In Re Aetna, Inc. Securities Litigation

PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

No. 09-2970

IN RE: AETNA, INC. SECURITIES LITIGATION

VARMA MUTUAL PENSION INSURANCE COMPANY,

Appellant

On Appeal from the United States District Court

for the Eastern District of Pennsylvania

(D. C. No. 2-07-cv-04451)

District Judge: Hon. Thomas N. O’Neill

Argued on February 11, 2010

Before: SLOVITER, ROTH, and TASHIMA*, Circuit Judges

(Opinion filed: August 11, 2010)

*Honorable A. Wallace Tashima, Senior United States

Circuit Judge for the Ninth Circuit, sitting by designation.

Michael K. Yarnoff, Esquire (Argued)

Benjamin J. Sweet, Esquire

Bharati O. Sharma, Esquire

Barroway, Topaz, Kessler, Meltzer & Check, LLP

280 King of Prussia Road

Radnor, PA 19087

Jay W. Eisenhofer, Esquire

Charles T. Caliendo, Esquire

Grant & Eisenhofer, P. A.

485 Lexington Avenue

New York, NY 10017

James R. Banko, Esquire

Geoffrey C. Jarvis, Esquire

Grant & Eisenhofer, P. A.

Chase Manhattan Centre

1201 North Market Street

Suite 2100

Wilmington, DE 19801

Counsel for Appellant

Michael P. Carroll, Esquire (Argued)

Michael S. Flynn, Esquire

Jonathan D. Martin, Esquire

Davis, Polk & Wardwell, LLP

450 Lexington Avenue

New York, NY 10017

2

John M. Elliott, Esquire

Frederick P. Santarelli, Esquire

Elliott, Greenleaf & Siedzikowski, P. C.

945 Harvest Drive, Suite 300

Blue Bell, PA 19422

Counsel for Appellees

OPINION

ROTH, Circuit Judge:

Plaintiff shareholders appeal the District Court’s order

dismissing this securities fraud class action under the Private

Securities Litigation Reform Act, 15 U.S.C. § 78u-5(c)(1),

which contains a safe harbor for forward-looking statements.

We find the alleged misrepresentations which form the basis of

plaintiffs’ claims are protected by the safe harbor because they

are forward-looking and immaterial as a matter of law. We will

therefore affirm the order of the District Court.

I. Factual and Procedural Background

Lead plaintiff Varma Mutual Pension Insurance

Company seeks to represent a class of investors who purchased

securities of Aetna, Inc., between October 27, 2005, and July 27,

2006. The Consolidated Class Action Complaint names as

defendants Aetna and four of its officers employed at the time

3

of the alleged fraud: John Rowe, Ronald Williams, Alan

Bennett, and Craig Callen.1 Aetna, a Pennsylvania corporation

with operations in multiple states, provides medical insurance

and health care benefits to more than 14 million customers.

The complaint alleges a fraudulent scheme wherein

defendants misled investors about Aetna’s pricing of insurance

policies and then sold shares of Aetna’s stock before the scheme

was revealed to the public. In particular, plaintiffs claim that

defendants falsely characterized Aetna’s pricing of medical

insurance premiums as “disciplined,” which, plaintiffs claim,

refers to a conservative underwriting practice of setting

premiums in a fixed proportion to expected future medical costs.

Within the health care industry, this proportion is known as the

1

Williams is Chairman and CEO of Aetna; he previously

served as President from May 2002 to July 2007. Rowe was

CEO from February 2000 to February 2006 and Chairman from

April 2001 to October 2006. Bennett was CFO from September

2001 to April 2007. Callen was Senior Vice President and Head

of Strategic Planning and Business Development from April

2004 to November 2007.

4

“medical cost ratio” (MCR).2 According to plaintiffs, investors

rely on MCR as an indicator of profitability.

Plaintiffs claim the fraud began in September 2005, when

Aetna allegedly relaxed its underwriting criteria in an effort to

underprice competitors and gain market share. Plaintiffs claim

that defendants knew this would adversely affect Aetna’s MCR

and stock price so that defendants concealed the relaxed

underwriting criteria by publicly touting a “disciplined” pricing

policy. In February 2006, Rowe, Bennett and Callen sold

substantial holdings of Aetna stock on the open market at prices

that plaintiffs claim were artificially inflated by the fraud.3 In

April and July 2006, Aetna reported two consecutive quarterly

increases in MCR, which plaintiffs attribute to Aetna’s

supposedly secret policy of underpricing premiums.

2

Plaintiffs describe the MCR as “a ratio of the dollars a

company spends on medical costs, physician reimbursement and

other claims-related services (collectively referred to as medical

costs) expressed as a percentage of premiums charged to the

insured for such services. In other words, the ratio is medical

costs divided by premiums.”

