A federal district court denied a motion to dismiss claims under Section 10(b) of the Securities and Exchange Act of 1934 and Rule 10b-5. Plaintiffs alleged that defendants, acting as stock brokers and investment counselors, solicited and received funds from the plaintiffs which the defendants represented would be invested so that plaintiffs received a guaranteed investment return. Plaintiffs alleged, among other things, that defendants did not inform the plaintiffs of the potential risks of the investments and made other material misrepresentations and omissions in order to induce plaintiffs to invest. Ultimately, plaintiffs lost virtually their entire investment – including their retirement assets and proceeds from the sale of a house.
The Court disagreed with defendant’s contention that plaintiffs failed to meet the pleading burdens established under the Private Securities Litigation Reform Act (PSLRA). After noting that the PSLRA’s enhanced pleading standards only applied to the material misrepresentation and scienter elements of plaintiffs’ securities claim, and not the reliance and causation elements, the Court held that plaintiffs had met their pleading burden. Without any detailed analysis, the Court concluded that the plaintiffs: (i) specifically alleged instances where the defendants made misrepresentations or omissions and identified how each was misleading; (ii) alleged throughout the complaint that the defendants made representations with reckless disregard for the truth and with the knowledge that their actions were misleading plaintiffs; (iii) justifiably relied on the defendants’ material omissions or misstatements because, among other things, plaintiffs were unsophisticated investors who had a long standing business relationship with the defendants; and (iv) alleged that as a direct and proximate result of the defendants’ actions, plaintiffs suffered a variety of economic losses. (May, et al. v. Peninger, et al.. 2008 WL 509470 (D.S.C. Feb. 22, 2008))