Ninth Circuit Reverses PSLRA Dismissal

The Ninth Circuit has reversed the dismissal of a PSLRA action, and although it’s a private placement case rather than a securities class action, it’s still a 10(b) action that offers new insight into multiple PSLRA requirements. Ninth Circuit Judge Dorothy W. Nelson authored the panel decision, which was joined by fellow Ninth Circuit Judges Stephen Reinhardt and Sidney R. Thomas. The panel eviscerated District Judge John C. Coughenour’s (W.D. Wash.) dismissal of all claims against Salomon Smith Barney on multiple grounds, including materiality, scienter, loss causation, reliance, damages, statute of limitations, and even state law securities claims.

Since it’s not a securities class action, you won’t mind if we skip the facts, right? Instead, let’s touch on some of the high points (or maybe they are low points to you), but either way, here’s the meat of the decision. In holding "that the district court erred in concluding that the contested statement was immaterial," the Ninth Circuit announced that it will now "expressly adopt the logic of the First and Seventh Circuits and hold that extension of the bespeaks caution doctrine to statements of historical fact is inappropriate."

Moving on to scienter, the Ninth Circuit found that "because [Plaintiff] alleges that the Defendants knew the contested statement's most obvious interpretation was false when made, [Plaintiff] has met the heightened pleading standard for scienter." The court continued, although we have "found that allegations of a motive to mislead, standing alone, cannot satisfy the heightened scienter standard, we are not precluded from considering allegations of motive in combination with other allegations of Defendants' intent to mislead or deliberate recklessness. Therefore, we hold that the totality of the allegations creates a strong inference that the Defendants acted with the requisite scienter and reverse the district court's conclusion to the contrary."

As for loss causation, the Ninth Circuit relied upon McGonigle v. Combs, 968 F.2d 810 (9th Cir. 1992) in holding that Plaintiff "sufficiently pled both elements of causation because it has alleged both that they would not have purchased the PCI stock but for the misrepresentation and that the Defendants' misrepresentation was directly related to the actual economic loss it suffered." McWho? Where’s Dura? Well, don’t worry, the court didn’t forget about it, they just said "Dura is not controlling," because "at issue is a private sale of privately traded stock." Besides, Plaintiff "not only asserted that it purchased the security at issue at an artificially inflated price, but pled that the Defendants' misrepresentation was causally related to the loss it sustained." So much for that.

Finally, the Ninth Circuit reviewed the district court’s conclusion that, "as a matter of law," Plaintiff "could not establish reliance because the notice contained sufficient cautionary language to make any reliance unreasonable." In rejecting that, the Ninth Circuit said "for the reasons discussed above, we refuse to extend the bespeaks caution doctrine to misrepresentations of historical facts as opposed to forward-looking projections. Therefore, we reverse the district court's finding that [Plaintiff] inadequately plead reliance."

For the rest of the meat, you can find the decision, issued August 2, 2005, here or at 2005 U.S. App. LEXIS 15815.

Nugget: "In finding the statement immaterial, the district court also extended the bespeaks caution doctrine to statements of fact, despite the lack of approval from this circuit for such application of the doctrine as well as the explicit rejection of such an extension by two other circuits."