Marsden v. Select Med. Corp.

SECURITIES LAW

Marsden v. Select Med. Corp., No. Civ.A. 04-4020
(E.D. Pa. Apr. 6, 2006)

The United States District Court for
the Eastern District of Pennsylvania held that a group of shareholders could
sue a health care provider of long-term acute care hospitals for making materially
misleading statements regarding a CMS reimbursement proposal, resulting in
a significant drop in the provider’s stock price. The shareholders alleged
that the company, through its officers, made false statements about the state
of the company’s finances when it knew that it was fraudulently obtaining reimbursement
dollars, and that these statements contributed to the stock market’s response
to its press release that a proposed CMS regulation would have disastrous
consequences for the company. The court found that the shareholders had the
requisite knowledge to plead such facts. However, they were not able to plead
that the provider company lacked internal controls because a lack of internal
controls is not by itself a violation of the securities law.