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Keippel v. Health Insurance Innovations, Inc.

United States District Court, M.D. Florida, Tampa Division

November 4, 2019

JULIAN KEIPPEL, Individually and on behalf of all others similarly situated, Plaintiff,



         Plaintiffs Oklahoma Municipal Retirement Fund and City of Birmingham Retirement and Relief System (collectively "Lead Plaintiffs" or "Plaintiffs") filed a Consolidated Class Action Complaint against Defendant Health Insurance Innovations, Inc. and its executives Defendant Gavin Southwell and Defendant Michael D. Hershberger (collectively "Defendants") for alleged violations of federal securities laws. This matter is before the Court on Defendants' Motion to Dismiss the Consolidated Complaint (Dkt. 41), Lead Plaintiffs' response in opposition (Dkt. 47), and Defendants' reply (Dkt. 49).[1] After careful review of the pleadings and for the reasons stated below, the Court finds that the Defendants' motion to dismiss (Dkt. 41) is due to be denied.

         I. Procedural and Factual Background[2]

         Plaintiffs' Consolidated Class Action Complaint (the "Complaint") asserts a securities fraud class action on behalf of all purchasers of the common stock of Health Insurance Innovations, Inc. ("HIIQ")[3] between September 25, 2017 and April II, 2019, inclusive (the "Class Period"). Dkt. 30. HIIQ is a Delaware corporation with headquarters in Tampa, Florida, that sells and distributes health and life insurance products. Id. ¶ 13. Defendant Gavin Southwell ("Southwell") has served as HIIQ's president since July 2016 and its chief executive officer ("CEO") since November 2016. Id. ¶ 14. Defendant Michael D. Hershberger ("Hershberger") served as HIIQ's chief financial officer ("CFO") since September 2015. Id. ¶ 15. Plaintiffs allege that throughout the Class Period, Southwell and Hershberger (collectively "Individual Defendants") controlled the contents of HIIQ's reports to the Securities and Exchange Commission ("SEC"), as well as press releases and presentations to investors, analysts, and portfolio managers. Id. ¶ 16.

         Steve Dorfman ("Dorfman") was an owner, member or manager of Simple Health Plans LLC ("Simple Health Plans"), Health Benefits One LLC ("HBO"), Health Center Management LLC ("HCM"), Innovative Customer Care LLC ("ICC"), Simple Insurance Leads LLC ("SIL"), and Senior Benefits One, LLC ("SBO") (collectively "Simple Health"). Id. ¶¶ 17-23. Simple Health advertised, marketed, distributed, and/or sold HIIQ's limited benefit and medical discount plans to consumers throughout the United States. Id. ¶ 24. The plans are not comprehensive health insurance and do not comply with the Affordable Care Act ("ACA"). Id. ¶1.

         Plaintiffs allege that, throughout the Class Period, Defendants falsely assured investors that HIIQ and its call centers adhered to exceptional compliance standards and experienced low rates of consumer complaints. Id. ¶ 2. Defendants claimed a complaint rate of nearly 0.0% on HIIQ policies and attributed their performance to outstanding customer service and compliance. Id. ¶¶ 2-3.

         In general, Plaintiffs allege a widespread fraudulent scheme in which agents at HIIQ's distributor call centers (Simple Health) preyed on consumers in search of comprehensive health insurance and sold them essentially worthless policies in a classic bait-and-switch scam. Id. ¶ 4-5. Unwitting consumers were duped into believing they were purchasing a Preferred Provider Organization medical insurance policy ("PPO") that is compliant with the ACA, but instead were sold a limited benefit indemnity plan that was not ACA-compliant and resulted in consumers being stuck with thousands of dollars of unpaid medical bills and penalties for not having ACA-compliant insurance. Id. ¶¶ 5, 40. The FTC ultimately obtained a court order shutting down Simple Health's operations and freezing its assets. Id.

