Opinion ID: 778688
Heading Depth: 2
Heading Rank: 2

Heading: Securities Fraud Pleading Standard

Text: 26 Rule 10b-5, promulgated by the Securities and Exchange Commission under section 10(b) of the Act, prohibits fraudulent conduct in the sale and purchase of securities. 15 U.S.C. § 78j; 17 C.F.R. § 240.10b-5; Florida State Bd. of Admin., 270 F.3d at 653; In re NationsMart Corp. Sec. Litig., 130 F.3d 309, 320 (8th Cir. 1997). Section 20 of the Act extends liability under section 10(b) and Rule 10b-5 to any controlling person. 15 U.S.C. § 78t(a). Rule 10b-5 provides that it is unlawful for any person, directly or indirectly: 27 (a) To employ any device, scheme, or artifice to defraud, 28 (b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or 29 (c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security. 30 17 C.F.R. § 240.10b-5. 31 Standing under § 10(b) and Rule 10b-5 requires a showing of (1) misrepresentations or omissions of material fact or acts that operated as a fraud or deceit; (2) causation, often analyzed in terms of materiality and reliance; (3) damages; and (4) fraudulent activity occurring in connection with the purchase and sale of a security. Alpern v. UtiliCorp United, Inc., 84 F.3d 1525, 1533-34 (8th Cir.1996). Although not explicitly mentioned in the text of the rule, scienter is nevertheless an essential element of a Rule 10b-5 claim. Florida State Bd. of Admin., 270 F.3d at 653. Scienter means the intent to deceive, manipulate, or defraud. In re NationsMart Corp. Sec. Litig., 130 F.3d at 320 (citation omitted). 32 To determine whether the facts pleaded in the amended complaint are adequate, we review them in light of the pleading standard the investors have to satisfy. Complaints brought under Rule 10b-5 and section 10(b) are governed by special pleading standards adopted by Congress in the PSLRA. These pleading standards are unique to securities and were adopted in an attempt to curb abuses of securities fraud litigation. Florida State Bd. of Admin., 270 F.3d at 654. Congress enacted two heightened pleading requirements for securities fraud cases. The first requires that the complaint specify each false statement or misleading omission and explain why the omission was misleading. 15 U.S.C. § 78u-4(b)(1) [1997]. The second requires that the complaint state `with particularity' facts giving rise to a `strong inference' that the defendant acted with the scienter required for the cause of action. 15 U.S.C. § 78u-4(b)(2) [1997]. Id. 33 Prior to the enactment of the PSLRA, pleadings were evaluated under Federal Rule of Civil Procedure 9(b) for particularity. Parnes v. Gateway 2000, Inc., 122 F.3d 539, 549 (8th Cir.1997). Contrary to the district court's analysis, the investors technically do not need to meet the requirements of both Federal Rule of Civil Procedure 9(b) and the PSLRA, as the PSLRA supercedes reliance on 9(b) in securities fraud cases and embodies the standards of 9(b). Lipton v. Pathogenesis Corp., 284 F.3d 1027, 1034 n. 12 (9th Cir.2002) (noting that the PSLRA changed the pleading requirements in private securities fraud litigation previously governed by 9(b) by requiring that a complaint plead with particularity both falsity and scienter); City of Philadelphia v. Fleming Cos., 264 F.3d 1245, 1255 n. 13 (10th Cir.2001) (The scienter pleading requirements of the PSLRA supercede the provisions of Rule 9(b) in securities fraud cases.) (citation omitted); Greebel, 194 F.3d at 193 (The effect of [the PSLRA] is to embody in the Act itself at least the standards of Rule 9(b), Fed.R.Civ.P.). Specifically, the PSLRA requires that both falsity and scienter be pleaded with particularity. Under 9(b), [m]alice, intent, knowledge, and other condition of mind of a person [could] be averred generally. Fed.R.Civ.P. 9(b). With these standards in mind, we turn to the adequacy of the investors' pleadings.