• Third Circuit Affirms Dismissal Of Securities Fraud Claims, Finding Plaintiffs’ “Kitchen-Sink” Pleading Insufficient To Meet Particularized Pleading Requirements
   

  08/29/2016
  On August 22, 2016, the United States Court of Appeals for the Third Circuit affirmed the lower court’s dismissal of a putative securities class action filed against Cooper Tire & Rubber Company (“Cooper”) and two of its officers.  OFI Asset Mgmt. v. Cooper Tire & Rubber Co., No. 15-2664 (3d Cir. Aug. 22, 2016).  The Third Circuit held that plaintiffs’ lengthy allegations amounted to nothing more than claims of fraud-by-hindsight and thus did not meet the requirement that claims of securities fraud be pled with particularity. 
  
  Plaintiffs were investors in Cooper who alleged that defendants made material misrepresentations and omissions related to Cooper’s planned merger with another tire company, in violation of Sections 10(b), 14(a), and 20(a) of the Securities Exchange Act of 1934.  In particular, plaintiffs alleged that documents filed with the SEC in connection with the merger made misstatements and omissions related to, among other things, a potential strike by factory employees, the strike’s likely impact on the pending merger, and developments in merger negotiations.  The district court granted defendants’ motion to dismiss the complaint, finding that these statements were either not false, were “forward-looking” statements accompanied by sufficient cautionary language, or lacked a strong showing of scienter.  The Third Circuit agreed with the district court and affirmed the dismissal. 
  
  In its opinion, the Third Circuit ruled that the defendants’ forward-looking statements were protected by the safe harbor of the Private Securities Litigation Reform Act.  For example, even though defendants stated that they did not expect the strike to derail the merger, that statement was nonactionable because defendants provided a sufficiently detailed warning that labor unrest posed a risk to the merger. The Court also held that it did not matter whether defendants believed this statement because the speaker’s state of mind is irrelevant when a forward-looking statement is accompanied by sufficient cautionary language, as was the case here.  
  
  The Court also held that even if some of defendants’ other statements might have been technically incorrect, plaintiffs did not plead facts supporting a strong inference that defendants made these misstatements with fraudulent intent.  For example, even if defendants misstated who orchestrated the strike, plaintiffs did not explain what defendants “stood to gain from this relatively minor” potential misstatement.  The alternative explanation that the statement was inadvertently stated imprecisely given its context was a more likely explanation than plaintiffs’ claim that defendants sought to defraud investors.
  
  Lastly, the Third Circuit rejected plaintiffs’ argument that the district court erred by directing them to focus at oral argument on just their five most compelling allegations.  The Court explained that plaintiffs’ sprawling 245-paragraph complaint presented an “extraordinary challenge” for the district court because of its length and lack of clarity.  The lower court’s effort to streamline plaintiffs’ arguments did not preclude it from also evaluating other allegations and assessing these claims holistically.  Following this approach, the Third Circuit explained that plaintiffs’ “post hoc scouring of countless pages of documents for a stray and inartfully phrased comment” is “just the sort of litigation maneuver” that the law is designed to prevent.
  Categories: Misstatement/Omission, Scienter
  

Links & Downloads

• OFI Asset Mgmt. v. Cooper Tire & Rubber Co.