In one of the first decisions to apply the Supreme Court’s Tellabs, Inc. v. Makor Issues & Right, Ltd. decision, a Missouri district court dismissed a securities fraud class action lawsuit filed against a corporation and its management. The complaint alleged that the defendants made multiple false statements that artificially inflated the defendant company’s stock price and that the stock price fell by nearly 50% when a corrective disclosure was made just weeks following the allegedly false statements.
The court first held that the plaintiffs failed to sufficiently plead that the allegedly false statements (regarding the corporation’s anticipated earnings and expected performance) were false at the time they were made. Because the statements were based on estimates that were made in accordance with the Company’s established methodology for making such estimates and were approved by the company’s internal and external actuaries, the court ruled that they were not false when made.
The court also ruled that the plaintiffs failed to adequately plead scienter. Applying the standard established in Tellabs, the court ruled that the plaintiffs were required to plead facts that gave rise to an inference of scienter at least as compelling as any opposing inferenceof nonfraudulent intent. The plaintiffs sought to meet this burden by, among other things, alleging that both the CEO and CFO engaged in insider stock sales while the allegedly false statements remained uncorrected. However, the Court found this basis to be insufficient because the plaintiffs failed to allege any facts showing that such sales were “unusual.”
While the Court was “sympathetic” to plaintiffs’ additional argument that the proximity of the alleged misrepresentations and “subsequent revelation of the truth” suggested that defendants knew the statements were false, it ruled that this “possibility” fell short of meeting the PSLRA’s requirement that plaintiffs articulate “facts” supporting a strong inference of scienter in order to withstand a motion to dismiss. (Elam v. Neidorff, 2007 WL 1880747 (E.D. Mo. June 29, 2007))