Judge Finds Way Through GeoPharma Mist

Judge Shira A. Scheindlin (S.D.N.Y.), who first tossed the GeoPharma securities class action back in September 2005, took another look when Plaintiffs filed an amended complaint. The key to the forty page opinion is scienter, with Judge Scheindlin framing the question as how should a "court should determine whether the alleged failure to disclose additional information is intentional, reckless, or negligent, when the alleged misleading statement is literally true?"

The answer? Well, Judge Scheindlin said that "the long answer is found by reading the entire Opinion," something you should do if your interested. But for the rest of you, "the short answer is that a court must consider the viability of the alleged scheme to defraud, the entire alleged misstatement (not just certain phrases), the context in which the statement was made, the public's access to additional information, the defendant's response to any market confusion resulting from the alleged misstatement, and any other indicia that the defendant acted with fraudulent intent. If all of these factors are given full consideration, the mist created by creative counsel dissipates and the intent, or lack of it, is revealed."

After analyzing the scienter allegations and rejecting them, she concluded that "although plaintiffs again request leave to amend, further amendment would be pointless. Having already been given the opportunity to replead, plaintiffs, who are represented by highly experienced counsel, have surely presented all relevant facts by now, and have twice failed to plead scienter. Accordingly, the Amended Complaint is dismissed with prejudice."

You can read In re GeoPharma, issued January 27, 2006, at 2006 U.S. Dist. LEXIS 3342.

Nugget: "The purpose of section 10(b) and Rule 10b-5 is to punish knowing fraud or reckless behavior, not mistakes that arise from negligent or even grossly negligent behavior."