No Group Pleading

The “group pleading” doctrine creates the presumption that the senior officers of a company are collectively responsible for misrepresentations or omissions contained in public statements made by the company (e.g., press releases, SEC filings). District courts are divided over whether a plaintiff’s ability to plead in this manner has survived the enactment of the PSLRA with its heightened pleading standards for securities fraud.

Last week, the U.S. Court of Appeals for the Fifth Circuit made a strong statement against the use of group pleading. In Southland Sec. Corp. v. INSpire Ins. Solutions, Inc., 2004 WL 626721 (5th Cir. March 31, 2004), the court held that group pleading “cannot withstand the PSLRA’s specific requirement that the untrue statements be set forth with particularity as to ‘the defendant’ and that scienter be pleaded with regard to ‘each act or omission sufficient to give rise to a strong inference that the defendant acted with the required state of mind.'” As a result of the PSLRA’s repeated references to “the defendant,” the court found that Congress intended plaintiffs to inform each defendant of his or her particular role in the alleged fraud.

Holding: Affirmed in part, reversed in part (the decision also contains an interesting, if relatively uncontroversial, discussion on determining scienter for a corporate defendant).

Quote of note: “[C]orporate officers may not be held responsible for unattributed corporate statements solely on the basis of their titles, even if their general day-to-day involvement in the corporation’s affairs is pleaded. However, corporate documents that have no stated author or statements within documents not attributed to any individual may be charged to one or more corporate officers provided specific factual allegations link the individual to the statement at issue.”

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