Saxena White Wins Motion to Dismiss Against Covetrus, Inc.

On August 3, 2021, Saxena White secured a major victory with a significant decision issued by the Honorable Gary R. Brown of the Eastern District of New York in City of Hollywood Police Officers Retirement System v. Henry Schein, Inc.  et al., Case No. 2:19-cv-05530-GRB-RLM (E.D.N.Y.).  In his order, Judge Brown denied in part defendants’ motion to dismiss the amended consolidated class action complaint for violations of the federal securities laws (the “Complaint”).

The Complaint alleged that during the Class Period, Covetrus, Inc. (“Covetrus” or the “Company”) and certain of its former executive officers (“Defendants”) made a series of misrepresentations regarding the purported successful integration of Covetrus, a new company formed through the spin-off and merger of the Henry Schein Animal Health business (“HSAH”), a veterinary supply chain, distribution, and software business, and Vets First Choice (“VFC”), a privately-held start-up that developed an online pharmacy solution for veterinary clinics. Unknown to investors, Defendants’ statements promoting a successful integration were false and misleading.  At the time of Defendants’ statements, Covetrus was unintegrated and wholly fragmented, leading to disappointing earnings.   When the truth about Covetrus’s lacking integration and poor financial performance was revealed, the Company’s stock price dropped nearly 47%, harming shareholders.

In the Court’s order denying Defendants’ motion to dismiss, Judge Brown found that Covetrus “repeatedly assured investors that [] critical integration processes had been successfully completed, while [the Company’s new CEO], months later, acknowledged that no integration had taken place.”  Specifically, the Court found that Covetrus “made a series of representations . . . suggest[ing] that the company had successfully completed integration of the sales force,” adding that the Company’s former CEO “assured the public that the integration of the sales force had been completed.”  Moreover, “these statements represent[ed] concrete, factual representations” of successful integration, while the Complaint’s allegations “demonstrate[d] that, even a year after the merger, this was still not the case.”  Judge Brown found that “given the allegedly woeful state of the sales force integration efforts, [the former CEO’s] repeated and seemingly erroneous representations that those efforts had been successfully completed,” the Complaint’s allegations satisfied the heightened pleading standard for securities fraud claims.  Additionally, the Court sustained misrepresentations concerning the Company’s purported IT integration.

In finding a “strong inference of fraud,” the Court stated that “the repeated representations [of successful integration] made, compared to the factual material concerning the actual state of the integration, leads to an inference that, at a minimum, [the former CEO] acted recklessly in making such statements,” also stating that the former CEO’s “significant financial stake” in the transaction, “far beyond that of an ordinary corporate official,” supported investors’ allegations.

The case will now proceed to the discovery phase.