[00:00:00] Speaker 00:
Good morning.

[00:00:00] Speaker 04:
Good morning.

[00:00:01] Speaker 04:
Thank you, your honor.

[00:00:03] Speaker 04:
John Rizio Hamilton of Bernstein Litowitz for the appellants and lead plaintiffs below.

[00:00:08] Speaker 04:
I'd like to reserve four minutes for rebuttal, please.

[00:00:10] Speaker 00:
If you're on the clock, we'll try to help you.

[00:00:12] Speaker 04:
Thank you, your honor.

[00:00:14] Speaker 04:
The district court committed two principal errors in this case.

[00:00:17] Speaker 04:
The first is that it incorrectly held that the complaint failed to give rise to an inference of science or for any alleged misstatement.

[00:00:25] Speaker 04:
And the second is that it incorrectly held that only two of the alleged misstatements were properly pled as such.

[00:00:34] Speaker 04:
I'd like to begin with the science question and focus in particular on the statements that were made.

[00:00:39] Speaker 02:
Actually, before you do, can I ask you just to do this?

[00:00:41] Speaker 02:
Can you give me the three statements that you think are most misleading or false?

[00:00:47] Speaker 02:
for purposes of the Securities Act and then also for the purposes of the Exchange Act, and with the page citation to the record that you're referring to.

[00:00:56] Speaker 04:
Yeah, so for the Securities Act, I think it's actually an omission.

[00:01:01] Speaker 04:
OK.

[00:01:01] Speaker 04:
It's the item 303 omission.

[00:01:04] Speaker 04:
And item 303 requires that.

[00:01:08] Speaker 04:
You don't need to explain.

[00:01:09] Speaker 02:
Just tell me what they are and the page number.

[00:01:11] Speaker 04:
It's the item 303 omission.

[00:01:13] Speaker 04:
And it would be the omission of the uncertainty of revenue collection under these circumstances.

[00:01:21] Speaker 04:
And for the Exchange Act, Your Honor,

[00:01:25] Speaker 04:
I would start with the statements made during the pendency of the audit.

[00:01:28] Speaker 04:
Take, for instance, Defendant Gormson's September 9th misstatement that BCBS was not questioning claims.

[00:01:38] Speaker 04:
Further, and that's at paragraph 154, Your Honor, of the complaint.

[00:01:45] Speaker 04:
Further, on August 12th, Defendant Gormson stated that the audit was an educational opportunity

[00:01:52] Speaker 04:
to further broaden our insurance coverage.

[00:01:55] Speaker 04:
And that's at paragraph 147 of the complaint.

[00:01:59] Speaker 04:
And then finally, rounding out the top three for the Exchange Act, Your Honor, the May 13, 2021 statement in the company's first quarter 2021 form 10Q that the audit was, quote unquote, routine.

[00:02:15] Speaker 04:
And that's at paragraph 306 of the complaint, Your Honor.

[00:02:20] Speaker 04:
So beginning with that September 9th, 2021 statement that BCBS was not questioning claims, Mr. Gormson, at the time he made that statement, knew or recklessly disregarded that it was misleading because BCBS was, in fact, doing just that.

[00:02:38] Speaker 04:
It was flatly questioning claims.

[00:02:40] Speaker 04:
And in fact, it was questioning Eargo's entitlement to any reimbursement whatsoever for its product.

[00:02:46] Speaker 04:
We know this because the complaint alleges in great detail the written communications that BCBS provided to Irgo prior to Mr. Gormson making this misstatement.

[00:02:57] Speaker 04:
For example, on April 7th, months before the misstatement that BCBS was not questioning claims, Mr. Gormson and Irgo were notified that BCBS had identified irregularities in your billing and noncompliance with Blue Shield's payment policy and standards of industry billing.

[00:03:16] Speaker 04:
They were also told that BCBS would simply freeze payment on claims and not pay them at all anymore unless... Counsel, can I ask how reasonable is it to rely on a statement like that?

[00:03:28] Speaker 03:
They're announcing they're going through an audit, which an audit means you're questioning claims.

[00:03:34] Speaker 03:
So the fact that he says they're not questioning claims, would a reasonable investor really rely on a statement like that?

[00:03:42] Speaker 04:
Yes, Your Honor, they would, and I'll explain why, and I would also like to point, Your Honor, to the record demonstrating that they in fact did.

[00:03:50] Speaker 04:
Okay.

[00:03:50] Speaker 04:
So the reason they would is because in this particular context, you know, insurance reimbursement under this federal program, the way it works is that providers self-certify the propriety of the claims they're submitting, and they are then approved and paid by the insurer based upon that self-certification.

