Ind. Pub. Requirement Sys. v. AAC Holdings

INDIANA PUBLIC REQUIREMENT SYSTEM, Individually and on Behalf of All Others Similarly Situated Plaintiff, v. AAC HOLDINGS, et al., Defendants.

No. 3:19-cv-00407

United States District Court, M.D. Tennessee, Nashville Division

February 24, 2023

MEMORANDUM OPINION AND ORDER

ELI RICHARDSON UNITED STATES DISTRICT JUDGE.

Pending before the Court is Plaintiff's motion for class certification. (Doc. No. 76). Defendants filed a response (Doc. No. 83) and Plaintiff filed a reply (Doc. No. 100). Defendants requested permission to file a sur-reply on the grounds that Plaintiff raised issues in its reply for the first time. (Doc. No. 106). The Court granted Defendants' request (Doc. No. 108) and Defendants filed a sur-reply (Doc No. 109). For the reasons stated herein, Plaintiff's motion for class certification is granted in part and denied in part.^[1]

The facts set forth below alleged in the amended complaint^[2] and are discussed to provide context for Plaintiff's motion for class certification.

BACKGROUND

The proposed class in this purported class action consists of investors who purchased common stock of AAC Holdings, Inc. (“AAC” or “the Company”) between March 8, 2017 and November, 52018. (Doc. No. 77 at 7)^[3]. AAC is a healthcare company primarily operating in the field of addiction treatment, providing addiction treatment centers and sober living services. (Doc. No. 45 at 4).^[4] As explained in part in the Court's opinion (Doc. No. 62 “motion-to-dismiss opinion) denying Defendants' motion to dismiss (Doc. No. 52) the amended complaint Plaintiff^[5]brings a Restatement Claim and a Marketing Claim against Defendants under Section 10(b) of the Securities and Exchange Act and Rule 10b-5 promulgated thereunder. Plaintiff's Restatement Claim asserts that Defendants made false and misleading statements about AAC's accounts receivable, leading to false financial statements that were ultimately revealed to investors through AAC's Restatement of its financial results^[6] for fiscal years 2016 and 2017 and the first three quarters of 2018. (Doc. No. 62 at 2-3). Plaintiff's Marketing Claim alleges that Defendants engaged in a fraudulent and deceptive sales and marketing scheme and made false and misleading statements related to AAC's sales and marketing practices that were revealed to investors as the industry and Congress began to investigate and cast light upon such deceptive practices. (Id.).

Plaintiff also brings Scheme Claims against Defendants pursuant to § 10(b).^[7] (Doc. No. 45 at 10). Specifically Plaintiff alleges that Defendants participated in a scheme and wrongful course of conduct that operated as a fraud or deceit on purchasers of AAC common stock. (Id.). Plaintiff's Scheme Claims are predicated on the same conduct underlying Plaintiff's Restatement and Marketing Claims. (Id. at 1, 5).^[8]

1. Marketing Claim

Plaintiff alleges two primary misleading marketing behaviors on the part of AAC. AAC acquired Referral Solutions Group, LLC (“RSG”) in July 2015, whose primary business involved operating over 100 websites with uniform resource locators (“URLs”) such as “rehabs.com” and “recovery.com.” (Id. at 12). Plaintiff contends that contrary to how they were advertised, these websites did not merely provide “informational resources” about drug abuse and treatment, but instead were “thinly veiled lead generation mechanisms” that used search engine optimization (“SEO”) techniques to increase the sites' visibility. (Id.). The sites also purposedly charged rehab providers for advertisement space or for when visitors clicked on the advertisements to then reach the rehab providers' websites. (Id.). As for the second allegedly misleading marketing behavior, Plaintiff accuses AAC of paying their representatives who provided individuals with information about addiction and treatment options a commission based on individuals' enrollment in AAC's facilities (Id.). These representatives were also supposedly “subject to minimum admissions goals.” (Id.).

Central to Plaintiff's Marketing Claim are several allegedly materially false and misleading statements and omissions made by Defendants. On May 23, 2017, Defendants Michael Cartwright, the former Chief Executive Officer (“CEO”) of AAC and Chairman of the AAC Board of Directors, and Kirk Manz, AAC's former Chief Financial Officer (“CFO”), spoke at the UBS Global Healthcare Conference in New York. (Id. at 26). The slide deck presented by Defendants referred to AAC's “sales and marketing engine” as “best in class” and stated that AAC's “marketing knowledge and infrastructure” provided AAC with a “significant competitive advantage.” (Id. at 26-27).

