Phillip J. Singer v. Kenneth Reali

PUBLISHED

UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT

No. 15-2579

PHILLIP J. SINGER, Individually and on behalf of all other persons similarly
situated,

Plaintiff – Appellant,

and

JOEL CAPLIN, Individually and on behalf of all others similarly situated,

Plaintiff,

v.

KENNETH REALI; JOSEPH P. SLATTERY; RICHARD RANDALL;
MICHAEL LUETKEMEYER; TRANS1, INC.,

Defendants – Appellees.

No. 16-1019

PHILLIP J. SINGER, Individually and on behalf of all other persons similarly
situated,

Plaintiff – Appellee,

and

JOEL CAPLIN, Individually and on behalf of all others similarly situated,

Plaintiff,

v.
KENNETH REALI; JOSEPH P. SLATTERY; RICHARD RANDALL;
MICHAEL LUETKEMEYER; TRANS1, INC.,

Defendants – Appellants.

Appeals from the United States District Court for the Eastern District of North Carolina, at
Wilmington. James C. Fox, Senior District Judge. (7:12-cv-00023-F)

Argued: January 25, 2017 Decided: February 22, 2018

Before KING, AGEE, and FLOYD, Circuit Judges.

No. 15-2579 vacated and remanded, and No. 16-1019 affirmed, by published opinion.
Judge King wrote the majority opinion, in which Judge Floyd joined. Judge Agee wrote a
dissenting opinion.

ARGUED: Jeremy Alan Lieberman, POMERANTZ LLP, New York, New York, for
Appellant/Cross-Appellee. Stephen L. Ram, Aaron C. Humes, STRADLING YOCCA
CARLSON & RAUTH, P.C., Newport Beach, California, for Appellees/Cross-Appellants.
ON BRIEF: Michele S. Carino, POMERANTZ LLP, New York, New York, for
Appellant/Cross-Appellee. John F. Cannon, STRADLING YOCCA CARLSON &
RAUTH, P.C., Newport Beach, California; Jonathan D. Sasser, Thomas H. Segars, Kelly
Margolis Dagger, ELLIS & WINTERS LLP, Raleigh, North Carolina, for
Appellees/Cross-Appellants.

2
KING, Circuit Judge:

These appeals arise from the dismissal of a securities fraud class action complaint

in the Eastern District of North Carolina. The action relates to the healthcare provider

reimbursement practices of defendant TranS1, Inc., and four officers thereof — defendants

Kenneth Reali, Joseph P. Slattery, Richard Randall, and Michael Luetkemeyer

(collectively, the “Officers”) — in connection with TranS1’s AxiaLIF system (the

“System”). According to the operative second amended complaint of lead plaintiff Phillip

J. Singer (the “Complaint”), TranS1 and the Officers (together, the “Company”) conjured

up and carried out a scheme that enabled surgeons to utilize the System and secure

fraudulent reimbursements from various health insurers and government-funded healthcare

programs. The scheme resulted in federal False Claims Act proceedings against TranS1 in

the District of Maryland and a fraud investigation conducted by the Department of Health

and Human Services (the “DHHS”). On the theory that the Company had concealed the

fraudulent reimbursement scheme from the market by way of false and misleading

statements and omissions — and that TranS1’s stock price dropped precipitously when the

scheme was finally revealed — this class action was initiated pursuant to, inter alia, section

10(b) of the Securities Exchange Act.

In dismissing the Complaint with prejudice, the district court concluded that,

although the Complaint alleges the loss causation element of the section 10(b) claim, it

does not sufficiently plead the material misrepresentation element or the scienter element

of that claim. By his appeal (No. 15-2579), Singer seeks reinstatement of the Complaint,

contesting the court’s rulings on the misrepresentation and scienter elements. TranS1 and

3
the Officers have cross-appealed (No. 16-1019), asserting that the court erred in rejecting

their challenge to the loss causation element. As explained herein, we vacate in No. 15-

2579 the court’s rulings that the Complaint fails to satisfy the misrepresentation and

scienter elements, and we affirm in No. 16-1019 the court’s ruling that the Complaint

sufficiently alleges the loss causation element. Consequently, we remand for further

proceedings.

I.

A.

According to the Complaint, TranS1 is a medical device company that first received

approval in 2004 to sell the System, which was designed for minimally invasive surgery

on the lower lumbar spine to treat degenerative disc disease. See Compl. ¶¶ 2, 25, 27. 1 A

System surgery utilizes a “pre-sacral approach” — i.e., the surgery is performed straight

up the tailbone, with the patient remaining on her stomach — differentiating it from more

common surgeries performed through the anterior portion of the spine. Id. ¶¶ 2, 26.

TranS1 derives its revenues almost entirely from sales of the System and related surgical

1
Because we are assessing the dismissal of the Complaint, we accept as true all
well-pleaded facts in the Complaint and construe them in the light most favorable to lead
plaintiff Singer. See SD3, LLC v. Black & Decker (U.S.) Inc., 801 F.3d 412, 422 (4th Cir.
2015). In so doing, we draw all reasonable inferences in favor of Singer. See Nemet
Chevrolet, Ltd. v. Consumeraffairs.com, Inc., 591 F.3d 250, 253 (4th Cir. 2009). We are
also entitled to consider matters of which the district court took judicial notice. See Katyle
v. Penn Nat’l Gaming, Inc., 637 F.3d 462, 466 (4th Cir. 2011). Facts drawn from the
Complaint and from judicially noticed documents are thus recited in the light most
favorable to Singer.

4
instruments, as well as from a share of the reimbursements made by health insurers and

government-funded healthcare programs to surgeons for spinal surgeries using the System.

Id. ¶¶ 3, 25. The financial success of the Company largely hinges on surgeons’

reimbursement claims being paid, not only because TranS1 receives a share of those

reimbursements, but also because, if the reimbursement claims were denied, surgeons

“would simply stop utilizing the [System].” Id. ¶ 4.

In this securities fraud class action, the putative class includes those investors in

TranS1 who purchased common stock between February 23, 2009, and October 17, 2011

— the period in which the Complaint alleges that the Company’s fraudulent reimbursement

scheme was concealed from the market. See Compl. ¶ 1. Each of the Officers was, in one

capacity or another, involved in the management of TranS1 during the relevant time

frame. 2

The Complaint explains that a healthcare provider submitting a reimbursement

claim for a surgery is obliged to use Current Procedural Terminology codes (“CPT codes”)

promulgated by the American Medical Association (the “AMA”). See Compl. ¶ 4. For

spinal surgeries, the AMA generally adheres to the coding recommendations provided by

2
As described in the Complaint, Reali was TranS1’s CEO (since January 2011),
president (since January 2010), and COO (January 2010 to January 2011), and also on its
board of directors (since January 2011); Slattery was TranS1’s CFO (since April 2010) and
on its board of directors (November 2007 to April 2010); Randall was TranS1’s CEO (June
2002 to January 2011), its president (June 2002 to January 2010), and on its board of
directors (since June 2002), and also was the executive chairman since leaving his post as
CEO; and Luetkemeyer was TranS1’s CFO (April 2007 to March 2010). See Compl.
¶¶ 20-23.

5
the National Association of Spine Surgeons (the “NASS”). Id. The various CPT codes

fall into three categories, which are designated as Categories I, II, and III. Only the

Category I and Category III codes are relevant here. A Category I code indicates that a

surgical procedure is “traditional” and widely accepted in the medical community, assuring

a full or substantial reimbursement. Id. ¶ 6. On the other hand, the use of a Category III

code reflects that the procedure is “experimental” and not widely accepted. Id. ¶ 5. A

Category III code often results in no reimbursement at all, dissuading healthcare providers

from performing Category III procedures. Id. ¶ 6.

Relevant here, the System was initially coded as a Category I anterior fusion

procedure and thus garnered a full or substantial reimbursement. See Compl. ¶¶ 5, 29. In

February 2008, however, the NASS recommended that the coding for the System be

changed to Category III, because the System is unlike traditional anterior fusion procedures

and “suffered from a dearth of safety and efficacy data.” Id. ¶¶ 5, 30. 3 The AMA adopted

the NASS recommendation and, effective January 1, 2009, required the System to be coded

under Category III. Id.

B.

The Category III coding requirement threatened TranS1’s revenue stream and

financial viability, in that surgeons could no longer count on reimbursements from health

insurers and government-funded healthcare programs for using the System. See Compl.

3
According to the Complaint, the System does not constitute a Category I anterior
fusion procedure because, inter alia, System surgeries are “performed straight up the
tailbone and never approach[] the anterior portion of the spine.” See Compl. ¶ 33.

6
¶¶ 6, 30. The Complaint alleges that, as a result of the new Category III code, the Company

concocted and carried out its multifaceted and sophisticated fraudulent reimbursement

scheme. Id. ¶ 7. The crux of that scheme was “to convince surgeons to engage in improper

reimbursement practices in direct violation of” various statutes, including the federal False

Claims Act. Id. ¶ 31. That is, the Company “encouraged and coached surgeons to utilize

alternate codes, instead of the mandated experimental Category III designation assigned to

[the System], in order to allow for reimbursement for the procedure.” Id.

The Complaint describes the fraudulent reimbursement scheme as it was perpetrated

and carried out by the Company. Pursuant to that scheme, the Company on occasion

acknowledged the System’s new Category III code and some of the difficulty in securing

reimbursement for it, but at other times encouraged and instructed surgeons to nevertheless

use a Category I code for the System. The fraudulent reimbursement scheme was executed

by way of, inter alia, the following:

• The Company formed a reimbursement committee to train surgeons
on how to avoid the mandatory Category III code for the System. The
head of the committee, a TranS1 employee, gave presentations
detailing exactly which non-Category III codes to use and in what
manner, and she established a “hotline” for surgeons to call to get
coding advice. Pursuant to her instructions, when surgeons did use
the Category III code, they were to “bury” it in the reimbursement
claim so that the insurer might overlook it. See Compl. ¶¶ 32, 51.

• During conference calls with its third-party product distributors, the
Company instructed the distributors to advise surgeons that the
System should be coded as a Category I anterior fusion procedure, as
it had been prior to the AMA’s adoption of the Category III code. In
an effort to quell the concerns of surgeons who were aware of the new
Category III designation, the Company further advised the distributors
to tell such surgeons that “all surgeons” were using a Category I code
for the System. Id. ¶¶ 33, 56.
7
 • The Company conducted on-site training sessions designed to
encourage surgeons to exchange tips on how to “manipulate” coding
to get reimbursed. The most popular site was Cincinnati, Ohio, where
TranS1’s top consultant gave numerous presentations wherein he
coded the System under Category I. Id. ¶¶ 34, 62.

• The Company drafted and distributed a reimbursement guide, dated
January 1 through June 30, 2009, for surgeons to use in making
successful claims for reimbursement of System surgeries. It was only
on the guide’s last page that the Company acknowledged the required
Category III code for the System and the unlikelihood of
reimbursement for Category III procedures. Id. ¶ 35.

• At the behest of the Company, TranS1’s top consultant created a
template demonstrating how to improperly code the System as a
Category I anterior fusion procedure. The template contained
suggested post-operation notes meant to disguise the fact that a
surgery involved the non-reimbursable System. Id. ¶¶ 36, 63.

• At TranS1’s annual national meeting in 2009 — attended by many of
its employees and executives — the Company promoted the continued
use of a Category I code for the System, despite the AMA’s
mandatory Category III code. The “official company line” to
surgeons was, “‘We have a [Category III] code, but here’s how other
[surgeons] are coding it.’” Id. ¶¶ 37, 64.

The Complaint describes the Company’s fraudulent reimbursement scheme — and

especially its efforts to have surgeons code the System under Category I, rather than

Category III — as “blatant gamesmanship [that] created an acute risk that [TranS1] would

be subject to legal action as well as scrutiny by the DHHS and other regulatory bodies.”

Id. ¶ 38.

8
 C.

1.

After implementing the fraudulent reimbursement scheme, the Company concealed

the scheme from the market by numerous false and misleading statements and omissions.

See Compl. ¶ 12. The Company specifically failed to disclose, inter alia, that it “engaged

in a scheme to encourage surgeons to continue using the [Category I] code for anterior

procedures in direct disregard of the AMA’s Category III code assignment for [the

System],” and that TranS1’s “revenues, derived primarily from sales of [the System] as

well as a portion of the insurance reimbursement each performing provider received as a

result of using improper billing codes for [the System], were generated as a direct result of

[the Company’s] improper coding scheme.” Id.

