Late last year, the United States District Court for the District of New Jersey dismissed a securities fraud litigation that had been brought against a payment card processor in connection with the theft, by cybercriminals, of credit and debit card information from the company’s computer system. In re Heartland Payment Systems, Inc. Securities Litigation, Civ. No. 09-1043 (D.N.J., Dec, 7, 2009). As the court explained, shareholders of the defendant initiated their securities fraud claims after the defendant disclosed the data breach and its share price fell. The shareholder plaintiffs based their claims on allegations that the defendant had “misrepresented the state of its computer network security” and “concealed [an earlier] attack.” The misrepresentations were allegedly made during “earnings conference calls” and in financial statements filed with the Securities and Exchange Commission.

On the defendant’s motion to dismiss, the court examined the claims under the heightened pleading standards provided by the Private Securities Litigation Reform Act of 1995 (PSLRA). The court explained that the PSLRA requires fraud to be pleaded with particularity, and also requires plaintiffs to state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind. Citing the Supreme Court’s decision in Tellabs, Inc. v. Makor Issues & Rights Ltd., 551 U.S. 308 (2007), the court explained that a complaint will adequately allege state of mind only if a reasonable person would deem the inference of scienter to be at least as strong as any inference of non-fraudulent intent.

The court found that the plaintiffs had failed to meet this heightened pleading requirement. In particular, the court found that the defendant’s statements regarding its computer security, when examined with “careful attention to context,” were “not fraudulent.” The court also found that the plaintiffs had “failed to allege scienter.” Having found that the complaint failed to adequately allege two of the elements of its fraud claims, the court dismissed the complaint with prejudice.

To read a copy of the court’s decision, please click here.