Articles Posted in PSLRA/SLUSA Class Actions

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District Court Properly Found Class Action’s State Law Claims Fell within Scope of Securities Litigation Uniform Standards Act (SLUSA) Sixth Circuit Holds

Plaintiff filed a putative class action against Fifth Third Bank and its holding company, Fifth Third Bancorp., alleging breach of fiduciary duty and breach of contract. Segal v. Fifth Third Bank, N.A., 581 F.3d 305, 308 (6th Cir. 2009). According to the allegations underlying the class action complaint, Fifth Third “ breached its fiduciary and contractual duties to the class in three ways: (1) It invested fiduciary assets in proprietary (and often higher-fee) Fifth Third mutual funds rather than superior funds operated by the Bank’s competitors; (2) it promised trust beneficiaries that their fiduciary accounts would receive ‘individualized’ management and breached that agreement by providing standardized and largely automated management…, often by ‘relatively inexperienced’ and ‘low-level’ employees…; and (3) it invested too many of the funds’ assets in low-yielding investments in order to cover the accounts’ near-term tax liabilities.” Id. Defense attorneys moved to dismiss the class action on the grounds that the state law claims were preempted by the Securities Litigation Uniform Standards Act of 1998 (SLUSA); the district court agreed and dismissed the class action complaint. Id. The Sixth Circuit affirmed.

The Sixth Circuit explained that Congress enacted Private Securities Litigation Reform Act (PSRLA) to “curb[] ‘perceived abuses’ of federal class-action securities litigation by imposing special requirements and obstacles on claimants filing such actions.” Segal, at 308 (citations omitted). However, “some claimants responded by ‘avoid[ing] the federal forum altogether,’ bringing ‘class actions under state law, often in state court’ instead.” Id., at 309 (citation omitted). Because this “was not what Congress had in mind,” it enacted SLUSA: its purpose was to “‘prevent certain State private securities class action lawsuits alleging fraud from being used to frustrate the objectives of’ PLSRA…[by] expressly prohibit[ing] certain state law class actions,” id. (citation omitted). The Circuit Court explained that “SLUSA prohibits a claimant from filing a class action when four things are true: (1) the class action is ‘covered,’ which means it involves more than fifty members; (2) the claims are based on state law; (3) the action involves a ‘covered security,’ which means a nationally listed security; and (4) the complaint alleges ‘an untrue statement or omission of a material fact in connection with’ buying or selling a covered security or a ‘manipulative or deceptive device or contrivance in connection with’ buying or selling a covered security.” Id. (citations omitted). The parties agreed that the first three of these requirements were satisfied by the class action – the question on appeal was whether the last requirement had been met. Id.

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Class Action Alleging Securities Fraud Properly Dismissed because Class Action Complaint Failed to Meet Heightened Pleading Requirements Established by Private Securities Litigation Reform Act (PSLRA) Sixth Circuit Holds

Plaintiffs filed a putative class action against Omnicare and individual officers and directors of Omnicare alleging violations of federal securities laws; in the words of the Sixth Circuit, “Seizing on a few vague statements from management, the plaintiffs try to turn bad corporate news into a securities class action.” Indiana State Dist. Counsel of Laborers, etc. v. Omnicare, Inc., 583 F.3d 935 (6th Cir. 2009) [Slip Opn., at 1, 2]. We do not here summarize the “sprawling and repetitive” allegations underlying the class action complaint, id., at 3; interested readers may find the Circuit Court’s summary at pages 3 through 7 of the opinion. Defense attorneys moved to dismiss the class action, which the district court granted. See id., at 7-8. Reviewing the district court’s decision de novo, id., at 8, the Sixth Circuit affirmed. The Court summarized its holding at page 2 as follows, “Because the Private Securities Litigation Reform Act (‘PSLRA’) forbids such alchemy, we generally affirm the district court’s dismissal, although we reverse its disposition regarding the claims brought under the Securities Act of 1933.”