The Complaint describes various false and misleading statements and omissions of

the Company. For example, on February 23, 2009, Officers Randall and Luetkemeyer

participated in a conference call with analysts for TranS1’s fourth quarter of 2008. See

Compl. ¶ 69. During that conference call, without acknowledging the fraudulent

reimbursement scheme, Randall stated that the Company was assisting surgeons in

obtaining so-called “‘appropriate reimbursement for our procedure.’” Id. Both Randall

and Luetkemeyer opined that there would not be “‘any significant additional headwind’”

with respect to the new Category III coding requirement for the System. Id. They did not

explain that the reason they expected continuing reimbursements was that the Company

was coaching surgeons to improperly avoid the mandatory Category III code. Id. ¶ 72.

9
 In the 2008 Form 10-K 4 filed by TranS1 with the Securities and Exchange

Commission (the “SEC”) on March 13, 2009, TranS1 reported a single source of revenue,

i.e., “‘sales of [the System] and related surgical instruments.’” See Compl. ¶¶ 70-71. By

that Form 10-K, the Company acknowledged the new Category III code for the System and

related that merely “‘some’” health insurers and government-funded healthcare programs

“‘may not reimburse’” Category III procedures. Id. ¶ 71. The Company further

downplayed the significance of the Category III code by suggesting that the System was

gaining in popularity and thus unlikely to carry the Category III code for long. Id. The

Company also represented that the Category III code for the System “‘is only one of up to

10 different CPT codes physicians may submit to capture the entirety of a spinal fusion

[surgery,] lessening the impact should payment for [the System] be initially denied.’” Id.

Meanwhile, the Company omitted the fraudulent coding practices that it advised be utilized

and that were then being employed by surgeons to secure reimbursements for the System

itself. Id. ¶ 72.

In the subsequent 2009 and 2010 Form 10-Ks and in the various quarterly filings of

Form 10-Qs 5 submitted by TranS1 to the SEC, the Company substantially repeated the

false and misleading statements and omissions of the 2008 Form 10-K. See Compl. ¶¶ 75-

4
Pursuant to federal securities statutes and regulations, publicly traded companies
are required to annually file a Form 10-K with the SEC. See 15 U.S.C. §§ 78m, 78o(d); 17
C.F.R. § 249.310.
5
Like a Form 10-K, a Form 10-Q is filed with the SEC under the federal securities
statutes and regulations. See 15 U.S.C. §§ 78m, 78o(d); 17 C.F.R. § 249.308a.

10
76, 78-79, 81-82, 84-86, 89-90, 92-93, 95-96, 98-100, 102-103, 105-106. Those filings

variously touted a growing acceptance of the System among health insurers and providers,

see, e.g., id. ¶¶ 81, 85, 99, and attributed revenue losses to “‘concerns and uncertainty in

the marketplace surrounding physician reimbursement for our . . . procedure,’” id. ¶¶ 89,

92, 95. Like the 2008 Form 10-K, the subsequent filings with the SEC omitted mention of

the Company’s reliance on the fraudulent reimbursement scheme to generate the revenues

that TranS1 did have. Nevertheless, two or more of the Officers signed each of the Form

10-Ks and Form 10-Qs filed by TranS1 during the relevant timeframe, and two Officers

certified “‘that the financial information contained in [each filing] was accurate and that

they disclosed any material changes to [TranS1’s] internal control over financial

reporting.’” Id. ¶¶ 70, 75, 78, 81, 84, 89, 92, 95, 98, 102, 105.

2.

As TranS1 suffered losses from 2009 to 2011, the Company communicated the

losses to the market through press releases. See Compl. ¶¶ 73, 77, 80, 83, 87, 91, 94, 97,

101, 104. On April 27, 2009, for example, the Company reported a net loss of $5,000,000

for the first quarter of 2009. Id. ¶ 73. That very day, Officer Randall participated in a

conference call where he assured investors that “‘we remain diligent about helping our

surgeons obtain appropriate reimbursement for our procedure.’” Id. ¶ 74. Randall cited,

for example, the reimbursement committee’s “hotline” and the Company’s reimbursement

guide — without revealing that the Company was instructing surgeons to improperly code

the System. Id.

11
 Similarly, on May 4, 2010 — after reporting a net loss of $6,000,000 in the first

quarter of 2010 — Officers Slattery and Reali participated in a conference call with

financial analysts. See Compl. ¶¶ 87-88. During that call, Slattery and Reali described a

strategy to earn a Category I code for the System by “‘working with the payers to remove

our experimental designation over time,’” “‘working with the spine societies to gain

endorsement and acceptance of our procedure in a broad manner,’” and “‘working with our

physician customers getting further clinical data published and presented at key

meetings.’” Id. ¶ 88. Additionally, Slattery falsely asserted that the System’s Category III

code was “‘not an experimental code,’” but was in fact “‘a tracking code.’” Id. Once

again, the Company did not disclose the fraudulent reimbursement scheme it had devised

to ensure reimbursements despite the Category III code. Id. ¶ 90.

3.

In sum, none of the Form 10-Ks or Form 10-Qs filed with the SEC, or the various

press releases or conference calls, revealed that the Company was “engaged in a scheme to

encourage surgeons to employ CPT codes meant for anterior and other non-Category III

procedures in direct disregard of the AMA mandated Category III code for [the System].”

See Compl. ¶ 72. Nor did any of those SEC submissions or other statements explain that

“a substantial portion of [TranS1’s] earnings and revenues” were generated by the

Company’s ongoing fraudulent reimbursement scheme, and that the scheme put TranS1 at

“substantial risk” of regulatory scrutiny. Id.

12
 D.

According to the Complaint, the truth about the Company’s fraudulent

reimbursement scheme finally began to emerge in October 2011. See Compl. ¶¶ 9-10, 108-

11. Specifically, after the market closed on October 17, 2011, TranS1 filed a Form 8-K 6

with the SEC, reporting that it had received a subpoena on or about October 6, 2011, issued

by the DHHS “‘under the authority of the federal healthcare fraud and false claims

statutes.’” Id. ¶ 108. TranS1’s Form 8-K explained that the DHHS sought “‘documents

for the period January 1, 2008 through October 6, 2011.’” Id. The Complaint alleges that,

based on the Form 8-K, the market fully apprehended “that the focus of the subpoena

related to [TranS1’s] reimbursement practices, given that insurance company

reimbursement for [the System], [TranS1’s] flagship product, accounted for a majority of

its revenue.” Id. ¶ 9; see also id. ¶¶ 109-110.

As evidence of the market’s realization of the Company’s fraudulent reimbursement

scheme, the Complaint points to an analyst report issued on October 18, 2011, the day after

the revelatory Form 8-K was filed. See Compl. ¶¶ 9, 109. That analyst report revealed

factual information about TranS1 and its subpoena from the DHHS, including that the

subpoena “‘included 19 items ranging from patient names to serial lot traceability to

reimbursement communications with physicians.’” Id. ¶ 109. Additionally, the analyst

report revealed the fact that “‘half of TranS1’s revenues come from physicians still using

6
A Form 8-K — like a Form 10-K or a Form 10-Q — is a report filed under law
with the SEC, which announces major events of concern to shareholders. See 15 U.S.C.
§§ 78m, 78o(d); 17 C.F.R. § 249.308.

13
[a Category I] code (which provides reimbursement), rather than the designated [Category

III] code (which does not provide reimbursement).’” Id.

The analyst report also expressed opinions and beliefs, including that “‘we think

that [TranS1] has been making strong efforts to educate physicians about correct coding.’”

See Compl. ¶ 109 (noting that “ultimately the decision regarding which code to use lies in

the hands of the physician”). Nevertheless, premised on the known facts, the analyst report

concluded that TranS1’s subpoena from the DHHS “‘could be due to reimbursement

communications.’” Id. The analyst report also deduced that, in light of recent downsizing

by TranS1, “‘the subpoena could perhaps stem from allegations by a disgruntled former

employee.’” Id.

The very day of the analyst report — October 18, 2011 — the stock price of TranS1

collapsed, as its “securities plummeted $1.27 or 40.7%, to close at $1.85.” See Compl.

¶ 111. The Complaint describes “a massive selloff of [TranS1] shares” and an “unusually

heavy trading volume of 2.1 million shares.” Id. ¶ 10.

E.

In July 2013, it was publicly confirmed that federal False Claims Act qui tam

proceedings relating to the fraudulent reimbursement scheme had been commenced against

TranS1 by a former employee in April 2011 — six months before TranS1’s stock price

collapse. See Compl. ¶ 8. 7 In other words, the October 18, 2011 analyst report had

7
The False Claims Act is codified at 31 U.S.C. §§ 3729-3733. It imposes liability
on individuals and entities that have defrauded federal government programs. An
individual (i.e., a relator) can initiate a claim under the Act by way of a qui tam action. See

14
“surmised with radar precision that the subpoena [issued to TranS1 in early October 2011

by the DHHS] was triggered by ‘allegations by a disgruntled former employee’ relating to

[TranS1’s] illicit ‘reimbursement communications.’” Id. ¶ 9. The qui tam action against

TranS1 had been initiated by relator Kevin Ryan, a former sales manager for TranS1, in

the District of Maryland on April 21, 2011. Id. ¶¶ 8, 39-44. The action was commenced

under seal and remained sealed until July 1, 2013. Id. ¶ 8.

The qui tam complaint of April 2011 alleged in detail the fraud scheme being carried

out by TranS1 in contravention of the federal False Claims Act, as well as the Medicare

Act and the North Carolina False Claims Act. See J.A. 929-64. 8 Similar to the Complaint

in these proceedings, the qui tam complaint specified that TranS1 had “knowingly caused

to be submitted and facilitated the submission of false and fraudulent claims, statements

and/or documents to federal agencies by causing physicians and hospitals to submit

improper claims for payment to Medicare and state health insurance programs and

insurers.” Id. at 930. The qui tam complaint also alleged that, “[t]hrough the use of

incorrect and misleading billing and description codes to represent the [System], [TranS1]

fraudulently caused hospitals and physicians to obtain and continue to obtain

reimbursement from Medicare and the State of North Carolina Health Plan.” Id. at 931.

31 U.S.C. § 3730(b). The United States is entitled to intervene and control any such qui
tam action. If the action is successful, by settlement or otherwise, the relator or relators
may share in the award. Id. § 3730(d).
8
Citations herein to “J.A. ___” refer to the contents of the Joint Appendix filed by
the parties in these appeals.

15
The qui tam complaint explained, inter alia, that once the Category III code for the System

took effect at the beginning of 2009, the System could “only” be billed as a Category III

procedure. Id. at 941. Nevertheless, TranS1 instructed its sales staff and surgeons “to

disregard the [Category III code],” as part of “an intentional and systematic effort to bypass

the [Category III code] designation and to obtain reimbursement from Medicare and other

insurance programs despite the non-reimbursable status of [the System].” Id. at 951.

On June 6, 2013, the United States intervened in the qui tam action for purposes of

settlement. By a settlement agreement consummated on June 28, 2013, TranS1 agreed to

pay the United States the sum of $6,000,000 to resolve the fraud allegations of the qui tam

action with respect to federal government programs. See J.A. 905-28; see also Compl.

¶¶ 11, 46. The settlement agreement included various recitals of the contentions of the

United States against TranS1. For example, the United States contended that TranS1 had

“knowingly caused providers to submit claims [to publicly funded healthcare programs]

for [System] procedures using incorrect diagnosis or procedure codes, . . . which in some

cases resulted in providers receiving greater reimbursement than that to which they were

entitled.” See J.A. 906. In entering the settlement agreement, however, TranS1 denied

liability and the various contentions of the relator and the United States. Id. at 907. 9

9
In addition to being the subject of substantial discussion in the Complaint, the qui
tam complaint and the qui tam settlement were judicially noticed by the district court in
September 2013. See Order, Caplin v. TranS1, Inc., No. 7:12-cv-00023 (E.D.N.C. Sept.
19, 2013), ECF No. 48.

16
 F.

1.

