In this putative class action, investors alleged that Biogen executives misled the public about the impact on sales of the company’s multiple sclerosis drug Tecfidera after one patient’s death. Plaintiffs alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act by Biogen and three Biogen executives. The First Circuit affirmed the District Court’s dismissal of the investors’ amended complaint for failure to meet the heightened pleading requirements of the Private Securities Litigation Reform Act, as well as the District Court’s denial of investors’ motion to vacate the dismissal and for leave to file a second amended complaint.

Tecfidera accounted for one-third of Biogen’s revenues prior to the announcement of the patient death during an earnings call in October 2014. Following the announcement and an FDA warning to the public about the patient death, Biogen eventually revised its estimate of overall 2015 revenue growth, “based largely on revised expectations for the growth of Tecfidera.” Biogen’s stock plummeted over 20 percent in one day following the announcement of the revised revenue growth estimate.

Plaintiffs’ amended complaint set forth numerous allegedly misleading statements made by defendants regarding the material impact of the patient death on Tecfidera sales, “alleg[ing] in substance that Biogen executives made statements about future Tecfidera sales that were misleading because they were unduly optimistic.”

To support their claims that the statements were made with scienter and were misleading, plaintiffs relied on the statements of several confidential witnesses. Of the 20 misrepresentations alleged in the complaint, the District Court found that only three of defendants’ statements appeared to be “plausibly misleading” based on the complaint’s allegations. The court found that the remainder of the statements were either protected by the Reform Act’s safe harbor for forward-looking statements, or constituted immaterial expressions of corporate optimism or puffery. With respect to the three “plausibly misleading” statements, the court commented that “[e]ven assuming that defendants made a materially false or misleading statement, plaintiffs have not sufficiently alleged that defendants made those statements with ‘conscious intent to defraud or a high degree of recklessness.’” The District Court also found that the record gave rise to inferences in the defendants’ favor. In granting the motion to dismiss, the court noted that, “[b]ased on the complaint as a whole, plaintiffs’ asserted inference of scienter may be plausible, but it is not strong, cogent, or compelling” as required by the Reform Act’s heightened pleading standards.

In affirming the dismissal, the First Circuit adopted the District Court’s analysis regarding the falsity of defendants’ statements, focusing on the complaint’s allegations of scienter with respect to the three “plausibly misleading” statements. The First Circuit found that the confidential witness statements, a substantial basis for the complaint’s allegations as to scienter, “very often made about events occurring after the defendants’ statements at issue, are so lacking in connecting detail that they cannot give rise to a strong inference of scienter.”  Elaborating on this conclusion, the First Circuit found that the allegations were “insufficiently particular, do not make misleading the defendants’ public disclosures, and do not speak with specificity as to why the defendants’ alleged misstatements were untrue or misleading.” In particular, the confidential witness statements did “not even begin to quantify the magnitude” of the decline in Tecfidera sales, “explain with any precision” the specific cause of the decline, or contain contemporaneous facts that “purport to contradict” Biogen’s financial reports during the class period. The allegations suffered from “a significant timing problem” in that the majority of the confidential witness statements and other alleged “evidentiary admissions” did not address how the defendants’ statements were “knowingly or recklessly misleading at the time they were made.” Indeed, the First Circuit found that the witness statements were “consistent with the defendants’ public disclosures,” and that the defendants repeatedly warned investors about the growth risks throughout the class period.

The court also rejected plaintiffs’ scienter allegations based on the “core operations” inference of scienter and the individual defendants’ motive. First, the court rejected the “core operations” allegations as “inapt” because plaintiffs did not plead “materially” contradictory “reasonably accessible data within the company” at the time the statements were made. As for motive, the court agreed that that the “most cogent inferences from the record favor the defendants,” including the defendants’ compensation structure, which was tied in part to revenue growth, as well as the fact that the individual defendants increased their Biogen stock holdings during the class period, thereby suffering losses as a result of the decline in share price. The court underscored the importance of “evaluating the complaint as a whole, including ‘plausible opposing inferences’,” as a part of the scienter analysis.

In a matter of first impression in the Ninth Circuit, the court applied the Supreme Court’s Omnicare standard for pleading the falsity of a statement of opinion to a Section 10(b) claim in City of Dearborn Heights Act 345 Police & Fire Retirement System v. Align Technology, Inc., — F.3d —, 2017 WL 1753276 (9th Cir. May 5, 2017).

The litigation arose from Align’s $187.6 million acquisition of Cadent Holdings, Inc. in April 2011, and Align’s alleged failures to properly assess and write off the goodwill associated with the acquisition. Align’s statements regarding the fair value of goodwill, of course, were quintessential statements of opinion, because they were inherently subjective. In Omincare, the Supreme Court set the standard for pleading the falsity of an opinion claim under Section 11. Many practitioners, including Lane Powell’s securities litigation team, had opined—and the Second Circuit and other courts had held—that the rationale of Omnicare should equally apply to Section 10(b) claims, since the falsity element is the same. In Align, the Ninth Circuit agreed, and partially overturned a previous Ninth Circuit case that permitted plaintiffs to plead falsity by alleging that “there is no reasonable basis” for the defendant’s opinion.

Align’s accounting for the acquisition resulted in $135.5 million of goodwill, $76.9 million of which was attributable to one of Cadent’s business units (the “SCCS unit”). The plaintiffs alleged that the purchase price, and thus the goodwill, was inflated due to Cadent’s channel stuffing practices prior to the acquisition, and that the defendants must have known as much after performing their due diligence. Following the acquisition, the SCCS unit’s financial results suffered due to numerous factors. Nevertheless, at the end of 2011, Align found no impairment of its recorded goodwill. Align did not perform any interim goodwill testing in the first or second quarters of 2012. Id. at *2-3.

On October 17, 2012, Align finally announced it would be conducting an interim goodwill impairment test for the SCCS unit, which it said was triggered by the unit’s poor financial performance in the third quarter of 2012 and the termination of a distribution deal in Europe. That announcement led to a 20% hit to Align’s stock price. On November 9, 2012, Align announced a goodwill impairment charge of $24.7 million, and it announced subsequent goodwill charges in the following two quarters. Id. at *3. The plaintiffs alleged that the defendants made seven false and misleading statements concerning the goodwill valuation between January 30, 2012 and August 2, 2012. The plaintiffs’ allegation was that defendants deliberately overvalued the SCCS goodwill, thereby injecting falsity into statements concerning the goodwill estimates and the related financial statements. The district court dismissed the complaint with prejudice for failing to adequately plead falsity and scienter. Id. at *4.

