Southland Securities v. Inspire Ins. Solutions, 02-10558.
| Decision Date | 31 March 2004 |
| Docket Number | No. 02-10558.,02-10558. |
| Parties | SOUTHLAND SECURITIES CORPORATION, on behalf of Itself and All Others Similarly Situated; et al., Plaintiffs, Jeffrey A. Fielkow; Rick Taylor; William Wares; Ron Rumpler; William White, Plaintiffs-Appellants, v. INSPIRE INSURANCE SOLUTIONS INC., et al., Defendants, Inspire Insurance Solutions Inc.; F. George Dunham, III; Robert K. Agazzi; Terry G. Gaines; Ronald O. Lynn; Jeffrey W. Robinson; William J. Smith, III; Millers Mutual Fire Insurance Company, Defendants-Appellees. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Joseph David Daley (argued), Eric Alan Isaacson, Helen J. Hodges, Milberg, Weiss, Bershad, Hynes & Lerach, Edward M. Gergosian, Barrack, Rodos & Bacine, San Diego, CA, for Plaintiffs-Appellants.
Edward Saul Koppman (argued), Jeffrey M. Goldfarb, Akin Gump Strauss Hauer & Feld, Susan L. Hays, Waters & Krauss, Dallas, TX, for Defendants-Appellees.
Appeal from the United States District Court for the Northern District of Texas.
Before GARWOOD, JOLLY and HIGGINBOTHAM, Circuit Judges.
Plaintiffs Southland Securities Corporation, Jeffrey Fielkow, Rick Taylor, William Wares, Ron Rumpler, and William White (plaintiffs) appeal the district court's dismissal, pursuant to Fed.R.Civ.P. 9(b) and the Private Securities Litigation Reform Act (PSLRA), of their securities fraud complaint. We affirm in part and reverse in part and remand.1
INSpire Insurance Solutions, Inc. (INSpire), the corporate defendant in this case, provided policy and claims administration to the property and casualty insurance industry and offered outsourcing and software services. In this securities-fraud class action, the defendants are INSpire; Millers Mutual Fire Insurance Company, allegedly the original parent corporation and largest shareholder of INSpire (see note 1 above); F. George Dunham (Dunham), the President, CEO and Chairman of the Board of INSpire during the class period; Ronald O. Lynn (Lynn), Executive Vice President and CIO during the class period; Terry G. Gaines (Gaines), Executive Vice President, CFO, and Treasurer during the class period; Robert K. Agazzi (Agazzi), Executive Vice President of Software and Systems during the class period; Jeffrey W. Robinson (Robinson), Executive Vice President of Outsourcing and later President and COO during the class period; and William J. Smith (Smith), President and COO from May 1, 1998 to January 7, 2000, (collectively defendants). INSpire was established in 1995 as a wholly owned subsidiary of Millers, and remained such until August 1997 when Millers spun it off through an initial public offering (IPO) of 8.25 million shares, Millers retaining 43.7 percent of INSpire's outstanding shares. Plaintiffs generally contend that defendants engaged in a fraudulent scheme to deceive investors about the company's performance for the purpose of inflating the price of INSpire stock for their own financial benefit. The proposed plaintiff class consisted of all those who acquired INSpire common stock between January 28, 1998, and October 14, 1999.
The plaintiffs' Second Amended Complaint (Complaint), from the dismissal of which this appeal is taken, alleges that the defendants committed securities fraud by knowingly, or with severe recklessness, touting INSpire's software products2 and contracts despite the software's critical flaws; issuing inaccurate earnings and revenue estimates; and violating Generally Accepted Accounting Principles (GAAP) by failing to timely classify receivables as uncollectible, improperly capitalizing software development costs, and failing to write down goodwill associated with purchases of software assets. The plaintiffs allege these misleading statements were made in forward-looking statements, press releases, and other corporate documents, and relied upon by analysts in their reports. The plaintiffs further allege defendants made stock sales based on insider information, pointing to these sales as evidence of scienter. The plaintiffs seek to recover damages on behalf of all persons who acquired INSpire stock between January 28, 1998 and October 14, 1999.