On January 24, 2012, plaintiff Joel Caplin filed this securities fraud class action

against TranS1 and the Officers in the Eastern District of North Carolina. Shortly

thereafter, Singer moved for appointment as lead plaintiff. The district court appointed

Singer as the lead plaintiff on May 8, 2012, and he filed an amended complaint on July 9,

2012. 10

In sum, the amended complaint alleged that TranS1 and the Officers violated section

10(b) of the Securities Exchange Act — as well as § 240.10b-5 of Article 17 of the Code

of Federal Regulations (“SEC Rule 10b-5”) — by concealing the fraudulent reimbursement

scheme from the market through false and misleading statements and omissions.

According to the amended complaint, the Company thereby artificially inflated TranS1’s

stock price during the course of the fraudulent reimbursement scheme and injured investors

when the scheme was finally revealed to the public and the stock price plummeted. The

amended complaint also spelled out a claim against the Officers, under section 20(a) of the

Securities Exchange Act, alleging that they were control persons subject to individual

liability for TranS1’s violation of section 10(b).

On September 7, 2012, the Company moved to dismiss the amended complaint

pursuant to Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure and the Private

10
Caplin is yet a named plaintiff in the class action, but he is not a party to these
appeals.

17
Securities Litigation Reform Act of 1995. On September 19, 2013, the district court

granted the dismissal motion, focusing on the loss causation element of the section 10(b)

claim. See Order, Caplin v. TranS1, Inc., No. 7:12-cv-00023 (E.D.N.C. Sept. 19, 2013),

ECF No. 48. In so ruling, the court recognized that “federal courts have developed two

somewhat distinct theories of loss causation: (1) corrective disclosure theory and

(2) materialization of a concealed risk.” Id. at 13. The court analyzed both theories of loss

causation and concluded that the amended complaint had not sufficiently pleaded the loss

causation element of the section 10(b) claim under either theory. The court dismissed the

amended complaint with prejudice, on the belief that “allowing further amendment would

be futile.” Id. at 28.

2.

Singer promptly requested the district court to alter or amend its judgment and

submitted his second amended complaint, which is now the operative Complaint. Upon

reconsideration of its dismissal ruling eight months later, on May 5, 2014, the court

changed its earlier ruling and agreed that the Complaint sufficiently pleads the loss

causation element of the section 10(b) claim under the materialization of a concealed risk

theory. See Order, Singer v. TranS1, Inc., No. 7:12-cv-00023 (E.D.N.C. May 5, 2014),

ECF No. 54 (the “Reconsideration Order”). That Order relied on the Complaint’s

allegations that the October 18, 2011 decline in TranS1’s stock price resulted from the

revelation — by way of TranS1’s October 17, 2011 Form 8-K, coupled with the October

18, 2011 analyst report — of the Company’s long-concealed fraudulent reimbursement

scheme. Id. at 12 (explaining that the analyst report, “when considered in conjunction with

18
[TranS1’s] disclosure of the subpoena, . . . calls into question [TranS1’s] prior

representations that it was educating physicians about proper coding and reveals to the

public, at least in some sense, that [TranS1] was potentially improperly manipulating the

insurance reimbursement system”).

3.

On July 3, 2014, the Company moved to dismiss the Complaint, contending that it

fails to allege the material misrepresentation and scienter elements of the section 10(b)

claim. TranS1 then filed a bankruptcy petition in Delaware, which resulted in an automatic

stay of the class action proceedings with respect to TranS1.

During the bankruptcy stay, this litigation could only proceed in the district court

with respect to the Officers. On May 14, 2015, the court dismissed the Complaint as to the

Officers. See Order, Singer v. TranS1, Inc., No. 7:12-cv-00023 (E.D.N.C. May 14, 2015),

ECF No. 72 (the “Officers Order”). With respect to the material misrepresentation

element, that Order explained that the Complaint is inadequate to show that any of the

Officers “knew TranS1’s reimbursement practices were illegal” or “failed to sufficiently

disclose TranS1’s reimbursement practices.” Id. at 13-14. On the scienter element, the

Officers Order specified that the Complaint “does not allege when and how the [Officers]

knew or recklessly failed to know that their disclosures and statements were false or

misleading, much less make a powerful or cogent inference of [the Officers’] scienter.” Id.

at 20 (internal quotation marks omitted). The Officers Order further observed that, despite

being given “three opportunities to submit a complaint that meets the requirements set forth

19
herein,” Singer had “failed to do so.” Id. at 23. The Officers Order thus dismissed the

Complaint as to the Officers with prejudice.

4.

After lifting the bankruptcy stay on May 14, 2015, the district court requested

supplemental briefing on whether the dismissal motion should also be granted as to TranS1.

On December 18, 2015 — after receiving further briefing — the court granted TranS1’s

motion to dismiss. See Order, Singer v. TranS1, Inc., No. 7:12-cv-00023 (E.D.N.C. Dec.

8, 2015), ECF No. 92 (the “Final Order”).

The Final Order first explained that, because the Complaint had been dismissed as

to the Officers, “the only way . . . to establish liability as to [TranS1], the corporate

defendant, is (1) to identify some other corporate agent who made a material

misrepresentation or omission, and (2) to make allegations manifesting a strong inference

of scienter as to at least one authorized agent.” See Final Order 5. The court then

concluded, on the material misrepresentation element of the section 10(b) claim, that the

Complaint “does not sufficiently allege that any authorized corporate agent made a material

misrepresentation or omission.” Id. at 6. With respect to the scienter element, the Final

Order reiterated that, as with the Officers, the Complaint fails to allege that TranS1 “knew

that its public disclosures and statements were misleading.” Id. The Final Order thus

dismissed the Complaint as to TranS1 with prejudice.

With the Complaint fully dismissed, Singer noted his appeal in No. 15-2579,

challenging the district court’s rulings that the Complaint does not allege the material

misrepresentation and scienter elements of the section 10(b) claim. The Company

20
thereafter cross-appealed in No. 16-1019, taking issue with the Reconsideration Order’s

earlier ruling that the loss causation element is sufficiently pleaded. We possess

jurisdiction over these appeals pursuant to 28 U.S.C. § 1291.

II.

These appeals relate solely to the sufficiency of the Complaint, which we review de

novo. See Teachers’ Ret. Sys. of La. v. Hunter, 477 F.3d 162, 170 (4th Cir. 2007). In

reviewing the district court’s dismissal, we accept all factual allegations in the Complaint

as true, and we consider the Complaint in its entirety. See Matrix Capital Mgmt. Fund, LP

v. BearingPoint, Inc., 576 F.3d 172, 176 (4th Cir. 2009). We also draw all reasonable

inferences in favor of Singer. See Nemet Chevrolet, Ltd. v. Consumeraffairs.com, Inc., 591

F.3d 250, 253 (4th Cir. 2009). In addition to the Complaint, we are entitled to consider

matters of which the district court took judicial notice, including the qui tam complaint and

the qui tam settlement. See Katyle v. Penn Nat’l Gaming, Inc., 637 F.3d 462, 466 (4th Cir.

2011); see also supra note 9.

III.

We first consider Singer’s appeal (No. 15-2579), which implicates the Officers

Order and the Final Order. If we were to affirm the district court’s rulings in those Orders,

the Company’s cross-appeal would be moot, as it merely provides an alternative reason for

dismissal of the Complaint.

21
 The Complaint advances two separate claims. First, it alleges that TranS1 and the

Officers violated section 10(b) of the Securities Exchange Act, as well as its companion

regulatory provision in SEC Rule 10b-5. See 15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b-5. 11

11
Section 10(b) of the Securities Exchange Act, which is codified at § 78j(b) of Title
15 of the United States Code, provides in pertinent 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[,] . . . 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.

See 15 U.S.C. § 78j. SEC Rule 10b-5 is found in section 240.10b-5 of Title 17 of the Code
of Federal Regulations, and provides in pertinent 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 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 . . .

***

in connection with the purchase or sale of any security.

22
Second, the Complaint alleges separate violations of section 20(a) against the Officers. See

15 U.S.C. § 78t(a). 12 Section 10(b) and SEC Rule 10b-5, along with section 20(a), “act to

protect the integrity of the market in securities and prohibit fraud in connection with the

purchase or sale of a security.” See Cozzarelli v. Inspire Pharm. Inc., 549 F.3d 618, 623

(4th Cir. 2008).

The Supreme Court has recognized that a typical claim under section 10(b) and SEC

Rule 10b-5 has six elements. See Stoneridge Inv. Partners, LLC v. Sci.-Atlanta, Inc., 552

U.S. 148, 157 (2008). Those elements are the following: “(1) a material misrepresentation

or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation

or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation

or omission; (5) economic loss; and (6) loss causation.” Id. (citing Dura Pharm., Inc. v.

Broudo, 544 U.S. 336, 341-42 (2005)). Relatedly, section 20(a) is the vehicle for imposing

liability on control persons. The liability of a control person under section 20(a) is

derivative of — and dependent upon — liability of a controlled person under section 10(b).

See 17 C.F.R. § 240.10b-5.
12
Section 20(a) of the Securities Exchange Act, which is codified at § 78t(a) of Title
15 of the United States Code, provides in pertinent part:

Every 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.

See 15 U.S.C. § 78t(a).

23
See Yates v. Mun. Mortg. & Equity, LLC, 744 F.3d 874, 894 n.8 (4th Cir. 2014). Thus, if

the complaint “is legally insufficient with respect to the [section] 10(b) claim, the

[derivative section] 20(a) claim must also fail.” Id. 13

Importantly, the allegations of securities fraud claims in the federal courts are

subject to strict pleading standards. As a general proposition, “[i]n alleging fraud . . . , a

party must state with particularity the circumstances constituting fraud.” See Fed. R. Civ.

P. 9(b). Moreover, the Private Securities Litigation Reform Act of 1995 imposes additional

pleading requirements to prevent Securities Exchange Act claims from being “employed

abusively to impose substantial costs on companies and individuals whose conduct

conforms to the law.” See Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 313

(2007). Pursuant thereto, a securities fraud complaint must “specify each statement alleged

to have been misleading, [and] the reason or reasons why the statement is misleading.” See

15 U.S.C. § 78u-4(b)(1). Further, “the complaint shall . . . 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). If those exacting pleading requirements are not satisfied, the

complaint must be dismissed. See Cozzarelli, 549 F.3d at 623.

13
The district court dismissed the section 20(a) claim against the Officers solely
because the Complaint does not sufficiently plead the section 10(b) claim. Nevertheless,
as an alternative ground for affirmance of the court’s dismissal of the section 20(a) claim,
the Company maintains that the Complaint merely and inadequately “alleges that by virtue
of the [Officers’] corporate positions they had control.” See Br. of Appellees 66. Because
the court did not address that contention, we do not address it, though it may be considered
on remand. See United States ex rel. Carson v. Manor Care, Inc., 851 F.3d 293, 307 n.7
(4th Cir. 2017).

24
 In his appeal, Singer challenges the district court’s rulings — in the Officers Order

and the Final Order — that the Complaint fails to allege the material misrepresentation and

scienter elements of the section 10(b) claim. As explained below, the Complaint

sufficiently pleads those elements. Accordingly, we vacate the court’s rulings with respect

to the misrepresentation and scienter elements.

A.

To begin, the Company argues that the Complaint fails to allege the material

misrepresentation element. That element of a section 10(b) claim requires an allegation

that the defendant acted deceptively, i.e., that the defendant engaged in deceptive acts such

as “misstatements” and “omissions by those with a duty to disclose.” See U.S. S.E.C. v.

Pirate Inv’r LLC, 580 F.3d 233, 239-40 (4th Cir. 2009). Furthermore, the deceptive act

“must concern a material fact.” Id. at 240.

1.

As set forth above, the Complaint specifies a series of statements alleged to have

been misleading, because of both what was falsely said and what was deceptively omitted.

By those statements — made by the Officers in SEC filings, press releases, and conference

calls — the Company acknowledged the new Category III code for the System and efforts

to eventually return to a Category I code. At the same time, however, the Company

misrepresented the assistance and training it was providing to surgeons as being wholly for

the attainment of “‘appropriate’” — i.e., legal — reimbursements for the System. See, e.g.,

Compl. ¶¶ 69, 74. The Company also misrepresented that the Category III code was “‘not

an experimental code.’” Id. ¶ 88. Meanwhile, the Company downplayed the immediate

25
financial consequences of the Category III code, and suggested that losses would be

insignificant and temporary. Throughout the Officers’ statements, they omitted key facts:

that the Company was coaching surgeons to improperly use a Category I code for the

System, rather than the mandatory Category III code, and was relying on that fraudulent

reimbursement scheme to generate a substantial portion of TranS1’s continuing revenues.

