Opinion ID: 3025920
Heading Depth: 2
Heading Rank: 1

Heading: Group Pleading Doctrine

Text: Assuming Winer can properly plead violations of Rule 10b-5, it contends the Individual Defendants are liable for misrepresentations and omissions based upon the group pleading doctrine. “Smithfield [Foods] and the Individual Defendants were responsible for the accuracy of the public reports and releases detailed herein as ‘group published’ information, and are therefore responsible and liable for the representations contained therein.” Specifically, Winer asserts liability on the 32 basis of the Individual Defendants’ access to, control over, and ability to edit and withhold dissemination of Pennexx’s press releases and SEC filings. In rejecting this argument, the District Court held the group pleading doctrine did not survive the specific pleading requirements of the PSLRA. We agree. The group pleading doctrine is a judicial presumption that statements in group-published documents including annual reports and press releases are attributable to officers and directors who have day-to-day control or involvement in regular company operations. Under the doctrine, where defendants are insiders with such control or involvement, their specific connection to fraudulent statements in group-published documents is unnecessary. See Wool v. Tandem Computers, Inc., 818 F.2d 1433, 1440 (9th Cir. 1987) (“In cases of corporate fraud where the false or misleading information is conveyed in prospectuses, registration statements, annual reports, press releases, or other ‘group-published information,’ it is reasonable to presume that these are the collective actions of the officers.”). Accordingly, the group pleading doctrine allows a plaintiff to plead that defendants made a misstatement or omission of a material fact without pleading particular facts associating the defendants to the alleged fraud. See 3 Thomas Lee Hazen, Treatise on the Law of Securities Regulation § 12.13 (5th ed. 2006) (citing cases). Consistent with the purposes behind the PSLRA, Congress expressly intended to substantially heighten the pleading requirements to reduce abuses in securities class action 33 lawsuits. See In re Advanta, 180 F.3d at 531 (citing H.R. Conf. Rep. No. 104-369, at 28 (1995), reprinted in 1995 U.S.C.C.A.N. 679, 748). To plead fraud in a private suit for damages, plaintiffs must specify each statement alleged to be misleading and specify the reasons the statement is misleading. 15 U.S.C. § 78u-4(b)(1). For allegations based on information or belief, the PSLRA requires plaintiffs to “state with particularity all facts” forming the basis of the belief. Id. Each untrue statement or omission must be set forth with particularity as to “the defendant” and scienter must be pleaded in regards to “each act or omission” sufficient to support a strong inference that “the defendant” acted with the required state of mind. 15 U.S.C. § 78u-4(b)(2). The PSLRA does not address group pleading, nor have we explicitly addressed the doctrine. In Tellabs the Supreme Court recognized the disagreement among the courts of appeals as to whether the group pleading doctrine survived the PSLRA. Tellabs, 127 S. Ct. at 2511 n.6. Because the issue was not before it, the Court did not disturb the Court of Appeals for the Seventh Circuit’s holding that the group pleading doctrine did not survive the enactment of the PSLRA. Id. Winer contends it is untenable to require a plaintiff, at the pleading stage, to identify each individual involved in preparing public statements. But the PSLRA changed the pleading requirements in private securities actions. A presumption of particularity is inconsistent with the PSLRA’s requirement that scienter be pleaded with respect to “each act or omission” by 34 “the defendant.” In any private action arising under this chapter in which the plaintiff may recover money damages only on proof that the defendant acted with a particular state of mind, the complaint shall, with respect to each act or omission alleged to violate this chapter, state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind. 15 U.S.C. § 78u-4(b)(2). The PSLRA requires plaintiffs to specify the role of each defendant, demonstrating each defendant’s involvement in misstatements and omissions.5 5 Before the PSLRA, only the Courts of Appeals