Affirming the District Court’s decision to grant defendants’ motion to dismiss plaintiffs’ securities fraud claims, the Third Circuit Court of Appeals held that plaintiffs did not meet the heightened pleading standards of the Private Securities Litigation Reform Act (PSLRA) because they failed to allege specific facts demonstrating that defendants acted with scienter, i.e., by setting forth facts showing either (i) motive and opportunity to commit fraud, or (ii) strong circumstantial evidence of conscious misbehavior or recklessness.
Plaintiffs claimed that defendants knowingly falsified and inflated the earnings reported by the defendant company in order to preserve the company’s credit line. After noting that the complaint set out nothing more than an ordinary business motive (i.e., preservation of credit) and that such motivations were “typically insufficient to support a strong inference of fraud,” the Third Circuit found that plaintiffs’ bald allegations, which failed to specify which financial figures were manipulated or when defendants knew of or implemented the fraud, were insufficient. The Court explained that the mere misstatement of financial earnings coupled with only generalized allegations of motive and intent are not grounds upon which fraud can be inferred under the PSLRA. (Key Equities Investors, Inc. v. Sel-Leb Marketing, Inc., 2007 WL 2510385 (3d Cir. Sept. 6, 2007))