In light of those allegations, the Complaint sufficiently pleads the material

misrepresentation element of the section 10(b) claim. That is, the Complaint’s allegations

of false and misleading statements and omissions easily survive a materiality analysis at

the dismissal stage of the proceedings. See Pirate Inv’r, 580 F.3d at 240 (explaining that

a “fact stated or omitted is material if there is a substantial likelihood that a reasonable

purchaser or seller of a security (1) would consider the fact important in deciding whether

to buy or sell the security or (2) would have viewed the total mix of information made

available to be significantly altered by disclosure of the fact” (internal quotation marks

omitted)); see also Ganino v. Citizens Utils. Co., 228 F.3d 154, 162 (2d Cir. 2000)

(recognizing that “a complaint may not properly be dismissed on the ground that the

alleged misstatements or omissions are not material unless they are so obviously

unimportant to a reasonable investor that reasonable minds could not differ on the question

of their importance” (alteration and internal quotation marks omitted)).

Furthermore, the Complaint adequately alleges that the Company acted deceptively

by way of misstatements and omissions by those with a duty to disclose. The Complaint’s

focus is on the Company’s repeated failure to divulge its fraudulent reimbursement scheme.

Of course, as the Supreme Court has observed, section 10(b) and SEC Rule 10b-5 “do not

26
create an affirmative duty to disclose any and all material information.” See Matrixx

Initiatives, Inc. v. Siracusano, 563 U.S. 27, 44 (2011); see also Basic, Inc. v. Levinson, 485

U.S. 224, 239 n.17 (1988) (“Silence, absent a duty to disclose, is not misleading under

[SEC] Rule 10b-5.”). Nevertheless, disclosure of material information is required “when

necessary to make statements made, in the light of the circumstances under which they

were made, not misleading.” See Matrixx Initiatives, 563 U.S. at 44 (alteration and internal

quotation marks omitted). In other words, “companies can control what they have to

disclose under [section 10(b) and SEC Rule 10b-5] by controlling what they say to the

market.” Id.

Under the Complaint, by choosing to inform the market that it was training surgeons

on how to obtain reimbursements for the System in the wake of the AMA’s Category III

coding requirement, the Company was obliged to further disclose its fraudulent

reimbursement scheme, i.e., its instructions to surgeons to unlawfully code the System

under Category I. Otherwise, the Officers’ statements about the Company’s training efforts

were utterly misleading. The same is true of the Officers’ statements that the Category III

code was causing only limited losses; by not disclosing the Company’s fraudulent

reimbursement scheme and improper use of Category I codes, the Officers misled the

market about the actual source of TranS1’s continuing revenues. As such, the Complaint

alleges that the Company possessed — and breached — a duty to disclose the fraudulent

reimbursement scheme. See, e.g., Meyer v. Jinkosolar Holdings Co., 761 F.3d 245, 250

(2d Cir. 2014) (“Even when there is no existing independent duty to disclose information,

once a company speaks on an issue or topic, there is a duty to tell the whole truth.”); see

27
also Br. of Appellant 37 (“Having put coding and reimbursement front and center [on every

analyst conference call and in every public filing during the class period], [the Company

was] compelled to disclose the full extent of [its] reimbursement strategy . . . .”).

2.

The Company nevertheless contends that the Complaint is fatally insufficient on the

material misrepresentation element for several reasons. First, the Company argues that the

Complaint reflects that the Company fully disclosed its reimbursement practices, rendering

the Officers’ statements not misleading. We reject that contention. To be sure, the Officers

informed the market that the Company was assisting surgeons in obtaining reimbursements

for the System by way of, e.g., its “hotline” and reimbursement guide. The Officers also

acknowledged the AMA’s designation of the System as a Category III procedure and

provided some truthful information relevant thereto. Such information included that the

Company was making efforts to reobtain a Category I code for the System. It also included

that, in the meantime, surgeons using the Category III code might be denied payment for

the System itself, but could at least be reimbursed for other aspects of a spinal surgery.

Critically, however, the Officers did not disclose that the Company was coaching surgeons

to improperly use a Category I code for the System, rather than the mandatory Category III

code.

Next, the Company maintains that the Complaint does not properly allege violations

of the federal False Claims Act or any other law, in that no court or other adjudicative body

has found the Company’s reimbursement practices to be illegal, and that the Complaint

explains no theory of illegality. Unfortunately for the Company, the duty to disclose may

28
extend to uncharged and unadjudicated illegal conduct. See, e.g., Menaldi v. Och-Ziff

Capital Mgmt. Grp. LLC, 164 F. Supp. 3d 568, 581 (S.D.N.Y. 2016) (observing that “a

corporation may be compelled to disclose uncharged wrongdoing if its statements are or

become materially misleading in the absence of disclosure”). Moreover, even if the

Complaint insufficiently describes how the scheme contravenes the False Claims Act and

other statutes, the judicially noticed qui tam complaint fully explains the scheme’s alleged

illegality. See J.A. 929-64 (enumerating, inter alia, provisions of False Claims Act and

compliance rules governing Medicare payments, as well as Company’s conduct violative

thereof).

Relying on the Sixth Circuit’s 2009 decision in Indiana State District Council of

Laborers & Hod Carriers Pension & Welfare Fund v. Omnicare, Inc., 583 F.3d 935 (6th

Cir. 2009), the Company also contends that it had no duty to disclose its reimbursement

practices because the Complaint does not allege that the Company specifically asserted it

was complying with a particular law. In Omnicare, the plaintiffs were pursuing a section

10(b) claim on the theory that the defendant corporation “had a duty to disclose its

involvement in ‘illegal’ activities,” in that it had “made several general statements that it

complied with state law and regulations and had a policy of complying with the law.” See

583 F.3d at 945. The court of appeals rejected the plaintiffs’ theory, because the complaint

did “not sufficiently establish that [the corporation and its officers] actually knew that the

‘legal compliance’ statements were false when made,” and because “the generic claim of

lawfulness, in the absence of any specifics, [did not] require the disclosure of the allegedly

‘illegal’ activities.” Id. at 947. Contrary to the Company’s contention herein, the

29
Omnicare decision did not hold that there is never a duty to disclose an illegal activity

absent a specific assertion of compliance with the relevant law. Rather, the Omnicare court

simply concluded that the generic assertions of legal compliance made in that case —

without more — did not engender a duty to disclose the illegal activities alleged by the

plaintiffs. Here, the Complaint does not depend on mere generic assertions of legal

compliance to establish the Company’s duty to disclose its fraudulent reimbursement

scheme. The Complaint relies instead on the Company’s choice to speak about its

reimbursement practices — including, but not limited to, its efforts to train surgeons to

attain “‘appropriate’” reimbursements — without telling the whole, material truth.

Accordingly, the Omnicare decision is inapposite to the material misrepresentation

analysis in these proceedings. 14

Finally, the Company argues that its failure to divulge the alleged fraudulent

reimbursement scheme cannot have rendered any of the Officers’ statements materially

misleading, because the Form 10-Ks filed by TranS1 with the SEC included general

warnings about the risks of regulatory scrutiny and litigation. For example, the 2008 Form

14
Notably, the district court incorrectly deemed this case to be “analogous” to
Omnicare and thus ruled the Complaint to be insufficient on the material misrepresentation
element for failing to allege that the Company “knew TranS1’s reimbursement practices
were illegal” and “made express representations to the contrary.” See Officers Order 15-
16 (citing Omnicare, 583 F.3d at 945-47). Because the 2009 Omnicare decision is
inapposite here, we need not decide whether we agree with it. Were we to do so, however,
we would also consider decisions in subsequent Omnicare proceedings that were not
discussed by the district court or the Company. See Ind. State Dist. Council of Laborers &
Hod Carriers Pension & Welfare Fund v. Omnicare, Inc., 719 F.3d 498 (6th Cir. 2013),
vacated and remanded, Omnicare, Inc. v. Laborers Dist. Council Constr. Indus. Pension
Fund, 135 S. Ct. 1318 (2015).

30
10-K cautioned the market that TranS1 “may be subject to or otherwise affected by federal

and state healthcare laws, including fraud and abuse and health information privacy and

security laws, and could face substantial penalties if we are unable to fully comply with

such laws.” See J.A. 128 (emphasis omitted). The Company’s argument that such general

warnings effectively satisfy the duty to disclose specific illegal activities was rejected by

the Second Circuit in its 2014 Meyer decision. There, the defendant had warned the market

that it “generates, uses, and stores dangerous chemicals and wastes and is subject to

Chinese regulations regarding such chemicals and wastes,” plus “that compliance with

such regulations is costly and that non-compliance may lead to bad publicity, fines, and

even a suspension of the business.” See Meyer, 761 F.3d at 251 (internal quotation marks

omitted). In concluding that those warnings failed to cure the corporation’s non-disclosure

of ongoing and serious pollution violations, the Meyer court explained:

A generic warning of a risk will not suffice when undisclosed facts on the
ground would substantially affect a reasonable investor’s calculations of
probability. One cannot, for example, disclose in a securities offering a
business’s peculiar risk of fire, the installation of a comprehensive sprinkler
system to reduce fire danger, and omit the fact that the system has been found
to be inoperable, without misleading investors.

Id. (citation omitted). We agree with the Second Circuit’s cogent analysis. Despite the

general warnings in TranS1’s Form 10-Ks, the Officers’ statements about the Company’s

reimbursement practices may be deemed materially misleading premised on the omission

of the fraudulent reimbursement scheme.

At bottom, the Complaint is sufficient to establish that, by choosing to speak about

its reimbursement practices, the Company possessed a duty to disclose its alleged illegal

31
conduct. The Company violated that duty and acted deceptively by way of false statements

and statements that were misleading because they omitted the fraudulent reimbursement

scheme. Furthermore, the facts of that scheme were material, in that a reasonable investor

would have considered the scheme important in deciding whether to buy or sell TranS1

stock, and would have viewed the total mix of information made available to be

significantly altered by the scheme’s disclosure. We are therefore satisfied that the

Complaint adequately alleges the material misrepresentation element of the section 10(b)

claim.

B.

Turning to the issue of scienter, the Company argues that the Complaint also

insufficiently pleads that element of the section 10(b) claim. In order to allege the scienter

element, a plaintiff must demonstrate “that the defendant acted with ‘a mental state

embracing intent to deceive, manipulate, or defraud.’” See Zak v. Chelsea Therapeutics

Int’l, Ltd., 780 F.3d 597, 606 (4th Cir. 2015) (quoting Tellabs, 551 U.S. at 319). A

complaint’s “[a]llegations of reckless conduct can satisfy the level of scienter necessary to

survive a motion to dismiss.” Id. (citing Matrix Capital Mgmt. Fund, LP v. BearingPoint,

Inc., 576 F.3d 172, 181 (4th Cir. 2009)). The reckless conduct sufficient to engender the

mandatory strong inference of scienter may be conduct that, inter alia, “is ‘so highly

unreasonable and such an extreme departure from the standard of ordinary care as to

present a danger of misleading the plaintiff to the extent that the danger was either known

to the defendant or so obvious that the defendant must have been aware of it.’” Id. (quoting

Matrix Capital, 576 F.3d at 181).

32
 According to the Complaint, TranS1 and its Officers responded to the new,

financially threatening Category III code for the System with a mix of legal and illegal

strategies. Their legal strategies included advising surgeons to “bury” the Category III

code for the System among the CPT codes for other parts of a spinal surgery so that the

Category III code might be overlooked; touting efforts to move the System from the

Category III code back to a lucrative Category I code in the near future; and emphasizing

that, even though the System itself might be presently non-reimbursable, surgeons could

yet be compensated for a surgery’s other aspects.

