Class Action Defense Blog

Securities Fraud Class Action Complaint, though Extremely Lengthy, Failed to Plead Fraud with Specificity Required by PSLRA (Private Securities Litigation Reform Act) Missouri Federal Court Holds

Plaintiff filed a class action complaint against Novastar Financial and three of its officers alleging securities fraud. In re 2007 Novastar Financial, Inc., Securities Litig., ___ F.Supp.2d ___ (W.D. Mo. June 4, 2008) [Slip Opn., at 1]. Defense attorneys moved to dismiss the class action for failure to comply with the heightened pleadings requirements of the Private Securities Litigation Reform Act (PSLRA), and requested that the district court take judicial notice of certain documents. Id., at 1-2. The district court granted the motion and dismissed the class action, beginning its analysis with an insightful observation and warning as to a court’s consideration of the alleged falsity of a defendants’ statements: “One might be tempted to think that a complaint spanning more than 100 pages and consisting of more than 200 paragraphs could not fail to be specific. The temptation is dangerous and must be resisted.” Id., at 3. Here, the class action merely paints a “broad picture” and consists of “generalities” – which is “precisely what the PSLRA counsels against.” Id. The federal court explained at page 3, “This has allowed Plaintiff to pick isolated threads and snippets from the Complaint to create an illusion of detail and insinuate the existence of fraud, which in turn has made it exceedingly difficult for the Court to conduct the analysis required by law. The Court does not intend to parse out each and every sentence contained in the Complaint because doing so ignores the real problem: what the Complaint does not say is as critical as what it actually says.”

The fact the class action complaint contains more than 50 paragraphs spanning 35 pages does not serve as a talisman to create the requisite specificity. In re 2007 Novastar Financial, at 4. Neither the complaint nor plaintiff’s opposition to the motion to dismiss explained what was false about the challenged statements, id. Federal law does not require a company “to divulge every ‘fact’ known to everyone in a company”; indeed, “the PSLRA’s effort to combat claims of ‘fraud by hindsight’ demonstrates a reluctance to countenance claims that attach heightened importance to facts only when looking back at the aftermath of misfortune. “ Id. Based on the court’s analysis, the challenged statements failed to satisfy the PSLRA’s pleading requirements, id., at 5-6. In the end, the federal court found that the class action “fails to identify a single false entry in the Company’s financial statements, nor does he identify the ‘truth’ that should have been disclosed.” Id., at 6. In the court’s view, the class action complaint “reads more like a cautionary tale from a treatise on business management than a charge of knowing misstatements and concealments.” Id. At worst, the allegations may constitute negligence, breach of fiduciary duty or mismanagement, but not fraud. Id.

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Posted In: Class Action Court Decisions, PSLRA/SLUSA Class Actions

Securities Fraud Class Action Complaint Failed to Plead Fraud or Scienter with Specificity Required under the Private Securities Litigation Reform Act (PSRLA) thus Supporting Defense Motion to Dismiss Class Action Florida Federal Court Holds

Plaintiff filed a putative class action against Micrus Endovascular and two of its officers alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the Exchange Act). The class action was consolidated with a second class action, and the parties filed a consolidated class action complaint. Abrams v. Micrus Endovascular Corp., ___ F.Supp.2d ___ (S.D. Fla. May 20, 2008) [Slip Opn., at 1]. In essence, the class action plaintiffs alleged that the defendants “overstated the Company’s future prospects and failed to disclose material facts about the Company’s financial condition in violation of Sections 10(b) and 20(a) of the Exchange Act, resulting in artificial inflation of the Company’s stock price.” Id., at 2. Defense attorneys moved to dismiss the class action on the grounds that it failed to plead facts with the specificity required by the Private Securities Litigation Reform Act (PSLRA), and that the challenged statements were “forward-looking” within the meaning of the PSLRA’s “safe harbor” provision. Id., at 4-5. The district court granted the motion.

With respect to the class action’s Section 10(b) claim, the federal court outlined the heightened pleading requirements under the PSRLA, see Abrams, at 5-6, and concluded that the class action complaint failed to meet those requirements. In the district court’s view, the statements challenged by the class action “represent the type of ‘corporate optimism’ or ‘mere puffing’ which is not covered by the Exchange Act.” Id., at 6. This is true because “‘no reasonable investor would make an investment decision based on [such] statement[s].’” Id. (citation omitted). In the court’s view, “none of the challenged statements in this case are material statements of verifiable fact,” id., at 7 n.3. And under the facts of the case, the court also rejected plaintiffs’ suggestion that defendants were under an affirmative duty to disclose the internal challenges the Company was facing, id., at 7.