At issue in the Ninth Circuit was whether the plaintiffs had adequately pled that Align’s statements were false. The first question was what analytic framework applied. The plaintiffs did not dispute that five of the seven statements at issue were pure statements of opinion. However, with respect to two statements, the plaintiffs alleged the opinions contained “embedded statements of fact.” Those statements were that “there were no facts and circumstances that indicated that the fair value of the reporting units may be less than their current carrying amount,” and that “no impairment needed to be recorded as the fair value of our reporting units were significantly in excess of the carrying value.” The Court held that the former statement was an opinion with an embedded statement of fact, but that the latter was an opinion. Id. at *5.

The Court also addressed the proper pleading standard for falsity of opinion statements. The panel concluded that Omnicare established three different standards depending on a plaintiff’s theory:

  1. Material misrepresentation. Plaintiffs must allege both subjective and objective falsity, i.e., that the speaker both did not hold the belief she professed, and that the belief was objectively untrue.
  2. Materially misleading statement of fact embedded in an opinion statement. Plaintiffs must allege that the embedded fact is untrue.
  3. Misleading opinion due to an omission of fact. Plaintiffs must allege that facts forming the basis for the issuer’s opinion, the omission of which makes the opinion statement at issue misleading to a reasonable person reading the statement fairly and in context.

Importantly, the Ninth Circuit extended this Omnicare holding from the Section 11 context to the Section 10(b) and Rule 10b-5 claims at issue in Align. Id. at *7. In doing so, the Ninth Circuit joined the Second Circuit in extending Omnicare in this regard. See Tongue v. Sanofi, 816 F.3d 199, 209-10 (2d Cir. 2016). Finally, the court overruled part of its previous holding in Miller v. Gammie, 335 F.3d 889, 900 (9th Cir. 2003) (en banc), which allowed for pleading falsity by alleging that there was “no reasonable basis for the belief” under a material misrepresentation theory. City of Dearborn Heights, 2017 WL 1753276, at *7.

Applying this pleading standard to the Align facts, the Ninth Circuit concluded that the plaintiffs had not met their pleading burden. Because the plaintiffs did not allege the actual assumptions the defendants relied upon in conducting their goodwill analysis, the court could not infer that the defendants intentionally disregarded the relevant events and circumstances. Accordingly, six of the seven statements that relied on the material misrepresentation theory failed to allege subjective falsity and were properly dismissed. Likewise, the failure to allege the actual assumptions used by the defendants prevented plaintiffs from pleading objective falsity as to the one statement of fact embedded in an opinion statement. Id. at *8-10.

After concluding that the plaintiffs failed to allege falsity, the Ninth Circuit went on to hold that plaintiffs had not alleged scienter against the defendants, providing a second ground for dismissing the complaint. At most, the plaintiffs alleged that the defendants violated generally accepted accounting principles, but such a failure does not establish scienter. Likewise, the stock sale allegations, core operations inference, the temporal proximity between the challenged statements and the goodwill write-downs, the CFO’s resignation, and the magnitude of the goodwill write-downs did not create an inference of scienter. Id. at *10-13.

Judge Kleinfeld concurred in the judgment. He would have upheld the district court’s dismissal based on scienter alone, leaving the weightier issue of falsity described above to a future case where such a decision was necessary. Id. at *13-14 (Kleinfeld, J., concurring in the judgment).

In Brennan v. Zafgen, Inc., — F.3d –, 2017 WL 1291194 (1st Cir., April 7, 2017), the First Circuit affirmed a District of Massachusetts decision dismissing claims against Zafgen, Inc., a biopharmaceutical developer, and its CEO, Dr. Thomas Hughes. Judge Stahl, writing for a panel that included retired Supreme Court Justice Souter (sitting by designation), concluded that plaintiffs’ complaint did not allege facts giving rise to the “cogent and compelling” inference of scienter required by the Reform Act. Id. at *1 (quoting Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 324 (2007)).

Between August 2012 and May 2013, before Zafgen went public, the company conducted a Phase II trial of an anti-obesity drug called Beloranib. As the trial progressed, four patients in the trial who were receiving the drug suffered adverse “thrombotic”—i.e., blood-clotting—events of varying severity. Third-party clinical investigators classified two of these adverse thrombotic events as “superficial,” and the other two events as “serious.” In April 2014, as Zafgen was preparing for a June 2014 IPO, it disclosed the two serious events, but not the two superficial events, in its Form S-1 Registration Statement. Id. at *1-2.

In mid-October 2015, Zafgen’s share price began to decline, falling from $34.76 on October 12 to $15.75 at close of trading the next day. On October 15, Zafgen disclosed that a patient in its ongoing Phase III trial of Beloranib had died; and on October 16, the company confirmed that this patient had been treated with the drug (rather than a placebo), and that the FDA had placed Beloranib on a partial clinical hold. Also on October 16, 2015, Zafgen’s chief medical officer, Dr. Dennis Kim, disclosed for the first time the two superficial adverse events from the Phase II trial that was conducted in 2012-2013. By the end of trading on October 16, the price of Zafgen stock had dropped to $10.36. Id. at *2.

The plaintiffs in Brennan sued Zafgen and Dr. Hughes on behalf of a putative class consisting of all persons and entities who bought Zafgen stock between its IPO on June 19, 2014 and October 16, 2015, when the company announced the FDA’s partial clinical hold. Id. at *3. They argued that the company had made misleading statements about its Beloranib trial in ten different documents that were signed by Dr. Hughes, and they asserted claims under Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5. Specifically, the plaintiffs claimed that the challenged statements were misleading because they failed to mention the two superficial adverse events from the Phase II trial, which were disclosed for the first time by Dr. Kim on October 16, 2015. Id. at *1-3. (Despite alleging material omissions in Zafgen’s Registration Statement, plaintiffs did not assert Securities Act claims.)

The district court dismissed plaintiffs’ complaint on the ground that it failed to adequately plead a “strong inference” of scienter, as is required by the Reform Act. In doing so, the district court placed particular emphasis on the materiality of the two superficial adverse events, which it described as “marginal,” thereby weakening any inference of scienter. Id. at *4.

