Successful Motions to Dismiss Securities Class Actions in 2014

Motions to dismiss have been called “the main event” in securities class actions. They are filed in over 90% of securities class actions and they result in dismissal close to 50% of the time they are filed. In contrast, out of 4,226 class actions filed between 1995 and 2013, only 14 were resolved through a trial, and of those, only five resulted in verdicts for the defendant. In between a denial of a motion to dismiss and a trial are i) discovery, ii) opposition to class certification, iii) motion for summary judgment, iv) mediation, and v) settlement. Unfortunately for defendants in securities class actions, class certification is granted in whole or in part 84% of the time, and there is no summary judgment decision at all over 90% of the time. Thus, for most defendants in securities class actions, a denial of a motion to dismiss usually results in writing a settlement check, often after years of costly discovery. Defendants that fail to give adequate attention to motions to dismiss are shortchanging the very best opportunity they have to avoid what may otherwise become multi-year, expensive litigation.

We previously addressed 75 defenses to securities class actions that are the building blocks for successful motions to dismiss. In this alert, we look at recent cases—2014 decisions that relied on established precedents to dismiss securities class actions. Our purpose is not to be exhaustive, but rather to give examples of key defenses that worked well in 2014. All of the cases in the text were decided this year. We have focused on recurring issues of broad application rather than narrow issues unlikely to affect more than a handful of cases. For highly experienced securities practitioners, much of this will be common knowledge; but for those who face securities class actions only occasionally, it provides a primer and recent authorities on the defenses most likely to form a basis for successful motions to dismiss. We have also included in the endnotes of the complete publication the key Supreme Court cases addressing these issues.

Before turning to the 2014 cases, we provide a very brief overview of Section 10(b) of the Securities Exchange Act of 1934 and Sections 11 and 12(a)(2) of the Securities Act of 1933. Most securities class actions allege violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. Neither provides an express cause of action, but both the Supreme Court and lower courts implied private rights of action under these provisions long before the Supreme Court adopted a far more restrictive approach to implying private rights of action. Section 10(b)’s language is vague—it prohibits a “manipulative or deceptive device or contrivance”—but has been interpreted to require a plaintiff to allege and prove: i) a material misrepresentation or omission by the defendant, ii) scienter, iii) a connection between the misrepresentation or omission and the purchase or sale of a security, iv) reliance on the misrepresentation or omission, v) economic loss, and vi) loss causation.

In Section 10(b) class actions, alleging facts sufficient to support the scienter pleading requirement is particularly challenging. The Private Securities Litigation Reform Act of 1995 (“PSLRA”)—described recently as “[t]he elephant-sized boulder blocking” a plaintiff’s securities class action complaint—requires that, with regard to any claim for damages requiring “proof that a defendant acted with a particular state of mind,” i) the complaint must “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind;” ii) imposes a requirement that every complaint alleging securities fraud must “specify each statement alleged to have been misleading, the reasons or reasons why the statement is misleading, and if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed;” iii) created a safe harbor for forward-looking statements accompanied by meaningful cautionary language; iv) created a second safe harbor for forward-looking statements in which defendants lacked “actual knowledge” that the statements were false or misleading; and v) provided an automatic stay of discovery pending rulings on the motion to dismiss. Further, in addition to the PSLRA, Fed. R. Civ. P. 9(b) requires that in all averments of fraud, plaintiff must plead with particularity the circumstances constituting the fraud, which lower courts have held requires the plaintiff to plead the time, place, speaker, and content of the alleged misrepresentations.

Plaintiffs also often file under Sections 11 and 12(a)(2) of the Securities Act of 1933, both of which provide express private rights of action. Sections 11 and 12(a)(2) are limited to misrepresentations or omissions in a registration statement or prospectus and, thus, often do not apply to the conduct at issue. On the other hand, when there is a securities offering to which they do apply, they do not require a plaintiff to prove scienter, reliance, or loss causation. As a result, it is often more difficult to obtain complaints alleging misrepresentations or omissions related to a securities offering. In this post, we consider successful motions to dismiss Section 10(b) class actions. We save for another day an alert covering successful motions to dismiss Sections 11 and 12(a)(2) class actions.

With that background in mind, we turn to 2014 decisions in which courts granted (or affirmed the grant of) motions to dismiss securities class action claims and the key principles on which they relied.

The complete publication, include footnotes, is available here.