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Court Confirms Refusal to Dismiss Fraud Suit Against Health Care Concern

Friday, September 6, 2013

The U.S. District Court for the Northern District of California Sept. 3 declined to reconsider its refusal to dismiss would-be class securities fraud allegations that healthcare concern Celera Corp.'s (CRA) failed to disclose certain billing and collection problems (In re Celera Corp. Securities Litigation, N.D. Cal., No. 5:10-cv-02604 EJD, 9/3/13).

Judge Edward J. Davila declined to “say for certain” at the motion-to-dismiss stage that Celera's alleged misstatements warrant Private Securities Litigation Reform Act safe harbor protection. 

Unpaid Receivables

According to the complaint, in October 2007, Celera acquired Berkeley HeartLab Inc. to operate as its lab services division. BHL allegedly accounted for more than 60 percent of Celera's revenue.

During the class period, Blue Cross-insured patients accounted for about 20 percent of BHL's sales. In early 2008, Blue Cross began remitting payment for Celera tests to patients rather than reimbursing the company directly. Because the patients often failed to forward the payment they received from their insurer, Celera's unpaid receivables allegedly began to increase.

In January 2009, Celera began billing patients directly; however, many patients complained to their physicians, who stopped ordering Celera tests. Celera's stock price plummeted upon revelation of its collections problem.

In their lawsuit, the plaintiff-shareholders faulted Celera's failure to disclose its billing problem, among other matters. A year ago, the court allowed the suit to proceed (173 SLD, 9/7/12). 

Cautionary Language

In seeking reconsideration, Celera argued that the court applied the wrong standard in concluding that PSRLA's safe harbor provisions did not protect its forward-looking statements. Specifically, the court explained, Celera maintained that even knowingly false forward-looking statements do not give rise to liability if accompanied by meaningful cautionary language.

The court noted its previous conclusion that Celera's statements regarding Blue Shield's reimbursement practices--although “'technically correct'”--nonetheless were misleading. It also acknowledged that there is precedent for Celera's position that misleading statements do not give rise to liability provided they are forward-looking and accompanied by meaningful cautionary language.

However, the court stated, “the failure to alert investors to the reimbursement problem was not forward-looking; rather, it was an omission of a historical fact.”

It said the challenged financial projections “were too closely related” material factual omissions “to say for certain at the motion to dismiss stage that they warrant safe harbor protection.

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