3

According to the complaint, “Rowe, Bennett and Callen

all had set up 10b5-1 trading plans from early October to mid-

November 2005.” Rowe sold 887,000 shares (proceeds of

$42.89 million), Bennett sold 280,000 shares (proceeds of

$14.18 million), and Callen sold 60,000 shares (proceeds of

$3.04 million). Williams did not sell any shares.

5

During the class period, the price of Aetna’s stock fell

from $52.48 to $33.25. The loss of shareholder equity occurred

when the alleged underpricing was revealed by Aetna’s

reporting of quarterly MCR data. Plaintiffs claim that

defendants’ statements about “disciplined” pricing artificially

inflated Aetna’s stock by leading investors to believe that MCR

would be lower and that profitability would be higher.

To corroborate their allegations, Plaintiffs cite

contemporaneous reports by financial analysts and journalists

who speculated that Aetna was boosting its market share by

underpricing premiums. Plaintiffs also proffer confidential

witness statements by Aetna employees who claim to have

implemented the relaxed underwriting criteria. Other

confidential witnesses stated that they personally observed the

individual defendants’ hands-on managerial style, from which

plaintiffs impute actual knowledge that Aetna was underpricing

premiums.

A. Defendants’ Statements

The complaint identifies numerous statements which

allegedly misled investors; all statements pertain to Aetna’s

“disciplined” pricing of medical insurance premiums. We

summarize the relevant statements below.

On October 27, 2005, Rowe stated on an analyst

conference call, “Regarding pricing, we continue to adhere to a

disciplined pricing policy of achieving premium yields that are

in line with medical cost trends.” During the same call,

Williams stated, “[W]e are pricing very clearly in line with our

6

medical cost trend . . . . [W]e have a very strong amount of

pricing discipline . . . . What we are doing is making certain that

we are pricing appropriately as best we can, to be certain that

we’re meeting our shareholder expectations.”

On February 9, 2006, Rowe and Williams participated in

another analyst conference call; plaintiffs claim that “Rowe

continued to stress Aetna’s ‘disciplined approach to pricing’

while Williams emphasized Aetna’s commitment to ‘profitably

grow market share and earnings’ through ‘disciplined pricing’

and noted that ‘[o]ur pricing discipline is unchanged.’”

Plaintiffs claim that Rowe and Williams misled investors by

publicly touting a “disciplined” pricing policy while secretly

underpricing premiums to boost market share.

Plaintiffs claim that in April 2006, when Aetna reported

financial results for the first quarter, it concealed the alleged

underpricing by falsely attributing an increase in MCR to higher

medical expenses:

This increase in the medical cost ratio for the first

quarter of 2006 reflects a percentage increase in

per member medical costs that outpaced the

percentage increase in per member premiums, due

to higher medical cost trends for inpatient and

outpatient facility and physician services offset by

a moderation in medical cost trend for ancillary

and pharmacy services.

Aetna Form 10-Q (Apr. 27, 2006). Plaintiffs claim that this

disclosure was misleading because the increase in MCR was

7

caused by the underpricing of premiums, not by higher medical

expenses.

On April 27, 2006, Williams discussed Aetna’s first

quarter results on an analyst conference call and stated, “[W]e

continue to adhere to our pricing discipline.” On the same call,

Bennett stated, “[W]e expect a quarterly pattern to reflect a

slightly higher MCR in the second quarter compared to the first-

quarter level.” Plaintiffs claim that Williams’ statement was

false because Aetna’s pricing was not disciplined and that

Bennett’s statement was misleading because he knew

underpricing would cause the second quarter MCR to increase

substantially, not slightly. On April 28, 2006, Aetna’s stock

price fell by more than 20%, causing a market capitalization loss

of $5.4 billion.

On May 1, 2006, Williams discussed Aetna’s first quarter

MCR performance on an analyst conference call and stated:

In addition, some have questioned our

membership growth and said that we must be

pricing aggressively . . . .

Of the 82,000 total fully insured additions, 15,000

are Medicaid Advantage, 4,000 were in student

health, 14,000 in SRC and 23,000 in individual.

That leaves growth of 26,000 members from our

main customer markets of national, middle and

small group. This is solid and balanced growth

that is representative of our dedication to

pricing, as well as the broad diversification of

markets we are actively pursuing.

8

I will end my comments by reaffirming to you

my personal commitment to continue to

maintain discipline and rigor in everything we

do at Aetna.

(Compl. ¶ 89, A101 (emphasis and alteration in complaint).)

