Hypothetical 3             C. Class Discussion

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Sarbanes-Oxley Act

SECTION 4
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     2. There was not much controversy (except as to group pleading issues, which we disregard for the moment) that Rule 9(b) in a 10b-5 action required pleading the representations alleged to have been false, when, where, how, and by whom made. The controversy related to (a) factual basis necessary to plead representations were false and (b) extent to which state of mind could be pled generally.  The Ninth Circuit and the First Circuit were most explicit as to their views in this respect as to (a), pleading reasons representations were false. What where their views?

     3.  Rule 9(b) stated in effect that state of mind could be pled generally and the Ninth Circuit held that it meant what it said in this respect. Second and some other Circuits required pleading that created a strong inference of scienter. Is there any doubt that the PSLRA, when state of mind is an issue in a private action under the Exchange Act, repudiated the 9th Circuit view and adopted as a minimum the requirement that state of mind be pled with particularity and create a strong inference of a culpable state of mind? See Section 3.02.

     4. Match up the provisions of (b)(1) and (b)(2) of Section 21D of the Exchange Act with the Rule 9(b) counterparts. To what extent have the Circuits reached a consensus in applying these provisions. See § 3.03. Keep in mind that a motion to dismiss generally stays discovery under the PSLRA until the motion to dismiss is ruled upon, which means ordinarily the pleadings do not have the benefit of discovery. See Background. Based on Judge Harmon's outline of the elements of a Rule 10b-5 claim what we discussed under  Facts/Questions for Chapter 1,  what are the pertinent elements that plaintiff must  plead (and prove) to establish a Rule 10b-5 claim.

     5.   "In considering a Rule 12(b)(6) motion, the court will accept as true all of the factual allegations contained in the complaint and any reasonable inferences that can be drawn therefrom. Nami v. Fauver, 82 F.3d 63, 65 (3d Cir.1996). Dismissal of claims under 12(b)(6) should be granted only if "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957)." Virtually every case post-PSLRA recites this prre-PSLRA  rote learning as if it continues to be appropriate, at least in some contexts. Throughout this chapter, ask yourself, is this an oxymoron in light of the PSLRA pleading standards as to (1) the reasons the representations are false or misleading or (2) creating a strong inference of a culpable state of mind, or (3) requiring the complaint to set forth with particularity all facts on which an information and  belief allegation is  based? Also ask to what extent in ruling on the motion to dismiss did the court actually rely on the assumption the factual allegations were true and draw all reasonable inferences from the representation. Consider also in this context the First Circuit distinction between a reasonable inference and a strong inference. See § 3.07. Add to the mix the statement of a Ninth Circuit Panel "that when determining whether plaintiffs have shown a strong inference of scienter, the court must consider all reasonable inferences to be drawn from the allegations, including inferences unfavorable to the plaintiffs. " See 12.Gompper v. VISX, Inc., 298 F.3d 893 (9th Cir. 2002)

     6. We will come back to this issue, but is the information and belief provison of (b)(1) (see Background) a separate pleading standard under the PSLRA applicable both to pleading the reasons representation are false or misleading or to pleading scienter or to both? For the Eighth Circuit view see § 3.14? What were the Rule 9(b) views as to pleading based on  information and belief. See § 3.14 and see discussion in Greebel at Background.

     7. No matter how much plaintiffs may attempt to disguise it other than pleading the representations that were made and by whom (ordinarily a matter of record) other allegations relating to reasons were false at time made and what defendants knew at the relevant period of time are based on information and belief. See basis of allegations in Novak referred to by Judge Schwartz in Novak I discussed at Section 3.10.

     8. In what innovative fashion did the amended pleading in Novak II  improve the plaintiffs position vis a vis the motion to dismiss? See Section 3.10, In what respect to the Second and Ninth Circuit differ in this regard. See Section 3.11. What has been the impact on the district courts? See Section 3.13[1]. What ethical problems are posed in interviewing employees and former employees of the defendant. Click Here. The Fifth Circuit has adopted Novak and expanded on it. Click HERE. The First Circuit has also adopted Novak. Click HERE. The Fifth Circuit followed Novak but at the end of the day the court sustained the granting of the motion to dismiss. Why?

   . 9. Take a cursory look at the cases included under Factual basis and explain in broad terms the different views among the circuit courts of appeals as to (1) what constitutes scienter, (2) the extent to which motive and opportunity is relevant in pleading scienter,  (3) otherwise pleading scienter, and (4) pleading materiality.

     10. The Ninth Circuit in Silicon Graphics as a result of the PSLRA modified its view as to what is required to allege "recklessness" as a basis for alleging 10b-5 scienter. What does this new standard require. See Section 3.05? The Eighth Circuit the ninth and last to date to opine on PSLRA pleading provisions summarized views of other eight circuits, what did it say about the Ninth Circuit's view in this regard. See Section 3.03.

     11. Green Tree in summarizing the other circuits noted that although there is variation among the circuits that have spoken on the extent to which motive and opportunity alone can satisfy the strong inference of scienter standard, there is general agreement as to the type of motive and opportunity that is not relevant and that which at least may support a strong inference of scienter. Explain. See See Section 3.03..

      12. Be prepared to discuss Green Tree in depth. See Section 3.04.

      13. Be prepared to discuss Fleming in depth; particularly, with emphasis on the concept of materiality as an aspect of scienter. See Section 3.09[1]. In the same context, consider what the Ninth Circuit had to say in Transitional Hospital. Consider also what we noted about materiality in Chapter 1 at Section 1.11[2] and what the Supreme Court said specifically in TSC Industries.

       14,  Be prepared to discuss Zonagen and Ampad in depth. See Section 3.09[2].

       15.  Be prepared on a comparative basis and applying all of the above to discuss the conflicting views between the majority and the dissent in K-Tel.. See also § 3.09[3], where similar issues are discussed on the district court level.

        16. Are the PSLRA enhanced pleading provisions applicable to actions based on Section 11 or 12(a)(2) of the Securities Act? See § 3.16[1].    

        17. Is Rule 9(b) applicable to actions based on Section 11 or 12(a)(2) of the Securities Act? See § 3.16[2.

         18. Is discovery stayed by the PSLRA on a motion to dismiss a Section 11 or 12(a)(2) action under the Securities Act? See Securities Act, § 27(b).