Reiner v. Teladoc Health, Inc.

REPORT AND RECOMMENDATION TO THE HON. GREGORY H. WOODS

BARBARA MOSES, UNITED STATES MAGISTRATE JUDGE.

Beginning in 2014, defendant Mark Hirschhorn, a senior executive at defendant Teladoc Health, Inc. (Teladoc or the Company), had an extra-marital affair with a lower-level Teladoc employee, Charece Griffin, "causing drama" in her department. When the Board of Directors learned about the affair in 2016, it retained counsel, investigated, and disciplined Hirschhorn, but did not discharge him. In 2018, when the affair and the Company's response became public, the price of Teladoc's stock dropped, the Company entered into a separation agreement with Hirschhorn, and litigation ensued. In this action, lead plaintiffs Wayne Arcuri, Badruddin Salimbhai, and David Williams, suing on behalf of themselves and all others similarly situated, allege that Teladoc, Hirschhorn, and Teladoc's Chief Executive Officer (CEO) Jason Gorevic engaged in securities fraud from March 3, 2016 through December 5, 2018 (the Class Period) by making false or misleading statements regarding (1) the Company's commitment to ethical governance, as set forth in its Code of Business Conduct and Ethics (CBCE); and (2) the risks arising from the Company's dependence on its senior management team.

In a Memorandum Opinion and Order dated November 30, 2020 (Op. & Order) (Dkt. No. 70), ^[1] which adopted, in part, my Report and Recommendation dated September 9, 2020 (R&R)

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(Dkt. No. 65), ^[2] the Hon. Gregory H. Woods, United States District Judge, dismissed plaintiffs' Second Amended Consolidated Class Action Complaint (SAC) (Dkt. No. 35) in its entirety, with leave to amend. The District Judge concluded, among other things, that most of the challenged statements in or about the CBCE were inactionable "puffery," too insubstantial to be the basis of a securities fraud claim, and that as to two statements capable of being proven true or false, plaintiffs failed to allege facts showing that they were either false or misleading. Op. & Order at 7-10. As to the "key personnel" disclosures, the District Judge adopted, without modification, the R&R's conclusion that Teladoc's statements, which did not mention Hirschhorn by name, "were 'not misleading for having omitted unadjudicated allegations that might one day lead to his ouster.'" R&R at 26 (quoting Okla. Law Enf't Ret. Sys. V. Papa John's Int'l Inc., 444 F.Supp.3d 550, 563 (S.D.N.Y. 2020) (Papa John's I)); Op. & Order at 5. Additionally, the District Judge agreed with the R&R that, in the absence of any actionable misstatement or omission, there was no need to reach the issue of scienter, and that because plaintiffs had not pled a primary securities fraud violation, their claim for control person liability also failed. R&R at 26; Op. & Order at 5.

Now before me for report and recommendation is defendants' motion (Dkt. No. 76) to dismiss the Third Amended Consolidated Class Action Complaint (TAC) (Dkt. No. 71), with prejudice, on substantially the same grounds asserted against the SAC. Moving pursuant to Fed.R.Civ.P. 9(b) and 12(b)(6), as well as the Private Securities Litigation Reform Act of 1995 (PSLRA), 15 U.S.C. §§ 78u-4 et seq., defendants argue that plaintiffs fail to plead any materially false or misleading statement; that they fail to plead particularized facts giving rise to a strong inference of scienter; and that their control person claim should be dismissed for failure to plead a

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primary securities fraud violation. I agree with defendants that, after four tries, plaintiffs have failed to allege any materially false or misleading statement by any defendant. For this reason, as discussed in more detail below, I recommend that defendants' motion be granted.

I. BACKGROUND

A. Procedural History

Plaintiffs filed the TAC on December 30, 2020. Count I alleges that defendants violated § 10(b) of the Securities Exchange Act of 1934 (Exchange Act), 15 U.S.C. § 78j(b), and Securities and Exchange Commission (SEC) Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5. Count II alleges that the individual defendants - Gorevic and Hirschhorn - are liable for any false or misleading statements disseminated by the Company because they are control persons pursuant to § 20(a) of the Exchange Act, 15 U.S.C. § 78t(a).

Defendants filed their motion to dismiss the TAC on February 12, 2021, supported by a memorandum of law (Def Mem.) (Dkt. No. 77) and the Declaration of Audra J. Soloway (Soloway Decl.) (Dkt. No. 78), attaching various SEC filings and related documents. On March 26, 2021, plaintiffs filed their opposition memorandum (Pl. Opp.) (Dkt. No. 79), accompanied by the Declaration of Leah Heifetz-Li (Heifetz-Li Decl.) (Dkt. No. 80), attaching one additional SEC filing by the Company. On April 23, 2021, defendants filed their reply brief. (Def. Reply) (Dkt. No. 83.)