On May 16, 2006, Williams spoke at a health care

conference and stated:

We also continue as a priority to exhibit

commitment to discipline pricing. I think it is

important to understand that the management

incentives and discipline that we have are aligned

to profit increases. We operate a set of fully

allocated profit and loss P&Ls throughout the

Company where general managers are incented to

achieve a discipline level designed to help

maximize those margins and not simply to support

membership growth. Given a decision, we will

always take profitability over growth.

(Compl. ¶ 91, A102 (emphasis in complaint).) Plaintiffs claim

these statements were false and misleading because Williams

knew Aetna was underpricing premiums and sacrificing

profitability for growth.

On July 27, 2006, Aetna announced financial results for

the second fiscal quarter, including a 2% quarterly increase in

MCR. Plaintiffs claim that, contrary to Bennett’s April 27, 2006

prediction of “a slightly higher MCR in the second quarter,” the

9

actual increase of 2% was substantial. That same day, Aetna’s

stock price fell by 17%, causing a market capitalization loss of

$3.58 billion.

Based on these occurrences, the plaintiffs filed a

complaint asserting three causes of action under the Securities

Exchange Act of 1934: Count I alleges violations of Exchange

Act Section 10(b), Count II alleges violations of Exchange Act

Section 20(a), and Count III alleges violations of Exchange Act

Section 18.

B. District Court’s Dismissal

Defendants filed a motion to dismiss the complaint,

which the District Court granted with prejudice. In its thorough

and well-crafted opinion, the District Court held that all

statements which form the basis of Count I were forward-

looking and therefore protected by the statutory safe harbor, 15

U.S.C. § 78u-5(c)(1). The court dismissed Count II as

derivative of Count I, and held that Count III was barred by the

statute of limitations. Plaintiffs only appeal the dismissal of

Counts I and II.

II. Discussion

A. Standard of Review and Jurisdiction

We review the District Court’s decision de novo,

accepting as true all allegations in the complaint and all

reasonable inferences that can be drawn therefrom as viewed

most favorably to the non-moving party. DeBenedictis v.

10

Merrill Lynch & Co., 492 F.3d 209, 215 (3d Cir. 2007). The

District Court had jurisdiction under 28 U.S.C. § 1331. We

have jurisdiction under 28 U.S.C. § 1291.

B. Securities Exchange Act of 1934 Section 10(b)

The Securities Exchange Act of 1934 Section 10(b), and

regulations promulgated thereunder, prohibit fraud in connection

with the sale or purchase of securities. 15 U.S.C. § 78j(b); 17

C.F.R. § 240.10b-5(b).4 Parties injured by securities fraud may

bring a private cause of action under Section 10(b), which

requires proof of six elements: “(1) a material misrepresentation

(or omission); (2) scienter, i.e., a wrongful state of mind; (3) a

connection with the purchase or sale of a security; (4) reliance,

often referred to in cases involving public securities markets

(fraud-on-the-market cases) as ‘transaction causation’; (5)

economic loss; and (6) ‘loss causation,’ i.e., a causal connection

4

“Section 10(b) of the Securities Exchange Act forbids

(1) the ‘use or employ[ment of] . . . any manipulative or

deceptive device or contrivance,’ (2) ‘in connection with the

purchase or sale of any security,’ and (3) ‘in contravention of

[SEC] rules and regulations.’ 15 U.S.C. § 78j(b) (2006). SEC

regulations, in turn, make it unlawful ‘[t]o make any untrue

statement of a material fact or to omit to state a material fact

necessary in order to make the statements made, in the light of

the circumstances under which they were made, not misleading’

in connection with the purchase or sale of any security. 17

C.F.R. § 240.10b-5(b).” McCabe v. Ernst & Young, LLP, 494

F.3d 418, 424 (3d Cir. 2007).

11

between the material misrepresentation and the loss.” McCabe

v. Ernst & Young, LLP, 494 F.3d 418, 424 (3d Cir. 2007) (citing

Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 341-42 (2005)).

This appeal involves only the first element, whether defendants

made a material misrepresentation or omission.

Federal securities fraud litigation is governed by the

Private Securities Litigation Reform Act of 1995 (PSLRA), 109

Stat. 737, which Congress enacted “[a]s a check against abusive

litigation by private parties . . ..” Tellabs, Inc. v. Makor Issues

& Rights, Ltd., 551 U.S. 308, 313 (2007). The PSLRA imposes

two exacting and distinct pleading requirements for securities

fraud actions. First, “the complaint shall specify each statement

alleged to have been misleading, the reason or reasons why the

statement is misleading, and, if an allegation regarding the

statement or omission is made on information and belief, the

complaint shall state with particularity all facts on which that

belief is formed.” 15 U.S.C. § 78u-4(b)(1). Second, “the

complaint shall, with respect to each act or omission alleged to

violate this title, state with particularity facts giving rise to a

strong inference that the defendant acted with the required state

of mind.” 15 U.S.C. § 78u-4(b)(2).

