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

Claims of Improper Accounting By Restaurant Chain Dismissed

A securities fraud class action alleging that a restaurant chain and its officers violated Exchange Act Sections 10(b) and 20(a) was dismissed with leave to replead. The class claimed that the company and its officers artificially inflated the company's stock price through a series of earnings restatements resulting from alleged GAAP violations and material misrepresentations. The class also claimed that the company misrepresented that its internal controls were adequate and reliable.

The court (DC Minn) disagreed, holding that the class failed to meet the heightened pleading standards of the Private Securities Litigation Reform Act. Specifically, the court held that the class allegations that the officers' directions to treat free employee meals as sales to increase revenues, and other GAAP violations failed to show scienter because the class did not show that the officers knew that the actions were fraudulent at the time of occurrence. Additionally, the court held that the class failed to prove loss causation because they failed to identify how a series of partial disclosure of the alleged fraud that was connected to the stock's price decline. Because the class failed to prove a primary violation of Section 10(b), the court also dismissed its Section 20(a) control person claim.

In re Buca Inc. Securities Litigation (DC Minn) is reported at ¶94,107.