By Joseph B. Crace and Matthew M. Curley 

As discussed in a previous post, the United States Court of Appeals for the Sixth Circuit recently reversed a dismissal of a claim under § 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 for failure to plead facts giving rise to a strong inference of scienter.  Frank v. Dana Corp., -- F.3d --, No. 09-4233, 2011 WL 2020717 (6th Cir. May 25, 2011).  The Sixth Circuit held that allegations of scienter must be considered collectively, or “holistically,” and that the presence or absence of specific factors are no longer determinative of whether a plaintiff has adequately pled scienter.  Id. at *5-6.  The Sixth Circuit, however, provided little guidance regarding what a “collective” or “holistic” analysis of scienter allegations otherwise might entail.

In Ashland, Inc. v. Oppenheimer & Co., Inc., -- F.3d --, 2011 WL 3181277, (6th Cir. July 28, 2011), the Sixth Circuit again addressed the issue of the appropriate pleading standard for scienter.  This time, the court ruled that plaintiff had “insufficiently alleged scienter” and affirmed the district court’s dismissal of claims under § 10(b) and Rule 10b-5.  Id. at *7.  The court held that a “holistic” or “collective” analysis of scienter was not an invitation for plaintiffs to rely on conclusory assertions of fraud.  Id. at *5.  “Simply put, apart from conclusory allegations, [the plaintiff] fails to provide any facts” supporting its allegation that defendant possessed a “deliberate intent to manipulate, deceive, or defraud.”  Id. (quotations omitted).  The court specifically faulted plaintiff for failing to explain “why or how [defendant] possessed advance, non-public knowledge that underwriters would jointly exit the [auction rate securities] market and cause its collapse in February 2008,” and for making the “unfounded assertion” that the “liquidity problems in the ARS market were already well known” to the defendant.  Id. 

In Ashland, the court elaborated on what a “holistic” scienter analysis entails.  The court explained that its opinion in Frank “eschew[ed] [the] checklist approach” established in Helwig v. Vencor, in which the court “laid out a non-exhaustive list of factors … deemed probative in securities-fraud cases.”  Id. at *5 (quoting Helwig v. Vencor, 251 F.3d 540, 552 (6th Cir. 2001), abrogated on other grounds byTellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007)).  As a result, district courts in the Sixth Circuit should now “forgo the itemized claim analysis” and “Helwig’s checklist approach” in favor of an “entirely collective assessment.”  Id. at *5.  It is important to note, however, that in both Frank and Ashland, the Sixth Circuit did not reject the relevance of the Helwig factors outright.  For this reason, those factors presumably are still relevant to a scienter analysis.  It is evident, however, that the presence or absence of each factor no longer will be scrutinized in isolation in determining whether a plaintiff has adequately pled scienter.  Moreover, the Sixth Circuit reiterated that a plaintiff may not rely on boilerplate allegations of scienter, especially where there is a plausible alternative inference of non-fraudulent intent.  Id. at *6 (“While the existence of scienter is possible in this case, the more compelling explanation is that the near-spontaneous collapse of the ARS market caught [defendant] and its employees off-guard.”).  The PSLRA’s “exacting pleading requirements for pleading scienter” continue to present a viable basis for a motion to dismiss claims under § 10(b).  Frank, 547 F.3d at 570.

(Joe Crace is an attorney at Bass, Berry & Sims PLC, concentrating his practice on corporate and securities litigation, shareholder litigation and general commercial disputes. Matt Curley is a Member of Bass, Berry & Sims PLC, focusing his practice on complex commercial, securities and class action litigation and the representation of clients in connection with internal and governmental investigations and related proceedings).