Part III: Securities Class Actions: Current And Emerging Trends
Since most securities class actions are resolved shortly before or after the motion to dismiss, pleading standards are often critical. The PSLRA adopted the particularity requirement of Rule 9(b) in its specialized pleading standards.
Now however, a new pleading standard has emerged – Federal Civil Rule 8(a). Traditionally, the requirements of this Rule have been viewed as fairly easy to comply with and minimal. Last year however, in Bell Atlantic Corp. v. Twombly, 137 S.Ct. 1955 (2007), the Supreme Court reinvigorated the Rule. After reinterpreting its oft-cited Rule 8 holding in Conley v. Gibson, 355 U.S. 41 (1957), which many had viewed containing a very pro-plaintiff standard, the Court concluded that the Rule has a plausibility standard – a plaintiff must plead a cause of action which is plausible.
While Twombly is an antitrust case, in reaching its conclusion, the Court noted that “[w]e alluded to the practical significance of the Rule 8 entitlement requirement in Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005), when we explained that something beyond the mere possibility of loss causation must be alleged, lest a plaintiff with a ‘largely groundless claim’ be allowed to ‘take up the time of a number of other people, with the right to do so representing an in terrorem increment of the settlement value,’” quoting Blue Chip Stamps v. Manor Drug Stores, 411 U.S. 723 (1975).
The Court’s citation to Dura, a securities class action, as part of the origin of the “plausibility” standard, and Blue Chip Stamps, another securities damage action, for the abusive impact of discovery in meritless cases, clearly suggests that Twombly be applied in securities damage actions as a primary pleading standard.
Subsequently, Twombly has been followed in securities damage actions. In Atsi Communications, Inc. v. The Shaar Fund, Ltd., 493 F.3d 87 (2nd Cir. 2007), the Second Circuit concluded that Twombly applies in securities damage actions. The court went on to affirm the dismissal of a securities damage complaint, concluding in part that the manipulation alleged in the complaint did not pass the “plausibility” test.
The First Circuit adopted a similar approach in ACA Financial Guaranty Corp. v. Advest, 512 F.3d 46, 58 (1st Cir. 2008). Although the court affirmed the dismissal of a securities damage complaint for failure to comply with the PSLRA pleading standards, the Court noted that the Twombly standard applies.
Finally, the Ninth Circuit reached a similar conclusion in Mississippi Public Employees Retirement System v. Boston Scientific Corp., 2008 WL 1735390 (9th Cir. April 16, 2008). See also Foster v. Wilson, 504 F.3d 1046, 1051 (9th Cir. 2007) (affirming the dismissal of a securities class action noting that ‘here the flaw in the federal fraud claim is not a failure to allege sufficient facts, but a failure to state a tenable theory upon which the claim could be established” without citing Twombly).
Next: PSLRA pleading standards – a strong inference of scienter