[00:04:08] Speaker 04:
The way insurers put a check on potential fraud and they must pay them upfront in good faith reliance on the provider certifications because otherwise payment would take forever given the volume of claims and the provision of medical services to federal employees could grind to a halt.

[00:04:24] Speaker 04:
The way insurers put a check on potential fraud here is that on the back end, they loop around and they kind of conduct due diligence audits from time to time.

[00:04:36] Speaker 04:
And so this is a routine feature of

[00:04:41] Speaker 00:
uh... the uh... claims reimbursement in this particular setting and there are routine audits that do occur this was not a routine audit by any measure but counsel in retrospect in hindsight you may be right but if i understand the record correctly payments have been made for years uh... and audits are as my colleague has pointed out they're pretty routine

[00:05:05] Speaker 00:
So at that point, since he didn't know exactly what was going to happen, and you had all the past payments, why was this statement, why does it mean a 99B requirement, basically?

[00:05:16] Speaker 00:
I mean, it seems like fraud by hindsight.

[00:05:19] Speaker 04:
So it meets the 9b requirement because he's mischaracterizing the nature of the audit and the nature of BCBS's stated concerns and communications to Irgo and him.

[00:05:31] Speaker 04:
BCBS, in that April 7th letter that I quoted, specifically says that they found noncompliance with the payment policy and the standards of billing.

[00:05:44] Speaker 04:
In July,

[00:05:45] Speaker 04:
their communications became even more concerning.

[00:05:47] Speaker 04:
Again, before this misstatement, and this is paragraph 138 of the complaint, they write candidly and directly to the company's chief legal officer, quote, there is concern that the hearing aids are over-the-counter products which would not be a covered benefit under the member's benefit plan.

[00:06:04] Speaker 04:
And there are concerns at Blue Shield that the hearing aids being provided are neither medically necessary, which the plan requires, nor a covered service under the party's contract.

[00:06:15] Speaker 04:
So what we see here is that BCBS is quite explicitly questioning claims, quite explicitly stating to ERGO that they have very serious concerns that the product may not be covered at all.

[00:06:28] Speaker 04:
And investors would rely, and in fact did rely on Defendant Gormson's misleading insurance, that this type of questioning was not occurring.

[00:06:36] Speaker 02:
When was that made, though?

[00:06:37] Speaker 02:
After the April 7th, when was the next statement that you're saying was downplayed?

[00:06:44] Speaker 02:
This statement.

[00:06:45] Speaker 04:
This statement that I'm focused on now is September 9th.

[00:06:50] Speaker 04:
There was another statement on August 12th in which he characterized the audit as an opportunity to expand their insurance coverage, when in fact, as BCBS's communications show, they were questioning fundamentally whether the product was covered at all for even a dollar.

[00:07:06] Speaker 04:
And I do just want to direct the court to paragraphs 149 of the complaint and paragraph 155 of the complaint.

[00:07:13] Speaker 04:
We quote, quote, copious analyst reaction in which they are absolutely reassured by this misleading statement.

[00:07:21] Speaker 04:
For instance, Wells Fargo issued a report following the

[00:07:27] Speaker 04:
the August.

[00:07:29] Speaker 02:
Let me ask you, didn't Blue Shield, Council from Blue Shield meet with Council from Ergo sometime in August?

[00:07:37] Speaker 02:
Yes, Your Honor.

[00:07:37] Speaker 02:
And they didn't indicate that they were stopping anything at that point in time, did they?

[00:07:42] Speaker 04:
Yes, they did, Your Honor.

[00:07:43] Speaker 02:
What did they say?

[00:07:44] Speaker 04:
There was an August 10th meeting between Blue Cross Blue Shield at Defending Gormson and others.

[00:07:50] Speaker 04:
And in this meeting,

[00:07:51] Speaker 04:
They discussed the insurer's concerns.

[00:07:54] Speaker 04:
And the insurer did not roll back those concerns.

[00:07:57] Speaker 04:
The insurer stood on those concerns.

[00:07:59] Speaker 04:
And the insurer told them that in order for them to potentially even try to get coverage, they had to design a new system of documenting the validity of the claims.

[00:08:09] Speaker 04:
And then they had to have that system approved by Blue Cross and Blue Shield, which Eargo never did.

[00:08:15] Speaker 04:
And this is at paragraphs 139 to 141 of the complaint, critically.

[00:08:21] Speaker 04:
Just a couple of weeks after defending Gormson tells the market that BCBS is not questioning claims, the Department of Justice opens up a criminal investigation.

