CLASS ACTION DEFENSE BLOG
Welcome to Michael J. Hassen's Blog. Here you will find over 2,000 articles related to class actions.
Summary Judgment as to Securities Fraud Claims against Various Deloitte Entities Denied because Genuine Issues of Fact Existed as to Liability for Claims in Class Action Complaint New York Federal Court Holds
Following the collapse of Parmalat Finanziaria, S.p.A., Parmalat S.p.A. and their affiliates because of a multi-billion dollar fraud that understated Parmalat’s debt by $10 billion and overstated Parmalat’s assets by $16 billion, various securities fraud class actions were filed against numerous parties: one such class action was filed against Deloitte Touche Tohmatsu (DTT), Deloitte & Touche LLP (DT-US), and James Copeland (collectively “Deloitte defendants”) on behalf of purchasers of Parmalat stock. In re Parmalat Securities Litig., ___ F.Supp.2d ___ (S.D.N.Y. January 27, 2009) [Slip Opn., at 2]. The class action alleged violations of Section Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and of Rule 10b-5 thereunder, _id._, at 2-3. Defense attorneys moved for summary judgment as to the class action claims against the Deloitte defendants, _id._, at 2. Alternatively, the defense argued that the Deloitte defendants were not jointly and severally liable under the Private Securities Litigation Reform Act of 1995 (PSLRA), _id._, at 8.
We do not here discuss Deloitte’s corporate structure, or the Parmalat scandal and the alleged fraud of Deloitte Italy. See In re Parmalat, at 3-7. In a detailed opinion, the federal district court first rejected the defense challenge to DTT’s vicarious liability, on a respondeat superior theory, for the federal securities class action claims arising out of the acts of its alleged agent, Deloitte Italy. See id., at 9-11. The question was whether DTT had a principal-agent relationship with Deloitte Italy, id., at 12, and the district court found that a triable issue of material fact existed as to whether it did, see id., at 12-19. As the court concluded at page 19, “In all the circumstances, the totality of the evidence…raises a genuine issue of material fact as to whether Deloitte Italy was an agent of DTT with respect to the Parmalat engagement.” It accordingly denied DTT’s motion for summary judgment as to those class action claims premised on respondeat superior liability for Section 10(b) violations. Id., at 19. Turning to the class action’s Section 20(a) claim against DTT, defense attorneys argued that “there is no evidence that would justify a conclusion that it controlled the alleged primary violator, Deloitte Italy,” and that in any event DTT is not liable because it “acted in good faith and did not induce the act or acts constituting the alleged violations.” Id., at 19-20. Again, the federal court found a genuine issue of material fact existed as to whether DTT was a “control person” within the meaning of Section 20(a), id., at 20-21, and that it could not find, as a matter of law, that DTT acted in good faith, see id., at 21-25.
Class Action Court Decisions PSLRA/SLUSA Class Actions Uncategorized
Read more...
District Court Properly Dismissed Securities Fraud Class Action Against JP Morgan Chase because Misrepresentations Underlying Class Action were not Material and Class Action Failed to Adequately Allege Scienter under Heightened Pleading Requirements Established by Private Securities Litigation Reform Act (PSLRA) Second Circuit Holds
Plaintiffs filed a class action against JP Morgan Chase (JPMC) and two of its officers alleging violations of federal securities laws; the class action complaint asserted that defendants “defrauded JPMC shareholders by making deliberate misrepresentations that artificially inflated the price of JPMC stock and ultimately led to a collapse of JPMC’s share price.” ECA v. JP Morgan Chase Co., ___ F.3d ___ (2d Cir. January 21, 2009) [Slip Opn., at 4]. More specifically, the class action alleged that JPMC “created disguised loans for Enron and concealed the nature of these transactions by making false statements or omissions of material fact in its accounting and Securities and Exchange Commission (SEC) filings.” _Id._ “JPMC created ‘Special Purpose Entities,’ among them an entity called Mahonia Ltd., to facilitate disguised loan transactions with Enron Corporation.” _Id._ “Following the collapse of Enron, however, the Senate investigated JPMC’s role in Enron’s fraudulent practices and concluded that JPMC had knowingly engaged in and actively assisted Enron in its sham transactions; the resulting disclosures caused JPMC’s stock to suffer significant losses.” _Id._, at 5. Defense attorneys moved to dismiss the class action for failure to meet the heightened pleadings requirements established by the Private Securities Litigation Reform Act (PSLRA); the district court dismissed the class action because it found that the class action complaint “failed to plead with the requisite particularity that JPMC made a materially false statement or omitted a material fact, with scienter.” _Id._, at 6. In particular, the district court found that plaintiffs adequately pleaded scienter only as to the “alleged improper accounting of the Mahonia transactions as trades rather than loans,” but found further that “the allegedly improper accounting of the Mahonia transactions as trades rather than loans was not material.” _Id._, at 6. Plaintiffs filed an amended class action complaint that included new allegations concerning “(1) JPMC’s alleged downplaying of its Enron-related exposure, (2) JPMC’s alleged misrepresentation of its integrity and risk management, and (3) the allegedly faulty reporting of the Mahonia transactions.” _Id._, at 7. Defense attorneys again moved to dismiss the class action, and the district court again granted the motion. _See id._, at 7-9. The Second Circuit affirmed.
