September 27, 2013

That Word Does Not Mean What You Think It Means

In its Tellabs decision, the U.S. Supreme Court held that a court must assess a plaintiff's scienter (i.e., fraudulent intent) allegations "holistically" in determining whether the plaintiff has met the requisite "strong inference" pleading standard. The 10b-5 Daily noted at the time of the Tellabs decision that this holding "would appear to alter the evaluation of scienter in the Second Circuit and Third Circuit, both of which have held that a court can examine allegations of motive or knowledge/recklessness separately." The Second Circuit has failed to address this inconsistency, however, leading to decisions that are arguably at odds with binding precedent.

In In re Gentiva Sec. Litig., 2013 WL 5291297 (E.D.N.Y. Sept. 19, 2013), the court addressed allegations that the company violated Medicare rules and artificially inflated the Medicare payments it received. In its first motion to dismiss decision, the court found that the plaintiffs had failed to adequately plead either motive and opportunity to commit fraud or sufficient circumstantial evidence of conscious misbehavior.

As to the amended complaint, the court again concluded that there were insufficient allegations to establish that the "Individual Defendants knew or had access to information showing that Gentiva was pressuring its staff to provide as many therapy visits as possible to receive extra Medicare payments without consideration of patients' needs." On the issue of motive, however, the court found that two of the individual defendants had exercised stock options and sold a significant amount of shares during the class period. It also found that corporate scienter could be "inferred from the 'suspicious' insider stock sales." Accordingly, the court denied the motion to dismiss "to the extent the Plaintiff seeks to establish scienter of the Defendants Malone, Potapchuk, and Gentiva based on a theory of 'motive and opportunity.'"

What does it mean to "holistically" examine the complaint's scienter allegations if they are divided into two categories? The court offers no explanation, but the responsibility ultimately lies with the Second Circuit, which needs to address this question.

Holding: Motion to dismiss denied, with the court curiously stating the plaintiff would "not be permitted to present . . . at trial" a theory of scienter based on circumstantial evidence of misbehavior or recklessness.

Posted by Lyle Roberts at 5:01 PM | TrackBack

September 13, 2013

Leading Off

Securities litigation is at the top of the Supreme Court's docket this fall. On October 7, the first day of the term, the Court will hear three cases - Chadbourne & Parke v. Troice, Proskauer Rose v. Troice, and Willis v. Troice - that have been consolidated for one hour of argument. The topic is the scope of the Securities Litigation Uniform Standards Act ("SLUSA").

SLUSA precludes certain class actions based upon state law that allege a misrepresentation in connection with the purchase or sale of nationally traded securities. In the three related cases, the Fifth Circuit held that the "best articulation of the 'coincide' requirement" is that the fraud allegations must be "more than tangentially related to (real or purported) transactions in covered securities." The Fifth Circuit then concluded that the relationship between the alleged fraud, which centered around the sale of certificates of deposit, and any transactions in covered securities was too attenuated to trigger SLUSA preclusion. The defendants successfully moved for certification on the grounds that the Fifth Circuit's "more than tangentially related" standard was in conflict with the standards articulated by other circuits.

The ABA Preview of Supreme Court Cases has all of the briefs, which include amicus briefs from the United States (petitioners), DRI - the Voice of the Defense Bar (petitioners), Occupy the SEC (respondents), and Sixteen Law Professors (respondents). A preview article in The National Law Journal (Sept. 4 issue - subscrip. req'd) focuses on the perceived threat to law firms and other third parties arising from the Fifth Circuit's decision to allow the state law claims to proceed.

Interestingly, both sides will be represented by prominent Supreme Court advocates: former solicitor general Paul Clement for the defendants (petitioners) and Tom Goldstein for the plaintiffs (respondents).

Posted by Lyle Roberts at 11:46 PM | TrackBack