         HIIQ's partnership with Simple Health was formed in March 2013. Id. ¶ 44. Simple Health exclusively sold HIIQ products, and in turn HIIQ directed and performed a variety of services for Simple Health, including processing enrollment forms, collecting payments, and financing Simple Health's business by advancing commissions. Id. ¶ 45. By 2015, Simple Health had call centers across the State of Florida and was responsible for almost all of HIIQ's limited benefit indemnity policy sales. Id. ¶ 46. From January 2016 to April 2018 Simple Health received $145 million from one of HIIQ's wholly-owned subsidiaries. Id. ¶ 47. This amount represented 49% of the total third-party commissions paid by HIIQ during the approximate same time frame. Id. Simple Health was HIIQ's largest call center and accounted for up to half of HIIQ's revenues during the Class Period. Id. ¶ 42.

         Plaintiffs allege that HIIQ and Simple Health teamed up to deceive consumers by creating misleading "lead generation" websites and implementing fraudulent sales practices using misleading sales scripts and classic telemarketing scams. Id. ¶¶ 49-54. The misleading websites used terms associated with the ACA such as "Obamacare," "Obama Health Care," and "Obama Marketplace" to lure prospective customers to Simple Health call centers in the anticipation of shopping for ACA-compliant policies. Id. ¶ 50. In addition to creating the lead generation websites, HIIQ was responsible for finding and training salespeople to staff the Simple Health call centers and providing them with carefully crafted scripts designed to mislead consumers into believing they were being offered ACA-compliant policies. Id. ¶¶ 54-57. Sales agents employed numerous deceptive tactics falsely representing that the policies were a PPO health insurance plan, that the plan qualified under the ACA, that the insurance plan was widely accepted by physicians in the customer's geographic area, and that there were no limitations for pre-existing conditions. Id. ¶¶ 59, 68. In fact, the HIIQ plans were not PPOs, nor were they insurance, but rather the plans merely provided a discount for medical care, the level of which was unknown prior to receiving the care. Id. ¶ 60.

         Both before and during the Class Period, HIIQ received thousands of customer complaints that its call centers, including Simple Health, misrepresented the nature and material terms of the plans sold. Id. ¶ 70. Despite the excessive number of customer complaints, HIIQ, Southwell, and Hershberger represented in investor presentations, conference calls, press releases and SEC filings that HIIQ enjoyed excellent customer service and a low level of complaints. Id. ¶¶ 157-202.

         A. Alleged False and Misleading Statements by HIIQ

         1. 2017 Statements

         In a September 25, 2017 HIIQ investor presentation with the SEC, HIIQ stated it had "best-in-class compliance" which was a "significant barrier to entry" for competitors. HIIQ claimed customer complaints to the Department of Insurance ("DOI") were less than 0.01% of policies in force as of June 30, 2017. Id. ¶ 158. In a press release published on September 27, 2017, HIIQ represented that it had unparalleled customer service. Id. ¶ 162. A November 1, 2017, press release stated HIIQ engaged in "secret shopping" of its external call centers to ensure compliance and claimed that it previously terminated distributors that did not meet compliance benchmarks. Id. ¶ 164. HIIQ claimed its investment in compliance has generated a strong customer experience. Id. ¶ 165. In a November 2, 2017, investor conference call, Southwell attributed the company's "record performance" to providing consumers with insurance that meets their needs. Id. ¶ 166. Southwell represented that HIIQ's technology holds HIIQ's distributors to high standards in customer service and compliance. Id. ¶ 167. In the call, Southwell stated that no third-party call center represented more than 16% of sales. Id. ¶ 168. A November 8, 2017 investor presentation asserted that customer complaints upheld by the DOI were 0.0% of policies in force as of September 2017. Id. ¶ 172. In a December 15, 2017 press release and SEC report, HIIQ announced the formation of a new risk and compliance committee to further strengthen the company's market-leading compliance. Id. ¶ 174.

