In Ashland, Inc. v. Oppenheimer, No. 10-5305 (6th Cir. July 28, 2011).pdf, the Sixth Circuit eschewed the checklist of non-exhaustive factors set forth in Helwig v. Vencor Inc., 251 F.3d 540, 552 (6th Cir. 2001).pdf, for analyzing scienter in securities-fraud cases.  Instead, the Sixth Circuit, in an opinion by Judge Cook, followed the “holistic” approach used by the Supreme Court of the United States in Tellabs, Inc. v. Makor Issues & Rights, Ltd, 551 U.S. 308 (2007).pdf—a test the Supreme Court recently reaffirmed in Matrixx Initiatives, Inc. v. Siracusano, 131 S.Ct. 1309 (2011).pdf.

Plaintiff Ashland purchased from Oppenheimer auction rate securities (“ARS”), which are long-term bonds with interest rates that are periodically reset through recurring auctions.  Investors holding ARS may liquidate their investments at any auction, but only if there is a sufficient demand.  Ashland sought to invest capital it had set aside for acquisitions.  Oppenheimer suggested ARS, claiming that they not only had strong credit ratings, but they were “safe and liquid” and, thus, “comparable to money market instruments.”  Oppenheimer also advised Ashland that underwriters “had never allowed an auction to fail and would continue to act to prevent such an occurrence.”  In February 2008, however, following failed auctions by Goldman Sachs and Piper Jaffray, the ARS markets collapsed.  Ashland tried to sell its ARS at auction, but with no success.  It was left with $194 million in illiquid ARS, on which it lost millions through discounting them for sale.  Because Ashland was without liquid capital for acquisitions, it incurred millions in finance charges to execute its intended acquisitions.

Ashland claimed that Oppenheimer knew about the ARS meltdown before it happened and filed suit against Oppenheimer alleging that Oppenheimer violated Section 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5.  Ashland also brought Kentucky state law claims against Oppenheimer.   The district court granted Oppenheimer’s motion to dismiss all claims, and the Sixth Circuit affirmed.

The Sixth Circuit found that many of Oppenheimer’s purported misstatements and omissions were not actionable, either because they lacked materiality or because Oppenheimer had no duty to disclose them.  Furthermore, relying on Tellab and Matrixx, the Sixth Circuit agreed with the district court that Ashland failed to plead scienter, but disagreed with the district court’s test for assessing scienter.  The Court refused to apply the checklist of factors that the Helwig Court deemed probabtive of scienter, and instead followed the “holistic” scienter examination espoused by the Supreme Court in Tellabs and Matrixx.  As the Supreme Court stated in Tellabs, “the court’s job is not to scrutinize each allegations in isolation but to assess all the allegations holistically.”  Tellabs, 551 U.S. at 326.  The Sixth Circuit concluded that “Ashland’s factual allegations, when considered together, do not give rise to a strong inference that Oppenheimer acted with scienter.”  Indeed, quoting Tellabs’ interpretation of the Private Securities Litigation Reform Act (“PSLRA”), the Sixth Circuit held that “to qualify as strong, and inference of scienter must be more than merely plausible or reasonable—it must be cogent and at least as compelling as any opposing inference of nonfraudulent intent.”  After weighing the competing inferences, it was more likely, the Sixth Circuit held, that Oppenheimer was caught off-guard by the collapse, even if negligently so.

Since the Sixth Circuit decided Helwig in 2001, the Sixth Circuit and courts within it have, with few exceptions, consistently cited it when evaluating scienter in securities fraud cases, even after Tellabs.  The Ashland case expressly undermines Helwig’s continued validity and highlights the proper scienter examination to be applied in the Sixth Circuit.