South Ferry LP, No. 2 v. Killinger
542 F. 3d 776, 2008 U.S. App. LEXIS 19178, 2008 WL 4138237 (2008)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
The 'core operations inference'—which presumes key officers are aware of facts critical to the company's central business—is generally insufficient on its own to establish a strong inference of scienter under the PSLRA. However, such allegations may be considered as part of a holistic review of the complaint and can support a strong inference when combined with other particularized facts or in rare circumstances where the undisclosed information is of such prominence that it would be absurd to suggest management was unaware.
Facts:
- Washington Mutual, Inc. (WAMU) was a publicly-traded financial services company with a significant mortgage lending business.
- Key officers included Kerry Killinger (CEO), Thomas Casey (CFO), and Deanna Oppenheimer (President of Consumer Group).
- WAMU's mortgage business faced two main risks from interest rate changes: 'MSR-related risk' from homeowners refinancing, and 'pipeline risk' from interest rates changing after a loan rate was locked in.
- WAMU publicly stated it managed these risks through a 'natural hedge' and other financial instruments, which depended on well-integrated information systems.
- During the class period (April 2003 - June 2004), Killinger, Casey, and Oppenheimer made public statements assuring investors that WAMU's risk management strategies and integrated information systems were effective.
- South Ferry and other investors purchased WAMU stock during this period.
- South Ferry alleged that these statements were false because WAMU's information systems were not properly integrated, which prevented the company from effectively managing its hedges and risks.
Procedural Posture:
- South Ferry LP and other shareholders (Plaintiffs-Appellees) filed a securities fraud action against Washington Mutual, Inc. and its officers (Defendants-Appellants) in the U.S. District Court for the Western District of Washington.
- Defendants filed a motion to dismiss for failure to meet the PSLRA's heightened pleading standards.
- The district court denied the motion to dismiss as to defendants Killinger, Casey, and Oppenheimer, holding that the 'core operations inference' was sufficient to plead a strong inference of scienter.
- Defendants moved for reconsideration or, in the alternative, for certification of the order for interlocutory appeal.
- The district court denied the motion for reconsideration but granted the certification for an interlocutory appeal on the question of whether the core operations inference satisfies the PSLRA's scienter requirement.
- Defendants, as Appellants, appealed the district court's order to the U.S. Court of Appeals for the Ninth Circuit.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does the 'core operations inference,' which presumes that key corporate officers have knowledge of facts critical to the company's central business, suffice on its own to create a 'strong inference' of scienter as required by the Private Securities Litigation Reform Act (PSLRA)?
Opinions:
Majority - Gould, Circuit Judge
No, the core operations inference, standing alone, is generally insufficient to create a strong inference of scienter under the PSLRA. The Supreme Court's decision in Tellabs requires a holistic assessment of all allegations to determine if the inference of scienter is cogent and compelling when weighed against opposing inferences. While prior Ninth Circuit precedent in cases like Read-Rite rejected reliance on the core operations inference, Tellabs clarified that such allegations should not be dismissed in isolation but considered as part of the totality of the circumstances. Therefore, allegations about management's role can support a strong inference of scienter, but typically only when combined with other particularized allegations showing defendants' actual exposure to the negative information or in rare cases where the undisclosed facts are so central to the company's survival that it would be 'absurd' to think management was unaware. Because the district court applied the inference without the benefit of this framework, its order is vacated and the case is remanded for reconsideration.
Analysis:
This decision significantly clarifies the role of the 'core operations inference' in securities fraud litigation within the Ninth Circuit following the Supreme Court's landmark ruling in Tellabs. It moves away from a rigid rule that automatically rejects the inference, adopting a more flexible, holistic analysis. While reaffirming that an executive's position alone is typically insufficient to prove scienter, the court provides plaintiffs a clearer pathway to use such allegations as a component of a larger factual narrative. This ruling harmonizes the Ninth Circuit's traditionally strict pleading standard with the Supreme Court's holistic approach, creating a nuanced framework that will guide lower courts in assessing the sufficiency of scienter allegations in future securities fraud cases.
