September 21, 2006

You, Sir, Are A No-Good Defrauder

Whether plaintiffs who combine nonfraud and fraud securities claims in the same complaint are subject to the particularity pleading requirement of Fed. R. of Civ. P. 9(b) has been an open issue. Although claims under Section 11 and Section 12(a)(2) of the Securities Act of 1933 do not require the plaintiff to establish fraudulent intent, a number of federal circuits (2nd, 3rd, 5th, 7th, and 9th - with only the 8th disagreeing) have held that these claims must be plead with particularity if they "sound in fraud" based on the existence of a related securities fraud claim.

The U.S. Court of Appeals for the Eleventh Circuit has joined the majority position this week. In Jacobson v. First Horizon Pharm. Corp., 2006 WL 2661652 (11th Cir. Sept. 18, 2006), the court found that a Section 11 or Section 12(a) claim "must be pled with particularity when the facts underlying the misrepresentation at stake in the claim are said to be part of a fraud claim, as alleged elsewhere in the complaint."

The court also addressed whether the complaint was improperly dismissed pursuant to Fed. R. Civ. P. 12(b)(6) on the basis that it was a "shotgun pleading" that did not clearly link its alleged facts to the causes of action. Interestingly, the district court had granted the dismissal and conditioned any amendment of the complaint "on the [plaintiffs'] payment of the defendants' costs and fees associated with the motion to dismiss." On appeal, the court avoided that issue by holding that instead of dismissing the complaint, the district court should have sua sponte ordered a repleading for a more definitive statement of the claim pursuant to Fed. R. Civ. P. 12(e).

Quote of note: "It is not enough to claim that alternative pleading saves the nonfraud claims from making an allegation of fraud because the risk to the defendant's reputation is not protected. It would strain credulity to claim that Rule 9(b) should not apply in this allegation: The defendant is a no good defrauder, but, even if he is not, the plaintiff can still recover based on the simple untruth of the otherwise fraudulent statement."

Posted by Lyle Roberts at September 21, 2006 9:31 PM | TrackBack
Email this entry to:


Your email address:


Message (optional):