The Second Circuit’s opinion provides a detailed discussion of the applicable law. See ECA, at -11-16. With respect to JPMC’s allegedly false financial reports, plaintiffs argued that defendants’ GAAP violations created a presumption that the financial statements were misleading, id., at 16-17. The Second Circuit agreed with plaintiffs that they had adequately alleged that JPMC and Mahonia were “related” and that they adequately alleged false or misleading statements by defendants, id., at 17, but the Court found the class action complaint failed to adequately allege scienter, id., at 17-25. The Circuit Court agreed with the district court’s finding that the class action “fail[s] to allege facts explaining why, if it was aware of Enron’s problems, [JPMC] would have continued to lend Enron billions of dollars,” id., at 25 (citation omitted), explaining at page 25 that “Even if JPMC was actively engaged in duping other institutions for the purposes of gaining at the expense of those institutions, it would not constitute a motive for JPMC to defraud its own investors.” The Court further rejected plaintiffs’ claim that JPMC disguised its loans to Enron as “trading activities,” id., at 25-30, agreeing with the district court that even assuming JPMC should have treated the prepaid transactions as trades rather than as loans was immaterial, id., at 25-26. Accordingly, “Because Plaintiffs have failed to adequately plead that JPMC made a materially false statement or omitted a material fact with scienter,” the district court properly dismissed the class action complaint. Id., at 33.
Class Action Court Decisions PSLRA/SLUSA Class Actions Uncategorized
Read more...
Securities Fraud Class Action Complaint Failed to Adequately Plead Strong Inference of Scienter Required by Private Securities Litigation Reform Act (PSLRA) because Defense Presented Compelling Inference that Company Refused to Disclose Details of Phase III Drug Trials for “Competitive Reasons,” thereby Supporting District Court Order Dismissing Class Action Complaint Without Leave to Amend Fourth Circuit Holds
Plaintiffs filed a class action against Inspire Pharmaceutical and three of its directors (collectively “Inspire”), as well as other defendants, alleging violations of federal securities laws; the class action complaint asserted that Inspire “overstat[ed] the prospects for an experimental drug that the company was developing to treat dry eye disease.” Cozzarelli v. Inspire Pharmaceuticals Inc., 549 F.3d 618 (4th Cir. 2008) [Slip Opn., at 2]. Specifically, the class action alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and of Rule 10b-5, as well as violations of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933. See id., at 6. Defense attorneys moved to dismiss the class action on the ground that the allegations in the class action complaint failed to meet the heightened pleading requirements established by the Private Securities Litigation Reform Act of 1995 (PSLRA), and the Supreme Court’s decision in Tellabs, Inc. v. Makor Issues & Rights, Ltd., ___ U.S. ___, 127 S.Ct. 2499 (2007). _See id._, at 2-3 and 6-7. Specifically, Inspire argued that plaintiff’s class action complaint failed to raise the requisite “strong inference of scienter,” _id._, at 6, or that defendants had made false or misleading statements, _id._, at 7. The magistrate recommended that the motion be granted, and the district court dismissed the class action. _Id._, at 6-7. The Fourth Circuit affirmed.