Meanwhile, as for the illegal strategies, the Company engaged in its fraudulent

reimbursement scheme to encourage and coach surgeons to continue coding the System

under Category I despite the mandatory Category III code. Significantly, the Complaint

reflects that the illegality of the fraudulent reimbursement scheme was obvious and known

to TranS1 and the Officers. That is, the law was clear that, once the System was assigned

the Category III code, only the Category III code could be used for the System. See, e.g.,

Complaint ¶ 29 (alleging that “[f]ederal law, including the False Claims Act, requires

surgeons to label services rendered with an appropriate CPT code, to insure that

reimbursement[s] from [health insurers and government-funded healthcare programs] are

legitimately procured”); J.A. 941 (qui tam complaint) (explaining that, once the Category

III code for the System took effect, the System could “only” be billed as a Category III

procedure). That the Company knew the law is further evidenced by its public

acknowledgment of the System’s Category III code and related reimbursement issues.

Indeed, if the Company believed that the System could still lawfully be coded under

33
Category I, it certainly would have said so. It is striking that — throughout the Officers’

statements in the relevant SEC filings, press releases, and conference calls — they spoke

in detail about the Company’s legal strategies to deal with the new Category III coding

requirement, without ever mentioning the Company’s illegal efforts to persuade surgeons

to use a Category I code instead. Those recurring omissions are particularly remarkable

because the undisclosed scheme was the primary source of TranS1’s continuing revenues,

while the strategies discussed in the Officers’ various statements generated far less

significant returns. See Zak, 780 F.3d at 611 (explaining that “the scienter inquiry

necessarily involves consideration of the facts and of the nature of the alleged omissions

or misleading statements within the context of the statements that a defendant affirmatively

made”).

The Company contends, however, that the Complaint is insufficient on the scienter

element because it fails to allege facts demonstrating that the Officers knew of the

fraudulent reimbursement scheme’s existence, much less the scheme’s illegality. Of

course, the Complaint is premised on the proposition that the Officers directed the

fraudulent reimbursement scheme, not that lower-level agents or employees independently

conjured up and carried out the scheme without the Officers’ knowledge. And, in any

event, the fact that the System’s new Category III code did not result in substantially greater

losses to TranS1 would have put any otherwise-innocent Officer on notice that the

fraudulent reimbursement scheme was afoot.

By alleging that the fraudulent reimbursement scheme was known to the Officers,

clearly illegal, and fundamental to TranS1’s financial success, the Complaint establishes

34
that the Officers’ failure to disclose the scheme presented a danger of misleading Singer

and other investors — a danger that was also known to the Officers, or so obvious that the

Officers must have been aware of it. That is, the Complaint gives rise to a strong inference

that TranS1 and the Officers intended to deceive the market, or at the very least acted

recklessly, when they made false and misleading statements about the Company’s

reimbursement practices that omitted the fraudulent reimbursement scheme. See Zak, 780

F.3d at 610 (concluding that there was a strong inference of scienter where “the plaintiffs’

allegations, when considered in the context of the entire complaint, [demonstrated] that the

defendants either knowingly or recklessly misled investors by failing to disclose critical

information . . . , while releasing less damaging information that they knew was

incomplete”); cf. Pirate Inv’r, 580 F.3d at 243 (affirming scienter finding where defendant,

acting on financial motive, made statement knowing it was false).

In these circumstances, we are satisfied that the Complaint adequately pleads the

scienter element of the section 10(b) claim against both TranS1 and the Officers.

Consequently, in Singer’s appeal, we vacate the district court’s rulings in the Officers

Order and the Final Order that the Complaint fails to allege the scienter element, along

with the court’s rulings in those same Orders that the Complaint is insufficient as to the

material misrepresentation element of the section 10(b) claim.

IV.

Because we rule in favor of Singer in his appeal, the Company’s cross-appeal (No.

16-1019) must now be addressed. In that regard, we assess whether the Complaint

35
sufficiently pleads the loss causation element of the section 10(b) claim, as the district court

concluded in its Reconsideration Order.

We are obliged to review a complaint’s “allegations of loss causation for sufficient

specificity, a standard largely consonant with Fed. R. Civ. P. 9(b)’s requirement that

averments of fraud be pled with particularity.” See Katyle v. Penn Nat’l Gaming, Inc., 637

F.3d 462, 471 (4th Cir. 2011) (internal quotation marks omitted). The loss causation

element requires the pleading of “a sufficiently direct relationship between the plaintiff’s

economic loss and the defendant’s fraudulent conduct,” which may be accomplished by

alleging facts establishing that the defendant’s “misrepresentation or omission was one

substantial cause of the investment’s decline in value.” Id. at 472 (internal quotation marks

omitted). In such circumstances, the plaintiff must plead (1) the “exposure” of the

defendant’s misrepresentation or omission, i.e., the revelation of “new facts suggesting [the

defendant] perpetrated a fraud on the market,” and (2) that such exposure “resulted in the

decline of [the defendant’s] share price.” Id. at 473 (emphasis and internal quotation marks

omitted).

On appeal, the Company challenges the district court’s ruling that the Complaint

alleges exposure of the Company’s false and misleading statements and omissions under

the materialization of a concealed risk theory. The Company maintains that the Complaint

fails under that theory, as well as the related, but somewhat distinct, corrective disclosure

theory. For his part, Singer contends that the Complaint sufficiently pleads exposure under

each theory. We conclude that the Complaint demonstrates exposure by way of an

amalgam of the two theories and, thus, affirm.

36
 A.

As we have recognized, exposure for purposes of the loss causation element can be

alleged pursuant to the corrective disclosure theory and the materialization of a concealed

risk theory. On the one hand, under the corrective disclosure theory, a complaint may

allege that the defendant company itself made a disclosure that “publicly revealed for the

first time” that the company perpetrated a fraud on the market by way of a material

misrepresentation or omission. See Katyle, 637 F.3d at 473. On the other hand, utilizing

the materialization of a concealed risk theory, a complaint may allege that news from

another source revealed the company’s fraud. Id. at 477 n.10 (explaining that, “[i]n such a

case, the plaintiffs would not need to identify a public disclosure that corrected the

previous, misleading disclosure because the news of the materialized risk would itself be

the revelation of . . . fraud that caused plaintiffs’ loss” (quoting Teachers’ Ret. Sys. of La.

v. Hunter, 477 F.3d 162, 187 n.3 (4th Cir. 2007)). The materialization of a concealed risk

theory has been generally accepted as a means of proving loss causation because, inter alia,

a company “accused of securities fraud should not escape liability by simply avoiding a

corrective disclosure.” See Ohio Pub. Emps. Ret. Sys. v. Fed. Home Loan Mortg. Corp.,

830 F.3d 376, 384-85 (6th Cir. 2016). 15

15
Although we recognized in our Katyle and Teachers’ Retirement System decisions
that exposure for purposes of the loss causation element can be proved by way of the
materialization of a concealed risk theory, we have not heretofore had occasion to apply
that theory. Meanwhile, a decisive majority of our fellow courts of appeals have applied
the materialization of a concealed risk theory or, like we have, recognized it as a viable
means for a securities fraud plaintiff to prove exposure. See In re Omnicom Grp., Inc. Sec.
Litig., 597 F.3d 501, 513 (2d Cir. 2010) (applying materialization of concealed risk theory);

37
 Importantly, the ultimate loss causation inquiry under either the corrective

disclosure theory or the materialization of a concealed risk theory is the same: whether a

“misstatement or omission concealed something from the market that, when disclosed,

negatively affected the value of the security.” See In re Vivendi, S.A. Sec. Litig., 838 F.3d

223, 261-62 (2d Cir. 2016) (emphasis omitted). That is, pursuant to each theory, the

plaintiff must show “that the loss caused by the alleged fraud results from the ‘relevant

truth . . . leak[ing] out.’” Id. at 261 (quoting Dura Pharm., Inc. v. Broudo, 544 U.S. 336,

342 (2005)).

As we have recognized in the context of corrective disclosures, “neither a single

complete disclosure nor a fact-for-fact disclosure of the relevant truth to the market is a

necessary prerequisite to establishing loss causation (although either may be sufficient).”

See Katyle, 637 F.3d at 472. Rather, the truth may have “gradually emerged through a

Ohio Pub. Emps. Ret. Sys. v. Fed. Home Loan Mortg. Corp., 830 F.3d 376, 384-85 (6th
Cir. 2016) (same); Schaaf v. Residential Funding Corp., 517 F.3d 544, 550-553 (8th Cir.
2008) (same); Nakkhumpun v. Taylor, 782 F.3d 1142, 1156 (10th Cir. 2015) (same); see
also McCabe v. Ernst & Young, LLP, 494 F.3d 418, 428-29 (3d Cir. 2007) (recognizing
materialization of concealed risk theory); Ray v. Citigroup Glob. Mkts., Inc., 482 F.3d 991,
995 (7th Cir. 2007) (same); Nuveen Mun. High Income Opportunity Fund v. City of
Alameda, 730 F.3d 1111, 1120 (9th Cir. 2013) (same); In re Harman Int’l Indus., Inc. Sec.
Litig., 791 F.3d 90, 110 (D.C. Cir. 2015) (same). Two courts of appeals have ruled that
there should be an alternative to the corrective disclosure theory, albeit without adopting
the “materialization of a concealed risk theory” by name, and another has simply refrained
from unnecessarily deciding the validity of the materialization of a concealed risk theory.
See Mass. Ret. Sys. v. CVS Caremark Corp., 716 F.3d 229, 240 (1st Cir. 2013) (recognizing
importance of alternative theory to prove loss causation absent company’s corrective
disclosure); Lormand v. US Unwired, Inc., 565 F.3d 228, 264 & n.32 (5th Cir. 2009)
(same); Hubbard v. BankAtlantic Bancorp, Inc., 688 F.3d 713, 726 n.25 (11th Cir. 2012)
(deeming it unnecessary to decide whether material of concealed risk theory may be used
to prove loss causation).

38
series of partial disclosures,” with the “entire series of partial disclosures [prompting] the

stock price deflation.” Id. Moreover, the disclosure or series of partial disclosures “need

not precisely identify the misrepresentation or omission” about which the plaintiff

complains, but “must reveal to the market in some sense the fraudulent nature of” such

misrepresentation or omission, and “must at least relate back to the misrepresentation [or

omission] and not to some other negative information about the company.” Id. at 473

(emphasis and internal quotation marks omitted).

B.

Here, to establish exposure for purposes of the loss causation element, the

Complaint relies on a partial corrective disclosure by the Company (TranS1’s Form 8-K of

October 17, 2011, reporting that it had received a subpoena from the DHHS), coupled with

news from another source (the October 18, 2011 analyst report addressing the subpoena).

At the time, the market already knew from the Officers’ public statements that, as of

January 1, 2009, the System was required to be coded under Category III and thus was

largely non-reimbursable. The market also knew of TranS1’s lawful efforts to return the

System to a lucrative Category I code and to deal with the Category III code in the

meantime. Together, the Form 8-K and analyst report revealed to the market the following

additional facts: that TranS1 had received a subpoena on or about October 6, 2011, issued

by the DHHS “‘under the authority of the federal healthcare fraud and false claims

statutes’”; that the items sought by the subpoena included “‘reimbursement

communications with physicians’”; and that, despite the System’s nearly three-year-old

Category III coding requirement and the Company’s purported “‘strong efforts to educate

39
physicians about correct coding,’” approximately “‘half of TranS1’s revenues [were

coming] from physicians still using [a Category I] code.’” See Compl. ¶¶ 108-109.

As such, TranS1’s own Form 8-K and the analyst report revealed enough facts for

the market to finally recognize what the Officers’ previous statements had materially

omitted: the existence of the Company’s fraudulent reimbursement scheme to encourage

surgeons’ continued use of a Category I code for the System, rather than the mandatory

Category III code, and to thereby bolster TranS1’s System-dependent revenues. Indeed,

the plausibility of that interpretation of the facts revealed in the Form 8-K and the analyst

report is evidenced by the analyst report’s opinion that the subpoena “‘could be due to

reimbursement communications.’” See Compl. ¶ 109. As the Complaint understandably

emphasizes, based on the new facts, the analyst report “surmised with radar precision that

the subpoena . . . relat[ed] to [TranS1’s] illicit ‘reimbursement communications.’” Id. ¶ 9.

In these circumstances, pursuant to an amalgam of the corrective disclosure and

materialization of the concealed risk theories, the facts revealed in the Form 8-K and the

analyst report were sufficient to establish exposure for purposes of the loss causation

element, because those facts collectively “suggest[] [the Company] perpetrated a fraud on

the market.” See Katyle, 637 F.3d at 473.

