Hill v. Gozani

United States Court of Appeals
For the First Circuit

No. 10-1048

GORDON L. HILL; NECA-IBEW PENSION FUND;
SOUTHWEST CARPENTERS PENSION TRUST,

Plaintiffs,

ANIMA S.G.R.P.A.,

Plaintiff, Appellant,

v.

SHAI N. GOZANI; W. BRADFORD SMITH;
GARY GREGORY; NEUROMETRIX, INC.,

Defendants, Appellees.

APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Rya W. Zobel, U.S. District Judge]

Before
Boudin, Ripple,* and Selya,
Circuit Judges.

Benjamin J. Sweet, with whom Michael Yarnoff, Lauren Wagner
Pederson, Richard A. Russo, Jr., Barroway Topaz Kessler Meltzer &
Check LLP, David Pastor, and Gilman & Pastor LLP were on brief, for
appellant.
Deborah S. Birnbach, with whom Kevin P. Martin, Lauren Stock
Craven, and Goodwin Procter LLP were on brief, for appellees.

March 18, 2011

*
Of the Seventh Circuit, sitting by designation.
 RIPPLE, Circuit Judge. The NECA-IBEW Pension Fund, a

shareholder in NeuroMetrix, Inc., instituted this action against

NeuroMetrix and three of its officers, alleging securities fraud in

violation of sections 10(b)(5) and 20(a) of the Securities Exchange

Act, 15 U.S.C. §§ 78j(b) and 78t(a). On the plaintiff’s motion,

the case was consolidated with several other pending shareholder

suits against NeuroMetrix. The district court designated Anima

S.G.R.P.A. as lead plaintiff for the class of shareholders during

the period of October 27, 2005, through March 6, 2007.

In the consolidated action, the defendants moved to

dismiss the complaint for failure to state a claim under Federal

Rule of Civil Procedure 12(b)(6), as well as under the additional

pleading requirements of Rule 9(b), applicable to fraud claims.

The district court granted the motion, concluding that the

plaintiffs had failed to identify actionable misstatements under

the securities laws. The plaintiffs now appeal.

Because the district court correctly analyzed the

allegations of the complaint and correctly concluded that, in light

of the applicable legal standards, it contained no actionable

misstatements, we affirm the judgment of the district court.

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 I

BACKGROUND

A. Facts

The complaint alleges a scheme in which NeuroMetrix

manufactured a medical device that vastly simplified an existing

medical procedure. In marketing the device to physicians for use

in their offices, NeuroMetrix represented that procedures performed

could be billed using existing standardized codes when seeking

reimbursement from insurers, including Medicare. These codes had

been created to reimburse for the older, specialist-driven,

invasive procedure. Use of the “neurology codes” thus resulted in

reimbursement at artificially high rates for a procedure performed

with NeuroMetrix’s device. According to the shareholders,

NeuroMetrix knew that its scheme would be discovered shortly and

that, as profit margins to physicians’ offices fell dramatically,

the market value of the device also would plummet. A decrease in

revenue and a collapse of stock value would follow. The complaint

alleges that NeuroMetrix misled investors into underestimating the

risk of this fall in value, while individual officers, with

knowledge of the real risk, divested themselves of significant

amounts of stock at great personal profit. Federal civil and

criminal investigations followed, and the shareholders thereafter

brought this action.

Because this case was dismissed for failure to state a

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claim upon which relief could be granted, we recount the facts as

set forth in the complaint in significant detail.

1. The NC-Stat

NeuroMetrix manufactured and marketed a signature product

during the class period, a machine called the NC-Stat. The NC-Stat

is a device that permits non-invasive nerve conduction studies to

“detect[], diagnos[e], and monitor[] neurological conditions

affecting the peripheral nerves.” R.32 at 2. The NC-Stat “is

comprised of a battery-operated hand-held device and disposable

single-use biosensors that are placed on the patient’s body . . .

to detect neuropathies.” Id. at 11. The device was marketed “to

provide primary care and specialist physicians with the ability to

rapidly diagnose neuropathies in the physician’s office at the time

the patient is examined.” Id. at 12. Prior to the introduction of

the NC-Stat, the prevailing standard technology for neurological

studies for these conditions was electromyography (“EMG”), an

invasive, needle-based test performed by neurologists.

The NC-Stat sold for about $5,000 and the disposable

biosensors for roughly $35 a piece. The bulk of the profit to

NeuroMetrix came through the sale of the biosensors. The device

was marketed as providing non-specializing physicians, who

traditionally could not perform diagnostic tests in this field,

with a sustainable source of revenue.

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 2. Billing Codes and Insurance Reimbursement

The ability of physicians to profit from the use of any

medical equipment device--a significant factor in the device’s

market value--depends largely upon reimbursement rates from

insurers. Medical reimbursement across insurers begins with a

physician’s bill to an insurer under a standardized system, which

uses five-digit, procedure-specific identifiers, called Current

Procedural Terminology (“CPT”) codes. CPT codes are assigned by

the American Medical Association (“AMA”). A number of “relative

value units” (“RVUs”) is then recommended for each coded procedure.

RVUs attempt to account for the work performed by a physician, the

physician’s training and expertise, the type of equipment used and

the professional liability insurance required to perform a

particular coded service. Insurers, including Medicare, assign a

physician fee schedule based on a dollar-amount multiplier per

approved RVU.1 In short, in selecting a CPT code to bill for a

particular procedure, a physician effectively knows of a

determinative reimbursement rate for that procedure from each

insurer during a given fiscal year. As part of fraud detection

efforts, when use of a particular code increases by 10% or more

during a given year, Medicare “is alerted and usually commences an

1
To arrive at an individual insurer’s actual reimbursement
amount, an RVU is multiplied by a fixed conversion factor, specific
to each insurer, and then generally is adjusted further by
geographic region.

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investigation.” Id. at 17.

When the NC-Stat was introduced to the market, it did not

have a specific CPT code assigned to it. Instead, according to the

allegations of the complaint, NeuroMetrix instructed its sales

personnel to “actively promote” the use of existing, neurology-

based CPT codes to seek reimbursement for the NC-Stat procedure.

Id. at 14; see also id. at 15-16. According to a confidential

NeuroMetrix employee witness, the recommended codes

were originally value weighted for
neurologists to detect and diagnose
neuropathies through combined use of invasive
EMG needle tests and conventional nerve
conduction studies involving highly calibrated
multi-million dollar equipment . . . . Thus,
under the RVUs assigned to the nerve
conduction CPT billing codes, a neurologist
could make between $700 and $900 per exam,
. . . because an expensive calibrated machine
is utilized. In short, according to [the
confidential witness], the expensive equipment
used by a neurologist is one of the key
factors in determining that the neurology-
based CPT codes (95903 and 95904) reimburse at
significantly higher dollar amounts than
simple, automated procedures such as the NC-
Stat System.

Id. at 15 (emphasis in original).

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 3. Internal Billing Discussions and Recommendations

The complaint further alleges that NeuroMetrix, through

its officers, knew that the billing practices it advised physicians

to adopt were unsustainable.2 It employed two separate directors

of reimbursement with more than fifty years of collective CPT

coding experience. Both of these experts advised Shai Gozani,

President and Chief Executive Officer, and Gary Gregory, Chief

Operating Officer, that they could not promote the use of the

neurology-based codes in marketing the NC-Stat. The first such

director advised the executives that NeuroMetrix should instruct

physicians to use miscellaneous codes in the short term, which

would, “at best, pay one-third or one-fourth of what the existing

neurology-based CPT codes paid to physicians.” Id. at 16. The

director advised that, in the longer term, the company needed to

apply to the AMA for a new code for the NC-Stat procedure and, in

advance of such application, that NeuroMetrix should obtain certain

peer-reviewed articles about the efficacy of the device.

Mr. Gregory asked the director what amount physicians would be

reimbursed in the interim, and was told “‘close to nothing’ until

the AMA ‘validated’” the device. Id. According to the director,

2
NeuroMetrix sold its products in the healthcare industry to
service providers; it merely provided a product to physicians for
a price. As such, NeuroMetrix did not bill insurers and was not
involved in the actual use of billing codes. Physicians used the
CPT codes to seek reimbursement from third-party insurers for
individual tests performed on patients with the NC-Stat.

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Mr. Gozani and Mr. Gregory hoped instead to “‘fly under the

radar,’” and Mr. Gregory specifically stated that the company

“‘could not afford to tell physicians,’” who were “‘making $250 a

test’” that “‘they would possibly get nothing.’” Id. The director

informed the executives that such course of proceeding was

impossible due to the 10% rule, under which the increased use of

the neurology codes was likely to spark a Medicare investigation.

The director informed them that Medicare knows which physicians--

primary care or neurologists--are seeking reimbursement, because

physicians also have a specific identification number included in

reimbursement requests. The director advised that recommending the

use of improper codes would be Medicare fraud. This first director

resigned after the company refused to change its policy. The

company’s second director of reimbursement, Jan Foote, also advised

the company to apply for a new, device-specific code for the NC-

Stat. She told an employee that Mr. Gregory and Mr. Gozani “wanted

to wait until problems with the AMA actually materialized before

making any changes.” Id. at 18. She also resigned “out of

frustration.” Id.

