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     For our facts to some degree we are going to revert to the case method and consider five important circuit court cases in an effort to try to understand the different directions the Circuit Courts of Appeals are coming from with respect to pleading securities fraud after the Private Securities Litigation Reform Act. Before we do so, however, consider the legislative history relating to pleading state of mind as discussed at § 3.02. The Eighth Circuit's opinion in Green Tree, summarized the holdings relating to the enhanced pleading provisions of the PSLRA of the other eight circuit courts of appeals that previously opined. That summary, which is set forth at § 3.03, is incorporated by reference. The five cases that we will consider in some detail are the Ninth Circuit’s decision in  Silicon Graphics[1] (§ 3.05, § 3.10); the Second Circuit’s decision in Novak[2] (AnnTaylor Stores) (§ 3.08, § 3.10 et. seq); the Tenth Circuit in Fleming[3] (§ 3.09[1]), the Fifth Circuit in Zonagen[4] (§ 3.09[2]), and the Eighth Circuit in Green Tree[5] (§ 3.04); not necessarily in the order listed. Consider also in the context of the Tenth Circuit's views in Fleming as to materiality, excerpts (click HERE) from Ninth Circuit opinion in Transitional Hospital. The section(s) at which each case is discussed is included in parenthesis and the citations to each include a link to the case in Westlaw, if you feel the need for greater detail.

           The Eighth Circuit in Green Tree purported to see something of a consensus if we leave out the Ninth Circuit. One thing is correct-- the Ninth Circuit is the most difficult circuit in which to meet the PSLRA pleading standards. During 2001 and 2002, the Ninth Circuit considered ten cases on appeal in which the district court dismissed the complaint for failure to satisfy the PSLRA standards and in all ten the Ninth Circuit panels affirmed without any dissenting opinions. This in the context in which the appellate court does not attach any deference to the district court, but reaches its own conclusion based on the record. The Eighth Circuit post Green Tree in the three cases to reach it also affirmed the decisions of district courts dismissing class actions under the PSLRA pleading standard, although there were dissenting opinions in two of them. This is not the whole story, however, as if a motion to dismiss is denied absent of a seldom granted interlocutory the case will not reach the appellate court until after it is tried and if settled as many are will never reach the appellate court. To get a feel for the latitude courts have in determining whether a case meets the PSLRA enhanced pleading standard we look at the opinion (including the dissent) of the Eight Circuit in In re K-tel Intern., Inc. Securities Litigation.

     We want to think in terms of how to plead cases in a number of different categories, including the following: (a) Positive misrepresentations in the face of alleged deteriorating financial condition; (b) alleged false and misleading financial statements based on (i) alleged improper recognition of revenue, (ii) failure to write down inventory of items not moving, or (iii) other accounting irregularities; (c) in the accounting context differentiating between glaring and subtle irregularities and between those acknowledged by restating financials and those unacknowledged; (d) failure to disclose known but uncertain to occur factors that could significantly impact the company’s business, (e) failure to disclose (or belated disclosure of) apparent factors that could significantly impact the company’s business, and (f) serious operational problems that senior officials allegedly were aware of while making positive representations about the company’s business. With respect to all of the above, the extent to which motive (and what type of motive) may be relevant in pleading state of mind or otherwise and the role of circumstantial evidence in the same context. Keep in mind that in all the cases plaintiff did not have the benefit of discovery or mandatory disclosure available in other cases under Federal Rules of Civil Procedure 26. See § 4.01. In a sense, what is in issue in each case is whether plaintiffs are to be allowed to proceed to discovery, with the district court judge the gatekeeper. Realistically, courts know that if full blown discovery is allowed that increases the pressure on defendants to settle.

     We have made the point that under our appellate system that it may take an extended period of years before the Supreme Court reviews and clarifies the conflicting views of the Circuit Courts of Appeals relating to the enhanced PSLRA pleading standards. We also have stressed that even within a Circuit different panels although bound to some degree by decisions of other panels find a way when they choose to take a different direction. The Ninth Circuit has rendered 10 or 11 decisions since Silicon Graphics affirming district court decisions granting motions to dismiss for failure to comply with the PSLRA. The 9^th Circuit heretofore has never reversed such a district court opinion, although in one recent case a panel remanded because the district court refused to grant plaintiff an opportunity to amend the complaint after dismissal. See Eminence Capital, LLC v. Aspeon, Inc., 2003 WL 139525 (9^th Cir. Jan. 23, 2003).  On Feb. 13, 2003, a divided 9^th Circuit panel (including a member of the 8^th Circuit sitting by designation as part of the majority) reversed a district court decision granting defendant’s motion to dismiss. See

There is much in this opinion that is instructive and may in the view of some  a departure from Silicon Graphics, notwithstanding the insistence of the majority opinion to the contrary. Of particular significance is the contrasting view of majority and dissent as to impact of the Enron et al fiasco:

Majority: In this era of corporate scandal, when insiders manipulate the market with the complicity of lawyers and accountants, we are cautious to raise the bar of the PSLRA any higher than that which is required under its mandates. The District Court's failure to accept Plaintiffs' allegations as true and construe them in the light most favorable to Plaintiffs does just that. The District Court erred in finding that Plaintiffs' Second Amended Complaint failed to raise a strong inference that Defendants made false or misleading statements with actual knowledge or deliberate recklessness. We hold that Plaintiffs sufficiently pleaded a securities fraud claim under Section 10(b) and Rule 10b-5and established a prima facie showing that TPG and Continental are controlling persons under Section 20t(a).

Dissent: There is no doubt that in this post-Enron era suspicions have been raised regarding corporate malfeasance and insider trading. But the law is the law. Under the Reform Act, the burden to plead facts with particularity establishing the required element of materiality remains squarely on plaintiffs. Plaintiffs also maintain the burden to plead detrimental reliance. These pleading standards have not been met here. The district court properly dismissed the second amended complaint. I respectfully dissent.

Click HERE for the full opinon in America West Holding.