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Case 1:09-cv-00554-JNL-DLM Document 61 Filed 07/25/13 Page 1 of 32 PageID #: 1787

UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF RHODE ISLAND








Civil Action No. 1:09-cv-00554-S-DLM








vs.

Plaintiff,

RICHARD MEDOFF, Individually and On
Behalf Of All Others Similarly Situated,

x
:
:
:
:
:
:
:
CVS CAREMARK CORPORATION,
:
THOMAS M. RYAN, DAVID RICKARD, and
:
HOWARD McLURE,
:
:
:
x



Defendants.

SUPPLEMENTAL MEMORANDUM OF LAW IN SUPPORT

OF DEFENDANTS’ MOTION TO DISMISS








HINCKLEY, ALLEN & SNYDER LLP
50 Kennedy Plaza, Suite 1500
Providence, Rhode Island 02903
Telephone:
Facsimile:

(401) 274-2000
(401) 277-9600



DAVIS POLK & WARDWELL LLP
450 Lexington Avenue
New York, New York 10017
(212) 450-4000
Telephone:
Facsimile:
(212) 701-5800

Attorneys for Defendants

Case 1:09-cv-00554-JNL-DLM Document 61 Filed 07/25/13 Page 2 of 32 PageID #: 1788



TABLE OF CONTENTS

PAGE

TABLE OF AUTHORITIES .......................................................................................................... ii



PRELIMINARY STATEMENT .....................................................................................................1

BACKGROUND .............................................................................................................................3

ARGUMENT ...................................................................................................................................8

I.

PLAINTIFFS FAIL TO ALLEGE AN ACTIONABLE MISSTATEMENT
OR OMISSION ....................................................................................................................9

A. Plaintiffs Fail to Plead That the Alleged Misstatements Were Untrue ..................10

B. Most of the Alleged Misstatements Are Inactionable Corporate Puffery ..............14

II.

THE COMPLAINT FAILS TO PLEAD A STRONG INFERENCE
OF SCIENTER ..................................................................................................................16

A. The Complaint’s Allegations Fail to Allege That Defendants Acted with

Recklessness or Conscious Intent to Defraud ........................................................17

1. Plaintiffs Do Not Allege That Defendants Had Reason to

Believe Their Statements Were Untrue. ..................................................19

2. Plaintiffs Do Not Allege with Particularity That Defendants

Had Access to Contradictory Facts. ........................................................19

B. Plaintiffs’ Allegations Based on Confidential Witness Statements Do

Not Support a Strong Inference of Scienter. ..........................................................21

C. Plaintiffs’ Allegations Regarding Insider Stock Sales Fail to Give Rise

to a Strong Inference of Scienter. ..........................................................................22

III.

PLAINTIFFS DO NOT STATE A CLAIM FOR CONTROL PERSON
LIABILITY ........................................................................................................................25

CONCLUSION ..............................................................................................................................25



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TABLE OF AUTHORITIES

CASES





PAGE


ACA Fin. Guar. Corp. v. Advest, Inc.,

512 F.3d 46 (1st Cir. 2008) ........................................................................................... 8, 17, 20

Aldridge v. A.T. Cross Corp.,

284 F.3d 72 (1st Cir. 2002) ................................................................................................. 9, 11

Basic Inc. v. Levinson,

485 U.S. 224 (1988) ................................................................................................................ 11

Cal. Pub. Emps.’ Ret. Sys. v. Chubb Corp.,

394 F.3d 126 (3d Cir. 2004).............................................................................................. 21, 22

City of Dearborn Heights Act 345 Police & Fire Ret. Sys. v. Waters Corp.,

632 F.3d 751 (1st Cir. 2011) .................................................................................................. 23

City of Dearborn Heights Act 345 Police & Fire Ret. Sys. v. Waters Corp.,

699 F. Supp. 2d 331 (D. Mass. 2010) .................................................................................... 24

City of Monroe Emps. Ret. Sys. v. Bridgestone Corp.,

399 F.3d 651 (6th Cir. 2005) ............................................................................................. 18-19

Dura Pharm., Inc. v. Broudo,

544 U.S. 336 (2005) ................................................................................................................. 8

Greebel v. FTP Software, Inc.,

194 F.3d 185 (1st Cir. 1999) ............................................................................... 17, 23, 24, 25

Grossman v. Novell, Inc.,

120 F.3d 1112 (10th Cir. 1997) .............................................................................................. 15

Hill v. Gozani,

638 F.3d 40 (1st Cir. 2011) ................................................................................................... 8, 9

In re Art Tech. Grp., Inc. Sec. Litig.,

394 F. Supp. 2d 313 (D. Mass. 2005) ..................................................................................... 12

In re Bos. Tech., Inc. Sec. Litig.,

8 F. Supp. 2d 43 (D. Mass. 1998) ........................................................................................... 20

In re Cabletron Sys., Inc.

311 F. 3d 11 (1st Cir. 2002) .................................................................................................... 24

ii

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In re Gildan Activewear, Inc. Sec. Litig.,

636 F. Supp. 2d 261 (S.D.N.Y. 2009) ..................................................................................... 23

In re Int’l Rectifier Corp. Sec. Litig.,

No. CV 07-02544-JFW (VBKx), 2008 WL 4555794 (C.D. Cal. May 23, 2008) .................. 25

In re Peritus Software Servs., Inc. Sec. Litig.,

52 F. Supp. 2d 211 (D. Mass. 1999) ....................................................................................... 16

In re Rackable Sys., Inc. Sec. Litig.,

No. C 09-0222 CW, 2010 WL 199703 (N.D. Cal. Jan. 13, 2010) .......................................... 21

In re Razorfish, Inc. Sec. Litig.,

No. 00 CIV. 9474, 2001 WL 1111502 (S.D.N.Y. Sept. 21, 2001) ......................................... 16

