In its Tellabs decision, the U.S. Supreme Court created an “at least as compelling” standard for weighing competing inferences of scienter in securities fraud cases. The fact that a draw goes to the plaintiff was criticized by Justice Scalia in his concurrence, although he noted that his preferred “more plausible” standard would be unlikely to have much of a practical effect because “[h]ow often is it that inferences are precisely in equipoise?” Beware of rhetorical questions.
In In Re Paincare Holdings Sec. Litig., 2008 WL 348781 (M.D. Fla. Feb. 7, 2008), the court considered an amended complaint filed after a dismissal without prejudice. The magistrate judge (whose order was adopted by the court), found that scienter had been adequately plead because “the inference of scienter is equal to the inference of non-fraudulent intent.” In support of its holding, the decision noted the sheer magnitude of the financial restatement, the company’s ambitious acquisition strategy, and the company’s alleged false rationalization for the financial restatement.
Quote of note: “To the extent the reason offered to the public [for the financial restatement] was not true, one can infer that the Company had a reason not to delve too deeply in presenting its mea culpa to the public. While fecklessness is not recklessness, when truly falling on your sword, you aim for the heart.”
The 10b-5 Daily 