Generic Representations of Regulatory Compliance Not Actionable under Federal Securities Laws

Adrienne C. Rogove

In a case alleging violations of federal securities laws by Cigna Corporation and certain of its officers, the Second Circuit Court of Appeals affirmed the dismissal of the complaint on the basis that the statements made by the defendants were simple, generic assertions about its regulatory policies and procedures upon which no reasonable investor would reasonably rely, and were therefore not materially misleading. Singh v. Cigna Corp., No. 17-3484-cv, (2d Cir. Mar. 5, 2019). Following Cigna’s acquisition of HealthSpring, a regional Medicare insurer, Cigna issued several public statements, including 10-K filings, concerning its commitment to regulatory compliance given the significant regulatory responsibilities involved in Medicare coverage. In its 2013 Form 10-K filed on February 27, 2014, Cigna said it had “established policies and procedures to comply with applicable requirements,” and that it “expect[ed] to continue to allocate significant resources” to compliance efforts. Id. at *5. In December 2014, Cigna published a pamphlet titled “Code of Ethics and Principles of Conduct,” which affirmed the importance of compliance and integrity:

[I]t’s important for every employee. . .to handle, maintain, and report on [Cigna’s financial] information in compliance with all laws and regulations. . .

[W]e have a responsibility to act with integrity in all we do, including any and all dealings with government officials.

Id. at **4-5. In its 2014 Form 10-K, Cigna stated that it would “continue to allocate significant resources” to compliance. Id. at *6. The 10-K included a discussion of the difficulty of compliance in the regulatory environment given the “uncertainty surrounding legislation and implementation of national healthcare reform.” Id.

A 2015 audit of Cigna’s Medicare operations by the Centers for Medicare and Medicaid Services (“CMS”) revealed numerous regulatory violations. Cigna filed a Form 8-K disclosing the CMS audit conclusions and accompanying sanctions. Within several days, Cigna’s stock price fell substantially.

A Cigna investor, the plaintiff Patel, filed a putative class action alleging securities fraud violations under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5. The United States District Court for the District of Connecticut dismissed the complaint, the amended complaint, and a second amended complaint, due to plaintiff’s failure to allege sufficiently the elements of a material, false statement, as well as scienter.

On appeal, the Second Circuit affirmed, finding that the statements at issue were not material. The Second Circuit held that no reasonable stockholder would consider the statements “important in deciding whether to buy or sell shares of stock.” Id. at **10-11 (citing Operating Local 649 Annuity Tr. Fund v. Smith Barney Fund Mgmt. LLC, 595 F. 3d 86, 92-93 (2d Cir. 2010)). The statements were therefore not material misstatements. The Second Circuit noted that to be actionable under Section 10(b) of the 1934 Act and under Rule 10b-5, the statements “must, in the view of a reasonable investor, have ‘significantly altered the ‘total mix’ of information made available’,” and that the statement “must also be ‘mislead[ing] evaluated not only by ‘literal truth,’ but by ‘context and manner of presentation’.” Id. at *10.

As for the statements in the Cigna Code of Ethics, the Second Circuit found that they were a “textbook example of ‘puffery’”—i.e., “too general to cause a reasonable investor to rely upon them.” Id. at *11 (citing City of Pontiac Policemen’s & Firemen’s Ret. Sys. v. UBS AG, 752 F.3d 173, 183 (2d Cir. 2014)). With respect to the 10-K statements, the Second Circuit likewise found that no reasonable investor would rely on the statements as “representations of satisfactory compliance.” Id. at **11-12. It concluded that “[b]ecause the challenged statements are tentative and generic, and because they emphasize the complex, evolving regulatory environment that Cigna faced . . . Plaintiffs have failed to plausibly allege that a reasonable investor would view these statements as having significantly altered the total mix of information made available.” Id. at *14.

Although this decision evaluated Cigna’s statements in the context of securities fraud allegations, it highlights the distinction between statements that are generic and not materially misleading, and statements which constitute actionable fraud. Allegations of securities fraud based on generic statements—like Cigna’s statements here—only serve to further dilute the information companies provide in their public statements. The over-litigation of securities fraud claims thus leads to less disclosure to investors—which is exactly the opposite effect the securities laws were designed to achieve.