The 10b-5 Daily

The U.S. Court of Appeals for the Fourth Circuit has issued its first post-Dura decision on loss causation. In Glaser v. Enzo Biochem, Inc., 2006 WL 2692848 (4th Cir. Sept. 21, 2006), the court examined whether the plaintiffs had adequately alleged a Virginia common law fraud claim related to the sale of securities. (The federal securities claims had previously been dismissed on statute of limitations grounds.)

The court found that it “is only after the fraudulent conduct is disclosed to the investing public, followed by a drop in the value of the stock, that the . . . investor has suffered a ‘loss’ that is actionable after the Supreme Court’s decision in Dura.” Because the complaint appeared to concede that the plaintiffs had sold their shares before the “alleged truth about Enzo’s science” was “publicly revealed,” any losses they suffered “must have been the result of market factors or other factors, not the revelation of the alleged truth.”

Whether plaintiffs who combine nonfraud and fraud securities claims in the same complaint are subject to the particularity pleading requirement of Fed. R. of Civ. P. 9(b) has been an open issue. Although claims under Section 11 and Section 12(a)(2) of the Securities Act of 1933 do not require the plaintiff to establish fraudulent intent, a number of federal circuits (2nd, 3rd, 5th, 7th, and 9th – with only the 8th disagreeing) have held that these claims must be plead with particularity if they “sound in fraud” based on the existence of a related securities fraud claim.

The U.S. Court of Appeals for the Eleventh Circuit has joined the majority position this week. In Jacobson v. First Horizon Pharm. Corp., 2006 WL 2661652 (11th Cir. Sept. 18, 2006), the court found that a Section 11 or Section 12(a) claim “must be pled with particularity when the facts underlying the misrepresentation at stake in the claim are said to be part of a fraud claim, as alleged elsewhere in the complaint.”

The court also addressed whether the complaint was improperly dismissed pursuant to Fed. R. Civ. P. 12(b)(6) on the basis that it was a “shotgun pleading” that did not clearly link its alleged facts to the causes of action. Interestingly, the district court had granted the dismissal and conditioned any amendment of the complaint “on the [plaintiffs’] payment of the defendants’ costs and fees associated with the motion to dismiss.” On appeal, the court avoided that issue by holding that instead of dismissing the complaint, the district court should have sua sponte ordered a repleading for a more definitive statement of the claim pursuant to Fed. R. Civ. P. 12(e).

Quote of note: “It is not enough to claim that alternative pleading saves the nonfraud claims from making an allegation of fraud because the risk to the defendant’s reputation is not protected. It would strain credulity to claim that Rule 9(b) should not apply in this allegation: The defendant is a no good defrauder, but, even if he is not, the plaintiff can still recover based on the simple untruth of the otherwise fraudulent statement.”

The Sarbanes-Oxley Act of 2002 (“SOX”) extends the statute of limitations for federal securities fraud to the earlier of two years after the discovery of the facts constituting the violation or five years after the violation. Although the legislation clearly provides that it “shall apply to all proceedings addressed by this section that are commenced on or after the date of enactment of this Act [July 30, 2002],” left unresolved is whether Congress intended to revive claims that had already expired under the earlier one year/three years statute of limitations.

In an opinion issued this week – Margolies v. Deason, 2006 WL 259788 (5th Cir. Sept. 11, 2006) – the Fifth Circuit has joined the clear majority of federal appellate courts (including the Second, Third, Fourth, Seventh, and Eighth Circuits) in holding that the new statute of limitations should not be applied retroactively. The Eleventh Circuit remains the only dissenter.