The Seventh Circuit is determined to be the market leader in interpreting U.S. Supreme Court securities litigation opinions. Following up on its application of Tellabs, last week it issued the first appellate decision utilizing the Stoneridge decision.
In Pugh v. Tribune Co., 2008 WL 867739 (7th Cir. April 2, 2008), the court considered the issue of “scheme liability” in the context of a corporate insider’s activities (as opposed to the actions of a third party). One of the individual defendants was a Tribune vice-president, as well as the director of circulation for a subsidiary. In his capacity as an officer of the subsidiary, the individual defendant allegedly signed false circulation audits that inflated the paid circulation figures for two publications. The plaintiffs argued that it was “‘forseeable’ that this scheme [to defraud the advertisers] would result in improper revenue which, in turn, would be reflected in Tribune’s published financial statements.”
The Seventh Circuit found that these allegations were insufficient. As in Stoneridge, the individual defendant “participated in a fraudulent scheme but had no role in preparing or disseminating Tribune’s financial statements or press releases.” Moreover, there was no allegation that Tribune investors had been informed of the false circulation audits. Accordingly, the plaintiffs failed to establish “the requisite proximate relation” between the advertiser fraud and the harm to Tribune’s investors.
Interestingly, the Seventh Circuit also addressed the issue of whether the scienter of this individual defendant could be imputed to Tribune on a respondeat superior theory. The court concluded that it could not because: (a) the individual defendant had no primary liability; (b) the misconduct of an employee of a subsidiary is not normally attributable to the corporate parent; and (c) the advertiser fraud was not undertaken to benefit Tribune. (For a discussion of the lower court’s decision on corporate scienter, see this post.)
Holding: Dismissal affirmed.
The 10b-5 Daily 