Question

Fleming, a publicly held company, and several officers of the company, were sued by various stockholders for securities fraud for filing documents that were materially misleading. The stockholders contended that information failed to discuss litigation lost by Fleming that resulted in a damage award of $200 million, which led to the company's stock falling by about 25%. The stock pricer recovered some after part of the trial verdict was set aside, and Fleming settled the case by paying $20 million. Stockholders contended that failure to fully reveal the risks of that litigation caused losses to investors in Fleming stock. The district court dismissed the suit because the plaintiffs failed to show that Fleming made deliberate and materially misleading statements of omissions. Stockholders appealed. [City of Philadelphia v. Fleming Co., 264 F.3d 1245, 10th Cir. (2001)]

What evidence is required in order to show that the defendant "deliberately" made misleading statements or omissions to potential stockholders.

Answer 1

The evidence that is required in order to show that the defendant "deliberately" made misleading statements or omissions to potential stockholders will be evidence that will provide a strong inference that the defendant failed to disclose, either intentionally or recklessly, the material risks and pending events that may give rise to risk (in this case the pending litigation) in a manner that will give rise to liability for securities fraud. A violation of the securities law also has to be established.

Allegations of motive and opportunity are relevant to finding of scienter but they themselves are not sufficient to establish scienter. Under the PSLRA (The Private Securities Litigation Reform Act of 1995) the plaintiff will have to give facts that give rise to a "strong inference" of scienter (scienter is a legal term for intent or knowledge of wrongdoing). Cogent and compelling evidence has to be provided by the plaintiff and the evidence should establish intent for the wrongdoing.