Tuesday, February 21, 2006

Back to the Drawing Board

Judge Neil Vincent Wake (D. Ariz.) has given Plaintiffs 30 days to try again in the Hypercom securities class action. In tossing the amended complaint, Judge Wake found that “Plaintiffs allege little more than the fact that Hypercom issued a financial restatement because of GAAP violations. The amount of the restatement is not overly probative. Plaintiffs have failed to allege with particularity how the GAAP violations were so obvious that Smolak and Alexander must have known about the misclassification. The culpability statement only provides that there were internal control deficiencies, which caused the accounting error. Such a culpability statement does not establish a strong inference that Defendants misrepresented Hypercom's financial figures with knowledge or deliberate recklessness.”

“Furthermore, the allegations of one confidential witness in this case fail to raise the level of the inference to ‘strong.’ While Plaintiffs may have alleged facts establishing a reasonable inference of scienter, the standard is a strong inference, which Plaintiffs have not raised. Therefore, Plaintiffs' claim that Defendants violated Section 10(b) of the Securities Exchange Act of 1934 is dismissed without prejudice.”

You can read In re Hypercom, issued January 26, 2005, at 2006 U.S. Dist. LEXIS 2669.

Nugget: “Plaintiffs need to plead particularized facts establishing a strong inference that Defendants acted with scienter, not mere negligence.”

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