In brief, Inspire had reached Phase III trials of its drug diquafosol tetrasodium, but while the study showed that the drug objectively resulted in substantial improvement of dry eye disease, the company failed to achieve its second primary goal, or “endpoint,” in that patients did not report subjective feelings of improvement. See Inspire, at 3-4. The FDA gave Inspire two options: (1) “conduct two additional trials that met both an objective endpoint and a subjective endpoint,” or (2) “conduct one additional trial that replicated – this time as a primary endpoint – the corneal clearing that Inspire achieved” in its prior study. Id., at 4. Inspire chose the second option but was “tight-lipped” about details of its new study, id., at 5. Inspire made several “generic” comments about its new study, including that it was “very similar” to the prior study and that it was a “confirmatory” Phase II trial, id. Additionally, some stock analysts “speculated that the primary endpoint of [the new study] was only a relative improvement in corneal staining scores and that [the new study] was likely to meet that endpoint.” Id. In point of fact, however, the new study failed to meet its primary endpoint, and Inspire’s stock plunged 44.5% on the news. Id., at 6. Plaintiffs’ class action complaint followed, id.
Class Action Court Decisions PSLRA/SLUSA Class Actions Uncategorized
Read more...
Securities Class Action Complaint Properly Dismissed because Class Action Failed to Satisfy Heightened Pleading Requirements under Private Securities Litigation Reform Act (PSLRA) Ninth Circuit Holds
Plaintiffs filed a class action against InVision Technologies and two of its officers alleging violations of federal securities law; the class action complaint arose because after InVision announced that it had entered into a merger agreement with General Electric, the company disclosed that the merger may not occur because of the discovery of potential violations of the Foreign Corrupt Practices Act causing an immediate drop in InVision’s stock price, even though the merger eventually went through. Glazer Capital Management, LP v. Magistri, 549 F.3d 736 (9th Cir. 2008) [Slip Opn., at 15765-66]. The class action alleged that defendants violated Section 10(b) of the Securities Exchange Act of 1934, as well as Rule 10b-5. Id., at 15768. Defense attorneys moved to dismiss the class action for failure to plead adequately falsity or scienter under the heightened standards established by the Private Securities Litigation Reform Act (PSLRA); the district court granted the motion and dismissed the class action complaint. Id., at 15766. (Plaintiffs had amended the class action complaint twice, but the district court denied them leave to file a third amended class action complaint. See id., at 15768.) The Ninth Circuit affirmed.
We do not discuss here the facts detailed in the Circuit Court’s opinion, see Glazer Capital, at 15766- 68. The pertinent facts are that, after announcing the merger agreement, (1) “on July 30, 2004, InVision issued a press release stating that an internal investigation had revealed possible violations of the FCPA in connection with certain foreign sales transactions,” and (2) “InVision announced that it had voluntarily reported the activities to the Securities and Exchange Commission (SEC) and the Department of Justice (DOJ), but warned that subsequent investigations could potentially delay or terminate the merger.” Id., at 15767. InVision’s stock price plummeted on the news, and only a few days later the class action complaint was filed. Id. Within a few months, InVision settled with DOJ and with the SEC, and the merger with GE went through. Id., at 15767-78.
Certification of Class Actions Class Action Court Decisions PSLRA/SLUSA Class Actions Uncategorized
Read more...
Securities Fraud Class Action Properly Dismissed by District Court because Class Action Complaint Failed to Adequately Allege Failure to Disclose and because Class Action Complaint Failed to Create Strong Inference of Scienter Sixth Circuit Holds
Plaintiffs filed a class action against Visteon Corporation and certain officers and directors of Visteon, and against its outside auditor, Pricewaterhousecooper, alleging violations of federal securities law; specifically, the class action complaint asserted claims for violations of § 11 of the Securities Act of 1933, § 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, and § 20(a) of the Exchange Act. Ley v. Visteon Corp., 543 F.3d 801, 804-05 (6th Cir. 2008). The class action complaint followed the disclosure by Visteon of “$108 million in accounting errors which understated net losses by in excess of $60 million,” id., at 805. According to the class action, this disclosure “shocked the market” and caused Visteon’s stock to drop dramatically. Id., at 804-05. Defense attorneys moved to dismiss the class action complaint, id., at 804. Defense attorneys moved to dismiss the class action’s § 11 claim as barred by the statute of limitations, id., at 806. The defense motion as to the remaining class action claims focused on the failure of the class action complaint to meet the heightened pleading requirements of the Private Securities Litigation Reform Act of 1995 (PSLRA). The district court granted the motion and dismissed the class action complaint in its entirety, id., at 805. Plaintiffs appealed but did not challenge the dismissal of the class action’s § 11 claim, id., at 806; accordingly, the Sixth Circuit affirmed that portion of the district court’s order without discussion and focused its analysis only on the remaining claims. The Sixth Circuit affirmed.