[00:08:31] Speaker 02:
Well, let me stop you.

[00:08:32] Speaker 02:
Didn't they issue, they issued an August of 2021, didn't they issue another 10Q?

[00:08:38] Speaker 02:
And they mentioned these things, precisely.

[00:08:41] Speaker 04:
But they mentioned the fact that there was an audit and that there had been a payment freeze.

[00:08:47] Speaker 02:
Don't they say we are unable to provide assurances regarding the outcome of these audits?

[00:08:51] Speaker 02:
I mean, they say that.

[00:08:52] Speaker 02:
What more do you want them to say?

[00:08:53] Speaker 04:
Well, it's more what I want them to refrain from saying.

[00:08:57] Speaker 04:
What I want Defending Gormson to refrain from saying is mischaracterizing the fact that BCBS was not questioning claims.

[00:09:03] Speaker 04:
They absolutely were.

[00:09:04] Speaker 04:
And in paragraph 155,

[00:09:06] Speaker 02:
Are they questioning claims, actual claims, or were they questioning the process that was being utilized by the defendant in their system of issuing these hearing aids?

[00:09:19] Speaker 04:
Both, Your Honor.

[00:09:20] Speaker 04:
They're questioning that the hearing aid appears to be not entitled to any coverage whatsoever under the insurance plan.

[00:09:26] Speaker 04:
They're questioning all the claims, all of them.

[00:09:29] Speaker 04:
And in fact, shortly after the Department of Justice opened up a criminal investigation, it was transitioned to a civil matter.

[00:09:36] Speaker 04:
And the company agreed to pay back substantially all of the insurance revenue.

[00:09:40] Speaker 02:
That's way later.

[00:09:43] Speaker 04:
We are not relying on that as the only fact to plead falsity.

[00:09:47] Speaker 04:
We have the contemporaneous communications with the insurer in which they are flatly questioning claims.

[00:09:53] Speaker 00:
Counsel, I used to be a securities lawyer in part.

[00:09:59] Speaker 00:
This seems like fraud by hindsight to me.

[00:10:01] Speaker 00:
You have issues, but you had payments for three years, something like that, no problem.

[00:10:07] Speaker 00:
They said there's an audit.

[00:10:08] Speaker 00:
Lawyers talk, people talk, going back and forth, back and forth.

[00:10:11] Speaker 00:
And when, as my colleague points out, when there was an actual threat, it gets disclosed.

[00:10:17] Speaker 00:
I remember the 10K, I think it was.

[00:10:20] Speaker 00:
And all these things that happened you talk about came up later, and that's what what do you call it fraud by hindsight?

[00:10:27] Speaker 04:
That's different Respectfully your honor that is not the case we are relying on the contemporaneous communications between the insurer and the company prior to the issuance of the alleged misstatements concerning the audit and critically and

[00:10:41] Speaker 04:
It is one thing to say there's an audit, but they went further here.

[00:10:46] Speaker 04:
If they had just left it at that and not characterized the nature and severity of the audit, we probably wouldn't be here.

[00:10:52] Speaker 04:
But they went much further, and they said that the key insurer was not questioning claims, when indisputably, based on the April and July communications, the insurer was in fact questioning claims, quite clearly and quite completely.

[00:11:07] Speaker 00:
You want to save the balance of your time?

[00:11:09] Speaker 00:
It's up to you.

[00:11:11] Speaker 00:
Very well.

[00:11:12] Speaker 00:
Okay, Mr. Leon.

[00:11:21] Speaker 01:
May it please the court?

[00:11:23] Speaker 01:
Every one of the appellant's arguments is a variation.

[00:11:25] Speaker 00:
If you could move closer to the microphone, please.

[00:11:27] Speaker 00:
You're on camera, you know.

[00:11:28] Speaker 00:
They want to be able to hear you.

[00:11:30] Speaker 00:
Your mother wants to be able to see you.

[00:11:33] Speaker 00:
My apologies.

[00:11:34] Speaker 01:
Every one of appellant's arguments here is a variation on the same basic theme.

[00:11:39] Speaker 01:
that defendants knew all along that all of Irgo's insurance claims were invalid.

[00:11:43] Speaker 01:
As the district court stated repeatedly, there are no factual allegations to support that inference, and we would submit the inference makes no sense.

[00:11:51] Speaker 01:
This is what appellants would have this court believe, that the defendants here built an entire hearing aid business that was based upon selling directly to consumers and seeking insurance reimbursement, that we trumpeted this fact on our website

[00:12:07] Speaker 01:
when the company was formed in 2015, and then again in the IPO prospectus in October of 2020.