On appeal, the plaintiffs argued that they had, in fact, satisfied the Reform Act’s scienter requirement, because they had pled that defendants (1) knew, or were reckless in not knowing, about news and scientific articles purportedly showing a link between Beloranib and adverse thrombotic events; and (2) had a motive to commit securities fraud, as shown by Zafgen’s compensation structure, and by “heavy” insider sales before the patient death was announced. Id. at *5.

Regarding the news and scientific articles cited by plaintiffs, the First Circuit noted that “‘[t]he key question … is not whether defendants had knowledge of certain undisclosed facts, but rather whether [they] knew or should have known that their failure to disclose those facts’ risked misleading investors.” Id. (quoting City of Dearborn Heights Act 345 Police & Fire Ret. Sys. v. Waters Corp., 632 F.3d 751, 758 (1st Cir. 2012)). In this case, the cited articles “may [have] suggest[ed]” that the defendants were aware of a link between Beloranib and thrombotic events. But the articles did not demonstrate that the defendants “deliberately or recklessly risked misleading investors” by not disclosing the two superficial events from the Phase II trial until October 16, 2015. Id.

Turning to plaintiffs’ motive allegations relating to insider trading and Zafgen’s compensation structure, the First Circuit agreed with the district court that “the strength of the insider trading allegations drifts towards the marginal end of that spectrum because [CEO] Hughes and all other Zafgen insiders kept the vast majority of their Zafgen holdings.” Id. at *6 (observing that after accounting for vested options, Dr. Hughes retained at least 93 percent of his Zafgen stock, and every other insider identified in the complaint retained at least 85 percent). In light of this fact, the district court was correct in determining that the plaintiffs’ insider trading allegations “d[id] not alter the conclusion that the complaint as a whole fails to raise a strong inference of scienter.” Id.

As for the plaintiffs’ arguments regarding Zafgen’s compensation structure, the First Circuit found that the complaint’s allegations offered no basis for inferring fraudulent intent, but showed only “the usual concern by executives to improve financial results.” Id. (quoting In re Cabletron Sys., Inc., 311 F.3d 11, 39 (1st Cir. 2002)). An allegation that a defendant had motive and opportunity to commit fraud, or that a corporation “rewards [its executives for] the achievement of corporate goals,” does not satisfy the Reform Act “without something more.” Id.

The First Circuit also discussed several other considerations that “bolster[ed]” its conclusion that the complaint’s allegations did not give rise to a sufficiently strong inference of scienter. These included the fact that (1) the materiality of the two undisclosed superficial adverse events was “marginal,” which “tends to undercut the argument that the defendants acted with the requisite intent … in not disclosing [them],” id. at *7 (quoting In re Ariad Pharm. Sec. Litig., 842 F.3d 744, 751 (1st Cir. 2016)); and (2) Zafgen’s disclosures before and during the class period mentioned the two serious thrombotic events from the Phase II study, and also stated that the company would not disclose all adverse events as they occurred, which “weaken[ed] the complaint’s scienter showing,” id. at *8.

Having thus concluded that the plaintiffs’ allegations, considered as a whole, did not give rise to a “cogent and compelling” inference of scienter, the First Circuit affirmed the dismissal of plaintiffs’ Section 10(b) claim as well as their Section 20(a) claim against Dr. Hughes, which was derivative of the former. Id.

The First Circuit affirmed the dismissal of nearly all securities class action claims against Ariad Pharmaceuticals, Inc. (Ariad) and four corporate officers, in In re Ariad Pharmaceuticals, Inc., Securities Litig., 842 F.3d 744 (1st Cir. 2016). The litigation focused on Ariad’s public statements about the potential for FDA approval of an experimental drug designed to treat a particular type of leukemia.  Ariad made robust public statements about the efficacy of the drug, until the FDA pulled the drug from clinical trials amid negative side effects. The First Circuit found that other than one statement, the allegations of misrepresentations were insufficient to support a strong inference of scienter. The court also held that the allegations of insider trading were not actionable.

Ariad is a pharmaceutical company employing R&D to develop new products. One such product showed promise in treating a chronic form of leukemia. After a series of clinical trials, Ariad sought FDA approval. The FDA initially rejected Ariad’s application, but eventually approved limited use, with the caveat that the packaging must indicate a significant risk of adverse cardiovascular events (a so-called “black-box” label). Black-box labels are the strictest warnings issued by the FDA and indicate that evidence of a serious hazard exists with the drug. Despite the concerns and the required label, Ariad projected public confidence about the drug’s effectiveness, which included a statement that management believed the drug would be approved “with a favorable label.” Within a year, however, clinical studies showed increased medical complications, ultimately resulting in the decision to suspend commercial distribution of the drug.  Ariad’s stock price went from $23/share to $2.20/share.

Plaintiffs brought claims under both the Exchange Act and the Securities Act. Plaintiffs identified two categories of alleged misstatements: (1) those statements made before the FDA approved the drug for limited use; and (2) those statements made post-approval. On either side of the FDA approval timeline, the crux of the alleged misstatements related to what Ariad knew and said (or failed to say) about the rate of cardiovascular events attributed to the drug’s use. To bolster their scienter allegations, plaintiffs alleged that certain executives sold shares during the class period.

On appeal, the First Circuit affirmed, in part, the district court’s dismissal. The court overwhelmingly rejected plaintiffs’ theory because, while the complaint was replete with conclusory allegations that the Ariad defendants knew about the rate of cardiovascular events, “plaintiffs’ theory of fraud suffer[ed] from a glaring omission”—plaintiffs failed to make concrete allegations of contemporaneous knowledge. The allegations, taken as a whole, did not establish when the adverse events occurred or, more importantly, when the defendants knew about those adverse events.  Instead, the complaint sought to impermissibly establish fraud by hindsight. As such, plaintiffs failed to create the required strong inference of scienter.

The court did find, however, that one statement did support a strong inference of scienter. After the FDA had informed Ariad that its limited approval would include a black-box label requirement, Ariad published a report indicating the drug would likely receive a favorable label. The court found this allegation sufficient.

The First Circuit also dispensed with the stock-sale allegations. Relying on its decision in Greebel v. FTP Software, Inc., 194 F.3d 185 (1st Cir. 1999), the court analyzed the insider trading allegations under its holding that insider trades may be probative of scienter, but do not, on their own, establish scienter. The court found that the bulk of insider trades occurred well before the high point of Ariad’s stock price, an indication that the trades did not appear to be suspicious. Ariad’s CFO made trades closest to the stock’s high point, but, significantly, the court concluded a pharmaceutical company’s CFO is not likely to have access to nonpublic information obtained through clinical trials. As such, it was unlikely, in the court’s estimation, that the CFO’s trades indicated knowledge of negative information not yet available to the public. The upshot: none of the insider trading allegations bolstered the plaintiffs’ scienter allegations.

