Articles Posted in PSLRA/SLUSA Class Actions

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District Court Properly Dismissed Securities Class Action but Existing Circuit Court Authority Overruled because Neither § 10(b) of the Securities Exchange Act of 1934 nor Rule 10b-5 is Extraterritorial Supreme Court Holds

Plaintiffs filed a putative class action against National Australia Bank, and its wholly-owned subsidiary HomeSide Lending (a mortgage servicing company) and three of its executives, alleging violations of the Securities Exchange Act of 1934 after National announced that it was writing down the value of HomeSide causing its stock price to drop. Morrison v. National Australia Bank Ltd., ___ U.S. ___, 130 S.Ct. 2869, 2010 WL 2518523, *3-*4 (2010). According to the allegations underlying the class action, from 1998 to 2001 both National’s annual reports and other public documents, and HomeSide’s executives, “touted the success of HomeSide’s business.” Id., at *3. But in July 2001, National wrote down the value of HomeSide by $450 million, and in September it wrote down the value of HomeSide by another $1.75 billion. Id. The class action alleged that National downplayed the write-downs, and that HomeSide and its executives “had manipulated HomeSide’s financial models…in order to cause the mortgage-servicing rights to appear more valuable than they really were.” Id. The class action complaint was filed in the district court for the Southern District of New York and “alleged violations of §§ 10(b) and 20(a) of the Securities and Exchange Act of 1934…, and SEC Rule 10b-5,” id., at *4. Defense attorneys moved to dismiss the class action for lack of subject-matter jurisdiction under Rule 12(b)(1) and for failure to state a claim under Rule 12(b)(6). Id. The federal court dismissed the class action for lack of subject matter jurisdiction “because the acts in this country were, ‘at most, a link in the chain of an alleged overall securities fraud scheme that culminated abroad.’” Id. (citation omitted). The Second Circuit affirmed on the same grounds, id. (citation omitted). The Supreme Court granted certiorari, and affirmed.

The Supreme Court explained that this case presented the question of “whether § 10(b) of the Securities Exchange Act of 1934 provides a cause of action to foreign plaintiffs suing foreign and American defendants for misconduct in connection with securities traded on foreign exchanges.” Morrison, at *3. As a preliminary matter, the High Court addressed Second Circuit’s analysis of the extraterritorial reach of § 10(b) and circuit court precedent on the issue. Id. (citing Schoenbaum v. Firstbrook, 405 F.2d 200, 208, modified on other grounds en banc, 405 F.2d 215 (2d Cir. 1968); In re CP Ships Ltd. Sec. Litig., 578 F.3d 1306, 1313 (11th Cir. 2009); Continental Grain (Australia) Pty. Ltd. v. Pacific Oilseeds, Inc., 592 F.2d 409, 421 (8th Cir. 1979)). The Court explained at page *4, “But to ask what conduct § 10(b) reaches is to ask what conduct § 10(b) prohibits, which is a merits question. Subject-matter jurisdiction, by contrast, ‘refers to a tribunal’s “‘power to hear a case.’”’ [Citations.] It presents an issue quite separate from the question whether the allegations the plaintiff makes entitle him to relief. [Citation.]” But while this was error, the Supreme Court declined to remand the matter finding “that unnecessary” because “nothing in the analysis of the courts below turned on the mistake, [so] a remand would only require a new Rule 12(b)(6) label for the same Rule 12(b)(1) conclusion.” Id., at *4-*5.

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District Court Properly Remanded Class Action to State Court on Ground that Variable Life Insurance Policy Constituted a “Security” Within the Meaning of Exception to Federal Court Jurisdiction under CAFA (Class Action Fairness Act) Seventh Circuit Holds