After discussing briefly the rules governing its review of the dismissal of the class action complaint, see Ley, at 805-06, the Sixth Circuit summarized the law governing securities fraud claims and the heightened pleading requirements necessitated by the PSLRA, see id., at 806-07. The § 10(b)/Rule 10b-5 class action claim against Visteon alleged that it failed to disclose certain information; specifically, Visteon, a spin-off of Ford Motor, “failed to disclose that ‘Ford so dominated the day to day business affairs of Visteon via the contracts between the two and beholden Visteon management, such that Visteon was essentially no more than a repository for operations of Ford that had built in losses.’” Id., at 807. In the words of the Circuit Court, “Essentially, Plaintiffs argue that Defendants failed to adequately disclose that Visteon may have difficulty shedding unprofitable business lines.” Id. The Sixth Circuit disagreed finding the company’s disclosure to be “rife with such information.” Id. And the Circuit Court similarly rejected plaintiffs’ other claims regarding Visteon’s failure to disclose material information, see id., at 807-08. In fact, the Court found that defendants made numerous disclosures and that Visteon was under no duty to disclose information relative to its competitors, id., at 808. As the Sixth Circuit explained at page 808:
Class Action Court Decisions PSLRA/SLUSA Class Actions Uncategorized
Read more...
Securities Fraud Class Action Properly Dismissed for Failure to Adequately Plead Falsity and Scienter because Allegations in Class Action Complaint did not Meet Heightened Pleading Requirements Under Private Securities Litigation Reform Act of 1995 (PSLRA) Eighth Circuit Holds
Plaintiffs filed a class action against Centene Corporation and three of its officers alleging violations of federal securities law; the class action complaint alleged violations of sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and of Rule 10b-5. Elam v. Neidorff, 544 F.3d 921, 924-25 (8th Cir. 2008). The class action centered on the company’s estimates of costs that had been “incurred but not reported” (IBNR). According to the class action, Centene – a “healthcare enterprise that primarily provides programs and related services to individuals receiving benefits under Medicaid,” acted as “an intermediary between the government and Medicaid recipients in the states” and “receive[d] a monthly amount for each Medicaid recipient in its plan and, in turn, [paid] for the recipient’s healthcare services.” Id., at 925. In filing its quarterly reports, the company “include[d] not only the costs incurred and billed during the quarter but also an estimate of medical costs that have been incurred but not reported (IBNR).” Id. Centene’s calculation of IBNR was necessarily an educated guess: it represented “an estimate of claims liability because some medical events occur before the end of a given reporting period (and Centene is therefore liable to pay them) but have not yet been formally billed to the company,” and Centene calculated the estimate “on a monthly basis employing various factors, including in-patient hospital utilization dates and prior claims experience.” Id. Moreover, “Independent actuaries review Centene’s quarterly estimates.” Id. In April 2006, Centene filed its Form 10-Q with the SEC and issued a press release that “were positive and in line with analyst estimates,” and providing positive guidance for the second quarter as well as the balance of the year. Id., at 925-26. In July 2006, the company disclosed that second quarter earnings would be “substantially lower than expected,” and this securities fraud class action complaint soon followed. Id., at 926. Defense attorneys moved to dismiss the class action complaint on the grounds that it failed to satisfy the heightened pleading requirements established by the Private Securities Litigation Reform Act of 1995 (PSLRA); the district court granted the motion and dismissed the class action “finding that plaintiffs failed to allege facts demonstrating that defendants had misrepresented a material fact or acted with scienter.” Id., at 926. The Eighth Circuit affirmed.