According to the complaint, sales and customer service

staff confirm that they were instructed to recommend the neurology

billing codes to customers. NeuroMetrix

used actual reimbursement payment receipts
from other offices as verification of
reimbursement under the recommended codes.
Specifically, if a physician was skeptical

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 about the precise amount of expected insurance
reimbursement it would receive after using the
NC-Stat System, sales representatives would
provide purported actual payment slips from
Aetna, Blue Cross, or Medicare to prove that
payment had been received in other offices
. . . .

Id. at 20. The complaint further details the manner in which the

individual defendants were involved in the billing issues.

Notably, after physicians started to complain that a particular

insurer had a coverage ban on NC-Stat procedures, Mr. Gozani

allegedly told physicians not to worry; he noted that, if billed

using the general neurology codes, the insurer could not discern

whether the NC-Stat or traditional neurologic tests were performed.

As a consequence, according to Mr. Gozani, it could not enforce its

ban.

4. Kickbacks

The complaint alleges that the company employed several

unlawful practices to mask the billing problems with the NC-Stat.

At the time of the complaint, investigations by the Office of the

Inspector General in the Department of Health and Human Services as

well as by the United States Attorney’s Office in Massachusetts

were focused on the company’s sales practices. A former employee

claimed that one dubious practice was to offer a free box of

biosensors for every box purchased. Biosensors were also given

away for referrals and as inducements to purchase the NC-Stat. The

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employee claims to have told Mr. Gregory that the company could not

give away a product that would be billed out by physicians to

insurers, but was ignored. After the investigation was announced,

the practice abruptly stopped. Id. at 26.

Another former employee described problems that occurred

when the NC-Stat revealed a need for follow-up testing. Primary

care physicians had difficulty making referrals for the testing

because prior use of the neurology billing code meant that the

expensive, invasive tests, for which the code was intended, would

not be reimbursed because insurers would see them as second and

duplicative tests.

After the company became aware of reimbursement problems,

a customer service representative created a spreadsheet of carriers

and states in which reimbursement was problematic. The head of the

reimbursement department told the employee to “‘stop immediately,’”

because “‘if we don’t know, we don’t have to tell anyone.’” Id. at

31. Although the company pulled back from some of these sales

strategies, “attempted to deliberately avoid answering questions

about reimbursement” and employed no reimbursement consultants

after late 2007, id. at 32, it continued to inform physicians,

through its sales staff, of “‘historically how other physicians

billed for the NC system,’” including use of the neurology codes.

Id. at 33.

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 5. Stock Prices

The plaintiffs describe the trajectory of stock prices at

some length. The essential point, according to the plaintiffs, is

that the stock price rose with profits through early 2006 to a high

of just over $40, but by the end of the same year, after insurers

began denying coverage, the price had dropped to below $15. A July

2006 article in Neurology Today noted a 17% spike in use of the

neurology codes at issue, which the article attributed to use of

automated devices, such as the NC-Stat. The 17% spike in usage was

sufficient to trigger a Medicare investigation. The article also

stated the position of an association of neurologists that the NC-

Stat did not provide essential information that traditional nerve

conduction studies would provide.

On March 6, 2007, The Boston Globe reported that a

federal grand jury was convened to investigate health care fraud

issues with NeuroMetrix and the NC-Stat. The article described the

company’s billing recommendations and noted the failure to seek a

unique CPT code. Following this article, shares fell to less than

$10. At the end of the month, the company’s Annual Report for 2006

noted the reimbursement problems, but, according to the complaint,

“further falsely reported that the nerve conduction tests performed

by the NC-Stat System met the requirements stipulated in the AMA

billing code and that these codes were currently being used by

physicians to obtain reimbursement . . ., except in the limited

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instances in which the local Medicare insurance carrier had denied

or limited coverage.” Id. at 37. In fall 2007, NeuroMetrix

announced that it had made a presentation to an AMA working group

on coding and expected recommendations shortly about coding for the

procedure. At this point, the share price was $8.61.

On February 11, 2008, TheStreet.com reported that the AMA

had met and that the soon-to-be-rendered decision would “result in

minimal reimbursement to healthcare providers who used” the NC-Stat

“and that the system would not be eligible for reimbursement under

Medicare or Medicaid.” Id. at 38. The next day, NeuroMetrix

disclosed that it anticipated “‘significant challenges’” with

billing, which “would continue to adversely impact their financial

results.” Id. at 39.

6. Stock Sales

The plaintiffs allege that the defendants “were motivated

to commit fraud by their desire to profit from sales of NeuroMetrix

stock at artificially-inflated prices.” Id. The plaintiffs claim

that the individual defendants sold more than $12 million in stock

in 2005 and 2006, before the decline in value caused by the

reimbursement issues. The plaintiffs claim that the only sales of

company stock by the individual defendants since the company’s

initial public offering in 2004 were these sales at the height of

the market.

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B. District Court Proceedings

1. Initial Proceedings

After several shareholders brought related actions in the

District of Massachusetts, the cases were consolidated and Anima

was appointed lead plaintiff for the putative class. Following its

selection, Anima filed an amended complaint.

After setting forth the facts we already have recounted,

the complaint reprints more than thirty pages of statements by the

defendants alleged to have been misleading to investors, which we

shall address individually below. The claimed misstatements

include SEC filings as well as conference calls with investors and

analysts. In many of the statements, NeuroMetrix and the

individual defendants mentioned “risks” to the business relating to

potential issues with insurance reimbursement throughout the class

period, and they did so with increasing specificity as time went

on. They also set forth their “belief” that the studies were

reimbursable under the existing neurology codes, that the majority

of insurers were reimbursing and that the general outlook was

positive. In 2006, they began to report that there were

reimbursement issues “from time to time,” also noting that several

regional carriers had either decided not to reimburse or were

evaluating the issue carefully. Id. at 48. Toward the end of

2006, they began stating that the outlook was satisfactory, but

that, at any point in time, several insurers might not reimburse

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for the procedure and that the AMA had convened a committee to look

at the issue. By 2007, they noted that a majority of Blue Cross

carriers had indicated they would not reimburse and that the work

of the AMA cast a veil of uncertainty on future profitability.

Throughout the period, the company reiterated its position that the

neurology codes were applicable.

After extensive quotation from company documents and

transcripts of conference calls with investors and reporters, the

complaint references back in almost every instance to a single

paragraph that explains why, in the plaintiffs’ view, the

statements were misleading. That paragraph, ¶ 135, provides that

(1) the defendants refused to apply for a new CPT code for the NC-

Stat, despite being informed it was necessary; (2) sales staff

promoted the use of the neurology codes by physicians billing for

NC-Stat procedures; (3) internal, company-employed experts informed

senior executives that use of the neurology codes was fraudulent;

and (4) the Company understated the “serious risk that insurers”

would not reimburse for the procedure. Id. at 44.

The plaintiffs further alleged that, because of the

above-listed misstatements, class members “purchased or otherwise

acquired NeuroMetrix common stock at artificially-inflated prices.

When the partial corrections and materialization of the risks

associated with Defendants’ fraud came to light, the artificial

inflation in the prices . . . was removed,” causing unspecified

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losses. Id. at 67.

The defendants moved to dismiss under Rule 12(b)(6),

contending that Anima had failed to state a claim upon which relief

could be granted. The defendants argued that Anima had failed to

allege adequately any actionable misstatements, scienter, loss

causation or individual defendant liability.

2. Decision of the District Court

The district court granted the defendants’ motion to

dismiss. The court began by noting the special pleading rules

applicable to securities fraud claims under Rule 9(b) of the

Federal Rules of Civil Procedure and the Private Securities

Litigation Reform Act (“PSLRA”), which we shall review in detail.

Applying these standards, the court found the complaint difficult

to parse, given the large block-quotes of text claimed to be

misleading. As a consequence, it treated the alleged misstatements

together rather than examining each in detail. In its view,

[a]s best can be discerned, based on the
factual allegations in the complaint, the
substance of the plaintiffs’ argument is that
defendants’ warnings regarding the risk of
non-reimbursement were misleading or false
because defendants knew the level of risk, or
even a certainty, of non-reimbursement under
existing CPT codes was more serious than was
disclosed in the warnings.

R.52 at 5. The remaining allegations, the court noted, “could be

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understood as support for the central allegation.”3 Id. The court

found this central claim “more than the factual allegations in the

complaint will bear.” Id. at 7. Specifically,

[t]he complaint establishes, at most,
that at certain points in time there was
internal disagreement as to the applicability
of existing CPT codes, but that a large,
albeit declining, percentage of physicians
were reimbursed for their use of the NC-Stat.
Put simply, the reimbursement environment was
uncertain; there was risk.