Plaintiff filed a putative class action against the issuer of his life insurance policy, Lincoln National Life Insurance, alleging that it breached the terms of certain of its variable life insurance policies. Lincoln Nat’l Life Ins. Co. v. Bezich, ___ F.3d ___ (7th Cir. June 25, 2010) [Slip Opn., at 1]. According to the allegations underlying the class action complaint, “Each month, Lincoln deducts cost-of-insurance charges from the accounts of its policyholders…[that] are not determined based on expected mortality, as promised by the policy.” Id., at 1-2. Defense attorneys removed the class action to federal court, asserting jurisdiction under the Class Action Fairness Act (CAFA), id., at 2. However, the district court remanded the class action to state court on the ground that CAFA provides an exception for class actions “that solely involves a claim . . . that relates to the rights, duties (including fiduciary duties), and obligations relating to or created by or pursuant to any security (as defined under section 2(a)(1) of the Securities Act of 1933 (15 U.S.C. 77b(a)(1)) and the regulations issued thereunder).” Id. (citing § 1332(d)(9)(C)). Defendant filed a petition with the Seventh Circuit seeking permission to appeal the district court’s remand order. Id., at 1-2. Lincoln National Life argued “that its petition raises a ‘novel and important issue’ under CAFA: ‘whether contract claims grounded in the traditional insurance features of variable life insurance policies, as opposed to those related to their security features, qualify under the securities exception to CAFA.’” Id., at 2. Because the Seventh Circuit agreed with the district court’s conclusion that § 1332(d)(9)(C) required remand, it dismissed the appeal for lack of jurisdiction. Id.

The Circuit Court explained that Lincoln allowed the holders of single variable life insurance policies to “allocate money between a General Account, which accumulates value from premium payments, and a Separate Account, an investment account whose value varies depending on the performance of the investments selected.” Bezich, at 2-3. The policyholder may place 100% of his or her funds in either the General or Separate Account, or may split the funds between the accounts in any percentage they desire. Id., at 3. “The Separate Account is registered with the Securities and Exchange Commission as a unit investment trust under the Investment Company Act of 1940,” id. (citation omitted). The class action challenges the insurance charges deducted from both the General and Separate Account based on the percentage of funds in each account. Id. Defense attorneys argued that the appeal should be accepted because “no court of appeals has ever considered the application of CAFA to this type of variable life insurance policy.” Id.

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District Court Order Remanding Class Action to State Court Must be Dismissed because Class Action Fairness Act did not Authorize Appellate Review of Specific Facts of the Case Second Circuit Holds

Plaintiffs, the “holders of certificates issued by the trusts,” filed a putative class action in New York state court against various Countrywide Financial entities seeking a declaratory judgment that, under the terms of Pooling and Servicing Agreements between plaintiffs and defendants, Defendant Countrywide Servicing is required to repurchase the certain loans from the plaintiff-trusts “at a price equal to their unpaid principal plus any accrued interest.” Greenwich Financial Services Distressed Mortgage Fund 3 LLC v. Countrywide Financial Corp., ___ F.3d ___, 2010 WL 1541628, *1, *2 (2d Cir. April 20, 2010). Defense attorneys removed the class action to federal court pursuant to the Class Action Fairness Act (CAFA), id., at *1. Plaintiffs moved to remand the class action to state court on the grounds that “while CAFA extended federal jurisdiction for most class actions meeting certain monetary and diversity requirements, it did not apply to this action because the statute exempted suits involving claims that ‘relate[d] to the rights, duties[,] … and obligations relating to or created by or pursuant to any security.’” Id. (quoting 28 U.S.C. § 1332(d)(9)(C)). The district court agreed and remanded the class action to state court, id. Defendants appealed the remand order. The Second Circuit dismissed the appeal, concluding that it lacked jurisdiction to consider it.

