I do not envy any attorney who attempts plead a Section 10b-5 claim. Courts throughout the country have made pleading scienter extremely difficult, and the benefit of any doubt favors the defendants. Under the PSLRA, a plaintiff must plead a strong interference of scienter by alleging sufficient facts to show that the defendant had both motive and opportunity to commit fraud and/or facts sufficient to show that there is strong circumstantial evidence of intentional or reckless behavior.
In a recent opinion, the Court of Appeals for the Tenth Circuit dismissed the plaintiffs’ Section 10b-5 claims. The plaintiffs alleged that the officers made false statements relating to the progress of an important network integration project, which would significantly impact the financial condition of the firm. The Tenth Circuit acknowledged that the defendants made false statements of material fact relating to the network integration project, but held that competing plausible inferences indicated that the officers may have been merely careless and did not adequately track the progress of the project.
The Tenth Circuit’s ruling is consistent with the trend around the country. Merely pleading a false statement of material fact is not enough, and courts generally rule in favor of the defendants when analyzing competing plausible inferences. Plaintiffs’ attorneys can meet this high burden by specific and detailed allegations of intentional behavior – a burden that can be difficult to meet without discovery.