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Posted In: Class Action Court Decisions, PSLRA/SLUSA Class Actions

Securities Class Action Erroneously Dismissed because Company’s Characterization of “Stop-Work” Orders as “Backlog” could have Misled Investors as to Company’s True Financial Condition Ninth Circuit Holds

Plaintiffs filed a putative class action against Applied Signal Technology (AST) and two of its officers for violations of federal securities laws; specifically, the class action complaint alleged that the company’s “backlog” reports misled investors as to its financial condition. Berson v. Applied Signal Technology, Inc., 527 F.3d 982 (9th Cir. June 5, 2008) [Slip Opn., at 6391-92]. The Ninth Circuit explained that AST’s customers were predominantly government agencies that may, at any time and for any reason, issue “stop-work” orders; once issued, AST immediately stops earning money on those projects, “[a]nd, because stopped work often is eventually cancelled altogether, a stop-work order signals a heightened risk that the company never will earn the money.” Id., at 6391-92. However, AST “continued to count the stopped work as part of its ‘backlog’ – a term the company defines as the dollar value of the work it has contracted to do but hasn’t yet performed.” Id., at 6392. The class action alleged that plaintiffs were misled into believing that it was “likely” the stop-work projects would be completed when “in reality” it was “likely to be lost forever.” Id. Defense attorneys moved to dismiss the class action; the district court granted the motion and plaintiffs appealed. The Ninth Circuit reversed.

The Circuit Court began its analysis by rejecting the defense argument under Rule 9(b) that plaintiffs failed to plead fraud with particularity; we do not discuss that portion of the opinion. See Whiting, at 6392-94. Rather, we begin with the defense argument that the statements regarding the company’s backlog were not misleading. First, AST argued that because its SEC filings clearly revealed that the backlog consisted of “uncompleted portions of existing contracts,” investors would know that this work included stop-work orders. Id., at 6394-95. The Ninth Circuit found this to be a “conceivable interpretation” of the SEC disclosure, but not the “most plausible” one, id., at 6395. In the end, the Court concluded, “we cannot find, as a matter of law, that defendants disclosed that backlog included a significant amount of work that had been halted by the company’s customers.” Id., at 6396. The Ninth Circuit noted that AST was not required to release its backlog report, but once it “chose to tout” the backlog, it was obligated to do so “in a manner that wouldn’t mislead investors as to what that backlog consisted of.” Id., at 6397. The Circuit Court held further that plaintiffs had “state[d] with particularity facts giving rise to a strong inference” of defendants’ intent to deceive by alleging that defendants “were aware that stop-work orders had halted significant amounts of work, yet counted the stopped work as backlog anyway.” Id.

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Posted In: Class Action Court Decisions, PSLRA/SLUSA Class Actions

Class Action Complaint Failed to Plead Securities Fraud with Specificity Required by Private Securities Litigation Reform Act (PSLRA) thus Subjecting Class Action to Motion to Dismiss without Leave to Amend Missouri Federal Court Holds

Plaintiff filed a class action complaint against NovaStar Financial and three of its directors alleging securities fraud violations. In re 2007 NovaStar Financial, Inc., Securities Litig., ___ F.Supp.2d ___ (W.D. Mo. June 4, 2008) [Slip Opn., at 1]. Defense attorneys moved to dismiss the class action, id.; the class action complaint failed to meet the heightened pleading requirements under the Private Securities Litigation Reform Act (PSLRA), which “is intended to eliminate abusive securities litigation and put an end to the practice of pleading ‘fraud by hindsight,’” id., at 2 (citation omitted). The district court granted the defense motion, holding that the class action “has not – and cannot – satisfy the PSLRA’s pleading requirements.” Id., at 3. The language of the district court’s opinion should prove useful to class action defense attorneys, so we quote it at length.