Beginning in late 2017, the United States House of Representative Committee on Energy and Commerce, Subcommittee on Oversight and Investigations began holding hearings on the deceptive and fraudulent marketing practices in the addiction treatment industry. (Id. at 14). Among the public discussion of misleading marketing practices in the addiction treatment industry, in January 2018, Google expanded a nation-wide ban on selling advertisements for addictiontreatment related search terms to a global ban. (Id. at 17).

On February 22, 2018, Defendants Cartwright and Andrew McWilliams, AAC's former Chief Accounting Officer, hosted a conference call to discuss AAC's financial results. (Id. at 27). When asked about AAC's marketing efforts, Cartwright said: “. . . I think the team that we have focused on digital marketing is incredible. The talent is really exceptional. And I think the ideas that they come up with on a quarterly basis amaze me ....” (Id. at 27). The following day, AAC filed with the Securities and Exchange Commission (“SEC”) its Form 10-K for Fiscal Year (“FY”) 2017, in which AAC stated that the “national sales and marketing program provides [AAC] with a competitive advantage compared to treatment facilities that primarily target local geographic areas and use fewer marketing channels to attract clients.” (Id. at 28).

In a similar set of comments during a May 3, 2018 conference call, Defendant Cartwright stated, in response to a question regarding the marketing engine:

One thing I'm most impressed about is the people we have in sales and marketing. We have the right people. So it's not really a people issue because we have extremely talented people in our call center as well as on the outside BD team as well as in the digital marketing space ....

(Id. at 33).

On July 25, 2018, Congress called Defendant Cartwright to testify, and during the testimony he was questioned directly about AAC's marketing practices. During his testimony, Cartwright stated that AAC “make[s] sure that [AAC's] website visitors know who they are contacting” and that AAC makes “clear that users know which treatment centers are going to answer the numbers they call.” (Id. at 64).

On August 1, 2018, ahead of AAC's release of its 2Q18^[9] financial results, AAC issued a press release in which Defendant Cartwright stated, “We are pleased with the progress we have made this year as we continue to execute to plan and make strides in transforming our sales and marketing team, including opening a new admissions center and bringing on new leadership ....” (Id. at 33).

Later that month, Google also released an update to its broad core algorithm, which could have impacted “where a given website appear[ed] in the hierarchy of Google's search results.” (Id. at 18). The update came to be known as the “Your Money or Your Life” update, and allegedly prioritized content that demonstrated “expertise, authoritativeness, and trustworthiness.” (Id. at 18-19). With the new update in place, websites with more trustworthy content were supposedly ranked higher in search results than less reputable websites. (Id. at 19).

On November 6, 2018, AAC filed with the SEC its 3Q18 Form 10-Q, in which AAC warned that Google's changes to its algorithms may impact the number of calls to AAC's admissions center and “decrease in interactions with potential clients and a lowering of [AAC's] census.” (Id. at 31). In a conference call that day, Defendant Cartwright remarked that “Google launched changes to its algorithm that impacted the search engine optimization [“SEO”] of [AAC's] health care and medical-related websites.” (Id. at 36). Cartwright attributed the downturn in calls to AAC's call centers from July to September to the SEO changes. (Id.). After the conference call, AAC common stock purportedly declined “more than 44%” from close of $5.31 on November 5, 2018 to “close of $2.96 on November 6, 2018.” (Id. at 55).

2. Restatement Claim

Plaintiff's Restatement Claim relies on the theory that AAC was forced to restate its financial results after it improperly calculated its accounts receivable. (Id. at 19). According to Plaintiff, AAC designated debts owed to the Company that were unlikely to be collectable as “doubtful accounts” or “bad debt” on its financial statements. (Id. at 20). AAC allegedly treated a “large portion of its revenues as collectible” based on industry data when AAC was in possession of historical data that indicated that the revenue actually should have been designated as doubtful accounts or otherwise uncollectible, thus knowingly inflating its accounts receivable. (Id. at 22 23).

Beginning with AAC's 2016 Form 10-K, the amended complaint provides in detail a series of disclosures and statements made by AAC in which AAC allegedly misrepresented its accounts receivable and the information on which it was basing the calculations for its accounts receivable. (Id. at 37-46).

In March 2018, the SEC subpoenaed AAC, seeking information regarding accounts receivable where AAC had received partial payment from an insurance company but had supposedly continued to...