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«Successful Motions to Dismiss Securities Class November 6, 2014 Practice Groups: Actions, A Review of What Worked in 2014 Government Enforcement; ...»

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Successful Motions to Dismiss Securities Class

November 6, 2014

Practice Groups:

Actions, A Review of What Worked in 2014

Government

Enforcement;

U.S. Securities and Transactional Litigation Alert

Securities

Enforcement; By: Jon Eisenberg

Securities and Motions to dismiss have been called “the main event” in securities class actions. They are

Transactional

filed in over 90% of securities class actions and they result in dismissal close to 50% of the Litigation;

time they are filed.1 In contrast, out of 4,226 class actions filed between 1995 and 2013, only Class Action 14 were resolved through a trial, and of those, only five resulted in verdicts for the Litigation Defense;

defendant. 2 In between a denial of a motion to dismiss and a trial are i) discovery, ii) Commercial opposition to class certification, iii) motion for summary judgment, iv) mediation, and iv) Disputes;

settlement. Unfortunately for defendants in securities class actions, class certification is Global Government granted in whole or in part 84% of the time,3 and there is no summary judgment decision at Solutions all over 90% of the time. 4 Thus, for most defendants in securities class actions, a denial of a motion to dismiss usually results in writing a settlement check, often after years of costly discovery. Defendants that fail to give adequate attention to motions to dismiss are shortchanging the very best opportunity they have to avoid what may otherwise become multi-year, expensive litigation.

We previously addressed 75 defenses to securities class actions that are the building blocks for successful motions to dismiss.5 In this alert, we look at recent cases—2014 decisions that relied on established precedents to dismiss securities class actions. Our purpose is not to be exhaustive, but rather to give examples of key defenses that worked well in 2014. All of the cases in the text were decided this year. We have focused on recurring issues of broad application rather than narrow issues unlikely to affect more than a handful of cases.

For highly experienced securities practitioners, much of this will be common knowledge; but for those who face securities class actions only occasionally, it provides a primer and recent authorities on the defenses most likely to form a basis for successful motions to dismiss. We have also included in the endnotes the key Supreme Court cases addr

–  –  –

In Section 10(b) class actions, alleging facts sufficient to support the scienter pleading requirement is particularly challenging. The Private Securities Litigation Reform Act of 1995 (“PSLRA”)—described recently as “[t]he elephant-sized boulder blocking” a plaintiff’s securities class action complaint 12 —requires that, with regard to any claim for damages requiring “proof that a defendant acted with a particular state of mind,” i) the complaint must “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind;” 13 ii) imposes a requirement that every complaint alleging securities fraud must “specify each statement alleged to have been misleading, the reasons 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;” iii) created a safe harbor for forward-looking statements accompanied by meaningful cautionary language; iv) created a second safe harbor for forward-looking statements in which defendants lacked “actual knowledge” that the statements were false or misleading; and v) provided an automatic stay of discovery pending rulings on the motion to dismiss. Further, in addition to the PSLRA, Fed. R. Civ. P. 9(b) requires that in all averments of fraud, plaintiff must plead with particularity the circumstances constituting the fraud, which lower courts have held requires the plaintiff to plead the time, place, speaker, and content of the alleged misrepresentations.14 Plaintiffs also often file under Sections 11 and 12(a)(2) of the Securities Act of 1933, both of which provide express private rights of action. Sections 11 and 12(a)(2) are limited to misrepresentations or omissions in a registration statement or prospectus and, thus, often do not apply to the conduct at issue. On the other hand, when there is a securities offering to which they do apply, they do not require a plaintiff to prove scienter, reliance, or loss causation. 15 As a result, it is often more difficult to obtain complaints alleging misrepresentations or omissions related to a securities offering. In this alert, we consider successful motions to dismiss Section 10(b) class actions. We save for another day an alert covering successful motions to dismiss Sections 11 and 12(a)(2) class actions.

With that background in mind, we turn to 2014 decisions in which courts granted (or affirmed the grant of) motions to dismiss securities class action claims and the key principles on which they relied.