The Sixth Circuit began its analysis by explaining that § 10(b) securities fraud claims must be pleaded with the same specificity as fraud claims under FRCP Rule 9(b). Omnicare, at 9. The Court further explained, “Bolstering this rule of specificity, the PSLRA imposes further pleading requirements…. First, the complaint must ‘specify each statement alleged to have been misleading’ along with ‘the reason or reasons why the statement is misleading.’… Second, plaintiffs must ‘state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.’” Id. (citations omitted). Under this standard, the Sixth Circuit affirmed. The Circuit Court concluded that the statements challenged by the class action complaint were not material, see id., at 9-11, or failed to adequately allege loss causation, see id., at 11-12, or failed to establish that defendants knew Omnicare’s claims of “legal compliance” were false when made, see id., at 13-16.

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Class Action Complaint Alleging Securities Fraud Violations Arising from Disclosures Concerning Drug under Development Failed to State Claims under Section 10(b) of the Securities Exchange Act of 1934 or Rule 10b-5 New York Federal Court Holds

Plaintiffs filed a putative class action against French pharmaceutical company Sanofi-Aventis and certain individual defendants alleging violations of the Securities Exchange Act of 1934; specifically, the class action complaint alleged that defendants misrepresented facts concerning the company’s “research activities and attempt to market a drug called ‘rimonabant’ used to treat obesity and related illnesses.” In re Sanofi-Aventis Sec. Litig., ___ F.Supp.2d ___ (S.D.N.Y. September 25, 2009) [Slip Opn., at 1-2]. According to the allegations underlying the class action complaint, during the approval process the FDA sent Sanofi an approval letter for the drug’s use in connection with obesity, but a non-approval letter with respect to the drug’s use as a smoking cessation aid.” Id., at 2-3. Additionally, the FDA expressed concern “that use of rimonabant in treating obesity might be associated with higher rates of suicidality and other mood disorders.” Id., at 3. However, defendants’ disclosures allegedly failed to disclose the scope of the FDA’s concerns. Id., at 4. Defense attorneys moved to dismiss the class action complaint. Id., at 1. The district court granted the motion and dismissed the class action complaint.

With respect to the class action’s claims under Section 10(b) and Rule 10b-5, the federal court noted that “the complaint must explain why the allegedly misleading misstatements were fraudulent in order to satisfy the pleading standard of Rule 9(b) of the Federal Rules of Civil Procedure.” In re Sanofi-Aventis, at 5 (citation omitted). Based on the court’s analysis, the class action failed to identify any material misstatements or omissions sufficient to state a securities fraud claim. See id., at 5-10. Moreover, the class action complaint failed to satisfy the scienter requirement. See id., at 10-13. And because plaintiffs failed to “establish a primary violation of the securities laws,” the claims under Section 20(a), seeking to impose liability on the individual defendants, failed as a matter of law. Id., at 13. Accordingly, the district court granted defendants’ motion and dismissed the class action complaint without leave to amend. Id., at 14.

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District Court did not Abuse its Discretion in Approving Class Action Settlement in Securities Fraud Class Action Filed in United States because Class Members with Claims in Canadian Class Actions were Provided Adequate Notice of the Right to Opt Out of the U.S. Class Action Settlement Eleventh Circuit Holds

Plaintiffs filed a class action against CP Ships, a container shipping company, and others alleging violations federal securities laws; specifically, the class action complaint alleged that Belo – a media company that inter alia published the Dallas Morning News (DMN), which accounted for 30% of Belo’s revenue – “engaged in a fraudulent scheme designed to inflate DMN’s circulation artificially.” In re CP Ships Ltd. Securities Litig., 578 F.3d 1306 (11th Cir. 2009) [Slip Opn., at 1]. Defendant is organized under the laws of Canada, headquartered in England, and operates in several countries; 80% of the company’s stock is traded on the Toronto Stock Exchange (TSX), and 20% is traded on the New York Stock Exchange (NYSE). Id. Additionally, “crucial headquarters activities – including the relevant operations and personnel that were central to the fraud (i.e. the accounting department and executive offices) – were located in Tampa, Florida.” Id. According to the allegations underlying the class action complaint, CP Ships acquired 9 business during a 10-year period, each with its own accounting system: the company eventually transitioned to a single accounting system, but later “announced that the transition had caused it to understate its operational costs” causing the stock price to drop by more than 20% on both the TSX and NYSE. Id. This class action complaint followed, as did lawsuits filed in Canada, id. Defense attorneys successfully moved to dismiss the U.S. class action on the grounds that the complaint failed to adequately plead scienter under the heightened pleading requirements established by the Private Securities Litigation Reform Act (PSLRA), but while plaintiffs’ appeal from that order was pending, the parties negotiated a class action settlement. Id. The district court approved the settlement over various objections, including the objections of an individual who was also a class member in a Canadian class action that “the settlement would prevent some members of the Canadian class from pursuing their action in Canada.” Id., at 1-2. All class members were given notice and an opportunity to opt out of the U.S. class action settlement, id., at 1. One of the objectors appealed, and the Eleventh Circuit affirmed.