The Circuit Court explained that appeal turned on a provision in CAFA that “bars appellate review of orders remanding securities class actions to state court.” Greenwich Financial, at *1. By way of background, the defendants originate and service residential home loans. Id. Defendant Countrywide Home Loans raised money to finance the loans by selling mortgages in securitization transactions “to specially created trusts, which received payment of interest and principal from mortgage borrowers.” Id. The trusts then “sold certificates to investors,” which entitled the owners to repayment of their principal and to interest payments, id. Defendant Countrywide Servicing administered the loans under Pooling and Servicing Agreements (PSAs). Id. Defendants Countrywide Home Loans and Countrywide Servicing, together with various other entities, were parties to the PSAs; however, the holders of the certificates and Defendant Countrywide Financial were not. Id. According to the allegations underlying the class action, in 2008, the attorneys general of seven states filed lawsuits against various Countrywide entities alleging predatory lending; specifically, “The states alleged that Countrywide engaged in deceptive sales practices, charged unlawful fees, and made loans it had no reasonable basis to think could be repaid.” Id., at *2. Countrywide eventually entered into a single settlement agreement resolving the multi-state litigation, which required Countrywide “to modify the terms of many of the mortgages owned by the trusts and administered by Countrywide Servicing on behalf of the trusts.” Id. Under the terms of the settlement, some homeowners “would make smaller payments of interest and principal to the trusts, thereby decreasing the value of the certificates.” Id.

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Class Action Settlement of Lawsuits Challenging Merger of Schering-Plough and Merck Warranted Approval where Terms Required Declaratory Relief for Class in the Form of Additional Disclosures by Schering-Plough Prior to Shareholder Vote on Proposed Merger and Payment of $3.6 Million to Class Counsel in Attorney Fees and Costs New Jersey Federal Court Holds

Following the announcement of a planned merger, various plaintiffs filed several class action lawsuits in New Jersey state and federal courts against Schering-Plough and its Board of Directors seeking to block the company’s merger with Merck. In re Schering-Plough/Merck Merger Litig., U.S.D.C. Case No. 2:09-cv-01099-DMC-MF (D.N.J. March 26, 2010) [Slip Opn., at 1-2]. According to the allegations underlying the various class action complaints, “the Schering board members had breached their fiduciary duties to shareholders by approving the Merger, because the terms of the Merger were insufficiently favorable to Schering’s shareholders and/or the Board had failed to perform appropriate due diligence before approving the Merger.” Id., at 3. The New Jersey district court appointed Class Counsel, and consolidated all of the federal class actions and denied a request to abstain from considering the class actions during the pendency of the state court class actions. Id., at 2-3. The state court dismissed the state class actions, id., at 3. Defendants denied any wrongdoing, id. Following the filing of a consolidated class action complaint, id., at 3-4, and after conducting discovery, id., at 4-5, the parties agreed upon a proposed class action settlement, id., at 5-6. The proposed settlement called for Schering to make additional disclosures to shareholders in advance of a vote on the proposed merger with Merck, id., at 5; Schering made the disclosures agreed upon by the parties and its shareholders “voted overwhelmingly” in favor of the merger, id., at 6. The district court gave preliminary approval to the proposed class action settlement, id., at 6-7. The parties then moved the district court to give final approval to the class action settlement, id., at 1. In an unpublished order, and noting that “only five Class members objected to the Settlement, representing a minuscule .00001% of the Class,” id., at 7, the district court granted the motion.

The federal court first analyzed whether the class action requirements of Rule 23 had been satisfied, and concluded that class action treatment was warranted. In re Schering-Plough, at 11-16. The court then considered the proposed terms of the settlement, and found them to be fair, reasonable and adequate. See id., at 16-23. The court discussed the handful of objections filed against the class action settlement and found them inadequate to reject the settlement. See id., at 23-28. The most interesting aspect of the settlement was its provision for payment of $3.5 million to Class Counsel, which the district court affirmed under the “common benefit doctrine,” despite the relief secured for the class. See id., at 28-34. The federal court also award Class Counsel costs in the amount of $131,777.16. Id., at 35. Accordingly, the district court granted final approval to the class action settlement and awarded Class Counsel in excess of $3.6 million in fees and costs. Id.