Makor Issues & Rights v. Tellabs, Inc.,

513 F.3d 702 (7th Cir. 2008) .................................................................................................. 18

Malin v. XL Capital Ltd.,

499 F. Supp. 2d 117 (D. Conn. 2007) ..................................................................................... 21

Mass. Ret. Sys. v. CVS Caremark Corp.,

716 F.3d 229 (1st Cir. 2013) .......................................................................................... passim

Matrixx Initiatives, Inc. v. Siracusano,

131 S. Ct. 1309 (2011) ............................................................................................................ 11

Miss. Pub. Emps. Ret. Sys. v. Bos. Scientific Corp.,

523 F.3d 75 (1st Cir. 2008) ..................................................................................................... 23

N.J. Carpenters Pension & Annuity Funds v. Biogen IDEC Inc.,

537 F.3d 35 (1st Cir. 2008) ............................................................................................... 21, 23

Novak v. Kasaks,

216 F.3d 300 (2d Cir. 2000).................................................................................................... 20

Phillips v. Scientific-Atlanta, Inc.,

374 F.3d 1015 (11th Cir. 2004) ............................................................................................. 18

Rombach v. Chang,

355 F.3d 164 (2d Cir. 2004)................................................................................................... 14

Rosen v. Textron, Inc.,

321 F. Supp. 2d 308 (D.R.I. 2004)...................................................................................... 8, 23

Scritchfield v. Paolo,

274 F. Supp. 2d 163 (D.R.I. 2003).......................................................................................... 14

iii

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Shaw v. Digital Equip. Corp.,

82 F.3d 1194 (1st Cir. 1996) ................................................................................................... 14

Shields v. Citytrust Bancorp, Inc.,

25 F.3d 1124 (2d Cir. 1994).................................................................................................... 15

Simon v. Am. Power Conversion Corp.,

945 F. Supp. 416 (D.R.I. 1996)......................................................................................... 14, 15

Sloman v. Presstek, Inc.,

Civil Action No. 06-cv-377-JD, 2007 WL 2740047 (D.N.H. Sept. 18, 2007) ................. 16-17

Southland Sec. Corp. v. INSpire Ins. Solutions, Inc.,

365 F.3d 353 (5th Cir. 2004) .................................................................................................. 18

Stiegele ex. rel. Viisage Tech., Inc. v. Bailey,

No. 0510677-MLW, 2007 WL 4197496 (D. Mass. Aug. 23, 2007) ...................................... 25

Teamsters Local 445 Freight Div. Pension Fund v. Dynex Capital, Inc.,

531 F.3d 190 (2d Cir. 2008).............................................................................................. 18, 20

Tellabs, Inc. v. Makor Issues & Rights, Ltd.,

551 U.S. 308 (2007) ............................................................................................................ 2, 16

Watterson v. Page,

987 F.2d 1 (1st Cir. 1993) ......................................................................................................... 4

Wietschner v. Monterey Pasta Co.,

294 F. Supp. 2d 1102 (N.D. Cal. 2003) .................................................................................. 24

STATUTES & RULES

15 U.S.C. § 78u-4(b)(1) ........................................................................................................ 2, 8, 12

15 U.S.C. § 78u-4(b)(2). ................................................................................................................. 8

15 U.S.C. § 78u-4(b)(3)(A)............................................................................................................. 8

17 C.F.R. § 240.10b5-1(c)(1)(i)(A) ................................................................................................ 7

Fed. R. Civ. P. 9(b) ......................................................................................................................... 1

Private Securities Litigation Reform Act of 1995 ................................................................. passim

iv

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Defendants CVS Caremark Corporation (“CVS Caremark” or the “Company”), Thomas

M. Ryan, David Rickard, and Howard McLure (collectively the “Individual Defendants” and,

together with CVS Caremark, the “Defendants”) respectfully submit this supplemental

memorandum of law in support of their motion to dismiss the Corrected Consolidated Class

Action Complaint (the “Complaint”), pursuant to Federal Rules of Civil Procedure 9(b) and

12(b)(6) and the Private Securities Litigation Reform Act of 1995 (the “PSLRA”).

PRELIMINARY STATEMENT

On remand from the First Circuit, only a narrow subset of the claims in the Complaint

remains. Specifically, Plaintiffs can no longer proceed on the claim they asserted in their

original complaint: that Mr. Ryan’s statement on the Company’s second-quarter 2009 earnings

call that he would be disappointed if the Company did not experience 13-15% growth in 2010

(the “Preliminary Earnings Prediction”) was allegedly false or misleading. Nor, as the First

Circuit made clear, can Plaintiffs pursue a theory related to alleged misstatements about the

success of the combined CVS Caremark business model. Instead, the Court of Appeals held that

Plaintiffs could sufficiently allege loss causation only as to alleged misstatements about “the

success of CVS Caremark’s integration and the quality of its service.” Mass. Ret. Sys. v. CVS

Caremark Corp., 716 F.3d 229, 239 (1st Cir. 2013) (the “First Circuit Decision”).

In reaching its decision on loss causation, the Court of Appeals made clear that it was not

concluding that Plaintiffs could satisfy the PSLRA’s heightened pleading standards as to any

alleged misstatement about merger integration or service. Instead, it left for this Court the

threshold questions of (i) whether Plaintiffs have pled an actionable misstatement and (ii)

whether Plaintiffs have pled the requisite strong inference of scienter. Plaintiffs cannot meet

their heightened pleading burden on either.



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First, Plaintiffs have failed to satisfy the PSRLA’s requirement that they “specify each

statement alleged to have been misleading [and] the reason or reasons why the statement is

misleading.” 15 U.S.C. § 78u-4(b)(1). This is not a case in which plaintiffs allege that some

statement of objective fact (e.g., a revenue or expense item) in a company-generated public

document is false. Instead Plaintiffs contend that a handful of isolated, generalized verbal

comments—made by two individuals over the course of thirteen months, largely in response to

questions on earnings calls—are actionable misstatements. But they have not alleged with the

requisite specificity that any of these scattered statements were, when considered in context,

actually false or misleading (or the reasons why). Moreover, as expressions of subjective and

generalized corporate optimism or “puffery,” the statements are inactionable as a matter of law.

