The Group Pleading Doctrine Following Janus

Israel David is partner at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on his Fried Frank memorandum.

The “group pleading doctrine” has long been a tool employed in class action securities litigation by plaintiffs seeking to name corporate officers who are otherwise not alleged to have directly made any of the challenged statements. It is widely known that the viability of the doctrine was questioned in the wake of 1995 enactment of the PSLRA. Less known or appreciated is the fact that the group pleading doctrine has come into further question in the wake of the Supreme Court’s 2011 decision in Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. 135 (2011). Since Janus, federal courts nationwide have grappled with the question of whether Janus forecloses use of the group pleading doctrine. This post details that struggle.

Background

The group pleading doctrine, when viable, generally permits securities fraud plaintiffs to rely on a presumption, subject to certain limitations, that statements in group-published documents, such as prospectuses, registration statements, annual reports, or press releases, are the collective work of the high-level individual corporate officers with direct involvement in the everyday running of a company’s business.

The doctrine is most commonly applied to high-ranking corporate officers. Following the enactment of the PSLRA, several circuit courts held that the group pleading doctrine was no longer viable because it failed to meet the PSLRA’s requirement that securities fraud allegations be pled with particularity. At the same time, a number of other courts (including a number of courts within the Southern District of New York) held that the group pleading doctrine was compatible with the PSLRA. That divide has been well documented.

Janus presents a different question. In Janus, the Supreme Court held that only the “maker” of a statement—one who has “ultimate authority” over the statement’s content and whether to communicate it—can be liable for violations of subsection (b) of Rule 10b-5. At first glance, the group pleading doctrine appears to lump together a number of defendants who are, by definition, not “makers” of the corporate statement. District courts continue to grapple with this question, often coming to competing conclusions.

Courts Finding the Group Pleading Doctrine Incompatible with Janus

Following Janus, a number of district courts rejected the group pleading doctrine as being incompatible with Janus. Recently, two Southern District of New York cases on this issue—both decided in 2018—noted that “it is unclear whether the group pleading doctrine survives Janus.” Das v. Rio Tinto PLC, 332 F. Supp. 3d 786, 805 (S.D.N.Y. 2018); In re Veon Ltd. Sec. Litig., 2018 WL 4168958 (S.D.N.Y. Aug. 30, 2018). Those courts “assum[ed] arguendo” that the group pleading doctrine applied, but ultimately dismissed both complaints on other grounds.

Perhaps the most clear articulation of the reasoning for rejecting group pleading post-Janus is found in a Southern District of New York decision by Judge Gregory Woods. In In re Banco Bradesco S.A. Securities Litigation, 277 F. Supp. 3d 600 (S.D.N.Y. 2017), Judge Woods held that “the group-pleading doctrine does not survive Janus” for three reasons. First, contrary to the reasoning adopted in cases like Touchstone, a District of Colorado case discussed below, “Janus is not limited to third parties” because “[t]he Janus Court did not so limit its rule expressly—a task that would have been quite simple— and it is difficult to understand why the Court would have referred to ‘the person or entity with ultimate authority’ in fashioning its rule if it had intended such a reading.” Second, “a mere presumption that a person worked on a statement by virtue of his or role within the company must … fall short” because even “undeniable proof that an individual worked on a statement does not meet Janus’s requirement that the individual have ‘ultimate authority over the statement.’” Third, Janus provides “a means of determining who among the many who participated in creating and disseminating a statement had the ultimate authority over what the statement said,” whereas “group pleading would simply sweep in that entire group, if not an even larger one.”

The Western District of Washington was one of the early courts to reject group pleading under Janus. In In re Coinstar Inc. Securities Litigation, 2011 WL 4712206 (W.D. Wash. Oct. 6, 2011), three defendants argued for the dismissal of the securities fraud claims against them because they did not “make” any of the allegedly misleading statements. Plaintiffs countered that those defendants were liable under the group pleading doctrine. The court rejected the plaintiffs’ group pleading argument because “the only statements that are actionable are those of other executive officers” and “[a] s held in Janus … liability does not expand beyond the person or entity that ultimately has authority over a false statement or omission.”

Similarly, the Northern District of California rejected the group pleading doctrine in Biotechnology Value Fund II, L.P. v. Celera Corp., 2014 WL 988913 (N.D. Cal. Mar. 10, 2014). In Celera, the plaintiffs raised the group pleading doctrine, claiming that documents in connection with the company’s sale contained misrepresentations that were “group-published.” The court rejected that argument, concluding that the group pleading doctrine was incompatible with “the standard set forth by Janus” because the defendants had not “made” the alleged misrepresentations. [1] Earlier that month, the Eastern District of Tennessee reached the same conclusion, using similar language to that used in Celera. In In re Miller Energy Resources Securities Litigation, 2014 WL 415730 (E.D. Tenn. Feb. 4, 2014), the plaintiff alleged that one defendant, as president of the company, was liable under the group pleading doctrine for false and misleading statements issued by the company. The court rejected the group pleading doctrine argument because “the admittedly narrow definition adopted by Janus” precluded the court from applying the group pleading doctrine, especially because “there are no allegations tying any actions by [that defendant] to any of the statements.”

Courts Accepting the Group Pleading Doctrine After Janus

A number of courts have found the group pleading doctrine viable after Janus. For example, the District of Connecticut in FIH, LLC, v. Foundation Capital Partners LLC, 176 Supp. 3d 52 (D. Conn. 2016) addressed Janus in its analysis of the group pleading doctrine. The court held that Janus “addressed only whether third parties can be held liable for statements made by their clients.” The court stated that it would be consistent with Janus to “presume,” for example, that multiple people in a corporation have joint authority to “make” documents like SEC filings, meaning any misstatements in those documents would have more than one “maker.”

