Massachusetts Retirement Systems v. CVS Caremark Corp.

United States Court of Appeals
For the First Circuit

No. 12-1900

MASSACHUSETTS RETIREMENT SYSTEMS, Lead Plaintiff, CITY OF
BROCKTON RETIREMENT SYSTEM; PLYMOUTH COUNTY RETIREMENT SYSTEM;
NORFOLK COUNTY RETIREMENT SYSTEM,

Plaintiffs, Appellants,

RICHARD MEDOFF, individually and on behalf of all others
similarly situated,

Plaintiff,

v.

CVS CAREMARK CORPORATION; THOMAS M. RYAN;
DAVID RICKARD; HOWARD MCLURE,

Defendants, Appellees.

APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF RHODE ISLAND

[Hon. Joseph N. Laplante, U.S. District Judge]

Before

Howard, Circuit Judge,
Souter,* Associate Justice
and Torresen,** District Judge.

Douglas Wilens, with whom Robbins Geller Rudman & Dowd LLP,
Joseph A. Fonti, Serena Hallowell, and Labaton Sucharow LLP were on
brief, for appellants.
Lawrence Portnoy, with whom Edmund Polubinski III, Jessica K.

*
Hon. David H. Souter, Associate Justice (Ret.) of the Supreme
Court of the United States, sitting by designation.
**
Of the District of Maine, sitting by designation.
Foschi, Jason M. Spitalnick, Davis Polk & Wardwell LLP, Willliam R.
Grimm, and Hinkley, Allen & Snyder LLP were on brief, for
appellees.

May 24, 2013
 HOWARD, Circuit Judge. This is an appeal from the

dismissal of a putative class action for securities fraud against

CVS Caremark Corporation and certain of its current and former

employees. For the reasons below, we vacate the dismissal and

remand the case for further proceedings.

I. Background

Because this appeal involves a dismissal for failure to

state a claim, Fed. R. Civ. P. 12(b)(6), we recount the relevant

facts based on the well-pleaded allegations in the complaint. SEC

v. Tambone, 597 F.3d 436, 438 (1st Cir. 2010) (en banc). At times,

we borrow from the district court's thorough opinion.

A. CVS Merges with Caremark

In November 2006, CVS Corp. ("CVS") and Caremark Rx Inc.

("Caremark") announced that they would merge. At the time, CVS was

the nation's largest retail pharmacy chain, and Caremark was the

nation's second-largest prescription benefits manager ("PBM"). A

PBM administers prescription drug benefits on behalf of employers,

government agencies, labor unions, and other entities, known as

"sponsors," that provide those benefits as part of their health

insurance plans. The sponsors pay fees to the PBM under a contract

for its services, which include managing prescription drug claims

submitted by those enrolled in the plan. PBMs also negotiate the

prices that the sponsors pay to drug manufacturers for their

products, which are then sold either through retail pharmacies

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(like CVS) that have their own contracts with the PBMs, or through

the PBMs' own mail-order pharmacies. By merging, CVS and Caremark

intended to provide services that only a combined retail pharmacy

and PBM could offer, and to leverage their purchasing power to

drive down their costs.

CVS President and CEO Thomas M. Ryan recognized that the

combined company's success would depend on its ability to deliver

quality service. On a conference call with analysts in November

2006, Ryan said that the combined company would "help employers and

plan providers deliver the right drug at the right place at the

right time." At a March 2007 conference, Ryan stated,

No one is going to have a lower cost structure
than this combined company. No one is going
to be able to out-cost us in the market when
we go. So, then it's all about, okay, what
about service, what about product? And we
think we can out-service and out-sell our
competition here.

Ryan reiterated the importance of service on a May 2007 earnings

call with analysts:

I guess the two things that [plan sponsors
are] most concerned about, one is that there's
no degradation of service. That's the first
thing. And they want to get calmed down that,
as I said earlier, that we're still going to
focus on execution and service and we're
confident that we are.

To provide effective service, CVS would have to integrate

the computer systems of its own proprietary PBM, PharmaCare, with

Caremark's. A failed integration could cause mistakes in the

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pricing and delivery of drugs. One analyst expressed "serious

concerns about the 'merger of equals' structure of the transaction

and the heightened integration risk, given that both companies

themselves have been active industry consolidators in the recent

past." In 2004, Caremark had become the then-largest PBM by

merging with AdvancePCS, which itself was the product of a merger.

According to a confidential witness, Caremark had a "myriad of

systems, they basically let them be autonomous, and had tons of

different systems so they didn't all talk to one another."

Nevertheless, a few days before CVS and Caremark shareholders

approved the merger, Ryan expressed confidence about the prospects

for integration:

Integration planning is on the way . . . .
Caremark has done a lot of these. PharmaCare
is relatively small. I don't mean to diminish
any integration because there's always risk,
but it's relatively straight-forward . . . .

CVS and Caremark completed their merger in March 2007,

creating CVS Caremark Corporation ("CVS Caremark"). Ryan became

the President and CEO of CVS Caremark; David Rickard, who had been

the Executive Vice President and CFO of CVS, retained these titles

at the merged company; and Howard McLure, who had been the Senior

Executive Vice President and COO of Caremark, became the President

of Caremark Pharmacy Services, a division of CVS Caremark.

