Facts

Eargo Inc. sells hearing devices for those with hearing loss. Instead of selling their products through doctors who would provide prescriptions to the consumer and order the hearing aid for them, customers could purchase the hearing device directly from Eargo without a prescription, consequently, at a lower cost. In October 2020, Eargo went public at $18 per share. At the close of May 20, 2022, when its stock plummeted to $1.25 per share, shareholders filed a securities violation suit in USDC Northern.

PLAINTIFFS' CONTENTIONS: Plaintiffs contended that defendant's fraudulent behavior caused stock prices to plummet. A Department of Justice (DOJ) investigation related to insurance reimbursement claims filed by the company submitted on behalf of its customers who were covered by the Federal Employees Health Benefits Program concluded that the company's insurance claims practices were improper. The company thereafter misled investors as to the audit, falsely reassuring its investors that it was commonplace, yet each revelation regarding the investigation thereafter continued to cause a cascading effect of the stock price's precipitous descent. A $34.4 million settlement was thereafter reached between the company and the DOJ to resolve the healthcare fraud investigation, an amount that was more than the company's reported 2021 revenue and over eight times the company's gross profit of $4.1 million in 2021.

DEFENDANTS' CONTENTIONS: Defendants asserted that plaintiffs failed to plead the falsity and scienter elements of their claims. Specifically, Plaintiffs failed to plead that Defendants made any false or misleading statements or that Defendants acted either intentionally or with deliberate recklessness. For example, Defendants truthfully described the company's business model and accurately described the status of the insurer audit. Likewise, Plaintiffs alleged no facts suggesting Defendants knew their statements were false or misleading when made. Indeed, Plaintiffs' own allegations showed that Defendants believed their insurance claims were proper. And although plaintiffs alleged that certain defendants sold stocks during the class period, the sales were made to either cover tax obligations or through a valid trading plan. If anything, defendants increased their company holdings during the class period, which undermined an inference of scienter.

Result

The court granted defendants' motion to dismiss plaintiffs' complaint twice. Plaintiffs then notified the court that they would not file a third amended complaint, seeking instead entry of final judgment so as to appeal the case.