In re: Initial Public Offering Securities Litigation case brief summary
483 F.3d 70
483 F.3d 70
FACTS:
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:
- Investment banks routinely required substantial investors to participate...in order to receive allotments of these valuable IPO’s
- 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.
- 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.
RATIONALE:
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.
- 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.
- Deterrence
- Accusations of fraud, even if proven untrue, can do serious damage to the goodwill of a business firm or professional person.
- Assertions of fraud often are involved in attempts to reopen completed transactions or set aside previously issued judicial orders.
- Plaintiffs tend to file suit alleging fraud for the wrong reasons
- 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.
- 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
- 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:
- Where a claim is dismisssed as a matter of law becauase it fails to state a claim, repleading would be “futile”
- Where leave to amend or replead has been repeatedly granted, it may be appropriate to deny leave.
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