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 B. Misrepresentations About Service and Integration

After the merger, Ryan claimed that CVS Caremark had

integrated its computer systems, was providing excellent service,

and was maintaining its client base. In November 2007, Ryan said

that he was "pleased that we've completed the integration of both

the organization and back end systems quickly and successfully."1

On a conference call with analysts on October 30, 2008, the first

day of the class period, Ryan stated, "Even in these difficult and

uncertain times . . . our PBM continues to retain existing clients

and attract new ones. We will continue to gain share because . . .

[w]e have excellent service." Ryan acknowledged that CVS Caremark

had lost some major clients, but he said that new business would

roughly offset the losses: "For 2009 revenue impact perspective,

the wins and losses are in fair balance." In the following days,

analysts reacted positively to the prospects of CVS Caremark's PBM

business.

In January 2009, Ryan stated on an earnings guidance call

that CVS had secured many of its "2009 wins" because it "repriced

a significant amount of business" in order to take certain "key

accounts . . . off the table and reprice early for all the reasons

1
This statement, like some others mentioned here, predates
the beginning of the class period on October 30, 2008. The
plaintiffs claim that this statement was false, but they do not
include it in the list of alleged misrepresentations upon which
they base their causes of action. Therefore, we recount such
statements to give context to the alleged misrepresentations that
were made during the class period.

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that you can imagine." This repricing included discounts not only

on contracts that were up for renewal, but also on contracts that

were set to expire in 2010 and beyond. According to Ryan, "over

half of our PBM business received improved pricing and close to 70%

of our national accounts were repriced." Reacting to this news, an

analyst asked Ryan, "Is there a concern about the service for the

systems and how can you get people past that also for 2010?" Ryan

denied that concerns about service caused the repricing, stating

that there were "[n]o trade-offs because of our service" or "hidden

agenda here about giving a lower price because of lack of service."

Another analyst asked Ryan whether CVS Caremark's systems "are able

to talk to each other." Ryan responded, "All the systems are able

to talk to each other . . . . We have got no issue with our

systems." Again, analysts reacted positively to the prospects of

CVS Caremark's PBM business.

CVS Caremark continued to proclaim good news as 2009 wore

on. During another earnings call in February 2009, Ryan stated

that in 2008, CVS Caremark's PBM business "had an excellent client

retention and achieved all time industry sales and new business

growth . . . . So for anyone wondering if our offerings are

resonating they certainly are." CVS Caremark's Form 10-K for its

2008 fiscal year, filed later that month, struck a similarly upbeat

tone: "We believe the breadth of capabilities resulting from the

Caremark [m]erger are resonating with our clients and contributed

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to our success at renewing existing clients and obtaining a

significant number of new clients in the 2008 selling season."

Rickard, the Executive Vice President and CFO of CVS Caremark, used

similar language during a meeting with institutional investors on

March 10, 2009, telling them that "our model is resonating in the

PBM marketplace." Rickard further stated that "we have done the

things strategically that needed to be done to make this merger

successful." In two presentations to analysts in May, Ryan stated

that "[a]s far as the 2010 pipeline . . . we're essentially on

plan, in good shape," and reiterated that "[w]e are exactly where

we need to be from a re-upping contract standpoint. So from the

PBM side of our business, we're in good shape." On the company's

earning conference call in August, Ryan forecasted earnings for

2010: "I would be very disappointed if we didn't have an [earnings

per share] growth of at least 13 to 15% next year." Glowing

reports from analysts followed Ryan's statements.2

C. The Truth About the Merger

The complaint alleges that all of these statements

concealed that the merger was, in fact, a disaster. According to

confidential witnesses, problems with the integration of computer

2
For example, in May 2009 an analyst from Deutsche Bank
maintained a "Buy" rating for CVS Caremark and wrote that
"management outlined the recent successes of CVS' unique drug
retail/PBM model and cleared up lingering misinformation about how
the model works and delivers value to payers, patients, and
shareholders."

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systems following the merger caused mistakes that contributed to

the loss of major clients. Three of these clients were worth

$3 billion in annual revenue to CVS Caremark: Coventry, Horizon

Blue Cross Blue Shield of New Jersey ("New Jersey"), and Chrysler.

CVS Caremark lost its Medicare Part D, or "Med-D"

business with Coventry in 2008,3 and the remainder, known as the

"commercial business," followed in 2009. In 2008, Rickard claimed

that the loss of the Med-D business was "due in large part to

price." But according to a former CVS Caremark employee, problems

with the integration of computer systems often resulted in CVS

Caremark representatives being unable to access participants'

information. Participants also complained that they were told that

they would receive a prescription drug at a certain price, but they

would be given a more expensive substitute without their consent.

Another former employee said that the failed computer integration

and high employee turnover resulted in a "nightmare" with Coventry.

CVS Caremark knew no later than October 2008 that it would be

losing Coventry's commercial business, but it did not inform

investors until May 2009.

CVS Caremark considered its contract with New Jersey to

be "at risk" as early as the fourth quarter of 2007. Because it

had failed to integrate its computer systems, CVS Caremark "had 'no

3
Medicare Part D provides partial coverage for prescription
drugs to Medicare beneficiaries. First Med. Health Plan, Inc. v.
Vega-Ramos, 479 F.3d 46, 48 (1st Cir. 2007).

