Michelle Reed, Matthew Lloyd Article on PSLRA Pleading Standards Published by Law360
The article discusses the heightened pleading requirements of the Private Securities Litigation Reform Act (PSLRA) and their continued affirmation by the 5th Circuit, as demonstrated in Local 731 I.B. of T. Excavators and Pavers Pension Trust Fund v. Diodes Inc., where the court “affirmed the district court’s dismissal of a securities class action, holding that the complaint failed to adequately allege facts concerning the defendants’ state of mind in making alleged misstatements or omissions to stockholders. In its decision, the court reaffirmed several principles establishing a high bar to satisfying the PSLRA’s scienter pleading requirements.”
Reed and Lloyd discuss the elements and progress of the case to the appellate court and conclude that it is important for several reasons:
- “[I]t illustrates how favorably courts in securities fraud actions may view companies that have been forthcoming about anticipated negative results. While the Fifth Circuit in Diodes did not expressly affirm dismissal based on the adequacy of the company’s disclosures, the court did note “the curious nature of [the plaintiffs’] claims,” and even expressed skepticism “that a case [could] theoretically be made for more disclosure.” This leaves open the possibility that similar cases alleging insufficient disclosure despite accurate warnings of anticipated poor economic performance may be subject to dismissal regardless of how well the scienter allegations are pleaded.”
- “[I]t provides guidance as to what kind of ‘special circumstances’ may be required in order to overcome the Fifth Circuit’s general rule that an officer’s position with a company is insufficient to create an inference of scienter. Prior to Diodes, the Fifth Circuit largely determined whether such circumstances were present on an ad hoc basis, making it difficult to anticipate when an officer’s position in a company would support an inference of scienter and when it would not…Plaintiffs in future Fifth Circuit securities fraud cases will therefore want to be careful to plead some combination of the four factors set forth in Diodes if they would rely on an officer’s position in order to establish an inference of scienter.”
To read the full article, please click here.