Id. (emphasis in original). Furthermore, the disclosures

themselves contained express warnings, “in more severe terms as

reimbursement problems developed.” Id. Investors were “fully

informed as to both defendants’ reimbursement strategy and the

substance of the dispute with insurance companies, and they could

make their own judgment as to whether that strategy was wise or

ill-considered.” Id. The defendants’ repeated statement about

reimbursing under the existing codes, the court noted, “was not

only characterized as their ‘belief,’ but it was immediately

followed by cautionary language that any changes in CPT codes may

3
The remaining allegations were quickly dismissed by the
court. With respect to the plaintiffs’ allegation that the
reimbursement experts had informed the company that it was engaging
in fraud and that it should apply for a new CPT code, the court
noted that none of the alleged misstatements misrepresented the
experts’ opinions. Turning to whether sales staff “‘improperly
promoted’” an unsupportable reimbursement strategy, the court found
the allegation itself “incomprehensible.” See R.52 at 7.
Concerning the allegation that the defendants had disregarded
recklessly the advice of the reimbursement experts, the district
court noted that the basis of the experts’ opinion was not
contained in the factual allegations.

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adversely affect reimbursement for NC-Stat.” Id. at 8.

The plaintiffs also had alleged that the disclosures by

NeuroMetrix were lacking in certain details, the omission of which

rendered them materially misleading. The district court disagreed,

finding that the undisclosed facts the plaintiffs identified were

beyond the scope of the disclosures, and, thus, were not

actionable.4

Finally, the court addressed the plaintiffs’ claims that

specific statements were false or misleading for reasons other than

the general allegations. The plaintiffs had alleged that the

statement that NeuroMetrix was “not involved . . . in billing by

our customers” was false or misleading, but the court found that

the other allegations of the complaint did not support this

accusation. Id. at 9 (omission in original). The plaintiffs had

alleged that there were “pervasive” billing problems, while the

defendants publicly noted only isolated problems with billing. Id.

at 9. The court found that the complaint did not support the claim

that the problems were indeed pervasive. The last statements

alleged to be false were Mr. Gregory’s statements that the device

was approved by the federal Food and Drug Administration (“FDA”),

4
These undisclosed facts included: (1) that the device was
being marketed for use by non-medical staff; (2) that reimbursement
for NC-Stat could preclude reimbursement for other procedures; and
(3) that the Food and Drug Administration (“FDA”) had approved the
NC-Stat as a supplement, rather than as a replacement, to existing
nerve conduction studies.

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that the standard codes describe the service it performs and that

the Medicare Physician Fee Schedule details reimbursement for these

codes. The court found that these allegations did not state that

Mr. Gregory claimed that these codes were weighted for the NC-Stat.

Further, the court noted that Mr. Gregory expressly characterized

his comments as “belief” and that the comments were not

inconsistent with the fact that reimbursement experts and two

insurance companies “did not share Gregory’s reasoning.” Id. at

10.

Having determined that Anima did not identify any

actionable misstatements, the district court did not reach the

defendants’ further contentions that the elements of scienter and

loss causation were not pleaded sufficiently.

II

DISCUSSION

Anima now appeals the district court’s decision

dismissing the action for failure to state a claim. Before

examining the parties’ specific contentions, we begin with an

examination of the two statutes that govern securities fraud

actions and that provide both the substantive and procedural

standards for our evaluation of this complaint.

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A. Statutory Background

1. Securities Exchange Act

The substantive standards applicable to the present

action by a putative class of NeuroMetrix shareholders are found in

the Securities Exchange Act of 1934, 15 U.S.C. §§ 78a-78pp. The

protections against securities fraud are located in sections 10(b)

and 20(a) of the Act, 15 U.S.C. §§ 78j(b) and 78t(a), and in Rule

10b-5, 17 C.F.R. § 240.10b-5.

Section 10 of the Act provides, in relevant part:

It shall be unlawful for any person, directly
or indirectly, by the use of any means or
instrumentality of interstate commerce or of
the mails, or of any facility of any national
securities exchange--

. . .

(b) To use or employ, in connection with
the purchase or sale of any security
registered on a national securities
exchange or any security not so
registered, or any securities-based swap
agreement (as defined in section 206B of
the Gramm-Leach-Bliley Act), any
manipulative or deceptive device or
contrivance in contravention of such
rules and regulations as the Commission
may prescribe as necessary or appropriate
in the public interest or for the
protection of investors.

15 U.S.C. § 78j(b).

The implementing regulation for this section, Securities

and Exchange Commission (“SEC”) Rule 10b-5, declares it unlawful:

(a) To employ any device, scheme, or
artifice to defraud,

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 (b) To 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, or

(c) To engage in any act, practice, or
course of business which operates or would
operate as a fraud or deceit upon any person,

in connection with the purchase or sale of any security.

17 C.F.R. § 240.10b-5.

Although the statute does not provide for a private right

of action, the Supreme Court has implied such a right, “which

resembles, but is not identical to, common-law tort actions for

deceit and misrepresentation.” Dura Pharm., Inc. v. Broudo, 544

U.S. 336, 341 (2005). The elements of a 10b-5 claim, in the

context of publicly traded securities, are:

(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 between the material
misrepresentation and the loss.

Id. at 341-42 (citations omitted) (emphasis in original).

Claims brought under section 20(a) of the Act, 15 U.S.C.

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§ 78t(a), are derivative of 10b-5 claims. Specifically, once any

“person” is found liable for violating the Act’s substantive

provisions,

[e]very person who, directly or indirectly,
controls any person liable under any provision
of this chapter or of any rule or regulation
thereunder shall also be liable jointly and
severally with and to the same extent as such
controlled person to any person to whom such
controlled person is liable, unless the
controlling person acted in good faith and did
not directly or indirectly induce the act or
acts constituting the violation or cause of
action.

Id.

Importantly, “the statutes make the[] . . . actions

available, not to provide investors with broad insurance against

market losses, but to protect them against those economic losses

that misrepresentations actually cause.” Dura Pharm., 544 U.S. at

345.

The courts have long acknowledged that “litigation under

Rule 10b-5 presents a danger of vexatiousness different in degree

and in kind from that which accompanies litigation in general.”

Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 739 (1975).

“Even weak cases brought under the Rule may have substantial

settlement value, . . . because [t]he very pendency of the lawsuit

may frustrate or delay normal business activity.” Merrill Lynch,

Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71, 80 (2006) (final

modification in original) (internal quotation marks omitted). As

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a result, the Supreme Court cabined the private right of action

consonant with the policies of preserving the private enforcement

function, but minimizing potential “ill effects,” in part by

limiting the universe of potential plaintiffs to buyers and sellers

of the securities. Id. at 80-81.

2. Private Securities Litigation Reform Act

In the mid-nineties, Congress took up the issue of

reforming securities litigation, with “twin goals: to curb

frivolous, lawyer-driven litigation, while preserving investors’

ability to recover on meritorious claims.” Tellabs, Inc. v. Makor

Issues & Rights, Ltd., __ U.S. __, 127 S. Ct. 2499, 2509 (2007).

As the Court recently recounted:

Policy considerations similar to those
that supported the Court’s decision in Blue
Chip Stamps [v. Manor Drug Stores, 421 U.S.
723 (1975),] prompted Congress, in 1995, to
adopt legislation targeted at perceived abuses
of the class-action vehicle in litigation
involving nationally traded securities. While
acknowledging that private securities
litigation was “an indispensable tool with
which defrauded investors can recover their
losses,” the House Conference Report
accompanying what would later be enacted as
the Private Securities Litigation Reform Act
. . . identified ways in which the
class-action device was being used to injure
“the entire U.S. economy.” H.R. Conf. Rep.
No. 104-369, p. 31 (1995). According to the
Report, nuisance filings, targeting of
deep-pocket defendants, vexatious discovery
requests, and “manipulation by class action
lawyers of the clients whom they purportedly
represent” had become rampant in recent years.

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 Ibid. Proponents of the Reform Act argued
that these abuses resulted in extortionate
settlements, chilled any discussion of
issuers’ future prospects, and deterred
qualified individuals from serving on boards
of directors.

Dabit, 547 U.S. at 81 (citation omitted). The Private Securities

Litigation Reform Act of 1995, Pub. L. No. 104-67, 109 Stat. 737

(codified as amended in scattered sections of 15 and 18 U.S.C.),

created a host of substantive reforms addressing issues from class

certification and lead plaintiff selection, to limitations on

recoverable damages and mandatory sanctions for frivolous

litigation. In addition, it created a safe-harbor provision for

forward-looking statements when not made with knowledge of falsity

or when the statement itself is identified as forward-looking and

is 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).

Finally, and particularly relevant to our analysis in the

present case, the PSLRA made a number of procedural changes

applicable in securities actions, including the creation of

specific pleading requirements for 10b-5 actions. Prior to the

PSLRA, such actions were governed by the heightened pleading

requirements of Rule 9(b) of the Federal Rules of Civil Procedure.

Rule 9(b) provides that, in the context of fraud claims, the usual

requirement of “a short and plain statement of the claim,” Fed. R.

