9th Cir. Reboots Fraud Suit Against Medical Software Provider

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By Antoinette Gartrell

Medical software provider Quality Systems Inc. is back on the hook for class securities fraud claims it misled investors with false statements about its projected sales and revenues.

A defendant can’t transform statements that aren’t forward looking into forward-looking statements protected from liability by combining the two, the U.S. Court of Appeals for the Ninth Circuit said on a question of first impression ( In re Quality Sys. Inc. Sec. Litig. (City of Miami Fire Fighters & Police Officers’ Ret. Tr. v. Quality Sys. Inc.) , 2017 BL 262571, 9th Cir., No. 15-55173, 7/28/17 ).

It joined the First, Second, Third, Fifth, and Seventh Circuits in saying the nonforward-looking portions of mixed statements don’t come under the Private Securities Litigation Reform Act’s safe-harbor provisions.

PSLRA exempts from liability forward-looking statements that either are accompanied by meaningful cautionary language or are made without actual knowledge that they are false or misleading. The safe-harbor provision allows companies to provide investors with information about future and prospective plans.

A number of QSI’s alleged misstatements were “mixed” because they contained both forward-looking and nonforward-looking statements of current and past facts and projected revenues, Judge William A. Fletcher said July 28, reversing dismissal of the complaint. A defendant can’t turn nonforward-looking statements into protected forward-looking statements by combining past or current facts with projected revenues and earnings, the court said.

Suspect Statements

According to the plaintiff retirement fund, between May 2011 and July 2012, QSI and its officers made misleading statements about the company’s sales “pipeline” to support investor guidance about projected growth and revenue. The fund claimed that QSI knew its statements were false because it had real-time data showing a decline in sales due to market saturation beginning as early as April 2011.

Dismissing the complaint, the district court said that while some of the alleged misstatements weren’t forward looking, they amounted to “non-actionable puffery.” The remaining alleged misstatements were forward looking, but accompanied by appropriate cautionary language, it said.

Reversing, the appeals court said many of the nonforward-looking statements were materially false or misleading. It also said many of the forward-looking statements were materially false or misleading, weren’t accompanied by appropriate cautionary language, and were made with actual knowledge of their falsity.

To contact the reporter on this story: Antoinette Gartrell in Washington at agartrell@bna.com

To contact the editor responsible for this story: Phyllis Diamond at pdiamond@bna.com

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