Forest For The Trees

In its Tellabs and Matrixx decisions, the Supreme Court emphasized that whether a plaintiff has adequately plead a strong inference of scienter is subject to a holistic review (i.e., the allegations in the complaint must be considered in their entirety). This approach conflicts with the more traditional judicial approach of reviewing each scienter allegation separately and then coming to an overall conclusion as to whether the plaintiff has met its pleading burden.

In Frank v. Dana Corp., 2011 WL 2020717 (6th Cir. May 25, 2011), the court addressed this issue and held that in light of the Supreme Court’s decisions it must adopt a new, more efficient approach to evaluating scienter allegations. Exactly how efficient, however, may have come as a surprise to the parties. In just one page of analysis, the court concluded that in light of such factors as overall industry problems, rising prices for a key commodity, and the quick collapse of the company, it was “difficult to grasp the thought that [the defendants] really had no idea that Dana was on the road to bankruptcy.” Accordingly, the court found that the plaintiffs had adequately plead a strong inference of scienter because “the inference that [the defendants] recklessly disregarded the falsity of their extremely optimistic statements is at least as compelling to us as their excuse of failed accounting systems.”

Holding: Dismissal reversed. (The 10b-5 Daily has previously posted about an earlier, related appellate decision in the case.)

Quote of note: “[In Matrixx] the Court provided for us a post-Tellabs example of how to consider scienter pleadings ‘holistically’ in section 10(b) cases. Writing for the Court, Justice Sotomayor expertly addressed the allegations collectively, did so quickly, and, importantly, did not parse out the allegations for individual analysis. This is the only appropriate approach following Tellabs’s mandate to review scienter pleadings based on the collective view of the facts, not the facts individually. Our former method of reviewing each allegation individually before reviewing them holistically risks losing the forest for the trees. Furthermore, after Tellabs, conducting an individual review of myriad allegations is an unnecessary inefficiency.”

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