Class Action Complaint Alleging Securities Fraud Failed to Adequately Plead Misrepresentation or Scienter under Heightened Pleading Requirements Established by Private Securities Litigation Reform Act (PSLRA) New Jersey Federal Court Holds
Plaintiffs filed a putative class action against Heartland Payment Systems and others alleging violations of federal securities laws; specifically, the class action complaint alleged that defendants concealed information and/or made affirmative misrepresentations that were material to the value of the company’s stock and that plaintiffs suffered damage because the company’s stock value declined almost 80%. In re Heartland Payment Systems, Inc. Securities Litig., U.S.D.C. Case No. 09-1043 (D.N.J. December 7, 2009) [Slip Opn., at 1, 3.] According to the allegations underlying the class action complaint, Heartland “provides bank card payment processing services to merchants” and “maintains millions of credit and debit card numbers on its computer network.” Id., at 1. In 2008, Hackers managed to steal 130 million credit and debit card numbers from Heartland. Id., at 2. At the time of the theft, the company believed hackers had targeted solely the “payroll manager application” which “does not contain data on cardholders’ credit and debit card accounts” but rather “internal corporate information such as employees’ names, addresses, social security numbers, and other confidential information.” Id. Heartland did not discover the full extent of the breach until January 2009, at which time it “immediately notified the U.S. Department of Justice, the U.S. Secret Service, and the credit card companies who account numbers had been stolen,” and soon thereafter “publicly disclosed the theft.” Id. Following the public disclosure, Heartland’s stock price dropped dramatically, id. Plaintiffs filed their class action complaint on the theory that company statements concerning the adequacy of its security systems were fraudulent because the company was “aware that Heartland had poor data security and had not remedied the problem.” Id., at 3. Defense attorneys moved to dismiss the class action on the grounds that it failed to satisfy the heightened pleading requirements of the Private Securities Litigation Reform Act (PSLRA), id. The district court granted the motion.
The district court explained that the PSLRA requires a plaintiff “to plead the ‘who, what, when, where, and how’ of the allegedly fraudulent statements.” In re Heartland, at 3-4 (citing Institutional Investors Group v. Avaya Inc., 564 F.3d 242, 252 (3d Cir. 2009). Moreover, the PSLERA “requires that the complaint ‘state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.’” Id., at 4 (citation omitted). The federal court agreed with defense attorneys that the class action complaint failed to adequately allege a material misrepresentation, see id., at 5-11. The court agreed further that the class action failed to adequately plead the requisite scienter to support the class action claims. See id., at 11-13. The district court therefore found it unnecessary to address defendant’s loss causation argument. See id., at 5, 13-14. The court dismissed the class action complaint without leave to amend, concluding that “further specificity would not cure the Complaint’s deficiencies,” id., at 14.