Divided 6th Circuit Addresses Pleading Standards in Securities Class Actions

(May 31, 2001) The U.S. Court of Appeals (6thCir) issued its opinion in Helwig v. Vencor, a case regarding pleading standards in class action securities suits under the Private Securities Litigation Reform Act (PSLRA). The Court, sitting en banc, was split seven to six. There are also conflicting interpretations by the various circuits that have examined this issue.

Carl Helwig, on Behalf of Himself and All Others Similarly Situated, et al. v. Vencor, Inc., et al., Appeal No. 99-5153, an appeal from the U.S. District Court for the Western District of Kentucky at Louisville, U.S.D.C. No. 97-00835, Judge Charles Simpson presiding.

Previously, the District Court, and then a divided three judge panel of the Appeals Court, concluded that plaintiffs failed to state a claim. See, Helwig v. Vencor, 210 F.3d 612 (6th Cir. 2000). The Appeals Court, sitting en banc, reversed. 

Plaintiffs are investors in Vencor, a health care provider now known as Kindred Healthcare. Plaintiffs filed a complaint in the U.S. District Court (WDKent) against Vencor, and several of its directors, alleging violation of federal securities laws. Plaintiffs plead misleading statements and omissions in violation of 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. Plaintiffs sought class action status. Defendants moved to dismiss under Ruled 12(b)(6) for failure to state a claim. At issue is whether the plaintiffs' complaint meets the pleading requirements set by the Private Securities Litigation Reform Act of 1995 (PSLRA), which the Congress passed to insulate defendants from abusive suits. The PSLRA creates both a safe harbor for forward looking statement, and a heightened pleading requirement: plaintiffs must "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind."

The majority found that plaintiffs met the pleading requirements, and hence, reversed and remanded. The majority followed the approach taken by the First Circuit in Greebel v. FTP Software. The Court held that the PSLRA contains a "fact-sensitive approach to pleading". It wrote: "Because Congress did not endorse or prohibit a particular manner of pleading, we cannot disregard any set of facts as insufficient as a matter of law. We inquire instead whether those facts produce a strong inference of scienter in securities fraud, which in this Circuit is recklessness for statements of present or historical fact and actual knowledge in the case of forward-looking statements." The Court then enumerated the types facts that are probative of securities fraud, as listed in the Greebel case.

Merritt wrote the majority opinion, in which Martin, Daughtrey, Moore, Cole, Clay and Gilman joined. Kennedy wrote the dissent, in which Boggs, Norris, Suhrheinrich, Siler and Batchelder joined. The plaintiffs are represented by several law firms, including Milberg Weiss, a law firm based in San Diego that specializes in bringing securities class action suits against technology companies. Defendants are represented by several law firms, including Fried Frank.

Other Circuits. There is conflict among the various circuits on this issue. See, for example:
  Janas v. McCracken (In re Silicon Graphics Sec. Litig.), 183 F.3d 970 (9th Cir. 1999).
  Novak v. Kasaks, 216 F.3d 300 (2d Cir.).
  In re Advanta Corp. Sec. Litig., 180 F.3d 525 (3d Cir. 1999).
  Bryant v. Avado Brands, 187 F.3d 1271 (11th Cir. 1999).
  Greebel v. FTP Software, 194 F.3d 185 (1st Cir. 1999).