Friday, September 22, 2006

Eleventh Circuit Sides with Majority of Circuits, Holding Non-Fraud Securities Claims Must be Pled with Particularity

Per Wagner v. First Horizon Pharmaceutical Corp., 2006 WL 2661652 (11th Cir. Sept. 18, 2006):

The question presented to us, however, regards whether there are circumstances when Federal Rule of Civil Procedure 9(b) would require nonfraud securities claims to be pled with particularity. Our sister circuits split on this matter. Compare Cal. Pub. Employees' Ret. Sys. v. Chubb Corp., 394 F.3d 126, 161 (3d Cir.2004); Rombach v. Chang, 355 F.3d 164, 171 (2d Cir.2004); Lone Star Ladies Inv. Club v. Schlotzsky's, Inc., 238 F.3d 363, 368 (5th Cir.2001); In re Stac Elecs. Sec. Litig., 89 F.3d 1399, 1404-05 (9th Cir.1996), with In re Nationsmart Corp. Sec. Litig., 130 F.3d 309, 314- 15 (8th Cir.1997). In line with the majority of circuits to address the matter, we hold that Rule 9(b) applies when the misrepresentation justifying relief under the Securities Act is also alleged to support a claim for fraud under the Exchange Act and Rule 10(b)-5.

We conclude that a § 11 or § 12(a)(2) claim must be pled with particularity when the facts underlying the misrepresentation at stake in the claim are said to be part of a fraud claim, as alleged elsewhere in the complaint. It is not enough to claim that alternative pleading saves the nonfraud claims from making an allegation of fraud because the risk to the defendant's reputation is not protected. It would strain credulity to claim that Rule 9(b) should not apply in this allegation: The defendant is a no good defrauder, but, even if he is not, the plaintiff can still recover based on the simple untruth of the otherwise fraudulent statement. Nor is it enough to present a general disclaimer in an attempt to immunize the nonfraud claims from the Rule 9 requirements, for the same common sense reasons. The purpose of the rule is to protect a defendant's good will and reputation when that defendant's conduct is alleged to be fraudulent.


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