         2. 2018 Statements

         In a March 1, 2018, investor conference call, Southwell stated that HIIQ's third-party licensed agent call centers drove the year-over-year increases in HIIQ's business and that HIIQ's improved compliance and customer service resulted in a less than 0.01% DOI complaint ratio. Id. ¶ 176. Hershberger stated the high customer service was driven by the company's technology platform. Id. ¶ 177. Southwell stated that too many calls to customer service due to a call center's misconduct would result in HIIQ turning off the link to its system so as to maintain its high level of customer satisfaction. Id. On March 13, 2018, HIIQ published an investor presentation that stated customer complaints upheld by the DOI were 0.0% of policies in force since December 2017. Id. ¶ 179. In a May 3, 2018, investor conference call, Southwell stated that HIIQ had outstanding compliance performance and highly compliant third-party call centers. Id. ¶ 181. Southwell compared HIIQ's complaint ratio to AC A carriers, claiming the AC A carriers have 14 to 37 times more complaints than HIIQ. Id. He stated that while the AC A carriers' complaints have risen significantly, HIIQ's complaints plummeted 56% over the same period from 2016 to 2017. Id. ¶ 182. In a May 8, 2018 presentation, HIIQ again represented that customer complaints upheld by the DOI are 0.01% of policies in force as of March 2018. Id. ¶ 184. In an August 2, 2018, investor conference call, Southwell touted HIIQ's record revenue and performance, attributing the success to low levels of customer complaints upheld by the DOI and HIIQ's commitment to customer service. Id. ¶ 187. In an October 30, 2018, investor conference call, Southwell states that HIIQ works with leading third-party distributors to ensure that customers are offered a product that meets their demands and needs. Id. ¶ 192. In promoting HIIQ's high compliance standards and high customer satisfaction, Hershberger stated he wanted investors to have all the facts. Id. Southwell claimed that HIIQ had a very happy consumer base, very low number of complaints, and very high customer satisfaction. Id. In November and December 2018 press releases, HIIQ downplayed the relationship between HIIQ and Simple Health, claiming that Simple Health was the agency of record for less than 10% of HIIQ's submitted policies. Id. ¶ 194. These statements were made following the FTC's press release on November 2, 2018, announcing the commencement of an enforcement action against Simple Health and Dorfman. Id. In a December 20, 2018, investor presentation, HIIQ highlighted the reduced number of DOI and Better Business Bureau ("BBB") complaints about HIIQ. Id. ¶ 197. The presentation sought to minimize the importance of Simple Health and the percentage of submitted policies from it. Id. ¶ 198.

         3. 2019 Statements

         On January 7, 2019, HIIQ filed a report with the SEC that was signed by Hershberger and included an investor presentation stating that Health Benefit One was 8.2% of submitted applications through October 2018 and that complaints were down. Id. ¶ 200. The presentation stated there were 4 upheld DOI complaints in 2017 and 3 DOI complaints upheld in 2018. Id. In a March 6, 2019, investor conference call, Southwell recapped the amount of time, energy and investment spent over the last few years on creating best-in-class compliance and customer care. Id. ¶ 202. He emphasized that the strength of the business is attributable to HIIQ's technology, customer experience, and compliance. Id.

         B. Additional A negations of Scienter

         HIIQ loaned to Simple Health tens of millions of dollars in working capital that allowed Simple Health to grow. Id. ¶ 205. HIIQ co-founded with Simple Health the lead generation websites. Id. HIIQ recruited and trained Simple Health sales agents. Id. The receiver for the FTC concluded that Simple Health was a classic bait-and-switch scam and that the business was never legally viable and deception permeated the entire business relationship with customers. Id. ¶ 159. At the same time HIIQ was telling investors that HIIQ had no complaints, its own senior officers acknowledged in emails that HIIQ was being bombarded with complaints about Simple Health and that customer complaints were "out of control." Id. ¶ 161. HIIQ's documents revealed it received thousands and thousands of complaints about Simple Health every year from 2014 through 2018. Id. HIIQ's technology, a proprietary data management platform, documented all of the Simple Health customer complaints and indicated that customer satisfaction was exceptionally poor. Id. HIIQ emails and other HIIQ evidence revealed that HIIQ was aware of Simple Health's sales misconduct for years dating back to 2014. Id. ¶¶ 208, 211. Simple Health accounted for 49% of the third-party commissions paid by HIIQ in the January 2016 to April 2018 time frame. Id. ¶ 216. The Individual Defendants engaged in insider trading each selling unusually large amounts of their HIIQ stock in February 2019 prior to several disastrous disclosures that resulted in a significant decline in the stock price. Id. ΒΆ 219. The sale of stock was far out of line with the Individual Defendants' prior trading ...

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