Thursday, February 22, 2007, 9:51 AM

Fourth Circuit Dismisses Federal Securities-Fraud Class Action

On Tuesday Feb. 20 the Fourth Circuit, in a split decision, affirmed the MDNC's Rule 12(b)(6) dismissal of a 168-page federal securities-fraud class action complaint brought against Cree, Inc., a technology business based in Durham. The case is Teachers' Retirement System of La. v. Schoenfeld. Judge Niemeyer wrote the majority opinion, joined by Judge Wilkinson. Judge Shedd dissented.

This is an important case concerning the application of the Private Securities Litigation Reform Act's heightened pleading requirements for 10b-5 cases alleging misrepresentations or omissions. See 15 U.S.C. 78u-4(b). The heightened pleading standard applies to two elements: (1) that the defendant made a false statement or omission of material fact (2) with scienter. The panel divided on whether the complaint satisfied the heightened pleading requirements.

The panel also divided on whether the complaint adequately pleaded a separate issue: loss causation. Loss causation requires a plaintiff to show a causal link between the defendant's misrepresentation and the decline in stock value. See generally Dura Pharm., Inc. v. Broudo, 544 U.S. 336 (2005) (discussing loss causation).

Interestingly, just last month the economic consulting firm NERA published a study which, in addition to documenting a dramatic decrease in federal securities class action filings, found that the Fourth Circuit has the highest rate of dismissal of federal securities class actions, dismissing 31 percent of cases within two years.


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