On July 5, 2016, the Tenth Circuit Court of Appeals affirmed the dismissal of a putative securities fraud class action complaint filed by shareholders of airplane part manufacturer Spirit AeroSystems, Inc.  See Anderson et al. v. Spirit AeroSystems Holdings et al., No. 15-3142 (10th Cir. July 5, 2016). Plaintiffs asserted claims under Section 10(b) of the Securities Exchange Act of 1934. In the wake of defendants’ October 2012 announcement of a forward loss of $434.6 million in connection with specified projects, plaintiffs alleged that defendants had knowingly overstated the success of their efforts to cut costs and meet production deadlines for those projects in more than 40 statements in 2011 and 2012. The Court held that plaintiffs’ complaint was properly dismissed because they had failed to allege facts creating an inference of scienter that was cogent and compelling in light of the alternative inference that defendants had merely been overly optimistic.

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On June 8, 2016, the United States Court of Appeals for the Ninth Circuit and the United States District Court for the Southern District of New York issued decisions as to separate securities class action lawsuits, dismissing complaints against defendants Peregrine Pharmaceuticals, Inc. and Cellceutrix Corporation, in Fahey v. Peregrine Pharmaceuticals, Inc., et al., No. 14-5582, slip op. (9th Cir. Jun. 8, 2016) and Zagami v. Cellceutrix Corporation, et al., No. 15 Civ. 7194, slip op. (S.D.N.Y. Jun. 8, 2016).  

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On May 24, 2016, the United States Court of Appeals for the Sixth Circuit affirmed the District Court’s dismissal of securities fraud claims asserted against a corporation and the corporation’s CEO and CFO.  Doshi v. Gen. Cable Corp., No. 15 Civ. 5621, 2016 BL 164374 (6th Cir. May 24, 2016).  Although a corporate executive’s knowledge typically will be imputed to a corporation, the Court held that an executive’s state of mind, i.e., intent, will not be imputed unless that executive himself or herself makes a public misstatement.    This decision confirms the Sixth Circuit’s decision in In re Omnicare, Inc. Sec. Litig., 769 F.3d 455 (6th Cir. 2014) and makes clear that courts must review “all the allegations holistically” to determine whether a corporation’s scienter has been adequately pleaded.  Plaintiffs had alleged that defendants violated sections 10(b) and 20(a) of the Securities Exchange Act (the “Securities Act”) by recklessly issuing and/or approving materially false public financial statements.   

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On May 23, 2016,  the United States Court of Appeals for the Second Circuit overturned a jury verdict finding that defendants had violated the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”), and invalidated more than $1.2 billion in civil penalties.  The Court ruled that the Government had failed to establish that defendants, including Bank of America N.A. and Countrywide Home Loans, Inc. (“Countrywide”), had committed fraud because there was no evidence of the requisite intent to defraud at the time the contracts leading to the loan sales at issue were executed. U.S. ex rel. O’Donnell v. Countrywide Home Loans, Inc., — F.3d —, 2016 WL 2956743 (2d Cir. 2016).  The Second Circuit noted that, absent contemporaneous intent to defraud at the time a contract is entered into, the Government’s case amounted to nothing more than intentional breach of contract, which is not a predicate for a FIRREA offense.
 
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On May 20, 2016,  the United States Court of Appeals for the Second Circuit affirmed the dismissal on summary judgment claims against a Hong Kong-based auditor brought under Section 10(b) of the U.S. Securities Exchange Act of 1934 (the “Exchange Act”) and Section 11 the Securities Act of 1933 (the “Securities Act”), holding that plaintiffs had not demonstrated that the auditor had either recklessly issued “clean” audit opinions or did not believe the opinions were true when issued.   In re Puda Coal Securities Litigation, Inc., — F.3d —, 2016 WL 2942415 (2d Cir. 2016).  In so holding, the Court clarified that “audit reports are statements of opinion subject to the Omnicare standard for Section 11 claims,” and held absent evidence of subjective disbelief or actionable omissions of information regarding the basis for the opinion, there could be no claim under Section 11.

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On May 10, 2016, Best Buy shareholder plaintiffs filed a motion for rehearing in the United States Court of Appeals for the Eighth Circuit, seeking en banc review of the first circuit court ruling to apply the United States Supreme Court’s seminal decision in Halliburton II, and hold that a defendant had rebutted the fraud-on-the-market presumption of reliance by showing lack of price impact.  IBEW Local 98 Pension Fund et al. v. Best Buy Co. Inc. et al., case number 14-3178, in the U.S. Court of Appeals for the Eighth Circuit.  Plaintiffs seek rehearing of the Court’s 2-1 decision in April, which relied on Halliburton II in overturning the class certification order of the United States District Court for the District of Minnesota, after finding that the District Court had ignored evidence presented by defendants demonstrating that the alleged misstatements did not impact the share price.  In seeking rehearing, Plaintiffs are attempting to align the Eighth Circuit with the United States Court of Appeals for the Seventh and Eleventh Circuits, which have held that for purposes of invoking the fraud-on-the-market presumption, a plaintiff may point to evidence that a false statement maintained an inflated price until the price dropped as a result of a corrective disclosure.

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On April 22, 2016, Judge Kimba Wood of the United States District Court for the Southern District of New York denied defendants’ motion to dismiss plaintiffs’ claim brought under Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”), holding that the Private Securities Litigation Reform Act (“PSLRA”) safe-harbor for forward-looking statements does not apply to statements that incorporate misleading representations of present fact.  In re Salix Pharmaceuticals, Ltd., No. 14 Civ. 8925, 2016 WL 1629341 (S.D.N.Y. Apr. 22, 2016).  Plaintiffs had alleged misrepresentations regarding the inventory levels of defendant’s primary products, intentionally increasing levels beyond customer demand, in order to make the company appear more financially robust than it was.

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