The federal court began its analysis with a cogent observation, noting at page 3: “One might be tempted to think that a complaint spanning more than 100 pages and consisting of more than 200 paragraphs could not fail to be specific. The temptation is dangerous and must be resisted.” Under the district court’s careful analysis, it found that the class action complaint “has not specified the allegedly misleading statements, nor has he specified why the statements he has referred to are misleading.” Id. Instead, the class action “presents a very broad picture, and Plaintiff discusses his claims in generalities – precisely what the PSLRA counsels against.” Id. In the court’s words, “This has allowed Plaintiff to pick isolated threads and snippets from the Complaint to create an illusion of detail and insinuate the existence of fraud, which in turn has made it exceedingly difficult for the Court to conduct the analysis required by law.” Id. Relying on the Eighth Circuit’s opinion in In re Cerner Corp. Sec. Litig., 425 F.3d 1079 (8th Cir. 2005), the district court held that the class action failed to plead falsity with the required specificity. See id., at 3-6. At bottom, the class action “has not stated a claim because companies…are not expected to be clairvoyant, and bad decisions do not constitute securities fraud.” Id., at 6.

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Posted In: Class Action Court Decisions, PSLRA/SLUSA Class Actions

Class Action Failed to Adequately Allege Securities Law Violations because Pharmaceutical Company’s Meta-Analyses were Inconclusive and because Class Action Failed to Adequately Plead Scienter New York Federal Court Holds

Plaintiffs filed a putative class action against pharmaceutical company GlaxoSmithKline (GSK) and certain individual officers and directors of GSK for violations of federal securities laws; specifically, 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 on the grounds that defendants failed to disclose the truth about its meta-analysis in connection with its diabetes drug, Avandia. Borochoff v. GlaxoSmithKline PLC, ___ F.Supp.2d ___ (S.D.N.Y. May 9, 2008) [Slip Opn., at 1-2]. Plaintiffs filed an amended class action complaint 5 months later, and defense attorneys moved to dismiss the class action under Rule 12(b)(6), id., at 9-10. The district court granted the motion and dismissed the class action.

The class action complaint alleged that in September 2005, GSK finalized a meta-analysis that “showed an estimate of…an increased risk of heart attack, associated with the use of Avandia.” Borochoff, at 2. Nonetheless, its October 2005 press release attributed GSK’s “excellent pharmaceutical sales growth” in part to Avandia’s “tremendous success” and “emphasize[d] that we do not expect the growth rate to slow down over the next couple of years.” Id., at 2-3. GSK’s February 2006 press release also referred to Avandia as a “significant growth driver[],” id., at 3. GSK did not disclose the results of its first mea-analysis, which were duplicated by its second meta-analysis, finalized in March 2006. Id. On the contrary, GSK’s 2005 Annual Report, filed on March 3, 2006, stated that “strong growth” from Avandia was expected to continue in 2006. Id., at 4. The class action alleged that GSK’s statements were “materially false and misleading” because it knew, based on its meta-analyses, that use of Avandia carried with it an increased risk of heart attack, id. The class action also cited two additional press releases, from April and July 2006, that called Avandia a “key growth driver[]” and stressed a “32% increase in sales of Avandia.” Id., at 4-5.

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Posted In: Class Action Court Decisions, PSLRA/SLUSA Class Actions

Judicial Panel Grants Defense Request for Pretrial Coordination of Class Action Lawsuits Pursuant to 28 U.S.C. § 1407 and Transfers Actions to Western District of Washington

Seven (7) class action lawsuits (5 in Washington and 2 in New York) were filed against various defendants, including Washington Mutual, “arising from alleged misrepresentations or omissions concerning WaMu’s financial condition with respect to its subprime home loan portfolio.” In re Washington Mutual, Inc., Securities, Derivative & “ERISA” Litig., ___ F.Supp.2d ___ (Jud.Pan.Mult.Lit. February 21, 2008) [Slip Opn., at 1]. Defense attorneys for common defendant Washington Mutual filed a motion with the Judicial Panel for Multidistrict Litigation (MDL) requesting centralization of the class action litigation pursuant to 28 U.S.C. § 1407 in the Western District of Washington, where five class actions already were pending; no party opposed pretrial coordination, but plaintiffs’ lawyers in the New York class actions argued for that district as the transferee court. Id. The Judicial Panel granted the motion to centralize the class action lawsuits and agreed with the defense that the Western District of Washington was the appropriate transferee court because most of the actions were pending there and because WaMu is headquartered in Seattle. Id., at 1-2.

