The Circumstances of Fraud

Federal Rule of Civil Procedure 9(b) states that “[i]n alleging fraud or mistake, a party must state with particularity the circumstances  fraud or mistake.”  Whether FRCP 9(b) applies to the pleading of loss causation in securities fraud cases, however, has been an open question.

In the Dura case, the Supreme Court heard argument on the issue.  The Court ultimately punted, however, noting in its 2005 decision that it would “assume, at least for argument’s sake, that neither the Rules nor the securities statutes impose any special further requirement [beyond FRCP 8’s notice pleading standard] in respect to the pleading of proximate causation or economic loss.”  Perhaps not surprisingly, this quickly lead to a split in the lower courts, with some courts requiring notice pleading and other courts requiring particularity.  Moreover, this split has continued at the appellate level with, at a minimum, the Fifth Circuit (FRCP 8 applies) and the Fourth Circuit (FRCP 9(b) applies) taking opposite positions.

In Oregon Public Employees Retirement Fund v. Apollo Group, Inc., 2014 WL 7139634 (Dec. 16, 2014), the Ninth Circuit has addressed the split and come down firmly in favor of FRCP 9(b)’s particularity requirement applying to the pleading of loss causation (and, by extension, to every element of a securities fraud claim).  The court gave three reasons for its decision.  First, because FRCP 9(b) “applies to all circumstances of common law fraud, and since securities fraud is derived from common law fraud, it makes sense to apply the same pleading standard.”  Second, FRCP 9(b) applies on its face because loss causation, as an element of the claim, is “part of the ‘circumstances’ constituting fraud.”  Finally, applying FRCP 9(b) “creates a consistent standard through which to assess pleadings in 10(b) actions.”

Holding: Dismissal affirmed.

Quote of note: “We are persuaded by the approach adopted in the Fourth Circuit and hold today that Rule 9(b) applies to all elements of a securities fraud action, including loss causation.”

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