Part VI: Securities Class Actions: Current And Emerging Trends
Previous installments of this series have discussed new pleading requirements under Federal Civil Rule 8(a) and Twombly (here) and the impact of the Supreme Court’s interpretation of the PSLRA ‘s “strong inference” of scienter in Tellabs (here).
Another pleading issue involves whether the “group pleading” doctrine survives the PSLRA and Tellabs. Prior to the PSLRA, some circuits permitted fraudulent statements in corporate documents to be attributed to directors and officers. For example, in Wool v. Tanden Computers, Inc., 818 F.2d 1433 (9th Cir. 1987), the court held that “[i]n cases of corporate fraud where the false or misleading information is conveyed in prospectuses, registration statements, annual reports, press releases, or other ‘group-published information,’ it is reasonable to presume that those are the collective actions of the officers.” See also Serabian v. Amoskeag Bank Shares, Inc., 24 F.3d 357 (1st Cir. 1994); Schwartz v. Celestial Seasonings, Inc., 124 F.3d 1246 (10th Cir. 1997).
The PSLRA, however, requires that each fraudulent statement be pled. In addition, if the statement is based on “information and belief,” each fact supporting the belief must be pled. In view of these requirements, some courts concluded that the group pleading doctrine was no longer viable. See, e.g., Southland Sec. Corp. v. INSpire Ins. Solutions, Inc., 365 F.3d 353 (5th Cir. 2004); Makor Issues & Rights, Inc., 437 F.3d 588 (7th Cir. 2005), reversed on other grounds, 127 S.Ct. 2499 (2007); Gurfein v. Ameritrde, Inc., 411 F. Supp. 2d 416 (S.D.N.Y. 2006).
In contrast, the Ninth and Tenth Circuits, along with some district courts, have concluded that the doctrine is not inconsistent with the dictates of the PSLRA. See, e.g. Howard v. Everex Sys., 228 F.3d 1057 (9th Cir. 2000); Schwartz v. Celestial Seasoning, Inc., 124 F.3d 1246 (10th Cir. 1997); In re Van Der Moolen Holding N.V. Sec. Litig., 405 F. Supp. 2d 388 (S.D.N.Y. 2005).
In Tellabs, the Supreme Court referenced the doctrine. The Seventh Circuit had held that the doctrine did not survive the PSLRA. Since that issue was not before the Supreme Court, it did not rule on the question.
The only post-Tellabs circuit court decision to address the issue held that the group pleading doctrine did not survive the PSLRA. The Winer Family Trust v. Queen, 503 F.3d 319 (3rd. Cir. 2007). That decision is consistent with pre-Tellabs decisions in the circuit.
Next: Confidential witnesses