(The news featured below is a selection from the news covered in the Federal Securities Report Letter, which is distributed to subscribers of the Federal Securities Law Reports.)

Insurance Company Investors Fail to Plead Falsity

Investors failed to plead fraud with sufficient particularity because their complaint did not identify why an insurance company's disclosures were false and misleading. The 3rd U.S. Circuit Court of Appeals held that the complaint failed to satisfy the Private Securities Litigation Reform Act's requirement that pleadings based on information and belief state with particularity all facts on which the investors' belief was formed. Investors attributed allegations about misleading statements to a number of confidential sources.

The court adopted the position that confidential sources do not need to be named as a general matter, but found that the confidential sources set forth in the complaint were not described with sufficient particularity to support the probability that the source possessed the information alleged. Investors' claims made in connection with a proxy statement sounded in fraud and also were dismissed because the allegations were insufficiently particular.

The court additionally held that the Private Securities Litigation Reform Act's heightened pleading standard also applies to claims brought under Securities Act Section 11, insofar as the claims are premised on allegations of fraud. The district court did not abuse its discretion by denying leave to amend the complaint, concluded the court.

According to the majority opinion, clearly declared valid reasons for denying leave. As described by the panel, the lower court had provided the plaintiffs "with a detailed roadmap for curing the deficiencies in their claims." Concluding that the defendants had already been forced to defend against three complaints, the panel stated that "the district court's decision to prevent plaintiffs from having yet another chance to revise their complaint was properly within its discretion."

Circuit Judge Sloviter dissented in part from the majority decision to deny leave to amend the pleadings, as he believed that the investors may have had a colorable claim under Securities Act Section 11 and Exchange Act Section 14(a). While he recognized the deficiencies of the complaint as pleaded, he stated that "he would not preclude them the opportunity to assert a possibly meritorious claim because of defects in the pleadings."

California Public Employees' Retirement System v. Chubb Corp. (3rdCir) is reported at ¶93,053.