Sometimes, I find it useful to take a step back and review the legal standard applicable to securities fraud claims under Section 10(b) and Rule 10b-5. To stay in court, and securities litigation all about surviving motions to dismiss, a plaintiff must allege all of the following:
- A material misrepresentation or omission;
- A connection between the purchase and sale of a security;
- Economic loss; and
- Loss causation.
Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148, 157 (2008). The Private Securities Litigation Reform Act, (PSLRA) and Rule 9(b) of the Federal Rules of Civil Procedure impose more exacting pleading standards. The PSLRA requires that a complaint:
[s]pecify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief , the complaint shall state with particularity all facts on which the belief is formed.
15 U.S.C. § 78u-4(b)(1)(B). The PSLRA also requires that a complaint, with respect to each act or omission:
[S]tate with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind [i.e., scienter].
Id. at § 78u-4(b)(2)(A). "With particularity" means that a plaintiff must provide "in great detail, all the relevant facts forming the basis of her belief." In re Silicon Graphics Inc. Sec. Litig., 183 F.3d 970, 985 (9th Cir. 1999), superseded by statute on other grounds. Rule 9(b) further requires that in alleging fraud, a plaintiff must "state with particularity" the circumstances constituting fraud or mistake.
Does this mean that the other elements of a securities fraud action are not subject to Rule 9(b)'s requirement of particularity? Yesterday, the Ninth Circuit Court of Appeals joined the Fourth Circuit in concluding that Rule 9(b) applies to all elements of a securities fraud, including loss causation. Oregon Public Employees Retirement Fund v. Apollo Group Inc., Case No. 12-16624 (Dec. 16, 2014). The Ninth Circuit gave three reasons:
- "Since Rule 9(b) applies to all circumstances of common-law fraud, Salaamed v. Tarsadia Hotel, 726 F.3d 1124, 1133 (9th Cir. 2013) cert. denied, 134 S. Ct. 1322 (2014), and since securities fraud is derived from common law fraud, it makes sense to apply the same pleading standard to all circumstances of security fraud."
- Loss causation is part of the "circumstances constituting fraud because, without it, a claim of securities fraud does not exist.
- Applying particularity to all elements creates a consistent standard for assessing complaints in Section 10(b) actions.
Because class action securities fraud suits rarely go to trial, the battle is almost always "lost and won" at the pleading stage. This makes the Ninth Circuit's opinion particularly important to both plaintiffs and defendants.