What’s the Difference?

Defendants cried foul in the Veritas securities class action, claiming that “plaintiffs have not pled fraud with adequate specificity because no ‘dates, transactions, customer names and amounts by which revenue was allegedly misstated’ were disclosed. Did it work you smartly ask? Well, not one bit actually, as Chief Judge Sue L. Robinson (D. Del.) quickly schooled them that “the requirement for particularity in pleading fraud does not demand an exhaustive cataloging of facts, but only specificity sufficient to provide assurance that plaintiffs have investigated the alleged fraud and reasonably believe that a wrong has occurred.”

You see, “the court concludes that plaintiffs have adequately pled facts regarding improper revenue recognition” because “the complaint, based in part on former Veritas employees with personal knowledge of the wrongdoings, alleges a scheme by defendants to inflate the company’s revenue numbers by including ‘sales’ from contracts that had not been signed by the customer or that were missing essential terms such as price.”

Also, “the complaint alleges that these fraudulent activities were ‘standard practice’ at the company, that they happened ‘all the time,’ and that incomplete or unsigned contracts were personally approved by defendant Brigden who, when confronted about this practice, stated, ‘What’s the difference? We already know what the numbers for the quarter are.’ So, “under the circumstances, the court finds the pleading is adequate to withstand a motion to dismiss.”

You can read In re Veritas, issued May 23, 2006, at 2006 U.S. Dist. LEXIS 32619.

Nugget: “No manner of cautionary language can cure false statements knowingly made.”

Half Full

We had Plaintiffs getting hammered the other day, but now it’s time to turn the tables. This time it’s Defendants who get stomped, and oh boy, do they get stomped. Listen to these comments from Judge Curtis Joyner (E.D. Pa.) on the motions to dismiss in the Select Medical securities class action.

O.K., well, let’s see, Judge Joyner concluded that Defendants’ arguments are “unpersuasive and irrelevant,” “would entirely undermine the Exchange Act’s fraud provisions,” “ignores significant distinctions,” they “offer no legal authority for this conclusion,” “present no binding authority,” “is not persuasive,” “is unavailing,” “present no legal authority for the categorical exclusion of second-hand knowledge,” “is seriously misplaced,” “have not persuaded us otherwise,” their “reliance on the lack of market reaction is misplaced,” make unpersuasive “conclusory arguments” regarding “the confidential witnesses” “offer no authority,” “cannot defend alleged material omissions by noting that their statements omitted the same information on which Plaintiffs’ claims are based,” and to top it all off, “we reject Defendants characterization of the case.”

But that’s just on the issues of on the issues of materiality, duty, safe harbor, bespeaks caution, particularity, confidential witnesses, loss causation, and scienter. This glass is half full, as Defendants did “correctly point out that it is not a violation of the securities laws to simply fail to . . . provide sufficient internal controls.” Nice.

Result? Plaintiffs take near total victory on the motions.

You can read Marsden v. Select Medical, issued April 6, 2006, at 2006 U.S. Dist. LEXIS 16795.

Nugget: “Because we have found that Plaintiffs have identified actionable statements made earlier in the Class Period, we will not dismiss their claims based on post-Class Period statements.”

Try Try Again

Defendants can score a victory for themselves in the Invision Technologies securities class action, with Judge Martin J. Jenkins (N.D. Cal.) granting their motions to dismiss the 1934 Act claims. It seems the case centers around Invision’s March 15, 2004 “press release announcing that it was being acquired by General Electric Company.” You see, it seems a few months after this announcement, “InVision issued another press release, this time saying that the DOJ and the SEC were investigating several transactions involving InVision employees located abroad, in which employees allegedly made payments to foreign officials in violation of the FCPA.”

In rejecting Plaintiffs’ complaint, Judge Jenkins said that “the language cited by Plaintiffs contains broad assertions about Defendants’ duty to disclose that are vague in nature,” “are not specifically directed to the March 15 Announcement,” and “do not explain why that statement in particular was false or misleading.” He also commented that “obviously, Plaintiffs’ factual allegations must be based upon what Defendants actually said, not upon Plaintiffs’ desired interpretation of what Defendants said. Here Plaintiffs’ factual allegations, even viewed in the light most favorable to Plaintiffs, do not in any way illuminate the truth or falsity of Defendants’ actual Certification statements. Therefore, Plaintiffs have failed to meet their PLSRA burden in this respect.”