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information on their formularies [i.e., the list of drugs available

under a sponsor's plan], no information on their drug costs,'

resulting in the denial of participant benefits," according to a

former employee. In May 2008, CVS Caremark provided New Jersey

with an "Error Report" that contained approximately 11,000 records.

By the time these errors were substantially resolved, 10,000 more

had occurred.4 In August 2009, CVS Caremark lost New Jersey's

business.

Chrysler had been a client of Pharmacare, CVS's previous

in-house PBM. After the merger, CVS Caremark employees had to

resort to manual data entry to get the participants' correct

information into its systems, and service failures relating to the

merger led to contentious meetings between the two companies. At

one point, the friction was so severe that Ryan himself felt

compelled to participate in a teleconference with Chrysler. As a

result, CVS Caremark knew no later than mid-2008 that Chrysler was

at risk for loss. CVS Caremark announced in August 2009 that it

had lost a portion of Chrysler's business.

D. CVS Caremark Discloses the Truth

On November 5, 2009, the same day that CVS Caremark

reported its earnings for the third quarter of 2009, Ryan

participated in another call with investors. Ryan noted that

4
Former employees state that CVS Caremark had similar
problems with other clients, with groups of as many as 40,000 plan
participants going months without appropriate medication.

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CVS-Caremark's PBM business had suffered "some big client losses"

totaling $4.5 billion. He explained that "approximately two-plus

billion of those came . . . since the [August] call."

Specifically,

I think you know about obviously the State of
New Jersey. This was a bid that the state
wanted on a stand-alone basis, so it was a
kind of price and carve-out issue. We lost
the State of Ohio and the managed Medicare
business. It was carved in, which is about
500 plus million [dollars]. And then we had
another 600 million [dollars] miscellaneous.
These were basically smaller clients . . .
that just really wanted essentially smaller
PBMs. So in total, that was about $2 plus
billion since the last call.

And then, lastly, we had $1.7 billion that we
lost in Med-D business . . . . So net-net,
it's about $4.8 billion in loss . . . for 2010
and approximately almost [$]3.7 billion since
the last call. If you look at the losses,
total the losses with the Med-D and the $4.5
billion contract losses they really come from
four contracts plus . . . Med-D . . . . The
two really that I mentioned and then Chrysler
and Coventry.

Discussing CVS Caremark's financial performance, he stated:

[During the August analyst call] I also said
I'd be disappointed if we didn't have an
[earnings per share] growth of at least 13 to
15% next year for the enterprise. To get to
that 13 to 15% growth rate, I expected strong
double-digit growth in our retail business,
which I still do, and I expected low-to-mid
single digit [growth] in our PBM business,
which is not going to happen. What's changed?
Well, as I just said, we lost more PBM
business than we expected since the [August]
call, $2 billion in contracts. . . . Given all
of that, it now looks like operating profit in
the PBM will decline in 2010, perhaps as much

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 as 10 to 12%. . . . 10 percentage basis points
[sic] of the change is Med-D alone.

Ryan also announced the unexpected retirement of Howard McLure, who

was the President of Caremark Pharmacy Services and, according to

Ryan, "one of the chief architects of [the CVS Caremark] integrated

model."

Later in the call, a market analyst asked Ryan, "why, in

the long run, you're still optimistic about . . . the combined

model? And maybe sort of what's gone wrong in the last year or two

and why you think that's going to get better in the next year or

two?" In response, Ryan acknowledged "some big losses," including

"Coventry, which--we lost the Med-D business, and then we obviously

expected to lose the commercial business," and "Chrysler, we lost

the retirees [as opposed to Chrysler's active employees]. It's the

smallest piece of it. It went to where Ford and General Motors

were, with Michigan Blues," i.e., Blue Cross Blue Shield of

Michigan. Ryan added, "[I]f you look at these contracts that we

lost, none of them were because of the model. There were varying

reasons[:] some price, one service, there were varying reasons, but

none of them because of the model."

At another point in the call, an analyst asked Ryan:

But then you look at the PBM numbers, and it
gives everyone heart palpitations. So number
one is why are people kind of shying away from
Caremark's PBM? If it's not the combined
model, and you kind of said maybe it's--there
must be some reason that you're not proving
you're good enough to stand alone PBM [sic] to

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 keep those business [sic]. How do you change
those people's minds?

Ryan replied, "Execution and performance, it's not the

products . . . . Now we have to tweak the marketing message a

little, which we're doing to make sure that it's clear about how

those operate and what those actually are and when they hit and

what the savings are, and the benefit to the payers."

Ryan went on to explain that "some stand-alone issues"

caused the downturn in CVS Caremark's PBM business:

the Coventry piece, when we lost Med-D, we
knew we were going to lose the commercial
business. There were some service issues on
that one. . . . Chrysler, we still keep the
[active employees]. We lost the
retirees . . . . [T]here were a variety of
issues. . . . I will tell you this, we didn't
lose anybody that said, well, because you guys
are combined with a retailer, we're leaving.
None of that.