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Class Action Complaint Against Halliburton Alleging Violations of Securities Laws did not Apply Wrong Legal Standard in Ruling on Class Action Certification Motion and Properly Denied Class Action Treatment because Plaintiff Failed to Establish Causation Seventh Circuit Holds

Plaintiff filed a putative class action against Halliburton and David Lesar (its COO and then CEO during the class period alleging violations of various federal securities laws; specifically, the class action complaint alleged that defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as well as Rule 10(b)-5. The Archdiocese of Milwaukee Supporting Fund, Inc. v. Halliburton Co., ___ F.3d ___, 2010 WL 481407, *1 (5th Cir. February 12, 2010). According to the allegations underlying the class action complaint, defendant was liable for securities fraud violations under a “fraud-on-the-market” theory, alleging that false statements had been made concerning “(1) Halliburton’s potential liability in asbestos litigation, (2) Halliburton’s accounting of revenue in its engineering and construction business, and (3) the benefits to Halliburton of a merger with Dresser Industries.” Id. Plaintiff moved the district court to certify the litigation as a class action; defense attorneys opposed class action treatment. Id. The district court denied the motion, holding that the Rule 23’s requirements for certification of a class action had not been met. Id. Specifically, in order to obtain class certification “Plaintiff was required to prove loss causation, i.e., that the corrected truth of the former falsehoods actually caused the stock price to fall and resulted in the losses.” Id. The district court denied certification because it found that plaintiff had failed to establish the necessary “causal relationship,” id. The Fifth Circuit affirmed.

Plaintiff argued on appeal “that the district court applied an erroneous standard for loss causation and required it to prove more than is required under law.” Halliburton, at *1. The Circuit Court disagreed. The Court explained,

In the case of a putative class, a plaintiff may create a rebuttable presumption of reliance under the fraud-on-the-market theory by showing “that (1) the defendant made public material misrepresentations, (2) the defendant’s shares were traded in an efficient market, and (3) the plaintiffs traded shares between the time the misrepresentations were made and the time the truth was revealed.”… A defendant may rebut the presumption “by ‘[a]ny showing that severs the link between the alleged misrepresentation and either the price received (or paid) by the plaintiff, or his decision to trade at fair market price[.]’”

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Class Action Challenging Secret Revenue-Sharing Payments in Purchase of Mutual Funds Fell Within Scope of “Covered Class Actions” under SLUSA (Securities Litigation Uniform Standards Act of 1998) and was Properly Dismissed because State-Actions Exception did not Apply Sixth Circuit Holds

Plaintiff filed a putative class action against various Nationwide Life Insurance entities on behalf of employee-participants in his employer’s “deferred compensation plan” alleging breach of fiduciary duty and unjust enrichment; the class action complaint alleged that Nationwide received “revenue-sharing payments from the mutual funds in which the § 457 plan invested its participants’ individual funds” and that “Nationwide implemented a scheme under which it would receive revenue-sharing payments from mutual funds and mutual fund advisors based upon a percentage of assets invested from the § 457 plans into the mutual funds.” Demings v. Nationwide Life Ins. Co., ___ F.3d ___, 2010 WL 364335, *1 (6th Cir. February 3, 2010). According to the allegations underlying the class action complaint, in selecting which mutual funds to use in the § 457 plans, Nationwide would not include a mutual fund in the plan unless it agreed to participate in this revenue-sharing scheme. Id. The thrust of plaintiff’s class action “was that plan participants, not Nationwide, were entitled to any revenue-sharing payments because such profits were directly derived from the assets of plan participants.” Id. Defense attorneys moved to dismiss the class action complaint on the ground that it was barred by the Securities Litigation Uniform Standards Act of 1998 (SLUSA), which prohibits certain “covered class action” lawsuits. Id., at *1-*2. Plaintiff admitted that his lawsuit was a “covered class action” within the meaning of SLUSA, but argued that it did not allege “fraud” or “deception in connection with the purchase or sale of any security,” id., at *2. The district court disagreed, finding that “although [plaintiff] did not specifically use the words ‘untrue statement’ or ‘omission’ in his complaint, the substance of his claim was that Nationwide misrepresented a relationship with mutual fund advisors or, at a minimum, failed to disclose material facts about the relationship.” Id. Accordingly, the district court dismissed the class action, id. The Sixth Circuit affirmed.

