•     Judge Lynch, writing for the First Circuit Court of Appeals, affirmed a decision dismissing shareholder claims that a drug company hid reports of serious adverse effects identified in clinical trials.  The scienter allegations about high infection rates were not clearly significant nor clearly linked to the drug treatment.  As soon as life-threatening risks were identified, the defendants pulled the drug from the market.  While there was significant insider trading during the class period, the timing of those sales did not correspond to the time the defendants learned of the risks.  The court also questioned whether the PSLRA allowed plaintiffs to amend their complaints after the filing of a motion to dismiss.

•     Judge Jacobs, writing for the Second Circuit Court of Appeals, affirmed the acquittal of a securities trader charged with illegal interpositioning on deals for customers.  He made no affirmative misrepresentations but was charged with manipulative or deceptive attacks.  Unless the deception of customers was based on some affirmative action by the trader, he had not committed any primary violation.  The mere violation of stock exchange regulations was not illegal.  Even if customers reasonably expected he would not engage in interpositioning due to the regulations, he could not be a primary violator if he did not communicate some agreement not to do so.

•     Judge Jones, writing for the Fifth Circuit Court of Appeals, reversed a district court judgment and held that plaintiffs had failed to allege a strong inference of scienter on claims focused on accounting irregularities.  Plaintiffs alleged errors in accounting for acquisitions, but there was no direct evidence of officers’ awareness of this.  The fraud was allegedly very large, but there had been no restatement or government findings to support the claims.  Claims of improper revenue recognition likewise had insufficient particularity; confidential witnesses were not described in sufficient detail or their reports on defendants’ awareness were not particular enough.  Other claims failed due to the lack of a duty to disclose a potential problem with a major contract.  Significant insider trading was not suspicious but had alternative innocent explanations.

•     Judge Brown, writing for the Fifth Circuit Court of Appeals, affirmed in part and reversed in part a decision dismissing fraud claims based on a private placement memorandum misrepresenting the security for investments in loan instruments.  Federal claims were dismissed under the statute of limitations, because the misrepresentations were six years earlier.  However, the court found that plaintiff sufficiently alleged scienter for state common law fraud claims, given the defendants’ central participation.  Some state securities law claims also could proceed.

•     Judge Smith, writing for the Eighth Circuit Court of Appeals, affirmed the dismissal of Section 14(a) claims that defendants failed to disclose positive drug test results in a proxy before a shareholder vote on a merger.  Although the complaint did not allege fraud, the court found that the PSLRA’s heightened pleading standards still applied.  Plaintiff alleged that the defendants were negligent in not discovering and disclosing positive test results for a product before making proxy disclosures.  The court found that there was no duty of the defendants to discover such test results, so there could be no negligence.

•     Judge Smith, writing for the Eighth Circuit Court of Appeals, affirmed the dismissal with prejudice of claims that a company misstated demand and understated its defect rate in order to enhance revenue statements.  The confidential witnesses cited in the complaint only testified that isolated sites were a problem and did not establish any great company-wide problem.  The company increased its allowances and had required no restatement.  The mere opening of an SEC investigation was not a basis to grant leave to amend the complaint.

•     Chief Judge Alex Kozinski, and Circuit Judges Michael Daly Hawkins and Robert E. Cowen (sitting by designation from the Third Circuit), reversed a District Court ruling that had granted defendant’s motion to dismiss based on an absence of loss causation. Plaintiffs alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act, 15 U.S.C. §§ 78j(b), 78t(a), and SEC Rule 10b-5, 17 C.F.R. § 240.10b-5.

•     Judge Sprizzo of the federal district court for the Southern District of New York denied a lead plaintiff’s motion to amend its complaint to add claims unrelated to the prior complaint, occurring several years later.  The court found that the amendment would prejudice the defendant, whose discovery had been completed in the initial action.  The amendment would also create class certification problems and apparently was aimed at taking control of separate claims for the lead plaintiff and engage in judge shopping.

•     Judge Garaufis of the federal district court for the Eastern District of New York granted a motion to dismiss claims that a company’s general counsel was liable for accounting manipulations to cover up options backdating.  While the defendant pled guilty to participating in the backdating, there was not a strong inference that he knew of or participated in associated manipulation of financial statements.  He received no benefit from the scheme other than that for any shareholder of the corporation.

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