The complaint alleges that Ryan's statements during this

call amounted to a disclosure of "the truth about [CVS Caremark's]

failure to integrate the merged-entity, which resulted in the loss

of billions of dollars in PBM contracts, and that the CVS Caremark

retail-PBM model had failed to gain acceptance by customers in the

pharmaceutical benefit market." The complaint further alleges that

"investors reacted severely, causing the share price of CVS

Caremark stock to collapse," dropping from $36.15 (the share price

at the close of the market the previous day, November 4, 2009) to

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$28.87 at the close of the market on the day of the earnings call

(November 5, 2009), a total of roughly 20 percent.

To support this allegation, the complaint quotes from

several analyst reports of the earnings call. One report said that

CVS Caremark had "stun[ned] with news of additional PBM

non-renewals" on the call and that the "[s]urprise nature of [this]

disclosure raise[d] credibility issues" for the company's

management, because "the magnitude of the loss was discovered on

the call and not in the [earnings] release." Other reports

observed that the "announcement show[ed] a breakdown in the

Caremark model," since the company's PBM business had "lost $4.5

billion with a retention rate of only 92%," and that CVS Caremark

had "provided undeniable evidence . . . that it has mismanaged the

Caremark acquisition and destroyed shareholder value." One analyst

considered the PBM business worthless for purposes of valuing CVS

Caremark's stock: "We do not consider the value of the PBM segment

in arriving at our price target. We view the PBM as essentially a

free option."

Later statements by Ryan and another CVS Caremark

employee reiterated the contribution of service problems to the

company's performance. At a conference on November 17, 2009, Ryan

stated that although

a number of employers, unions, health plans,
[plan administrators] . . . love our client
service[,] . . . we dropped the ball in some
client service issues that we shouldn't have.

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 And we're owning up to it and we're fixing it.
So, that's what happened, and it obviously was
a big one with Coventry because the natural
falloff is we know we're going to lose the
commercial business following it.

According to an article in Bloomberg Businessweek in February

2010, the new President of Caremark Pharmacy Services said that the

PBM business "has five segments that haven't been fully

integrated," referring to CVS and Caremark's PBM businesses and

their predecessors. This statement came more than two years after

Ryan said that he was "pleased that we've completed the integration

of both the organization and back end systems quickly and

successfully."

E. District Court Proceedings

This action was filed in November 2009 in the United

States District Court for the District of Rhode Island against four

defendants: CVS Caremark, Ryan, Rickard, and McLure. In June

2010, the complaint was amended to add new allegations and new

plaintiffs: the retirement systems of the City of Brockton and the

Counties of Plymouth and Norfolk, Massachusetts (collectively, the

"Retirement Systems").5 The Retirement Systems claim that the

defendants made material misrepresentations in violation of

5
In the district court, this case was styled Medoff v. CVS
Caremark Corp., No. 09-cv-554 (D.R.I.). The operative complaint
is the Corrected Consolidated Class Action Complaint, filed on
June 1, 2010. Richard Medoff, an individual who owned stock in CVS
Caremark, was named as a plaintiff in the original complaint but
not in the Corrected Consolidated Class Action Complaint.

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Sections 10(b) and 20(a) of the Securities Exchange Act of 1934

("Exchange Act"), 15 U.S.C. §§ 78j(b), 78t(a), as well as Rule

10b-5 of the Securities and Exchange Commission ("SEC"), 17 C.F.R.

§ 240.10b-5. The defendants moved to dismiss the complaint under

Federal Rule of Civil Procedure 12(b)(6) for failure to state a

claim for relief. The district court granted the motion, holding

that the complaint did not plausibly allege that Ryan's statements

on the November 5 earnings call caused the drop in CVS Caremark's

share price, with one exception: his warning that earnings per

share would not grow at least 13 to 15%, as he had forecasted. The

court held that Ryan's forecast could not form the basis for a

claim against the defendants, however, because it was a protected

"forward-looking statement" under the Private Securities Litigation

Reform Act ("PSLRA"), 15 U.S.C. § 77z-2(c)(1). The Retirement

Systems timely appealed.

II. Analysis

A. Standard of Review

We review de novo an order of dismissal for failure to

state a claim. Tambone, 597 F.3d at 441. In conducting this

review, "we accept as true all well-pleaded facts set forth in the

complaint and draw all reasonable inferences therefrom in the

pleader's favor." Artuso v. Vertex Pharm., Inc., 637 F.3d 1, 5

(1st Cir. 2011) (citing Tambone, 597 F.3d at 441). "To survive a

motion to dismiss, a complaint must contain sufficient factual

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matter, accepted as true, to 'state a claim to relief that is

plausible on its face.'" Ashcroft v. Iqbal, 556 U.S. 662, 678

(2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570

(2007)). A claim is facially plausible if it is supported by

"factual content that allows the court to draw the reasonable

inference that the defendant is liable for the misconduct alleged."

Id. While "[t]he plausibility standard is not akin to a

'probability requirement,'" it demands "more than a sheer

possibility that a defendant has acted unlawfully." Id. Unless

the alleged facts push a claim "across the line from conceivable to

plausible," the complaint must be dismissed. Id. at 680 (quoting

Twombly, 550 U.S. at 570).

B. Loss Causation

Section 10(b) of the Exchange Act makes it unlawful to

"use or employ, in connection with the purchase or sale of any

security . . . any manipulative or deceptive device or contrivance

in contravention of such rules and regulations as the [SEC] may

prescribe . . . ." 15 U.S.C. § 78j(b). One of these rules is SEC

Rule 10b-5, which prohibits any person from "mak[ing] any untrue

statement of a material fact or . . . omit[ting] 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." 17 C.F.R. § 240.10b-5.

