In a significant decision on federal securities pleading standards, the Sixth Circuit—led in this case by Judge Karen Nelson Moore—has attempted to clarify the previously and self-admittedly “muddied” waters of pleading standards in securities litigation. Last year, the Sixth Circuit diverged from the Second and Ninth as to whether § 11 of the Securities Act of 1933 imposes strict liability on a defendant corporation that makes untrue statements of material fact in connection with securities registration statements (with the Sixth Circuit holding that § 11 does impose strict liability), and the Supreme Court granted certiorari to resolve the split this term.
In an attempt to resolve a similar problem with the pleading standards for § 10(b) of the Securities Exchange Act of 1934, the panel in Ansfield announced new, comprehensive, and hopefully comprehendible standards for evaluating a plaintiff’s pleadings in a § 10(b) action. The Court noted that, in order to meet FRCP 9(b) and the PSLRA’s pleading standards, plaintiffs in these actions must make factual allegations both that a defendant made a false or misleading statement or omission, and that the misrepresentation or omission “concerned a material fact.” However, the Court criticized its own precedent in this area, noting that in past cases the Circuit has “failed to recognize that” a different framework applies to “cases based on affirmative misrepresentations,” as opposed to omissions, “and that different rules apply when the misrepresentation or omission concerns hard [objectively verifiable], as opposed to soft [speculation or opinion], information.”
As to “soft misrepresentations,” the Court adopted the First Circuit’s approach that pleading the defendant’s knowledge of the falsity of the statements essentially “raises the bar” for pleading the scienter requirement of § 10(b). The Court also took the time to point out that whether pleadings of “soft omissions” will meet the higher scienter bar ultimately will depend on the facts of the case. In discussing the materiality element of § 10(b), the Court merely noted that the element involves a heavily fact-based inquiry into which the district courts and the circuit must “tread lightly” and engage carefully. Finally, the Court reached the scienter requirement of § 10(b) as it relates to corporations. The Court once again disagreed with the Second and Ninth Circuits, but not by choosing one side of the circuit split on the issue. Rather, this time the Sixth Circuit established its own formulation of who within a corporation is able to commit material misrepresentations or omissions attributable to the defendant-corporation as a whole.
With regard to the first element of § 10(b) (material misrepresentations), the Court held that the plaintiffs in Ansfield pled sufficient facts to withstand the defendants’ motion to dismiss, having alleged both material and objectively false misrepresentations by the defendants. However, as to scienter, the Court held that the defendants did not make the misrepresentations with the necessary scienter (“intent to defraud the public”), nor could their statements be imputed to the corporation as a whole, and so the plaintiffs’ claim failed for this reason.
This case is designed to have a lasting effect on pleading standards, and we will continue to monitor this area to see how these standards are implemented in practice.