Those who believe that courts, in the post-Enron environment, should be more willing to temper the heightened pleading requirements of the PSLRA will be encouraged by a recent decision from the N.D. of Ill.
In In re Sears, Roebuck and Co. Sec. Litig., 2003 WL 22454021 (Oct. 24, 2003 N.D. Ill.) (thanks to Adam Savett for the link), the court addressed allegations that the defendants made misstatements "about the risk level of balances in accounts in Sears' credit card portfolio, the delinquencies in those accounts, and the amount of 'charge-offs' of unpaid accounts." The plaintiffs argued that they had established a strong inference of scienter (i.e., fraudulent intent) because the individual defendants were executive officers of Sears and therefore must have known the information that made the alleged misstatements false and misleading. The court agreed, holding: "Officers of a company can be assumed to know of facts 'critical to a business's core operations or to an important transaction that would affect a company's performance.'"
It is difficult to reconcile this decision with the PSLRA. The PSLRA requires plaintiffs to "state with particularity facts giving rise to a strong inference that the defendant acted with the required stated of mind." The mere pleading of a defendant's official corporate title and responsibilities would not appear to be sufficient.
Moreover, the case cited (and quoted!) by the court in support of this proposition, Stavros v. Exelon Corp., 266 F. Supp. 2d 833 (N.D. Ill. 2003) says no such thing. Stavros is a case based on allegedly false financial projections and merely notes, after a discussion of the need to plead scienter with particularity, that a "plaintiff might also plead that key officers knew of facts critical to a business's core operations or to an important transaction that would affect a company's performance." There is no suggestion that this knowledge can be assumed based on the officers' positions with the company. There are cases finding that this assumption is enough to establish a strong inference of scienter (although a significant majority of post-PSLRA cases appear to go the other way - see, e.g., In re Advanta Corp. Sec. Litig., 180 F. 3d 525, 539 (3rd. Cir. 1999)), but Stavros just does not happen to be one of them.
Holding: Motion to dismiss denied.
Quote of note: "Plaintiffs specifically allege that the positions held by each of the individual defendants during the class period gave them knowledge of the specific information in question. . . Logically, defendants in their positions would be expected to have knowledge of the facts regarding the credit card portfolio at the time they were making statements about the portfolio or signing off on SEC filings."Posted by Lyle Roberts at November 6, 2003 1:23 PM | TrackBack