 F. Supp. 3d 900, 913 (M.D. Tenn. 2019)

(quoting Zaluski v. United Am. Healthcare Corp., 527 F.3d 564, 572 (6th Cir. 2008)). “Hard

information is typically historical information or other factual information that is objectively

verifiable. Such information is to be contrasted with ‘soft’ information, which includes

predications and matters of opinion.” Id. (quoting Zaluski, 527 F.3d at 572). With regard to soft

information, “a defendant may choose silence or speech based on the then-known factual basis,

but it cannot choose half-truths.” Id. (quoting In re Ford, 381 F.3d at 569); see also City of Monroe

Employees Ret. Sys. v. Bridgestone Corp., 399 F.3d 651, 675 (6th Cir. 2005) (“the protections for

soft information end where speech begins.”) (internal citation omitted). “Thus, once a company

has chosen to speak on an issue – even an issue it had no independent obligation to address – it

cannot omit material facts related to that issue so as to make its disclosure misleading.” Weiner,

365 F. Supp. 3d at 913 (citation and internal quotations omitted).

i. “Quality Care” Statements

According to Defendants, the Complaint alleges that Defendants’ statements regarding the

quality of Acadia’s care services and adequacy of staffing at Acadia’s facilities were misleading

because Defendants failed to disclose that Acadia was understaffing facilities and had patient

incidents. (Doc. No. 41 at 18). Defendants assert that these challenged quality care statements,

(see Doc. No. 41-4 (citing Doc. No. 39 ¶¶ 112, 113, 115-120, 122-126, 131, 132, 134-140, 144-

146, 160, 166)), are not actionable because Acadia disclosed its employee numbers, staffing costs,

and that it had patient incidents. (Doc. No. 41 at 18-19; Doc. No. 50 at 3, 8).

However, the Complaint does not allege that Defendants’ statements about Acadia’s

facilities being adequately staffed and providing “high-quality services” were misleading because

Defendants failed to disclose its employee numbers, staffing costs, and that it had patient incidents.

Rather, it alleges these statements were misleading because Acadia did not provide high quality

care services and achieved growth by inadequately staffing facilities and slashing costs, which led

to widespread violence, sexual assault, and counter-therapeutic policies and practices in its

facilities. (Doc. No. 39 ¶¶ 129, 148).

Additionally, Plaintiffs note that the total employee figures Acadia disclosed during the

Class Period say nothing about the number of nurses, psychiatrists or medical technicians at each

facility, the number of patients at each facility, staff-to-patient ratios or any other metric that would

enable investors to determine whether Acadia’s facilities were appropriately staffed. (Doc. No. 47

at 16). Plaintiffs assert that this information could not be reached from the reported total employee

number given Defendants repeated statements that much of the necessary facility staff were not

employed by Acadia and worked in their facilities as independent contractors or medical staff

members. (Doc. No. 47 at 16 n. 5). Plaintiffs also assert that Defendants’ statements about having

some patient incidents did not come close to revealing or disclosing the systemic staffing and

widespread past and ongoing patient issues alleged. (Doc. No. 47 at 17). The Court finds that the

Complaint sufficiently alleges that “quality care” statements were false or misleading.

ii. Statements about substantial regulatory compliance

The Complaint alleges that Defendants’ statement in its Forms 10-K that “[m]anagement

believes we are in substantial compliance with all applicable laws and regulations” was misleading

because “Acadia’s facilities were in regular violation of CMS and state regulations regarding

patient-to-staff ratios and other measures of patient safety or care.” (Doc. No. 39 ¶ 149; see also

id. ¶¶ 157, 185-186). Defendants argue that their alleged knowledge of regulatory violations at

some of Acadia’s facilities does not render their statement about Acadia’s substantial regulatory

compliance false or misleading because a reasonable investor would not infer from their statement

that Acadia fully complied with every regulation or requirement. (Doc. No. 41 at 21 (citing In re

Plains All Am. Pipeline, L.P. Sec. Litig., 307 F. Supp. 3d 583, 635 (S.D. Texas 2018)).

In Response, Plaintiffs point out that the Complaint alleges that these violations did not

just occur at some of Acadia’s facilities but were chronic and pervasive throughout Acadia’s acute

inpatient facilities, which accounted for 40%-43% of Acadia’s U.S. revenue throughout the Class

Period. (Doc. No. 47 at 18 (citing Doc. No. 39 ¶¶ 185-186)). Additionally, Plaintiffs argue these

alleged violations conflict with what reasonable investors expected based on Defendants’

substantial compliance statements in Acadia’s SEC filings. Id. (citing Omnicare, Inc. v. Laborers

Dist. Council Const. Indus. Pension Fund, 575 U.S. 175, 190 (2015) (“Investors do not, and are

right not to, expect opinions contained in those statements to reflect baseless, off-the-cuff

judgments, of the kind that an individual might communicate in daily life.”)). The Court finds that

the Complaint sufficiently alleges that Defendants’ statement about substantial regulatory

compliance was false or misleading.3

3 Defendants also argue that this statement about substantial regulatory compliance is not actionable

because the Complaint does not allege facts demonstrating that Defendants had actual knowledge of its

falsity. (Doc. No. 41 at 8, 20-22 (citing In re Omnicare, Inc. Sec. Litig., 769 F.3d 455, 471 (6th Cir. 2014)

(the Complaint must “allege particular facts demonstrating that defendants had actual knowledge that their

statements concerning soft information were false or misleading at the time that they were made.”)).