B. Repleaded Allegations

Most of the factual allegations in the TAC were previously asserted in the SAC and are detailed in the R&R, at 5-12, familiarity with which is assumed. Consequently, I summarize those allegations only briefly in the sections that follow. As required by McCarthy v. Dun & Bradstreet Corp., 482 F.3d 184, 191 (2d Cir. 2007), I accept the well-pleaded factual allegations contained in the TAC as true for purposes of the motion to dismiss.

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1. Events

Teladoc is a publicly-traded Delaware corporation providing telehealth services. TAC ¶¶ 2, 21. Defendant Gorevic served, at all relevant times, as the company's CEO. Id. ¶ 22. Defendant Hirschhorn became the company's Executive Vice President and Chief Financial Officer (CFO) in October 2012. Id. ¶ 31.

In May 2014, Hirschhorn began a relationship with Griffin, who worked in the Company's Lewisville, Texas office. TAC ¶¶ 4, 13. Thereafter, Griffin "received a series of promotions" over colleagues with "either more industry experience or better credentials," and her compensation grew to "about $125, 000." Id. ¶ 13. The affair spanned at least two years, id. ¶¶ 35, 37, and was an open secret in Lewisville, where Griffin "regularly discussed her relationship with Hirschhorn." Id. ¶¶ 4, 30-33. Griffin also told her colleagues that she and Hirschhorn liked to trade Teladoc stock together. Id. ¶¶ 13, 35. "More accurately, after Griffin received a stock grant, Hirschhorn would tell her when he thought there were good opportunities to sell some shares." Id. ¶ 35.

On September 28, 2016, Hirschhorn was promoted to Chief Operating Officer (COO), while retaining his CFO title. TAC ¶ 63.

Griffin's "ultimate boss" Amy McKay reported the improper relationship to Pina Tripodi and Theresa Kirk-Fowler, Teladoc's Director and Associate Director of Human Resources (HR), respectively, TAC ¶¶ 5, 42, as did an individual identified as Former Employee 2 (FE2). Id. ¶ 42. In October 2016, McKay drafted, and submitted to the Legal and HR departments, an eight-page document setting forth the timeline of the relationship and detailing the "complaints of unfairness" raised by other employees regarding Griffin's stock trading. Id. ¶¶ 6, 43.

Beginning in early October 2016, several Teladoc employees, including McKay, received harassing emails from fake email addresses. SAC ¶¶ 7, 45. Two of the recipients filed police reports (at Kirk-Fowler's suggestion), suggesting that Griffin may have sent the emails. TAC ¶¶ 7,

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45-48, Exs. B, C. However, after interviewing Griffin, the police closed both cases without further action. Id. Exs. B, C.

In November 2016, McKay learned that the Company had retained a law firm to investigate her allegations. TAC ¶¶ 9, 49. The investigation substantiated those allegations and revealed "inappropriate conduct" by Hirschhorn, but defendants "failed to act to ensure that investors would not be harmed." Id. ¶¶ 9, 49-50. Instead, on December 27, 2016, Teladoc entered into an amended employment contract with Hirschhorn containing only "minor slaps on the wrist." Id. ¶ 9, 50.^[3]

In October 2017, McKay was fired, albeit with a "severance package," after spending "months 'bitterly complaining and arguing with the HR and Legal departments'" about the Hirschhorn decision. TAC ¶¶ 13, 35, 51.^[4] In addition, FE2 was bullied by a manager who reported to Hirschhorn. Id. ¶ 52.^[5] Griffin "resigned quietly in late 2017." Id. ¶¶ 13, 45, 51. Hirschhorn retained his position at Teladoc for another two years, until the Southern Investigative Research Foundation published an expose of the Hirschhorn-Griffin affair (the SIRF Report) on December 5, 2018, id. ¶¶ 13, 33, 35 & Ex. A, after which the price of Teladoc's common stock dropped by $4 per share (6.69%). Id. ¶ 13. On December 17, 2018, Hirschhorn resigned. Id. ¶ 14.

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In the wake of the SIRF Report, CEO Gorevic falsely told analysts that Teladoc was not aware of the inappropriate relationship between Hirschhorn and Griffin when Hirschhorn was promoted to COO on September 28, 2016, and that McKay was not terminated for reporting the relationship. TAC ¶¶ 8, 61-64.^[6]

Over the course of the approximately 2-1/2 year Class Period, see TAC ¶ 1, Hirschhorn sold Teladoc stock representing a total of more than 99% of his holdings. Id. ¶ 89. Gorevic also sold large amounts of stock, as did Adam Vandervoort, Teladoc's Chief Legal Officer (CLO), who is not a defendant. Id. ¶¶ 90-93.

2. Statements

During the Class Period, the Company made a number of public statements - in its proxy statements and on its website - about its "integrity" and "ethics," frequently highlighting its CBCE. TAC ¶¶ 68-70, 75-77, 81-83. For example, in its April 15, 2016 proxy statement, Teladoc stated that it was "committed to the highest standards of integrity and ethics in the way it...