But all may not be lost. Judge Jenkins is going to allow Plaintiffs to submit another amended complaint, but warned that “vague assertions and allegations, scattered throughout Plaintiffs’ Complaint will not serve to meet their PLSRA burden.”

You can read In re Invision, issued January 24, 2006, at 2006 U.S. Dist. LEXIS 12166.

Nugget: “In order for the Court to construe the allegations, as plead, as actually alleging the falsity of Defendants’ Certification statements, the Court would have to interpret Defendants’ statements well beyond their plain meaning. The Court declines to do so.”

Note: A quick check of the docket reveals that Plaintiffs have already filed an amended complaint, and that Judge Jenkins has set the oral argument on the next round of motions for June 6, 2006 at 9:30 A.M. So don’t change that dial.

Back to the Drawing Board

Judge Neil Vincent Wake (D. Ariz.) has given Plaintiffs 30 days to try again in the Hypercom securities class action. In tossing the amended complaint, Judge Wake found that “Plaintiffs allege little more than the fact that Hypercom issued a financial restatement because of GAAP violations. The amount of the restatement is not overly probative. Plaintiffs have failed to allege with particularity how the GAAP violations were so obvious that Smolak and Alexander must have known about the misclassification. The culpability statement only provides that there were internal control deficiencies, which caused the accounting error. Such a culpability statement does not establish a strong inference that Defendants misrepresented Hypercom’s financial figures with knowledge or deliberate recklessness.”

“Furthermore, the allegations of one confidential witness in this case fail to raise the level of the inference to ‘strong.’ While Plaintiffs may have alleged facts establishing a reasonable inference of scienter, the standard is a strong inference, which Plaintiffs have not raised. Therefore, Plaintiffs’ claim that Defendants violated Section 10(b) of the Securities Exchange Act of 1934 is dismissed without prejudice.”

You can read In re Hypercom, issued January 26, 2005, at 2006 U.S. Dist. LEXIS 2669.

Nugget: “Plaintiffs need to plead particularized facts establishing a strong inference that Defendants acted with scienter, not mere negligence.”

Fifth Circuit Tanks Amresco Action

The Fifth Circuit has spoken, and it looks like it could be the end of the line for investors in the Amresco securities class action. You see, despite that fact that Plaintiffs’ contested the district court’s order: “(1) implicitly denying application of collateral estoppel; (2) striking part of their expert’s affidavit; (3) holding the SAC (second amended complaint) failed to satisfy the PSLRA‘s pleading requirements; and (4) denying leave to amend the SAC,” the Fifth Circuit didn’t budge.

The Panel first held that “the district court correctly rejected group-pleading allegations.” Next, it noted that “an Individual Defendant is not liable for an Amresco business filing unless he either signed it or was involved in its creation,” and that “Plaintiffs provide no specific facts either tying any of the Individual Defendants to such filings they did not sign or demonstrating scienter for any filings they did sign.” Plus, “Plaintiffs’ mere allegation that the Individual Defendants were motivated by a desire to retain their jobs does not satisfy the scienter requirement.,” and “Plaintiffs never pleaded with specificity how, or why, Deloitte was unreasonable in failing to determine Amresco did not have a reasonable turnaround plan.”

Finally, the Panel considered Plaintiffs’ argument that “even if their SAC was properly dismissed, they should have been granted leave to amend (to permit a fourth try).” Rejecting this position, they held that “in seeking to avoid dismissal, Plaintiffs’ opposition employed facts claimed unavailable when filing the SAC. Although they had three prior opportunities to produce this information, and although they claimed the facts were previously unavailable and that others might become known, Plaintiffs did not explain why they were unable to obtain the information before filing the SAC. In other words, they never explained this to the district court as a basis for being allowed leave to file a fourth complaint. In short, Plaintiffs never provided the requisite specificity for leave to file a fourth complaint.”

