The U.S. Third Circuit Court of Appeals in City of Roseville Employees’ Retirement System v. Horizon Lines, Inc., et al., Case No. 10-2788, on August 24, 2011, in a 2-to-1 decision, read opinion here, affirmed the District Court’s granting of defendants’ motion to dismiss all claims against corporate defendants and five officers and directors for securities fraud under the heightened pleading rules codified in the Private Securities Litigation Reform Act (the “PSLRA”).  The majority substantively agreed with the District Court’s resolution of the defendants’ motion to dismiss, preferring to not “retrace all of the ground the Court so ably covered….”

This summary was prepared by Kevin F. Brady of Connolly Bove Lodge & Hutz LLP.

The Court of Appeals noted that the PSLRA places “a weighty burden on plaintiffs” to plead sufficient facts, when viewed in their totality, to raise a strong inference of scienter. The District Court applied the Fifth Circuit’s approach in Southland Securities Corp. v. INSpire Insurance Solutions, Inc., 365 F.3d 353, 366 (5th Cir. 2004), in which the court recognized that statements of executive officers may be attributed to a corporation when they are “made pursuant to their positions of authority within the company.”  But with respect to whether a corporation had the scienter to make the statements, the Fifth Circuit held that it [is] appropriate to look to the state of mind of the individual corporate official or officials who make or issue the statement . . . rather than generally to the collective knowledge of all the corporation’s officers and employees acquired in the course of their employment. Id.  Because the District Court found that there was no individual at Horizon who made actionable statements with scienter, the District Court concluded and the Court of Appeals agreed that the plaintiff had not pled scienter against Horizon.

On appeal, the plaintiff argued that it could successfully plead scienter against the corporation without successfully pleading a claim against any individual. The Court of Appeals, however, did not reach that argument, noting that “[e]ven if, however, it were possible to plead scienter against a corporation without pleading scienter against an individual, the facts alleged here would not survive a motion to dismiss.” 

In his dissent, Judge Ambro preferred to follow the Court of Appeals for the Sixth Circuit that “reviewing each allegation individually before reviewing them holistically risks losing the forest for the trees.” Frank v. Dana Corp., 2011 WL 2020717, at *5 (6th Cir. May 25, 2011).  He noted, for example, that the Puerto Rico market was a significant portion of Horizon’s business, that the conspiracy went on for six years, and that Horizon had an IPO during this period, which would have required senior management to take a close look at the company’s finances.  As a result, Judge Ambro concluded that “the Amended Complaint pled sufficient facts to raise a strong inference that the senior executives acted with scienter when they made material false statements, and thus that there were sufficient allegations of Horizon’s scienter, as well.” 

Finally, the majority noted that:

The dissent focuses not on the District Court’s analysis of each of these allegations but rather on the brevity of the Court’s explicit discussion of the totality of the facts related to scienter. That specific section of the Court’s opinion was brief, but it followed a lengthy discussion as to why each scienter-related allegation added little, if anything, to plaintiff’s side of the scienter scale. The Court did not need to explain at length that the total weight of these allegations was also scant. To put it succinctly, it does not take much to explain that zero plus zero equals zero.