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 The Supreme Court has identified six elements of a claim

under Section 10(b) and Rule 10b-5:

(1) a material misrepresentation (or
omission);

(2) scienter, i.e., a wrongful state of mind;

(3) a connection with the purchase or sale of
a security;

(4) reliance, often referred to in cases
involving public securities markets
(fraud-on-the-market cases) as "transaction
causation,";

(5) economic loss; and

(6) "loss causation," i.e., a causal
c o n n e c t io n between the material
misrepresentation and the loss.

Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 341-42 (2005) (emphasis

omitted) (citations omitted). Here, the district court focused on

the element of loss causation--whether the Retirement Systems

adequately alleged a causal connection between the defendants'

material misrepresentations and the drop in CVS Caremark's share

price that followed the November 5, 2009 earnings call.

Plaintiffs commonly establish loss causation by

(1) identifying a "corrective disclosure" (a
release of information that reveals to the
market the pertinent truth that was previously
concealed or obscured by the company's fraud);

(2) showing that the stock price dropped soon
after the corrective disclosure; and

(3) eliminating other possible explanations
for this price drop, so that the factfinder
can infer that it is more probable than not

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 that it was the corrective disclosure--as
opposed to other possible depressive factors--
that caused at least a "substantial" amount of
the price drop.

FindWhat Investor Grp. v. FindWhat.com, 658 F.3d 1282, 1311-12

(11th Cir. 2011) (footnote omitted). Loss causation is easiest to

show when a corrective disclosure is associated with a drop in

share price. In re Williams Sec. Litig.--WCG Subclass, 558 F.3d

1130, 1137 (10th Cir. 2009).

C. The District Court's Opinion

The district court began its analysis with a statement

that the defendants acknowledged could have caused the drop in CVS

Caremark's share price: Ryan's announcement that the company would

fail to grow its earnings per share by 13 to 15%, as he had

previously forecasted. Such a projection is a "forward-looking

statement" under the PSLRA, 15 U.S.C. § 77z-2(i)(1)(A), and one who

makes a forward-looking statement cannot be liable in a private

action under the securities laws if "the forward-looking statement

is . . . identified as a forward-looking statement, and is

accompanied by meaningful cautionary statements identifying

important factors that could cause actual results to differ

materially from those in the forward-looking statement." Id.

§ 77z-2(c)(1). The court held that because Ryan's projection was

"couched in cautionary terms" and prefaced with cautionary

language, it could not support the Retirement Systems' claims. The

Retirement Systems do not challenge this ruling on appeal.

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 The district court then turned to the remaining alleged

misrepresentations and corrective disclosures. The Retirement

Systems had alleged that during the November 5 earnings call,

"investors learned the truth about the Company's failure to

integrate the merged-entity, which resulted in the loss of billions

of dollars in PBM contracts, and that the CVS Caremark retail-PBM

model had failed to gain acceptance by customers in the

pharmaceutical benefit market." The court disagreed that Ryan had

made statements to this effect on the earnings call, citing Ryan's

denials that there was anything wrong with CVS Caremark's business

model, as well as his explanations that the loss of major clients

such as New Jersey and Chrysler resulted from facts specific to

each client. The court acknowledged Ryan's statement that CVS

Caremark had lost the Coventry contract due to "some service

issues," but it pointed out that Ryan did not attribute those

"service issues" to the integration of CVS and Caremark. The court

held that Ryan's statements did not plausibly constitute a

disclosure of CVS Caremark's failure to integrate or to gain

acceptance of its business model.

The district court also examined the extent to which

Ryan's statements on the earnings call merely reflected information

that had been disclosed previously. The Retirement Systems admit,

for example, that Ryan had disclosed months earlier that CVS

Caremark had lost its contracts with Chrysler and Coventry.

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Moreover, the defendants showed that The Providence Journal

newspaper had reported the loss of the New Jersey contract well

before the call. Therefore, the court held, the Retirement Systems

did not allege a plausible theory of loss causation based on CVS

Caremark's lost contracts.

Finally, the district court stated that McLure's sudden

retirement, which the Retirement Systems compare to a firing, could

not have plausibly caused the drop in CVS Caremark's share price.

The court reasoned that when an executive leaves a company due to

fraud or other problems, a drop in the company's share price

results from the underlying reasons for the departure, not the

departure itself. See New Orleans Emps.' Ret. Sys. v. Omnicom

Grp., Inc. (In re Omnicom Grp., Inc. Sec. Litig.), 597 F.3d 501,

513-14 (2d Cir. 2010).

Based on this analysis, the district court concluded that

CVS Caremark's failure to achieve Ryan's earnings forecast was the

only plausible explanation for the drop in its share price.

Because that forecast was a protected forward-looking statement,

the court dismissed the complaint.