Finally, the First Circuit held that plaintiffs did not adequately plead that the purchase of their shares was traceable to the relevant offering. Based on the plaintiffs’ allegations, the court found it more plausible than not that they purchased shares that were issued prior to the date(s) of the alleged misstatements.

Reversing a district court’s dismissal of a securities class action for failure to adequately allege scienter, the Ninth Circuit held in Schwartz v. Arena Pharmaceuticals, Inc. — F.3d —-, 2016 WL 6246875 (9th Cir. Oct. 26, 2016), that the facts alleged in the complaint gave rise to a strong inference of scienter where the defendants knew of the FDA’s concerns about the potential carcinogenic effects of a new drug based on animal studies, yet represented to investors that FDA approval was likely because all of the data gathered, including “animal studies,” were “favorable.”  The court reaffirmed that, while there is generally no affirmative duty to disclose material information to investors, such a duty arises when the information that is disclosed creates a misleading impression.  The court found that the defendants’ statements concerning “animal studies” were misleading in the absence of any disclosure about the FDA’s concerns.

Arena’s stock dropped sharply following the FDA’s disclosure of its concerns about the potential carcinogenic effects of lorcaserin, a weight-loss drug that Arena was developing.  The FDA based its concerns on testing of the drug in rats (the “Rat Study”).  While the rats developed cancer, Arena had proposed to the FDA an explanation for the carcinogenic mechanism based on the effect of the hormone prolactin, which made it irrelevant to humans.  The FDA did not halt the ongoing human clinical trials, but requested follow-up testing and bi-monthly reports on the rats’ prolactin levels, and later requested a final report on the Rat Study as soon as possible.  The complaint alleged that those requests were “highly unusual” and “out-of-process.”  However, following Arena’s discussions with the FDA in 2007 and 2008, Arena heard nothing further from the FDA on the Rat Study issue until September 2010.  Moreover, Arena’s February 2009 final report concluded that the follow-up studies substantiated the prolactin hypothesis.

Thereafter, Arena made a number of statements to its investors about its confidence in lorcaserin’s ultimate approval by the FDA.  In March 2009, Arena’s CEO told investors that confidence was based on both the preclinical and clinical data as well as the “animal studies” that had been completed.  In May 2009, Arena represented in an SEC filing that lorcaserin’s “safety and efficacy” has been “demonstrated” in part by carcinogenicity “animal studies.”  In September 2009, Arena’s Vice President of Clinical Development stated that lorcaserin showed “favorable results on everything we’ve compiled so far.”  Finally, in November 2009, Arena’s CEO stated that “all of the data in hand” would be included in Arena’s imminent FDA approval application, and that Arena was “not expecting any surprises” in the approval process.

In December 2009, Arena submitted is final application (which included the Rat Study conclusions) to the FDA.  In September 2010, the FDA published briefing documents in connection with Arena’s application that disclosed the existence of the Rat Study and the FDA’s concerns about lorcaserin’s potential carcinogenicity.  Following that disclosure, Arena’s stock plunged 40% in a single day.

Later, the FDA Advisory Committee voted against approval of lorcaserin based on its carcinogenicity concerns, and the FDA denied Arena’s drug approval application.  However, following further pathological review, the FDA ultimately approved lorcaserin, and it is currently on the market.

Following the September 2010 FDA disclosure, plaintiffs brought a putative class action suit against Arena and several of its officers, alleging that the defendants’ statements referring to the animal studies were misleading and made with scienter.  The district court dismissed the complaint for failure to adequately allege scienter.   The Ninth Circuit reversed.  Assuming that the challenged statements were misleading, the Ninth Circuit focused its opinion on what it described as a “simple” theory of scienter: because Defendants had referred to the animal studies when touting lorcaserin’s safety and likely approval, they were obligated to disclose the Rat Study’s existence to the market, and their failure to do so demonstrated scienter.  2016 WL 6246875, at *4.

While acknowledging that it was a “close case,” the Ninth Circuit ultimately agreed.  Id.  The court observed that, under Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27 (2011), Defendants would have been under no affirmative duty to disclose the Rat Study in the absence of other statements they had made to the market.  However, as in Matrixx, once Defendants represented that “animal studies” supported lorcaserin’s safety and likely approval, they were bound to do so in a manner that would not mislead investors.  Id. at *5-*7.  The court found that, at the time those statements were made, “Arena knew the animal studies were the sticking point with the FDA[,]” and that it was simply untrue that all of those studies were “favorable.”  Id. at *7 (emphasis in original).

The Ninth Circuit also rejected Defendants’ attempt to analogize the case to In re AstraZeneca Sec. Litig., 559 F. Supp. 2d 453 (S.D.N.Y. 2008), where the court found that a “scientific disagreement” between the defendant company and the FDA regarding the safety profile of a proposed new drug did not give rise to an inference that the defendants did not honestly believe that the drug was safe.  The court observed that Schwartz’s “theory of fraud” was not that Defendants had misled the market as to lorcaserin’s objective safety, but rather that they had withheld information about the FDA’s concerns about its safety, which implicated its prospects for approval—regardless of whether those concerns were well-founded.  Id. at *8.

In some respects, the Ninth Circuit’s opinion seems rather harsh.  After all, while the FDA had initially expressed some concern about the Rat Study, Arena had ultimately concluded that the animal tests did not suggest that lorcaserin was carcinogenic to humans, and the FDA had not expressed disagreement with that conclusion at the time the challenged statements were made.  It seems plausible that, at the time they made those statements, Defendants actually believed that the Rat Study supported the drug’s safety and would not be a significant stumbling block in the approval process.

On the other hand, the FDA had not expressed that its concerns about the Rat Study had been mollified, either.  By expressly invoking “favorable animal studies” as a basis for Arena’s belief that lorcaserin would be approved, Defendants arguably created an impression that nothing in the animal studies would cause the FDA any concern—an arguably misleading impression, given that the FDA had already expressed its concern.  Had Arena simply stated its belief or confidence that lorcaserin would be approved, it likely would have avoided an inference of scienter.  But once it specifically referenced “animal studies” as a basis for that belief, the failure to disclose that those “animal studies” had actually given the FDA pause arguably created a misleading picture for investors.