Second, even if Plaintiffs could identify an actionable misstatement, the Complaint’s

allegations would fail for the independent reason that they also do not raise a strong inference of

scienter that is “cogent and at least as compelling as any opposing inference one could draw from

the facts alleged.” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 324 (2007). The

Complaint is devoid of well-pled allegations that any senior executive had the conscious intent to

defraud or the high degree of recklessness required by the First Circuit as to any of the

statements on which Plaintiffs now base their claims. The vast majority of the anonymous

witnesses cited in the complaint—only half of whom were even still employed by the Company

during the alleged class period—are not alleged even to have had any contact with any senior

executive at the Company, much less the two Individual Defendants who made any of the

statements Plaintiffs now allege to be false. Thus, even if the assertions attributed to the

anonymous witnesses could plausibly suggest systemic as opposed to isolated problems (which

they cannot), none could remotely support the notion—much less the strong inference required

2

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by the PSLRA—that any relevant executive was aware of those issues or otherwise had the

requisite scienter at the time of any alleged misstatement. Finally, Plaintiffs’ allegations relating

to stock sales by Messrs. Ryan, Rickard and McLure are of no import: Among other things, they

involved percentages of their holdings that are too small, as a matter of law, to support any

inference of scienter.

A.

Procedural History

BACKGROUND

Plaintiffs filed their initial complaint on November 17, 2009, alleging a single fraudulent

statement: the Preliminary Earnings Prediction. On May 3, 2010, Plaintiffs filed a Consolidated

Class Action Complaint, followed several weeks later by the Complaint. Although the

Preliminary Earnings Prediction remained a prominent feature, those later complaints also

included the narrow allegations regarding integration and service that remain in the case.

Defendants moved to dismiss the Complaint in its entirety.

In an order dated June 18, 2012 (ECF No. 50) (the “District Court Decision”), this Court

granted Defendants’ motion on two grounds. First, the Court found that the Preliminary

Earnings Prediction was an inactionable forward-looking statement protected by the PSLRA’s

safe-harbor provisions. And second, the Court dismissed Plaintiffs’ claims other than those

based on the Preliminary Earnings Prediction, concluding that Plaintiffs had failed to adequately

plead loss causation. Because those two grounds were dispositive, the Court declined to consider

other, independent bases for dismissal that Defendants had raised. District Court Decision at 17.

Plaintiffs appealed this Court’s ruling on loss causation but did not appeal the ruling that

the Preliminary Earnings Prediction was a forward-looking statement. Thus, that ruling remains

law of the case. As to loss causation, however, the First Circuit vacated and remanded, holding

that Plaintiffs had plausibly alleged loss causation for a narrow set of potential claims. In its

3

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opinion, the First Circuit held that Plaintiffs “fail to state a claim regarding the business model

itself.” Mass. Ret. Sys., 716 F.3d at 239. But the Court of Appeals held that Plaintiffs had

plausibly alleged loss causation as to any alleged misstatements about “the success of CVS

Caremark’s integration and the quality of its service.” Id. The First Circuit expressly noted that

it was not addressing any of the “alternative grounds for dismissal,” including Plaintiffs’ failure

to meet their burden under the heightened pleading standards of the PSLRA to plead actionable

misstatements and their failure to plead the requisite strong inference of scienter. See id. at 244.

The Court of Appeals left those issues for this Court to address in the first instance. Id.

B.

The Relevant Allegations1

In the wake of the First Circuit Decision on loss causation, the only statements on which

Plaintiffs could possibly state a claim relate to: (i) the quality of service provided by the

Company’s Pharmacy Benefits Management (“PBM”) segment to its clients; and (ii) the post-

merger integration of CVS Corporation and Caremark Rx, Inc.

1.

Alleged Misrepresentations

Within the 97-page, 235-paragraph Complaint, only a limited number of allegations even

arguably relate to purported service or integration issues.2 None of these allegations describes a



1 Defendants respectfully refer the Court to its earlier opinion on Defendants’ motion to dismiss for a

description of CVS Caremark’s business. See District Court Decision at 4-6. For purposes of this brief, the non-
conclusory factual allegations in the Complaint are taken as true. The facts described herein are taken from the
Complaint, as well as from publicly available documents and other sources central to plaintiffs’ claim or sufficiently
referred to in the Complaint. See Watterson v. Page, 987 F.2d 1, 3-4 (1st Cir. 1993).

2 Given the First Circuit’s holding that “[Plaintiffs] fail to state a claim regarding the business model itself,”

Mass. Ret. Sys., 716 F.3d at 239, many related allegations are no longer at issue either. For example, even if they
could otherwise constitute actionable misstatements, the following allegations are all categorically non-actionable in
light of the First Circuit Decision: “We expect the company to continue to execute on its unique vertically-
integrated drug retail/PBM model” (Compl. ¶ 129), “our model is working” (id. ¶ 113), “the breadth of capabilities
resulting from the Caremark Merger are resonating with our clients and contributed to our success” (id. ¶ 133), and
the “answer” to the question “whether our model is resonating in the PBM marketplace . . . has to be a resounding
yes” (id. ¶ 135).

4

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single alleged misstatement in a public filing or any other written document.3 Instead, Plaintiffs

identify a scattered collection of individual sentences and phrases spoken by Mr. Ryan or, in one

case, by Mr. Rickard, on earnings calls and at investor conferences.