The Circuit Court began by observing that plaintiff’s theory on appeal differed from his theory in the district court: “[Plaintiff] Demings does not now dispute that his proposed class-action suit was a covered state-law class action that would generally be precluded under SLUSA’s terms. Instead, he argues that his suit fits within the ‘state actions’ exception to SLUSA preclusion.” Demings, at *1 (citation omitted). This is the only argument plaintiff raised on appeal, and it formed the foundation of plaintiff’s claim that the district court therefore erred in denying him leave to amend his class action complaint. Id., at *3. The Sixth Circuit explained SLUSA’s state-actions exception does not “preclude a State or political subdivision thereof or a State pension plan from bringing an action involving a covered security on its own behalf, or as a member of a class comprised solely of other States, political subdivisions, or State pension plans that are named plaintiffs, and that have authorized participation, in such action.” Id., at *4 (citation omitted). The Circuit Court held that this exception did not apply for two reasons. First, even though plaintiff is a sheriff, he is not “a state, political subdivision thereof, or a state pension plan bringing a suit on its own behalf.” See id., at *4-*5. Second, the class action was not “brought on behalf of a class comprised solely of other states, political subdivisions, or state pension plans that were named plaintiffs, and that had authorized participation, in such action.” See id., at *5-*8. In this regard, the Sixth Circuit held that the language of SLUSA requires that the State “authorize” its participation at the time the class action was filed, id., at *8. Accordingly, the state-actions exception did not apply, and the district court properly concluded that the class action was barred by SLUSA. Id. Accordingly, the Circuit Court affirmed the judgment of the district court, id.

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District Court Properly Dismissed Securities Fraud Class Action because, though Plaintiffs Adequately Alleged Falsity (Contrary to District Court Finding), Class Action Failed to Meet Pleading Requirements of Private Securities Litigation Reform Act (PSLRA) for Scienter Eleventh Circuit Holds

Plaintiffs-shareholders filed a putative class action against Jabil Circuit – “a publicly traded electronics and technology company headquartered in St. Petersburg, Florida” – and certain of its officers and directors alleging violations of securities laws. Edward J. Goodman Life Income Trust v. Jabil Circuit, Inc., ___ F.3d ___, 2010 WL 154519, *1 (11th Cir. January 18, 2010). According to the allegations underlying the class action complaint, Jabil violated its corporate policy of requiring stock options to be exercised at a price “at least equal to fair market value” by backdating options “to a day where the trading price was lower than that on the actual date it is issued, resulting in an instant paper gain to the issuee.” Id. The allegations of backdating in the class action complaint “rely almost exclusively on circumstantial evidence…to show that stock option grants to executives were backdated”; the complaint failed to “identify any particular transaction or scheme of backdating or specific recipients of such a scheme.” Id. The Securities and Exchange Commission had conducted an informal investigation into Jabil’s stock option practices; moreover, Jabil itself reviewed its stock option practices and concluded that an accounting error “resulted in an overstatement of earnings by $54.3 million [from 1996 to 2005], forcing Jabil to restate its earnings for each of those years.” Id., at *2. However, Jabil denied purposely backdating stock options to directors and $49 million of the restated amount was attributable to non-executive employee compensation expenses. Id. Defense attorneys moved to dismiss the class action complaint on the grounds that it failed to meet the heightened pleading requirements established by the Private Securities Litigation Reform Act (PSLRA). Id., at *1. The district court granted the motion and plaintiffs appealed, id. The Eleventh Circuit affirmed.

The Eleventh Circuit began its analysis with the observation that backdating options “is not itself illegal under the securities laws, nor is it improper under accounting principles.” Jabil, at *1. Allegations of improper backdating appeared in the Wall Street Journal, after which Jabil raised its third quarter projections for fiscal year 2006. Id., at *2. The class action complaint alleges that Jabil made this announcement “in order to divert attention from the allegations concerning backdating, and that Jabil knew that the factual bases for its improved forecasts were false even at the time it made the projections.” Id. But these allegations relied on confidential witnesses, and only one confidential source identified anyone as having “specific knowledge” of the allegations asserted therein. Id. The district court dismissed the first amended class action complaint without prejudice, but defense attorneys challenged the second amended class action complaint also for failure to meet the pleading requirements of the PSLRA. Id. “[T]he district court held that the shareholders failed to adequately plead falsity of the allegedly fraudulent statements, failed to raise a sufficient inference of scienter on the part of [plaintiffs], and failed to plead enough facts to show loss causation.” Id., at *3. The Eleventh Circuit began its analysis with the class action’s fraud claim under section 10(b) of the Securities Exchange Act and Rule 10b-5. Id. The Circuit Court did not address loss causation because it concurred with the lower court’s finding that the class action failed to adequately allege scienter. Id.