Analogizing a plaintiff’s allegations to “brushstrokes” intended to paint a “portrait” of scienter, the First Circuit found those allegations “cover[ed] too little canvas” to give rise to the strong inference of scienter required under the Private Securities Litigation Reform Act.  See Local No. 8 IBEW Ret. Plan & Trust v. Vertex Pharmaceuticals, — F.3d —-, 2016 WL 5682548 (1st Cir. 2016).  In doing so, the First Circuit reaffirmed the very high bar that a plaintiff must clear to allege scienter on the basis of recklessness.

The case arose from Vertex’s correction of previously-reported preliminary results from clinical trials for an experimental drug combination treatment for cystic fibrosis.  Initially, Vertex reported an “absolute improvement” in lung function of 5 percent or more for 46 percent of patients receiving the combination therapy, and an “absolute improvement” of 10 percent or more for 30 percent of patients receiving the treatment.  Vertex was effusive in describing the preliminary results, stating that they “exceeded expectations” and were driving Vertex to accelerate its plans to bring the treatment to market.  Immediately thereafter, Vertex’s stock price shot up by more than 55 percent, and by a few weeks later had risen more 73 percent.  During that period, several of Vertex’s officers and directors sold over half a million shares of their Vertex stock for a total of almost $32 million.

At that point, however, Vertex reported that the preliminary results had been overstated.  Vertex explained that it had “misinterpreted” the results received from a third-party vendor, which reflected a “relative improvement” from the patients’ baseline lung function, rather than an “absolute improvement.”  Vertex reported that, once the results were recalculated to put them in terms of “absolute improvement,” only 35 percent of patients showed an improvement in lung function of 5 percent or more, and only 19 percent showed an improvement of 10 percent or more.  Following that disclosure, Vertex’s stock price declined significantly, although it remained over 54 percent higher than it had been before the initial announcement.

Plaintiffs filed a securities class action.  The lead plaintiff, Local No. 8 IBEW Ret. Plan & Trust (“Local No. 8”), alleged that, “[w]hen faced with … study results that seemed too good to be true, Defendants, rather than checking the results, turned a blind eye, accepting and promoting unlikely data that offered them a windfall on the sale of their stock.”  Id. at *3 (quoting complaint).  Defendants moved to dismiss, arguing that the facts alleged did not give rise to a “strong inference” of scienter, as required by the Reform Act.  The district court granted the motion, and Local No. 8 appealed.

On appeal, the First Circuit explained that, to show scienter through “recklessness” rather than actual intent for purposes of a securities fraud claim, a defendant’s conduct must go beyond “merely simple, or even inexcusable negligence, but [must involve] an extreme departure from the standards of ordinary care.”  Id. (citation omitted).  The court explained that this form of recklessness is “closer to a lesser form of intent” than to ordinary negligence. Id. (citation omitted).

With that background, the First Circuit turned to the facts alleged in the complaint that Local No. 8 argued cumulatively supported an inference of scienter.  The court indicated it was “mindful that ‘[e]ach individual fact about scienter may provide only a brushstroke,’ but it is our obligation to consider ‘the resulting portrait.’”  Id. at *4 (citation omitted).  Thus, the court would evaluate each fact individually, and then assess their cumulative effect.  Id.

The First Circuit did not find that any of the facts alleged, considered individually, were particularly indicative of scienter:

  • Local No. 8 alleged that the implausibility of the initial results should have been obvious for a number of reasons, and that some individuals within the company were highly skeptical of them.  The court found that, while Defendants admitted the initial results were surprising, Local No. 8 did not allege facts indicating that they were “so obviously suspect” that Defendants should have inquired further.  Id. at *4-*6.  Nor did Local No. 8 allege that any of the individuals within the company who were “skeptical” of the results reported that skepticism to any of the Defendants.  Id. at *5.
  •  Local No. 8 argued on appeal that it was “rare” for a company to publish interim results.  The First Circuit declined to consider that contention, as it was not made in the complaint and, in any event, there was no legal requirement that Vertex double-check interim results before reporting them.  Id. at *6.
  •  The First Circuit found that Local No. 8’s allegations of insider trading also did not strongly suggest scienter.  The court observed that one of the individual defendants—Vertex’s CEO—did not sell any stock, and one of the others sold only small amounts that were consistent with his trading pattern both before the initial announcement and after the correction.  While the other individual defendants had more substantial stock sales, the court found them “perfectly understandable” in light of Vertex’s previously languishing stock price.
  • Finally, Local No. 8 alleged that the sudden retirement of Vertex’s Chief Commercial Officer, Nancy Wysenski, shortly after a U.S. Senator asked the SEC to investigate potential insider trading by Vertex executives suggested consciousness of guilt, at least with respect to her.  Id. at *7.  The court noted that the allegations “point[ing] the finger” at Wysenski “tend to exculpate the others who did not retire or leave the company.”  Id. at *8.  Moreover, “[a]lternative explanations abound[ed]” for Wysenski’s retirement—her large insider sales could have been embarrassing to the company even in the absence of fraud, or she might have been negligent in preparing the press release announcing the initial results.  Id.

The First Circuit concluded that, “[c]umulatively, the brushstrokes here do not paint the required strong inference of scienter.”  Considered in the context of the allegations as a whole, “the stock sales by some of the individual defendants and the timing of Wysenski’s retirement (which might otherwise look very different) cover too little canvas to evoke inferences of scienter strong enough to equal the alternative inference that Vertex was negligent in viewing very good results as being even better than they in fact were.”  Id.

The Third Circuit engaged in a searching analysis of plaintiffs’ falsity and scienter allegations and found them insufficient under the exacting standards of the Reform Act, upholding the district court’s dismissal of the complaint in OFI Asset Management v. Cooper Tire & Rubber, — F.3d —, 2016 WL 4434404 (3d Cir. 2016).

In its ruling, the Third Circuit also had some harsh words for plaintiffs’ “kitchen sink” pleading style, finding that it “has been a hindrance at every stage of these proceedings.”  Id. at *7.

