The 10b-5 Daily

Rambus, Inc. just announced that the securities class action pending against it in the N.D. of Cal. has been dismissed with prejudice — apparently with the approval of the lead plaintiff.

In Johnson v. Tellabs, Inc., 2003 WL 21183390, (N.D. Ill. May 19, 2003), the court addressed the viability of group pleading following the passage of the PSLRA. Tellabs is one of the numerous securities class actions that arose out of the severe downturn in the telecommunications industry in 2001 and 2002. The court granted defendants’ motion to dismiss on multiple grounds. Of particular interest, however, is the court’s discussion of group pleading.

The “group pleading” doctrine creates the presumption that senior executives of a company may be held liable for misrepresentations or omissions contained in the public statements made by the company (e.g., press releases, SEC filings, etc.). Courts are divided (including a clear split within the N.D. of Ill.) over whether a plaintiff’s ability to plead in this manner has survived the enactment of the PSLRA. The Tellabs court strongly suggested that it has not.

First, the court held that even if the group pleading doctrine continues to be viable in “some form,” plaintiffs must allege facts “relating to an individual defendant’s duties or legal obligations that create a presumption that the company’s statement was somehow caused by or attributable to an individual defendant.” Merely alleging an individual defendant’s title is not enough. Second, the court concluded that group pleading can never be used to establish scienter, because the PSLRA expressly requires that scienter be plead with particularity as to each defendant.

Holding: Motion to dismiss granted, with leave to replead.

Over Memorial Day weekend, the Los Angeles Times ran a critical two-part story on Cisco Systems Inc. The first article focused on Cisco’s loans to financially-troubled customers. The second article focused on Cisco’s acquisitions of companies backed by Sequoia Capital. The author noted that last month Judge Ware of the N.D. of Cal. refused to dismiss the consolidated securities class action against the company, its auditor, and top executives.

Quote of note (first article): “Ware wrote that the allegations contained in the 198-page complaint, including a claim that Cisco artificially inflated its revenue through its lending operation, were ‘sufficient to support a strong inference’ of wrongdoing. His ruling clears the way for investor attorneys, who are seeking billions of dollars in damages, to collect internal documents and conduct sworn interviews with Chief Executive John Chambers and other executives.”