The objector leveled a multi-prong attack against the class action settlement: (1) the district court lacked subject-matter jurisdiction over the claims of class members who purchased foreign stock, or at the very least, as a matter of comity, should have declined to exercise jurisdiction over the dispute, (2) that the notice was inadequate, and (3) that the terms of the settlement were not fair, reasonable or adequate. In re CP Ships, at 1. The Circuit Court began by considering de novo whether subject matter jurisdiction was present over the dispute. Id., at 2. The Court found that the objector failed to raise a factual challenge to jurisdiction, see id., at 2-3, and concluded that the facial challenge to jurisdiction failed because jurisdiction exists under the “conduct test,” see id., at 3-6. The Eleventh Circuit then readily rejected the objector’s challenge to the adequacy of the notice, id., at 7, and turned to the adequacy of the class action settlement.

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Class Action Complaint Alleging Securities Fraud Properly Denied Class Action Treatment because Plaintiffs Failed to Establish that Decline in Stock Price was Connected to Disclosure of Alleged Fraud rather than Long-Term Industry Trends Fifth Circuit Holds

Plaintiffs filed a putative class action against Belo Corporation and others alleging violations of the Securities Exchange Act of 1934; specifically, the class action complaint alleged that Belo – a media company that inter alia published the Dallas Morning News (DMN), which accounted for 30% of Belo’s revenue – “engaged in a fraudulent scheme designed to inflate DMN’s circulation artificially.” Fener v. Belo Corp., ___ F.3d ___ (5th Cir. August 12, 2009) [Slip Opn., at 1-2]. According to the allegations underlying the class action complaint, Belo “allegedly paid bonuses for achieving circulation targets, rigged audits of DMN’s circulation, and implemented a no-return policy that eliminated any incentive for distributors to return unsold newspapers.” Id., at 2. These acts “artificially increased recorded circulation, which led to higher advertising revenues for DMN and larger profits for Belo” because 90% of DMN’s revenue came from advertising. Id. Belo eventually disclosed these facts in a press release, and the company’s stock price dropped substantially, id., at 2-3. The class action complaint followed, and plaintiffs moved the district court to certify the litigation as a class action. Id., at 3. Defense attorneys opposed class action treatment, relying on an expert opinion that “plaintiffs could not show that the fraudulent disclosure in the press release was the primary cause of the stock price decline.” Id., at 3-4. Plaintiffs countered with an expert opinion that the drop in stock price was “entirely or almost entirely attributable to the revelation of the relevant truth in this case.” Id., at 4. The district court denied class action treatment and plaintiffs appealed. Id. The Fifth Circuit affirmed.

After outlining the standard of review and the elements (including loss causation) required to prove a securities fraud case, see Fener, at 4-7, the Circuit Court noted that a district court may properly examine loss causation as part of a class action certification determination, id., at 7. The issue before the Court was “whether these plaintiffs have presented enough information to show loss causation under Rule 23.” Id. While plaintiffs submitted 100 pages in support of their class certification motion, defendants introduced expert testimony that Belo’s press release contained three distinct parts: “DMN’s circulation decrease resulted from (1) fraudulent overstatements; (2) changes in DMN’s methodology; and (3) industry-wide decline in newspaper circulation” and concluded – based on an examination of 132 analyst reports – that Belo’s stock dropped primarily because of “the non-fraudulent disclosures instead of the fraudulent one.” Id., at 8-9. The Fifth Circuit stated that it was important to resolve whether the press release should be viewed as “one complete disclosure or three separate ones,” id., at 9. Based on the “plain language” of the press release, the Circuit Court concluded that it was three separate disclosures. Id., at 10. Accordingly, “the release divides the news into fraudulent and non-fraudulent information related to possible future circulation declines.” Id.