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Class Action Alleging Violations of Federal Securities Laws based on Oil Company’s “Proved Reserves” Estimates in Public Offering Documents Warranted Dismissal because Cautionary Language Warned Reasonable Investor of Risk of Lower Reserves Texas Federal Court Holds

Plaintiff filed a putative class action against Cano Petroleum (an independent oil and natural gas company) and individual officers and directors of Cano, as well as defendants involved in the underwriting of Cano’s secondary public offering, alleging violations of federal securities laws; specifically, the class action complaint alleged that the documents issued in connection with the secondary public offering contained material misrepresentations in violation of Sections 11, 12 and 15 of the Securities Act of 1933. Truk Int’l Fund LP v. Wehlmann, ___ F.Supp.2d ___ (N.D.Tex. December 3, 2009) [Slip Opn., at 2-3.] According to the allegations underlying the class action complaint, defendants’ disclosures concerning Cano’s “proved reserves” were significantly overstated. Id., at 3-4. The class action further alleged that only one month after the secondary public offering, Cano’s CEO announced that the company’s proved reserves had declined by roughly 20%. Id., at 4-5. Following that announcement, Cano’s stock price fell “sharply and immediately.” Id., at 5. Defense attorneys moved to dismiss the class action on various grounds, see id., at 5-6. The district court granted the motions.

The district court began by summarizing public information relevant to the motion, see Truk, at 7-13, as well as the applicable standards governing the defendants’ motions, see id., at 13-15, and the relevant provisions of the Securities Act, see id., at 15-20. Focusing on the central allegations underlying the class action claims, see id., at 20-23, the district court first held that “[t]he cautionary statements in the Offering Documents made clear that the proved reserve numbers stated in the documents were estimates as of June 30, 2007, and that a large number of factors could cause the estimates to be lower if recalculated as of the date of the offering,” id., at 23. The new estimates had been based on a new estimate provided June 30, 2008, and were the result of circumstances that the Offering Documents warned could lead to a reduction in the proved reserves estimate. Id., at 24. In the federal court’s view, “a reasonable investor would know from reading the cautionary language in the Offering Documents that an investment in Cano was risky and that a part of that risk was in the uncertainty as to the quantity of proved reserves.” Id., at 28. Accordingly, the court granted the motions to dismiss the class action claims. Id., at 28, 30-31. The court also denied leave to amend, noting that “the nature of the pleading deficiencies suggest that repleading would be futile” and that “defendants should not be subjected to further costs of litigation.” Id., at 30.

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Class Action Complaint Alleging Securities Fraud Failed to Adequately Plead Misrepresentation or Scienter under Heightened Pleading Requirements Established by Private Securities Litigation Reform Act (PSLRA) New Jersey Federal Court Holds

Plaintiffs filed a putative class action against Heartland Payment Systems and others alleging violations of federal securities laws; specifically, the class action complaint alleged that defendants concealed information and/or made affirmative misrepresentations that were material to the value of the company’s stock and that plaintiffs suffered damage because the company’s stock value declined almost 80%. In re Heartland Payment Systems, Inc. Securities Litig., U.S.D.C. Case No. 09-1043 (D.N.J. December 7, 2009) [Slip Opn., at 1, 3.] According to the allegations underlying the class action complaint, Heartland “provides bank card payment processing services to merchants” and “maintains millions of credit and debit card numbers on its computer network.” Id., at 1. In 2008, Hackers managed to steal 130 million credit and debit card numbers from Heartland. Id., at 2. At the time of the theft, the company believed hackers had targeted solely the “payroll manager application” which “does not contain data on cardholders’ credit and debit card accounts” but rather “internal corporate information such as employees’ names, addresses, social security numbers, and other confidential information.” Id. Heartland did not discover the full extent of the breach until January 2009, at which time it “immediately notified the U.S. Department of Justice, the U.S. Secret Service, and the credit card companies who account numbers had been stolen,” and soon thereafter “publicly disclosed the theft.” Id. Following the public disclosure, Heartland’s stock price dropped dramatically, id. Plaintiffs filed their class action complaint on the theory that company statements concerning the adequacy of its security systems were fraudulent because the company was “aware that Heartland had poor data security and had not remedied the problem.” Id., at 3. Defense attorneys moved to dismiss the class action on the grounds that it failed to satisfy the heightened pleading requirements of the Private Securities Litigation Reform Act (PSLRA), id. The district court granted the motion.

