Opinion ID: 612383
Heading Depth: 3
Heading Rank: 3

Heading: Omissions and Insider Trading Claims against Spot Runner

Text: WPP also brings omission and insider trading claims against Spot Runner under Rule 10b-5. The district court dismissed both claims, holding that WPP did not adequately allege scienter. In support of its claims against Spot Runner, WPP says that on May 24, 2007, Spot Runner sold more than $1.7 million of shares to WPP in the primary offering, while failing to disclose that the Founders were selling their own shares in the secondary offering at the same time. WPP's allegations against Spot Runner tend to meld with the various allegations made against the individual Defendant-Appellees. WPP alleges that Spot Runner knew that the Founders were selling in the secondary offering at the time of WPP's participation in the primary offering and that Spot Runner purposely did not reveal this information to induce WPP into purchasing shares. [A] person violates Rule 10b-5 by buying or selling securities on the basis of material nonpublic information if (1) he owes a fiduciary or similar duty to the other party to the transaction; (2) he is an insider of the corporation in whose shares he trades, and thus owes a fiduciary duty to the corporation's shareholders; or (3) he is a tippee who received his information from an insider of the corporation and knows, or should know, that the insider breached a fiduciary duty in disclosing the information to him. S.E.C. v. Clark, 915 F.2d 439, 443 (9th Cir.1990) (citation omitted). A corporate issuer in possession of material nonpublic information, must, like other insiders in the same situation, disclose that information to its shareholders or refrain from trading with them. McCormick v. Fund Am. Cos., 26 F.3d 869, 876 (9th Cir.1994). The PSLRA heightened pleading standards for scienter also apply to insider trading claims. United States v. Smith, 155 F.3d 1051, 1068 (9th Cir.1998); In re Countrywide Fin. Corp. Sec. Litig., 588 F.Supp.2d 1132, 1203 n. 82 (C.D.Cal.2008). Under the PSLRA, a plaintiff must plead specific facts supporting a strong inference that the defendant acted with scienter, 15 U.S.C. § 78u-4(b)(2), which is knowing, intentional, or reckless conduct `to the extent that it reflects some degree of intentional or conscious misconduct,' or what we have called `deliberate recklessness.' South Ferry, 542 F.3d at 782 (quoting In re Silicon Graphics, 183 F.3d at 977). As explained, to qualify as a strong inference, an inference of scienter must be more than merely plausible or reasonable  it must be cogent and at least as compelling as any opposing inference of nonfraudulent intent. Tellabs, 551 U.S. at 314, 127 S.Ct. 2499. Here, we find that WPP fails to allege a cogent scienter theory explaining why Spot Runner would enable the Founders' pump and dump scheme. To a large extent, WPP's allegations against the Founders, which allege that the Founders sold shares in the secondary offering even though the sale was detrimental to the Company and the Investors, weaken WPP's allegations against Spot Runner. For example, WPP alleges that the Founders diverted tens of millions of dollars away from the Company and into [their own] pockets at a time when the Company was entirely reliant on private investment capital to survive, the Founders line[d] their own pockets rather than bring in needed capital to the Company, and that all of the shares of Spot Runner became worthless once the scheme became widely known. Thus, WPP describes Spot Runner as being disadvantaged when Founders Grouf and Waxman made secondary market sales. Against this backdrop, an inference of scienter is no more compelling as any opposing inference of non-fraudulent intent. Indeed, the Founders' alleged plot served both to divert badly needed capital from the Company during a time that Spot Runner needed the capital and to also reduce the demand for newly issued shares on the open market. Because Spot Runner is a corporate entity distinct from the Founders, the Founders' motivation to commit fraud cannot be automatically ascribed to the Company, particularly where the alleged behavior is at odds with the Company's financial interests. Although WPP offers one explanation for Spot Runner's behavior  intent to defraud  this explanation for the Company's behavior is not the most plausible. Rather, the allegations in the Amended Complaint tend to paint Spot Runner as a victim of the Founders' behavior, rather than as a potentially culpable perpetrator of fraud. Accordingly, we find that WPP does not adequately allege the scienter element of claims for Rule 10b-5 insider trading or actionable omission against Spot Runner and we AFFIRM the dismissal of these claims against this Defendant.