Defendants are correct that “[w]hen an alleged misrepresentation concerns ‘soft information,’ which

‘includes predictions and matters of opinion,’ a plaintiff must additionally plead facts showing that the

statement was ‘made with knowledge of its falsity.’” In re Omnicare, 769 F.3d at 470 (internal citations

omitted). However, the Sixth Circuit has adopted the approach of analyzing this component as part of the

scienter analysis. See id. at 470-71 (noting that “whether someone made a statement with the knowledge

3. Materiality

The Supreme Court has endorsed “a fact-intensive test” of materiality in securities fraud

cases that is dependent “on the significance the reasonable investor would place on the withheld

or misrepresented information.” See City of Monroe Employees Ret. Sys. v. Bridgestone Corp.,

399 F.3d 651, 669 (6th Cir. 2005) (quoting Helwig v. Vencor, Inc., 251 F.3d 540, 555 (6th Cir.

2001) (quoting Basic Inc. v. Levinson, 485 U.S. 224, 240 (1988))). Accordingly, “the materiality

inquiry requires the court to place itself in the shoes of a reasonable investor deciding whether to

buy, sell, or retain the company’s stock.” Grae v. Corr. Corp. of Am., No. 3:16-CV-2267, 2017

WL 6442145, at *16 (M.D. Tenn. Dec. 18, 2017); see, e.g., Ashland, Inc. v. Oppenheimer & Co.,

648 F.3d 461, 468 (6th Cir. 2011) (“Misrepresented or omitted facts are material only if a

reasonable investor would have viewed the misrepresentation or omission as having significantly

altered the total mix of information made available.”) (citation omitted). Additionally, context

must inform determinations of materiality. See In re Omnicare, Inc. Sec. Litig., 769 F.3d 455, 472,

478 (6th Cir. 2014) (“as we have said and the Supreme Court has made clear, context matters when

analyzing materiality”) (citing Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27, 43 (2011)). The

question of whether alleged misrepresentations or omissions are material is a mixed question of

law and fact. See Helwig, 251 F.3d at 563 (citing TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438,

450 (1976)); see id. (noting that “[c]ourts generally reserve such questions for the trier of fact.”).

In the present case, Defendants appear to contend that their statements regarding the quality

of the care services provided at Acadia facilities are inactionable puffery because the word

“quality” is too vague to communicate anything important. (See Doc. No. 41 at 17 (“Indeed, as the

Sixth Circuit held, ‘statements describing a product in terms of “quality” or “best” . . . are too

that it was false is, at bottom, a question of someone's state of mind—the general subject of a scienter

inquiry.”).

squishy, too untethered to anything measurable, to communicate anything that a reasonable person

would deem important to a securities investment decision.’”) (quoting Bridgestone, 399 F.3d at

671); see also Doc. No. 50 at 8).

Defendants are correct that “[a] company’s general boasts of quality are typically

insufficient to establish liability under Section 10(b), because such statements usually ‘lack[ ] a

standard against which a reasonable investor could expect them to be pegged.’” Grae, 2017 WL

6442145, at *14 (quoting Bridgestone, 399 F.3d at 671). However, “[t]he Sixth Circuit has made

clear that even superficially broad statements of corporate self-praise must be evaluated in context

to determine if they convey more than just a generalized optimism.” Id. (citing Bridgestone, 399

F.3d at 671-72). “The key is whether the proposition at issue can be proven or disproven using

standard tools of evidence. Thus, … vague statements not subject to verification by proof are

generally deemed non-actionable puffery. But ‘opinion or puffery ... in particular contexts when it

is both factual and material ... may be actionable.’” Bridgestone, 399 F.3d at 674 (quoting

Longman v. Food Lion, Inc., 197 F.3d 675, 683 (4th Cir. 1999)) (emphasis omitted). As Plaintiffs

point out, Defendants’ statements regarding staffing levels and the quality of care at Acadia’s

facilities are both capable of objective measurement and verification using standard tools of

evidence. (See Doc. No. 47 at 15 (citing Doc. No. 39 ¶¶ 52-53, 187, 217)).

Viewing the Complaint in the light most favorable to Plaintiffs, the Court finds that a

reasonable juror could conclude that Defendants’ statements regarding staffing levels and the

quality of care at Acadia’s facilities were material misrepresentations.

B. Element Two: Scienter

“To establish liability under § 10(b) and Rule 10b–5, a private plaintiff must prove that the

defendant acted with scienter, ‘a mental state embracing intent to deceive, manipulate, or

defraud.’” Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27, 48 (2011) (quoting Tellabs, Inc. v.