Plaintiffs’ proposed Class Period begins on October 30, 2008, when CVS held its third-

quarter earnings call for 2008. (Compl. ¶ 112.) In discussing the Company’s record-breaking

PBM selling season, Mr. Ryan commented generally on the Company’s service performance.

(See, e.g., id. ¶ 112 (“[w]e will continue to gain share because . . . . [w]e have excellent

service”).) On January 9, 2009, the Company held a conference call to provide guidance for

2009 to investors and analysts. (Id. ¶ 118.) In response to an analyst question about the

PharmaCare computer system,4 Mr. Ryan said that the system would not likely be fully moved

over to the Caremark system until at least the end of 2009. (Ex.5 1, Jan. 9, 2009 CVS Caremark

Corporation Guidance Announcement—Final (“Jan. 9 Tr.”), at 13.) He added that the systems

already used by Caremark would not undergo any significant conversion in 2009.6 When an

analyst followed up to ask whether the computer systems will nevertheless “be able talk to each

other,” Mr. Ryan explained: “All the systems are able to talk to each other. . . . We have got no

issue with our systems.” (Id.; cf. Compl. ¶ 121.) Nowhere on that call or any other did Mr.

Ryan or any other CVS executive state that every aspect of the two companies’ businesses and

systems had been fully integrated with no problems. In fact—in a portion of the discussion with


3 The only allegations in the Complaint from the Company’s public filings are generalized comments

relating to the combined CVS Caremark model (e.g., Compl. ¶ 133 (From CVS Caremark Form 10-K: “We believe
the breadth of capabilities resulting from the Caremark Merger are resonating with our clients . . . .”)), and thus are
also inactionable under the First Circuit Decision, see Mass. Ret. Sys., 716 F.3d at 239.

4 PharmaCare was the small PBM business operated by CVS before the merger with Caremark.

5 Citations styled “Ex. __-__” refer to exhibits to the Declaration of Lawrence Portnoy, dated July 25, 2013.

6 This potential conversion of the three Caremark systems was not “integration” and was unrelated to the

merger. Caremark operated those systems separately before the merger and continued to do so afterward.

5

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analysts on this very call that Plaintiffs did not quote—Mr. Ryan said precisely the opposite,

explaining that the migration of the PharmaCare system to the legacy Caremark systems would

likely not be complete until at least the fourth quarter of 2009. (Ex. 1, Jan. 9 Tr., at 13.)

On the same call, Mr. Ryan discussed the Company’s repricing of PBM contracts during

the 2008 selling season. (See Compl. ¶ 118 (“[A] larger than ever portion of our client book

repriced for ’09. That was comprised of renewals that we bid aggressively plus improved pricing

on other contracts that were not up for renewal.”).) One analyst asked if this repricing was

necessary due to poor service, to which Mr. Ryan responded, “[T]hese are accounts that we kind

of wanted to lock down. No trade-offs because of our service. We just got the JD Power

Associates Health Plan PBM of the Year for our service and our call centers. So the notion that

we had to reprice because the service was poor, our service in our PBM business is the best it has

been. . . . So there was no hidden agenda here about giving a lower price because of lack of

service if that is what you are asking.” (Id. ¶ 121.)

Mr. Rickard later spoke at an investor conference where he also commented on the

repricing that took place during the 2008 selling season. (Id. ¶ 137 (“A couple of major contracts

became extremely competitive and we did have some pull-forward of contracts to lock up

business going forward. . . . So I think that you can complain about not making as much financial

progress this year as some competitors. That’s certainly true. I think, however, that we have

done the things strategically that needed to be done to make this merger successful.”) (emphasis

omitted).) While Mr. Rickard did discuss the service benefits of CVS Caremark’s integrated

PBM and the integration, including that it was a “somewhat slow process,” (Ex. 2, CVS

Caremark Corporation at Raymond James Institutional Investor Conference—Final, at 6),

Plaintiffs have not alleged that any of those statements was false.

6

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On May 5, 2009, during the Company’s second-quarter conference call, Mr. Ryan

reviewed the Company’s loss of the Coventry commercial contract, which he described as being

worth about $1 billion in revenue. (Id. ¶ 141.) While Mr. Ryan explained that the loss was “not

unexpected” (Id.), he did not discuss any of the reasons for the loss.7

2.

Scienter Allegations

In support of their claim that Defendants acted with the requisite scienter, Plaintiffs rely

primarily on allegations of stock sales by the Individual Defendants. (Compl. ¶ 204.) But

Plaintiffs also concede facts negating any inference of scienter that can be drawn from these

trades. For instance, Mr. Rickard and Mr. McLure both traded pursuant to “pre-arranged 10b-5

trading plans”8 (id. ¶ 205), and Mr. Ryan made only two trades during the alleged class period,

which amounted to only 5.4% of his total holdings of stock (id. ¶ 109).

The remaining scienter allegations, purportedly based on information from anonymous

witnesses, include a variety of conflicting, irrelevant, and conclusory allegations about isolated

customer service and integration issues. (See, e.g., id. ¶¶ 68, 69, 98.) But none of these is a

particularized allegation concerning any Defendant’s state of mind. None describes a single

conversation or meeting with any of the Individual Defendants and none describes whether or

how the Individual Defendants would have known about the alleged integration or service issues.

In fact, most of the anonymous witnesses referenced in the Complaint did not work at the

Company during the alleged Class Period, and the remainder worked there for only small


7 Plaintiffs also claim that, on the Company’s August 4, 2009 earnings call, Mr. Ryan failed to disclose that
the Company “lost a verbal commitment from a potential customer due to service-related and transparency issues.”
(Compl. ¶ 165.) The Complaint makes clear, however, that the service issues referred to could not have been CVS
Caremark’s: Mr. Ryan explained that this customer had been “with the incumbent for a while” (id. ¶ 162 (emphasis
added)), meaning that the potential customer was dissatisfied with some other PBM’s service, but ultimately chose
not to switch, because “the pricing was so good, it was hard to pass up” (id.).

