On Wednesday, the Sixth Circuit sent a securities fraud case back to the district court for the third time, after reversing the district court’s second dismissal of the complaint under Fed. R. Civ. P. 8, 9(b) and 12(b)(6).  At issue in Frank v. Dana Corp., No. 09-4233 (6th Cir. May 25, 2011).pdf was the sufficiency of the putative class’s allegations that Dana Corp.’s former CEO and CFO deliberately or recklessly misled shareholders, through, among other things, filings with the SEC, press releases and conference calls, and section 302 certificates under Sarbanes-Oxley Act, about the prosperity of the company in 2004 and 2005, in violation of sections 10(b) and 20(a) of the Securities Exchange Act of 1934.

The Sixth Circuit held that the district court improperly evaluated the plaintiffs’ claims individually, instead of “holistically” as required by the Supreme Court’s recent decision in Matrixx Initiatives, Inc. v. Siracusano, 131 S. Ct. 1309 (2011) as well as Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007).  When viewed holistically, the Court concluded that the inference that the defendants recklessly disregarded the falsity of their statements was at least as compelling as the inference proffered by the defendants, that a faulty accounting system was to blame for the misstatements.  According to the Court, “[i]t is difficult to grasp the thought that [Dana Corp.’s former CEO and CFO] really had no idea that Dana was on the road to bankruptcy. From the first public statement that Dana’s earnings statements might be false, the company fell to its demise in a matter of nine months.”  Consequently, the Court held that the district court erred when it dismissed the plaintiffs’ section 10(b) claims for failure to adequately plead scienter. 

Moreover, because the district court’s dismissal of the plaintiffs’ section 20(a) “controlling person” claims stemmed from its dismissal of their section 10(b) claims, the Sixth Circuit also reversed the district court's dismissal of the section 20(a) claims.

Finally, the Court joined the First, Fourth, Fifth, Seventh and Eleventh Circuits in concluding that good faith is an affirmative defense to a section 20(a) claim.  Because the defendants bear the burden to demonstrate the applicability of an affirmative defense, the plaintiffs had no obligation to plead its inapplicability.

The Court’s decision in Dana Corp. is one of the few Sixth Circuit decisions in recent years to reverse the dismissal of a securities fraud claim brought under sections 10(b) and 20(a).