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).
The district court characterized the class action as “a sprawling jumble of a securities-fraud action … based on dozens, if not hundreds, of accounting errors-errors of many different types committed by many different employees over many different years.” In re Ceridian, at 245 (citation omitted). Plaintiffs’ primary argument in opposition to the motion to dismiss was that “the sheer number of violations, and the magnitude of the restatements, give rise to an inference that defendants were at least severely reckless,” an argument the district court rejected. Id., at 246. The fact the CFO and CEO had sold 200,000 shares of stock, and had earned substantial year-end bonuses “based primarily on earnings and revenue growth,” were insufficient under the facts of this case to “raise a strong inference of scienter” as required by the PSLRA. Id. (citation omitted). The Eighth Circuit agreed. Id., at 246-47. Nor did the vague allegations of confidential witnesses and two whistleblowers raise the requisite inference of scienter, particularly as they did not implicate the relevant time period. Id., at 247-48. Similarly, allegations of accounting errors that “were discovered months and years later” were insufficient to create the required “strong inference that the certifications were knowingly false when made.” Id., at 248. In the end, the Circuit Court affirmed the district court’s order dismissing the class action for failure to meet the PSLRA’s heightened pleading requirements. Id., at 248-29.