You can read Financial Acquisition Partners v. Blackwell here, issued February 14, 2006, or at 2006 U.S. App. LEXIS 3523.

Nugget: “Even if non-opinion portions of an expert’s affidavit constitute an instrument pursuant to Rule 10, opinions cannot substitute for facts under the PSLRA.”

Dismiss it Like a Ford

Well, the Second Circuit has sure made a quick job of the Ford securities class action, which had been tossed out by Judge Charles S. Haight (S.D.N.Y.) earlier this year. After summarizing the procedural history and a bit of the facts, the Panel said “upon de novo review, we conclude, substantially for the reasons set forth in the District Court’s thoughtful and comprehensive opinions, that the amended complaint was properly dismissed for failure to plead with particularity that defendants made any material misrepresentation or omission with scienter.”

That’s it folks. No analysis, no discussion, just a swift kick to the curb. Ouch.

You can read Fadem v. Ford Motor Co., issued December 7, 2005, here, or at 2005 U.S. App. LEXIS 26839.

Nugget: “We have considered all of plaintiffs’ arguments on appeal and find them to be without merit.”

Confidential Sources Not Identified With Particularity

Judge Jose L. Linares (D. N.J.) has ruled that Defendants’ motions to dismiss in the PDI securities class action will be granted in part and denied in part. Of course, reading the decision, at the end you might be wondering what portion of the motions were denied. Well, many of the statements were forward looking, but Judge Linares found that the safe harbor defense could not rescue defendants, saying “the adequacy of the warnings is not so obvious to this Court.” Of course, that doesn’t help too much when the next thing the court says is that your complaint “does not plead any particularized facts to support an inference that Defendants had actual knowledge of their statement’s falsity.”

The decision is quite fact specific and analyzes each of the alleged false statements in depth, but of note is the court’s discussion of confidential sources. The court said “Plaintiffs fail to plead falsity of Defendants’ statements with the particularity demanded by the Reform Act because the confidential sources relied upon by Plaintiffs are not accompanied by corroborative facts. Notably, Plaintiffs have failed to provide supporting facts that explain what department the ‘former senior PDI employee’ worked in, what Saldarini actually said, and what other parties were present. Similarly, Plaintiffs have not provided any details on how the ‘former PDI regional manager’ determined that it was allegedly ‘common knowledge at PDI’ that Evista was guaranteed to lose money — that is, to whom was this language common, and when and how did this knowledge become common. In light of the foregoing, this Court finds that Plaintiffs’ sources have not been described with sufficient particularity to support the probability that a person in the position occupied by the source would possess the information alleged, and therefore, Plaintiffs have failed to plead the falsity of Defendants’ statements with the particularity demanded by the Reform Act.”

You can read In re PDI Securities Litigation, issued August 17, 2005, at 2005 U.S. Dist. LEXIS 18145.

Nugget: “The Court does not see any basis to justify denying Plaintiffs leave to amend. Accordingly, this request is granted, and Plaintiffs are hereby granted leave to amend the Second Amended Complaint.”

ABFS dismissed

Judge O’Neil (E.D. Pa.) has dismissed the American Business Financial Services action in its entirety. In his decision, he finds Plaintiffs’ allegations concerning ABFS’ loan delinquency rates failed to meet the PSLRA’s requirements for falsehood, materiality, and scienter. Although the Plaintiffs were successful in providing the proper background information of the five confidential witnesses, they weren’t particular enough with the information they provided. Also, the court indicated that it would not dismiss claims pertaining to false statements made after the named Plaintiffs’ final stock purchase, as long as false statements or omissions were made prior to the last purchase, and they were part of a common scheme to defraud. But there was no such occasion, as the court, after rejecting general application of the group pleading doctrine (but allowing individual liability for group published documents), proceeded to find the scheme alleged by Plaintiffs was not particularized, and even if it was, it was simply not material to investors. Twenty days were given to amend.

Finally, something we can all agree on: “Obviously, there can be no securities fraud liability for a true statement.”

Nugget: “While insider sales are one way to prove scienter, they are not required.”