D. Loss Causation Revisited

Our review begins with the same question that the

district court addressed: Could Ryan's statements on the November

5 earnings call plausibly have caused the Retirement Systems'

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losses?6 We agree with the district court that one plausible cause

of this loss was Ryan's announcement that CVS Caremark would not

achieve the earnings growth that he had previously forecasted, an

announcement that the Retirement Systems no longer claim as

supporting liability. To allege loss causation here, then, the

Retirement Systems must allege that Ryan's other statements were a

"substantial" cause of their losses. FindWhat, 658 F.3d at 1309;

Hartman v. Gilead Scis., Inc. (In re Gilead Scis. Sec. Litig.), 536

F.3d 1049, 1055-56 (9th Cir. 2008); McCabe v. Ernst & Young, LLP,

494 F.3d 418, 425 (3d Cir. 2007).

The Retirement Systems claim that the November 5 call

revealed two categories of previous representations to be false:

that CVS Caremark's business model had gained acceptance in the

marketplace, and that the company could deliver quality service

because it had fully integrated its back-end systems. As to the

acceptance of CVS Caremark's business model, the complaint does not

allege that clients rejected the idea of a combined PBM and retail

pharmacy. Therefore, the Retirement Systems fail to state a claim

6
It is unclear whether a plaintiff may plead loss causation
with "a short and plain statement of the claim showing that the
pleader is entitled to relief," Fed. R. Civ. P. 8(a)(2), or if
there is a heightened standard akin to the rule that "a party must
state with particularity the circumstances constituting fraud,"
Fed. R. Civ. P. 9(b). See Lormand v. US Unwired, Inc., 565 F.3d
228, 258 (5th Cir. 2009) (applying Rule 8(a)(2)); Katyle v. Penn
Nat'l Gaming, Inc., 637 F.3d 462, 471 (4th Cir. 2011) (applying
Rule 9(b)). Here, the Retirement Systems' allegations are specific
enough that the outcome would be the same under either standard.

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regarding the business model itself. But the complaint does allege

that the defendants misrepresented the success of CVS Caremark's

integration and the quality of its service. According to the

complaint, Ryan told the market that CVS's and Caremark's systems

had been integrated shortly after the merger of the two companies.

Ryan later told analysts that a worrisome repricing of contracts

was unrelated to concerns about CVS Caremark's service, and he

reiterated that CVS's systems were working with Caremark's.

Several facets of the November 5 call, however, revealed that

Ryan's previous statements were misrepresentations. For example,

Ryan admitted for the first time that the Coventry contract was

lost in part due to "service issues," and McLure's sudden

retirement indicated problems with the "integrated model" that he

had built. After the call, analysts understood that CVS Caremark

had mismanaged the acquisition and damaged the PBM business. The

market reacted accordingly, driving down CVS Caremark's share price

by twenty percent. Later statements by CVS Caremark employees

confirmed that the analysts were correct in their assessment of the

problems with the PBM business.

The defendants argue that the complaint nevertheless

fails to plausibly allege loss causation for three reasons. First,

there was no corrective disclosure because Ryan never said on the

November 5 call that there were problems with the integration of

CVS Caremark's systems. Second, the market knew well before the

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call that CVS Caremark had lost its contracts with Coventry, New

Jersey, and Chrysler. Third, the Retirement Systems cannot support

their theory of loss causation with analysts' reactions to Ryan's

statements. We find these objections unpersuasive.

1. Lack of Corrective Disclosure

The district court concluded that the November 5 call

could not have been a corrective disclosure because Ryan did not

state on the call that CVS Caremark had failed to integrate its

systems. In fact, Ryan attributed the company's lost contracts to

stand-alone issues with particular clients. But a corrective

disclosure need not be a "mirror-image" disclosure--a direct

admission that a previous statement is untrue. Alaska Elec.

Pension Fund v. Flowserve Corp., 572 F.3d 221, 230 (5th Cir. 2009);

In re Williams, 558 F.3d at 1140. To be sure, the corrective

disclosure must relate to the same subject matter as the alleged

misrepresentation. FindWhat, 658 F.3d at 1311 n.28; In re

Williams, 558 F.3d at 1140; Lentell v. Merrill Lynch & Co., 396

F.3d 161, 173 (2d Cir. 2005). But a defendant's failure to admit

to making a misrepresentation, or his denial that a

misrepresentation was made, does not necessarily preclude loss

causation. Flowserve, 572 F.3d at 230 ("If a fact-for-fact

disclosure were required to establish loss causation, a defendant

could defeat liability by refusing to admit the falsity of its

prior misstatements. And if a 'complete' corrective disclosure

-24-
were required, defendants could immunize themselves with a

protracted series of partial disclosures." (citation omitted)

(internal quotation marks omitted)).

Instead, the appropriate inquiry is whether the

November 5 call, as a whole, plausibly revealed to the market that

CVS Caremark had problems with service and the integration of its

systems. Four aspects of the call lend plausibility to this theory

of loss causation.

First, Ryan disclosed for the first time that "service

issues" had led to the loss of the Coventry contract, a statement

that the Retirement Systems interpret as an admission that the

failed integration of CVS Caremark was responsible for the loss of

a major client. The district court disagreed with this

interpretation because Ryan did not attribute those "service

issues" to the integration. We believe that the complaint supports

the conclusion that the "service issues" resulted from poor

integration, and that the market could plausibly have drawn this

conclusion. From the time the merger was announced, analysts had

questioned CVS's ability to integrate with Caremark. One analyst

expressed "serious concerns" about "the heightened integration

risk, given that both companies themselves have been active

industry consolidators in the recent past." Shortly after the

merger was completed, Ryan told analysts that the "first thing"

that concerned plan sponsors was the possibility that the merger

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would degrade service. When Ryan announced in January 2009 that

CVS Caremark had repriced half of its business, one analyst asked

if the reason for the repricing was "a concern about the service

for the systems," to which Ryan responded that "there was no hidden

agenda here about giving a lower price because of lack of service."