On December 3, 1999, the plaintiffs, on behalf of themselves and others similarly situated, filed their original complaint against the defendants. This case was consolidated with substantially identical suits subsequently filed by other plaintiffs. On June 7, 2000, the plaintiffs filed their Consolidated Amended Complaint. On August 10, 2000, the defendants filed motions to dismiss the plaintiffs' Consolidated Amended Complaint, which motions were granted by the Court on March 12, 2001. In that Dismissal Order, the court found that, because the plaintiffs' Consolidated Amended Complaint had failed to plead fraud with particularity and improperly relied on the "group pleading" doctrine in lodging allegations against the defendants collectively, the plaintiffs did not meet the pleading requirements established by Fed.R.Civ.P. 9(b) and the Private Securities Litigation Reform Act (PSLRA). The court held that the plaintiffs must plead with sufficient particularity wrongdoing and scienter as to each defendant individually. The court also found the plaintiffs failed to allege facts supporting an inference that the forward-looking statements cited in the Consolidated Amended Complaint were made with actual knowledge that they were false or misleading.
The court gave the plaintiffs an opportunity to amend their Complaint. They filed their Second Amended Complaint3 on May 16, 2001. The defendants filed responsive motions to dismiss. The plaintiffs asserted claims under section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 of the Securities and Exchange Commission (SEC), as modified by the PSLRA, codified in relevant part at 15 U.S.C. §§ 78u-4 and 78u-5, against all of the defendants except Millers. The plaintiffs also asserted claims under section 20(a) of the Securities Act, 15 U.S.C. § 78t(a), which provides for control-person liability, against INSpire, Millers, and Dunham.
This court reviews the dismissal of a complaint for failure to state a claim de novo, accepts "the facts alleged... as true and construe[s] the allegations in the light most favorable to the plaintiff." Nathenson v. Zonagen Inc., 267 F.3d 400, 406 (5th Cir.2001). However, we will not "strain to find inferences favorable to the plaintiffs." Westfall v. Miller, 77 F.3d 868, 870 (5th Cir.1996). Nor do we accept conclusory allegations, unwarranted deductions, or legal conclusions. Nathenson, 267 F.3d at 406. A dismissal for failure to plead fraud with particularity as required by rule 9(b) is a dismissal on the pleadings for failure to state a claim. Shushany v. Allwaste, Inc., 992 F.2d 517, 520 (5th Cir.1993).
Section 10(b) of the Securities Exchange Act provides in relevant part:
"It shall be unlawful for any person, directly or indirectly
. . .
(b) To use or employ, in connection with the purchase or sale of any security ... any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [Securities and Exchange] Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors." 15 U.S.C. § 78j(b) (2000).
Rule 10b-5 provides in relevant part:
"It shall be unlawful for any person, directly or indirectly
. . .
(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading ...
in connection with the purchase or sale of any security." 17 C.F.R. § 240.10b-5 (2001).
The PSLRA speaks to the requirements of a securities law class action complaint as follows:
"(b) Requirements for securities fraud actions
(1) Misleading statements and omissions
In any private action arising under this chapter in which the plaintiff alleges that the defendant —
(A) made an untrue statement of a material fact; or
(B) omitted to state a material fact necessary in order to make the statements made, in the light of the circumstances in which they were made, not misleading; the complaint shall specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed.
(2) Required state of mind
In any private action arising under this chapter in which the plaintiff may recover money damages only on proof that the defendant acted with a particular state of mind, the complaint shall, with respect to each act or omission alleged to violate this chapter, state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.
(3) Motion to dismiss; stay of discovery
In any private action arising under this chapter, the court shall, on the motion of any defendant, dismiss the complaint if the requirements of paragraphs (1) and (2) are not met." 15 U.S.C. § 78u-4(b).
Federal Rule of Civil Procedure 9(b) likewise requires the plaintiffs in securities fraud causes to plead with particularity the circumstances constituting the alleged fraud. To satisfy Rule 9(b)'s pleading requirements, the plaintiffs must "specify the statements contended to be fraudulent, identify the speaker, state when and where the statements were made, and explain why the statements were fraudulent." Williams v. WMX Technologies, Inc., 112 F.3d 175, 177-78 (5th Cir.1997), cert. denied, 522 U.S. 966, 118 S.Ct....
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