Fraud by Hindsight Claims Fail to Show Scienter

by Rodney Tonkovic
Associate Writer-Analyst
CCH Federal Securities Law Reporter

In Indiana State District Council of Laborers and Hod Carriers Pension and Welfare Fund v. Omnicare, Inc. (here), a 6th Circuit panel affirmed the dismissal of a fraud complaint that attempted to show "fraud by hindsight." The class action complaint alleged that a provider of pharmaceutical care services and several of its officers and directors made a number of false and misleading statements. The district court (ED Ky) found that the shareholders failed to plead loss causation and scienter and dismissed the action.

The panel agreed that the shareholders were trying "to turn bad corporate news into a securities class action" and generally affirmed the dismissal. The appellate court first found that the complaint failed to allege a material misstatement or omission. A statement by the CEO which the shareholders claimed should have disclosed a contract dispute was protected as a forward-looking statement because it discussed the company's "growth outlook," and general optimistic statements by management predicting positive future results were not material. Next, the shareholders failed to plead loss causation because the complaint failed to allege that a company's operational difficulties or alleged GAAP violations were known to the market or that they caused the company's stock price to fall.

The company's statements regarding legal compliance were also not actionable. The panel found that in this case, while the shareholders claimed that the company's statement on legal compliance was made knowing it was false when made, the allegations did not support this claim. Finally, the panel reversed and remanded the complaint's Securities Act Section 11 claims after finding that they sounded in fraud, leaving it to the court to apply the stricter fraud pleading standards of Rule 9(b).

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