Finally, to the extent the Company argues that the Complaint fails to allege that the

exposure of the Company’s concealment of its fraudulent reimbursement scheme resulted

in the decline of TranS1’s stock price, we disagree. According to the Complaint, the

revelations in the October 17, 2011 Form 8-K and the October 18, 2011 analyst report

caused the value of TranS1’s stock to plummet more than 40% on October 18, 2011, alone.

40
Such an allegation is wholly adequate to demonstrate that the exposure of the Company’s

fraud was at least “one substantial cause of the investment’s decline in value.” See Katyle,

637 F.3d at 472 (internal quotation marks omitted).

Having conducted a thorough and holistic assessment of the Complaint, we

conclude that its allegations are sufficient to plead the loss causation element of the section

10(b) claim, as the district court properly determined. That is, the Complaint satisfies the

ultimate loss causation inquiry by alleging losses resulting from “the relevant truth . . .

leak[ing] out” about the Company’s previously concealed fraudulent reimbursement

scheme. See Dura Pharm., 544 U.S. at 342. We therefore affirm the court’s loss causation

ruling in its Reconsideration Order and reject the Company’s cross-appeal. 16

V.

Pursuant to the foregoing, we vacate the judgment of the district court and remand

in No. 15-2579 for such other and further proceedings as may be appropriate. We affirm

the ruling being challenged in the cross-appeal, that is, No. 16-1019.

No. 15-2579 VACATED AND REMANDED, and
No. 16-1019 AFFIRMED

16
Because we conclude that the Complaint sufficiently pleads the material
misrepresentation, scienter, and loss causation elements of the section 10(b) claim, we need
not address the contention made in Singer’s appeal that the district court erred in denying
leave to amend when it dismissed the Complaint.

41
AGEE, Circuit Judge, dissenting:

According to plaintiff Phillip Singer, defendant TranS1, Inc. (the “Company”) and

its officers engaged in a years-long pattern of behavior that violated federal securities law.

That behavior is alleged to have deceived healthcare providers, the Medicare and Medicaid

administrative agencies and violated the False Claims Act, 31 U.S.C. §§ 3729–33. Singer

now asserts that the Company’s alleged actions establish liability to investors under

sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Act”), 15 U.S.C. §§

78a–78qq. Although the district court convincingly found the complaint deficient as a

matter of law, the majority agrees with Singer, vacates the judgment of the district court

and reinstates Singer’s complaint.

I disagree and respectfully dissent. Singer has not pled the necessary elements of

either a section 10(b) claim or a section 20(a) claim. I would affirm the district court’s

judgment dismissing the complaint. 1

I.

Section 10(b) of the Act prohibits the use of “any manipulative or deceptive device

or contrivance” with regard to securities. 15 U.S.C. § 78j(b). The associated regulation

provides that section 10(b) prohibits “mak[ing] any untrue statement of a material fact

1
Singer’s section 20(a) claim against the Company’s officers fails because liability
under section 20(a) is derivative of liability under section 10(b). Yates v. Mun. Mortg. &
Equity, LLC, 744 F.3d 874, 894 n.8 (4th Cir. 2014). I therefore discuss only Singer’s
section 10(b) claim.

42
or . . . omit[ting] to state a material fact necessary in order to make the statements made [in

connection with the sale of a security] not misleading.” 17 C.F.R. § 240.10b-5(b).

Expounding on that definition, the Supreme Court has stated that a section 10(b)

claim has six elements. A securities fraud plaintiff must plead “(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 . . . ; (5) economic loss; and

(6) loss causation, i.e., a causal connection between the material misrepresentation and the

loss.” Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 341–42 (2005). 2 Primarily at issue in

the district court were the first, second, and sixth of these elements. That is: did Singer

sufficiently plead that the Company made a material misrepresentation with scienter that

also established loss causation? The district court held that Singer had failed to do so with

respect to the first and second elements, but had made the requisite showing for loss

causation. In my view, Singer fails on all three elements.

II.

We review the grant of a motion to dismiss de novo, applying the traditional Federal

Rule of Civil Procedure 12(b)(6) standards. Teachers’ Ret. Sys. of La. v. Hunter, 477 F.3d

162, 170 (4th Cir. 2007). The Private Securities Litigation Reform Act of 1995, Pub. L.

2
I have omitted internal quotation marks, alterations, and citations here and
throughout this dissent, unless otherwise noted.

43
No. 104-67, 109 Stat. 737 (codified as amended in scattered sections of 15 U.S.C.) (the

“PSLRA”), also governs our review.

Under Rule 12(b)(6), we determine “whether the complaint states a claim upon

which relief can be granted in light of the pleading requirements of Rules 8 and 9, as well

as the larger design of the Federal Rules [of Civil Procedure].” Hunter, 477 F.3d at 170.

Rule 9, and in particular Rule 9(b), requires that fraud be pled “with particularity.” We

“accept as true [the complaint’s] well-pleaded factual allegations, but owe no allegiance to

unwarranted inferences, unreasonable conclusions, or arguments drawn from those facts.”

Katyle v. Penn Nat’l Gaming, Inc., 637 F.3d 462, 466 (4th Cir. 2011).

We also apply the PSLRA, which “provides that in pleading a material

misrepresentation or omission, . . . and the scienter necessary to such a misrepresentation

or omission, the plaintiff must plead facts,” Hunter, 477 F.3d at 172, and cannot rely on

mere speculation. The “complaint must include each statement alleged to have been

misleading, the reason . . . why the statement is misleading, and 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.” Id.; see also 15 U.S.C. § 78u-4(b)(1).

Similarly, “in alleging scienter, the plaintiff must, with respect to each act or omission

alleged to violate [section 10(b)], state with particularity facts giving rise to a strong

inference that the defendant acted with the required state of mind.” Hunter, 477 F.3d at

172; 15 U.S.C. § 78u-4(b)(2).

With this background in mind, I turn to the merits of Singer’s appeal.

44
 III.

On appeal, the parties again dispute the elements of omission, scienter, and loss

causation. A failure to plead any one of those elements in accord with the PSLRA or Rules

8 and 9(b) would doom Singer’s case. But Singer’s complaint fails under each of the three

disputed elements.

A.

First, Singer has failed to plead any actionable misrepresentation or omission. A

misrepresentation or omission is actionable if it is factual, false or misleading, and material.

See Longman v. Food Lion, Inc., 197 F.3d 675, 682–83 (4th Cir. 1999). In the abstract an

issuer generally has no duty to disclose damaging information. See Basic Inc. v. Levinson,

485 U.S. 224, 239 n.17 (1988) (“Silence, absent a duty to disclose, is not misleading under

Rule 10b-5.”). Thus, the omission of damaging information often is not actionable, even if

the corporation fails to divulge illegal conduct. See City of Pontiac Policemen’s &

Firemen’s Ret. Sys. v. UBS AG, 752 F.3d 173, 184 (2d Cir. 2014) (“[D]isclosure is not a

rite of confession, and companies do not have a duty to disclose uncharged, unadjudicated

wrongdoing.” (footnote omitted)).

That is not an absolute rule, however. For example, if the corporation’s silence on a

subject “would make other [of its] statements misleading or false,” then it must speak.

Taylor v. First Union Corp. of S.C., 857 F.2d 240, 243–44 (4th Cir. 1988); accord City of

Monroe Emps. Ret. Sys. v. Bridgestone Corp., 399 F.3d 651, 669 (6th Cir. 2005) (“In order

to be actionable, a misrepresentation or omission must pertain to material information that

the defendant had a duty to disclose . . . . A duty to affirmatively disclose may arise when

45
there is insider trading, a statute requiring disclosure, or . . . an inaccurate, incomplete or

misleading prior disclosure.”).

Any misrepresentation or omission also must be material. That is to say, it must be

one that a reasonable investor “would consider . . . important in deciding whether to buy

or sell the security” or a fact that would have “significantly altered” the “total mix of

information made available” to the investor. See Longman, 197 F.3d at 683.

1.

The Company made no material misstatement or omission in its various descriptions

of its reimbursement practices. To the contrary, the Company was forthcoming about the

fact that the American Medical Association (“AMA”) had given a “Category III CPT”

classification to the AxiaLIF System (the “System”) for billing purposes, told investors

that Category III CPT codes were unlikely to be reimbursed, and described in detail the

steps it was taking to preserve its revenues—including by encouraging the use of a

multiple-step coding sequence.

To begin, the Company repeatedly disclosed to investors that the AMA gave the

System a Category III CPT code for reimbursement purposes. In a February 2009

conference call with investors, the Company indicated that “a portion of [its] surgeon fee

migrated from an unlisted code to a category three CPT . . . code[.]” J.A. 1196 ¶ 69. The

Company further stated that the Category III code may create some difficulty in obtaining

reimbursements, but that any difficulty would be no more than that experienced before the

System received any tracking code. See J.A. 1196 ¶ 69 (“[W]e do not anticipate that [the

Category III CPT reimbursement code] will create any significant additional headwind

46
with regards to adoption. . . . [W]e feel that [the] unlisted code gave us about a 5% kind of

a headwind and it’s probably consistent again this year.”). Finally, the Company revealed

in a Form 10-K filed with the Securities and Exchange Commission (“SEC”) in March

2009 that “some payors . . . may not reimburse” Category III CPT codes. J.A. 1197 ¶ 71.

The Company also disclosed that it was encouraging surgeons to use a multiple–

step coding sequence to obtain reimbursement. In the March 2009 Form 10-K, the

Company stated “[the Category III CPT code] is only one of up to ten different CPT codes

physicians may submit to capture the entirety of a spinal fusion procedure lessening the

impact should payment for our code be initially denied.” J.A. 1197 ¶ 71 (emphasis added).

And on an investor conference call in April 2009, the Company described in detail how it

was teaching surgeons to use its multiple-step coding procedure:

We have an 800 number and call-in resource center, up and running to assist
surgeons with reimbursement issues that may arise.

We have also added two additional reimbursement specialists in the field to
work with our surgeon customers and their billing specialists, to help them
determine the appropriate coding for the fusion procedures they are
performing.

As a strong case volume this quarter would suggest, we have not seen a drop
off in procedure volumes as a result of the current weak economic conditions.
Having said that, we have begun to see some insurance companies raising
the bar on whether to pay for fusion surgery in general or asking more
patients to get a second opinion, before agreeing to cover the procedure.

[W]e had the category-three code put in place in January and that was
a change in coding. We have actually put out a coding guide now, which has
been blessed by everyone. And coding fusions is fairly complex and what we
saw initially with the category-three code was right away a lot of coders in
the practice went to the concern that like the Charité disc they are just not
going to get paid.

47
 The reality is, as we’ve discussed in the past, this access code is one
of several codes that they employ during a typical fusion. So I would say our
coding issues have been grassfires, not forest fires, and so, this flare is up. A
coder becomes concerned, because they see a category-three code. And we
either work through the rep, or we work through the hotline, or now we’ve
actually, as I have mentioned, brought on a couple of field related personnel,
who had worked by the way at Saint Francis Medical, where they knew
category-three code inside and out. Those people are then, if needed,
deployed and we put these fires out.

I don’t think we’ve had many instances, if any, where we just have
surgeons stop doing this, but often times there is a concern when they see the
category-three code. We need to work with them and once they understand
the coding sequence, based on the particular operation that the surgeon does,
we move through the process. So, that’s why we proactively hired these
folks.

J.A. 1198–99 ¶ 74 (emphases added).

The Company’s statements in 2009 laid out each aspect of the Company’s

reimbursement practices. As the district court observed, “[u]nless [Singer] is contending

that the [Company] needed to disclose each and every aspect of [its] reimbursement

practices, down to the most minute detail, [I do] not see how [the Company] failed to

sufficiently disclose . . . [those] practices.” J.A. 1348. In sum, “[n]o further disclosure was

required because the [Company’s] statements were” truthful and accurate in the main and

were “not misleading under the circumstances [in which] they were made.” J.A. 1348.

2.

Nevertheless, the majority holds that the Company’s failure to disclose its “scheme

to encourage surgeons to employ CPT codes meant for anterior and other non-Category III

procedures in direct disregard of the AMA’s mandated Category III code for the System”

is an actionable omission for section 10(b) purposes. Majority Op. 12. They conclude that

48
the Company “cho[se] to speak about its reimbursement practices,” and thus “possessed a

duty to disclose its alleged illegal conduct.” Majority Op. 31-32.