Posted In: Multidistrict Litigation, Class Action Court Decisions, PSLRA/SLUSA Class Actions

District Court Properly Dismissed Securities Fraud Class Action Without Leave to Amend because Class Action Complaint Failed to Satisfy Private Securities Litigation Reform Act (PSLRA) Pleading Requirements Eighth Circuit Holds

Plaintiff filed a class action complaint against Possis Medical and two individuals alleging securities fraud violations. The class action alleged that after Possis Medical decided in 2001 to study whether its non-surgical catheter system, designed to remove blood clots, could be used for other medical procedures, it “made several public statements regarding the study's potentially favorable impact on company revenues”; however, in August 2004, Possis Medical released the results of its study “which did not support expanded…usage.” The precipitous drop in stock value led plaintiff to file her putative class action. Cornelia I. Crowell GST Trust v. Possis Medical, Inc., 519 F.3d 778, 781 (8th Cir. 2008). Defense attorneys moved to dismiss the class action on the ground that the class action complaint “failed to meet the heightened pleading standards” required by the Private Securities Litigation Reform Act (PSLRA), id. The district court granted the motion and dismissed the class action complaint, without granting leave to amend, on the ground that the pleadings were insufficient under the PSLRA. Id. Plaintiff appealed, arguing that the class action adequately alleged securities fraud or, alternatively, that the district court erred in failing to grant leave to file an amended class action complaint, id. The Eighth Circuit affirmed.

With respect to the motion to dismiss the class action, the district court found that the complaint “failed to establish that Possis Medical had misrepresented a material fact or acted with the required scienter.” Crowell Trust, at 782. The Eighth Circuit agreed. First, the class action failed to “provide the level of detail” required to support the misrepresentation element: “‘[R]ote allegations that the defendants knowingly made false statements of material fact’ alone are insufficient.” Id. (quoting In re Navarre Corp. Sec. Litig., 299 F.3d 735, 745 (8th Cir. 2002)). The Circuit Court held that the anonymous statements relied on by plaintiff failed to provide the necessary “who, what, when, where and how” of the allegedly actionable statements. Id., at 782. Moreover, the scienter element was missing because the court cannot focus on isolated acts but rather must consider “‘whether all the facts alleged, taken collectively, give rise to a strong inference of scienter, not whether any allegation, scrutinized in isolation meets that standard.’” Id. (quoting Tellabs, Inc. v. Makor Issues & Rights, Ltd., ___ U.S. ___, 127 S.Ct. 2499, 2502 (2007)). The mere fact that the study was important was insufficient to establish scienter, id., at 783.

With respect to the denial of leave to amend, the Circuit Court noted that plaintiff “failed to demonstrate any meaningful basis upon which it could amend its complaint to comply with the heightened securities pleading standards”; accordingly, the trial court did not err in refusing to grant leave to amend. Crowell Trust, at 784. The Eighth Circuit therefore affirmed the district court order, id.

Posted In: Class Action Court Decisions, PSLRA/SLUSA Class Actions

Following Dismissal of Securities Fraud Class Action, District Court Failure to Include Rule 11(b) Statutory Findings in Judgment may be Decided by Court of Appeal Eighth Circuit Holds

Plaintiff filed a putative securities fraud class action against various defendants, including Scientific-Atlanta and Motorola. The district court dismissed the class action claims against Scientific-Atlanta and Motorola and entered a separate, final judgment under Rule 54(b). Plaintiff appealed, and the Eighth Circuit affirmed. See In re Charter Communications, Inc., Securities Litig., 443 F.3d 987 (8th Cir. 2006). Plaintiff filed a petition for writ of certiorari with the U.S. Supreme Court; the High Court granted the writ and affirmed the Eighth Circuit’s decision. See Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., ___ U.S. ___, 128 S.Ct. 761 (2008). (Our summary of the Supreme Court opinion may be found here.) On remand, the Eighth Circuit was confronted with a matter of first impression: specifically, a provision of the PSLRA (Private Securities Litigation Reform Act of 1995) states that the district court “shall include in the record specific findings regarding compliance by each party and each attorney representing any party with each requirement of Rule 11(b) of the Federal Rules of Civil Procedure as to any complaint, responsive pleading, or dispositive motion.” In re Charter Communications, Inc., Securities Litig., 519 F.3d 730, 731 (8th Cir. 2008) (quoting 15 U.S.C. § 78u-4(c)(1)). The district court had failed to include such findings, though no party had raised this issue either in the district court or on appeal. Id. Defense attorneys notified the Circuit Court that Scientific-Atlanta and Motorola “waive all rights in this case to assert, that Plaintiff-Appellant did not comply with Fed.R.Civ.P. 11(b)” and requested entry of a final judgment dismissing the class action complaint. Id.

