The U.S. Court of Appeals for the Fourth Circuit has issued an opinion – Yates v. Municipal Mortgage & Equity, LLC, 2014 WL 890018 (4th Cir. March 7, 2014) – that clarifies the court’s position on several securities fraud issues.
(1) Core operations (scienter) – Core operations is a scienter theory that infers that facts critical to a business’s ‘core operations’ or an important transaction are known to the company’s key officers. Exactly how and to what extent the theory can be invoked to satisfy a plaintiff’s burden to plead a strong inference of scienter has been the subject of some judicial debate. In Yates, the Fourth Circuit held that “such allegations are relevant to the court’s holistic analysis of scienter,” but without other allegations “establishing the defendant’s actual exposure to the . . . problem, the complaint falls short of the PSLRA’s particularity requirement.”
(2) Rule 10b5-1 trading plans – Two of the individual defendants sold shares pursuant to non-discretionary Rule 10b5-1 trading plans. The court found that the use of these plans “further weakens any inference of fraudulent purpose” caused by the sales, but also noted that because one of the plans was instituted during the class period, it did “less to shield [that defendant] from suspicion.”
(3) Statute of repose for Section 11 claims – The case included Section 11 claims based on an alleged misrepresentation in a registration statement that was declared effective on January 14, 2005. The plaintiffs argued that their Section 11 claims were not barred by the applicable 3-year statute of repose – despite being brought on February 1, 2008 – because the actual offering did not commence until two weeks after the effective date. The court adopted what it described as the majority position: “Section 11 is violated when a registration statement containing misleading information becomes effective.” The fact that the plaintiffs “did not know that the registration statement was effective as of January 14 is of no consequence for statute of repose purposes.”
Holding: Dismissal affirmed.