The District Court denied defendants’ motion to dismiss plaintiffs’ class action complaint asserting claims under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, holding, among other things, that plaintiff adequately pleaded scienter under the standard established by the Supreme Court in Tellabs Inc. v. Makor Issues & Rights, Ltd. Plaintiff alleged the corporate defendant made material misstatements by stating in documents filed with the Securities and Exchange Commission that employment contracts it entered into with its CEO and President were “designed to insure their long-term employment” when, in fact, the defendants knew at the time that the two executives were facing “financial ruin” based upon their efforts to avoid paying more than $100 million in taxes by investing in tax shelters the IRS determined to be invalid. The complaint alleged that defendants’ also failed to disclose anything about the executives’ financial difficulties, their impending bankruptcy and the likelihood that their employment would terminate as a result.
After holding that, under Tellabs, a plaintiff must allege facts giving rise to at least as strong an inference of scienter as an inference of a defendant’s innocent intent, the Court ruled that plaintiff’s complaint met this standard. Defendants argued that the most reasonable inference to draw from plaintiff’s complaint was that at the time the defendants executed the employment contracts, they did not believe that the executives’ tax problems would impair their continued employment. The Court disagreed, characterizing defendants’ argument as a flawed attempt to reframe the scienter question to require plaintiffs to allege that defendants acted with scienter when signing the employment agreements. The Court ruled that plaintiffs simply needed to allege defendants acted with scienter in making the alleged material misstatements.
Finally, based on its finding that defendants “seized on the execution [of the employment agreements] to boast to investors, without disclosing the significant tax problems faced by the executives, that the contracts would, in effect, ‘ensure’ the long-term employment of the executives,” the Court concluded that plaintiff’s complaint gave rise to an inference of scienter at least as compelling as defendants’ competing innocent inference and denied the motion to dismiss. (New Jersey v. Sprint Corp., 2008 WL 191780 (D. Kan. Jan. 23, 2008))