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Civ. P. 8(a)(2), must be exceeded. Specifically, a party alleging

fraud “must state with particularity the circumstances constituting

fraud” in the pleading, but “[m]alice, intent, knowledge, and other

conditions of a person’s mind may be alleged generally.” Fed. R.

Civ. P. 9(b). The PSLRA went further, requiring that a pleading

(1) “specify each statement alleged to have been misleading [and]

the reason or reasons why the statement is misleading” and (2) “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). With regard to the element of scienter, the PSLRA

requires that the pleading “state with particularity facts giving

rise to a strong inference that the defendant acted with the

required state of mind.’” Id. § 78u-4(b)(2)(A). The Supreme Court

has held that, in order for the facts to give rise to the requisite

“strong inference,” the allegations “must be more than merely

plausible or reasonable--[they] must be cogent and at least as

compelling as any opposing inference of nonfraudulent intent.”

Tellabs, 127 S. Ct. at 2504-05.

B. Standard of Review

In reviewing the district court’s order dismissing the

action for failure to state a claim under Rule 12(b)(6), we must

determine whether allegations of securities fraud under sections

-24-
10(b)(5) and 20(a) of the Securities Exchange Act have been pleaded

sufficiently, using the standards set forth in the PSLRA and the

Federal Rules. We recently have outlined a roadmap for this task.

See ACA Fin. Guar. Corp. v. Advest, Inc., 512 F.3d 46, 58-59 (1st

Cir. 2008).

First, as with any 12(b)(6) inquiry, “we accept

well-pleaded factual allegations in the complaint as true and view

all reasonable inferences in the plaintiffs’ favor.” Id. at 58;

see also Tellabs, 127 S. Ct. at 2509. To survive a motion to

dismiss, a complaint must allege facts sufficient to demonstrate “a

plausible entitlement to relief.” Bell Atl. Corp. v. Twombly, 550

U.S. 544, 559 (2007); see also ACA Fin. Guar., 512 F.3d at 58. In

the present case, the plaintiffs must allege six elements to state

a 10b-5 claim: “(1) a material misrepresentation or omission; (2)

scienter, or a wrongful state of mind; (3) a connection with the

purchase or sale of a security; (4) reliance; (5) economic loss;

and (6) loss causation.” ACA Fin. Guar., 512 F.3d at 58; see also

Dura Pharm., 544 U.S. at 341-42.

As with all allegations of fraud, a plaintiff must plead

the circumstances of the fraud with particularity, pursuant to Rule

9(b). ACA Fin. Guar., 512 F.3d at 58. Under the further

requirements of the PSLRA, in order to survive a motion to dismiss,

the plaintiff must “‘specify each statement alleged to have been

misleading [and] the reason or reasons why the statement is

-25-
misleading.’” Id. (modification in original) (quoting 15 U.S.C. §

78u-4(b)(1)). Furthermore, the complaint “‘shall, with respect to

each [alleged] act or omission . . . state with particularity facts

giving rise to a strong inference that the defendant acted with the

required state of mind.” Id. at 58-59 (omission in original)

(first emphasis added) (quoting 15 U.S.C. § 78u-4(b)(2)). As we

noted in ACA Financial Guaranty Corp. v. Advest, Inc., 512 F.3d 46,

63 (1st Cir. 2008), “the PSLRA does not require plaintiffs to plead

evidence.” Nevertheless, a significant amount of “meat” is needed

on the “bones” of the complaint. Id.

C. Analysis of the Alleged Misstatements

With these standards providing our decisional matrix, we

turn to the parties’ contentions and the specific allegations of

the complaint. Anima contends that the district court erred in

failing to view the facts in their totality, with inferences drawn

in its favor. With respect to the alleged misrepresentations,

Anima contends that the district court erred in determining that

they were not misleading or were within the statutory safe harbor.

The defendants counter that the district court was correct to find

no actionable material misstatements. We examine each alleged

misstatement in turn.

-26-
 1. 2005 NeuroMetrix Press Release

According to ¶ 134 of the complaint, on October 27, 2005,

NeuroMetrix issued a press release concerning its third quarter

results. The release reported significant revenue increases. It

also contained an express disclosure

that the statements contained in the release
“involve a number of risks, uncertainties
(some of which are beyond the Company’s
control) or other assumptions that may cause
actual results or performance to be materially
different from those expressed or implied by
these forward-looking statements. These risks
and uncertainties include, but are not limited
to, risks associated with . . . reimbursement
by third party payors to the Company’s
customers for procedures performed using the
NC-Stat System.”

R.32 at 43 (quoting Oct. 27, 2005 press release) (emphasis and

omission in original). The plaintiffs have not alleged any

affirmative misstatement in this release, nor do we perceive one

when the statement is read alongside the factual allegations. The

claim, therefore, must rest on the omission of some fact, which, by

its absence, rendered the release misleading. See 17 C.F.R. §

240.10b-5(b). The omitted material identified by the plaintiffs,

as noted above, was: (1) that the company declined to apply for a

new code, even though the reimbursement specialists had informed it

that it was necessary; (2) sales personnel were advising physicians

on use of the neurology codes; (3) reimbursement specialists had

advised that use of the neurology codes was fraud; and (4) “[t]here

was a serious risk that insurers would not allow NC-Stat tests

-27-
. . . to be reimbursed under neurology-based CPT codes.” R.32 at

44.

There are sufficient factual allegations in the complaint

to permit the conclusion that the principals of NeuroMetrix knew of

the four alleged situations as early as 2005. According to the

complaint, by mid-2005, the reimbursement expert had resigned

because of a conflict with the principals over the coding

recommendations, id. at 18; sales representatives were advising

physicians to seek reimbursement under the neurology codes, id. at

19. By late 2005, regional insurance carriers had begun denying

coverage, id. at 32. Reading the factual allegations of the

complaint in whole, they support the assertion that the company was

aware of at least some level of risk of non-reimbursement and had

been apprised by experts that continuing in its then-current course

of billing recommendations could have significant repercussions.

We also agree with the plaintiffs that the omitted facts

were material. As we have stated, “information is material only if

its disclosure would alter the total mix of facts available to the

investor and if there is a substantial likelihood that a reasonable

shareholder would consider it important to the investment

decision.” Cooperman v. Individual, Inc., 171 F.3d 43, 49 (1st

Cir. 1999) (quotation marks omitted); see also TSC Indus., Inc. v.

Northway, Inc., 426 U.S. 438, 449 (1976) (defining, in another type

of securities action, information as material where it “would have

-28-
assumed actual significance in the deliberations of the reasonable

shareholder”). “The omission of a known risk, its probability of

materialization, and its anticipated magnitude, are usually

material to any disclosure discussing the prospective result from

a future course of action.” Lormand v. US Unwired, Inc., 565 F.3d

228, 248 (5th Cir. 2009). As this press release acknowledges on

its face, the ability of physicians to receive third-party

reimbursement for procedures performed with the NC-Stat is of

critical importance to the profitability of the device and of

NeuroMetrix itself. That experts flatly had informed the

principals that the company’s suggested method of billing was

unsustainable certainly would have been relevant to a reasonable

shareholder’s investment decisions. We further have stated that

“[i]f an alleged omission involves speculative judgments about

future events, . . . materiality will depend at any given time upon

a balancing of both the indicated probability that the event will

occur and the anticipated magnitude of the event in light of the

totality of the company activity.” Milton v. Van Dorn Co., 961

F.2d 965, 969-70 (1st Cir. 1992) (emphasis in original) (internal

quotation marks omitted). The complaint’s allegations regarding

the Medicare 10% rule and the company’s sales growth are sufficient

to demonstrate a significant probability that the noted risks would

materialize and that the effect of those risks on the company’s

future would be significant.

-29-
 Nevertheless, “the mere possession of material[,]

nonpublic information does not create a duty to disclose it.”

Cooperman, 171 F.3d at 49 (internal quotation marks omitted); see

also Chiarella v. United States, 445 U.S. 222, 235 (1980).

Instead, the “issue . . . is whether the securities law imposes on

defendants a ‘specific obligation’ to disclose information of the

type that plaintiffs claim was omitted.” Cooperman, 171 F.3d at

49-50. Rule 10b-5 requires that, when a company speaks, it cannot

omit any facts “necessary in order to make the statements made, in

the light of the circumstances under which they were made, not

misleading.” 17 C.F.R. § 240.10b-5; see also SEC v. Texas Gulf

Sulphur Co., 401 F.2d 833, 862 (2d Cir. 1968) (en banc). “[E]ven

a voluntary disclosure of information that a reasonable investor

would consider material must be complete and accurate.” Backman v.

Polaroid Corp., 910 F.2d 10, 16 (1st Cir. 1990) (en banc) (internal

quotation marks omitted). Nevertheless, this obligation has its

limits: It “does not mean that by revealing one fact about a

product, one must reveal all others that, too, would be

interesting, market-wise”; a company must reveal only those facts

“that are needed so that what was revealed would not be so

incomplete as to mislead.” Id. (internal quotation marks omitted)

(emphasis added).

