Opinion ID: 769157
Heading Depth: 4
Heading Rank: 2

Heading: Implications of the PSLRA for the Pleading Standard for Scienter in this Circuit

Text: 51 Courts have disagreed on the proper interpretation of the new pleading requirement imposed by paragraph (b)(2) in light of the text of the PSLRA and its legislative history. They have generally come to one of two conclusions: 52 (1) The statute effectively adopts the Second Circuit's pleading standard for scienter wholesale, and thus plaintiffs may continue to state a claim by pleading either motive and opportunity or strong circumstantial evidence of recklessness or conscious misbehavior. See In re Advanta Corp. Sec. Litig., 180 F.3d 525 (3d Cir. 1999); Press v. Chemical Invest. Servs. Corp., 166 F.3d 529, 538 (2d Cir. 1999) (dicta); Rubinstein v. Skyteller, Inc., 48 F. Supp. 2d 315, 320 (S.D.N.Y. 1999) (following Press). 53 (2) The statute strengthens the Second Circuit's standard by rejecting the simple pleading of motive and opportunity. See Bryant v. Avado Brands, Inc., 187 F.3d 1271, 1283 (11th Cir. 1999); In re Silicon Graphics Inc. Sec. Litig., 183 F.3d 970, 979 (9th Cir. 1999); In re Comshare, Inc. Sec. Litig., 183 F.3d 542, 550-51 (6th Cir. 1999); Novak I, 997 F. Supp. at 430; In re Glenayre Tech., Inc. Sec. Litig., 982 F. Supp. 294, 298 (S.D.N.Y. 1997); In re Baesa Sec. Litig., 969 F. Supp. 238, 241-42 (S.D.N.Y. 1997). 54 Our own review of the text and legislative history leads us to a middle ground. We conclude that the PSLRA effectively raised the nationwide pleading standard tothat previously existing in this circuit and no higher (with the exception of the with particularity requirement). At the same time, however, we believe that Congress's failure to include language about motive and opportunity suggests that we need not be wedded to these concepts in articulating the prevailing standard. We are led to these conclusions by the considerations that follow. 55 In order to gauge the implications of paragraph (b)(2), we apply familiar canons of statutory construction. We look first to the text of the statute. If that language is plain and its meaning sufficiently clear, we need look no further. See Connecticut Nat'l Bank v. Germain, 503 U.S. 249, 254 (1992). Only if the text of the statute is not unambiguous do we turn for guidance to legislative history and the purposes of the statute. See Dowling v. United States, 473 U.S. 207, 218 (1985). Applying these principles, we conclude that the enactment of paragraph (b)(2) did not change the basic pleading standard for scienter in this circuit. 56 In this case, our interpretive task begins and ends with the text of the statute. In drafting paragraph (b)(2), Congress specifically incorporated this circuit's strong inference language to define the pleading standard for securities fraud cases. Compare 15 U.S.C. § 78u-4(b)(2) (requiring plaintiffs to state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind), with Acito, 47 F.3d at 52 ([P]laintiffs must allege facts that give rise to a strong inference of fraudulent intent.). We agree with the Third Circuit that this use of the Second Circuit's language compels the conclusion that the Reform Act establishes a pleading standard approximately equal in stringency to that of the Second Circuit. In re Advanta Corp., 180 F.3d at 534. Cf. United States v. Johnson, 14 F.3d 766, 770 (2d Cir. 1994) (finding that Congress's use of substantially identical language to that of an earlier statute bespeaks an intention to import judicial interpretations of that language into the new statute). 57 Given the absence of ambiguity in the statutory text, no resort to legislative history or the purposes of the PSLRA is required. In any event, there is nothing in these sources that would alter our conclusion. As far as the general purposes of the PSLRA are concerned, Congress plainly sought to impose a stricter nationwide pleading standard and did so. But this purpose does not require raising the standard above that of this circuit, particularly in light of the explicit Congressional recognition that our pre-PSLRA standard was the most stringent in the nation. See H.R. Conf. Rep. No. 104-369, at 41. In many jurisdictions, adoption of a 'strong inference' standard will substantially heighten the barriers to pleading scienter, a result Congress expressly intended. Moreover, even in jurisdictions already employing the Second Circuit standard, the additional requirement that plaintiffs state facts 'with particularity' represents a heightening of the standard. In re Advanta Corp., 180 F.3d at 534. 58 Meanwhile, in our view, as is so often the case with legislative history generally, the legislative history of the PSLRA contains conflicting expressions of legislative intent with respect to the pleading requirement. Id. at 533. For example, while the Conference Committee rejected language from the Senate bill that would have adopted the Second Circuit rule wholesale, including language about motive and opportunity and recklessness, see H.R. Conf. Rep. No. 104-369, at 41 & 48 n.23, the Senate Committee reporting the bill stated that it was proposing not a new and untested pleading standard that would generate additional litigation, but rather a uniform standard modeled upon the pleading standard of the Second Circuit. S. Rep. No. 104-98, at 15 (1995), reprinted in 1995 U.S.C.C.A.N. 679, 694 (noting that courts interpreting the proposed strong inference pleading standard might find Second Circuit case law instructive). 59 When all is said and done, we believe that the enactment of paragraph (b)(2) did not change the basic pleading standard for scienter in this circuit (except by the addition of the words with particularity). Accordingly, we hold that the PSLRA adopted our strong inference standard: In order to plead scienter, plaintiffs must state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind, as required by the language of the Act itself. Although litigants and lower courts need and should not employ or rely on magic words such as motive and opportunity, we believe that our prior case law may be helpful in providing guidance as to how the strong inference standard may be met. Therefore, in applying this standard, district courts should look to the cases and factors discussed in Section I.B.1 above to determine whether plaintiffs have pleaded facts giving rise to the requisite strong inference. These cases suggest, in brief, that the inference may arise where the complaint sufficiently alleges that the defendants: (1) benefitted in a concrete and personal way from the purported fraud, see supra at [page 307]; (2) engaged in deliberately illegal behavior, see supra at [page 308]; (3) knew facts or had access to information suggesting that their public statements were not accurate, see supra at [page 308-09]; or (4) failed to check information they had a duty to monitor, see supra at [pages 308-09]. We now turn to the complaint in this case to determine whether the plaintiffs have met their burden to plead scienter. 60