The district court explained that the PSLRA requires a plaintiff “to plead the ‘who, what, when, where, and how’ of the allegedly fraudulent statements.” In re Heartland, at 3-4 (citing Institutional Investors Group v. Avaya Inc., 564 F.3d 242, 252 (3d Cir. 2009). Moreover, the PSLERA “requires that the complaint ‘state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.’” Id., at 4 (citation omitted). The federal court agreed with defense attorneys that the class action complaint failed to adequately allege a material misrepresentation, see id., at 5-11. The court agreed further that the class action failed to adequately plead the requisite scienter to support the class action claims. See id., at 11-13. The district court therefore found it unnecessary to address defendant’s loss causation argument. See id., at 5, 13-14. The court dismissed the class action complaint without leave to amend, concluding that “further specificity would not cure the Complaint’s deficiencies,” id., at 14.

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Class Action Complaint Alleging Securities Fraud Violations Failed to Allege Facts (as Opposed to Conclusions) or Adequately Plead Scienter under Heightened Pleadings Requirements of Private Securities Litigation Reform Act (PSLRA) Illinois Federal Court Holds

Plaintiffs filed a putative class action against various officers and directors of Midway Games alleging violations of federal securities laws; specifically, the class action complaint “alleg[ed] that the executives artificially inflated the market value of Midway stock by deceiving the public about the company’s financial position.” Zerger v. Midway Games, Inc., ___ F.Supp.2d ___ (N.D. Ill. October 19, 2009) [Slip Opn., at 1]. (Plaintiffs also filed a class action against Midway Games, but voluntarily dismissed it after Midway filed for bankruptcy protection. Id., at 2.) According to plaintiffs, the allegations underlying the class action complaint established violations of §§ 10(b) and 20(a) of the Securities Exchange Act of 1934, and of SEC Rule 10b-5. Id., at 1. Defense attorneys moved to dismiss the class action complaint for failure to meet the heightened pleading requirements established by the PSLRA (Private Securities Litigation Reform Act), id. The district court granted the motion and dismissed the complaint.

Over the course of 20 years, Midway developed more than 400 video games for various platforms, including home-console, handheld, coin-operated and PC. Zerger, at 2. In 2001, the company decided to focus on home-console and handheld devices, such as Xbox, Game Cube, Game Boy and PlayStation. Id. In 2005, the company “announced its first profitable quarter in five years,” id. But in the words of the Circuit Court, “all was not well with Midway’s business model.” Id., at 3. And while the company “repeatedly assured the market that Midway had sufficient working capital to fund day-to-day operations and to continue product development,” in September 2005 it had to borrow money to fund its day-to-day operations. Id. The class action complaint outlined other alleged omissions, see id., at 3-5, concluding that defendants took advantage of the false impression they had given the market to sell 800,000 shares of stock, nearly all of them in a 3-week period, id., at 5. Plaintiffs also blamed Sumner Redstone (chairman of Viacom and controlling shareholder of Midway) for the inflated stock prices because he had announced that he was “evaluating Midway as a potential acquisition target for Viacom” and had purchased millions of shares of stock in the company. Id. Analysts expressed concern that these purchases caused Midway’s stock to be “somewhat overvalued” and warned that if Redstone decided to sell his shares then the stock price would drop. Id. Redstone later announced that Viacom would not acquire Midway, and the stock “immediately began to lose value” ultimately falling more than 50%. Id., at 5-6.

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