Opinion ID: 2827972
Heading Depth: 3
Heading Rank: 2

Heading: Inference of Scienter

Text: Taking these allegations together, we must decide “if a reasonable person would deem the inference of scienter cogent and at least as compelling as any plausible opposing inference one could draw from the facts alleged.” Tellabs, 551 U.S. at 324 (emphasis added). The district court found the complaint was devoid of particularized facts giving rise to any inference of scienter. We agree the facts above do not adequately allege that the omission of the pledged securities was done with the knowledge of a danger of misleading investors. But plaintiffs also contend that even if the facts alleged do not show Pedersen knew, at the time the omissions occurred, that the failure to reveal the margin account would likely mislead investors, there is enough to find he “acted with a reckless disregard of a substantial likelihood of misleading investors.” Nakkhumpun, 782 F.3d at 1150. They contend the danger of misleading investors by not disclosing that nearly 9 percent of the company was pledged as collateral in a margin account was so obvious that Pedersen must have been aware. As we noted above, recklessness in this context “is a particularly high standard,” Dronsejko, 632 F.3d at 668, something closer to “a state of mind approximating actual intent.” S. Cherry St., LLC v. Hennessee Grp. LLC, 573 F.3d 98, 109 (2d Cir. 2009) (emphasis omitted). If the standard was negligence or even gross negligence, plaintiffs’ argument may hold water. But we cannot say that plaintiffs’ identification of a failure to comply with Item 403(b)’s requirement to -22- “indicate, by footnote or otherwise, the amount of shares that are pledged as security,” 17 C.F.R. § 229.403(b), is evidence of conduct that was “an extreme departure from the standards of ordinary care,” Fleming, 264 F.3d at 1265, or “akin to conscious disregard,” In re Level 3, 667 F.3d at 1343 n.12. And when the lack of any particularized facts that would tend to establish that Pedersen knew of Item 403(b)’s requirement is paired with the fact that he personally disclosed the margin account after each margin call, we cannot say there is an inference that Pedersen “acted with a reckless disregard of a substantial likelihood of misleading investors.”6 Nakkhumpun, 782 F.3d at 1150. Even if we were to give the plaintiffs the benefit of saying that the complaint gives rise to some plausible inference of scienter, it is not the strong inference required by the PSLRA. Tellabs, 551 U.S. at 314 (“It does not suffice that a reasonable factfinder plausibly could infer from the complaint’s allegations the requisite state of mind.”). To be strong, the inference of scienter must be “cogent and at least as compelling as any opposing inference one could draw from the facts alleged.” Id. at 324. Here, ZAGG and Pedersen have put forward the plausible, 6 Plaintiffs’ recklessness argument at times equates Pedersen’s knowledge of an allegedly material fact with an inference of scienter. But “allegations that the defendant possessed knowledge of facts that are later determined by a court to have been material, without more, is not sufficient to demonstrate that the defendant intentionally withheld those facts from, or recklessly disregarded the importance of those facts to, a company’s shareholders in order to deceive, manipulate, or defraud.” Fleming, 264 F.3d at 1260; see also Weinstein, 757 F.3d at 1114 (“Plaintiffs have not shown anything more than alleged knowledge of arguably material facts.”). -23- nonculpable inference that Pedersen did not know Item 403(b)’s requirement and that he believed he appropriately disclosed the margin account, whether by Form 4 or Form 144, following each margin call. Thus, we must ask whether “a reasonable person [would] deem the inference of scienter at least as strong as any opposing inference,” id. at 326, and here the answer is clearly, no. In sum, the district court was correct to conclude the plaintiffs’ suit could not proceed.