Tuesday, May 31, 2011

Sixth Circuit Panel Says Scienter Pleadings Must Be Viewed Holistically after Supreme Court Matrixx Ruling

Considering scienter pleadings in securities fraud cases holistically as instructed by the Supreme Court’s Matrixx decision, a Sixth Circuit panel ruled that investors adequately stated a strong inference of scienter when viewing the factors holistically. The inference that two senior company officers recklessly disregarded the falsity of their extremely optimistic statements is at least as compelling as their excuse of failed accounting systems, said the appeals panel. Frank, et al. v. Dana Corporation, et al., (CA-6), No. 09-4233, May 25, 2011.

In the past, the Sixth Circuit conducted its scienter analysis in Rule 10b-5 securities fraud actions by sorting through each allegation individually before concluding with a collective approach. However, the panel here declined to follow that approach in light of the Supreme Court’s recent decision in Matrixx Initiatives, Inc. v. Siracusano, 131 S. Ct. 1309 (2011), in which the Court provided a post-Tellabs example of how to consider scienter pleadings holistically in section 10(b) cases.

Writing for the Court in Matrixx, Justice Sotomayor expertly addressed the allegations collectively, did so quickly, and, importantly, did not parse out the allegations for individual analysis. In the view of the panel, this is the only appropriate approach following Tellabs’s mandate to review scienter pleadings based on the collective view of the facts, not the facts individually.

According to the panel, the former method of reviewing each allegation individually before reviewing them holistically risks losing the forest for the trees. Further, after Tellabs, conducting an individual review of myriad allegations is an unnecessary inefficiency.