for the First, Ninth, and Tenth Circuits explicitly recognized a group pleading exception to the pleading-with-particularity requirements of Rule 9(b). The Court of Appeals for the First Circuit recognized a limited version of the group pleading doctrine for securities fraud, which, although characterized as “group pleading,” in essence, required specific indicia of defendant’s direct participation in making the alleged offending statement. See Serabian v. Amoskeag Bank Shares, Inc., 24 F.3d 357, 367–68 (1st Cir. 1994) (“The acceptance of responsibility for the contents of the Annual Report, demonstrated by defendants’ signatures, combined with specific allegations that they knew of conflicting conditions, establishes a sufficient link between the defendants and the alleged fraud to satisfy Rule 9(b)’s 35 particularity requirement.”). As noted, the Court of Appeals for the Ninth Circuit held: “[i]n cases of corporate fraud where the false or misleading information is conveyed in prospectuses, registration statements, annual reports, press releases, or other ‘group-published information,’ it is reasonable to presume that these are the collective actions of the officers.” Wool, 818 F.2d at 1440. The Court of Appeals for the Tenth Circuit cited Wool to hold: “[i]dentifying the individual sources of statements is unnecessary when the fraud allegations arise from misstatements or omissions in group-published documents such as annual reports, which presumably involve collective actions of corporate directors or officers.” Schwartz v. Celestial Seasonings, Inc., 124 F.3d 1246, 1254 (10th Cir. 1997). Also, the Court of Appeals for the Second Circuit has allowed group pleading, although it has not explicitly used the phrase “group pleading” in any precedential opinions. See DiVittorio v. Equidyne Extractive Indus., Inc., 822 F.2d 1242, 1247 (2d Cir. 1987) (quoting Luce v. Edelstein, 802 F.2d 49, 55 (2d Cir. 1986)) (“‘[N]o specific connection between fraudulent representations in [an] Offering Memorandum and particular defendants is necessary where, as here, defendants are insiders or affiliates participating in the offer of the securities in question.’”). The district courts within the Second Circuit have suggested the group pleading doctrine survives the enactment of the PSLRA. See, e.g., In re Van Der Moolen Holding N.V. Sec. Litig., 405 F. Supp. 2d 388, 399 (S.D.N.Y. 2005) (“The majority rule in this district is that the group pleading doctrine has 36 The only courts of appeals to have directly addressed the survival of the group pleading doctrine post-PSLRA have survived the PSLRA.”). The Courts of Appeals for the Ninth and Tenth Circuits have continued to allow the group pleading doctrine without explicitly discussing whether it survives the PSLRA. See Howard v. Everex Sys., Inc., 228 F.3d 1057, 1061–63 (9th Cir. 2000); Schwartz, 124 F.3d at 1254. The Courts of Appeals for the First and Sixth Circuits have recognized the issue but have not decided whether group pleading survives the PSLRA. The Court of Appeals for the First Circuit questioned the viability of group pleading after the PSLRA but has thus far declined to decide the issue. In In re Carleton Sys., Inc., 311 F.3d 11, 40 (1st Cir. 2002), the court held it would not consider the group pleading doctrine in determining whether the complaint stated a claim against each defendant and found liability existed for all but one defendant. Id. For that defendant, the court stated even under the group pleading presumption, the result would likely be the same, because the complaint did not allege the defendant’s participation in the production of any group published documents such as SEC filings. Id. at 41. Similarly, the Court of Appeals for the Sixth Circuit noted the disagreement regarding the viability of group pleading. City of Monroe Employees Ret. Sys. v. Bridgestone Corp., 399 F.3d 651, 689–90 (6th Cir. 2005). In that case the plaintiff failed to allege facts sufficient to qualify under even the group pleading doctrine. Id. at 690. 