Nevada Appellate Lawyer & Attorney : Tami D. Cowden : Nevada Supreme Court, Ninth Circuit Court of Appeals

In Betz v. Trainer Wortham, the Ninth Circuit made small amendments to the previous opinion, in which the three panel court had held that a jury must decide whether a securities fraud plaintiff was put on inquiry notice of fraud long enough before she filed suit for the statute of limitations to have run. With such amendments, the motion for en banc rehearing is denied. Judge Kozinski writes a stinging dissent from that denial, noting that the Court places itself in “left field again”—that is, alone among all the appellate circuits—by requiring a jury to determine whether the investor was placed on inquiry notice where the facts are undisputed.  Noting here that the investor claims she had been promised zero risk on her investment, yet understood statements showing a decrease in her principal, Kozinski argues that as a matter of law, she was placed on sufficient inquiry notice to start the running of the statute.

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Another victory for companies who face shareholder suits was handed down yesterday, following up on the Credit Suisse ruling earlier this week. 

In Tellabs, Inc. v. Makor Issues & Rights, Ltd., the U.S. Supreme Court clarified pleadings requirements set forth in the Private Securities Litigation Reform Act ( PSLRA). The PSLRA heightens the pleading requirements for suits alleged fraud under the §10b of the Securities Exchange Act or  Exchange Commission Rule 10-5, requiring particularity for claims of fraud and scienter.  Specifically, it  requires that plaintiffs “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.”

The Court held that these standards require a district court to weigh the competing inferences of fraud and innocence arising from the alleged facts, and that the inference of scienter must be “cogent and at least as compelling as any opposing inference of nonfraudulent intent.” In making such comparison, the district court may consider “omissions and ambiguities” as weighing against scienter.

The opinion was authored by Justice Ginsberg, with five justices joining. Justice Scalia concurred in the outcome, but asserted that a “strong inference” would require the any inference of scienter to be more compelling than that of no fraudulent conduct. Justice Alito also concurred, arguing that the weighing of facts should include only those facts alleged with particularity. Justice Stevens dissented, urging that a “probably cause” standard like that employed in criminal cases be the test.  

As ever when it happens, I find myself amazed to be in agreement with Justices Scalia (and now Alito) on anything. However, it does seem that if we accept that the intent of the PSLRA was to limit opportunistic suits, the “strong inference” should outweigh other possibilities, and specific facts, rather than conclusory allegations, should be what determined the inferences. 

However, with the frank acknowledgement that “omissions and ambiguities” are relevant to determining the relative weight of the inferences, this opinion does offer defendants some real teeth.

Blawgletter predicts the ruing will  "enhance the importance, and improve the quality, of story-telling in securities fraud pleadings."    Telling the client's story  is a concept always near and dear to my heart.  I may have to think about a seminar on tellig the story in pleadings.

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In Betz v Trainer Wortham & Co, Inc.,  the Ninth Circuit reversed the district court’s finding that the federal securities fraud claims were time barred. The district court had granted summary judgment because the plaintiff was aware of the depleting value of her portfolio, contrary to promises she had been made, more than two years before the filing of her complaint. The Court held that because the plaintiff was promised she would be taken care, she could not be aware of the scienter element of securities fraud until the defendants admitted to her that they would do nothing to recover her losses.  

The Court also adopted the Tenth Circuit’s “inquiry-plus-reasonable-diligence” standard to determine when a security fraud claim accrues for purposes of the statute of limitations. Under this standard, the statute begins running when the plaintiff had sufficient suspicion of fraud to investigate further, and with such investigation, should have discovered the facts constituting fraud. Here, because the, concerns of the plaintiff, a naïve investor, were lulled by the defendants’ assurances, the Court rejected the argument that plaintiff’s declining account balances should have put her on inquiry notice. Because a reasonable jury could conclude that the plaintiff’s delay was not unreasonable, summary judgment should not have been granted. 

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