The case is tied to Cooper’s failed merger with Apollo Tyres.  Cooper was valuable to Apollo largely due of its manufacturing facility in China (“CCT’), of which it owned 65%, with the remaining 35% owned by a Chinese company.  The merger fell through after workers at CCT went on strike, denied Cooper officials access to the facility, refused to provide Cooper with financial information, and stopped producing Cooper-branded tires.  At the same time, the merger announcement led to a labor dispute in Cooper’s U.S. manufacturing facilities, with a labor arbitrator eventually finding in favor of the union and barring Cooper from selling two of its U.S. plants to Apollo.

Plaintiffs alleged that Cooper made a number of false or misleading statements under Section 10(b) and 14(a) in connection with the failed merger, including in the merger agreement, the proxy statement, its financial statements, and two 8-Ks containing news about the merger.  The claim was dismissed by the district court in Delaware for failure to adequately allege falsity and scienter.

Prior to oral argument, the district court had ordered plaintiffs to submit a letter identifying the five most compelling examples of allegedly false statements, with three factual allegations demonstrating the falsity of each statement and three allegations supporting scienter as to each of the statements.  Upon appeal, plaintiffs’ first objection was as to the court’s process, arguing that the court abused its discretion by considering only five “artificially selected” allegedly false statements, and failing to rule on the whole of plaintiffs’ complaint.

The Third Circuit considered plaintiffs’ “umbrage. . . unfounded.” Far from harming OFI’s case, the court found that the district judge had tried to “give OFI an assist,” by offering it a chance to frame the issues in its complaint more clearly.  Asking OFI to bring some order and clarity to its 100-page, 245-paragraph complaint was well within the district judge’s discretion to manage complex disputes, and does not show that the judge failed to consider the allegations as a whole.  Id. at *6.

Held the Third Circuit: “As pled, the Complaint presents an extraordinary challenge for application of the highly particularized pleading standard demanded by the PSLRA. This is true not only due to the length of the Complaint, but also its lack of clarity. . . . Now that OFI has come to us with the same kind of broad averments that drove the District Court to demand specificity, we find ourselves more than sympathetic to the Court’s position.”  Id. at *6.

After holding that the district court had not abused its discretion in managing the case, the Third Circuit went on to explore in detail each of the allegedly false statements, finding that none of them were sufficient to maintain a claim.  In doing so, the court considered the context of each allegedly false or misleading statement, and examined whether the allegations of falsity as to each were sufficiently specific, rejecting those allegations that lacked the particularity required of the Reform Act or which failed to show how a statement was misleading rather than simply incomplete.

As to a number of forward-looking statements, the Third Circuit held that its allegations of falsity failed to account for the Reform Act’s Safe Harbor.  Because the statements had been accompanied by meaningful cautionary statements, the court held that the Safe Harbor immunized them from liability—and thus they were not actionable even if plaintiffs could show that they were false and made with scienter.  Id. at *15.

In regard to one isolated statement, the court also found that even if OFI had sufficiently pleaded technical falsity, it nevertheless failed to raise a strong inference of scienter, because the “plausible opposing inferences” were more likely, “including that the statement was simply imprecise or received little attention due to the context in which it was made[.]”  Id. at 12.

Wrote the court: “OFI’s post hoc scouring of countless pages of documents for a stray and inartfully phrased comment that can be argued to be technically false seems like just the sort of litigation maneuver the PSLRA was meant to eliminate. One purpose of the statute was to prevent disappointed investors from treating every imprecise statement during a transaction as an invitation to file a lawsuit.”  Id. at *13.

In Anderson v. Spirit Aerosystems Holdings, Inc., — F.3d —, 2016 WL 3607032 (10th Cir. 2016), the Tenth Circuit provided a blueprint for how to analyze securities class action scienter allegations, looking carefully at allegations made by confidential witnesses, examining the challenged statements in context, evaluating plaintiffs’ motive allegations, and weighing conflicting inferences of innocence and scienter.

In rejecting the scienter allegations as inadequate, the court also analyzed what has come to be known as the “core operations inference,” considering whether the court should attribute knowledge of wrongdoing to top level executives based on their position within the company, and the fact that the plaintiffs claim that their allegations implicate the “core operations” of the company.

Plaintiffs filed a class action against Spirit Aerosystems Holdings, Inc. (“Spirit”), and four executives, alleging violations of Section 10(b) and Rule 10b-5. Spirit supplies parts for Gulfstream aircraft and had periodically reported to the public about its progress on various projects, including cost overruns, production delays, and risks, while also expressing confidence about its ability to meet deadlines and ultimately break even. When Spirit later announced that it expected to lose hundreds of millions of dollars on three projects, its stock price fell and litigation ensued.

Plaintiffs alleged that top executives must have known that problems with the three projects would result in the company failing to meet economic forecasts. They claimed that the executives misrepresented and/or omitted cost overruns and production delays because they knew, or must have known, that the overruns or delays were going to impact materially impact revenue.

But the court rejected these “core operations” allegations because they were based solely on defendants’ positions within the company and their involvement with certain projects. The court cited to the Ninth Circuit’s decision in South Ferry LP, No. 2 v. Killinger, 542 F.3d 776, 784 (9th Cir. 2008), in finding that such allegations will fail to meet the scienter requirement unless there are detailed allegations about an executive’s actual knowledge of information that belied the truth of the public statements. Id. at *10.

The court held: “Based on the plaintiffs’ allegations of the defendants’ involvement in Spirit’s core operations, we can infer only that the four executives were overly optimistic about Spirit’s ability to achieve the forecasted production schedules and cost reductions. The plaintiffs have not provided a good reason to believe that the executives knew that the projects were unlikely to meet forecasts.”

The court also found that plaintiffs failed to demonstrate scienter through (1) allegations that the defendants were “motivated to mislead in order to buy time in the hope that a difficult financial situation ‘would right itself,’” (2) information from confidential witnesses, or (3) implementation of a recovery plan.

The court began its analysis of plaintiffs’ motive allegations by stating the Tenth Circuit’s legal standard: although motive is not required to plead scienter, the absence of a motive allegation is relevant in evaluating scienter. With respect to plaintiffs’ particular alleged motive, the court found, as an initial matter, that the argument had not been properly preserved. But even if it were considered, it would not suffice, because it is nothing more than a generalized corporate motive. In the absence of a particularized motive to obfuscate, the allegations were insufficient to support an inference of scienter.

The court next rejected the confidential-witness allegations, because they did not support the inference that the executives knew of specific contemporaneous facts that were inconsistent with their challenged statements. The court noted that most of the CWs did not work closely with the executives, and the allegations from the one witness who did concerned only claims of general corporate mismanagement, of a kind that was insufficient to establish scienter. Id. at *7.

