Opinion ID: 223134
Heading Depth: 2
Heading Rank: 1

Heading: The Elements of Securities Fraud

Text: For plaintiff to prevail on its claim that defendants violated Section 10(b) and Rule 10b-5, it must prove six elements: (1) a material misrepresentation or omission; (2) scienter, or a wrongful state of mind; (3) a connection with the purchase or sale of a security; (4) reliance; (5) economic loss; and (6) loss causation. Waters Corp., 632 F.3d at 756. This case turns on the second of these requirements, scienter, and the question of whether plaintiff has produced sufficient competent evidence that defendants acted with scienter to survive their motion for summary judgment. [14] Scienter is an intention to deceive, manipulate, or defraud. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 & n. 12, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976); see also SEC v. Ficken, 546 F.3d 45, 47-48 (1st Cir.2008). Under this circuit's precedent, proving scienter requires a showing of either conscious intent to defraud or `a high degree of recklessness.' ACA Fin. Guar. Corp. v. Advest, Inc., 512 F.3d 46, 58 (1st Cir.2008) (quoting Aldridge v. A.T. Cross Corp., 284 F.3d 72, 82 (1st Cir. 2002)). Recklessness in this context means a highly unreasonable omission, involving not merely simple, or even inexcusable[] negligence, but an extreme departure from the standards of ordinary care, and which presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious the actor must have been aware of it. SEC v. Fife, 311 F.3d 1, 9-10 (1st Cir.2002) (quoting Greebel v. FTP Software, Inc., 194 F.3d 185, 198 (1st Cir.1999)) (internal quotation marks omitted). Although this case turns on scienter, it is important to identify the related requirement of materiality. See BSC I, 523 F.3d at 87 (Knowingly omitting material information is probative, although not determinative, of scienter.). As the Supreme Court recently stated in Matrixx Initiatives, Inc. v. Siracusano, ___ U.S. ___, 131 S.Ct. 1309, 179 L.Ed.2d 398 (2011), the materiality requirement is satisfied when there is `a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the total mix of information made available.' Id. at 1318 (quoting Basic Inc. v. Levinson, 485 U.S. 224, 231-32, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988)) (internal quotation marks omitted). The Court explained that it was `careful not to set too low a standard of materiality,' for fear that management would `bury the shareholders in an avalanche of trivial information.' Id. (quoting Basic, 485 U.S. at 231, 108 S.Ct. 978). But at the same time, the Court rejected the use of a bright line rule that reports of adverse events associated with a pharmaceutical company's products cannot be material absent a sufficient number of such reports to establish a statistically significant risk that the product is in fact causing the events. Id. at 1318-19. The Court explained that because medical professionals and regulators act on the basis of evidence of causation that is not statistically significant, it stands to reason that in certain cases reasonable investors would as well. Id. at 1321. The Court cautioned, however, that it was not holding that all adverse events must be disclosed. It stressed that Rule 10b-5 and Section 10(b) do not create an affirmative duty to disclose any and all material information. Id. It explained that disclosure is required under these provisions only when necessary `to make... statements made, in the light of the circumstances under which they were made, not misleading.' Id. (quoting 17 C.F.R. § 240.10b-5(b)); see also Basic, 485 U.S. at 239 n. 17, 108 S.Ct. 978 (Silence, absent a duty to disclose, is not misleading under Rule 10b-5.). The Court explained that [e]ven with respect to information that a reasonable investor might consider material, companies can control what they have to disclose under these provisions by controlling what they say to the market. Matrixx, 131 S.Ct. at 1322.