A US appeals court has dismissed a proposed securities fraud class
action, clarifying when a corporation will be deemed to make
misstatements knowingly. The decision emphasizes the importance of
compliance procedures for vetting procedures when making public
statements and also demonstrates the strict approach US courts take
when examining pleadings alleging securities fraud.
The plaintiff shareholder in In Re: Omnicare, Inc. Securities
Litigation brought a proposed class action against the
defendant company, a pharmaceutical care provider, and several
executives. The plaintiff alleged the defendants had committed
securities fraud, making misrepresentations about the company's
compliance with Medicare and Medicaid regulations. The plaintiff
alleged the company knew these statements were false based on
internal audits that revealed evidence of fraudulent billing
The US appeals court for the Sixth Circuit, based in Cincinnati,
Ohio, dismissed the action. The decision found that
the plaintiff had failed to plead adequate facts:
That the defendant executives had actual knowledge of the audit
results when the misrepresentations were made; and
That there was an intent to defraud the public.
Corporate Knowledge Of Wrongdoing
The appeals court noted that courts have taken different
approaches to determining when a corporation will be deemed to have
knowledge of its wrongdoing.
The court drew a distinction between 'hard' information
(typically historical information which is objectively verifiable)
and 'soft' information (which includes predictions,
opinions and beliefs).
The statements at issue in this case were 'soft'
information because, in the words of the lower court, they
"merely revealed errors from limited internal audits, not
finding of irregularities by an agency."
The court set out its preferred approach that the knowledge of
the following individuals are probative of corporate knowledge of
The individual agent who made the misrepresentation
An individual agent who reviewed or authorized the relevant
information before the misrepresentation was made
Any high level manager or board member who ratified or
tolerated the misrepresentation after it was made
The court believed this formulation struck a balance
Preventing corporations from evading liability through tacit
encouragement or wilful blindness; and
Protecting corporations from liability when one individual
unknowingly makes a false statement that another unconnected
individual knew to be false.
The court's approach emphasizes to companies the importance
of vetting procedures when making public statements, but refuses to
apply a rule of strict liability. The proposed class action class
action was dismissed.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
It's not often that our little blog intersects with such titanic struggles as the U.S. presidential race – and by using the term "titanic" I certainly don't mean to suggest that anything disastrous is in the future.
J.J. v. C.C., is an interesting case in which the court held that an automotive garage owes a duty to minor children to secure the vehicles on the premises by locking the cars and safely storing the car keys...
In Irwin v. Alberta Veterinary Medical Association, 2015 ABCA 396, the Alberta Court of Appeal found that the "ABVMA" failed to afford procedural fairness to a veterinarian undergoing an incapacity assessment.
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).