Defense Attorneys Established that Class Action Complaint Failed to Adequately Plead Securities Fraud with Particularity as Required by Rule 9(b) and the Private Securities Litigation Reform Act of 1995 (PSLRA) but New York Federal Court Gives Plaintiffs Leave to Amend their Complaint
Seven putative securities fraud class actions were filed against 51Job and several of its officers and directors alleging “false and misleading statements with respect to the company’s revenues and expected growth, in violation of §§ 10(b) and 20(a) of the Securities Exchange Act of 1934 . . ., and Rule 10b-5,” Goplen v. 51job, Inc., 453 F.Supp.2d 759, 763 (S.D.N.Y. 2006) (citations omitted). Defense attorneys filed a motion to dismiss the class action complaint on the ground that it failed to satisfy the heightened pleading requirements set forth in Rule 9(b) of the Federal Rule of Civil Procedure and in the Private Securities Litigation Reform Act of 1995 (PSLRA), 15 U.S.C. § 78u-4, for securities fraud. Id. The district court agreed with the defense and dismissed the class action complaint, but granted plaintiffs leave to file an amended complaint if they could allege facts sufficient to satisfy the PSLRA.
We do not here summarize the particular factual allegations in this case; the facts are quite detailed and an attorney interested in understanding the applicability of the PSLRA’s heightened pleading requirements for securities fraud class actions is well advised to read the opinion in its entirety. We provide only a broad summary of the legal arguments in the opinion. The district court concisely summarized at pages 765 and 766 the legal standard it was to apply as follows:
To state a claim under § 10(b) and Rule 10b-5, a plaintiff must “plead that the defendant, in connection with the purchase or sale of securities, made a materially false statement or omitted a material fact, with scienter, and that the plaintiff’s reliance on the defendant’s action caused injury to the plaintiff.” [Citation.] [¶] In addition, a claim for securities fraud must satisfy the heightened pleading requirements of Federal Rule of Civil Procedure 9(b) and the PSLRA. These requirements involve: (1) the particularity of the facts pleaded, and (2) scienter.
The district court first concluded that the class action complaint adequately specified the fraudulent statements allegedly made by defendants, Goplen, at 766, but held that plaintiffs had not pleaded with particularity and sufficiency the facts underlying those allegedly fraudulent statements, and specifically why defendants’ statements concerning its third quarter profits were false or misleading, id., at 767 et seq. The federal court carefully analyzed the company’s reported third quarter revenues and held that the class action complaint failed to plead with the requisite particularity “that defendants knew or should have known that the reported third quarter revenues were false,” id., at 768. Because of this conclusion, the district court necessarily found that the claim against an individual for making positive statements concerning the company’s third quarter results also failed. Id. The federal court next held that the class action complaint failed to allege sufficient facts to support the claim that defendants had “failed to disclose that the Company’s business was experiencing a material downturn in advertising revenue,” explaining that the complaint did not even adequately demonstrate that “a material downturn in advertising revenue actually existed at the time of the [challenged] press release” or that, assuming one existed, that defendants knew about it at the time. Id., at 769. Next, the court held that the criticisms leveled at the company’s fourth quarter projections failed because “the Second Circuit does not recognize ‘fraud by hindsight.’” Id., at 770 (citations omitted). Rather, “Plaintiffs must show that defendants knew or should have known that the fourth quarter projections were misleading when made.” Id. Merely alleging that the information provided was inaccurate failed to establish fraud.
Finally, the district court addressed the question of scienter, Goplen, at 770 et seq., explaining that “To plead scienter under Rule 9(b) and the PSLRA, the complaint must allege facts that give rise to a strong inference of fraudulent intent,” id., at 771. In this regard, the district court applied the test set forth in Acito v. IMCERA Group, Inc., 47 F.3d 47, 53 (2d Cir.1995), concluding that the Second Circuit has not abandoned Acito despite the fact that it “appeared to express some dissatisfaction with the Acito formulation” in Novak v. Kasaks, 216 F.3d 300, 311 (2d Cir.2000). Goplen, at 771 n.12. Under Acito, “a strong inference of fraudulent intent ‘may be established either (a) by alleging facts to show that defendants had both motive and opportunity to commit fraud or (b) by alleging facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness.’” Id., at 771 (quoting Acito, at 52). Applying that standard, the district court first concluded that while defendants had the opportunity, the class action complaint failed to adequately allege motive. Id., at 771-73. The court then concluded that the complaint also failed to establish “conscious misbehavior or recklessness” because the complaint’s “bare assertions, without any further facts or details, do not adequately demonstrate defendants’ knowledge of facts or access to information contradicting their public statements.” Id., at 773. Accordingly, the district court granted the defense motion to dismiss, but gave plaintiffs leave to file an amended complaint. Id., at 775
NOTE: Because the district court held that plaintiffs had failed to state claim for relief under § 10(b), it necessarily concluded that the § 20(a) claim fails because “control person liability” cannot exist without a violation of the Exchange Act. Goplen, at 775 (citing Boguslavsky v. Kaplan, 159 F.3d 715, 720 (2d Cir.1998)).