Securities Class Action Complaint Properly Dismissed because Class Action Failed to Satisfy Heightened Pleading Requirements under Private Securities Litigation Reform Act (PSLRA) Ninth Circuit Holds
Plaintiffs filed a class action against InVision Technologies and two of its officers alleging violations of federal securities law; the class action complaint arose because after InVision announced that it had entered into a merger agreement with General Electric, the company disclosed that the merger may not occur because of the discovery of potential violations of the Foreign Corrupt Practices Act causing an immediate drop in InVision’s stock price, even though the merger eventually went through. Glazer Capital Management, LP v. Magistri, 549 F.3d 736 (9th Cir. 2008) [Slip Opn., at 15765-66]. The class action alleged that defendants violated Section 10(b) of the Securities Exchange Act of 1934, as well as Rule 10b-5. Id., at 15768. Defense attorneys moved to dismiss the class action for failure to plead adequately falsity or scienter under the heightened standards established by the Private Securities Litigation Reform Act (PSLRA); the district court granted the motion and dismissed the class action complaint. Id., at 15766. (Plaintiffs had amended the class action complaint twice, but the district court denied them leave to file a third amended class action complaint. See id., at 15768.) The Ninth Circuit affirmed.
We do not discuss here the facts detailed in the Circuit Court’s opinion, see Glazer Capital, at 15766- 68. The pertinent facts are that, after announcing the merger agreement, (1) “on July 30, 2004, InVision issued a press release stating that an internal investigation had revealed possible violations of the FCPA in connection with certain foreign sales transactions,” and (2) “InVision announced that it had voluntarily reported the activities to the Securities and Exchange Commission (SEC) and the Department of Justice (DOJ), but warned that subsequent investigations could potentially delay or terminate the merger.” Id., at 15767. InVision’s stock price plummeted on the news, and only a few days later the class action complaint was filed. Id. Within a few months, InVision settled with DOJ and with the SEC, and the merger with GE went through. Id., at 15767-78.
The Ninth Circuit explained at page 15768 that “[t]o state a claim under Rule 10b-5, a plaintiff must demonstrate ‘(1) a material misrepresentation or omission of fact, (2) scienter, (3) a connection with the purchase or sale of a security, (4) transaction and loss causation, and (5) economic loss.’” (Citation omitted.) Further, under the heightened pleading requirements of the Private Securities Litigation Reform Act of 1995 (PSLRA), plaintiffs’ class action complaint must “specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed.” Glazer Capital, at 15769 (citation omitted). We do not discuss here the Circuit Court’s analysis of whether the class action adequately alleged falsity, as the Court itself did not reach this issue as to one of the three alleged misrepresentations. See id., at 15770-72. The Ninth Circuit affirmed the dismissal of the class action because it concluded that the complaint “failed to plead scienter adequately with respect to the three statements.” Id., at 15772.
The first “scienter” issue considered by the Ninth Circuit was whether a corporate officer must have the requisite scienter or whether plaintiffs “can rely on a theory of ‘collective scienter,’ which would hold the company as a whole responsible for the statements contained in the merger agreement.” Glazer Capital, at 15773. Plaintiffs urged the Circuit Court to follow decisions from the Second and Seventh Circuits that adopted a “collective scienter” theory for purposes of meeting the PSLRA’s heightened pleading requirements, id., at 15773-74. The Court noted that the Fifth and Eleventh Circuits had rejected this theory, see id., at 15774, but ultimately the Court found it unnecessary to choose sides because plaintiff “rests its securities fraud claim on three statements, all of which appear in a sixty-page legal document” and if the collective scienter theory excused plaintiff “from pleading individual scienter with respect to these legal warranties, then it is difficult to imagine what statements would not qualify for an exception to individualized scienter pleadings.” Id., at 15776. On these facts, then, the Ninth Circuit held “that the PSLRA requires [plaintiff] to plead scienter with respect to those individuals who actually made the false statements in the merger agreement.” Id. Based on the Circuit Court’s analysis, the class action complaint failed to meet this test, see id., at 15776-83, so the district court did not err in dismissing the class action, id., at 15783-84.
NOTE: As a matter of first impression in the Ninth Circuit, the Court addressed “[the] interplay between the reporting requirements of Sarbanes-Oxley and the scienter pleading requirements of the PSLRA.” Glazer Capital, at 15780. The Circuit Court followed the decisions of the Eleventh and Fifth Circuits, which held that the fact senior executives signed Sarbanes-Oxley certifications was insufficient to establish the requisite scienter under the PSLRA. See id., at 15780-81.