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District Court did not Abuse Discretion in Denying Class Action Certification in Securities Fraud Class Action because Reliance Required to Establish Securities Exchange Act § 10(b) Violation could not be Proven on a Class-Wide Basis Ninth Circuit Holds

Numerous putative class action complaints were filed against Deutsche Bank alleging securities fraud in the alleged manipulation of the stock price of GenesisIntermedia, Inc. (“GENI”); the class action lawsuit “followed the collapse of an elaborate stock manipulation scheme.” Desai v. Deutsche Bank Securities Ltd., ___ F.3d ___, 2009 WL 2245223, *1 (9th Cir. July 29, 2009). The class action litigation dragged on for more than 7 years without leaving the class certification stage, id., at *3. We do not here summarize the facts underlying the class action allegations or the tortured history of the class action litigation, including its trip from California to Minnesota and then back to California, see id., at *1-*3. Eventually, the class action complaint alleged violations of § 10(b) and § 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5, id., at *2. And eventually, plaintiffs filed a motion for class certification which the district court denied, id., at *3. Plaintiffs then settled with the “last defendant standing” – Deutsche Bank – but reserved the right to appeal the district court order denying class action treatment to the lawsuit. Id. The Ninth Circuit affirmed.

Plaintiffs had sought to certify the lawsuit as a class action under Rule 23(b)(3), which requires a finding of both predominance of common issues of fact or law and superiority of the class action device as a mechanism for resolving the dispute. Desai, at *4. The district court refused to certify the litigation as a class action because it concluded that the predominance test had not been met; specifically, the district court found that the element of reliance – which is required to prove a violation of § 10(b) of the 1923 Act – would have to be proven “on an individual basis because they could not prove [reliance] class-wide.” Id. The Ninth Circuit explained, “A ruling on class certification ‘is subject to a very limited review and will be reversed only upon a strong showing that the district court’s decision was a clear abuse of discretion.’” Id. (citation omitted).

The Circuit Court held that “[r]eliance establishes the causal connection between the alleged fraud and the securities transaction.” Desai, at *6 (citation omitted). “To say that a plaintiff relied on a defendant’s bad act is to say that the defendant’s actions ‘played a substantial part in the plaintiff’s investment decision.’” Id. (citation omitted). The Ninth Circuit explained also that reliance can be presumed in two situations: in omission cases, provided that the information withheld is material, and under a “fraud on the market theory.” Id. The district court concluded that neither presumption applied because, under the facts of the case, plaintiffs could not demonstrate an “efficient market” for the securities. Id., at *7. The Circuit Court agreed, see id., at *7-*8. The district court also refused plaintiffs’ invitation “to create a novel presumption of reliance on ‘the integrity of the market’ in the context of manipulation cases.” Id., at *7. The Ninth Circuit also rejected this invitation, finding that there was no authority to support it, id., at *9. Accordingly, the Circuit Court affirmed the district court order denying class certification, id.

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Class Action Settlement Calling for Bar Order, Wiping Out Corporate Officer’s Indemnification Agreement and Advancement of Attorney Fees from Company Properly Approved by District Court Eleventh Circuit Holds

Plaintiffs filed a class action against HealthSouth Corporation and others, including its former chairman and CEO Richard M. Scrushy, alleging securities fraud; the class action complaint was filed in March 2003, after “HealthSouth acknowledged that its previous financial statements had substantially overstated its income and assets.” In re HealthSouth Corp. Sec. Litig., 572 F.3d 854, 2009 WL 1675398, *1 (11th Cir. 2009). According to the several class action complaints that were filed, defendants violated the Securities Act of 1933 and the Securities Exchange Act of 1934. Id. Ultimately, the class actions were consolidated in the Northern District of Alabama, and a partial settlement was reached between HealthSouth and the lead plaintiffs whereby HealthSouth would pay $445 million in settlement. Id. Scrushy was not a party to the settlement (having been prohibited from the mediation as the alleged mastermind of the fraud), and the district court approved the settlement over his objections, id. In part, the settlement included a bar order that extinguished “[Scrushy’s] contractual claims against HealthSouth for indemnification of settlement payments he might make to the underlying plaintiffs and extinguishes his claims for advancement of legal defense costs.” Id.