[00:12:13] Speaker 01:
And supposedly all along, the defendants knew that this business was doomed to fail because our hearing aids were not actually eligible for reimbursement.

[00:12:21] Speaker 01:
As this court stated in Winvie and the Logics, the theory does not make a whole lot of sense, and it makes a whole lot less sense when you consider that there's no allegation that any of the named defendants made any attempt

[00:12:34] Speaker 01:
to try to profit from this alleged fraud.

[00:12:36] Speaker 01:
This is not just a case where there's no evidence of stock sales during the class period.

[00:12:41] Speaker 01:
This is a case where the two named individual defendants, Messrs.

[00:12:45] Speaker 01:
Gormson and Messrs.

[00:12:46] Speaker 01:
Lipponis, increased their stock holdings during the class period.

[00:12:50] Speaker 01:
Your Honor wrote Souther City.

[00:12:52] Speaker 01:
You know those facts very well.

[00:12:53] Speaker 01:
In two well-reasoned decisions, the district court held in most respects, appellants failed to allege any contemporaneous falsity, and in all respects,

[00:13:02] Speaker 01:
They failed to allege any facts that support a strong inference of cienter.

[00:13:07] Speaker 01:
I want to start with now this September 9th, 2021 Wells Fargo Conference because Pelham's put a lot of emphasis on that.

[00:13:17] Speaker 01:
And the statement that they focus on the snippet is that the BSEA was not questioning claims.

[00:13:24] Speaker 01:
District Court found that they adequately pled that Gormson downplayed the audit, but there was no cienter.

[00:13:31] Speaker 01:
The primary argument we hear from appellants is that, well, that was contemporaneously false because, in fact, the BSEA was questioning claims and had frozen payments.

[00:13:42] Speaker 01:
Well, IRGO had disclosed the fact that BSEA had frozen payments a month before that Wells Fargo conference in September of 2021.

[00:13:52] Speaker 01:
They made a brief reference to it there.

[00:13:54] Speaker 01:
They said there was that August 12, 10K for the second quarter.

[00:14:02] Speaker 01:
10K.

[00:14:03] Speaker 01:
This is what Irgo said.

[00:14:05] Speaker 01:
We are currently subject to a claims audit with our largest third party payer.

[00:14:09] Speaker 01:
And then it goes on to say, during which claims submitted since March 1, 2021 have not been paid.

[00:14:15] Speaker 01:
That's at 585 of the record.

[00:14:17] Speaker 01:
Mr. Lapones said the exact same thing during the earnings call also on August 12th.

[00:14:23] Speaker 03:
In fact, right before the statement, they're not questioning claims.

[00:14:25] Speaker 03:
Doesn't he say they're not processing payments, but they're not questioning claims?

[00:14:30] Speaker 01:
Yes, and it's even better than that.

[00:14:32] Speaker 01:
If you go back and you look at the question,

[00:14:34] Speaker 01:
to which Mr. Gormson is responding at that conference.

[00:14:37] Speaker 01:
Here's the question from the analyst, quote, and I guess on the Q2 call, you announced that a leading insurer was auditing year ago and withholding claims payment.

[00:14:48] Speaker 01:
And then he goes on, are there any updates since the earnings call?

[00:14:51] Speaker 01:
That's at 640 of the record.

[00:14:53] Speaker 00:
Clearly, he was not trying to- So basically, what I gather is that Judge Breyer looked at this and just said, okay, the two leading individuals

[00:15:02] Speaker 00:
Instead of bailing, knowing there was a problem, increase their holdings, that the timing of these claims basically is retroactive, that at the time there was disclosure based upon the decline of the company.

[00:15:15] Speaker 00:
And I gather that's your position.

[00:15:16] Speaker 01:
That is our position.

[00:15:18] Speaker 01:
And if you look at our disclosures, they track exactly what we knew about the audit at each period in time.

[00:15:25] Speaker 03:
My theory on that statement, let me know what your thoughts on that.

[00:15:28] Speaker 03:
It is misleading, but no reasonable investor would rely on it, given all the other facts out there, like the statement that they're not processing payments.

[00:15:36] Speaker 03:
They're announced in audit, and audits are about questioning claims that they're not paying.

[00:15:40] Speaker 03:
So that makes it unique.

[00:15:42] Speaker 03:
I mean, it's not the standard routine audit if they're stopping payment.

