Smallen Revocable Living Trust v. Western Union Company

Majority - Baldock, Circuit Judge

No, the complaint fails to plead particularized facts giving rise to the strong inference of scienter required by the Private Securities Litigation Reform Act (PSLRA) to state a claim for securities fraud. The court affirmed the dismissal, finding that while the complaint alleged numerous compliance problems and government investigations, it lacked specific facts demonstrating the individual defendants made statements with an intent to defraud or conscious disregard of the risk that shareholders would be misled. The court explained that to establish a violation of Section 10(b) and Rule 10b-5, a plaintiff must prove, among other things, that the defendant acted with scienter, defined as 'a mental state embracing intent to deceive, manipulate, or defraud,' or 'recklessness.' Recklessness in this context is 'conduct that is an extreme departure from the standards of ordinary care, and which presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious that the actor must have been aware of it,' akin to conscious disregard rather than mere negligence or gross negligence. The PSLRA imposes a heightened pleading standard requiring particularized facts giving rise to a 'strong inference' of scienter, which 'must be more than merely plausible or reasonable' and 'at least as compelling as any opposing inference one could draw from the facts alleged,' as per Tellabs, Inc. v. Makor Issues & Rights, Ltd. The court systematically rejected Plaintiff's arguments based on various categories of alleged facts: (1) 'red flags' like consumer complaints and agent arrests were insufficient because Plaintiff failed to particularize the individual defendants' awareness of the fraud or the ineffectiveness of specific compliance programs, and the dollar amount of fraud, while significant, was a small percentage of overall transfers. (2) Discussions at board and committee meetings about compliance improvements were dismissed as 'mere attendance at meetings does not contribute to an inference of scienter' and did not equate to knowledge of ongoing, unaddressed violations. (3) Government investigations, while relevant, lacked particularized allegations showing the individual defendants themselves dealt with regulators, reviewed underlying documents, or were informed of ongoing legal noncompliance during the Class Period. Even for CEO Ersek, who was regularly briefed, the allegations did not establish he was informed about ongoing, unaddressed compliance violations. (4) The DPA admissions and FTC conclusions were deemed 'fraud by hindsight,' as these subsequent revelations do not prove the individual defendants knew of falsity at the time of their challenged statements. (5) Allegations of motive through insider stock sales by Ersek and Agrawal were found not unusual when viewed in context (e.g., increased aggregate holdings, sales being a fraction of total holdings), and the absence of sales by Scheirman further weakened this argument. Considering all allegations holistically, the court concluded that the inference of scienter was 'neither cogent nor as compelling as the competing inference of nonfraudulent intent,' which was that the individual defendants were overly optimistic about Western Union’s compliance systems rather than intentionally misleading investors or consciously disregarding risks. The court also declined to adopt a broad theory of 'corporate scienter' that would impute the scienter of any corporate agent to the company, instead requiring the state of mind of 'the individual corporate official or officials who make or issue the statement (or order or approve it or its making or issuance, or who furnish information or language for inclusion therein, or the like).' Even under this more limited view, the complaint failed to raise a strong inference of scienter for other named executives or unnamed compliance officers. Since no primary violation of securities laws was adequately pleaded, Plaintiff’s Section 20(a) control-person claims also failed.