The basis of the appeal is that, in 1994, “Scrushy and HealthSouth executed an agreement requiring HealthSouth to indemnify Scrushy to the fullest extent permitted by law.” In re HealthSouth, at *1. Specifically, the indemnity agreement “require[d] HealthSouth to indemnify Scrushy for any judgment or settlement in any action in which he is sued for actions taken as a director or officer of the company, if he acted in good faith and reasonably believed he was acting in the best interest of the company.” Id. The bar order, however, wiped out any indemnity obligations, id. Scrushy’s objection was premised on the fact that the bar order “extinguished valuable and enforceable rights to which Scrushy was entitled under his indemnification agreement with HealthSouth.” Id., at *2. But “[t]he Bar Order is reciprocal, extinguishing similar claims by the settling defendants.” Id., at *2 (footnote omitted). The Eleventh Circuit reviewed Scrushy’s challenges to the settlement bar order for an abuse of discretion, id., at *3.

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Judicial Panel Grants Plaintiff Request for Pretrial Coordination of Class Action Lawsuits Pursuant to 28 U.S.C. § 1407, Unopposed by Other Class Action Plaintiffs or by Common Defendants, and Transfers Actions to Southern District of New York

Six class actions – one in California and five in New York – were filed against Orleans Homebuilders and OHB Homes alleging violations of federal securities laws; specifically, the class action complaints “arise from a purported massive financial scandal involving common defendant Satyam Computer Services, Ltd. (Satyam), one of India’s largest information technology and outsourcing companies.” In re Satyam Computer Services, Ltd., Securities Litig., ___ F.Supp.2d ___ (Jud.Pan.Mult.Lit. April 9, 2009) [Slip Opn., at 1]. According to the allegations underlying the class actions, “defendants deceived the investing public regarding Satyam’s business and finances, and thereby caused plaintiffs to purchase the company’s American Depositary Shares at artificially inflated prices.” Id. Plaintiffs in the California class action filed a motion with the Judicial Panel for Multidistrict Litigation (MDL) requesting centralization of the class actions pursuant to 28 U.S.C. § 1407; initially, plaintiffs sought centralization in California, but ultimately agreed to centralization in the Southern District of New York, where the other five class actions were pending. Id. Only one class action plaintiff opposed centralization, id. The Judicial Panel granted the motion to centralize the class action lawsuits, id. The Panel also agreed that the Southern District of New York was the appropriate transferee court because “Five of the six constituent actions, including the first-filed action, are already pending there, and the parties suggest that some discovery from accountants and banks may take place in the district.” Id., at 2.

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Allegations in Securities Fraud Class Action Failed to Meet Heightened Pleading Requirements under Private Securities Litigation Reform Act (PSLRA) Warranting Dismissal with Prejudice of Class Action Complaint Washington Federal Court Holds

Plaintiffs filed a class action against Zumiez and three individual defendants alleging violations of federal securities laws; the class action complaint asserted that defendants “engaged in a scheme to defraud shareholders by making materially false and misleading statements by making false and misleading statements and engaging in insider trading.” In re Zumiez Inc. Sec. Litig., ___ F.Supp.2d ___ (W.D. Wash. March 30, 2009) [Slip Opn., at 7]. According to the allegations underlying the class action, defendants made six different statements that were false or misleading, each of which concerned guidance given to investors and expectations for earnings growth. Id., at 7-8. 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., at 9. The district court granted defendants’ motion.