[00:15:48] Speaker 03:
So even though it's false, we could say that there's no reasonable reliance on it.

[00:15:54] Speaker 01:
So I agree there's no reasonable reliance, but I actually think when you look at the statement in context, I'm not even sure that it's false.

[00:16:02] Speaker 01:
They take that tiny little snippet and say not questioning in claims, but I think it's OK.

[00:16:08] Speaker 03:
Just give me that it's false.

[00:16:10] Speaker 03:
Tell me why there's no reasonable investor can rely on it.

[00:16:13] Speaker 01:
So a couple of reasons.

[00:16:14] Speaker 01:
One.

[00:16:15] Speaker 01:
The reason that they say it's false is because that Gormson was suggesting that Blue Cross Blue Shield was not paying claims.

[00:16:24] Speaker 01:
That was already out in the market.

[00:16:25] Speaker 01:
It was out in the market a month before that conference.

[00:16:28] Speaker 01:
And then if you go and you look at the other statements that Gormson makes in that conference, he says this about the audit, quote, reality is the uncertainty is there.

[00:16:39] Speaker 01:
says that in the very same conference where he's talking about that.

[00:16:42] Speaker 01:
That's at 642 to 43 of the record.

[00:16:47] Speaker 01:
That's why we say when you look at it in context, and I think Judge, what you were getting at this, Gornson was not trying to convey his view that, what he was trying to do was convey his view, this was not an audit about individual claims.

[00:17:02] Speaker 01:
This was an audit about what was the process through which Ergo could seek reimbursement for

[00:17:12] Speaker 01:
it's hearing aids from Blue Cross Blue Shield.

[00:17:15] Speaker 01:
And he says, Gormson says in that same paragraph, quote, so it's really about, it's more, how do we define a process that allows for them to approve our claims in a more streamlined manner?

[00:17:29] Speaker 01:
That's at 641.

[00:17:30] Speaker 01:
And in Mr. Gormson's defense, if you look at the last communication that my clients received from BSEA before this audit,

[00:17:40] Speaker 01:
Right?

[00:17:41] Speaker 01:
All those communications with BSEA led up to an August 10th meeting where we explained why our hearing aids were medically necessary and satisfied for reimbursement.

[00:17:52] Speaker 01:
This was the email, and I want to read it because it's important.

[00:17:54] Speaker 01:
This is the email that we got from BSEA coming out of that August 10th meeting.

[00:17:59] Speaker 01:
It's at 667 from Mr. Crawley of BSEA.

[00:18:04] Speaker 01:
Hello, Christy.

[00:18:04] Speaker 01:
You work with a good group of folks.

[00:18:06] Speaker 01:
Thanks for the meeting today.

[00:18:08] Speaker 01:
My suggestion is that ERGO come up with a way to do some form of testing that can be documented and submitted, evidencing medical necessity for the hearing aids.

[00:18:17] Speaker 01:
We certainly cannot tell you what that testing looks like.

[00:18:19] Speaker 01:
However, once you've come up with a plan that works for you, you can present it to our group

[00:18:25] Speaker 01:
and see what the clinicians say.

[00:18:26] Speaker 01:
Is that a reasonable path?

[00:18:29] Speaker 01:
If this plan works for you, reach out to me once you have something to share, and we will schedule another meeting.

[00:18:34] Speaker 01:
Again, thanks for the partnership on this.

[00:18:37] Speaker 01:
That was the last thing we heard from BSEA before that hearing.

[00:18:41] Speaker 03:
And can I understand, so Eargo's theory was that the online, because you could fill out some sort of online questionnaire that that would be the medical documentation to prove necessity?

[00:18:53] Speaker 01:
That's exactly right.

[00:18:54] Speaker 01:
And if you look, and they acknowledge this, it's in the record, the FDA actually said in their guidance that patients can get hearing aids without a prescription.

[00:19:07] Speaker 01:
We disclosed that.

[00:19:07] Speaker 01:
That's in 354 of the record.

[00:19:09] Speaker 01:
We detail, in our perspectives, exactly the landscape.

[00:19:13] Speaker 03:
What ever happened with that?

[00:19:13] Speaker 03:
So Blue Cross denied that as a proper documentation, is that correct?

[00:19:22] Speaker 01:
What happened is it got taken out of Blue Cross's hands.

[00:19:27] Speaker 01:
And the next thing we heard was September 21, the DOJ announcing the criminal investigation.

[00:19:33] Speaker 01:
We were completely blindsided.

[00:19:34] Speaker 01:
As Your Honor said, it really was fraud by hindsight.