Under the PSLRA, alleged misrepresentations are not

actionable if they fall within the safe harbor for forward-looking

statements. 15 U.S.C. § 78u-5(c). The issue on appeal is

whether defendants’ statements were immunized by the safe

harbor.

12

1. PSLRA Safe Harbor for Forward-Looking

Statements

The PSLRA’s safe harbor for forward-looking statements

provides in relevant part:

(1) [I]n any private action . . . based on an untrue statement

of a material fact or omission of a material fact necessary

to make the statement not misleading, a person . . . shall

not be liable with respect to any forward-looking

statement, whether written or oral, if and to the extent

that–

(A) the forward-looking statement is–

(i) identified as a forward-looking statement, and is

accompanied by meaningful cautionary statements

identifying important factors that could cause actua

results to differ materially from those in the

forward-looking statement; or

(ii) immaterial; or

(B) the plaintiff fails to prove that the forward-looking

statement–

(i) if made by a natural person, was made with actual

knowledge by that person that the statement was false or

misleading; or

(ii) if made by a business entity;[,] was--

13

(I) made by or with the approval of an executive

officer of that entity; and

(II) made or approved by such officer with actual

knowledge by that officer that the statement was false or

misleading.

(2) Oral forward-looking statements. In the case of an oral

forward-looking statement . . ., the requirement set

forth in paragraph (1)(A) shall be deemed to be

satisfied–

(A) if the oral forward-looking statement is accompanied

by a cautionary statement–

(i) that the particular oral statement is a forward-

looking statement; and

(ii) that the actual results might differ materially from

those projected in the forward-looking

statement; and

(B) if–

(i) the oral forward-looking statement is accompanied

by an oral statement that additional information concerning

factors that could cause actual results to materially differ from

those in the forward-looking statement is contained in a readily

available written document, or portion thereof;

14

(ii) the accompanying oral statement referred to in

clause (i) identifies the document, or portion thereof, that

contains the additional information about those factors relating

to the forward-looking statement; and

(iii) the information contained in that written document

is a cautionary statement that satisfies the standard established

in paragraph (1)(A).

15 U.S.C. § 78u-5(c)(1)-(2).

Thus, the safe harbor applies to statements that are

forward-looking as defined by the statute provided that they are

(1) identified as such, and accompanied by meaningful

cautionary statements; or (2) immaterial; or (3) made without

actual knowledge that the statement was false or misleading.

a. Statutory Definition of “Forward-

Looking Statement”

Our threshold inquiry is whether defendants’ statements

fall within the broad statutory definition of ‘forward-looking

statement,’ which includes, inter alia, projections of future

performance, plans and objectives for future operations, and

assumptions underlying statements about future financial,

economic or operational performance. 15 U.S.C. § 78u-5(i)(1).5

5

The PSLRA defines “forward-looking statement” as:

(A) a statement containing a projection of revenues, income

15

We recently construed the statutory definition in Institutional

Investors Group v. Avaya, Inc., 564 F.3d 242 (3d Cir. 2009).

There, shareholders alleged a fraudulent scheme wherein

executives of Avaya, a telecommunications company, denied the

company “was offering unusual price discounts and that its

(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;

(D) any statement of the assumptions underlying or

relating to any statement described in subparagraph

(A), (B), or (C);

(E) any report issued by an outside reviewer retained

by an issuer, to the extent that the report assesses a

forward-looking statement made by the issuer; or

(F) a statement containing a projection or estimate of

such other items as may be specified by rule or

regulation of the Commission.

15 U.S.C. § 78u-5(i)(1).

16

profit margins were being impaired,” and then publicized

falsely-optimistic financial projections that could not be

achieved because of the price discounting’s negative effect on

profitability. Id. at 249. The shareholders filed suit under

Section 10(b) and alleged two types of misleading statements:

First, there are “pricing pressure statements,” in

which [defendants] are alleged to have falsely

denied Avaya was offering unusual discounts and

facing significant pricing pressure from market

rivals. Second, there are “forecast-related

statements,” in which defendants projected

financial results (such as operating margin and

revenue growth) and made positive portrayals,

notably the statement that Avaya was “on track”

to achieve its goals or projections.

Avaya, Inc., 564 F.3d at 246.

The “pricing pressure” statements were made by Avaya’s

chief financial officer, who denied that deteriorating demand

adversely affected the market price for the company’s products.6

The “forecast-related” statements contained forward-looking

projections, but described those projections in present-tense

language. For example, defendants stated, “Our first quarter

results position us to meet our goals for the year . . . . [W]e are

6

Although not an issue considered on this appeal, the safe

harbor did not apply to those statements because they clearly

referred to historical rather than future performance.