The Eighth Circuit held that the failure to include the required findings “did not affect either the appealability or the validity of the district court's Rule 54(b) final judgment.” In re Charter Communications, at 731 (citation omitted). After noting that courts have reached different decisions as to whether the failure to include Rule 11(b) statutory findings required a remand to the district court or whether, in the absence of district court findings, the Circuit Court could decide the Rule 11(b), and after confirming that “Congress in the PSLRA clearly intended to reduce judicial discretion to ignore or not sanction Rule 11(b) violations,” the Eighth Circuit held that “the Rule 11(b) issue may still be waived on appeal, either when it is not timely raised by any party or when, as here, it is affirmatively waived by the parties who prevailed in the district court.” Id. Accordingly, the Circuit Court reissued its mandate affirming the final judgment of the district court, id., at 732.

Posted In: Class Action Court Decisions, PSLRA/SLUSA Class Actions

Class Action Alleging Securities Violations Failed to Plead “Strong Inference of Scienter” as Required by the Private Securities Litigation Reform Act (PSLRA) Warranting Dismissal of Class Action With Prejudice Kentucky Federal Court Holds

Plaintiffs filed a class action lawsuit against Tempur-Pedic and others alleging securities laws violations arising out of allegedly false and misleading statements regarding the company’s financial situation as part of a scheme to drive up the stock price thereby allowing insiders “to sell more than $246 million worth of stock at an inflated price.” Grillo v. Tempur-Pedic Int’l, Inc., ___ F.Supp.2d ___ (E.D. Ky. March 28, 2008) [Slip Opn, at 1-2]. In essence, the class action alleged that after Tempur-Pedic announced a 6% price increase in its mattress lines in January 2005, it “caused a frenzy of retailers to stock up on their inventory needs before the price increase occurred.” Id., at 5. According to plaintiffs, this caused a “huge amount” of the company’s revenue to be “pulled forward,” but Tempur-Pedic denied this when asked by Goldman Sachs, id. The company reported record earnings and represented to the public that its growth could be “sustained,” when (according to the class action allegations) the company’s retail sales actually were “volatile and irregular.” Id., at 5-6. Plaintiffs’ class action complaint followed a September 19, 2005 press release that lowered guidance for the year, causing the stock to plummet 28% in a single day. Id., at 9. The complaint also detailed allegedly improper insider trading, see id., at 10-11. The class action alleged violations of Sections 10(b), 20(a) and 20A of the Securities and Exchange Act of 1934, and Rule 10b-5, id., at 2. Defense attorneys moved to dismiss the class action on the grounds that it failed to plead the specificity required under the Private Securities Litigation Reform Act (PSLRA). Id., at 2-3. The district court granted the defense motion and dismissed the class action complaint.

The federal court began with the now well known Supreme Court holding that, under the PSLRA, “‘a complaint will survive…only if a reasonable person would deem the inference of scienter cogent and at least as compelling as any opposing inference one could draw from the facts alleged.’” Grillo, at 17 (citation omitted). Plaintiffs’ mere allegation that defendants had access to internal financial reports and that those reports demonstrate the inaccuracy of the company’s financial representations was held to be inadequate, as they failed to provide any of those reports to the court or to “cite any of their specific details.” Id., at 18-19. Under the district court’s analysis, the allegations underlying the class action failed to meet the requisite level of scienter. For example, the mere fact that certain defendants held high positions within the company, or that they sold stock, were insufficient, as “[holding] high positions in the Company…is not enough to establish scienter,” id., at 19-20, and plaintiffs failed to demonstrate that the stock trades were “unusual or suspicious,” id., at 23-24. (The district court provided a detailed discussion of the stock trade issue. See id., at 24-27.) At bottom, the court concluded that the “strong inference” of scienter had not been shown.

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Posted In: Class Action Court Decisions, PSLRA/SLUSA Class Actions