Sunday, February 12, 2006

Allegations Against Execs Fail Beef Test

Looks like a mixed result on the motions to dismiss in the Dynex Capital securities class action. Although Judge Harold Baer, Jr. (S.D.N.Y.) denied the company’s motion, the CEO and President fared much better. In finding “that the allegations leveled against a particular individual must demonstrate that his or her culpability is based upon more than that person's mere position in the corporate hierarchy,” Judge Baer held that “with respect to the individual defendants, plaintiff's complaint fails the ‘where's the beef’ test.”

Why? Because “if plaintiff's allegations against Potts and Benedetti suffice to demonstrate scienter, senior officers of any corporation in which a pattern of wrongdoing is alleged would be liable for securities fraud. In broad terms, senior officers will always have ‘access’ to information indicative of malfeasance (if such information exists). The PSLRA demands more. Plaintiff has not alleged that Potts or Benedetti saw or had access to specific reports or statements that indicated malfeasance, or that contradicted their public statements. Nor has plaintiff alleged that Potts or Benedetti directly supervised or knew of any identified individual(s) who were engaged in specific wrongdoing. Therefore, plaintiff has failed to adequately plead scienter with respect to Potts and Benedetti.”

But is this just Round 1? Perhaps, as Judge Baer gave Plaintiffs 30 days to replead allegations against the execs.

You can read In re Dynex, issued February 10, 2006, here or at 2006 U.S. Dist. LEXIS 4988.

Nugget: “A plaintiff may, and in this case has, alleged scienter on the part of a corporate defendant without pleading scienter against any particular employees of the corporation.”

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