Opinion ID: 3049769
Heading Depth: 3
Heading Rank: 1

Heading: Scienter Pleading Requirements

Text: We review the grant of a motion to dismiss for failure to state a claim under Fed. R. Civ. P. 12(b)(6) de novo. Fin. Sec. Assurance, Inc. v. Stephens, Inc., 500 F.3d 1276, 1282 (11th Cir. 2007). In Count I, Jacoby asserted a violation of § 10(b) of the Securities Act and SEC Rule 10b-5. Section 10(b) of the Securities Act makes it unlawful to “use or employ, in connection with the . . . sale of any security . . . any manipulative or deceptive device or contrivance.” 15 U.S.C. § 78j(b). Pursuant to § 10(b), the SEC promulgated Rule 10b-5, which makes it unlawful, among other things, “to make any untrue statement of a material fact or to omit to state a material fact 8 necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading.” 17 C.F.R. § 240.10b-5(b). To state a claim for a violation of § 10(b), a plaintiff must allege: (1) the existence of a material misrepresentation (or omission), (2) made with scienter (i.e., “a wrongful state of mind”), (3) in connection with the purchase or sale of any security, (4) on which the plaintiff relied, and (5) which was causally connected to (6) the plaintiff’s economic loss. Dura Pharm. Inc. v. Broudo, 544 U.S. 336, 34142, 125 S. Ct. 1627, 1631 (2005); see also Bryant v. Avado Brands, Inc., 187 F.3d 1271, 1281 (11th Cir. 1999) (elaborating on the scienter requirement).11 Because Rule 10b-5 sounds in fraud, the plaintiff must plead the elements of its violation with particularity. See Mizzaro v. Home Depot, Inc., 544 F.3d 1230, 1237 (11th Cir. 2008) (stating Rule 9(b) requires securities fraud complaints “to state with particularity the circumstances constituting fraud”). When a § 10(b) claim is brought by a private litigant, it is subject to the PSLRA, under which a plaintiff must “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). In this context, a “strong inference” of scienter is one that is 11 Because we hold the Second Amended Complaint fails to satisfy the standard for pleading scienter, we do not reach the questions of whether the Second Amended Complaint adequately pleads the other elements of a § 10(b) claim. 9 “more than merely plausible or reasonable—it must be cogent and at least as compelling as any opposing inference of nonfraudulent intent.” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 314, 127 S. Ct. 2499, 2504-05 (2007). Three guidelines govern our review: courts must (1) “accept all factual allegations in the complaint as true,” (2) “consider the complaint in its entirety” and determine “whether all of the facts alleged, taken collectively, give rise to a strong inference of scienter,” and (3) “take into account plausible opposing inferences.” Tellabs, 551 U.S. at 322-23, 127 S. Ct. at 2509; see also Rosenberg v. Gould, 554 F.3d 962, 965 (11th Cir. 2009). Moreover, “scienter must be found with respect to each defendant and with respect to each alleged violation of the statute.” Phillips v. Scientific-Atlanta, Inc., 374 F.3d 1015, 1017-18 (11th Cir. 2004). Although the PSLRA imposes a heightened standard for pleading scienter, it does not alter the substantive intent requirements necessary to establish a § 10(b) and Rule 10b-5 violation. Mizzaro, 544 F.3d at 1238. In this Circuit, § 10(b) and Rule 10b-5 require a showing of either an “intent to deceive, manipulate, or defraud,” or “severe recklessness.” Id. (quoting Bryant, 187 F.3d at 1282). An allegation of “severe recklessness” must satisfy a demanding standard: Severe recklessness is limited to those highly unreasonable omissions or misrepresentations that involve not merely simple or even inexcusable negligence, but an extreme departure from the standards of ordinary care, and that present a danger of misleading buyers or 10 sellers which is either known to the defendant or so obvious that the defendant must have been aware of it. Bryant, 187 F.3d at 1282 n.18. Accordingly, to survive a motion to dismiss, Jacoby “must (in addition to pleading all of the other elements of a § 10(b) claim) plead ‘with particularity facts giving rise to a strong inference’ that the defendants either intended to defraud investors or were severely reckless when they made the allegedly materially false or incomplete statements.” Mizzaro, 544 F.3d at 1238. The Second Amended Complaint alleges RelationServe did not disclose a broker was involved in the securities sale to hide the fact that RelationServe sold securities through unregistered brokers. Further, the Second Amended Complaint asserts this act of hiding RelationServe’s use of a broker “could not have been perpetrated over a substantial period of time . . . without the knowledge and complicity of the . . . individual Defendants.” Viewed holistically, the Second Amended Complaint alleges the following facts as supporting a reasonable inference of scienter: (1) ten of the individual defendants “signed [or authorized] one or more certification[s] pursuant to the Sarbanes-Oxley Act that impermissibly omitted material facts;” (2) each individual defendant held a management position at RelationServe; (3) each individual defendant was “involved in the drafting, producing, reviewing, and/or dissemination of misleading statements and [was] aware [of]—or recklessly disregarded—the fact that misleading statements were 11 being issued and approved or ratified these statements;” (4) each individual defendant, “by virtue of [his or her] receipt of information . . . , control over or receipt of RelationServe[’s] materially misleading statements and/or [his or her] associations with RelationServe . . . [was an] active and culpable participant[];” (5) several individual defendants signed SEC forms “that failed to indicate RelationServe had contracted with Summit;” and (6) there were “accounting irregularities” in RelationServe’s financial statements. These conclusory allegations are insufficient to establish a “strong inference that the defendants acted with the required state of mind.” See Tellabs, 551 U.S. at 314, 127 S. Ct. at 2504. The inference that the individual defendants purposely failed to disclose the use of unregistered brokers to mislead the public regarding the company’s worth is not as compelling as the competing inference that the defendants did not disclose its use of unregistered brokers because the brokers were exempt from registration. Without an allegation that any of the named defendants knew the Summit employees (1) were not registered brokers and (2) were required to be registered brokers, we cannot conclude the inference of nefarious wrongdoing is “at least as compelling as any opposing inference of nonfraudulent intent.” See id. 12 Even if the Second Amended Complaint alleged the sales were not exempt transactions, it would still not be a “cogent” possibility that the defendants failed to disclose the use of unregistered brokers for the purpose of misleading the public. The Second Amended Complaint does not allege facts tending to show that any of the individual defendants were even aware of RelationServe’s relationship with Summit. This is particularly so with respect to defendants Soltoff, Obeck, and Gould—who, according to the Second Amended Complaint, were not employed by RelationServe until after the events relied on by plaintiffs occurred—and with respect to defendant Young—who, according to the Second Amended Complaint, was not employed by RelationServe. Simply put, the allegations in the Second Amended Complaint are insufficient to create a “strong inference” of scienter. Accordingly, the district court did not err by dismissing Jacoby’s § 10(b) and Rule 10b-5 claims against the individual defendants under the heightened pleading standards imposed by the PSLRA. Although the Second Amended Complaint failed to adequately plead scienter for any of the individual defendants, theoretically, the Second Amended Complaint could create a strong inference that the corporate defendant, RelationServe, acted with the requisite state of mind. Mizzaro, 544 F.3d at 1254. 13 Corporations have no state of mind of their own; rather, the scienter of their agents must be imputed to them. Id. Here, the Second Amended Complaint fails to sufficiently plead scienter as to any of the individuals who served as corporate directors or officers of RelationServe, and there are no other allegations that give rise to an inference of scienter. Thus, we affirm the district court’s dismissal of Count I for failure to state a cause of action under § 10(b) and Rule 10b-5 of the Securities Exchange Act.