Opinion ID: 769157
Heading Depth: 3
Heading Rank: 1

Heading: The PSLRA and Anti-Fraud Provisions in Federal Securities Laws

Text: 16 Section 10(b) of the 1934 Act, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, prohibit fraudulent activities in connection with securities transactions. Section 10(b) makes it unlawful 17 [t]o use or employ, in connection with the purchase or sale of any security . . ., any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors. 18 15 U.S.C. § 78j(b). Rule 10b-5 specifies the following actions among the types of behavior proscribed by the statute: 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 . . . . 19 17 C.F.R. § 240.10b 5. 20 In order to state a claim under these provisions, a complaint must allege that the defendants acted with scienter. See, e.g., Chill, 101 F.3d at 266. This scienter requirement for a private action under Rule 10b-5 has been firmly established for at least a generation. See Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 (1976) (holding that no private cause of action for damages will lie under § 10(b) and Rule 10b 5 in the absence of any allegation of 'scienter' -- intent to deceive, manipulate, or defraud); Lanza v. Drexel & Co., 479 F.2d 1277, 1301 (2d Cir. 1973) (in banc) (Other cases in this circuit clearly indicate that 'facts amounting to scienter, intent to defraud, reckless disregard for the truth, or knowing use of a device, scheme or artifice to defraud' are essential to the imposition of liability.) (quoting Shemtob v. Shearson, Hammill & Co., 448 F.2d 442, 445 (2d Cir. 1971)). This case pertains not to the scienter requirement itself, but rather the pleading requirement for scienter in the securities fraud context. Prior to the passage of the PSLRA, we had decided that, in order to state a claim for securities fraud, plaintiffs had to allege facts giving rise to a strong inference of fraudulent intent. Acito v. Imcera Group, Inc., 47 F.3d 47, 52 (2d Cir. 1995). 21 In addition to pleading scienter, it is well-established that a securities fraud complaint must also plead certain facts with particularity in order to state a claim. Fed. R. Civ. P. 9(b) requires that, whenever a complaint contains allegations of fraud, the circumstances constituting fraud . . . shall be stated with particularity. See also Chill, 101 F.3d at 267 (noting that the actual fraudulent statements or conduct and the fraud alleged must be stated with particularity) (internal citations omitted). [A] complaint making such allegations must '(1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent.' Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1128 (2d Cir. 1994) (quoting Mills v. Polar Molecular Corp., 12 F.3d 1170, 1175 (2d Cir. 1993)). 22 In 1995, Congress amended the 1934 Act through passage of the PSLRA. See Private Securities Litigation Reform Act of 1995, Pub. L. No. 104-67, 109 Stat. 737 (codified at 15 U.S.C. §§ 77k, 77l, 77z-1, 77z-2, 78a, 78j-1, 78t, 78u, 78u-4, 78u-5). Legislators were apparently motivated in large part by a perceived need to deter strike suits wherein opportunistic private plaintiffs file securities fraud claims of dubious merit in order to exact large settlement recoveries. See H.R. Conf. Rep. No. 104-369, at 31 (1995) (noting significant evidence of abuse in private securities lawsuits, including the routine filing of lawsuits against issuers of securities and others whenever there is a significant change in an issuer's stock price, without regard to any underlying culpability of the issuer, and the abuse of the discovery process to impose costs so burdensome that it is often economical for the victimized party to settle), reprinted in 1995 U.S.C.C.A.N. 730, 730. 23 In order to curtail the filing of meritless lawsuits, the PSLRA imposed stringent procedural requirements on plaintiffs pursuing private securities fraud actions. See id. at 41. This case concerns two of these provisions in particular. First, the statute requires that, 24 [i]n 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. 25 15 U.S.C. § 78u 4(b)(2) (emphasis added) [hereinafter paragraph (b)(2)]. Second, the statute requires that, 26 [i]n any private action arising under this chapter in which the plaintiff alleges that the defendant-- 27 (A) made an untrue statement of a material fact; or 28 (B) omitted to state a material fact necessary in order to make the statements made, in the light of the circumstances in which they were made, not misleading; 29 the complaint shall specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed. 30 15 U.S.C. § 78u 4(b)(1) (emphasis added) [hereinafter paragraph (b)(1)]. In addition, § 21D(b)(3)(A) of the PSLRA requires courts to dismiss complaints that fail to meet the pleading requirements of paragraphs (b)(1) and (b)(2). See 15 U.S.C. § 78u-4(b)(3)(A). We must determine the impact of these new requirements in order to decide whether the plaintiffs in this case have pleaded sufficient facts with enough particularity to state a claim under the 1934 Act.