17

on track to meet our goals for the year, even though there were

some aspects to our performance that are below our expectations

and that we are working on to improve.” Id. at 254. We

concluded that such a “mixed present/future statement is not

entitled to the safe harbor with respect to the part of the

statement that refers to the present.” Id. at 255. However, when

read in context, the present-tense statements (i.e., “we are on

track” and “first quarter results position us”) could not

“meaningfully be distinguished from the future projection of

which they are a part” (i.e., Avaya’s future goals). Id. To the

extent that those statements contained assertions about the

present, we found “the assertions of current fact are too vague

to be actionable.” Id.

As we noted in Avaya, it was distinguishable from cases

in which the allegedly misleading statements contained

separately discernable references to the present. Id. For

example, in Makor Issues & Rights, Ltd. v. Tellabs Inc., the

statement that sales were “still going strong” was not forward-

looking because it “would be misleading if [defendant] knew

that its sales were about to collapse.” 513 F.3d 702, 705 (7th

Cir. 2008). In In re Stone & Webster, Inc., Securities Litigation,

the statement that the defendant “has on hand and has access to

sufficient sources of funds to meet its anticipated . . . needs” was

not forward-looking because “[t]he part of the statement that

speaks of the quantity of cash on hand speaks of a present fact.”

414 F.3d 187, 207, 212 (1st Cir. 2005).

In the case before us, the allegedly misleading

representations consist of vague and generalized statements

18

about “disciplined” pricing.7 The District Court properly began

its analysis by ascertaining what factual assertions were

conveyed by those statements. According to the court, the

parties had agreed that “disciplined” pricing referred to Aetna’s

expectation of “achieving premium yields that are in line with

[Aetna’s] medical cost trend.” Based on this understanding of

the term “disciplined” pricing, the court concluded that the

statements were forward-looking because they expressed

expectations about Aetna’s medical cost trend, “a specific

measure of future performance.” So construed the

representations were within the safe harbor’s definition of

“forward-looking statement.” See 15 U.S.C. § 78u-5(i)(1)(B)

(“statement of the plans and objectives of management for

future operations”) and (C) (“statement of future economic

performance”). Applying Avaya, the court found that, while

certain elements of defendants’ statements were partly historical

7

Specifically, plaintiffs allege the following statements

are misleading: (1) “We have, we believe, very strong pricing

discipline;” (2) “we continue to adhere to a disciplined pricing

policy of achieving premium yields that are in line with medical

cost trends;” (3) “this pricing discipline has contributed to the

stability we have realized in our . . . MCR;” (4) “[o]ur pricing

policy remains consistent;” (5) “we continue to exercise pricing

discipline;” (6) “our pricing discipline is unchanged;” (7)

membership growth “is solid and balanced growth that is

representative of our dedication to disciplined pricing;” (8) “we

also continue as a priority to exhibit commitment to

discipline[d] pricing;” and (9) Aetna remains “committed to

pricing discipline [as it has over] the past five years.”

19

and partly present-tense (i.e., statements such as “remains

consistent,” “is unchanged,” and “we continue to adhere to”),

those elements could not be distinguished from the statements’

assertions about the future.

On appeal, plaintiffs argue that the District Court

misunderstood what defendants meant by the term “disciplined”

pricing. Plaintiffs contend that, by “engaging in ‘disciplined’

pricing, Aetna is telling investors that, based upon what the

Company currently estimates costs to be for the policies it is

writing, these policies will be profitable.” Plaintiffs argue that,

although the statements contain projections about future

profitability, they also convey information about current pricing

which is necessarily based on historic data. Plaintiffs also assert

that the District Court overlooked the allegedly misleading

statement in Aetna’s first quarter 2006 Form 10-Q, which

contained an allegedly false, past-tense explanation for the

increase in MCR.

Defendants contend that plaintiffs’ characterization is

wrong because Aetna explicitly defined “disciplined” pricing as

a policy of “achieving premium yields that are in line with [its]

medical cost trend.” They argue that the “disciplined” pricing

statements are “classic forward-looking statements” because

“whether Aetna succeeds in ‘achieving premium yields in line

with our medical cost trend’ cannot be confirmed until future

results – in particular, actual medical costs incurred on policies

– are known.” Defendants assert that the statements are not

actionable because they are vague projections of future

profitability. Regarding the allegedly misleading Form 10-Q

disclosure, defendants argue that the 10-Q explicitly stated the

20

fact that plaintiffs claim was fraudulently concealed , i.e., that

for some insurance policies, medical costs “outpaced the

percentage increase in per member premiums” – in other words

that Aetna underpriced some of its policies.8

Our examination begins with a determination of which

aspect of the statements are false. See In re Stone & Webster,

Inc., 414 F.3d at 213. Plaintiffs claim that defendants

misrepresented Aetna’s underwriting practices during the class

period by referring to its pricing as “disciplined.” However,

whether Aetna’s pricing was, in fact, disciplined could not have

been determined at the time defendants made the statements.