1. Consideration of Documents outside the Pleadings.

One of the developments that has greatly assisted defendants at the motion to dismiss stage has been the courts’ willingness to consider documents outside the pleadings. This is critical because “[w]ere courts to refrain from considering such documents, complaints that quoted only selected and misleading portions of such documents could not be dismissed under Rule 12(b)(6) even though they would be doomed to failure.”16 In In Re Omnicare, Inc. Sec. Litig., 2014 U.S. App. LEXIS 19326 (Oct. 10, 2014), in which the Sixth Circuit affirmed the dismissal of a securities class action complaint, the court explained, “[I]f a plaintiff references or quotes certain documents, or if public records refute a plaintiff’s claim, a defendant may attach those documents to its motion to dismiss, and a court can then consider them in resolving the Rule 12(b)(6) motion without converting the motion to dismiss into a Rule 56 motion for summary judgment.” It further stated, “Fairness and efficiency require this practice.” It cited Fed. R. Evid. 201(b), which states that a court may judicially notice a fact “that is not subject to reasonable dispute because it: i) is generally Successful Motions to Dismiss Securities Class Actions, A Review of What Worked in 2014 known within the trial court’s territorial jurisdiction, or ii) can be accurately and readily determined from sources whose accuracy cannot reasonably be questioned.” On the other hand, it denied plaintiff’s request to have the court take judicial notice of a number of documents (for example, the company’s audit committee charter and the company’s corporate integrity agreement) that the court stated plaintiffs had not referred to in their complaint and that plaintiffs were improperly seeking to introduce for the truth of the statements.





2. Conclusory Allegations.

Although courts generally assume the truth of the facts that are pled in considering a motion to dismiss, they do not have to accept as true conclusory allegations or legal conclusions masquerading as fact.17 In In re Zagg Sec. Litig., 2014 U.S. Dist. LEXIS 15783 (D. Utah Feb. 4, 2014), the court granted a motion to dismiss a securities class action after stating that it would not be bound by a complaint’s “legal conclusions, deductions and opinions couched as facts.” In response to allegations that defendants began a secret succession plan to remove the CEO because of margin calls, the court stated, “Plaintiffs’ general, conclusory assertions … are not sufficient to satisfy the heightened pleading requirements of Rule 9(b), much less the PSLRA’s strong inference requirement.” See also, e.g., Potier v.

JBS Liberty Securities, Inc., 2014 U.S. Dist. LEXIS 141271 (W.D. La. Sept. 29, 2014) (granting motion to dismiss and stating that “conclusory allegations and unwarranted deductions of fact” are not accepted as true on a motion to dismiss).

3. Strong Inference of Scienter.

The failure to plead facts creating a strong inference of scienter is by far the most common basis for granting motions to dismiss securities fraud claims under Section 10(b) of the Securities Exchange Act;18 that continued to be the case in 2014. Among the 2014 appellate court decisions affirming the dismissal of securities fraud class action complaints for failure to plead facts creating a strong inference of scienter are Wolfe v. Aspenbio Pharma, Inc., 2014 U.S. App. LEXIS 20222 (10th Cir. Oct. 17, 2014); Gold v. Ford Motor Co., 2014 U.S. App.

LEXIS 15700 (3d Cir. Aug. 15, 2014); Weinstein v. McClendon, 757 F.3d 1110 (10th Cir.

2014); Philadelphia Financial Management of San Francisco, LLC v. DJSP Enterprises, Inc., 2014 U.S. App. LEXIS 13543 (11th Cir. July 16, 2014) (per curiam); Police Retirement System of St. Louis v. Intuitive Surgical, Inc., 759 F.3d 1051 (9th Cir. 2014); Shemian v.

Research in Motion Limited, 2014 U.S. App. LEXIS 11511 (2d Cir. June 19, 2014) (summary order); In Re Genzyme Corp. Sec. Litig., 754 F.3d 31 (1st Cir. 2014); In re Bank of America AIG Disclosure Sec. Litig., 2014 U.S. App. LEXIS 9197 (2d Cir. May 19, 2014) (summary order); Kuyat v. BioMimetic Therapeutics, Inc., 747 F.3d 435 (6th Cir. 2014); Applestein v.

Medivation, Inc., 2014 U.S. App. LEXIS 4318 (9th Cir. Mar. 7, 2014); Yates v. Municipal Mortgage & Equity, LLC, 744 F.3d 874 (4th Cir. 2014); and Sinay v. CNOOC Ltd., 2014 U.S.