We begin with the issue central to two of the four

claimed omissions in the 2005 press release: the opinion of the

-30-
experienced reimbursement experts that the billing practices were

incorrect and possibly fraudulent. We previously have held that

the existence of internal disagreement about strategy is not the

kind of fact that must be disclosed to investors. In Cooperman v.

Individual, Inc., 171 F.3d 43 (1st Cir. 1999), we evaluated claims

that a company had failed to disclose that its CEO had significant

strategic disagreements with the board about the future direction

of the company. After noting that the existence of a board-level

conflict was material, we concluded that disclosure was not

required. “Disclosure of the business strategy supported by a

majority of the directors did not obligate defendants also to

disclose information about the extent to which each individual

Board member supported that model.” Id. at 51. Indeed, we held,

“[m]ore specifically,” that “disclosure of the business strategy

supported by the majority of the Board did not obligate defendants

also to disclose the fact that [the CEO]--a distinct minority of a

multi-member Board--opposed that strategy.” Id.

By contrast, in Lormand v. US Unwired, Inc., 565 F.3d 228

(5th Cir. 2009), our colleagues in the Fifth Circuit did find the

statements misleading, and therefore actionable. In Lormand, the

plaintiffs alleged that US Unwired had been pressured by Sprint,

with whom it had an affiliate relationship, to extend services to

customers with sub-prime credit without requiring the usual

safeguards. Through a series of negotiations, it became clear that

-31-
the management of US Unwired knew the business strategy would prove

“disastrous,” saw some of the risks actually materialize, and

fought hard--if unsuccessfully--to prevent the policy’s full

implementation. Id. at 237; see also id. at 247. At the same

time, US Unwired’s public statements touted the benefits of the

program and “omitted [the] serious risks inherent” in the

initiatives. Id. at 249. When risks were referenced, it was by

way of generalized risk factors, and the real potential problems

were “glossed over as a future risk of limited magnitude.” Id. at

247 (emphasis in original). The Fifth Circuit found our decision

in Cooperman distinguishable because, in Lormand, “the entire

management team of the company knew that disastrous effects would

result” from the strategy Sprint had forced upon US Unwired, but

continued to present to the public a contrary, or incomplete, view.

Id. at 250.

Finally, in In re Cabletron Systems, Inc., 311 F.3d 11

(1st Cir. 2002), we evaluated a complaint in which the allegations

were that company officials, like the principals in Lormand, saw

disaster looming on the horizon. According to the complaint, a

number of “adverse factors” converged on the company nearly

simultaneously, making clear that the company’s immediate future

was less than rosy. Id. at 23 (internal quotation marks omitted).

In response, the leadership of the company engaged in a host of

fraudulent practices designed to give the false impression that the

-32-
company’s prospects for success were much higher than they actually

were: (1) They falsified sales records; (2) they timed shipments

of goods to create the false impression of high sales for a quarter

while knowing that massive returns would occur in the next quarter,

sometimes with the cooperation of customers interested in the

company’s success; (3) they delayed reporting liabilities,

including parking raw materials with suppliers to avoid entering

them on balance sheets; and (4) they concealed negative facts about

the products from sales staff to avoid disclosure to potential

customers, although the facts were widely known internally. See

id. at 24. We characterized the pleading as portraying a “frenzied

effort by a troubled company to conceal its difficulties for as

long as possible,” and concluded that the allegations were

sufficient to survive dismissal. Id.

In our view, the situation we confront in this case is

closer to that of Cooperman than to that of Lormand or Cabletron.

The kind of information the plaintiffs wanted the company to

disclose--that the reimbursement experts informed the principals

that they needed to apply for a new code and that the persistence

in recommending the neurology codes was fraudulent--is not on the

order of the information withheld from investors in Lormand.

There, the principals unquestionably were forced into a losing

strategy and fully understood the near-certainty of financial

disaster to come. Here, although knowledgeable employees of

-33-
NeuroMetrix believed the strategy was both losing and potentially

dangerous, there is simply nothing in the complaint to suggest that

the expert opinions demonstrated that the danger posed by the

reimbursement strategy was, at the time the statement was made, a

near certainty of ruin. The principals of NeuroMetrix had this

information to factor into their decision-making about coding

recommendations to buyers of their device. They, however, had no

obligation to make it public simply because they mentioned the risk

associated with non-reimbursement by third-party payers in a profit

statement. Moreover, although there are allegations of other

questionable business practices, such as the use of potentially

illegal incentive programs, there is no allegation, as there was in

Cabletron, that the principals were engaged in a comprehensive

scheme to disguise negative information “to keep the house of cards

standing.” Cabletron, 311 F.3d at 24. The “total mix of

information” available to investors in the short press statement at

issue was not “highly skewed,” Lormand, 565 F.3d at 249, by the

failure to disclose the opinions of the reimbursement experts.

The plaintiffs submit, however, that Cooperman is

inapposite because there is no evidence of “disagreement.” In

their view, the facts of the complaint show that the only informed

opinion was that of the experts; the principals did not disagree

with that opinion, but disregarded it to maximize profits and shed

their own stock at an artificially inflated market price. We

-34-
cannot accept this argument. At bottom, Cooperman discusses when

factors that predate a company’s chosen course of action must be

disclosed to investors, and that question encompasses more than the

issue of board-level strategic disagreements. In neither Cooperman

nor the present case was the undisclosed information insignificant;

both involved something material to the investment decision and

both predicted that significant risks would materialize from the

course the company ultimately chose. But in neither case did the

undisclosed opinion even approach the widely-accepted certainty of

failure or the comprehensive cover-up in Lormand or Cabletron.

At the time the statement was made, the final resolution

of the third-party reimbursement issue was indeed unknown. As our

colleague in the district court noted, the RVUs for a CPT code

“reflect[] the estimated physician, practice, and malpractice costs

for the service represented by that code.” R.52 at 2. Although

the company took an aggressive, and in the view of some, an

unrealistically aggressive view of the appropriate resolution in

the promotion of its product, its press release does state

explicitly that the ultimate resolution of the issue is unknown

and, by reasonable implication, out of its hands.

Turning to the other alleged omissions, we conclude that

they too were not sufficient to demonstrate that the statement

itself was misleading. First, that the company’s sales team

provided advice on appropriate billing practices is plainly beyond

-35-
the scope of the disclosure. The statement as quoted by the

plaintiffs was not incomplete for failure to state specifically

that the company had a reimbursement-advice strategy, or for

failure to state what that strategy specifically was. Finally, the

plaintiffs maintain that the statement was misleading for failing

to disclose a “serious risk” of non-reimbursement. Nevertheless,

a risk of non-reimbursement specifically was disclosed. To the

extent that the plaintiff’s complaint is that the precise degree of

risk was not stated, that failure is not sufficient to have

rendered the statements misleading. Cf. In re Cabletron Sys.,

Inc., 311 F.3d at 23-24 (noting that allegations of a company’s

“unremittingly optimistic” statements in the face of numerous

adverse factors, coupled with company efforts to “hide th[e]

downward spiral,” were sufficient to state a claim).

A statement that discloses a level of risk may be so

understated as to be misleading. In Backman v. Polaroid Co., 910

F.2d 10, 16 (1st Cir. 1990) (en banc), we considered claims

regarding misleading statements made in reference to the Polavision

camera. We concluded that the company’s disclosure “that

Polavision was being sold below cost was not misleading by reason

of not saying how much below. Nor was it misleading not to report

the number of sales, or that they were below expectations.” Id.

We contrasted those statements with another allegation, namely,

that the principals knew that the Polavision camera was “a

-36-
commercial failure,” but stated only that earnings were negative;

we noted that the negative-earnings statement “might well be found

to be a material misrepresentation by half-truth and

incompleteness.” Id. Although we ultimately dismissed the

“commercial failure” claim as not supported by the allegations of

the complaint, the distinction between our treatment of these two

allegations is instructive, and it is mirrored again in the Fifth

Circuit’s decision in Lormand. A statement of risk does not

insulate the speaker from liability, particularly where it is

“generic and formulaic.” See Lormand, 565 F.3d at 245. At the

same time, neither does it create liability simply because it does

not disclose, at the level of detail the plaintiffs request in

retrospect, all of the factors that contribute to the risk

assessment. In cases where the risk approaches a certainty, courts

have no difficulty in finding a duty of disclosure. But where the

level of risk is unknown and the existence of a risk is disclosed,

we shall hesitate to conclude that disclosure is misleading merely

because it did not state that the risk was “serious.” R.32 at 44.5

5
Read in the plaintiffs’ favor, the factual allegations of
the complaint would support the view that the company actually had
experienced some reimbursement problems, potentially as early as
this October 2005 statement. See R.32 at 32 (noting some regional
denials of coverage in “late 2005”). That said, even if the
plaintiffs had alleged that the statement was misleading for
failing to include this specific information, we would be
unpersuaded. In circumstances where some level of risk
materializes, we have not required complete disclosure of all of
the details when the overall risk is disclosed and the nature of
the future risk remains uncertain. See Backman v. Polaroid Corp.,
-37-
 In sum, we agree with the district court that the

November 2005 NeuroMetrix press release is not misleading because

it failed to include the four facts alleged by the plaintiffs.

