Definite Maybe

The U.S. Court of Appeals for the Ninth Circuit has issued an opinion on pleading scienter that includes new law (sort of) on the issues of collective scienter, SOX certifications, and profit motive.

In Glazer Capital Management LP v. Magistri, 2008 WL 5003306 (9th Cir. Nov. 26, 2008) the Ninth Circuit considered a case based on alleged misstatements in a merger agreement attached to an SEC filing. The district court found that the complaint failed to adequately plead falsity or scienter. On appeal, the Ninth Circuit made the following rulings (among others) regarding scienter:

(1) Collective scienter – The decision appears to open the door for collective scienter arguments in the Ninth Circuit, but it is far from clear on this point. The collective scienter theory holds that it is possible to raise the required inference of scienter about a corporate defendant without doing so with regard to a specific individual defendant. Although there is a published (and an additional unpublished) Ninth Circuit decision that appear to reject the collective scienter theory, in Glazer the panel found that the earlier published decision had “not foreclose[d] the possibility that, in certain circumstances, some form of collective scienter might be appropriate.” In the instant case, however, the alleged misstatements were not susceptible to the theory because they were broad legal warranties contained in a single document. Accordingly, the panel did not need to decide whether the collective scienter theory was viable.

(2) SOX certifications/Profit motive – Following precedent from other circuits, the panel found that neither the signing of SOX certifications nor allegations that the individual defendant “was positioned to profit personally from the proposed merger” were sufficient to raise a strong inference of scienter.

Holding: Dismissal affirmed.

Quote of note: “If the doctrine of collective scienter excuses Glazer from pleading individual scienter with respect to these legal warranties, then it is difficult to imagine what statements would not qualify for an exception to individualized scienter pleadings. In fact, because the merger agreement warranted that the company was in compliance ‘with all laws,’ then under the collective scienter theory urged by Glazer, so long as any employee at InVision had knowledge of the violation of any law, scienter could be imputed to the company as a whole. This result would be plainly inconsistent with the pleading requirements of the PSLRA. We are thus not faced with whether, in some circumstances, it might be possible to plead scienter under a collective theory.”