Makor Issues & Rights, Ltd., 551 U.S. 308, 319 (2007)). “In the securities-fraud context, scienter

includes a knowing and deliberate intent to manipulate, deceive, or defraud, and recklessness.”

Doshi v. Gen. Cable Corp., 823 F.3d 1032, 1039 (6th Cir. 2016) (internal quotations and citation

omitted). “Recklessness is defined as ‘highly unreasonable conduct which is an extreme departure

from the standards of ordinary care. While the danger need not be known, it must at least be so

obvious that any reasonable man would have known of it.’” Frank v. Dana Corp., 646 F.3d 954,

959 (6th Cir. 2011) (quoting PR Diamonds, Inc. v. Chandler, 364 F.3d 671, 681 (6th Cir. 2004)).

“Recklessness is not negligence, but more ‘akin to conscious disregard.’” Id. (quoting PR

Diamonds, Inc., 364 F.3d at 681).

“Under the PSLRA, a plaintiff must ‘state with particularity facts giving rise to a strong

inference that the defendant acted with the required state of mind.’” Matrixx, 563 U.S. at 48

(quoting 15 U.S.C.A. § 78u–4(b)(2)(A)).4 “This standard requires courts to take into account

‘plausible opposing inferences.’” Id. (quoting Tellabs, 551 U.S. at 323). “A complaint adequately

4 The Sixth Circuit has enumerated a “non-exhaustive list of factors that do not necessarily establish

scienter, but are ‘usually relevant’ to its analysis,” which includes allegations of:

(1) insider trading at a suspicious time or in an unusual amount; (2)

divergence between internal reports and external statements on the same

subject; (3) closeness in time of an allegedly fraudulent statement or

omission and the later disclosure of inconsistent information; (4) evidence

of bribery by a top company official; (5) existence of an ancillary lawsuit

charging fraud by a company and the company's quick settlement of that

suit; (6) disregard of the most current factual information before making

statements; (7) disclosure of accounting information in such a way that its

negative implications could only be understood by someone with a high

degree of sophistication; (8) the personal interest of certain directors in not

informing disinterested directors of an impending sale of stock; and (9) the

self-interested motivation of defendants in the form of saving their salaries

or jobs.

Frank, 646 F.3d at 959 n. 2 (citing Helwig v. Vencor, Inc., 251 F.3d 540, 552 (6th Cir. 2001)).

pleads scienter under the PSLRA ‘only if a reasonable person would deem the inference of scienter

cogent and at least as compelling as any opposing inference one could draw from the facts

alleged.’” Id. (quoting Tellabs, 551 U.S. at 324). The inquiry “[is] not whether any individual

allegation, scrutinized in isolation, meets that standard.” Tellabs, Inc., 551 U.S. at 322-23. (“The

strength of an inference cannot be decided in a vacuum.”). Rather, “[i]n making this determination,

the court must review ‘all the allegations holistically.’” Matrixx, 563 U.S. at 48 (quoting Tellabs,

551 U.S. at 326).

Through their motion to dismiss, Defendants appear to argue that an inference of their

innocence is stronger than the competing inference of scienter. (See Doc. No. 41 at 22-30).5 In

Response, Plaintiffs argue that a compelling inference of actual knowledge or recklessness

disregard of the alleged scheme and the falsity of Defendants’ misrepresentations can be derived

from the allegations that: Defendants had intimate knowledge of patient admissions, staffing

levels, and quality control issues and monitored those metrics on a daily basis; before the

misconduct was revealed the Individual Defendants and one of Acadia’s founders unloaded more

than $600 million in Acadia stock while its price was inflated by fraud; Defendants installed

compensation structures designed solely to reward short-term profit at the expense of patient care;

and shortly after Defendants’ fraud was revealed, Acadia’s CEO and President were abruptly fired

or resigned with no notice under highly unusual circumstances. (Doc. No. 47 at 22-31).

When the factual allegations are considered collectively, the Court finds that there is an

inference that Defendants acted with actual knowledge or reckless disregard for the misleading

5 Notwithstanding the Supreme Court’s instruction that “the court’s job is not to scrutinize each

allegation in isolation but to assess all the allegations holistically,” Tellabs, 551 U.S. at 326, Defendants

challenge the sufficiency of Plaintiffs’ scienter allegations by advancing arguments against factual

allegations in isolation. (See Doc. No. 41 at 22-30).

nature of their statements that is at least as compelling as the innocence inference advanced by

Defendants. See, e.g., Grae v. Corr. Corp. of Am., No. 3:16-CV-2267, 2017 WL 6442145, at *20-

21 (M.D. Tenn. Dec. 18, 2017).

IV. CONCLUSION

For the foregoing reasons, Defendants’ Motion to Dismiss (Doc. No. 40) will be denied.°

An appropriate order will enter. VE ;

WILLIAM L. CAMPBELL, &.

UNITED STATES DISTRICT JUDGE

6 Because Defendants seek dismissal of the Section 20(a) claims for secondary liability against the

individual Defendants solely on the grounds that the Complaint fails to adequately allege a Section 10(b)

violation, (see Doc. No. 41 at 30), the Section 20(a) claims likewise will not be dismissed.

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