This is the latest in a series of columns by O’Melveny & Myers attorneys, focusing on key legal issues specific to a variety of U.S. industries.
In recent years, plaintiffs in federal securities cases have seized on language from two landmark U.S. Supreme Court decisions—Tellabs, Inc. v. Makor Issues & Rights, Ltd. (2007) and Matrixx Initiatives, Inc. v. Siracusano (2011)—in an attempt to erode the heightened pleading standards of the Private Securities Litigation Reform Act (PSLRA). These decisions recommend that courts take a “holistic” review of a complaint when deciding a motion to dismiss, that scienter allegations be analyzed “collectively” and not in “isolation.” Though unremarkable in context, plaintiffs argue that such language implies diminished scrutiny—an argument, plaintiffs suggest, that is supported by recent Sixth and Ninth Circuit references to a “quick” analysis and a consideration of “less precise allegations.” (See, e.g., Frank v. Dana Corp. (6th Cir. 2011) and South Ferry LP, No. 2 v. Killinger (9th Cir. 2008)).
The good news for general counsel potentially facing securities litigation is that the case law makes clear that was never the Supreme Court’s intent.
In Tellabs and Matrixx, the Supreme Court simply held that a reviewing court must look at all of the allegations relating to scienter and examine the complaint “in its entirety.” The call was for thoroughness, not “quick” or slackened scrutiny. Despite the push by plaintiffs for an easing of the standard, the good news for corporate defendants is that district court judges have thus far continued to hold plaintiffs to the PSLRA’s exacting pleading standard. Even when those courts cite the need for a “holistic” review, they decline to diminish the level of scrutiny.
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