[00:19:37] Speaker 01:
We thought we were working hand-in-hand with BSCA on the appropriate documentation.

[00:19:43] Speaker 01:
And literally, the next thing we get is the announcement from the DOJ.

[00:19:46] Speaker 03:
I guess what you would have to prove is that you knew that whatever that internet questionnaire was not proper documentation.

[00:19:55] Speaker 03:
Correct.

[00:19:56] Speaker 03:
And I haven't seen any evidence to suggest that.

[00:20:00] Speaker 01:
And this is what Judge Breyer said over and over again, which is we have conclusory allegations

[00:20:07] Speaker 01:
that of course you knew that your hearing aids were not eligible for reimbursement.

[00:20:11] Speaker 01:
But if you look at the facts just alleged in their complaint, we started submitting insurance claims for reimbursement to BSEA in January of 2017.

[00:20:21] Speaker 01:
That's undisputed for four years.

[00:20:25] Speaker 01:
Over four years, those claims are paid out by BSEA, no questions asked, they don't raise any issues with the reimbursement.

[00:20:33] Speaker 01:
So not only are there no facts to support an inference that somehow my clients knew that their insurance claims were invalid, we would submit the facts as alleged in their own complaint, support the opposite inference.

[00:20:46] Speaker 01:
That is that they had every reason to believe based on four years

[00:20:49] Speaker 01:
of prior practice that the claims were in fact valid.

[00:20:52] Speaker 00:
And I gather from your perspective that the, I guess you quoted from an email, it shows basically that the insurance company was kind of talking about a partnership in effect.

[00:21:02] Speaker 00:
Let's work this out in other words.

[00:21:04] Speaker 01:
That's exactly what they said.

[00:21:06] Speaker 01:
They came to us, that was the email that I had read from Mr. Crawley.

[00:21:10] Speaker 01:
Let's work together.

[00:21:11] Speaker 01:
Let's figure out the appropriate process for getting reimbursement.

[00:21:14] Speaker 01:
Thank you for the partnership on this.

[00:21:16] Speaker 00:
Is there anything in the record that indicates how the DOJ got involved in this?

[00:21:22] Speaker 00:
What triggered that, you know?

[00:21:24] Speaker 01:
Your Honor, we to this day do not know.

[00:21:27] Speaker 00:
OK.

[00:21:27] Speaker 01:
To this day, it was a call from out of the blue.

[00:21:31] Speaker 01:
September 21, we disclosed the DOJ investigation the very next day.

[00:21:34] Speaker 00:
So there's nothing in the record that suggests that anybody knew that the DOJ was sniffing this out and was going to maybe make some claims?

[00:21:44] Speaker 00:
No.

[00:21:45] Speaker 00:
OK.

[00:21:45] Speaker 01:
Nothing.

[00:21:46] Speaker 01:
There are no facts whatsoever.

[00:21:47] Speaker 01:
And on that point, I think it's important to note, this is not the typical case where there was no discovery and there's no record here.

[00:21:55] Speaker 01:
This is a case where they asked the district court, please lift that automatic stay.

[00:22:00] Speaker 01:
And the district court, in its discretion, did that and gave them access to discovery.

[00:22:04] Speaker 01:
And still, despite having access to all of that discovery, they cannot point to a single

[00:22:11] Speaker 01:
document anywhere that shows that the way that my clients portrayed the audit was somehow different than their actual belief at that given point.

[00:22:21] Speaker 00:
How long of a discovery period did Judge Breyer allow in this case?

[00:22:26] Speaker 00:
Any idea?

[00:22:27] Speaker 01:
I believe it was roughly a year.

[00:22:30] Speaker 00:
A year, wow.

[00:22:31] Speaker 01:
But I can't, I don't, to the extent I misspoke, it was not intentional.

[00:22:35] Speaker 00:
And I assume that depositions were taken of the two major shareholders, right?

[00:22:40] Speaker 01:
We did not have depositions.

[00:22:41] Speaker 01:
I just wanted to confirm that.

[00:22:43] Speaker 03:
So can you talk about Sienta, then?

[00:22:45] Speaker 03:
So is the argument mainly that they just didn't sell anything, and so therefore they could never have had Sienta?

[00:22:50] Speaker 03:
Or is there anything more?

[00:22:52] Speaker 01:
So as I said before, it's not just that they didn't sell.

[00:22:57] Speaker 01:
My two individual defendants increased their holdings.

[00:23:01] Speaker 01:
So we start there.

[00:23:02] Speaker 01:
And it was not just a minor increase.