App. LEXIS 2010 (2d Cir. Feb. 3, 2014) (summary order). Suffice it to say that in most securities fraud cases, the best argument for dismissal will be the failure to plead with particularity concrete, non-conclusory facts creating a strong inference of scienter.

4. Corporate Scienter.

A recurring issue in securities class actions is the relationship between corporate scienter and individual scienter. May a corporation be accused of scienter without allegations that a Successful Motions to Dismiss Securities Class Actions, A Review of What Worked in 2014 particular individual acted with scienter? Does scienter of a junior employee suffice to allege corporate scienter?

In In Re Omnicare, Inc. Sec. Litig., 2014 U.S. App. LEXIS 19326 (Oct. 10, 2014), the Sixth Circuit affirmed the dismissal of a securities class action complaint after considering a number of alternative approaches to the relationship between corporate scienter and individual scienter. It concluded that, going forward within the Sixth Circuit, the state of mind of the following persons are probative of whether a misrepresentation made by a corporation

was made by it with the requisite scienter:

1. The individual agent who uttered or issued the misrepresentation;

2. Any individual agent who authorized, requested, commanded, furnished information for, prepared (including suggesting or contributing language for inclusion therein or omission therefrom), reviewed, or approved the statement in which the misrepresentation was made before its utterance or issuance; and

3. Any high managerial agent or member of the board of directors who ratified, recklessly disregarded, or tolerated the misrepresentation after its utterance or issuance.… The court stated that this formulation protects corporations from strike suits when “one individual unknowingly makes a false statement that another individual, unrelated to the preparation or issuance of the statement, knew to be false or misleading.” On the other hand, it permits liability if lower-level employees “knowingly provide false information to their superiors with the intent to defraud the public.” Applying this standard, the court of appeals affirmed the district court’s holding that the allegations did not support a strong inference of corporate scienter.

5. Confidential Witness Statements.

Increasingly, plaintiffs seek to meet the demand requirements of pleading facts creating a strong inference of scienter by relying on confidential witness statements—often by disgruntled former company employees. Courts, however, often grant motions to dismiss complaints involving confidential witnesses. For example, in Applestein v. Medivation, Inc., 2014 U.S. App. LEXIS 4318 (9th Cir. Mar. 7, 2014), the court of appeals affirmed the lower court’s dismissal of claims purportedly supported by three confidential witness statements.

The court stated that, “confidential witness statements may be relied on only ‘where the confidential witnesses are described with sufficient particularity to support the probability that a person in the position occupied by the source would possess the information alleged’ and the complaint ‘provide[s] an adequate basis for determining that the witnesses in question have personal knowledge of the events they report.’”19 It agreed with the district court that plaintiffs failed to plead factors supporting an inference that the confidential witnesses had personal knowledge of the relevant information. Other recent decisions affirming the dismissal of complaints with confidential witness statements include, for example, In Re Omnicare, Inc. Sec. Litig., 2014 U.S. App. LEXIS 19326 (6th Cir. Oct. 10, 2014); In Re NVIDIA Corp. Sec. Litig., 768 F.3d 1046 (9th Cir. 2014); Yates v. Municipal Mortgage & Equity, LLC, 744 F.3d 874 (4th Cir. 2014); and City of Edinburgh Council v. Pfizer, 754 F.3d 159 (3d Cir. 2014).

Successful Motions to Dismiss Securities Class Actions, A Review of What Worked in 2014

6. Insider Sales.

Plaintiffs frequently rely on sales by insiders to support an inference of scienter. In Yates v.

Municipal Mortgage & Equity, LLC, 744 F.3d 874 (2014), the Fourth Circuit affirmed the dismissal of a securities class action complaint despite allegations of insider sales during the class period. The court stated that the sales occurred at regular intervals and amounts when compared to earlier periods, that the volume of the trading was not suspicious, that some of the trades occurred under nondiscretionary Rule 10b-5 plans, and that a lengthy class period makes it difficult to infer intent from a stock sale since insider selling is not unusual.

Similarly, in City of Bristol Pension Fund v. Vertex Pharmaceuticals Inc., 2014 U.S. Dist.



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