Class Action Complaint Alleging Securities Laws Violations Failed to Satisfy Heightened Pleading Requirements of Private Securities Litigation Reform Act (PSLRA) California Federal Court Holds
Plaintiffs filed a class action against Downey Financial and certain current and former officers and directors alleging violations of federal securities laws; the class action complaint asserted that defendants violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10(b)-5, and of Section 20(a) of the Act. In re Downey Securities Litig., ___ F.Supp.2d ___ (C.D.Cal. March 18, 2009) [Slip Opn., at 1-2]. The class action was consolidated with a similar class, and lead plaintiff filed a first amended consolidated class action complaint. Id., at 2. According to the allegations underlying the class action, “the decline in Downey’s shareholder value resulted from alleged misrepresentations made to the investing public by Downey’s current and former officers and/or directors, and not from the current economic climate,” id. Defense attorneys for the individual defendants moved to dismiss the class action, id., at 1-2; defendants argued that the complaint failed to meet the heightened pleading requirements of the Private Securities Litigation Reform Act (PSLRA), id., at 4. The district court agreed and dismissed the class action.
After discussing the PSLRA, the district court turned to the misstatements or omissions attributed to the individual defendants. See In re Downey, at 4-5. The federal court noted that generally “only those defendants who actually make a false or misleading statement will be liable under section 10(b) or Rule 10(b)-5,” id., at 5 (citation omitted), but under Ninth Circuit authority “‘an individual may become a primary violator through “substantial participation or intricate involvement in the preparation of fraudulent statements” even if he did not actually make the statements,’” id., at 5-6 (citation omitted). And based on the Supreme Court opinion in Stoneridge Investment Partners, LLC v. Scientific-Atlantic, Inc., 128 S.Ct. 761 (2008), courts “dismiss actors (including insiders) who have not made any misleading statements, either explicitly or implicitly because plaintiffs could not prove reliance on their actions.” Id., at 6 (citation omitted). The district court found that the complaint failed to state claims against the individual defendants because “there is not a single actionable misrepresentation or omission in the 161 pages of the [class action complaint] attributed to the Individual Defendants.” Id. The district court further concluded that the class action complaint failed to adequately plead scienter. See id., at 8-15. And finally, the court found that plaintiff failed to adequately plead loss causation. See id., at 15-16.
Turning to the alleged violation of Section 20(a), the district court readily concluded that the class action complaint failed to state a claim because the Section 10(b) claim failed. See In re Downey, at 16. Accordingly, the federal court granted the defense motion to dismiss the class action complaint, but granted plaintiff leave to amend. Id., at 17.