[00:23:05] Speaker 03:
With respect to that September conference call, when did they buy with respect to that?

[00:23:14] Speaker 01:
So let me give you some numbers on that.

[00:23:16] Speaker 01:
As of the IPO, Mr. Gormson owned 81,500 shares a year ago.

[00:23:22] Speaker 01:
That's at SCR 24.

[00:23:26] Speaker 01:
Ten months later, August 17th, 2021, so just before that conference, Mr. Gormson owned over 132,000 shares.

[00:23:35] Speaker 01:
That's at SCR 21.

[00:23:38] Speaker 01:
Same is true for Mr. Lapones.

[00:23:40] Speaker 01:
As of the IPO, Mr. Lapones owned 44,400 shares.

[00:23:45] Speaker 01:
Ten months later, August 17th, 2021, Mr. Lapones owned over 62,000 shares of IRGO.

[00:23:52] Speaker 01:
Now, something they had said in their briefs was, well,

[00:23:56] Speaker 01:
The reason that they didn't sell was because they were locked up.

[00:24:00] Speaker 01:
So two responses.

[00:24:01] Speaker 01:
One, it's not just that they didn't sell.

[00:24:03] Speaker 01:
They added to their long position.

[00:24:07] Speaker 01:
They're wrong about the lockup.

[00:24:08] Speaker 01:
The lockup period expired 180 days from the IPO.

[00:24:13] Speaker 01:
That was April 14th, 2021.

[00:24:15] Speaker 01:
That's at page 111 of the record, our prospectus, where we point that out.

[00:24:22] Speaker 01:
So the DOJ investigation did not come to light until September 21.

[00:24:29] Speaker 01:
of 2021.

[00:24:29] Speaker 01:
That's five months between the lockup period and the DOJ investigation coming to light in which the defendants had the opportunity to sell stock.

[00:24:40] Speaker 01:
They didn't sell stock.

[00:24:41] Speaker 01:
They added their position.

[00:24:43] Speaker 00:
And the stock purchases that you just recited occurred between the lockup period and the DOJ

[00:24:51] Speaker 00:
Is that correct?

[00:24:52] Speaker 01:
Some of the acquisitions, yes.

[00:24:54] Speaker 01:
That's right.

[00:24:55] Speaker 03:
And then your argument is also that they were aware of the communications from Blue Cross, but they thought that the last communication seemed sort of friendly so that they wouldn't have thought that this would end well.

[00:25:08] Speaker 01:
That's exactly right.

[00:25:09] Speaker 01:
And if your honors have any question about that, we would actually encourage you to go and look at the email communications with Blue Cross.

[00:25:17] Speaker 01:
There is no inference you can come away with other than the fact that they, the two parties were working collaboratively to solve for a problem.

[00:25:25] Speaker 01:
Because remember, Eargo's product

[00:25:28] Speaker 01:
really did solve for a very serious problem in this industry, which is that people with hearing loss, because of the need to go to audiologists to get audiograms, don't get the hearing aids that they need.

[00:25:42] Speaker 01:
And they had come up with, and they were quite honest about it, a disruptive way to solve for that problem.

[00:25:48] Speaker 01:
and expedite getting these hearing aids into the hands of consumers.

[00:25:51] Speaker 01:
And they thought they were working collaboratively with Blue Cross Blue Shield to make sure that we can continue this with this model.

[00:25:59] Speaker 01:
I see that my time is almost up.

[00:26:01] Speaker 00:
Other questions about my colleagues?

[00:26:03] Speaker 00:
I think not.

[00:26:04] Speaker 00:
Very well, thank you for your argument, Mr. León.

[00:26:08] Speaker 00:
Mr. Rizio-Hamilton, you have a little time.

[00:26:11] Speaker 04:
Thank you, Your Honor.

[00:26:11] Speaker 04:
I would like to begin with your honor's question about reasonable reliance on the September 9th statement.

[00:26:17] Speaker 04:
Sure.

[00:26:17] Speaker 04:
So it did occur at this Wells Fargo conference in paragraph 155 of our complaint, which is at record page 1642, describes that the next day Wells Fargo issued an analyst report and listed key takeaways.

[00:26:35] Speaker 04:
And one of the key takeaways that Wells Fargo had after the conference is as follows.

[00:26:40] Speaker 04:
quote, management has stressed that this is a routine audit, which is common in the hearing aid industry, and that they are not questioning claims or product.

[00:26:49] Speaker 04:
So not only would an investor rely on that statement, but here, highly sophisticated investors whose job it is to cover these companies did, in fact, rely on it.