The federal court began by noting that “One obvious difficulty with Plaintiffs’ theory is that, from arch until mid-October, Zumiez not only met, but significantly exceeded, its prediction of ‘mid-single digit’ comparable-store sales growth.” In re Zumiez, at 12. The district court explained at page 12, “Therefore, to raise a credible inference that the Company’s predictions during this time period were false or misleading, Plaintiffs must allege facts to suggest not only that Defendants knew of undisclosed problems within the company, but that these known problems (1) would somehow not manifest a negative effect on earnings until the later quarters, and (2) were not taken into account when calculating the Company’s projected earnings. Plaintiffs allege hardly any such facts, much less facts sufficient to raise a strong inference of wrongdoing.” The court considered plaintiffs’ claim that five of Zumiez’s 2007 earnings projections were false or misleading, see id., at 12-20, but ultimately found that the class action complaint “completely failed to raise a ‘strong inference’ that Defendants knowingly made false or misleading earnings projections,” id., at 20. The district court also considered plaintiffs’ challenges to “two statements that could arguably be viewed as assertions regarding current business performance, rather than forward-looking statements”; specifically, an October 18, 2007, statement that “the Company was ‘on track’ to grow earnings by at least 30%,” and a November 29, 2007, statement that “the Company’s month-to-date comparable-store sales growth were in line with its fourth quarter projections.” Id., at 20. To be actionable, these statements required allegations in the class action complaint of “specific facts sufficient to raise a strong inference that Brooks made the statements with deliberate recklessness to investors,” id., at 20-21 (citation omitted), but the court found no evidence to support such an inference, see id., at 21-23. Accordingly, the district court dismissed the class action complaint with prejudice.

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Sheer Size of Class Action Complaint for Securities Fraud Violations did not Defeat Motions to Dismiss because Class Action Allegations were “Verbose” but “Disordered” and Required “More Definite Statement” Washington Federal Court Holds

Three class action complaints were filed against dozens of defendants alleging securities fraud in connection with Washington Mutual home lending business; specifically, the class actions alleged violations of §§ 10(b) and 20(a) of the 1934 Securities and Exchange Act and Rule 10b-5 promulgated under § 10(b), and under §§ 11, 12(a)(2) and 15 of the 1933 Securities Act. The class actions were consolidated by the Judicial Panel on Multidistrict Litigation, lead plaintiff appointed, and a consolidated class action complaint filed. Among the more than three dozen defendants named in the consolidated class action were officers and directors, including outside directors, underwriters and investment banks, and accounting firms. In re Washington Mutual, Inc. Securities, Derivative & ERISA Litig., ___ F.Supp.2d ___ (W.D. Wash. May 15, 2009) [Slip Opn., at 1-3, 5]. The consolidated class action complaint was enormous, containing almost 400 pages (without exhibits), more than 1000 paragraphs, and citations to 89 confidential witnesses, id., at 5. The first 300 pages of the complaint consist of factual allegations of improper activity that claimed “(1) deliberate and secret efforts to decrease the efficacy of WaMu’s risk management policies…; (2) corruption of WaMu’s appraisal process…; (3) abandonment of appropriate underwriting standards for WaMu loans…; and (4) misrepresentation of financial results….” Id. Defense attorneys for various defendants filed five motions to dismiss the class action claims, id., at 1-2. And if plaintiffs believed that size alone would be sufficient to defeat a motion to dismiss, then they were mistaken: in the end, the district largely granted the motion to dismiss concluding that Counts One, Two and Three required “a more definite statement of the grounds for their claims,” and that Counts Four, Five and Six should be dismissed with respect to “claims regarding WaMu’s August 2006, September 2006, and December 2007 securities offerings.” Id., at 2. (The federal court denied the motion to dismiss Counts Four, Five and Six to the extent they concerned WaMu’s October 2007 securities offering. Id.)

We summarize only briefly the federal court’s 33-page opinion. It is worth noting that the district court characterized the massive class action complaint as a “verbose and disordered pleading,” and concluded that it “failed to organize and clearly identify allegations in support of each element of the 10(b) claims against each defendant” even though more than 280 page of the complaint were directed toward these claims. In re WaMu, at 8. Relying on the heightened pleading requirements established by the Private Securities Litigation Reform Act (PSLRA) which requires that “a plaintiff alleging securities fraud must ‘plead with particularity both falsity and scienter,’” id., at 15 (citation omitted), the district court found “Remarkably, Plaintiffs make no effort to connect a particular statement made by any defendant with allegations as to why that statement was false or misleading or with allegations of facts giving rise to a strong inference of scienter,” id., at 17. The federal court also observed at page 17, “The first 300 pages of the Complaint fail to organize and identify the allegations supporting securities fraud as to each defendant, contain no useful cross-references or paragraph citations to connect the relevant allegations, and appear to include numerous irrelevant allegations, thereby depriving Defendants of proper notice of the grounds for the 10(b) claims against them.”

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