July 13, 2012

Single Central Risk

The U.S. Court of Appeals for the First Circuit has issued a short, interesting decision discussing the "holistic" evaluation of scienter allegations. In In re Boston Scientific Corp. Sec. Litig., 2012 WL 2849660 (1st Cir. July 12, 2012), the company allegedly failed to disclose that it had fired ten sales personnel, who ended up going to a competitor and taking business with them. The district court found it was a material omission, but dismissed the claim based on the plaintiffs' failure to adequately plead a strong inference of scienter (i.e., fraudulent intent).

On appeal, the plaintiffs argued that the district court had failed to consider their scienter allegations holistically, as required by the Supreme Court in its Tellabs decision. The First Circuit noted that it was true that "allegations that are individually insufficient can sometimes combine together to make the necessary showing." In the instant case, however, "a single central risk existed - that sales personnel might leave and perhaps take some of their business with them." While that risk became greater over time, to the point where the district court decided that failure to disclose it was a material omission, the potential lost business was "extremely modest in relation to revenues." Accordingly, the court held that there was no basis for concluding that the defendants "were dishonest or at least reckless in failing to mention" something so marginally material.

Holding: Dismissal affirmed.

Posted by Lyle Roberts at July 13, 2012 8:48 PM | TrackBack
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