After summarizing the “heightened pleading requirements” imposed by the PSLRA on securities fraud cases (class action and non-class action), Elam, at 926-27, the Eighth Circuit turned its attention to plaintiffs’ claim that the class action complaint “sufficiently alleges both falsity and scienter, satisfying the elevated pleading standard for their securities fraud class action,” id., at 927. The Circuit Court held that the mere fact defendants “monitored” its medical costs was insufficient under the PSLRA to establish that defendants knew of information that contradicted any of the financial statements they made, id. The Eighth Circuit refused plaintiffs’ invitation to infer that defendants’ statements were false “based solely on defendants’ representations as to their ability to estimate medical costs.” Id. On the contrary, the PSLRA’s heightened pleadings standards requires that falsity be pleaded with particularity, and this requirement “cannot be satisfied with allegations that defendants made statements ‘and then showing in hindsight that the statement is false.’” Id. (quoting In re Navarre Corp. Sec. Litig., 299 F.3d 735, 743 (8th Cir. 2002)). Plaintiffs’ failure to “point to any contemporaneous reports, witness statements, or any information that had actually been provided to defendants as of April or June that indicated that Centene would need to increase estimated medical costs” was fatal to the class action. Id. (citation omitted). The Circuit Court therefore affirmed the district court’s conclusion that falsity had not been adequately pleaded. Id., at 927-28.
Class Action Court Decisions PSLRA/SLUSA Class Actions Uncategorized
Read more...
Securities Fraud Class Action Properly Dismissed without Leave to Amend because Class Action Failed to Plead Loss Causation, Scienter or Falsity with Specificity Required by Private Securities Litigation Reform Act (PSLRA) Ninth Circuit Holds
Plaintiff filed a putative class action against Corinthian Colleges (one of the nation’s largest operators of private for-profit vocational colleges) and three of its officers, alleging violations of federal securities laws; specifically, the securities fraud class action alleged violations of §§ 10(b) and 20(a) of the Securities and Exchange Act of 1934 and Rule 10b-5. Metzler Investment GMBH v. Corinthian Colleges, Inc., 540 F.3d 1049, 1055 (9th Cir. 2008). According to the class action complaint, “Corinthian’s colleges are pervaded by fraudulent practices designed to maximize the amount of federal Title IV funding – a major source of Corinthian’s revenue-that those schools receive.” Id. (footnote omitted). Defense attorneys moved to dismiss the class action for failure to meet the heightened pleadings requirements of the Private Securities Litigation Reform Act of 1995 (PSLRA); the district court granted the motion but dismissed the class action complaint with leave to amend. Id., at 1060. Plaintiff filed an amended class action complaint, and defense attorneys again moved to dismiss for failure to meet the PSLRA’s heightened pleading requirements. Id. The district court granted the motion and dismissed the class action without leave to amend, id. The Ninth Circuit affirmed.
We do not here discuss the class action complaint in detail: a detailed summary may be found at pages 1055 through 1059 of the opinion. The Ninth Circuit summarized the class action’s allegations of fraud as including “a variety of false or deceptive schemes: falsifying financial aid applications to obtain federal funds and increase federal award entitlements; encouraging students to falsify federal student aid forms themselves; manipulating student enrollment by counting students not yet enrolled (referred to in the [class action complaint] as ‘false starts’); manipulating or falsifying student grades to maintain federal funding eligibility; exposing the company to bad debt in order to meet regulatory requirements for continued federal funding; delaying notification to federal officials of dropped students and delaying refunds to the federal government after students had dropped; and manipulating job placement data in order to satisfy federal and state regulatory requirements.” Metzler Investment, at 1055. The fraud allegations were based on information from confidential witnesses – “former Corinthian employees that served at numerous campuses in differing capacities” including” campus presidents, admissions officials, financial aid officers, and IT and accounting personnel.” Id., at 1056. The class action complaint relied also on government investigations and private litigation that allegedly confirmed Corinthian’s practices, and noted that certain States had revoked, or were threatening to revoke, Corinthian’s accreditation. Id. With respect to scienter, the class action relied on (1) “suspicious stock sales” totaling more than $33 million by two of the individually-named officers, (2) “Corinthian’s ‘hands on’ management and tracking of student data and information,” to suggest that “Corinthian’s management must have known about underlying fraudulent conduct to achieve maximum federal funding at various schools,” and (3) the allegation that Corinthian’s corporate officers knew that its early revenue recognition practices – “crediting a full month’s worth of tuition regardless of whether a student started at the beginning or end of that particular month” – was improper. Id., at 1058. The bottom line is that the alleged fraud purportedly violated GAAP and inflated Corinthian’s stock price, id., at 1056.
