The Second Circuit recently issued an opinion highlighting the heightened pleading standards required by Federal Rule of Procedure 9(b) and the Private Securities Litigation Reform Act (PSLRA). In ECA v. JP Morgan Chase Co., 2009 U.S. App. LEXIS 972 (January 21, 2009, Decided), the shareholders of JP Morgan Chase (JPMC) brought a derivative action alleging that they were defrauded by JPMC's complicity in Enron Corporation's financial scandals. Specifically the shareholders alleged that JPMC defrauded them by (1) downplaying its Enron-related exposures, (2) failing to disclose alleged violations of law in connection with certain transactions, (3) falsely portraying itself as a low-risk company with a reputation for fiscal discipline and integrity, and (4) improperly accounting for certain transactions as trades rather than loans.
To meet the heightened pleading standards under FRCP 9(b) and the PSLRA the complaint must "specify each statement alleged to have been misleading, and the reasons or reason why the statement is misleading" and "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." (emphasis added). The Court held that "a desire to maximize the corporation's profits" is not sufficient motive to defraud, plaintiffs must allege that "JPMC or its officers 'benefitted in some concrete and personal way from the purported fraud." The Court dismissed the second amended complaint with prejudice for failure to comply with the heightened pleading standard and held that plaintiffs failed to create a strong inference of scienter based on motive and opportunity.
Marissa A. Coheley