The term “disciplined” pricing describes a policy of setting

prices in relation to future medical costs. At the time the

statements were made, the medical costs had not yet been

incurred and could not be ascertained until later.

8

The relevant language in the Form 10-Q is as follows:

This increase in the medical cost ratio for the

first quarter of 2006 reflects a percentage

increase in per member medical costs that

outpaced the percentage increase in per member

premiums, due to higher medical cost trends for

inpatient and outpatient facility and physician

services offset by a moderation in medical cost

trend for ancillary and pharmacy services.

Aetna Form 10-Q (Apr. 27, 2006).

21

Thus, to the extent that “disciplined” pricing said

anything about the current price of premiums, it did so in the

form of a projection. This is evident from plaintiffs’ own

understanding of the term. As noted above, plaintiffs contend

that by “engaging in ‘disciplined’ pricing, Aetna is telling

investors that, based upon what the Company currently estimates

costs to be for the policies it is writing, these policies will be

profitable.” Statements about future profitability and

assumptions underlying management’s expectations about the

future fall squarely within the definition of forward-looking

statement. 15 U.S.C. § 78u-5(i)(1)(A) and (D).

Plaintiffs further claim that Aetna’s April 27 Form 10-Q

disclosure was misleading because it falsely attributed the first

quarter increase in MCR to higher medical costs without

revealing the underpricing of premiums. While we agree that

the safe harbor does not apply to this statement because it is

historical rather than forward-looking, we find the statement

itself contains no falsity. Even accepting plaintiffs’ allegations

about underpricing as true, the statement asserts the very fact

allegedly concealed, that the increase in medical costs exceeded

the increase in premium revenue. Aetna need not adopt

plaintiffs’ characterization of “underpricing” in its financial

statements to avoid liability for securities fraud.9

9

Aetna also reported financial data about its premium

revenues, which plaintiffs do not allege to be inaccurate.

Aetna’s Form 10-Q reported total quarterly revenue from

premiums as compared to prior periods and a “News Release”

dated April 27, 2006, reported the number of insureds under

22

For these reasons, we hold that the allegedly misleading

assertions regarding Aetna’s “disciplined” pricing policy fall

within the safe harbor’s definition of forward-looking

statement.10

contract as compared to prior periods. These disclosures further

undermine plaintiffs’ theory of falsity. See In re Advanta Corp.

Securities Litigation, 180 F.3d 525, 538 (3d Cir. 1999) (“Factual

recitations of past earnings, so long as they are accurate, do not

create liability under Section 10(b).”).

10

The written forward-looking statements were identified

as such in Aetna’s written press releases and Form 10-Ks. The

oral forward-looking statements were identified as such in

contemporaneous oral statements that referred listeners to

written cautionary language in Aetna’s Form 10-Ks.

Plaintiffs, however, argue that two statements were not

identified as forward-looking and are thus ineligible for

protection under the safe harbor. Plaintiffs concede that the

statements were accompanied by cautionary language but argue

that “nothing in the record” shows exactly how the statements

were identified as forward-looking. Because plaintiffs did not

present this argument to the District Court, the record on this

issue was not properly developed for appellate review. The

alleged insufficiency of statements not contained in the record

provides no basis for remand.

23

b. Meaningful Cautionary Statements

The safe harbor provides that forward-looking statements

must be “accompanied by meaningful cautionary statements

identifying important factors that could cause actual results to

differ materially from those in the forward-looking statement.”

15 U.S.C. § 78u-5(c)(1)(A)(i). This aspect of the safe harbor is

analogous to the “bespeaks caution” doctrine, which holds that

“cautionary language, if sufficient, renders the alleged omissions

or misrepresentations immaterial as a matter of law.” EP

Medsystems, Inc. v. Echocath, Inc., 235 F.3d 865, 873 (3d Cir.

2000). Cautionary language must be extensive, specific, and

directly related to the alleged misrepresentation. GSC Partners

CDO Fund v. Washington, 368 F.3d 228, 243 n.3 (3d Cir. 2004).

Cautionary statements disclosed in SEC filings may be

incorporated by reference; they “do not have to be in the same

document as the forward-looking statements.” In re Merck &

Co. Sec. Litig., 432 F.3d 261, 273 n.11 (3d Cir. 2005).

Plaintiffs argue that the cautionary language, which

Aetna provided in financial reports filed with the SEC, was

insufficient because it failed to disclose the alleged practice of

underpricing premiums, and only addressed risks related to

medical cost projections. The cautionary statements included

the following language:

Our ability to forecast and manage health care

costs and implement increases in premium rates

affects our profitability. Our profitability depends

in large part on accurately forecasting health care

costs and on our ability to appropriately manage

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future health care costs through underwriting

criteria . . ..