Finally, the court analyzed plaintiffs’ allegations that the existence of a recovery plan tended to establish scienter. The court started with the assumption that certain statements were false or misleading, and then weighed the dual explanations to determine whether those misrepresentations were made with scienter. The defendants argued the statements were made from an honest belief that the recovery plan would reduce costs and accelerate production. The court, relying on In re Zagg, Inc., Sec. Litig., 797 F.3d 1194, 1198-99 (10th Cir. 2015), determined it was more likely than not that the executives had identified a better way of handling the project and not that the recovery plan suggested scienter. The court concluded that the “innocent inference” was more cogent and compelling than an inference of scienter. Id. at *8.

From time to time, D&O Developments will take a closer look at an important issue decided in an appellate opinion.  In this post, I analyze In re ChinaCast Education Corp. Securities Litigation, 809 F.3d 471 (9th Cir. 2015), in which the Ninth Circuit reversed the dismissal of a securities class action against ChinaCast Education Corporation, a for-profit e-learning provider in China.  ChinaCast’s founder and CEO, Ron Chan, had bilked the company out of millions and, due to his failure to disclose the underlying fraud, made false and misleading statements in conference calls, press releases, and SEC filings.  Even though Chan’s conduct was contrary to ChinaCast’s interests, the court ruled that his fraudulent intent could be imputed to the company because he acted with apparent authority on the company’s behalf.

At first blush, the Ninth Circuit’s holding seems fair: why shouldn’t the company be liable for the false statements of its CEO?  Yet the holding reads the scienter element out of Section 10(b), and thus expands the scope of liability under that section, contrary to the Supreme Court’s direction that its implied right of action be narrowly construed.  The Ninth Circuit compounded its legal error with an incomplete analysis of public policy considerations.  Holding a defrauded corporation liable for the fraud committed against it by its officers simply re-victimizes the corporation, and rewards class-period purchasers of stock at the expense of current shareholders.

Factual and Procedural Background

At least on appeal, the parties didn’t dispute the details of the fraud.  ChinaCast was a successful, promising business.  But its March 2011 10-K filing disclosed that the company’s outside auditor, a Deloitte affiliate, had identified “serious internal control weaknesses” with respect to ChinaCast’s financial oversight.  Within a few months of that report, Chan began the process of sending some $120 million in company money to outside accounts that he or close associates controlled.  He also used millions of dollars of ChinaCast money to secure loans that had nothing to do with the business, and engaged in other unauthorized and illegal transfers of company assets to third parties.

All the while, Chan made statements about the company’s success and financial security in press releases and on investor calls, and signed SEC disclosures that didn’t mention his looting.  Though the board of directors uncovered Chan’s actions in spring 2012, removed him as CEO, and publicly disclosed that he and other senior officers had engaged in illegal conduct, the damage was done. Chan’s actions ruined the company financially.

Purchasers of ChinaCast stock sued Chan, ChinaCast, its Chief Financial Officer, and the company’s independent directors in the Central District of California in September 2012.  The district court dismissed the complaint with prejudice as to ChinaCast and the independent directors, holding that the complaint had not adequately alleged scienter.  Specifically, the district court reasoned that Chan’s rogue conduct could not be held against the company or its directors because he acted only in his own self-interest and there was nothing to suggest the company benefitted from his actions—what the law of agency calls the “adverse interest exception” to the general principle of holding companies responsible for their agents’ actions.  Id. at 474.  (Chan and the CFO had not been served and were not the subject of the motion to dismiss ruling.)

The Ninth Circuit’s Ruling

The Ninth Circuit reversed, holding that common law agency principles permitted ChinaCast to be held accountable for Chan’s fraud.  The panel explained that ordinarily, actions within the scope of an officer’s apparent authority are imputed to the company.  While there is an adverse interest exception to this principle, the exception itself has an exception, which the district court failed to recognize: an agent’s rogue conduct is imputed to the principal (the company) to protect innocent third parties who dealt with the principal in good faith.  When ChinaCast permitted Chan to speak on investor calls and through the press, the company gave him its stamp of approval.  Innocent shareholders understandably relied on those statements, and protecting their interests requires that Chan’s conduct be imputed to the company.  In this case, the company and board did nothing to beef up their oversight processes despite Deloitte’s warning about serious internal risks, and failed to adequately monitor Chan, who, as CEO, should have been subject to careful scrutiny.

The panel relied on a 2013 decision of the Third Circuit, which had rejected a corporate defendant’s adverse interest argument, and allowed a complaint to go forward where the company’s Ponzi-scheming employee acted within the scope of his apparent authority.  Id. at 477 (citing Belmont v. MB Inv. Partners, Inc., 708 F.3d 470, 496 (3d Cir. 2013)).

The opinion closed by acknowledging the consequences of its reasoning:

Assuming a well-pled complaint, we recognize that, as a practical matter, having a clean hands plaintiff eliminates the adverse interest exception in fraud on the market suits because a bona fide plaintiff will always be an innocent third party.

Id. at 479.  But the panel further concluded that this result is consistent with the securities laws’ purposes of protecting investors and promoting confidence in securities markets.  Id.

The ChinaCast Holding Is Inconsistent with Section 10(b)

Resort to agency law for guidance on federal securities law questions can be appropriate, if it doesn’t conflict with the underlying securities law.  But the Ninth Circuit’s agency-law analysis, even if correct, reads the scienter element out of Section 10(b).  Under the types of facts present in ChinaCast, the company can only disclose the underlying fraud through those who know about it.  But when the looter himself is the only one who knows about the fraud, the company is incapable of disclosing it—the looter has essentially gagged the company.  In such a situation, to say that the company “knew,” by imputing the looter’s state of mind to the company, is a dangerous fiction:  a company can’t defraud purchasers of its stock by omitting information of which it had no knowledge or ability to disclose other than through the looter.  Moreover, the company doesn’t benefit from being defrauded.  To the contrary, it is not only directly harmed by the theft, but may also develop legal liabilities due to the looting, and its interest is in preventing further looting and pursuing remedies against the wrongdoer to address those legal liabilities.

