In the Baxter International securities litigation, Senior Judge William T. Hart (N.D. Ill.) issued two rulings in one opinion. In the first ruling, he sent a securities class action based solely on a federal claim (Section 11 of the 1933 Securities Act) back to Circuit Court of Cook County, Illinois. He did that because he said § 16(c) of the Securities Act “plainly and unambiguously limit[s] removal to certain class actions containing state law claims.” He also held that “where the statutory language is plain and unambiguous and does not produce an absurd result, that language should be applied and legislative history need not be considered.” A system that makes claimants file their federal claims in state court, and their state claims in federal court, doesn’t budge the needle on the absurdity-meter? Not even a little?
Moving on to the second ruling, which addressed the consolidated securities class action against Baxter based on '34 Act claims, Judge Hart granted Defendants’ request to dismiss Plaintiffs' claims that “a substantial portion of [Baxter’s] improperly recognized revenue resulted from sales to fictitious customers, fictitious sales to actual customers, and the illegal rigging of bids for the sale of blood by products to the Brazilian government.” Sounds like some pretty bad stuff, huh?
However, focusing almost exclusively on defendants’ knowledge and intent (a/k/a scienter, but to the Nugget more unnecessary Latin-speak), the court found that Plaintiffs’ allegations of weak internal controls, management’s “ineffective financial review,” the receipt by management of monthly financial reports, and overstatements of income or revenues (without more), were not enough to meet the scienter requirement. As for the insider’s stock sales, the court found that “it is not reasonable to infer that [defendants] were motivated to overstate net income by a mere 1.5% ($ 33,000,000 over three years) in order to obtain more favorable rates or returns for the listed transactions valued at more than $ 4,000,000,000. Even if the 1.5% overstatement were to be considered significant enough to affect the alleged transactions, plaintiffs fail to allege facts connecting the overstatements to the transactions nor any facts supporting that the individual defendants would directly benefit from these transactions.”
Judge Hart did not grant or deny Plaintiffs’ permission to modify their complaint. Instead, he gave them 10 days to ask him permission to do that, and ordered them to attach a copy of the proposed amended complaint to their request.
You can read the decision at 2005 U.S. Dist. LEXIS 12006.
Nugget: “No case containing a § 11 claim is removable from state court unless it meets the exception set forth in § 16(c). Section 16(c) provides that it only applies to covered class actions "as set forth in subsection (b)." To be a class action set forth in § 16(b), the case must be inter alia a "covered class action based upon the statutory or common law of any State or subdivision thereof.”