Successful Motions to Dismiss Securities Class
Actions, A Review of What Worked in 2014
U.S. Securities and Transactional Litigation Alert
By: Jon Eisenberg
Motions to dismiss have been called “the main event” in securities class actions. They are
filed in over 90% of securities class actions and they result in dismissal close to 50% of the
time they are filed.1 In contrast, out of 4,226 class actions filed between 1995 and 2013, only
14 were resolved through a trial, and of those, only five resulted in verdicts for the
defendant.2 In between a denial of a motion to dismiss and a trial are i) discovery, ii)
opposition to class certification, iii) motion for summary judgment, iv) mediation, and iv)
settlement. Unfortunately for defendants in securities class actions, class certification is
granted in whole or in part 84% of the time,3 and there is no summary judgment decision at
all over 90% of the time. 4 Thus, for most defendants in securities class actions, a denial of
a motion to dismiss usually results in writing a settlement check, often after years of costly
discovery. Defendants that fail to give adequate attention to motions to dismiss are
shortchanging the very best opportunity they have to avoid what may otherwise become
multi-year, expensive litigation.
We previously addressed 75 defenses to securities class actions that are the building blocks
for successful motions to dismiss.5 In this alert, we look at recent cases—2014 decisions
that relied on established precedents to dismiss securities class actions. Our purpose is not
to be exhaustive, but rather to give examples of key defenses that worked well in 2014. All
of the cases in the text were decided this year. We have focused on recurring issues of
broad application rather than narrow issues unlikely to affect more than a handful of cases.
For highly experienced securities practitioners, much of this will be common knowledge; but
for those who face securities class actions only occasionally, it provides a primer and recent
authorities on the defenses most likely to form a basis for successful motions to dismiss. We
have also included in the endnotes the key Supreme Court cases addressing these issues.
Before turning to the 2014 cases, we provide a very brief overview of Section 10(b) of the
Securities Exchange Act of 1934 and Sections 11 and 12(a)(2) of the Securities Act of 1933.
Most securities class actions allege violations of Section 10(b) of the Securities Exchange
Act of 1934 and Rule 10b-5 thereunder. Neither provides an express cause of action, but
both the Supreme Court and lower courts implied private rights of action under these
provisions long before the Supreme Court adopted a far more restrictive approach to
implying private rights of action. Section 10(b)’s language is vague—it prohibits a
“manipulative or deceptive device or contrivance”—but has been interpreted to require a
plaintiff to allege and prove: i) a material misrepresentation or omission by the defendant,6 ii)
scienter,7 iii) a connection between the misrepresentation or omission and the purchase or
sale of a security,8 iv) reliance on the misrepresentation or omission,9 v) economic loss, and
vi) loss causation.10 11
November 6, 2014
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Successful Motions to Dismiss Securities Class Actions, A
Review of What Worked in 2014
2
In Section 10(b) class actions, alleging facts sufficient to support the scienter pleading
requirement is particularly challenging. The Private Securities Litigation Reform Act of 1995
(“PSLRA”)—described recently as “[t]he elephant-sized boulder blocking” a plaintiff’s
securities class action complaint12—requires that, with regard to any claim for damages
requiring “proof that a defendant acted with a particular state of mind,” i) the complaint must
“state with particularity facts giving rise to a strong inference that the defendant acted with
the required state of mind;” 13 ii) imposes a requirement that every complaint alleging
securities fraud must “specify each statement alleged to have been misleading, the reasons
or reasons why the statement is misleading, and if an allegation regarding the statement or
omission is made on information and belief, the complaint shall state with particularity all
facts on which that belief is formed;” iii) created a safe harbor for forward-looking statements
accompanied by meaningful cautionary language; iv) created a second safe harbor for
forward-looking statements in which defendants lacked “actual knowledge” that the
statements were false or misleading; and v) provided an automatic stay of discovery pending
rulings on the motion to dismiss. Further, in addition to the PSLRA, Fed. R. Civ. P. 9(b)
requires that in all averments of fraud, plaintiff must plead with particularity the
circumstances constituting the fraud, which lower courts have held requires the plaintiff to
plead the time, place, speaker, and content of the alleged misrepresentations.14
Plaintiffs also often file under Sections 11 and 12(a)(2) of the Securities Act of 1933, both of
which provide express private rights of action. Sections 11 and 12(a)(2) are limited to
misrepresentations or omissions in a registration statement or prospectus and, thus, often do
not apply to the conduct at issue. On the other hand, when there is a securities offering to
which they do apply, they do not require a plaintiff to prove scienter, reliance, or loss
causation. 15 As a result, it is often more difficult to obtain complaints alleging
misrepresentations or omissions related to a securities offering. In this alert, we consider
successful motions to dismiss Section 10(b) class actions. We save for another day an alert
covering successful motions to dismiss Sections 11 and 12(a)(2) class actions.
With that background in mind, we turn to 2014 decisions in which courts granted (or affirmed
the grant of) motions to dismiss securities class action claims and the key principles on
which they relied.
1. Consideration of Documents outside the Pleadings.
One of the developments that has greatly assisted defendants at the motion to dismiss stage
has been the courts’ willingness to consider documents outside the pleadings. This is critical
because “[w]ere courts to refrain from considering such documents, complaints that quoted
only selected and misleading portions of such documents could not be dismissed under
Rule 12(b)(6) even though they would be doomed to failure.”16
In In Re Omnicare, Inc. Sec. Litig., 2014 U.S. App. LEXIS 19326 (Oct. 10, 2014), in which
the Sixth Circuit affirmed the dismissal of a securities class action complaint, the court
explained, “[I]f a plaintiff references or quotes certain documents, or if public records refute a
plaintiff’s claim, a defendant may attach those documents to its motion to dismiss, and a
court can then consider them in resolving the Rule 12(b)(6) motion without converting the
motion to dismiss into a Rule 56 motion for summary judgment.” It further stated, “Fairness
and efficiency require this practice.” It cited Fed. R. Evid. 201(b), which states that a court
may judicially notice a fact “that is not subject to reasonable dispute because it: i) is generally
