Thursday, January 24, 2013

In re: Initial Public Offering Securities Litigation case brief summary

In re: Initial Public Offering Securities Litigation case brief summary
483 F.3d 70

There was a class action suit that was brought against a series of underwriters, banks, and agents, because the plaintiffs believed that the following conspiracy had taken place:
  1. Investment banks routinely required substantial investors to order to receive allotments of these valuable IPO’s
  2. The companies going public and their officers profited handsomely by taking advantage of the inflated value of the stock to raise capital, enter into mergers and acquisitions, or sell their individual holdings at enormous allocations.
  3. To hide the scheme from the investing public, the investment banks, companies, and officers violated existing securities laws by making misleading statements in offering documents and by manipulating the market.
The end result was that thousands of ordinary investors (the plaintiffs) saw the value of their holdings plummet as a result of this unlawful conduct.

ISSUE: Whether Rule 9 or PSLRA should take precedence when handling a case alleging securities fraud

RULE: The two can act simultaneously, though most actions are governed by one or the other.


While Rule 8 of the FRCP requires “only a short and plain statement of the claim showing the pleader is entitled to relief”, Rule 9 (the governing rule in the FRCP when dealing with instances of fraud) requires that the circumstances constituting fraud be stated with particularity. Moreover, the Private Securities Litigation Reform Act requires two more things. First, when pleading that a defendant has made a material misstatement or omission on which the investing public relies, the complaint must specify each statements alleged to have been misleading, the reason the statement is misleading, and, if the misstatement is alleged on information and belief, the facts on which the belief is formed. Second, when a securities fraud claim requires that a defendant act with fraudulent intent, the complaint must “State with particularity facts giving rise to a strong inference that the defendant acts with the required state of mind.”

There are two fundamental reasons why Rule 9(b) requires particularity.
  1. Notice - General accusations of fraud are thought to be too amorphous  to provide defendants with sufficient notie to permit a response. Fraud embraces such a wide variety of potential conduct that a defendant needs a substantial amount of particularized information about plaintiff’s claim in order to enable him to understand it and effectively prepare a response.
  2. Deterrence
    1. Accusations of fraud, even if proven untrue, can do serious damage to the goodwill of a business firm or professional person.
    2. Assertions of fraud often are involved in attempts to reopen completed transactions or set aside previously issued judicial orders.
    3. Plaintiffs tend to file suit alleging fraud for the wrong reasons
      1. Some fraud claims are nothing more than “strike suits”, that is attempts by plaintiffs to extract settlements from defendants who would rather pay the plaintiff than face the cost of discovery and trial.
      2. To conduct “fishing expeditions” where a party files a complaint containing general allegations of fraud in hopes that subsequent discovery will uncover enough evidence to substantiate allegations
      3. Used by people who have felt a loss and want someone to blame for it.

Particularity deters claims of fraud by creating a disincentive to the filing of claims for an improper reason and increasing the cost of filing the complaint by forcing a plaintiff to conduct a more substantial investigation of the grounds for her claim before bringing suit.

When adding the PSLRA to the mix, plaintiffs are required to
1) specify each statements alleged have been misleading,
2) the reason(s) why the statement is misleading, and
3) 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 under 15 U.S.C. § 78 u-4(b)(1).

(b)(2) requires plaintiffs to state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind. This may be satisfied by showing “motive and opportunity to commit fraud” or “strong circumstantial evidence of conscious misbehavior or recklessness.”

Thus, Rule 9(b) governs generally, but the PSLRA governs specifically.

The court also determined that portions of those claims that are dismissed should be blocked from repleading, saying that there are two main reasons to block them:
  1. Where a claim is dismisssed as a matter of law becauase it fails to state a claim, repleading would be “futile”
  2. Where leave to amend or replead has been repeatedly granted, it may be appropriate to deny leave.
In this particular case, the plaintiffs had been notified of the defense’s issues with their complaint and more or less all of the holes that defense counsel saw in their pleading strategy. Moreover, they were advised by the courts to attempt to amend their complaints. They made no such effort. Thus, the court affirmed the decision to dismiss some of the pleadings, but allowed others to continue forward.

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