Class Action Court Decisions PSLRA/SLUSA Class Actions Uncategorized
Read more...
Class Action Claims Against Merrill Lynch Preempted by SLUSA (Securities Litigation Uniform Standards Act of 1998) because Pension Manager Lawsuit Constituted “Covered Class Action” under SLUSA Eleventh Circuit Holds
Plaintiff, a quasi-governmental agency that manages pension funds for armed forces personnel, filed a putative class action in Florida state court against Merrill Lynch alleging violations of various Florida state laws; it filed separate class action lawsuits against Lehman Brothers and against Pension Fund of America (PFA). Instituto de Prevision Militar v. Merrill Lynch, 546 F.3d 1340, 2008 WL 4723777, *1-*2 (11th Cir. 2008). According to the class action complaint, plaintiff was solicited by Pension Fund of America (PFA) to deposit pension funds with Merrill Lynch in a retirement trust account; believing PFA was the agent of Merrill Lynch, plaintiff invested almost $8 million in PFA through Merrill, id., at *2. The class action alleged further that PFA was carrying out an embezzlement and money laundering scheme, and at the time the class action was filed PFA could not account for almost $3 million of the funds plaintiff invested in it through Merrill Lynch. Id. Defense attorneys moved to dismiss the class action on the grounds that plaintiff’s claims were preempted by the federal Securities Litigation Uniform Standards Act (SLUSA); plaintiff opposed dismissal, arguing that the class action complaint was not a “covered class action” within the meaning of SLUSA. Id., at *3. The district court granted the motion and dismissed the class action. Id. The Eleventh Circuit affirmed.
The Eleventh Circuit explained that “[t]he central question presented on appeal is whether [SLUSA] bars [plaintiff] from pursuing state law claims against Merrill Lynch & Co. and its affiliates for their role in a fraud committed on [plaintiff] by [PFA], a non party to this action.” Instituto, at *1. The Circuit Court summarized the class action as one that arose out of PFA’s theft of funds that it was supposed to have invested, and that sought to hold Merrill Lynch liable under Florida state law for PFA’s fraud “because it allowed PFA to hold itself out as Merrill Lynch’s agent, and because it failed to stop PFA from misappropriating [plaintiff’s] funds.” Id. However, “Congress enacted the Securities Litigation Uniform Standards Act to ensure that securities fraud class actions were brought under federal law.” Id. The district court granted the defense motion to dismiss because it found plaintiff’s class action was a “covered class action” within the meaning of SLUSA. Id. The Circuit Court focused its analysis on whether that determination was correct, see id., at *4, and concluded that it was, id., at *6. The Eleventh Circuit further held that each of the four elements required for SLUSA preclusion had been met by Merrill Lynch. See id., at *6-*10.
Class Action Court Decisions PSLRA/SLUSA Class Actions Uncategorized
Read more...