8 A 10b5-1 plan is a contract between an executive and a broker that contains detailed instructions to sell
specified amounts of securities on particular dates or at specified prices. See 17 C.F.R. § 240.10b5-1(c)(1)(i)(A).

7

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portions of the alleged Class Period. (See id. ¶ 33.) And no confidential witness is alleged to

have ever even met any of the Individual Defendants, much less have particularized evidence of

what those Individual Defendants were thinking at the time they made the alleged misstatements.

ARGUMENT

The elements of a securities fraud claim are (1) a material misrepresentation or omission,

(2) scienter, (3) a connection with the purchase or sale of a security, (4) reliance, (5) economic

loss, and (6) loss causation. Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 341-42 (2005); accord

Rosen v. Textron, Inc., 321 F. Supp. 2d 308, 316 (D.R.I. 2004).



To survive a motion to dismiss a securities fraud suit, plaintiffs must satisfy the

heightened pleading standards of both Federal Rule of Civil Procedure 9(b) and the PSLRA. See

Hill v. Gozani, 638 F.3d 40, 54-55 (1st Cir. 2011). Rule 9(b) requires that “[i]n alleging fraud or

mistake, a party must state with particularity the circumstances constituting fraud or mistake.”

The PSLRA “augments Rule 9(b)’s particularity requirement.” Rosen, 321 F. Supp. 2d at 317.

It further requires that a complaint alleging a Rule 10b-5 violation (i) “specify each statement

alleged to have been misleading [and] the reason or reasons why the statement is misleading”

and (ii) “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)(1), (2)(A). The First Circuit has

explained that these pleading requirements are “notably strict and rigorous.” ACA Fin. Guar.

Corp. v. Advest, Inc., 512 F.3d 46, 58 n.7 (1st Cir. 2008) (internal quotation marks omitted).

Because Plaintiffs fail to meet them, the Complaint must be dismissed. See 15 U.S.C. § 78u-

4(b)(3)(A) (where pleading requirements are not met, “the court shall . . . dismiss the

complaint”).

8

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I.

PLAINTIFFS FAIL TO ALLEGE AN ACTIONABLE MISSTATEMENT OR
OMISSION

The First Circuit held that the only basis upon which Plaintiffs could adequately plead

loss causation is that “the November 5 call, as a whole, plausibly revealed to the market that

CVS Caremark had problems with service and the integration of its systems.” Mass. Ret. Sys. v.

CVS Caremark Corp., 716 F.3d 229, 240 (1st Cir. 2013). Thus, to survive a motion to dismiss

Plaintiffs must allege in the particularized fashion required by the PSLRA and Federal Rule of

Civil Procedure 9(b) the precise statements that they claim misrepresented the purportedly

hidden “truth” that was revealed on the November 5 call. And they must do so in a way that

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

statement is misleading.” Hill, 638 F.3d at 55 (second alteration in original) (internal quotation

marks omitted); see Aldridge v. A.T. Cross Corp., 284 F.3d 72, 78 (1st Cir. 2002) (a plaintiff

must provide “facts that show exactly why the statements or omissions were misleading”

(emphasis added)).

Yet Plaintiffs have not alleged that anyone from CVS Caremark ever said that the

Company had no “problems with service.” And they cannot do so. Likewise, they have not

alleged that anyone from CVS Caremark ever said there were no problems at all with integration

of any of the Company’s systems. Again, no one ever said such a thing. Instead, in the absence

of any such statement, Plaintiffs are left to string together equivocal and generalized statements

contained in stray sentences and phrases made by Individual Defendants over time. Inspection

of these statements reveals that they are not alleged to be false with the particularity required by

the PSLRA and, in any event, are the sort of vague, subjective statements that are consistently

found to be inactionable.

9

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A.

Plaintiffs Fail to Plead That the Alleged Misstatements Were Untrue

As an initial matter, Plaintiffs do not allege that any Defendant claimed that CVS had no

problems with service. Instead, Plaintiffs take issue with more generalized positive statements

by CVS Caremark’s executives about the Company’s service. Plaintiffs point to the following

statements: (i) “we’re still going to focus on execution and service” (Compl. ¶ 55), (ii) “clients

are telling us that we’ve kept our focus on service” (id. ¶ 71), (iii) “our PBM continues to retain

existing clients and attract new ones” due to “excellent service” (id. ¶ 112), (iv) the Company has

“excellent client retention” and “outstanding customer service” (id. ¶ 125), and (v) the PBM

business has “high customer satisfaction” (id. ¶ 159).

Plaintiffs cannot seriously claim that any of these statements is false. Plaintiffs do not

contend that employees at CVS Caremark did not “focus on execution and service,” or dispute

that some of the Company’s clients reported that it remained focused on service. Nor do

Plaintiffs contend that CVS Caremark did not retain some clients and gain others, at least in part

based on its service. The Company had over 3,000 clients under contract at the time (Ex. 3,

Final Transcript: Q2 2009 Earnings Call, at 3), and CVS Caremark (i) was recognized by J.D.

Power and Associates for excellent service (Compl. ¶ 125), (ii) won over $8 billion worth of

business in 2008 (id.), (iii) won $1.4 billion worth of business in 2009 (id. ¶ 183), and (iv) won

125 new clients in 2009 (Ex. 4, Final Transcript: Q3 2009 Earnings Call, at 4).