The majority faults the Company for “misrepresent[ing] the assistance and training

it was providing to surgeons as being wholly for the attainment of ‘appropriate’—i.e.,

legal—reimbursements for the System.” Majority Op. 25. But the majority’s narrow focus

on “appropriate reimbursement” ignores reality. Statements made on the Company’s April

2009 investor conference call, for example, acknowledge that the System’s Category III

CPT code could result in disallowed coverages and describe the steps taken by the

Company to improve prospects for reimbursement, including the use of a hotline and field

representatives to walk surgeons through coding the procedure. In addition, the Company

told investors it was encouraging surgeons to use multiple CPT codes, saying the Category

III CPT code was “one of up to ten different CPT codes” that surgeons could use to obtain

reimbursement. J.A. 1197 ¶ 71 (emphasis added).

The majority also faults the Company for suggesting that the System’s Category III

CPT code was “not an experimental code,” but rather was a “tracking code.” Majority Op.

12, 25. The majority’s focus on the Company’s use of the phrase “tracking code” ignores

the context in which that word was used. Although the Company called the Category III

CPT code a “tracking code,” it also was clear that such code was not a generally

reimbursable Category I CPT code. And the Company’s investors knew that the System

had been given a Category III code, which is generally not reimbursable, from the

Company’s multiple disclosures.

49
 More generally, the majority’s analysis errs in its central assumption that the

Company, if speaking about its reimbursement practices at all, not only had to characterize

those practices fairly, but also had to further describe them as fraudulent or illegal. When

the Company settled a related False Claims Act lawsuit with the United States, nowhere

did the settlement agreement “indicate that using multiple codes, in and of itself, [was]

inappropriate.” J.A. 1352. Neither Singer nor the majority cites to a statute, regulation, or

case that establishes this practice to be either illegal or fraudulent. Nevertheless, the

majority’s holding creates an inflexible rule that requires a publicly traded corporation

engaged in ambiguous activity to represent its behavior as illegal or else risk being the

subject of a securities fraud lawsuit. Neither section 10(b) nor the PSLRA requires that

result and the majority cites no case for such a rule. See Taylor, 857 F.2d at 243–44 (“Rule

10b-5 imposes . . . a duty to disclose only when silence would make other statements

misleading or false.”).

3.

Other aspects of the majority opinion warrant closer scrutiny. For instance, it

obliquely concludes that the Company made a material omission, claiming that, if the

Company had informed the market that its reimbursement mechanism was illegal, such

disclosure would have changed the “total mix of information” available to investors.

Majority Op. 32. Yet, the majority is unable to fully describe how an additional disclosure

by the Company would have altered that total mix of information. Its inability is

unsurprising for two reasons. First, Singer has failed to allege materiality with the required

specificity. That is to say, Singer has not demonstrated under Rule 9(b) and the PSLRA

50
that additional information would have changed the total mix of information available to

investors.

Second, and more importantly, the majority cannot identify any additional

information that the Company could have disclosed. As the district court correctly noted,

the Company disclosed “its reimbursement practices to the public in conference calls and

public filings,” where it acknowledged that the System “had received a Category III CPT

code designation,” it “had set up an 800 number and call-in resource center to help surgeons

with billing,” it “had reimbursement specialists in the field to work with its surgeons,” and

it “had published a coding guide.” J.A. 1347. In view of these numerous, accurate

disclosures, the majority errs in concluding that the Company omitted any material

information from its disclosures.

****

At bottom, as the district court correctly noted, there was no need for the Company

“to disclose each and every aspect of [its] reimbursement practices, down to the most

minute detail.” J.A. 1348. What the Company did disclose was sufficient to avoid section

10(b) liability—a result that is bolstered, in part, by Singer’s failure to plead what was

missing. I agree with the district court that Singer fails to adequately plead the required

element of a material misrepresentation or omission and I would dismiss the complaint for

that reason.

B.

Even if Singer adequately pled a material misrepresentation or omission, he has not

sufficiently alleged the element of scienter. Certainly, Singer has alleged that the

51
Company’s officers knew the mechanics of the Company’s reimbursement practices. Yet,

he has not provided material factual allegations from which it could be reasonably inferred

that the Company’s officers knew those practices violated any fraud statute, whether

related to healthcare or otherwise.

Scienter is “a mental state embracing [the] intent to deceive, manipulate, or

defraud.” Zak v. Chelsea Therapeutics Int’l, Ltd., 780 F.3d 597, 606 (4th Cir. 2015). To

survive a motion to dismiss, the complaint must allege sufficient facts that, when “taken

collectively, give rise to a strong inference of scienter.” Pub. Emps.’ Ret. Ass’n of Colo. v.

Deloitte & Touche LLP, 551 F.3d 305, 312 (4th Cir. 2009). That “strong inference” must

be “at least as compelling as” any other reasonable inference. Id.

Typically, a plaintiff pleads scienter through allegations of intentional misconduct.

But he may also plead scienter through allegations of “severe recklessness”—“a slightly

lesser species of intentional misconduct.” Ottmann v. Hanger Orthopedic Grp., Inc., 353

F.3d 338, 343–44 (4th Cir. 2003). The severe recklessness standard “comports with the

observation of the Supreme Court that the words ‘manipulative or deceptive’ used in

conjunction with ‘device or contrivance’ strongly suggest that § 10(b) was intended to

proscribe knowing or intentional misconduct.” Id. at 344. See generally 15 U.S.C. § 78j(b)

(prohibiting the “use . . . in connection with the purchase or sale of any security registered

on a national securities exchange or any security not so registered . . . any manipulative or

deceptive device or contrivance in contravention of [regulations promulgated by the SEC]”

(emphasis added)). A “severely reckless” act is one that is “so highly unreasonable and

such an extreme departure from the standard of ordinary care as to present a danger of

52
misleading the plaintiff to the extent that the danger was either known to the defendant or

so obvious that the defendant must have been aware of it.” Ottmann, 353 F.3d at 343.

1.

The allegations in the complaint, taken as a whole, do not plausibly suggest—much

less strongly so—that the Company or its officers acted with the requisite intent to deceive.

To the contrary, the complaint details a series of frequent and accurate disclosures, from

which the strong inference can be drawn that the Company endeavored to tell the truth.

Importantly, the complaint “fails to allege that the defendants knew the [Company’s

reimbursement] practices were illegal.” J.A. 1354. Instead, as the district court correctly

understood the complaint, Singer alleges only that the Company’s officers “knew about or

recklessly disregarded[] practices to encourage surgeons to illegally dupe insurance

companies.” J.A. 1349. But Singer’s allegations “are merely conclusory and are

unsupported by any specific allegations.” J.A. 1349. Thus, without supporting factual

matter, Singer’s complaint is without merit under the strictures of Rule 9(b) and the

PSLRA.

Just as damning, the complaint is bereft of evidence that the Company

“encourage[d] [the] omission of the Category III CPT Code.” J.A. 1355. Singer’s best

evidence is an allegation that the Company instructed surgeons to “bury the [code] in the

bottom part of the reimbursement request so that insurance companies might overlook it,”

J.A. 1189 ¶ 51, but he fails to allege any act by the Company to encourage those surgeons

to delete or falsify a Category III code.

53
 To be sure, the Company offered surgeons use of a coding guide that “direct[ed]

[them] to use [multiple] codes to secure reimbursements.” J.A. 1185 ¶ 35. However, the

coding guide clearly indicated “that [the System] had received a Category III code.” J.A.

1355. Moreover, investors were already aware that the Company was instructing surgeons

to use a multiple-step coding sequence to help them secure the maximum potential

reimbursement. Nowhere does the complaint “allege that such a practice was improper.”

J.A. 1352. In addition, the Company was forthright about potential adverse consequences

of its reimbursement strategy, as it disclosed to investors “the increased risk of regulatory

scrutiny and litigation” in its Form 10-K. J.A. 1348. Such disclosures are inconsistent with

any inference that the Company was trying to hide the alleged illegality of its

reimbursement practices.

It is unsurprising that the complaint “does not allege that the defendants knew that

using multiple codes was inappropriate.” J.A. 1352. Not even the Company’s settlement

agreement with the Government “indicate[s] that using multiple codes, in and of itself,” is

prohibited. J.A. 1352. And, as already noted, neither Singer nor the majority cites to a

statute, regulation, or case that establishes that the multiple-step coding process was illegal

or fraudulent. But even if the complaint had made such allegations, the Company fully

disclosed the specifics of its reimbursement scheme, as discussed above.

Like the district court, I “do[] not see how the defendants failed to sufficiently

disclose [the Company’s] reimbursement practices.” J.A. 1348. The complaint “shows (1)

that the defendants openly admitted that [the System] had received a Category III CPT

code, (2) that the [coding] guide noted that [the System] had received the Category III code,

54
and (3) that the defendants did not encourage omission of the Category III CPT code.” J.A.

1354–55. Singer cannot show scienter under these circumstances.

2.

Nonetheless, the majority concludes that the Company acted with scienter because

it responded to the Category III CPT code assigned to the System “with a mix of legal and

illegal strategies.” Majority Op. 33. Further, the majority finds that the Company

selectively downplayed its illegal strategies in communications with investors. It also holds

that the Company and its officers knew the Company’s conduct was illegal because “the

illegality of the fraudulent reimbursement scheme was obvious.” Majority Op. 33. But the

majority puts too much stock in the “obvious” illegality of the alleged scheme. Majority

Op. 33.

It incorrectly assumes that, because the Company’s reimbursement framework was

allegedly illegal, the Company axiomatically intended to defraud its investors. That

premise is not supported by statute or precedent. Even if it were fair to infer that the

Company’s officers were aware that the Company’s reimbursement scheme was illegal, it

is unfair to carry that inference one step further and conclude that because the Company

acted illegally it therefore also intended to deceive its investors. See Maguire Fin., LP v.

PowerSecure Int’l, Inc., 876 F.3d 541, 547–48 (4th Cir. 2017) (“First, an inference that

Hinton may have known his statement was false does not alone satisfy the scienter

requirement.”). By concluding otherwise, the majority has effectively “read the scienter

element out of the analysis in contravention of the PSLRA’s exacting pleading standard.”

Id. at 548. Under the majority’s reasoning, an illegal action on the part of a publicly traded

55
company automatically qualifies as fraud on investors for securities law purposes if its

conduct was “clearly illegal.” Majority Op. 34. That is simply not the law. See City of

Pontiac, 752 F.3d at 184 (“[D]isclosure is not a rite of confession, and companies do not

have a duty to disclose uncharged, unadjudicated wrongdoing.” (footnote omitted)). Just

because a plaintiff alleges an illegal act does not mean he has also pled fraud.

Nor is the majority’s analysis a correct application of the recklessness standard.

Even assuming that the Company may have been reckless about the legality of its conduct,

it doesn’t follow that the Company also acted recklessly with regard to its conduct as to

investors. The Company’s description of the alleged scheme was in the main forthcoming

and accurate, touching on each component of the alleged reimbursement scheme,

discussing its reimbursement practices in detail, and explaining why those practices were

used. E.g., J.A. 1196 ¶ 69; J.A. 1198 ¶ 74. 3

****

I agree with the district court and would dismiss the complaint for failure to

adequately plead the required element of scienter. The complaint contains no plausible

allegations to support the required “strong inference” that the Company and its officers

knew, or even suspected, that their conduct was illegal. It fails to address the individual

officers’ knowledge of the illegality of the Company’s reimbursement practices. At best,

Singer alleges only that the Company and its officers knew or recklessly disregarded

3
While Singer may have expected that the Company would rely only on legal
reimbursement practices, “an investor’s view of a statement is not itself evidence of the
speaker’s state of mind.” Maguire, 876 F.3d at 548.

56
practices to encourage surgeons to make it harder for insurance companies to process

claims. The district court correctly dismissed Singer’s complaint regarding the element of

scienter.

C.

Even assuming that Singer adequately pleaded the elements of omission and

scienter, his complaint fails to plead loss causation with “sufficient specificity.” Katyle,

637 F.3d at 471. The district court initially dismissed Singer’s complaint because it failed

to plead loss causation with the required specificity, but upon reconsideration changed its

view. The district court was right the first time.