“Core-Operations Inference” Insufficient Alone to Support PSLRA’s Heightened Pleading Requirements for Scienter in Securities Fraud Class Action Ninth Circuit Holds
Plaintiffs filed a putative class action against Washington Mutual and individual officer defendants alleging securities law violations; specifically, the class action complaint alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5. South Ferry LP, # 2 v. Killinger, 542 F.3d 776, 779 (9th Cir. 2008). The class action “relate[d] to several related aspects of WAMU’s mortgage lending business.” Id., at 780. The class action focused on two types of risks: the first involved the mortgage servicing rights (MSR) related risk that WAMU would lose revenue “due to the pre-payment of loans that it services”; the second involves a “pipeline risk” that WAMU will “commit to fund a loan at a certain interest rate only to see market interest rates change by the time the loan is finalized.” Id. According to the class action complaint, “the individual defendants made materially false or misleading statements concerning WAMU’s ability to manage MSR-related and pipeline risk during the class period.” Id. Defense attorneys moved to dismiss the class action for failure to meet the heightened pleading requirements under the Private Securities Litigation Reform Act (PSLRA). Id., at 779. The district court granted the motion as to certain defendants, but denied the motion as to others; it found plaintiff met the heightened pleading requirements of the PSLRA “by inferring that the remaining defendants had knowledge of WAMU’s difficulties with their information systems ‘because of the nature of the statements they [Defendants] were making and the nature of these specific alleged operational problems,’” id., at 781 (quoting In re Northpoint Communications Group, Inc. Securities Litig., 184 F.Supp.2d 991, 998 (N.D. Cal. 2001)). In short, the district court believed “that it may be inferred that facts critical to a business’s ‘core operations’ or important transactions are known to key company officers,” id. Defense attorneys filed an interlocutory appeal, and the Ninth Circuit reversed.
The issue on appeal was “whether a scienter theory that infers that facts critical to a business’s ‘core operations’ or an important transaction are known to a company’s key officers satisfies the PSLRA’s heightened pleading standard.” South Ferry, at 783. After reviewing its prior cases on the subject, see id., at 783-84, the Ninth Circuit explained at page 784 that plaintiffs argued that while not adequate in and of itself to satisfy the scienter requirement of the PSLRA, “the core-operations inference can be one relevant part of a complaint that raises a strong inference of scienter.” The Ninth Circuit concluded, “Where a complaint relies on allegations that management had an important role in the company but does not contain additional detailed allegations about the defendants’ actual exposure to information, it will usually fall short of the PSLRA standard.” Id., at 784. Moreover, “a general matter, ‘corporate management’s general awareness of the day-to-day workings of the company’s business does not establish scienter-at least absent some additional allegation of specific information conveyed to management and related to the fraud’ or other allegations supporting scienter.” Id., at 784-85 (citation omitted).
Class Action Court Decisions PSLRA/SLUSA Class Actions Uncategorized
Read more...
Securities Fraud Class Action Failed to Adequately Allege Scienter under Heightened Pleading Requirements of the Private Securities Litigation Reform Act (PSLRA) so District Court Properly Granted Defense Motion to Dismiss Class Action Complaint Eighth Circuit Holds
After Ceridian Corporation publicly disclosed accounting errors that “necessitated multiple amendments and restatements of its published financial statements,” the SEC opened an investigation into the company’s accounting practices and “numerous class action complaints were filed against Ceridian and three former corporate officers.” In re Ceridian Corp. Securities Litig., 542 F.3d 240, 243 (8th Cir. 2008). The class actions alleged securities fraud in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5. Id. The class actions were consolidated, and defense attorneys moved to dismiss the consolidated class action complaint for failure to “state with particularity facts giving rise to a strong inference that the defendant[s] acted with the required state of mind,” as required by the Private Securities Litigation Reform Act (PSLRA). Id. The district court granted the motion and dismissed the class action. Relying on the Supreme Court’s opinion in Tellabs, Inc. v. Makor Issues & Rights, Ltd., 127 S.Ct. 2499 (2007), id., at 244, the Eighth Circuit affirmed.
The Eighth Circuit recited the well-settled heightened pleading requirement, including “the required state of mind,” established by the PSLRA. In re Ceridian, at 244. The Circuit Court noted that scienter may be established through “proof of severe recklessness, that is, ‘highly unreasonable omissions or misrepresentations that … present a danger of misleading buyers or sellers which is either known to the defendant, or is so obvious that the defendant must have been aware of it.’” Id. (citation omitted). The Eighth Circuit observed that under Tellabs, “Not only must a plaintiff state with particularity facts giving rise to an inference of scienter that is strong when viewed in isolation, the inference ‘must be more than merely plausible or reasonable-it must be cogent and at least as compelling as any opposing inference of nonfraudulent intent.’” Id. (citation omitted).
Class Action Court Decisions PSLRA/SLUSA Class Actions Uncategorized
Read more...