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: Jim Hamilton's World of Securities Regulation

By Jim Hamilton

9th Circuit Discusses Tellabs Standard

A district court will re-examine scienter allegations against Washington Mutual and its senior officers in light of the Supreme Court's Tellabs opinion following a 9th Circuit panel decision. As alleged, the officers made materially false or misleading statements concerning the company?s ability to manage mortgage-related risks, because the bank was unprepared for interest rate volatility because it failed to integrate its information systems to permit it to keep a close watch on its hedging activities. The district court, in a pre-Tellabs decision, found that the scienter allegations were sufficient because knowledge by the officers of the company's "core operations" could be inferred from their positions.

On appeal, the panel reviewed the allegations in light of Tellabs, and found that when reviewing the complaint as a whole, "[a]llegations that rely on the core-operations inference are among the allegations that may be considered in the complete PSLRA analysis." Such allegations regarding management?s role in a company may be relevant and help to satisfy the PSLRA scienter requirement in three circumstances, stated the court:

First, the allegations may be used in any form along with other allegations that, when read together, raise an inference of scienter that is ?cogent and compelling, thus strong in light of other explanations.? This view takes such allegations into account when evaluating all circumstances together. Second, such allegations may independently satisfy the PSLRA where they are particular and suggest that defendants had actual access to the disputed information?Finally, such allegations may conceivably satisfy the PSLRA standard in a more bare form, without accompanying particularized allegations, in rare circumstances where the nature of the relevant fact is of such prominence that it would be ?absurd? to suggest that management was without knowledge of the matter.

(Citations omitted)

Because the lower court did not have the benefit of the Tellabs decision, the appellate panel vacated the order and remanded the case for further review in light of recent case law.

South Ferry LP v. Killinger

Full post as published by Jim Hamilton's World of Securities Regulation on September 10, 2008 (boomark / email).