Securities Fraud Class Action Complaint Failed to Plead Fraud or Scienter with Specificity Required under the Private Securities Litigation Reform Act (PSLRA) 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 PSLRA, 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.
Alternatively, the district court held that plaintiffs failed to adequately plead scienter. Rather, the class action complaint’s allegations as to scienter “are vague and simply conclude that Defendants knew certain information and intentionally hid that information from investors.” Abrams, at 8-9. Plaintiffs’ vague allegations, and their reliance on “confidential witnesses [who] were not employed by the Company at the time some of the challenged statements were made,” id., at 9, were insufficient to establish “with sufficient particularity” the necessary scienter, id., at 10. This was particularly true in light of plaintiffs’ failure to allege financial gain by the defendants, id. Accordingly, the district court granted the defense motion to dismiss the class action’s Section 10(b) claim. Id. And because the Section 10(b) claim falls, the class action’s Section 20(a) claim could not stand. Id., at 10-11. Accordingly, the federal court granted the defense motion to dismiss the class action, but granted plaintiffs leave to file an amended class action complaint, id., at 11.