2. Quarterly Report, Third Quarter 2005

The complaint next alleges that, on November 10, 2005,

NeuroMetrix filed its Quarterly Report with the SEC on form 10-Q

and included various statements regarding reimbursement, including

the following:

Reimbursement from third-party payers is an
important element of success for medical
products companies. Generally, we believe
that the nerve conduction studies performed by
our customers with the NC-Stat System have
been satisfactorily covered by third-party
payers. As our presence in the market expands
and the use of the NC-Stat System increases,
we have experienced and are likely to continue
to experience an increased focus from third-
party payers regarding the reimbursement of
nerve conduction studies performed using the
NC-Stat System and an increased focus from
third-party payers regarding the professional
requirements for performing nerve conduction
studies in general. Widespread adoption of
the NC-Stat System by the medical community is
unlikely to occur if physicians do not receive
satisfactory reimbursement . . . .

R.32 at 44-45. Further, the report stated explicitly that

reimbursement problems could lead to “future product sales [being]

severely harmed.” Id. at 45 (emphasis omitted). Finally, the

910 F.2d 10, 16 (1st Cir. 1990) (en banc) (not requiring the
company’s disclosure to include how far below expectations sales
were occurring and related details).
-38-
report stated that “[f]uture regulatory action” relating to

Medicare/Medicaid reimbursement could change the reimbursement

landscape, but closed, “We are unable to predict what changes will

be made in the reimbursement methods used by private or

governmental third-party payers. Additionally, we may be required

to expend substantial resources to address potential reimbursement

issues with third party payers.” Id. at 46. The plaintiffs

claimed these statements to be misleading for the identical four

reasons set forth above, relating to the internal expert opinions,

company advice to physicians regarding billing and the “serious

risk” of non-reimbursement. Id. at 44.

The same reasons that led to our conclusion that the

first alleged misstatement was not misleading require that we also

conclude that this disclosure cannot give rise to liability.

Indeed, this disclosure is more explicit about the nature of the

risks the company faced regarding third-party reimbursement and

specifically references the possibility of future government

action. Although the alleged omissions are material, the “total

mix” of statements in the November 2005 disclosures was not skewed

to present a rosy picture. Although cautious in tone and

substance, it acknowledged some attention from third-party payers

and the significant impact that either that attention or attention

from federal regulators could have on the profitability of the

business.

-39-
 3. 2005 Annual Report to the SEC

The plaintiffs next alleged that NeuroMetrix misled

investors in its 2005 Annual Report filed with the SEC. In that

report, the company explained briefly the mechanics and the

significance of CPT coding:

According to present Medicare guidelines,
nerve conduction studies may be performed by
medical doctors, or M.D.s, and doctors of
osteopathic medicine, or D.O.s, and are
reimbursable under the three CPT codes:
95900, 95903, and 95904. We believe that the
nerve conduction measurements performed by the
NC-Stat System meet the requirements
stipulated in the code descriptions published
by the AMA and that these [neurology] codes
are currently used by physicians performing
nerve conduction studies with the NC-Stat
System. If the CPT codes that apply to the
procedures performed using our products are
changed, reimbursement for performances of
these procedures may be adversely affected.

Id. at 46.

This statement is not misleading because it failed to

include the opinions of the reimbursement experts or the

reimbursement advice strategy or because it failed to characterize

explicitly the risk of non-reimbursement as serious.

In addition to repeating the same four omissions urged

with respect to the documents discussed earlier, the plaintiffs

further claim that this statement is misleading for its omission of

several additional facts: (1) that the sales staff for NeuroMetrix

marketed the device for use by non-medical office staff; (2) that

the device was marketed for primary care physicians to determine

-40-
whether referral to neurology was appropriate, but after the codes

were used for a NC-Stat procedure, claims for follow-up neurology

diagnostics under the same code were denied; and (3) that the FDA

had approved the NC-Stat as a supplement rather than as a

replacement for traditional nerve conduction studies. See id. at

46-47.

The district court stated succinctly that these facts

were “beyond the scope of the reimbursement disclosures.” R.52 at

8 (emphasis added). We agree. In making this determination, we

recall the perspective from which we must make this evaluation. We

must determine whether the omission of any of these facts from the

statement that appeared in the 2005 Annual Report rendered that

statement misleading. We can assume, for the sake of this

analysis, that these statements are material in the sense that a

reasonable shareholder would consider these matters important in

making an investment decision. See Cooperman, 171 F.3d at 49.

Nevertheless, we agree with the district court that the absence of

this material did not render the statements that actually were made

about the application of CPT codes to the NC-Stat System

misleading. We are not persuaded that the allegations concerning

limitations on FDA approval of the device or secondary billing

problems occurring for patients requiring follow-up traditional

nerve testing are sufficiently related to the quoted statement that

failure to disclose those facts rendered that statement misleading.

-41-
 The allegation that the device was marketed for use by

non-medical office staff poses the closest case for a material

misrepresentation. The Annual Report does state explicitly that

the Medicare guidelines call for procedures billed under the

neurology codes to be “performed by medical doctors, or M.D.s, and

doctors of osteopathic medicine, or D.O.s” and that NeuroMetrix’s

belief is that “the nerve conduction measurements performed by the

NC-Stat System meet the requirements stipulated in the code

descriptions.” R.32 at 46. That sales personnel of NeuroMetrix

attempted to induce members of the medical profession to circumvent

these billing requirements and delegate the performance of this

test to employees without their training is a serious accusation

and, if true, could no doubt make an investor think twice about the

desirability of investment in such a company. Nevertheless, the

more narrow inquiry before us is simply whether non-disclosure of

such a practice makes the statement in the report misleading. We

do not believe that it does. Whether the product conforms to the

current or future CPT codes is not dependent on the company’s

alleged attempt to sell the machine to unscrupulous members of the

medical profession.

-42-
 4. Quarterly Report, First Quarter 2006

The plaintiffs’ next allegations concern the third

quarter report for 2006. In that report, NeuroMetrix maintained

its position on reimbursement:

Generally, we believe that the nerve
conduction studies performed by our customers
with the NC-Stat System have been
satisfactorily covered by third-party payers.
As our presence in the market expands and the
use of the NC-Stat System increases, we have
experienced and are likely to continue to
experience an increased focus from third-party
payers and governmental agencies regarding
. . . reimbursement . . . [and] the
professional requirements for performing nerve
conduction studies in general. Widespread
adoption of the NC-Stat System is unlikely to
occur if physicians do not receive
satisfactory reimbursement from third-party
payers for procedures performed with the NC-
Stat System . . . . A successful market
expansion will depend upon, in part, our
targeting of primary care and specialty
physicians who traditionally have not been
targeted by companies selling equipment used
to perform nerve conduction studies and our
ability to alter physicians’ practices
relating to the diagnosis of neuropathies.

Id. at 47 (emphasis in original).

The complaint first alleges that the statements were

false and misleading because they failed to make the same

disclosures discussed above, relating to the advice of the

reimbursement experts, the advice by sales personnel to bill under

neurology codes and the “serious risk” of non-reimbursement. We

again conclude that the statements are not misleading because of

-43-
the failure to include any of those alleged facts. The statement

is clear that “generally,” reimbursement is satisfactory, but that

the company “ha[s] experienced and [is] likely to continue to

experience” scrutiny from third-party payers, which could have a

significant effect on future profitability. Id. (emphasis

omitted). Nothing about this statement changes our view that,

under Cooperman, 171 F.3d at 50-51, disclosure of the internal

opinions of two qualified employees was not required to prevent

skewing of the total mix of information available to shareholders.

Although by mid-2006, when this statement was made, NeuroMetrix

certainly was aware that its customers were experiencing

reimbursement issues, the complaint alleges only that the

complaints were sporadic and regional; that is consistent with the

qualified statement about reimbursements actually made in this

disclosure.6

5. Quarterly Report and Conference Call, Second
Quarter 2006

The plaintiffs next challenge the sufficiency of the

disclosures contained in a July 2006 conference call with analysts

and investors and the second quarter report issued in August 2006.

6
Furthermore, the complaint does not allege that the
statements were misleading for failing to include the fact of non-
reimbursement by particular insurers. In this regard, the
complaint alleges only that the statements failed to disclose the
more generic “serious risk” of non-reimbursement. See R.32 at 44.
-44-
 In the conference call, Mr. Gozani stated:

Basically, the reimbursement situation for NC-
Stat is very positive. We believe that over
600 payors have reimbursed our customers and
on a routine basis, our customers are clearly
being reimbursed. Obviously as for any
medical device company in today’s
reimbursement environment, there are from time
to time reimbursement issues that come up that
have to be addressed, many of them often are
just the way customers code, the way they code
their insurance claims or other very
straightforward administrative issues.
Sometimes they pertain to the
misunderstandings of the technology and so
forth. That is just par for the course in
this type of business. . . . We continue to
work with payors to explain our technology who
continue to do studies demonstrating the
viability and strength of our technology and
are very positive about the situation.

