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Federal District Court Holds One Adequately Pled Actionable Misstatement Sustains Shareholders' Class Action Securities Claim

The Rhode Island federal district court has held that one adequately pled actionable misstatement combined with an adequate pleading of scienter with respect to that misstatement is sufficient to defeat defendants' motion to dismiss a shareholders' class action securities fraud claim. The court said that "further narrowing of the plaintiffs' claims [will] await a later stage of the litigation."

This shareholders securities claim arises out of alleged misstatements by the corporate defendant and its then-CEO respecting the effect of a merger on the corporation's finances. Specifically, plaintiffs claim that as a result of the misstatements, they purchased the corporation's stock at artificially inflated prices only to see the share prices drop by 20 percent when "investors learned the truth about the company's failure to integrate the merged-entity." The district court had initially dismissed plaintiffs' complaint because they had failed to allege plausibly that defendants' claimed misstatements had caused their loss. The court did not rule on defendants' alternative argument that plaintiffs had failed to plead any actionable misstatement or scienter. The First Circuit reversed and remanded the case for further proceedings, at the district court's discretion, with respect to defendants' alternative argument. Massachusetts Retirement System v CVS Caremark Corp. 716 F.3d 229 (1st Cir. 2013). The district court permitted defendant further briefing on their alternative argument.

The court reviewed the relevant law. To plead a securities fraud claim under Section 10(b) of the Securities Act and Rule 10b-5 of the Securities and Exchange Commission, plaintiff must alleged a material misrepresentation or omission and specify why it is misleading. In addition, plaintiffs must plead with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind. In the First Circuit, a plaintiff may satisfy the scienter requirement with a showing of either conscious intent to defraud or a high state of recklessness. The complaint must allege facts from which a reasonable person would deem the inference of scienter cogent and at least as compelling as any opposing inference.

The court rejected defendants' argument that plaintiffs had failed to specify the reason why each statement was misleading as required. Plaintiffs had alleged that that the corporate defendant had unilaterally lowered prices on over 50 percent of the contracts acquired by the merger to retain dissatisfied customers, contrary to defendants' representations. The court rejected defendants' argument that plaintiffs had to specify which contracts were affected. The law does not require plaintiffs to plead evidence, only to put a significant amount of meat on the bones of the complaint. The court did agree that some of defendants' representations may have been "inactionable puffery," however, that description did not apply to the representation that customer dissatisfaction played no role in the re-pricing of contracts.

With respect to scienter, the court said the CEO had specifically denied during an earnings call with stock analysts that customer dissatisfaction had prompted the re-pricing of the contracts. The court observed that since the announcement of the merger, analysts had been questioning the corporation's ability to integrate the acquired business. This plausibly gave the CEO a motivation to make the alleged misrepresentation. The defendants had not offered any alternative explanation for the representation. The court concluded that because plaintiffs had adequately pled at least one misrepresentation and had adequately pled scienter with respect to that one misrepresentation, it would not dismiss the complaint.

City of Brockton Retirement System v. CVS Caremark, C.A. No. 09-554, 2013 WL 6841927 (D.R.I. Dec. 30, 2013)

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