Oh, That Tricky 10b-5

As reported in The New York Law Journal last week, an S.D.N.Y. judge recently dismissed a class action complaint against Oppenheimer Co. centering on sales of auction rate securities, a vehicle of infamy in recent years.  The case serves as a barometer of the Second Circuit's tolerance for Rule 10b-5 claims inviting a number of controversial defenses to securities fraud.  See Vining v. Oppenheimer Holdings Inc., 08 Civ. 4435 (Sept. 27, 2010).

As the judge ruled:

Plaintiffs' basic theory is that high-level Oppenheimer officials issued management directives and uniform sales materials to Oppenheimer financial advisors regarding ARS, and that these directives were issued recklessly or with the intention to defraud because the prospect of ARS illiquidity was "either known to [Oppenheimer] or so obvious that [Oppenheimer] must have been aware of it."

On the topic of imputing scienter of unnamed individuals to the corporate defendant, the Court readily concluded that, while such is theoretically permissible in the Circuit, Plaintiffs had failed to offer sufficient grounds in the Complaint.  Specifically, allegations of inadequate training did not create an inference that the trainer possessed a motive to defraud.

As for the Tellabs "competing inference" analysis, the Court concluded that the allegations of fraud failed when juxtaposed with "the more cogent theory that Oppenheimer was caught off-guard by the exceptional turmoil in the financial markets...."

And concerning Plaintiffs' attempts to satisfy the strong inference test via allegations of the entity's insider sales/desire to keep the ARS market afloat, the Court cited a 2001 Second Circuit case (Kalnit v. Eichler) for the continuing truism that allegations of a generalized profit motive will not satisfy the demands of scienter. 

Overall, by dismissing the Complaint, the S.D.N.Y. reiterated that, even in these angry times, lawsuits involving notorious vehicles may be dealt setbacks that have plagued 10b-5 suits for decades.

---JSC, 10/26/10