[00:26:59] Speaker 02:
It's because Wells Fargo is wrong.

[00:27:00] Speaker 02:
Doesn't that show that the defendant was incorrect in its statements?

[00:27:04] Speaker 04:
I'm so sorry, Your Honor, I didn't hear your question.

[00:27:06] Speaker 02:
Because Wells Fargo was wrong, and his interpretation doesn't necessarily mean the defendants were wrong in what they said.

[00:27:11] Speaker 04:
Respectfully, Your Honor, the statement that BCBS was not questioning claims is just contradicted by the facts in the record.

[00:27:20] Speaker 04:
In July, before this statement was made, BCBS sent the company's chief legal officer a written communication stating that they were concerned that the products are not a covered benefit under the member's benefit plan.

[00:27:33] Speaker 03:
So, but then what about the statements that suggest, well, you know, we're going to work collaboratively in documenting this, and you just have to figure out a way to document it, and then things will be great.

[00:27:46] Speaker 04:
But that's not what they say.

[00:27:47] Speaker 04:
They don't say that things will be great, and it's just a documentation issue.

[00:27:50] Speaker 04:
They tell them that their model does not substantiate the medical necessity requirement that exists in the plan.

[00:27:58] Speaker 04:
They must come up with, if they want coverage, they must come up with a way to substantiate that.

[00:28:03] Speaker 04:
They cannot tell them what it looks like.

[00:28:05] Speaker 04:
If they have an idea about how they could possibly do it, they need to have it cleared by Blue Cross.

[00:28:12] Speaker 03:
But I guess the point being at this point by the September statement, is there any indication that they knew they couldn't figure out a way to document it?

[00:28:22] Speaker 04:
Yes, there is, to directly answer your question, because in January of 2021, they had candidly admitted that the company was in no position to diagnose hearing loss.

[00:28:35] Speaker 04:
In particular, at paragraphs 81 and 82 of the complaint, the company's head of insurance reimbursement and head of sales, there's an email exchange between them where they say Eargo's not in a position to diagnose hearing loss.

[00:28:51] Speaker 03:
Right, but was it unreasonable to think that this, and I forget exactly what was happening, but it was an internet questionnaire to document the hearing loss, was it unreasonable for them to think that that satisfies the insurance documentation requirement?

[00:29:04] Speaker 04:
Yes, because the documentation requirement requires a diagnosis by a medical professional.

[00:29:12] Speaker 03:
No, I thought it said it didn't.

[00:29:13] Speaker 04:
No, it does, Your Honor.

[00:29:15] Speaker 03:
Didn't Blue Cross say we can't tell you how to do it?

[00:29:17] Speaker 04:
Blue Cross said we can't tell you how to do it, and they said, in fact, that a diagnosis by a medical professional may not be enough.

[00:29:24] Speaker 04:
We're not bound to accept it.

[00:29:26] Speaker 04:
However, it is a requirement that a medical professional diagnose hearing loss.

[00:29:31] Speaker 04:
The district court itself acknowledged this, and it's pled in our complaint at paragraphs 73 through 80.

[00:29:37] Speaker 04:
But I do want to refocus the panel, if possible, on the nature of the misstatement.

[00:29:44] Speaker 04:
Because his misstatement is not about, is there a world in which we could potentially fix this problem?

[00:29:51] Speaker 04:
Or is there a world in which our model would be successful?

[00:29:55] Speaker 04:
His statement is not speaking to that.

[00:29:58] Speaker 04:
His statement is speaking to the nature of the communications with the insurer and the nature of the insurer's questions.

[00:30:05] Speaker 00:
And yet,

[00:30:06] Speaker 00:
Gormson and Lapones bought lots more stock between the lockup period and the time that DOJ got involved.

[00:30:13] Speaker 00:
How do you explain that?

[00:30:15] Speaker 04:
I explain it on the ground that it's factually incorrect.

[00:30:18] Speaker 00:
Oh, that they didn't?

[00:30:19] Speaker 04:
They didn't buy.

[00:30:20] Speaker 04:
They passively acquired through grants, through their employment.

[00:30:24] Speaker 04:
They did not go out into the open market and buy stock, and that's a critical point that's been allided here.

[00:30:30] Speaker 00:
I see that my time is up.

[00:30:31] Speaker 00:
Other question by my colleague.

[00:30:33] Speaker 00:
Thanks to both counsel.

[00:30:34] Speaker 00:
Your argument is very helpful.

[00:30:35] Speaker 00:
The case just argued is submitted and the court stands adjourned for the day.