To resolve a prior dispute between the plaintiffs, who made a series of loans to the defendant corporation, and the defendants, the parties decided to enter into a settlement agreement in which plaintiffs would receive a payment of cash plus shares of defendant corporation’s common stock. After entering into the settlement agreement, the defendant corporation announced, that it had failed to follow Generally Accepted Accounting Principles revenue recognition procedures, resulting in $8 million in liabilities for the fiscal year. After making this announcement, the defendant corporation’s stock price dropped significantly, resulting in the plaintiffs selling their shares of the corporation’s stock at a very low price.
Shortly thereafter, plaintiffs filed this action, alleging, among other things, that the defendant corporation, its accounting firm, and certain of its officers violated section 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5 by deceiving the plaintiffs to induce them to enter into a settlement agreement in which plaintiffs accepted shares of the defendant corporation’s stock at artificially inflated prices. The defendants filed a motion to dismiss, which the court granted, because the plaintiffs failed to plead scienter adequately or allege fraud with particularity. More specifically, the court held that the plaintiffs failed to identify any specific overstatements or misstatements about the corporation’s financial condition. In addition, the court held that while the complaint alleged that the individual defendants were responsible for various SEC filings and press releases through which false information was conveyed, the plaintiffs failed to specify any statements within these filings that were fraudulent. Finally, the court held that the plaintiffs failed to establish a strong inference of scienter, and the complaint lacked any allegations that defendants had a motive or opportunity to commit fraud. The court stated that although the plaintiffs alleged that the defendants acted so as to effectuate a stock settlement with the plaintiffs at an artificially inflated value of the stock, this allegation did not constitute an assertion of concrete and individual gain to each defendant resulting from the fraud. (Bui v. Industrial Enterprises of America, Inc., 2009 WL 130180 (S.D.N.Y. January 15, 2009))