37 abolished the doctrine. See Fin. Acquisition Partners L.P. v. Blackwell, 440 F.3d 278, 287 (5th Cir. 2006) (citing Southland Sec. Corp. v. Inspire Ins. Solutions Inc., 365 F.3d 353, 364 (5th Cir. 2004); Makor Issues & Rights, Ltd. v. Tellabs, Inc., 437 F.3d 588, 602–03 (7th Cir. 2006) rev’d on other grounds, 127 S. Ct. 2499 (2007). Also, the Court of Appeals for the Eleventh Circuit has suggested the group pleading doctrine does not survive the enactment of the PSLRA, although it has not abolished the doctrine. Phillips v. Scientific-Atlanta, Inc., 374 F.3d 1015, 1018 (11th Cir. 2004) (acknowledging “the most plausible reading in light of congressional intent is that a plaintiff, to proceed beyond the pleading stage, must allege facts sufficiently demonstrating each defendant’s state of mind regarding his or her alleged violations”). The decision of the Court of Appeals for the Fifth Circuit to abolish group pleading was predicated on the PSLRA’s requirements that allegations be set forth with particularity concerning “the defendant” and scienter be pleaded for “each act or omission” sufficient to give “rise to a strong inference that the defendant acted with the required state of mind.” Southland, 365 F.3d at 364. The Court of Appeals for the Seventh Circuit, citing Southland and Phillips, also held the group pleading doctrine is inconsistent with the PSLRA. Makor, 437 F.3d at 603 (“While we will aggregate the allegations in the complaint to determine whether it creates a strong inference of scienter, plaintiffs must create this inference with respect to each 38 individual defendant in multiple defendant cases.”).6 We agree and hold the group pleading doctrine is no longer viable in private securities actions after the enactment of the PSLRA.7 If a private securities case proceeds past the 6 Winer contends the Court of Appeals for the Seventh Circuit’s decision to abolish the group pleading doctrine in Makor should be read narrowly as only abolishing group pleading for purposes of inferring scienter. Winer agrees that group pleading cannot be used to prove scienter, but contends it can be used to attribute statements to Individual Defendants. This argument is illogical. See, e.g., D.E. & J Ltd. P’ship v. Conaway, 284 F. Supp. 2d 719, 731 (E.D. Mich. 2003) (“Where individual defendants are the target of the fraud allegations, it would be nonsensical to require that a plaintiff specifically allege facts regarding scienter as to each defendant, but to allow him to rely on group pleading in asserting that ‘the defendant’ made the statement or omission.”). If Winer could plead scienter with the specificity required by the PSLRA, it would not need to resort to the group pleading doctrine in the first place. 7 Most of the district courts in this circuit to address the issue have reached the same conclusion. See In re Bio-Technology Gen. Corp. Sec. Litig. 380 F. Supp. 2d 574, 584 (D.N.J. 2005) (“[T]he prevailing authority within this District counsels that group pleading has been abolished.”) (citing cases); see also Majer v. Sonex Research, Inc., Civ. No. 05606, 2006 WL 39 pleadings stage against a corporation and discovery reveals individual culpability, a plaintiff may seek permission to amend the complaint to assert claims against individual defendants. See Fed. R. Civ. P. 15. But any such claims must be pleaded with the specificity required by the PSLRA with respect to each defendant. See 15 U.S.C. § 78u-4(b)(2). As a result, we hold Winer’s claims based on the group pleading doctrine fail. All Rule 10b-5 claims against Luter, Cole, and McGreal were properly dismissed, as only the group pleading allegation in paragraph 26 of the amended complaint connects Luter, Cole, and McGreal to the alleged misstatements.8 2038604, at  (E.D. Pa. July 19, 2006); In re Am. Bus. Fin. Servs., Inc. Sec. Litig., 413 F. Supp. 2d 378, 394 (E.D. Pa. 2005); P. Schoenfeld Asset Mgmt. LLC v. Cendant Corp., 142 F. Supp. 2d 589, 619–20 (D.N.J. 2001); In re Digital Island Sec. Litig., 223 F. Supp. 2d 546, 553 (D. Del. 2002), aff’d, 357 F.3d 322 (3d Cir. 2004). At least two district courts in this circuit have assumed the PSLRA did not necessarily abolish the group pleading doctrine in all cases. See, e.g., In re Rent-Way Sec. Litig., 209 F. Supp. 2d 493, 518 (W.D. Pa. 2002) (“We see no reason to find that group pled allegations per se cannot meet the heightened pleading standards of Rule 9(b) or the PSLRA, and rather will consider the allegations individually.”). 8 Winer’s claims against Queen did not rely solely on the group pleading doctrine because the amended complaint directly 40