R.32 at 48-49 (emphasis in original). Defendant Gregory added that

the company would not “comment specifically on what our overall

reimbursement mix is,” but that it was “very pleased with the

reimbursement landscape[] [a]nd that it allows physicians to

appropriately perform these tests and be reimbursed appropriately

for doing them.” Id. at 48. Mr. Gozani then clarified that the

company was “not involved obviously . . . in billing by our

customers . . . other than providing them with basic published

information on expected coding practices.” Id. at 49.

One month later, NeuroMetrix filed its quarterly report

for the second quarter of 2006, which was not materially different

from those of prior quarters. Indeed, it repeated that it believed

the procedure was reimbursed “satisfactorily,” even though it was

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the subject of “increased focus” from payers. Id.

Anima claims that these statements are false and

misleading for the same reasons it has cited repeatedly in the

complaint. We again conclude that these statements are not

rendered misleading by the omission of any of the information Anima

claims it should have included. The statements continue to

acknowledge some difficulties, and although they are certainly

optimistic about the future, they are not misleading because they

fail to identify a “serious risk” of non-reimbursement. See

Backman, 910 F.2d at 16 (distinguishing between the “commercial

failure” allegations and the allegations of undisclosed details

relating to risks).

With respect to this disclosure, the plaintiffs also

claim that the statement was misleading for what the plaintiffs

term a “reckless[]” failure to disclose that NeuroMetrix was “aware

of pervasive problems with insurer reimbursement for NC-Stat

tests.” R.32 at 49-50. Although this alleged misstatement might

give us pause if the allegations of the complaint were sufficient

to support it, they are not. The complaint is more than seventy

pages in length, but it is relatively thin on specific claims

regarding reimbursement denials.7 Moreover, because of its

7
The complaint includes very few specific facts about
reimbursement denials: (1) In late 2005, regional Blue Cross
providers began denying coverage; (2) “some insurers discovered in
2006” that physicians were billing under the neurology codes and
began denying coverage, id. at 34; (3) a single clinic in Florida
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structure, it is difficult to place any of the information

regarding the reimbursement along the timeline of the disclosures.

The failure of the complaint to detail with some greater degree of

specificity what these “pervasive” problems were is fatal to this

allegation. See ACA Fin. Guar., 512 F.3d at 63 (“It is true, as

the plaintiffs argue, that the PSLRA does not require plaintiffs to

plead evidence. But more meat was needed on these bones.”

(internal citations omitted)).

6. Conference Call, Third Quarter 2006

On October 26, 2006, NeuroMetrix held a conference call

for analysts and investors. In it, the defendants spoke at some

length about reimbursements:

We wanted to cover some basic information
which may offer some insights towards the
reimbursement landscape. First and foremost,
the NC-Stat System is a FDA-cleared technology
that is supported by strong language held

was denied reimbursement sometime in 2006; (4) one insurer, Cigna,
proposed a local coverage ban before September 2006; (5) sometime
after the middle of 2006, a confidential witness put together a
spreadsheet of “insurance carriers in specific states where
reimbursement had become a problem,” id. at 31; (6) sometime
between November 2006 and May 2007, Defendant Gregory was aware of
a “growing number of complaints from physicians about
reimbursement,” id. at 23; and (7) in March 2007, a sales manager
leaving NeuroMetrix sent a letter to clients warning of
“reimbursement problems,” id. at 32. Even if these facts were
sufficiently specific to satisfy the particularity requirements, a
question we do not address, they do not amount to “pervasive”
problems. Although the complaint does include other information
about denials, that information comes from quoted language in the
disclosures themselves. See, e.g., R.32 at 50.
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 within our FDA clearance. And I quote,
“Clinical data submitted in the 510(k)
demonstrates the nerve conduction measurements
obtained using the NC-Stat System are
comparable to those obtained using
conventional nerve conduction measurement
equipment.” As detailed here, the NC-Stat
System performs standard nerve conduction
measurements.
* * *
Furthermore, as reported by our customers, we
believe the technology has been routinely
reimbursed by over 600 payors, including all
Medicare carriers and nearly all commercial
and worker’s compensation payors throughout
the nation. Several Medicare carriers have
draft LCDs or local coverage determinations,
which includes select potential concerns for
NeuroMetrix, which if implemented as a final
policy could adversely impact the
reimbursement for the NC-Stat. . . .

Another Medicare carrier, Cigna, has issued a
draft LCD for NCS test[s] recently. And in
our review with Cigna, we noted that this does
not include any reference to the NC-Stat
System. Of course, this does not surprise us,
as the NC-Stat System performs standard nerve
conduction measurements. Our concern with the
draft is that if it implies that needle EMG
should be performed with the majority of nerve
conduction studies, we believe that the
decision to perform NCS and/or needle EMG
should be left up to the physician’s clinical
judgment and also supported by the evidence-
based medical guidelines.

R.32 at 50 (omissions in original). The principals then took

questions from the analysts. Specifically, an analyst noted:

Obviously, there are a couple of policies out
there, a couple of others in draft. Just
wanted to see what type of feedback you are
getting from your client base. . . . Are we
continuing to see good reimbursement etcetera?

Id. at 50-51. In response, Mr. Gregory replied:

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 The reimbursement landscape today remains
straightforward for the vast majority of our
customers.

And if you look at the areas where we have
some draft LCDs in question, when you really
distill it, it’s a relatively small portion of
the country. As importantly, it’s only for
Medicare, which we estimate to be less than
30% of the total testing that is done with the
NC-Stat System. So, as a broad sweeping
statement, the landscape on reimbursement for
our customers is straightforward and it
remains so for nearly all of them.

As importantly and as you all know, many of
these areas of question are just that--still
in question. And the LCDs are just that draft
and not implemented. So, that gives you a
little bit of a flavor but I think that the
landscape has certainly got some elements in
front [of] it before us but nothing has been
implemented and we have already given you some
good flavor I believe on our view on this and
how we are approaching it.

Id. at 51. Thereafter, another analyst asked how the

“reimbursement team” had responded to the draft coverage

determinations. Id. Mr. Gozani stated that the position of

NeuroMetrix “is always to deliver the facts to our customer base

. . . and allow[] the customer to be equipped with the information

to be able to perform their own activities and billing practices.”

Id.

Anima claims that all of these statements on the call

were misleading for failing to state the serious risk of non-

reimbursement, the opinions of the reimbursement experts, and the

facts concerning use by non-medical office staff. We find no merit

-49-
to these objections, for reasons set forth above. Anima also

submits that in these statements, the “Defendants failed to

disclose that the Company was by this time receiving widespread and

pervasive complaints from sales representatives, physicians and

other customers regarding reimbursement and billing problems.” Id.

at 51-52. As noted above, the factual allegations are simply

insufficient to support the charge that the company was aware of

“widespread and pervasive complaints” at this time or any other.

See supra note 7.

7. Quarterly Report, Third Quarter 2006

On November 9, 2006, the company filed its report for the

third quarter. In it, in addition to the same statements made in

the previous quarters that “[g]enerally, . . . the nerve conduction

studies performed by our customers with the NC-Stat System have

been satisfactorily covered by third-party payers,” id. at 52

(emphasis omitted), the company made additional statements

regarding the reimbursement landscape:

At any point in time, a number of third-party
payers may take the position of not
reimbursing our customers for their use of the
NC-Stat System. Recently, two local Medicare
carriers covering Florida, Texas and several
additional states issued policies indicating
that physicians using the NC-Stat System will
not be reimbursed under the existing Current
Procedural Terminology (“CPT”) codes for nerve
conduction testing (95900, 95903 and 95904)
but rather should submit for reimbursement

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 under a separate miscellaneous neurological
procedure code (95999). We do not know what
success our customers will have in obtaining
reimbursement under this code and what level
of reimbursement they may receive. This
decision could potentially adversely impact
our future revenues. In addition, several
additional local Medicare carriers have issued
draft local coverage determinations, which if
implemented as final policies, could adversely
impact the reimbursement received by our
customers and therefore potentially adversely
impact our future revenues.

Id. at 52 (emphasis in original). The risk factors also were

updated to include a reference to the possibility that providers

would be unable to receive sufficient reimbursement and that, as a

result, “our future product sales will be severely harmed.” Id. at

53 (emphasis omitted).

The quarterly report is alleged to be misleading for

failure to include the factual allegations made by the plaintiffs

regarding the serious risk of non-reimbursement and the marketing

techniques employed by the company, as well as that the company was

receiving “widespread and pervasive complaints.” Again, we find no

support in the factual allegations of the complaint for allegations

of widespread reimbursement problems. Further, none of the other

omitted facts alleged in the complaint rendered this statement so

incomplete as to mislead. Indeed, this statement specifically

disclosed more about the problems with reimbursement (including the

references to regional Medicare carriers) than we are able to

discern elsewhere in the factual allegations of the complaint.