Plaintiffs’ allegation that Mr. Ryan failed to disclose on the May 5, 2009 earnings call

that “service was known to be the reason” for the loss of the Coventry commercial contract

(Compl. ¶ 75) similarly fails to plead an actionable misstatement or omission. Plaintiffs do not

allege that there was any statement at all about the reason for the loss of the Coventry

commercial contract, much less an actionable false statement. Nor can they claim that there was

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anything misleading about his not disclosing the reason for the loss of the contract: Plaintiffs

cannot point to any duty requiring Mr. Ryan to disclose the reasons for contract losses. “Silence,

absent a duty to disclose, is not misleading.” Basic Inc. v. Levinson, 485 U.S. 224, 239 n.17

(1988); see Matrixx Initiatives, Inc. v. Siracusano, 131 S. Ct. 1309, 1321 (2011) (“[Section]

10(b) and Rule 10b-5(b) do not create an affirmative duty to disclose any and all material

information.”).9

Plaintiffs also fail to plead with the specificity required by the PSLRA any misstatement

regarding the reasons for CVS Caremark’s re-pricing of certain PBM contracts. Plaintiffs take

issue with Mr. Ryan’s explanation that CVS Caremark’s decision to re-price a number of PBM

contracts during the 2009 selling season was not “because of our service” and that “there was no

hidden agenda here about giving a lower price because of lack of service.” (Compl. ¶ 120

(emphases omitted).) In particular, they claim, with no additional detail or support, that the

Company “failed to disclose that during the 2009 selling season, CVS Caremark unilaterally

reduced prices on over 50 percent of its existing PBM contracts in order to retain customers that

were dissatisfied with the Company’s inferior service, integration-related issues, and lack of

transparency.” (Id. ¶ 122.)10

But Plaintiffs fail to plead the basis for this bare assertion with anything approaching the

particularity the PSLRA requires. The PSLRA demands that, “if an allegation regarding the



9 In any event, Plaintiffs’ two anonymous witnesses who purport to recount service problems do so by
providing only anecdotal details. (See Compl. ¶¶ 77-78.) Neither individual is alleged to have been involved in
contract negotiations between CVS Caremark and Coventry, and therefore neither would have had any personal
knowledge as to Coventry’s thought process in switching PBMs. The PSLRA, however, requires greater precision.
See Aldridge, 284 F.3d at 78 (“The plaintiff must provide factual support for the claim that the statements or
omissions were fraudulent, that is, facts that show exactly why the statements or omissions were misleading.”
(emphasis added)).

10 Notably, Plaintiffs’ conclusory assertions provide no plausible explanation why Mr. Ryan’s stated
reason for re-pricing—“to lock-up additional contracts” (Compl. ¶¶ 118, 120)—was incorrect when uttered.

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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). Plaintiffs here do

not identify a single contract that was re-priced during the 2009 selling season, let alone one that

was re-priced due to service. None of their anonymous witnesses, for example, is alleged to

have participated in any contract negotiations. And while Plaintiffs contend generally that CVS

Caremark’s “Sales Pipeline Reports” reflected an aggregate amount of PBM business “at risk” in

2008 (see Compl. ¶ 67), they fail to identify the date of any particular report or identify any

particular contract at risk because of alleged issues with service. And they most definitely

cannot allege that any “at risk” contract was re-priced due to service issues.11 Plaintiffs have

thus failed to specify the basis for their belief that Mr. Ryan’s statement about re-pricing was

untrue. See In re Art Tech. Grp., Inc. Sec. Litig., 394 F. Supp. 2d 313, 320-21 (D. Mass. 2005)

(“Where, as here, the complaint fails to set forth the source of the information and the reasons for

the belief, the complaint must be dismissed.” (internal quotation marks omitted)).

And Plaintiffs do not—because they cannot—allege that any Defendant ever claimed that

there would be no problems with integration or that integration was complete. To the contrary,

Mr. Ryan stated in January 2009 that PharmaCare’s computer systems had not been fully

converted to Caremark’s, nor would they be for some time: “[M]ost of the [P]harma[C]are

system is in the process of moving over. We will have that completed . . . probably in the fourth



11 In the same way, Plaintiffs’ anonymous witnesses who claim that service underlay the loss of the

Coventry (Compl. ¶¶ 77-78), New Jersey (id. ¶¶ 87-90), and a portion of the Chrysler (id. ¶¶ 93-94) contracts cannot
serve as the basis for Plaintiffs’ belief. Those contracts were lost outright; they were not re-priced. Moreover, the
allegations that Mr. Ryan admitted in November 2009, after the close of the alleged Class Period, that “we dropped
the ball in some client service issues” (id. ¶ 198) does not relate to any particular contract other than Coventry, and
thus adds nothing to Plaintiffs’ theory of fraud.

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quarter of this year.”12 (Ex. 1, Jan. 9 Tr., at 13.)

It was during that same call, in response to a follow-up question from an analyst asking

whether the PharmaCare and Caremark systems could “talk to each other,” that Mr. Ryan stated

that “[a]ll the systems are able to talk to each other” and “[w]e have got no issue with our

systems.” (Compl. ¶ 121.) Plaintiffs’ contention that those statements were “false because

Defendants knew that since March 2007, the Company’s computer systems were not integrated”

(id. ¶ 122) is thus based on a distorted reading of two selectively quoted phrases. A review of

the surrounding statements reveals that Mr. Ryan was not stating that there were no integration

problems or that the merger was an unqualified success; nor was he stating that any computer

system was free of integration problems. Rather, he was responding to a specific question from a

specific analyst about whether specific systems—one for PharmaCare and several for

Caremark—would be able to “talk to each other.” They were certainly not statements about the

existence or lack thereof of integration issues in any computer system impacting client service.13

Plaintiffs do not allege particularized facts plausibly linking Mr. Ryan’s statement to the

re-pricing of “over 50 percent of [the Company’s] exiting PBM contracts” (id.). Two of the

contracts the Complaint specifically names (New Jersey and Coventry) were legacy Caremark

contracts, and thus any problems converting the PharmaCare systems to be Caremark-compatible

would not have affected those clients. And because all three of those contracts were lost

outright, purported service issues with those contracts could not have resulted in re-pricing.