***

Our ability to forecast health care and other

benefit costs, detect changes in these costs, and

achieve appropriate pricing affects our

profitability. We continue to be vigilant in our

pricing and have increased our premiums for new

and renewal business in 2006. Premiums in the

health business are generally fixed for one-year

periods. Accordingly, future cost increases in

excess of medical cost projections reflected in

pricing cannot be recovered in the contract year

through higher premiums. As a result, the

Company’s results are particularly sensitive to the

price increases it projects in advance of renewal

of the business. There can be no assurance

regarding the accuracy of medical cost projections

assumed for pricing purposes, and if the rate of

increase in medical costs in 2006 were to exceed

the levels projected for pricing purposes, our

results would be materially adversely affected.

This language provides clear warning to investors that the

accuracy of medical costs cannot be assured, actual medical

costs may exceed projections assumed for purposes of setting

premiums, medical costs in excess of projections cannot be

recovered through higher premiums, and inaccurate medical cost

projections can have a materially negative effect on profitability.

We find this language adequate under 15 U.S.C. §

25

78u-5(c)(1)(A)(i) because it provided meaningful, extensive,

and specific caution directly related to the statements concerning

“disciplined” pricing.

c. Materiality

The safe harbor applies to forward-looking statements

that are not material. 15 U.S.C. § 78u-5(c)(1)(A)(ii). A

statement or omission “is material if there is a substantial

likelihood that a reasonable shareholder would consider it

important in deciding how to [act].” TSC Industries, Inc. v.

Northway, Inc., 426 U.S. 438, 449 (1976). See Basic Inc. v.

Levinson, 485 U.S. 224, 232 (1988) (“expressly adopt[ing] the

TSC Industries standard of materiality for the § 10(b) and Rule

10b-5 context”). A material misrepresentation or omission is

actionable if it “significantly altered the ‘total mix’ of

information made available.’” Basic, at 231-32 (quoting TSC

Industries, 426 U.S. at 449).

“Material representations must be contrasted with

statements of subjective analysis or extrapolations, such as

opinions, motives and intentions, or general statements of

optimism . . ..” EP Medsystems, Inc., 235 F.3d at 872. Such

statements “‘constitute no more than ‘puffery’ and are

understood by reasonable investors as such.’” In re Advanta

Corp. Sec. Litig., 180 F.3d at 538 (quoting In re Burlington Coat

Factory Sec. Litig., 114 F.3d 1410, 1428 n.14 (3d Cir. 1997)).

A representation is immaterial if the “statement at issue is too

vague to be actionable.” In re Burlington Coat Factory Sec.

Litig., 114 F.3d at 1428 (statement “that the company ‘believed

[it could] continue to grow net earnings at a faster rate than

26

sales’” was too vague). “[A]lthough questions of materiality

have traditionally been viewed as particularly appropriate for the

trier of fact, complaints alleging securities fraud often contain

claims of omissions or misstatements that are obviously so

unimportant that courts can rule them immaterial as a matter of

law at the pleading stage.” Id. at 1426.

In In re Advanta Corp. Securities Litigation, shareholders

alleged a theory of fraud similar to the one alleged here

regarding Aetna’s “disciplined” pricing policy. There,

shareholders claimed that Advanta, a credit card company,

publicly touted its strong financial health and “risk-adjusted

pricing strategy,” which targeted customers with good credit.

180 F.3d 525, 537. In its annual report, Advanta stated, “While

we added substantially to our account base, our credit quality

remained excellent. Our emphasis on gold cards – and targeting

of better quality customers – helps us maintain an enviable

credit quality profile.” Id. Shareholders alleged that, contrary

to those representations, Advanta had secretly relaxed its

“underwriting and monitoring procedures” by offering

introductory “teaser” rates to new customers with poor credit.

Id. Advanta’s positive portrayals ultimately proved wrong when

the new customers defaulted, causing a $20 million quarterly

loss. Id. at 528. We held that Advanta’s positive portrayals

were vague, and “even if arguably misleading, do not give rise

to a federal securities claim because they are not material . . ..”

Id. at 538. We expressed doubt that “reasonable investors

would make investment decisions based on the positive

portrayals.” Id. at 539.

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Here, the District Court applied Advanta and found

defendants’ statements about “disciplined” pricing “to be

immaterial and not actionable because they are puffery, vague

and non-specific expressions of corporate optimism on which

reasonable investors would not have relied.” On appeal,

plaintiffs contend that the “disciplined” pricing statements are

not vague because they related specific information about

Aetna’s current pricing policy and falsely implied that MCR

would remain stable. Plaintiffs argue that defendants’

statements about “disciplined” pricing “are far more concrete

than the vague and general adjectives in Advanta.”

