• Second Circuit Affirms BlackBerry’s Victory; Remands For District Court To Reconsider Plaintiffs’ Motion To Amend With New Evidence
   

  09/06/2016
  On August 24, 2016, a three-judge panel of the United States Court of Appeals for the Second Circuit affirmed the dismissal of claims brought by putative class members under Section 10(b) of the Securities Exchange Act and Securities and Exchange Commission Rule 10b-5 against defendants BlackBerry Ltd. and certain of its officers.  Pearlstein, et al. v. BlackBerry, et al., No. 15-3991 (2d Cir. August 24, 2016).  The Court, however, vacated U.S. District Court Judge Thomas P. Griesa’s denial of plaintiffs’ motion for leave to amend, noting that the record was “insufficient” to determine whether leave was proper.  The Court remanded the case for reconsideration of the motion for leave to amend “[b]ecause the district court did not explain its basis for denying leave to amend.”
  
  Plaintiffs, shareholders of BlackBerry Ltd., alleged that defendants made material misstatements and omitted material information about the release of the BlackBerry Z10 smartphone.  Defendants moved to dismiss, citing the stringent pleading standards of the Private Securities Litigation Reform Act (“PSLRA”), which requires the allegations in a complaint to give rise to a “strong inference of scienter” in order to survive dismissal. The District Court held that the allegations in the Amended Consolidated Complaint – namely that the individual defendants were high-ranking executives who had an incentive for the company to succeed – failed to give rise to such a strong inference. In affirming the District Court’s decision, the Second Circuit highlighted the “fraud by hindsight” nature of plaintiffs’ argument: “plaintiffs’ theory of scienter in the Complaint is that because the release of the Z10 ultimately . . . [was] a failure, defendants must have known that it would be a failure and lied about this fact to investors.”  The Second Circuit rejected this approach to pleading scienter and held that such allegations fail to meet the heightened pleading standards of the PSLRA.
  
  However, the Second Circuit held that the record was insufficient for the Court to determine whether the District Court’s denial of leave to amend was proper.  The Court’s decision was driven in part by two significant developments that occurred after the District Court’s decision: (1) the United States Supreme Court’s decision in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, 135 S. Ct. 1318 (2015), which altered the standard of what makes a statement of opinion misleading in the Second Circuit, and (2) specific evidence from a 2013 internal Blackberry report that plaintiffs discovered after the District Court’s dismissal by reviewing pleadings and documents in an unrelated criminal case that supported allegations that consumer returns of the Z10 were outpacing sales, a claim that BlackBerry had contemporaneously denied.  Because Judge Griesa issued his decision to deny leave to amend without explanation, the Second Circuit vacated the order and remanded the case for reconsideration of whether plaintiffs should be granted leave to amend.  While expressing no view if the District Court should grant leave to amend, the Second Circuit noted that if the District Court comes to the same conclusion, it should explain the basis for its decision.
  Category: Scienter
  

Links & Downloads

• Pearlstein, et al. v. BlackBerry, et al