Appellate Law

CA1: PSLRA case goes to defendant (as does denial of motion to amend), but not all news is good for defendants

By S. COTUS

ACA Financial v. Advest , 07-1367.  The First proudly announces that this its first post-Tellabs, Inc. v. Makor Issues & Rights, Ltd., 127 S. Ct. 2499 (2007) PSLRA case.  PSLRA, in case you are a moron, stands for Private Securities Litigation Reform Act of 1995, Pub. L. No. 104-67, 109 Stat. 737.  And, of course, it affirms the dismissal of the claims of bond-holders that were defaulted on by Bradford College (the bonds were issued by the Massachusetts Industrial Finance Agency ("MIFA")).   

The First acknowledges that its prior PSLRA precedent was, in part overruleed (as to determining the sufficiency of pleadings of scienter in securities fraud cases under FRCP 12(b)(6)).  So In re Credit Suisse First Boston Corp., 431 F.3d 36 (1st Cir. 2005) (our coverage here) ("Scienter allegations do not pass the 'strong inference' test when, viewed in light of the complaint as a whole, there are legitimate explanations for the behavior that are equally convincing.") is now bad law, and ?In other words, where there are equally strong inferences for and against scienter, Tellabs now awards the draw to the plaintiff.? 

And you are never going back to your old bankrupt school... so read on.

Essentially, the plaintiffs complain about misstatements in financial statements.  However, the First looks at each of them, and concludes that the college didn?t really have a duty to disclose everything (and accurately predict future financial activities), so merely not disclosing some things in not inherently bad.  If you ever wanted to read about how colleges are run like (sometimes failing) business, this case is for you.  The First even goes so far to say that it is troubled by some discrepancies, but the plaintiffs didn?t show that the relevant parties knew of them, so no scienter. 

Regarding denied motions to amend under 15(a), the First says taht the PSLRA doesn?t amend FRCP 15(a), ?nor does it require that all dismissals be with prejudice.?  However, the First says that it would be inefficient to remand to have the lower court analyze an amended complaint.

A claim under 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78t (controlling party liability), also fails because there was no underlying violation.

A claim under Section 12(a)(2) of the Securities Act of 1933, 15 U.S.C. § 77l (misleading prospectus) because there was no basis to conclude that Advest knew of any arguably misleading financial statements.

Full post as published by Appellate Law and Practice on January 10, 2008 (boomark / email).