12 Plaintiffs’ allegation that the Company admitted in February 2010 that integration was not complete (see

Compl. ¶ 200) is thus consistent with the timeline Mr. Ryan described, which merely set a probable end date for
converting certain PharmaCare systems.

13 The vagueness of the term “systems” further undercuts plaintiffs’ allegation. Indeed, the Complaint

refers to various systems (see, e.g., Compl. ¶ 77 (customer databases); id. ¶ (client billing)) without identifying any
as the one to which Mr. Ryan was referring when he spoke of “systems.”

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B. Most of the Alleged Misstatements Are Inactionable Corporate Puffery

Even if Plaintiffs could sufficiently allege that any of the statements was false, which

they cannot, those statements would not be actionable because it is well settled that such “vague,

or loosely optimistic statements about a company” are inactionable “puffery” because, given

their generalized and unverifiable nature, a reasonable investor would not rely on them.

Scritchfield v. Paolo, 274 F. Supp. 2d 163, 172 (D.R.I. 2003); cf. Rombach v. Chang, 355 F.3d

164, 174 (2d Cir. 2004) (“[C]ompanies must be permitted to operate with a hopeful outlook [and

are] not required to take a gloomy, fearful or defeatist view of the future.”). This Court has

endorsed a “contextual approach to assessing the applicability of the puffery defense.”

Scritchfield, 274 F. Supp. 2d at 175.

Alleged misstatements such as “[w]e will continue to gain share because . . . [w]e have

excellent service” (id. ¶ 112) and descriptions of CVS Caremark’s “excellent client retention”

(id. ¶ 125) are archetypes of inactionable puffery. The description of “excellent” service is

exactly the sort of subjective optimistic statement on which courts have refused to premise a

securities fraud claim. See, e.g., Shaw v. Digital Equip. Corp., 82 F.3d 1194, 1217 (1st Cir.

1996) (characterizing as inactionable puffery “loosely optimistic statements that are so vague, so

lacking in specificity, or so clearly constituting the opinions of the speaker, that no reasonable

investor could find them important to the total mix of information”), superseded on other

grounds by statute, 15 U.S.C. § 78u-4(b); Simon v. Am. Power Conversion Corp., 945 F. Supp.

416, 428-29 (D.R.I. 1996).

Simon is instructive. There, the court assessed the puffery defense against statements

including “we are gaining market share, we are gaining momentum, and our revenues are strong”

and “1995 [is going] to be a busy year.” 945 F. Supp. at 428. The court not only held that those

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statements were not actionable, it noted that “the market could have expected nothing less from a

CEO, i.e. predictions of . . . improvements and a busy year.” Id. at 429. So too here. The

market would have rightly expected Mr. Ryan, as CEO, to make optimistic statements about

CVS Caremark’s ability to gain market share and its “excellent service.” See Shields v. Citytrust

Bancorp, Inc., 25 F.3d 1124, 1129-30 (2d Cir. 1994) (“People in charge of an enterprise are not

required to take a gloomy, fearful or defeatist view of the future; subject to what current data

indicates, they can be expected to be confident about their stewardship and the prospects of the

business that they manage.”), superseded on other grounds by statute, 15 U.S.C. § 78u-4(b).

Statements about the “success” of CVS Caremark’s integration efforts are likewise

inactionable. (See, e.g., Compl. ¶ 137 (“[W]e have done the things strategically that needed to

be done to make this merger successful.”).) Numerous courts have characterized similar

statements as puffery.14 For instance, the Tenth Circuit found that claims by Novell’s CEO,

shortly after Novell acquired WordPerfect, “that Novell had experienced ‘substantial success’ in

integrating the sales forces of the two companies, that the merger was moving ‘faster than we

thought,’ and that the merger presented a ‘compelling set of opportunities for the company’”

were “correctly determined by the district court as a matter of law to be immaterial statements of

corporate optimism.” Grossman v. Novell, Inc., 120 F.3d 1112, 1121 (10th Cir. 1997); see id. at

1121-22 (“These are the sort of soft, puffing statements, incapable of objective verification, that

courts routinely dismiss as vague statements of corporate optimism.”). Similarly, the Southern

District of New York dismissed allegations that defendants had misrepresented the success of a

recent merger—including statements that the “[C]ompany successfully converged service



14 Additionally, these courts all applied the puffery doctrine to statements of past or present condition, thus

belying any suggestion that puffery is a defense against statements of future performance only.

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offerings and pricing,” that the company’s “major integration efforts [were] complete,” and that

the company was “hitting on all cylinders now that we have successfully integrated our

acquisitions”—explaining that “‘integration’ is far too loose and uncertain a term on which to

premise a claim of securities fraud in this context.” In re Razorfish, Inc. Sec. Litig., No. 00 CIV.

9474, 2001 WL 1111502, at *1-2 (S.D.N.Y. Sept. 21, 2001) (alterations in original) (emphases

omitted). And the District of Massachusetts held that the statement that Peritus Software’s

acquisition of Millennium Dynamics “has been a success” was inactionable, even though

plaintiff had pled that “Peritus had lost most of the Millennium sales force and had virtually

stopped selling Millennium products,” because “the ‘success’ comment seems exactly the type of

‘rosy affirmation’ frequently held nonactionable under the corporate puffery doctrine.” In re

Peritus Software Servs., Inc. Sec. Litig., 52 F. Supp. 2d 211, 217, 229 (D. Mass. 1999).

II.

THE COMPLAINT FAILS TO PLEAD A STRONG INFERENCE OF SCIENTER

Even if Plaintiffs could sufficiently allege misstatements about “the success of CVS

Caremark’s integration and the quality of its service,” Mass. Ret. Sys. v. CVS Caremark Corp.,

716 F.3d 229, 239 (1st Cir. 2013)—which they cannot—Plaintiffs must also allege with

particularity facts giving rise to a strong inference that Defendants made those specific scattered

statements about service and integration with an intent to defraud or with a high degree of

recklessness. Plaintiffs fail to do so.