Given these concerns, it is reasonable to infer that the market

understood Ryan's statement about "service issues" with Coventry to

imply problems with integration, which would have corrected Ryan's

previous statements that the integration had proceeded smoothly.

The complaint bolsters this inference with statements from

confidential witnesses that problems with the merger of information

systems affected CVS Caremark's relationship with Coventry.

Second, the alarm of the market following disclosure of

the magnitude of CVS Caremark's lost business likely reflected an

understanding that something systemic had gone wrong. Although it

was known that CVS Caremark had lost its contracts with Coventry,

New Jersey, and Chrysler, the company had announced the size of

only the contracts with Coventry ($1.4 billion) and Chrysler ($400

million). As Ryan put it, "approximately $2-plus billion" of CVS

Caremark's contract losses occurred after the previous earnings

call. Ryan also told analysts that the PBM business's operating

profit would decline by "as much as 10% to 12%." Asking Ryan about

these results, one analyst said that "it gives everyone heart

palpitations." The only systemic failure likely to produce these

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numbers and reactions was a failure to integrate the PBM systems,

and when analysts wrote scathing reports in response to the news,

one wrote off the entire value of the PBM business for purposes of

valuing CVS Caremark's shares.

Third, analysts noticed a wide discrepancy between CVS

Caremark's November 5 earnings press release and Ryan's description

of the PBM business. In the press release, Ryan mentioned "solid

performance in our PBM" in the third quarter of 2009, but he waited

until the call to disclose that CVS Caremark had lost billions of

dollars of PBM business since the previous quarterly earnings call

in August. One analyst reacted to the discrepancy by writing that

"the magnitude of the loss was discovered on the call and not in

the release. Surprising market participants with bad news on an

earning call tends to lead to questions about credibility with

respect to everything from earnings guidance to the business model

itself."

Fourth, McLure's retirement alerted the market to

problems with the PBM business. McLure was the President of

Caremark Pharmacy Services, and according to Ryan, he was a "chief

architect[] of [the] integrated model." The retirement came as a

surprise, and it occurred before CVS Caremark had found a

successor. One analyst wrote that "the suddenness of the

retirement of Howard McLure, Caremark's President, leads us to

-27-
believe that his departure was not exactly voluntary . . . . What

this means for future business retention is uncertain."

Perhaps the market did not perceive every detail of CVS

Caremark's struggles, but it knew enough to drive down the price of

CVS Caremark shares by 20%.7 The Ninth Circuit addressed a similar

situation in Sparling v. Daou (In re Daou Systems, Inc.), 411 F.3d

1006 (9th Cir. 2005), in which a company had concealed that it was

using an improper technique to recognize revenue prematurely.

Eventually the company revealed that it had a high level of

unbilled receivables, which the plaintiffs alleged was the result

of this improper technique. Id. at 1025-27. The price of the

company's stock dropped sharply, although the market did not know

the exact reason for the high level of unbilled receivables; one

analyst said that "[w]hen you say one thing on the conference call

and report something different on the [quarterly financial report],

that raises concern. . . . You have got to question whether they

are manufacturing earnings." Id. at 1026. The company later

confirmed that it had improperly recognized revenue. Id. The

court concluded that the plaintiffs' allegations were "sufficient

to provide [the company] with some indication that the drop in

[its] stock price was causally related to [its] financial

7
If this case proceeds, it will be up to the Retirement
Systems to prove how much of this drop resulted from revelations
about CVS Caremark's integration, which are actionable, and how
much resulted from disappointment in CVS Caremark's projected
earnings, which is not actionable.

-28-
misstatements reflecting its practice of prematurely recognizing

revenue before it was earned." Id. (citing Dura, 544 U.S. at 347).

We agree with the Ninth Circuit's approach, and we believe that the

result here is the same. The Retirement Systems' allegations

indicate that the drop in CVS Caremark's share price was causally

related to its misstatements regarding the integration of CVS and

Caremark, and these allegations are sufficiently plausible to

foreclose dismissal.

2. Public Knowledge of Contract Losses

The defendants point out, as did the district court, that

CVS Caremark's loss of Coventry, New Jersey, and Chrysler as

clients was public knowledge well before the November 5 call. In

fact, CVS Caremark had already disclosed the revenue impact of the

lost Coventry and Chrysler contracts. Therefore, the defendants

argue, Ryan's discussion of the loss of these contracts could not

have been a corrective disclosure. See In re Omnicom, 597 F.3d at

512 ("What appellant has shown is a negative characterization of

already-public information. A negative journalistic

characterization of previously disclosed facts does not constitute

a corrective disclosure of anything but the journalists' opinions."

(citations omitted)).

