Opinion ID: 3053999
Heading Depth: 5
Heading Rank: 1

Heading: Designed such disclosure controls and proce-

Text: dures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant . . . is made known to us . . . ; (b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures . . . . Glazer argues that this statement is sufficient to infer knowledge of the FCPA violations, because the controls and procedures put into place by Magistri and Mulholland would have necessarily alerted them to any FCPA violations. [9] Our circuit has yet to examine the precise interplay between the reporting requirements of Sarbanes-Oxley and the scienter pleading requirements of the PSLRA. However, at least two other circuits have specifically addressed the issue. In Garfield v. NDC Health Corp., the Eleventh Circuit rejected the plaintiffs’ argument that Sarbanes-Oxley certifications signed by senior executives were sufficient to demonstrate scienter. 466 F.3d 1255, 1267 (11th Cir. 2006). The court held: GLAZER CAPITAL MANAGEMENT v. MAGISTRI 15781 The plain language of Sarbanes-Oxley evidences no congressional intent to alter the pleading requirements set forth in the PSLRA. . . . If we were to accept [the plaintiff’s] proffered interpretation of Sarbanes-Oxley, scienter would be established in every case where there was an accounting error or auditing mistake made by a publicly traded com- pany, thereby eviscerating the pleading requirements for scienter set forth in the PSLRA. Id. at 1266. The Fifth Circuit recently reached a similar conclusion in Indiana Electrical Workers’ Pension Trust Fund IBEW v. Shaw Group, Inc., explicitly adopting the holding of Garfield. 537 F.3d 527, 544-45 (5th Cir. 2008). We agree with the reasoning of the Eleventh and Fifth Circuits. Because Congress expressed no intent to alter the pleading requirements of the PSLRA, “Sarbanes-Oxley certification is only probative of scienter if the person signing the certification was severely reckless in certifying the accuracy of the financial statements.” Garfield, 466 F.3d at 1266. Because Glazer has pled no facts to that effect, the Sarbanes-Oxley certifications are not sufficient, without more, to raise a strong inference of scienter on the part of Magistri. [10] Glazer next argues that because GE was able to discover evidence of FCPA violations relatively early in the due diligence process, the information must have been readily available and therefore known to Magistri when he signed the merger agreement. This argument is not sufficient to create a strong inference of scienter. The mere fact that GE was able to discover the FCPA violations does not create a direct inference that Magistri personally knew about the violations. At most, it creates the inference that he should have known of the violations. This is not sufficient to meet the stringent scienter pleading requirements of the PSLRA. See In re Silicon Graphics, 183 F.3d at 977 (requiring “some degree of intentional or conscious misconduct”). 15782 GLAZER CAPITAL MANAGEMENT v. MAGISTRI Moreover, the material misrepresentations at issue in this case appeared in the public filing of a private merger agreement. This fact undercuts any inference that Magistri knew about the FCPA violations when he signed the merger agreement, because such knowledge would have required him to make false representations knowingly, not only to the investing public, but also to the very company that would shortly be conducting a due diligence inquiry. [11] Glazer next argues that a strong inference of scienter arises from the fact that Magistri had a motive to make false statements, because he was positioned to profit personally from the proposed merger. Although neither side has cited any Ninth Circuit law on this issue, a number of out-of-circuit cases have rejected Glazer’s argument. In Phillips v. LCI International, Inc., the Fourth Circuit explained that because personal profit motive is present in almost every merger, inferring scienter from motive would “force the directors of virtually every company to defend securities fraud actions every time that company effected a merger or acquisition.” 190 F.3d 609, 623 (4th Cir. 1999) (internal citation omitted). The Third Circuit echoed this sentiment in GSC Partners CDO Fund v. Washington, when it held that “[i]n every corporate transaction, the corporation and its officers have a desire to complete the transaction, and officers will usually reap financial benefits from a successful transaction. Such allegations alone cannot give rise to a ‘strong inference’ of fraudulent intent.” 368 F.3d 228, 237-38 (3d Cir. 2004); see also, Kalnit v. Eichler, 264 F.3d 131, 139-40 (2d Cir. 2001) (holding that officers’ motive to maintain or increase compensation was insufficient to support scienter); Tuchman v. DSC Commc’ns Corp., 14 F.3d 1061, 1068 (5th Cir. 1994) (holding that “incentive compensation can hardly be the basis on which an allegation of fraud is predicated”). We join our sister circuits and hold that evidence of a personal profit motive on the part of officers and directors contemplating a merger is insufficient to raise a strong inference of scienter. GLAZER CAPITAL MANAGEMENT v. MAGISTRI 15783 [12] Finally, Glazer argues that the settlement agreements InVision entered into with the DOJ and SEC are sufficient to create a strong inference of scienter. In those agreements, InVision accepted responsibility for misconduct and admitted that the company “was aware of the high probability that its foreign sales agents or distributors paid or offered to pay something of value to government officials in order to obtain or retain business for InVision.” The company further admitted that it “improperly accounted for certain payments . . . in its books and records in violation of the FCPA.” The district court correctly held that these agreements were not sufficient to meet the pleading requirements of the PSLRA. First, the admissions in these settlement agreements were largely legal conclusions, rather than particularized facts giving rise to a strong inference of scienter. More importantly, even if InVision accepted the SEC’s and DOJ’s statements of fact, there is nothing in either settlement agreement that would support the conclusion that Magistri had actual knowledge of the violations. As discussed earlier, the mere fact that someone at InVision had knowledge of the illegal transactions is not sufficient to satisfy the scienter pleading requirements of the PSLRA, given the context and limited nature of the misrepresentations at issue. Therefore, we hold that the five identified events, individually or collectively, fail “to create a strong inference” of scienter. In re Daou, 411 F.3d at 1022.