To adequately allege scienter under the PSLRA, Plaintiffs must allege with particularity

facts giving rise to a strong inference of scienter that is “cogent and at least as compelling as any

opposing inference one could draw from the facts alleged.” Tellabs, Inc. v. Makor Issues &

Rights, Ltd., 551 U.S. 308, 324 (2007). In assessing claims of scienter, a court must weigh “not

only inferences urged by the plaintiff . . . but also competing inferences rationally drawn from

the facts alleged.” Id. at 314; Sloman v. Presstek, Inc., No. 06-cv-377-JD, 2007 WL 2740047, at

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*7 (D.N.H. Sept. 18, 2007). The First Circuit requires plaintiffs to plead that defendants acted

with “either conscious intent to defraud or a ‘high degree of recklessness.’” ACA Fin. Guar.

Corp. v. Advest, Inc., 512 F.3d 46, 58 (1st Cir. 2008). The definition of recklessness is

decidedly strict and “comes closer to being a lesser form of intent than merely a greater degree of

ordinary negligence.” Greebel v. FTP Software, Inc., 194 F.3d 185, 199 (1st Cir. 1999) (internal

quotation marks omitted); see id. at 198 (adopting a definition of recklessness “involving not

merely simple, or even inexcusable, negligence, but an extreme departure from the standards of

ordinary care” (internal quotation marks omitted)). Plaintiffs’ allegations do not satisfy this

heightened pleading requirement.

A.

The Complaint’s Allegations Fail to Allege That Defendants Acted with
Recklessness or Conscious Intent to Defraud

As explained above, the isolated statements on which Plaintiffs now base their claim

were all oral statements made by Mr. Ryan, often in response to questions on earnings calls, or in

only one case an oral statement by Mr. Rickard at an investor conference.15 (See, e.g., Compl. ¶¶

119-120 (Mr. Ryan’s statement that there were “[n]o trade-offs because of our service,” in

response to analyst question); id. ¶ 121 (Mr. Ryan’s statement that “[a]ll the systems are able to

talk to each other,” in response to analyst question).)

Under the circumstances here—involving isolated statements made by individual

executives16—the relevant inquiry is whether the executive making the particular statement at



15 The only statements by Mr. Rickard that arguably remain in the case are statements he made during a

Raymond James Institutional Investor Conference on March 10, 2009. (See Compl. ¶¶ 135, 137.) However, most
of his statements at this conference were directly related to the combined business model and thus are not actionable
under the First Circuit Decision. (E.g., id. ¶ 135 (“our model is resonating in the PBM marketplace”).) Mr. Rickard
did discuss the repricing of contracts at the end of the 2008 selling season, but none of his remarks pertain in any
way to service or integration. Mr. McLure is not alleged to have made any of the statements in the Complaint.

16 As noted above, supra, n.3, the only allegations in the Complaint from the Company’s public filings

relate to the combined CVS Caremark model, and thus are no longer at issue following the First Circuit Decision,
see Mass. Ret. Sys., 716 F.3d at 239.

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issue had the requisite scienter when the statement was made. “To establish corporate liability

for a violation of Rule 10b-5 requires ‘look[ing] to the state of mind of the individual corporate

official or officials who make or issue the statement (or order or approve it or its making or

issuance, or who furnish information or language for inclusion therein, or the like) rather than

generally to the collective knowledge of all the corporation’s officers and employees acquired in

the course of employment.’” Makor Issues & Rights v. Tellabs, Inc., 513 F.3d 702, 708 (7th Cir.

2008) (emphases added) (alteration in original) (quoting Southland Sec. Corp. v. INSpire Ins.

Solutions, Inc., 365 F.3d 353, 366 (5th Cir. 2004)); see Teamsters Local 445 Freight Div.

Pension Fund v. Dynex Capital, Inc., 531 F.3d 190, 195 (2d Cir. 2008) (PSLRA’s “strong

inference” requirement “means that the pleaded facts must create a strong inference that

someone whose intent could be imputed to the corporation acted with the requisite scienter”

(emphasis added)). As Plaintiffs have not adequately pled that Messrs. Ryan and Rickard—the

Defendants alleged to have made or participated in making the misstatements still at issue—

acted with scienter, they cannot plead scienter as to any Defendant, including the Company.

In any event, as explained in detail below, Plaintiffs do not allege any particularized facts

giving rise to a strong inference that any senior executive whose scienter could be imputed to the

Company, much less Mr. Ryan or Mr. Rickard, ever learned of systemic integration or service

problems—let alone at the time the isolated oral statements on which Plaintiffs now base their

case were uttered.17 For that reason, Plaintiffs have failed to meet their burden on scienter.



17 Because the alleged misstatements here involve isolated and generalized verbal statements by specific
individuals, the Court need not decide whether the First Circuit would categorically reject the notion that scienter
could ever be pled collectively (i.e., without reference to a specific individual’s state of mind)—as did the Fifth and
Eleventh Circuits, see Southland Sec. Corp., 365 F.3d at 366; Phillips v. Scientific-Atlanta, Inc., 374 F.3d
1015,1017-18 (11th Cir. 2004)—or whether it would accept collective scienter pleading in circumstances involving
“so dramatic an announcement” by a corporation that it necessarily “would have been approved by corporate
officials sufficiently knowledgeable about the company to know that the announcement was false,” Dynex, 531 F.3d
at 195 (emphasis added) (quoting Makor Issues & Rights, 513 F.3d at 710); see also City of Monroe Emps. Ret. Sys.
(…continued)

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1. Plaintiffs Do Not Allege That Defendants Had Reason to Believe Their

Statements Were Untrue

Most fundamentally, the undisputed facts in the Complaint and reflected in the calls make

clear that there was more than ample support for each of the statements in the Complaint about