The Retirement Systems respond that their allegations go

beyond the mere loss of these contracts. Instead, they allege that

during the November 5 call, the market learned for the first time

-29-
the real reason for the loss: the failed integration of CVS and

Caremark.8 That information, not the loss of the contracts

themselves, is the corrective disclosure at the heart of the

Retirement Systems' claims. As described above, various aspects of

the call allegedly revealed that the integration had failed: the

identification of "service issues" as a reason for the loss of the

Coventry contract, the first disclosure of the full value of lost

contracts, the discrepancies between CVS Caremark's earnings press

release and Ryan's statements on the call, and McLure's sudden

retirement. Despite the earlier disclosure of CVS Caremark's lost

contracts, this new information could plausibly have caused the

Retirement Systems' losses.

3. Use of Analyst Reports

The district court discounted the complaint's reliance on

analyst reports, stating that the Retirement Systems failed to

"explain how these analysts' remarks, harsh as they were, can serve

to alter the nature of what Ryan actually said during the November

5 earnings call." Although the reports cannot alter Ryan's words,

8
The Retirement Systems also question whether the market was
fully aware of CVS Caremark's loss of the New Jersey contract prior
to November 5, even though the loss had been previously reported in
two articles, one published online and the other in The Providence
Journal. Because the Retirement Systems pleaded the reliance
element of their claims by alleging that the market for CVS
Caremark stock was "open, well-developed, and efficient," meaning
that the price of the stock incorporated available material
information, see Basic Inc. v. Levinson, 485 U.S. 224, 241-42
(1988), they cannot now claim that the market was unaware of
information reported in a major Rhode Island newspaper.

-30-
the Retirement Systems argue that they reflected the meaning of

those words in the market in which they were used. Cf. Stuebler v.

Xcelera.com (In re Xcelera.com Sec. Litig.), 430 F.3d 503, 514 (1st

Cir. 2005) ("[T]he existence of a significant number of analysts

implies that company reports are closely reviewed by investment

professionals, who would in turn make buy/sell recommendations to

client investors." (internal quotation marks omitted)). We agree.9

When a plaintiff alleges corrective disclosures that are

not straightforward admissions of a defendant's previous

misrepresentations, it is appropriate to look for indications of

the market's contemporaneous response to those statements. To

preclude a plaintiff from relying on analyst reports that expose

the limitations of a defendant's statements could permit the

defendant to "defeat liability by refusing to admit the falsity of

its prior misstatements." Flowserve, 572 F.3d at 230. For

example, in In re eSpeed, Inc. Securities Litigation, 457

F. Supp. 2d 266 (S.D.N.Y. 2006), the plaintiffs alleged that

eSpeed, a brokerage company, had concealed that it was alienating

customers and harming its financial performance by allowing some

customers to obtain better trade executions by paying higher

commissions. Id. at 271-76. Following eSpeed's disclosure of

disappointing financial results, an analyst asked its CEO on a

9
The Retirement Systems also contend that the analyst reports
constituted corrective disclosures by themselves, even in the
absence of Ryan's statements. We do not reach this argument.

-31-
conference call whether animosity toward this practice had affected

the company's market share. Id. at 276. The CEO denied this, but

a news article about the conference call, published the next day,

posited a connection between eSpeed's pricing structure and its

poor financial results. Id. at 296-97. The court held that the

CEO's exchange with the analyst, on its own, could not sustain the

plaintiffs' allegations that "disclosure regarding [eSpeed's

pricing structure] was a proximate cause of the economic loss," id.

at 296, but the subsequent article "could establish that, despite

[the CEO's] specific denial, the market understood by the end of

the putative class period what it did not before--that the 'new

fees' or 'new charges' entailed by [eSpeed's pricing structure]

were damaging eSpeed's market share and financial performance," id.

at 297.

Here, Ryan did not admit on the November 5 call that he

had misrepresented the success of the merger, but various aspects

of the call, taken together, plausibly could have alerted the

market that the merger had been unsuccessful. In particular, the

contemporaneous analyst reports could have represented the market's

understanding that the PBM business's poor performance was not a

mere stumble but a signal that the merger had failed to produce any

value for CVS Caremark. Therefore, the analyst reports should have

been considered in deciding the motion to dismiss.

-32-
 E. Other Elements of the Retirement Systems' Claims

Although the district court based its decision

exclusively on loss causation, the defendants argue that we can

nevertheless affirm the decision because the Retirement Systems

failed to plead an actionable misstatement or omission by the

defendants.10 While it is true that the failure to plead an

actionable misstatement or omission would support dismissal of the

Retirement Systems' claims, the parties' briefing on this issue is

abbreviated, so we think it best to allow the district court to

consider this argument in the first instance. The same is true for

the scienter element of the Retirement Systems' claims, which was

briefed before the district court but not on appeal. Instead of

reversing the district court's decision, then, we will vacate it to

allow the court to consider alternative grounds for dismissal if it

chooses.

III. Conclusion

For the reasons above, we vacate the dismissal of the

complaint and remand for further proceedings consistent with this

opinion. Costs are awarded to the appellants.

10
For example, the defendants claim that the alleged
misrepresentations were puffery, meaning that they were "too
general to cause a reasonable investor to rely upon them." ECA &
Local 134 IBEW Joint Pension Trust of Chi. v. JP Morgan Chase Co.,
553 F.3d 187, 206 (2d Cir. 2009). In this opinion, we have assumed
without deciding that the Retirement Systems have adequately
alleged the elements of their claims other than loss causation.

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