Just The Fact(s)

In an unusual opinion, the U.S. Court of Appeals for the Eleventh Circuit has clarified its position on the pleading of scienter (i.e., fraudulent intent) under the PSLRA. The district court in the Scientific-Atlanta securities litigation had denied the defendants’ motion to dismiss, finding that “although individual allegations in the complaint, considered in isolation, may not have given rise to a strong inference of scienter, the allegations created such an inference when viewed collectively.” The defendants petitioned for interlocutory appeal, which the district court certified on the narrow question of whether factual allegations may be aggregated to create the necessary strong inference.

In Phillips v. Scientific-Atlanta, Inc., 2004 WL 1382906 (11th Cir. June 22, 2004) the Eleventh Circuit affirmed the lower court’s ruling. The PSLRA states that the complaint “shall, with respect to each act or omission alleged to violate this chapter, state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” As a threshold matter, the court noted “the Defendants have largely conceded the narrow, certified question and have attempted to parlay the appeal into a much broader review of the district court.” Under these circumstances, the court had little difficulty joining a number of other circuits in finding that nothing in the PSLRA suggests that scienter may only be inferred from individual facts.

The court also went beyond the certified question and found that scienter must be adequately plead with respect to each defendant and with respect to each alleged violation. In the instant case, however, “Plaintiffs’ complaint sufficiently alleges facts giving rise to a strong inference of scienter on the part of each defendant alleged to have committed each violation of the statute.”

Holding: Denial of motion to dismiss affirmed.

Quote of note: “We believe that the plain meaning of the statutory language compels the conclusion that scienter must be alleged with respect to each alleged violation of the statute. Although the plain language is less compelling with respect to alleging the scienter of each defendant, the statute does use the singular term ‘the defendant,’ and we believe that the most plausible reading in light of congressional intent is that a plaintiff, to proceed beyond the pleading stage, must allege facts sufficiently demonstrating each defendant’s state of mind regarding his or her alleged violations.”

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