Duane Morris Class Action Review - 2023 - Report - Page 307
These requirements, in addition to the heightened standards of Federal Rule of Civil
Procedure 9(b), were the basis for dismissal with prejudice in In Re Carnival Corp.
Securities Litigation, 2022 U.S. Dist. LEXIS 58526 (S.D. Fla. Mar. 30, 2022). Plaintiffs
alleged that Carnival had made false and misleading statements regarding its COVID19 polices and the risks posed to its business by the pandemic. The court’s review of
the complaint found that Carnival’s statements affirming compliance with regulatory
requirements and safety protocols were not actionable and immaterial. The court
deemed that statements affirming Carnival’s commitment to passenger and crew safety
too vague and general to satisfy the particularity requirements of Rule 9(b) and the
PSLRA. To establish scienter, as required under the PSLRA, plaintiffs stated generally
that Carnival possessed contemporaneous information that contradicted its public
statements. The court rejected these claims as lacking the particularity necessary to
demonstrate or create a strong inference of scienter.
The PSLRA requires heightened pleading of misstatements or omissions under Rule
10b-5(b), but not for allegations of fraudulent schemes under 10b-5(a) and (c). This has
led plaintiffs whose allegations cannot meet the heightened pleading requirements for
misrepresentations to argue that these same allegations establish scheme liability.
Several rulings in putative class actions in the Second Circuit have recently rejected
such attempts following the Second Circuit’s holding in SEC v. Rio Tinto, 41 F. 4th 47
(2d Cir. 2022). These rulings include Touchstone Strategic Trust, et al. v. GE, 2022 U.S.
Dist. LEXIS 176580 (S.D.N.Y. Sep. 28, 2022), and In Re Eastman Kodak Co. Securities
Litigation, 2022 U.S. Dist. LEXIS 174437 (W.D.N.Y. Sep. 27, 2022). In Rio Tinto, the
Second Circuit adhered to its prior case law holding that misstatements and omissions
alone do not establish scheme liability, and rejected the SEC’s arguments that the
Supreme Court’s decision in Lorenzo, et al. v. SEC, 139 S.Ct. 1094 (2019), required a
different outcome. Lorenzo held that a defendant who did not “make” statements under
10b-5(b), but disseminated them could still be liable under 10b(a) or (c). In rejecting the
SEC’s arguments in Rio Tinto, the Second Circuit noted that the misstatements at issue
in Lorenzo were not the only basis for scheme liability in that case. Citing the
particularity provisions of the PSLRA, the Second Circuit expressed concern that the
SEC’s interpretation of Lorenzo would allow plaintiffs in private class actions to fashion
claims under scheme liability to avoid the pleading requirements of claims asserting
misstatements or omissions.
Against this background, in Touchstone, the court found that the plaintiffs had not
sufficiently pleaded misstatements or scienter under the PSLRA, and then held that the
plaintiffs’ scheme liability claims could not survive dismissal because their complaint
alleged misstatements and omissions without any inherently deceptive conduct.
The court in Eastman likewise held that the plaintiff did not meet the PSLRA
misrepresentation pleading requirements, also relied on Rio Tinto in its dismissal of
plaintiffs’ scheme liability claims, and concluded that such a claim must show some
deceptive or manipulative act that is independent of a misstatement or omission.
Not all courts follow this interpretation of Lorenzo. Prior to the decision in Rio Tinto, the
court in Strougo, et al. v. Tivity Health, Inc. 2022 U.S. Dist. LEXIS 101449 (M.D. Tenn.
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Duane Morris Class Action Review – 2023
