January 22, 2004

2nd Circuit Clarifies Pleading Standard For '33 Act Claims

Section 11 and Section 12(a)(2) of the Securities Act of 1933 impose liability, under various circumstances, for untrue or misleading statements in registration statements. The statute does not require a plaintiff to establish that the defendant acted with scienter (i.e., fraudulent intent). Nevertheless, a number of federal circuits (3rd, 5th, 7th, and 9th - with only the 8th disagreeing) have found that Federal Rule of Civil Procedure 9(b)'s particularity pleading requirement applies to these claims if they "sound in fraud."

In Rombach v. Chang, 2004 WL 77928 (2d Cir. Jan. 20, 2003), the Second Circuit addressed the issue for the first time. The court noted that Rule 9(b) applies to "all averments of fraud" and "is not limited to allegations styled or denominated as fraud or expressed in terms of the constituent elements of a fraud cause of action." Although fraud is not an element of Sections 11 and 12(a)(2) claims, these claims are often predicated on the same course of conduct that would support a Rule 10b-5 claim. Accordingly, "while a plaintiff need allege no more than negligence to proceed under Section 11 and Section 12(a)(2), claims that do rely upon averments of fraud are subject to the test of Rule 9(b)."

The Rombach plaintiffs brought Section 11, Section 12(a)(2), and Rule 10b-5 claims based on the same course of conduct. Although they asserted that their Section 11 claims did not sound in fraud, the court held that "the wording and imputations of the complaint are classically associated with fraud: that the Registration statement was 'inaccurate and misleading;' that it contained 'untrue statements of material facts;' and that 'materially false and misleading written statements' were issued." Having found that the particularity requirement of Rule 9(b) was applicable, the court then affirmed the lower court's decision that the plaintiffs' had failed to adequately plead that the statements at issue were false or misleading.

Holding: Affirm grant of motion to dismiss.

Quote of note: "The particularity requirement of Rule 9(b) serves to 'provide a defendant with fair notice of a plaintiff's claim, to safeguard a defendant's reputation from improvident charges of wrongdoing, and to protect a defendant against the institution of a strike suit.' These considerations apply with equal force to 'averments of fraud' set forth in aid of Section 11 and Section 12(a)(2) claims that are grounded in fraud."

The New York Law Journal has an article (via law.com - free regist. req'd) on the decision.

Posted by Lyle Roberts at January 22, 2004 3:23 PM | TrackBack
Email this entry to:


Your email address:


Message (optional):