In making this error, the Ninth Circuit relied on “the public policy goals of both securities and agency law—namely, fair risk allocation and ensuring close and careful oversight of high-ranking corporate officials to deter securities fraud,” as a basis for refusing to apply the adverse interest exception.  ChinaCast, 809 F.3d at 478-79.  But expanding Section 10(b) liability on such grounds is not allowed.  The Supreme Court has consistently warned against expanding the scope of Section 10(b)’s implied private right of action without a clear statement from Congress.  See, e.g., Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296, 2301-02 (2011); Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, 552 U.S. 148, 165 (2008).  This principle is especially relevant in the context of corporate scienter.  Under Section 10(b), liability is foreclosed absent scienter, e.g., Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 (1976), and of course, scienter is required as to each defendant, including the company.

In contrast to Section 10(b), Congress has explicitly lowered the burden for plaintiffs in other provisions of the securities laws.  For example, Section 11 claims impose strict liability on issuers for misstatements in a registration statement.  See Ernst & Ernst, 425 U.S. at 200 (contrasting Section 10(b) to other liability provisions in the securities laws, including Section 11).  Congress designed Section 11’s lower burden “to assure compliance with the disclosure provisions of the Act by imposing a stringent standard of liability on the parties who play a direct role in a registered offering.”  Herman & MacLean v. Huddleston, 459 U.S. 375, 381-82 (1983).  Thus, where Congress intends to allocate risk among market participants, it does so explicitly, and there has been no similar allocation in the Section 10(b) context.

Moreover, the Ninth Circuit incorrectly calibrated its fairness analysis.  If an executive loots the company in secret and then prevents it from fulfilling its obligations under the securities laws to make accurate public disclosures, imposing liability on the company would further harm and thus re-victimize the company and its shareholders.  Indeed, holding the company liable rewards only class-period purchasers of stock, who may or may not be current shareholders, at the expense of the company and its current shareholders.

It is important for courts to remain faithful to the structure of the securities laws in cases that present facts similar to ChinaCast.  Although such cases are thankfully rare, they are cases in which there are many victims of the fraud—including the corporation itself, as well as innocent officers and directors.

In Doshi v. Gen’l Cable Corp., ___ F.3d ___, 2016 WL 2991006 (6th Cir. May 24, 2016), the Sixth Circuit affirmed a district court order dismissing a securities fraud class action against a company and two of its executives, on the grounds that the complaint failed to plead facts sufficient to create a strong inference of scienter on the part of either the company or the individual defendants. In its holding, the Sixth Circuit refused to impute the state of mind of a senior non-defendant executive to the company for the purposes of scienter, because that executive had not made any false or misleading public statements.

Plaintiff alleged that General Cable and its CEO and CFO had violated Sections 10(b) and 20(a) of the Exchange Act, as well as Rule 10b-5, by acting at least recklessly in issuing or approving materially false public financial statements. Defendants countered that the misstatements were a product of accounting errors and theft in General Cable’s Brazilian operations, and that they had promptly remediated these problems upon learning of them. The district court granted defendants’ motion to dismiss, on the grounds that plaintiff had failed to plead scienter, and denied plaintiff’s request to file an amended complaint as futile.

In evaluating the district court’s rulings, the Sixth Circuit emphasized the standards set forth in Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007), which requires that allegations of scienter be assessed “holistically,” and that courts weigh the strength of scienter allegations against “plausible opposing inferences” of innocent conduct. Doshi, 2016 WL 991006 at *4 (quoting Tellabs, 551 U.S. at 323, 326). In performing the Tellabs holistic review, the Sixth Circuit examined the nine factors listed in its decision in Helwig v. Vencor, Inc., 251 F.3d 540, 552 (6th Cir. 2001) (en banc). These factors, which are not exhaustive, include the following:

(1) insider trading at a suspicious time or in an unusual amount; (2) divergence between internal reports and external statements on the same subject; (3) closeness in time of an allegedly fraudulent statement or omission and the later disclosure of inconsistent information; (4) evidence of bribery by a top company official; (5) existence of an ancillary lawsuit charging fraud by a company and the company’s quick settlement of that suit; (6) disregard of the most current factual information before making statements; (7) disclosure of accounting information in such a way that its negative implications could only be understood by someone with a high degree of sophistication; (8) the personal interest of certain directors in not informing disinterested directors of an impending sale of stock; and (9) the self-interested motivation of defendants in the form of saving their salaries or jobs.

Doshi, 2016 WL 2991006 at *4 (citing Helwig, 251 F.3d at 552).

Plaintiff’s scienter arguments as to General Cable turned in large part on the conduct of a non-defendant executive named Mathias Sandoval, who headed the “Rest of World” (“ROW”) division that included the company’s operations in Brazil. While the Sixth Circuit accepted plaintiff’s theory that Sandoval’s knowledge of the theft and accounting errors in Brazil could be imputed to General Cable, it cited its decision in Omnicare in refusing to impute Sandoval’s scienter to General Cable, because plaintiff had not alleged that Sandoval had drafted, reviewed, or approved General Cable’s erroneous public statements—in other words, that Sandoval had “made” a statement. Doshi, 2016 WL 2991006 at *5 (citing In re Omnicare, Inc. Sec. Litig., 769 F.3d 455, 476, 481 (6th Cir. 2014)). The court then concluded that seven out of the nine Helwig factors weighed against an inference of scienter on the part of the company. Although “one could infer that General Cable acted recklessly by issuing its public financial statements,” the court concluded, the facts alleged in plaintiff’s complaint established a stronger countervailing inference that the materially false statements were a product of theft and errors by local managers in Brazil and the legitimate freedom accorded to ROW to report financial data. Id. at *7.

Having concluded that plaintiff’s complaint failed to create a strong inference that General Cable acted with scienter, the Sixth Circuit turned to the two individual executive defendants. Although the court allowed that a holistic review of the facts lent “some support to an inference that [the executive defendants] consciously disregarded the obvious risks that each issued or authorized false public financial statements,” it once again concluded based on the Helwig factors that there was no strong inference of scienter, and that at most the alleged facts supported an inference that the two executives had been negligent in issuing or authorizing false statements. Id.

In considering plaintiff’s request to file an amended complaint, the Sixth Circuit evaluated plaintiff’s new proffered allegations, which included, inter alia, assertions that General Cable had disclosed FCPA violations in foreign countries that were not Brazil, and that the executive defendants could have lost previously-issued incentive compensation by disclosing the misstatements. The Sixth Circuit held that the district court had correctly decided that these proposed amendments would have been futile, given that the FCPA violations were unrelated to the theft and errors in Brazil, and the new incentive compensation allegations were too general to support a strong inference of scienter.