“Loss causation is the causal link between the alleged misconduct and the economic

harm ultimately suffered by the plaintiff.” Lentell v. Merrill Lynch & Co., 396 F.3d 161,

172 (2d Cir. 2005); accord Gasner v. Bd. of Supervisors, 103 F.3d 351, 360 (4th Cir. 1996)

(“In a suit brought under Rule 10b-5, the plaintiff must show . . . loss causation—that the

misrepresentations or omissions caused the economic harm . . . .”). In other words, there

must be allegations of “facts to show . . . that the misrepresentation or omission was one

substantial cause of the investment’s decline in value.” Katyle, 637 F.3d at 472.

Loss causation is typically pled in one of two ways. One such form is “corrective

disclosure” of the alleged fraud, see id. at 472–73, by which a plaintiff establishes loss

causation by alleging a “corrective disclosure . . . [that] reveal[s] to the market the falsity

of the prior” statements, Lentell, 396 F.3d at 175 n.4.

The second method of alleging this element is known as “materialization of the

concealed risk.” See Katyle, 637 F.3d at 477 & n.10. Under this theory, a plaintiff pleads

57
loss causation “by showing that the loss was foreseeable and caused by the materialization

of the risk concealed by the fraudulent statement.” New Orleans Emps.’ Ret. Sys. v.

Omnicom Grp., Inc. (In re Omnicom Grp., Inc. Sec. Litig.), 597 F.3d 501, 513 (2d Cir.

2010). So long as “the risk that caused the loss was within the zone of risk concealed by

the misrepresentation[],” id., “the plaintiff [does] not need to identify a public disclosure

that correct[s a] previous, misleading disclosure,” Hunter, 477 F.3d at 187 n.3. Once the

risk materializes, “the news of the materialized risk would itself be the revelation of fraud

that caused [the] plaintiff[’s] loss.” Id. 4

Both theories of loss causation drive at the same point: did “the misstatement or

omission conceal[] something from the market that, when disclosed, negatively affected

the value of the security”? Lentell, 396 F.3d at 173; accord Schleicher v. Wendt, 618 F.3d

679, 683–84 (7th Cir. 2010). The Seventh Circuit has provided a useful example to

illustrate the commonality between the theories:

If a firm that is losing money says “we expect to lose $100 million next
quarter” when the managers actually expect the loss to be $200 million, that
statement will keep the price higher than it ought to be, and when the next
quarterly results show the real $200 million loss the price will adjust . . . .
The parties are wont to call the bad outcome (the $200 million loss) a

4
This Court has neither explicitly adopted nor applied the materialization of the
concealed risk theory of loss causation. And it does not do so here. Rather, we have
“acknowledged the possibility” that the materialization of the concealed risk theory is
viable. See Hunter, 477 F.3d at 187 n.3. Significantly, the majority neither adopts nor
applies the materialization of the concealed risk theory here. They instead focus on an
“amalgam” of the two loss causation theories. Majority Op. 37–41.

While the materialization of the concealed risk theory may be deemed at some point
too vague to withstand scrutiny, for purposes of this case I assume the majority’s amalgam
paradigm is feasible and address the end result.

58
 “materialization of the risk” that the loss would exceed $100 million. But it
should be clear that this is just a mirror image of the situation for the same
figures in black ink, rather than red. If the firm projects a $200 million profit,
when the managers actually expect $100 million, then the eventual disclosure
of the expected result could be called a “materialization of the risk” that the
real profit would be less than the managers’ optimistic number of $200
million.

Schleicher, 618 F.3d at 683–84. Because of their common end point, it follows that

materialization of the concealed risk is simply an alternate way of framing the same

causation principle embodied by corrective disclosure. Id.; Norfolk Cty. Ret. Sys. v. Cmty.

Health Sys., Inc., 877 F.3d 687, 695–96 (6th Cir. 2017) (observing that true corrective

disclosures “can be hard to come by, and courts have otherwise held that revelations can

come from many sources, including whistleblowers, analysts, and newspaper reports”).

1.

In a securities fraud case, “the fraud lies in an intentionally false or misleading

statement, and the loss is realized when the truth turns out to be worse than the statement

implied.” Schleicher, 618 F.3d at 684. For example, in Katyle—a corrective disclosure

case—this Court hypothesized that damaging, fact-based disclosures such as canceled

meetings, express investor doubts, and lack of regulatory approval could meet the section

10(b) pleading standard, depending on the context. 637 F.3d at 469. The Court then

observed that, in the light most favorable to the plaintiff, such disclosures could have

“alerted investors to the ever-mounting risk that the deal [at the heart of the suit] was

unlikely to close.” Id. at 477.

Here, the critical allegations in the complaint reveal disclosures to the market from

two different sources: (1) an October 17, 2011, Form 8-K—which the Company filed with

59
the SEC—that disclosed the existence of a subpoena received from the U.S. Department

of Health and Human Services (“DHHS”), and (2) an analyst’s report discussing the

subpoena, which was published a day later. But neither source meets the requirement of

pleading loss causation, which necessitates specific, fact-based allegations. The

Company’s Form 8-K disclosure and the analyst’s report here do not rise to the relevant

level as the examples posited in Katyle reflect.

a.

The analyst’s report does not contain plausible factual allegations sufficient to meet

the required pleading standard. See Nemet Chevrolet, Ltd. v. Consumeraffairs.com, Inc.,

591 F.3d 250, 255 (4th Cir. 2009) (“Ultimately, a complaint must contain sufficient factual

matter, accepted as true, to state a claim to relief that is plausible on its face.”). The portion

of the analyst’s report recited in the complaint provides in full:

Management mentioned in our conversation that they have “let so many reps
go in the last year and a half” (due to downsizing), which makes us think the
subpoena could perhaps stem from allegations by a disgruntled former
employee. Another speculation would be since about half of [the Company’s]
revenues come from physicians still using the [Category I CPT] code (which
provides reimbursement), rather than the designated [Category III CPT ]
code (which does not provide reimbursement), the issue could be due to
reimbursement communications, although we think that the Company has
been making strong efforts to educate physicians about correct coding. Note
that ultimately the decision regarding which code to use lies in the hands of
the physician.

J.A. 1210 ¶ 109.

The primary revelation—that the Company had received a DHHS subpoena—is not

actionable because it discloses only the fact of a DHHS investigation. Typically, the

disclosure of an investigation, “without more, is insufficient to constitute a[n] [actionable]

60
disclosure for purposes of § 10(b).” Meyer v. Greene, 710 F.3d 1189, 1201 (11th Cir. 2013)

(applying this principle to commencement of a government investigation); accord Loos v.

Immersion Corp., 762 F.3d 880, 890 (9th Cir. 2014) (holding the same for an internal

investigation). The possibility that some unspecified negative information may eventually

come to light as a result of the investigation is not the same thing as the possibility that

information about fraud will also be reflected. After all, fraud is but one of a panoply of

reasons that a given company could be under investigation. Drawing anything more from

the report is simply conjecture. For that reason, disclosure of the fact of the DHHS

investigation itself is not actionable.

Putting aside the disclosure of the investigation, the analyst’s report does not

otherwise meet the loss causation element because it does not tie the decline in value of the

Company’s stock to the alleged fraud. See Lentell, 396 F.3d at 173 (“[T]o establish loss

causation, a plaintiff must allege that the subject of the fraudulent statement or omission

was the cause of the actual loss suffered[.]”).

Singer has not alleged facts from which it reasonably could be inferred that the

Company’s allegedly fraudulent billing practices caused his injury. The analyst’s report

does not detail, describe, or discuss how, or even if, the Company violated the “federal

healthcare fraud and false claims statutes.” J.A. 1210 ¶ 108. The analyst’s report states only

that the subpoena potentially concerned the Company’s billing “communications,” but

called that hypothesis “speculation.” J.A. 1210 ¶ 109. Because the analyst’s report itself

calls its conclusion speculative, it is remarkable that the majority concludes otherwise.

61
 Indeed, the report offers several facts that just as likely reflect non-fraudulent

activity. For example, the report reveals “the Company has been making strong efforts to

educate physicians about correct coding.” J.A. 1210 ¶ 109. To be sure, the report does

suggest that “about half” of the Company’s revenues come from surgeons using the

Category I code. J.A. 1210 ¶ 109. But when considered alongside the analyst’s report’s

discussion of the Company’s “strong efforts” to educate surgeons about “correct coding,”

the report just as plausibly suggests that the Company directed physicians away from using

the Category I CPT code.

b.

The same problems affect the Company’s Form 8-K disclosure. There, the Company

revealed that it had “received a subpoena” from DHHS, which “s[ought] documents for the

period January 1, 2008 through October 6, 2011.” J.A. 1210 ¶ 108. This bare-bones

revelation may have given the market a reason to speculate, but it does not establish loss

causation. It neither corrects a prior statement nor conceals a later-materialized risk.

Instead, the Form 8-K discloses only that the Company was under investigation. And

“without more, [that fact] is insufficient to constitute a[n] [actionable] disclosure for

purposes of § 10(b).” Meyer, 710 F.3d at 1201.

2.

The majority examines the same allegations, but reaches a different conclusion.

Their error is in relying on the complaint’s speculative allegations as opposed to the sort

of plausible factual allegations that our sister circuits have required. For example, in

Sparling v. Daou (In re Daou Sys., Inc.), 411 F.3d 1006 (9th Cir. 2005), a case cited by

62
Singer, the Ninth Circuit held that the plaintiff had adequately pled loss causation when

the defendants “began to reveal [financial information that showed] the company’s true

[and lackluster] financial condition.” Id. at 1026. Likewise, in Hubbard v. BankAtlantic

Bancorp, Inc., 688 F.3d 713 (11th Cir. 2012), the Eleventh Circuit concluded the plaintiff

had sufficiently pled loss causation when the defendant, an investment company, revealed

to the market the weak contents of its commercial real estate portfolio. Id. at 727–28. And

in Ohio Public Employees Retirement System v. Federal Home Loan Mortgage Corp., 830

F.3d 376 (6th Cir. 2016), the Sixth Circuit concluded that allegations of a financial

disclosure that reported a $2 billion loss sufficiently pled loss causation. Id. at 381–82, 388.

Factual allegations of that quality are simply absent here.

****

In sum, Singer’s section 10(b) claim fails because he has pled no “revelation of the

truth.” In re Vivendi, S.A. Sec. Litig., 838 F.3d 223, 261 (2d Cir. 2016); see also Dura

Pharm., Inc., 544 U.S. at 342 (noting that loss causation requires the “relevant truth . . . to

leak out”). There is an insufficient nexus to connect any loss in the value of the Company’s

stock with the discovery that the truth was worse than the Company implied. Neither the

Form 8-K disclosure nor the analyst’s report, the only evidence proffered, confirm any

such “relevant truth.” Dura Pharm., Inc., 544 U.S. at 342. Instead, the Form 8-K suggested,

and the analyst’s report speculated, only that the Company was involved in a government

investigation. Such speculative allegations as part of a complaint are not enough to survive

a motion to dismiss because the loss causation element is not adequately pled. See Nemet

Chevrolet, Ltd., 591 F.3d at 259 (observing that speculation is not enough to survive a

63
motion to dismiss); see also Vitol, S.A. v. Primerose Shipping Co., 708 F.3d 527, 543 (4th

Cir. 2013) (stating that allegations in the complaint must allege “more than the mere

possibility of misconduct”). I therefore conclude the district court erred in finding a

sufficient pleading of loss causation, which, in and of itself, requires dismissal of Singer’s

complaint because he failed to adequately plead a required element of the cause of action.

IV.

The majority’s holding impermissibly expands the scope of liability under section

10(b) and elides our Rule 12(b)(6) and PSLRA jurisprudence. Singer will be allowed to go

on to discovery—and to tax the district court and defendants’ valuable time and

resources—despite his failure to show loss causation related to a decline in the Company’s

stock price that was caused by a false statement or omission made with scienter. That is

error.

For the reasons discussed above, I conclude that Singer has failed to properly plead

the elements of material misrepresentation or omission, scienter, and loss causation as

required by Rule 8 and 9(b), as well as the PSLRA. Any one of those failures undermines

his claim, and here Singer flunks all three. I would thus affirm the judgment of the district

court dismissing this case on the scienter and misrepresentation or omission arguments,

and reverse on its finding that loss causation was adequately pled. Because the majority

reaches a different conclusion, I respectfully dissent.

64