(The article featured below is a selection from Federal Securities Law Reporter, which is available to subscribers of that publication.)

8th Circuit: Complaint Failed to Satisfy PSLRA Pleading Requirements

An Eighth Circuit panel affirmed a district court's dismissal of a securities fraud class action for failure to meet the heightened pleading requirements of the Private Securities Litigation Reform Act. The complaint alleged that a subprime lender and three of its officers made false and misleading statements about the lender's operations and financial health during the class period.

The lower court found that the complaint failed to meet the PSLRA's pleading requirements because it failed to specify the allegedly misleading statements, or why the statements were misleading. The complaint also showed a lack of scienter, as the allegations discussed claimed wrongdoing in generalities and attempted to turn poor business decisions into "fraud by hindsight." The district court also concluded that amendment would be futile.

On appeal the lead plaintiff argued that the allegedly misleading statements had been specified in a 36-six page section of the complaint reproducing press releases, SEC filings, and transcripts of conference calls. The panel, however, stated that nowhere in this section was it indicated what specific statements in the communications were allegedly false or misleading or why they were misleading. According to the appeals court, this was sufficient to find that the district court did not err in dismissing the complaint.

The 8th Circuit indicated that the plaintiff appeared to recognize the weaknesses of the complaint by citing in his brief on appeal several specific statements and describing why they were false or misleading. The argument on appeal was not successful however. As the panel pointed out, "[i]dentifying specifically the false or misleading statements for the first time on appeal, however, does not excuse a litigant’s failure to comply with the pleading requirements under the PSLRA." The court did not need to address the lead plaintiff's additional arguments concerning compliance with the PSLRA's pleading requirements for scienter. The panel also affirmed the denial of leave to amend the complaint.

With regard to the denial of leave to amend, the appellate court noted that the plaintiff did not submit a proposed amended complaint or present the substance of any potential amendments to the district court prior to dismissal. Rather, "he merely included a footnote at the end of his response to Novastar’s motion to dismiss" requesting leave to amend. He also did not file a post-dismissal motion seeking leave to file an amended complaint. As described by the 8th Circuit, the denial of leave to amend was appropriate because "the district court is not required to engage in a guessing game as a result of the plaintiff’s failure to specify proposed new allegations."

In re 2007 Novastar Financial, Inc., Securities Litigation (8thCir) is reported at ¶95,338.