United States District Court, E.D. Michigan, Southern Division
DAVID N. ZIMMERMAN, Individually and on Behalf of All Others Similarly Situated, Plaintiffs,
DIPLOMAT PHARMACY, INC., PHILIP R. HAGERMAN, and SEAN M. WHELAN, Defendants.
OPINION AND ORDER DENYING DEFENDANTS' MOTION TO
Corbett O'Meara United States District Judge.
matter came before the court on defendants Diplomat Pharmacy,
Inc., Philip R. Hagerman, and Sean M. Whelan's May 26,
2017 Motion to Dismiss Plaintiffs' Amended Class Action
Complaint. Plaintiffs filed a response July 10, 2017; and
Defendants filed a reply brief August 9, 2017. Pursuant to
Local Rule 7.1(f)((2), no oral argument was heard.
a shareholder class action suit in which Plaintiffs allege
violations of the Securities Exchange Act of 1934 and is
governed by the Private Securities Litigation Reform Act of
1995 (“PSLRA”). On a motion to dismiss, the court
is required to “construe the complaint in the light
most favorable to the plaintiff, accept all well-pleaded
factual allegations as true, and examine whether the
complaint contains sufficient factual matter, accepted as
true, to state a claim to relief that is plausible on its
face.” Ohio Pub. Emps. Ret. Sys. v. Federal Home
Loan Mortg. Corp., 830 F.3d 376, 382-83 (6th
Cir. 2016) (citing Ashcroft v. Iqbal, 556 U.S. 662,
678 (2009)). Accordingly, the court takes its statement of
facts from Plaintiffs' response brief as follows:
In late 2015, Defendants were notified by Caremark, the
largest PBM [pharmacy benefits manager] through which
Diplomat dispensed its Part D prescriptions, that starting
January 1, 2016, DIR [direct and indirect remuneration] fees
assessed by Caremark would go from a flat $3 to $7 amount to
a percentage range of 3% to 5% on the cost of each billed
prescription's ingredients. What this meant for Diplomat,
the largest specialty pharmacy in the country, was that
because the ingredients of their Part D drugs cost upwards of
$30, 000 (or more) per prescription, the DIR fees deducted
from Caremark reimbursements would increase 1, 000% to 10,
000% (or more) in 2016. Therefore, Defendant knew that unlike
in prior years, when Caremark would have deducted only $3 to
$7 from a $30, 000 Part D prescription dispensed by Diplomat,
in 2016, the change to the 3% to 5% range meant that the DIR
fee would skyrocket to between $900 and $1, 500 on that same
Despite knowing about the financial havoc these Caremark DIR
fees would wreak on Diplomat's profitability, Defendants
concealed this information from investors by failing to
timely record adequate accruals for DIR fees in
Diplomat's publicly filed 1Q16 and 2Q16 financial
results, in violation of GAAP [generally accepted accounting
principles], and misleadingly omitting material information
about DIR fees from the Company's 2015 10-K and 1Q16 and
2Q16 10-Qs. Defendants knew that if they had properly accrued
these DIR fees in their publicly filed financial statements,
investors would have been alerted to the astronomical
increases in DIR fees and their material negative impact on
profitability, and Diplomat's stock price would surely
suffer (as it eventually did) and potentially derail the
ongoing merger negotiations it was having with Caremark's
parent company, CVS. And because Diplomat never even
mentioned DIR fees or related accruals in any of its
financials filed before the end of the Class Period, there is
no reason to believe that CVS was alerted to Defendants'
failure to properly accrue DIR fees assessed by Caremark.
Investors began to learn the truth when, after the close of
trading on October 25, 2016, Diplomat announced that
defendant Whelan had resigned without a successor in place
and just days before the release of 3Q16 financial results.
In response, on October 26, 2016, Diplomat's stock
tumbled more than 12% on unusually heavy trading volume. The
full truth of Defendants' previously concealed scheme was
revealed when after the close of trading on November 2, 2016,
Diplomat announced its 3Q16 results, reporting that
‘[t]hird quarter revenue and profit measures . . . were
negatively impacted by an incremental $8 million of DIR fees,
of which $4 million was retroactive to Q1 and Q2 2016.'
In response, on November 3, 2016, Diplomat's stock
plummeted more than 40%, falling from $22.38 to $12.95 on
heavy volume, thereby harming investors.
state a claim for securities fraud a plaintiff must allege
“(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.”
Matrixx Initiatives, Inc. v. Siracusano, 563 U.S.
27, 37-38 (2011). This claim is subject to the pleading
standards of the PSLRA, which require allegations to be
stated with particularity.
their motion to dismiss Defendants contend that Plaintiffs
have failed to plead, among other things, a strong inference
of scienter, the “knowing and deliberate intent to
manipulate, deceive, or defraud, ” or “highly
unreasonable conduct which is an extreme departure from the
standards of ordinary care.” Doshi v. General Cable
Corp., 823 F.3d 1032, 1039 (6th Cir. 2016).
Defendants argue that instead, Plaintiffs have pleaded
“fraud by hindsight.” Defs.' br. at 24-25.
the standard under which the court must review
Defendants' motion to dismiss “does not impose a
probability requirement at the pleading stage; it simply
calls for enough fact to raise a reasonable expectation that
discovery will reveal evidence of illegal [conduct].”
Bell Atl. Corp v. Twombly, 550 U.S. 544, 556 (2007).
Construing the amended complaint in this case in the light
most favorable to the purported plaintiff class and accepting
all well-pleaded factual allegations as true, the court finds
that it does contain sufficient factual matter, accepted as
true, to state a claim for relief. Accordingly, the court
must deny Defendants' motion to dismiss the amended
hereby ORDERED that Defendants' May 26,
2017 Motion to Dismiss Plaintiffs' Class ...