What Were They Thinking?

The research analyst cases continue to generate interesting judicial opinions. Judge Gerard Lynch of the S.D.N.Y. recently denied the motion to dismiss in the DeMarco case, which involved allegedly fraudulent buy recommendations for Corvis Corp. stock made by Robertson Stephens. Last month, however, Judge Lynch came to the opposite conclusion in two facially similar cases against Robertson Stephens over buy recommendations for Redback Networks and Sycamore Networks stock. See Podany/Finazzo v. Robertson Stephens, Inc., 2004 WL 307296 (S.D.N.Y. Feb. 17, 2004). Why the difference?

In all of the cases, the issue was whether the defendants deliberately misrepresented a truly held opinion (i.e., that the stock was not a good investment). The court framed the inquiry in this manner:

“While in a misstatement of fact case the falsity and scienter requirements present separate inquiries, in false statement of opinion cases such as these, the falsity and scienter requirements are essentially identical . . . . [A] material misstatement of opinion is by its nature a false statement, not about the objective world, but about the defendant’s own belief. Essentially, proving the falsity of the statement ‘I believe this investment is sound’ is the same as proving scienter, since the statement (unlike a statement of fact) cannot be false at all unless the speaker is knowingly misstating his truly held opinion.”

In the DeMarco case, the court found, the complaint “described acts and statements inconsistent with the defendants’ published opinions about the value of Corvis stock,” including the defendants’ statements to others that Corvis stock was overvalued and their personal sales of Corvis stock. In contrast, the Podany and Finazzo complaints pointed “to no inconsistent statements or actions by defendants from which a factfinder could infer that the published opinions were not truly held.” Plaintiffs’ arguments that the opinions were not objectively reasonable, that the analyst had a motive to lie because he owned shares in companies that were being acquired by Redback and Sycamore, and that defendants had engaged in similar schemes (e.g., the Corvis allegations) were insufficient to establish any misstatements of opinion.

Holding: Motions to dismiss granted.

Quote of note: “While the commission of similar fraudulent schemes may be admissible evidence of defendants’ state of mind under Federal Rule of Evidence 404(b), alleging the existence of such other schemes does not sufficiently plead that the opinions in these cases were fraudulent.”

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