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 8. Quarterly Report, Fourth Quarter 2006

On February 1, 2007, NeuroMetrix hosted another

conference call with investors. In the discussion of

reimbursement, Mr. Gregory stated:

Through the course of 2006, several Medicare
carriers issued draft LCDs, or local coverage
determinations, which included select
potential concerns for NeuroMetrix. . . .
We’re pleased that the majority of these draft
LCDs across Palmetto, Cigna, and NIHC were
modified and/or not implemented.
* * *
In response, we have retained a team of
reimbursement experts to assist us in
assessing and challenging these coding
articles. Based upon their review, . . . we
believe our customers should be able to
perform medically appropriate NCS tests and
appropriately bill them under standard NCS
codes. . . .

Id. at 54-55 (certain omissions in original). This statement was

not misleading for failing to include the same facts regarding

reimbursement repeated throughout the complaint. Further, the

complaint does not allege specifically that the information

regarding the positive developments for reimbursement are incorrect

or overstated, nor are any contrary facts specifically alleged that

would alter the total mix of facts.

9. Annual Report, 2006

In the 2006 Annual Report, issued March 29, 2007, the

Company issued “more extensive risk disclosures.” Id. at 55.

Those disclosures included that (1) five regional Medicare carriers
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covering a total of twenty states issued draft local coverage

determinations that could adversely affect reimbursement, including

several that would not reimburse for NC-Stat procedures under the

neurology codes; (2) the AMA Editorial Panel formed a committee to

examine coding practices for similar devices; and (3) local

coverage determinations and “coding articles” addressed other

issues, including the background and training of physicians

performing the tests. Id. The report stated that the company did

not believe that the local coverage determinations prohibited

physicians from receiving reimbursement for the NC-Stat, but

acknowledged that “they do appear targeted at limiting access to

perform and/or reimbursement for nerve conduction studies.” Id. at

56.

As with its fourth quarter 2006 statement, this

disclosure provides more information about the reimbursement

landscape than do the company’s earlier statements and reports. We

cannot find it to be materially misleading under these

circumstances.

10. Quarterly Report & Earnings Call, First Quarter
2007

On a conference call detailing first quarter 2007

results, held May 1, 2007, Mr. Gregory reiterated his usual

statements about generally satisfactory reimbursement. He again

noted that the AMA Editorial Panel had the coding of the procedure

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under review and that the timing of its decision was uncertain.

Finally, he reiterated the company’s belief that the existing

neurology codes were appropriate, listing a number of factors,

including “that the Medicare Physician Fee Schedule details the

codes and corresponding RVUs for [the] procedure.” Id. at 56.

Anima claims that the statement is misleading for all of

the same reasons cited with respect to the other statements. In

addition, Anima contends that the statement regarding the Medicare

Physician Fee Schedule “was blatantly false,” because “[t]he

Director of Reimbursement had expressly told [the defendants] that

the fee schedule and RVUs assigned to [the neurology codes] were

not weighted or valued for the NC-Stat and could not be used for

automated nerve conduction studies performed with the NC-Stat

test.” Id. at 57. The difficulty for Anima remains that, like the

other allegations concerning the experts’ opinions, we have not

required dissenting internal opinions to be disclosed. See

Cooperman, 171 F.3d at 49; see also discussion supra at II.C.1.8

On May 9, 2007, NeuroMetrix filed its quarterly report

for the first quarter of 2007, a full two pages of which are

excerpted into the complaint. In the excerpt, the company modified

its language in earlier statements about satisfactory reimbursement

to reflect several then-emerging problems and stated that “[a]

8
The plaintiffs make an identical argument with respect to
the near-identical disclosure in the July 2007 earnings call. We
do not address it separately.
-54-
number of third-party payers, including commercial payers, have

taken and may continue to take the position of not reimbursing our

customers for their use of the NC-Stat System.” R.32 at 57. The

disclosure then notes that Medicare providers covering twenty

states had indicated at various times that they would not reimburse

under the existing codes, but that one of those decisions

subsequently had been reversed; further, regional Blue Cross Blue

Shield carriers had adopted policies of not reimbursing the

procedure, calling it “experimental and investigational.” Id. at

58. The statement noted that, in certain regions, lower

reimbursement and higher claim denials had been reported and that

the future outcome of the reimbursement picture “could materially

and adversely impact our revenues and profitability.” Id. at 58.

It included information about the AMA Editorial Panel’s examination

of the appropriate codes, noting that the AMA “could potentially

take a position that could reduce or eliminate the reimbursement

for the NC-Stat System and could have the impact of deterring usage

by our customers.” Id. Further, it noted that new paperwork

requirements to document the medical necessity of the procedure

were “negatively impacting” the use of the system and were “having

an adverse impact on our revenues.” Id. Finally, it repeated the

statements in a prior disclosure that various reimbursement

policies from insurance carriers concerning related topics--such as

training requirements for physicians performing nerve conduction

-55-
studies--seemed targeted at limiting reimbursement for the NC-Stat

and similar procedures; these policies were already affecting

NeuroMetrix revenues.

Again, we conclude that these statements are not

misleading for failure to include the facts advanced by the

plaintiffs. Indeed, the company’s statements are specific about

the reimbursement problems and their probable impact on the

company’s earnings.

11. Quarterly Report, Second Quarter 2007

On August 9, 2007, NeuroMetrix issued its second quarter

report. After restating much of what appeared in the prior

quarter’s report, it noted that “a growing number of commercial

payers, including a significant number of regional Blue Cross Blue

Shield carriers have adopted policies indicating that they will not

provide reimbursement for the use of the NC-Stat System” for

various reasons. R.32 at 61. On the issue of future profits, the

statement noted:

We anticipate that revenues in the remainder
of 2007 may continue to decline. In the
second quarter of 2007, we experienced a
decline in revenues of 17.9% from the second
quarter of 2006, which we believe primarily
resulted from the uncertainty created by the
issuance of draft LCDs, final LCDs and coding
articles addressing reimbursement for nerve
conduction studies and policies issued by
commercial payers intended to deter usage or
limit the reimbursement for the NC-Stat
System. These developments and other future

-56-
 reimbursement decisions could continue to
adversely impact reimbursement for procedures
performed using the NC-Stat System. Our
revenues in the remainder of 2007 are likely
to be impacted by (a) the level of
reimbursement, if any, established for
procedures performed using the NC-Stat System
by these carriers and other third-party
payers; (b) whether final LCDs are applied in
a manner that places additional restrictions
or qualifications on the performance of these
procedures; (c) any other reimbursement
determinations relating to nerve conduction
studies that may be issued by third party
payers; (d) any other events causing
uncertainty as to the existence or amount of
reimbursement physicians are likely to receive
for performing procedures using the NC-Stat
System or (e) decisions potentially
forthcoming from the AMA CPT Editorial Panel
regarding reimbursement codes for nerve
conduction studies.

Id. at 61-62. Anima claims that the disclosure was misleading for

failing to include all of the same information we already have set

forth. Again, this statement is far more detailed and includes

actual negative results, a consideration far more relevant to an

investor than prior predictions of these results.

12. Quarterly Report & Earnings Call, Third Quarter
2007

Finally, Anima challenges the third quarter 2007

disclosures. In the earnings call, the defendants noted that the

AMA Panel’s work was underway, and they anticipated that any of a

number of recommendations could result, including continued

reimbursement under the existing codes or new codes that could

-57-
reimburse at various levels. They reiterated their belief that the

current codes were sufficient and appropriate and their reasoning.

On November 8, 2007, the company filed its third quarter

report. In the three pages of excerpts included in the complaint,

the defendants noted declining revenues, which they attributed to

“adverse developments over the last several quarters relating to

. . . reimbursement.” Id. at 63. They further noted that they

expected recommendations from the AMA Editorial Panel, “which may

or may not be beneficial,” in early 2008. Id. They noted the

ongoing difficulties with reimbursement and added that

“[a]dditional third-party payers, including local Medicare carriers

and commercial payers, could potentially take a position that could

reduce or eliminate the reimbursement for the NC-Stat System and

could have the impact of deterring usage by our customers.” Id. at

66.

As with the other statements from late in the class

period, this disclosure is more comprehensive on the problems being

faced by NeuroMetrix than are the factual allegations in the

complaint. The district court was correct to dismiss the claim

based on this statement.

Conclusion

In summary, because the allegations of the complaint do

not identify any actionable misstatements under the securities

-58-
laws, we affirm the judgment of the district court dismissing the

10b-5 claims.9 Further, because the 20(a) claims are derivative of

the 10b-5 claims, ACA Fin. Guar., 512 F.3d at 67-68, we affirm the

district court’s judgment that those claims must fail as well.

The judgment of the district court is affirmed.

AFFIRMED.

9
Accordingly, we do not address the defendants’ alternate
theories, that the complaint fails to allege adequately scienter
and loss causation.
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