A Fourth Circuit Judge Did What?

The following was first published on 2/21 over at Securities Litigation Watch, my new blog.

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First, the non-newsworthy part.

Yesterday, the United States Court of Appeals for the Fourth Circuit affirmed the dismissal of the consolidated securities class action pending against Cree, Inc. (NASDAQ: CREE), and six of the corporation's officers and directors. A copy of the Fourth Circuit's opinion is available here.

The dismissal itself (and certainly the affirmance by the Fourth Circuit) is not the big news. A quick review of the SCAS database reveals that fully 50% of the federal securities class actions filed within the Fourth Circuit since the PSLRA was enacted have been dismissed.

The big news is the dissent in the Cree litigation, authored by Judge Dennis W. Shedd.

Judge Shedd takes issue with the scienter analysis performed by both the District Court and the majority. In his words:

The majority approach to testing the adequacy of the Complaint examines in isolation each individual suspect transaction in order to ascertain whether the elements of securities fraud have been adequately pled with respect to each one. However, this approach ignores the fact that this case revolves around a single securities fraud action against a single company, Cree.

Judge Shedd goes on to write:

the Complaint does not-and need not-allege an action for securities fraud with respect to all six companies with which Cree dealt. Instead, the Complaint alleges a single cause of action for securities fraud, as evidenced by many transactions with multiple companies. If even one of these transactions is pled adequately enough to meet the pleading requirements under the PSLRA and Rules 8 and 9, the cause of action must survive the motion to dismiss. Moreover, if the totality of Cree's actions reveals a larger picture of fraud sufficient to meet the necessary pleading requirements, this case must advance beyond the current stage of the proceedings

Judge Shedd also takes issue with the analysis adopted by the majority regarding the standards to be applied to so-called "confidential sources." Such information sources, typically former employees or customers of the corporate defendant are a common investigative and pleading technique used by plaintiffs to meet the pleading standard imposed by the PSLRA.

The majority adopted the standard employed by the Seventh and Second Circuits in Makor Issues & Rights, Ltd. v. Tellabs, Inc., 437 F.3d 588 (7th Cir.2006) and Novak v. Kasaks, 216 F.3d 300 (2d Cir.2000), respectively. Under that analysis, a complaint which relies on confidential sources must allege facts sufficient "to support the probability that a person in the position occupied by the source would possess the information alleged."

Judge Shedd, in his dissent disagrees with the adoption of the Tellabs/Novak standard, noting:

I would resolve the issues surrounding unnamed sources differently because the approach adopted by the majority does not inhere in the plain language of the PSLRA. The plain language of the PSLRA does not subject unnamed sources to higher scrutiny than other averments made upon information and belief. Accordingly, in my view, a complaint must simply identify unnamed sources "with particularity," as required by the plain language of the PSLRA, which might include the source's job title and years of employment, or possibly, other facts sufficient to support a reasonable belief that the plaintiff did not merely invent sources. The purpose of the PSLRA's particularity requirement is to prevent the fabrication of information, not to weigh its reliability or credibility.

The Teachers' Retirement System of Louisiana is the lead plaintiff and Grant & Eisenhofer, P.A. are lead counsel in the Cree litigation.