Likewise, the District of Colorado in Touchtone Group, LLC v. Rink, 913 F. Supp. 2d 1063 (D. Colo. 2012) held that “Defendants are incorrect to argue that Janus prohibits group pleadings in all circumstances” because “Janus involved a statement drafted by one organization on behalf of another such that the latter had ultimate authority over the statement.” Thus, “Janus does not address the ‘making’ of statements that are published collectively by a group of equally authoritative individuals within an organization.” Against that backdrop, the court held that even if the false statements at issue “were collectively published by [the company],” the CFO and Chief Legal Counsel “can still be held liable under the group p[leading] doctrine.”

The District of Wyoming applied similar reasoning in Naomi L. Miles Revocable Trust v. Lawrence, 2013 U.S. Dist. LEXIS 191049 (D. Wyo. Mar. 28, 2013), where the court held that the group pleading doctrine is compatible with Janus. In Lawrence, defendant Holmes moved for summary judgment on the claims against him. The plaintiffs invoked the group pleading doctrine, claiming that Holmes knew or should have known of misrepresentations in a private placement memorandum given his position as the company’s general counsel, vice president, and/or chief operating officer. The court distinguished Janus to its facts, stating that Janus applies only to cases where “the entity which prepared the statement and the entity with ultimate authority and control over its publication were legally separate entities.” Thus, “a corporate officer can still be charged with the alleged misrepresentations and omissions by application of the group p[leading] doctrine.”

One Southern District of New York court that accepted group pleading post-Janus is in In re CannaVest Corp. Securities Litigation, 307 F. Supp. 3d 222 (S.D.N.Y. 2018). In that case, the court held that “the group pleading doctrine survives Janus” because Janus “addressed only whether third parties can be held liable for statements made by their clients.” [2]

While one Eastern District of New York court questioned the viability of the group pleading doctrine after Janus—Orlan v. Spongetech Delivery Systems, Inc. Securities Litigation, 2012 WL 1067975 (E.D.N.Y. Mar. 29, 2012)—other Eastern District of New York courts later reached the contrary conclusion. In Levy v. Maggiore, 48 F. Supp. 3d 428 (E.D.N.Y. 2014), the court determined, among other things, what individuals were the “makers” of a private placement memorandum that contained false statements about the company. On this point, Levy distinguished Janus, finding that Janus only “addressed the liability of a party external to a corporate defendant rather than, as is the case with group pleading, the liability of individual corporate defendants.” The court continued, “the holding in Janus … does not appear to be incompatible with the premise of the group pleading doctrine that often more than one individual defendant has ultimate authority or control over a written statement.” The court then found that the doctrine applied to one defendant, rendering him a “maker” of the private placement memorandum because, as the company’s CEO, he was “directly involve[d] in the everyday business of” the company. [3]

The Northern and Southern Districts of Iowa have reached opposite conclusions regarding the viability of the group pleading doctrine after Janus. The Northern District of Iowa in Sagez v. Global Agricultural Investments, LLC, 2014 WL 3779072 (N.D. Iowa July 31, 2014) held that the group pleading doctrine is compatible with Janus. In Sagez, the defendants argued that Janus invalidated the plaintiffs’ group pleading doctrine allegations. The court acknowledged the lack of Eighth Circuit precedent on point, noting that “[i]t is not inconsistent with Janus Capital to presume that multiple people in a single corporation have the joint authority to ‘make’ an SEC filing, such that a misstatement has more than one ‘maker.” The Sagez court acknowledged that it reached its decision notwithstanding “a similar case in the Southern District of Iowa,” Aviva Life & Annuity Co. v. Davis, 20 F. Supp. 3d 694, 706 (S.D. Iowa 2014), that “suggests a different conclusion.” In Aviva, the defendants argued that the complaint lacked allegations that any defendants “made any specific misstatements, misrepresentations, or material omissions” and that the group pleading doctrine could not remedy those defects because the doctrine “did not survive” Janus. The Southern District of Iowa acknowledged that “the [group pleading] doctrine must also survive the Supreme Court’s 2011 decision in Janus to remain viable.” Then, in lieu of applying the group pleading doctrine, the court took judicial notice of specific “allegations about each of the individual Defendants” and “specific statements made by each individual” contained in a related indictment and SEC complaint. The court noted that judicial notice of those facts spared the court from “requir[ing] Plaintiffs to amend their pleading with this additional information” in the wake of Janus.

Conclusion

Federal courts nationwide continue to grapple with whether the group pleading doctrine survived Janus. We anticipate that, in time, the circuits courts—and perhaps the Supreme Court—will have an opportunity to weigh in on this issue and provide litigants with more definitive guidance.

Endnotes

1Some courts in the neighboring Central District of California likewise rejected the group pleading doctrine following See In re Questcor Sec. Litig., 2013 WL 5486762 (C.D. Cal. Oct. 1, 2013); In re Am. Apparel, Inc. S’holder Litig., 2013 WL 174119 (C.D. Cal. Jan. 16, 2013); Okla. Firefighters Pension & Ret. Sys. v. Ixia, 50 F. Supp. 3d 1328 (C.D. Cal. 2014).(go back)

2Another Southern District of New York decision that found the doctrine still viable is City of Pontiac General Employees’ Retirement System Lockheed Martin Corp., 875 F. Supp. 2d 359 (S.D.N.Y. 2012).(go back)

3More recently, two more courts in the Eastern District of New York have accepted the group pleading doctrine in Weinstein Cardis Enterprises International N.V., 2017 WL 9485677 (E.D.N.Y. Aug. 3, 2017) and Honig v. Cardis Enterprises International N.V., 2016 WL 6304695 (E.D.N.Y. Oct. 27, 2016).(go back)

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