We disagree. The statements identified by plaintiffs

contain oblique references to Aetna’s pricing policy; such

references are too vague to ascertain anything on which a

reasonable investor might rely. For example, plaintiffs claim

Williams “misled investors regarding Aetna’s underpricing and

its effect on higher first quarter MCR” by stating the following

on a May 1, 2006 conference call with analysts:

This is solid and balanced growth that is

representative of our dedication to disciplined

pricing . . . I will end my comments by

reaffirming to you my personal commitment to

continue to maintain discipline and rigor in

everything we do at Aetna.

However, immediately before those remarks, Williams made

other relevant statements about MCR and pricing which

plaintiffs omit from the complaint:

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The customer markets, both geographical and by

customer type, are very dynamic and vary greatly

in terms of cost, premium levels, competitors and

complexity. We talk in terms of aggregated

consolidated results, but there are always markets

or specific customers that are functioning better or

worse than others or versus expectation.

***

[O]ur . . . book of business is constantly evolving

and changing. As new business is written, cases

get renewed and other cases lapse.

(A303.) These remarks, while broad and vague, at a minimum

convey the complexity of Aetna’s business, diversity of its

customers, and variable nature of its portfolio of insurance

contracts. They describe the difficulty of accurately predicting

MCR and the heterogeneous nature of Aetna’s products,

services, customers, and pricing. When read in context, no

reasonable investor could infer that “dedication to disciplined

pricing,” a vague and subjective statement, meant Aetna had

applied (or failed to apply) a static, across-the-board formula to

determine the price of premiums charged for all products and

services. General statements about the company’s dedication to

“disciplined” pricing and commitment to “discipline and rigor”

could not have meaningfully altered the total mix of information

available to the investing public. We therefore find the

statements immaterial as a matter of law.

29

We note that the state of the record renders our task of

evaluating materiality a difficult one. Plaintiffs direct our

attention to nine allegedly misleading statements made on

analyst conference calls.11 Quotations from those conference

calls appear on the face of the complaint and form the basis of

plaintiffs’ claims. However, plaintiffs did not submit transcripts

of those conference calls to the District Court, and the excerpted

transcripts submitted by defendants omit seven of the nine

statements we are called upon to review. The record only

contains transcripts of Rowe’s statement on October 27, 2005,

and Williams’ statement on May 1, 2006. This omission

precludes our full consideration of the context in which the

statements were made, an obvious impediment to our evaluation

of materiality.12

11

See footnote 7 supra.

12

We have previously explained that:

As a general matter, a district court ruling on a motion to

dismiss may not consider matters extraneous to the

pleadings. However, an exception to the general rule is

that a document integral to or explicitly relied upon in the

complaint may be considered without converting the

motion to dismiss into one for summary judgment.

The rationale underlying this exception is that the

primary problem raised by looking to documents outside

the complaint -- lack of notice to the plaintiff -- is

dissipated where plaintiff has actual notice and has relied

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d. Actual Knowledge

The safe harbor applies to statements made without

actual knowledge that the statement was false or misleading. 15

U.S.C. § 78u-5(c)(1)(B). The District Court considered the

allegations concerning defendants’ state of mind and found the

complaint failed to plead actual knowledge of the purported

underpricing. Because we find defendants’ statements too

vague to contain an actionable falsity, we need not consider

defendants’ state of mind.

C. Securities Exchange Act of 1934 Section 20(a)

The Securities Exchange Act of 1934 Section 20(a)

imposes liability on controlling persons who aid and abet

violations of the Act. 15 U.S.C. § 78t. Because we find there

was no violation under Section 10(b), and no other violations are

alleged, there is no controlling person liability under Section 20.

In re Merck & Co. Sec. Litig., 432 F.3d at 276. The District

upon these documents in framing the complaint. What

the rule seeks to prevent is the situation in which a

plaintiff is able to maintain a claim of fraud by extracting

an isolated statement from a document and placing it in

the complaint, even though if the statement were

examined in the full context of the document, it would be

clear that the statement was not fraudulent.

In re Burlington Coat Factory Sec. Litig., 114 F.3d at 1426

(citations, quotation marks and alterations omitted).

31

Court, upon finding no liability under Section 10(b), properly

dismissed the derivative claims under Section 20(a).

III. Conclusion

We hold that the PSLRA safe harbor for forward-looking

statements immunizes defendants from liability for securities

fraud. The allegedly misleading statements were forward-

looking, identified as such, accompanied by adequate cautionary

statements, and immaterial as a matter of law. We will therefore

affirm the judgment of the District Court.

32