A US appeals court has dismissed a proposed securities fraud class action, clarifying when a corporation will be deemed to make misstatements knowingly. The decision emphasizes the importance of compliance procedures for vetting procedures when making public statements and also demonstrates the strict approach US courts take when examining pleadings alleging securities fraud.
The plaintiff shareholder in In re: Omnicare, Inc. Securities Litigationbrought a proposed class action against the defendant company, a pharmaceutical care provider, and several executives. The plaintiff alleged the defendants had committed securities fraud, making misrepresentations about the company’s compliance with Medicare and Medicaid regulations. The plaintiff alleged the company knew these statements were false based on internal audits that revealed evidence of fraudulent billing practices.
The US appeals court for the Sixth Circuit, based in Cincinnati, Ohio, dismissed the action. The decision found that the plaintiff had failed to plead adequate facts:
- That the defendant executives had actual knowledge of the audit results when the misrepresentations were made; and
- That there was an intent to defraud the public.
Class Action Dismissed
The court dismissed the proposed class action because the pleadings had failed to plead in sufficient detail the elements of securities fraud, in particular the knowledge aspects discussed here.
The court noted that there is a heightened pleading standard for securities fraud cases. The plaintiff did not state with particularity facts giving rise to a strong inference that the defendants acted with the required state of mind.
The plaintiff needed to plead that:
- the defendant knew the misstatements were false when they made them or failed to correct them; and
- there was an intent to defraud the public.
The court found that the pleadings failed to detail how the audit results were ever communicated to the executives or what those results were. There was also not sufficient detail pleaded regarding an intent to defraud the public. It was not enough to plead that the corporation desired to earn money; a link was needed between the misstatement and a specific payment.
The decision is an example of the strict approach US courts may take when examining the adequacy of a pleading alleging securities fraud.