Ostrich Defendants

“A defendant whose head is in the sand with respect to corporate earnings likely has his head in the sand with respect to his Sarbanes-Oxley certification as well.” So says Judge James L. Robart (W.D. Wash.) in the Watchguard securities class action. He also said that “although the passage of Sarbanes-Oxley may make it somewhat more reasonable to infer that a certifying Defendant whose head is in the sand is being deliberately reckless, it does not transform the PSLRA's requirement of falsity-plus-scienter into a requirement of falsity-plus-a-Sarbanes-Oxley-certification.”

So “because the PSLRA places the burden on Plaintiffs to plead facts giving rise to a ‘strong inference’ that a defendant's head was above the sand, or was at least deliberately recklessly buried in the sand, its defendant-friendly provisions trump the plaintiff-friendly Sarbanes-Oxley Act, at least in this case.”

Result? Case dismissed with leave to amend.

You can read In re Watchguard, issued April 21, 2006, at 2006 U.S. Dist. LEXIS 27217.

Nugget: “Corporate officers make mistakes. If the market is efficient, it will punish corporations whose mistakes are too frequent or too egregious. Securities fraud, however, requires much more than a mistake -- it requires a misstatement that was either intentional or deliberately reckless.”