In re Ceridian Corp. Securities Litigation

• Citation: 542 F.3d 240
• Decision Date: 11 September 2008
• Docket Number: No. 07-2707.,07-2707.
• Parties: In re CERIDIAN CORPORATION SECURITIES LITIGATION, Western Pennsylvania Electrical Employees Benefits Funds, et al., Plaintiffs-Appellants, v. Ceridian Corporation, et al., Defendants-Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (8th Circuit)

542 F.3d 240

In re CERIDIAN CORPORATION SECURITIES LITIGATION,

Western Pennsylvania Electrical Employees Benefits Funds, et al., Plaintiffs-Appellants, v. Ceridian Corporation, et al., Defendants-Appellees.

No. 07-2707.

United States Court of Appeals, Eighth Circuit.

Submitted: April 14, 2008.

Filed: September 11, 2008.

Sanford Svetcov, argued, Susan K. Alexander, Eli R. Greenstein, on the brief, San Francisco, CA, for appellant.

Peter William Carter, argued, Daniel J. Brown, David Y. Trevor, and Bryan C. Keane, on the brief, Minneapolis, MN, for appellee.

Before LOKEN, Chief Judge, JOHN R. GIBSON and MELLOY, Circuit Judges.

LOKEN, Chief Judge.

Between February 2004 and April 2005, Ceridian Corporation ("Ceridian"), then a publicly held company, announced that various accounting errors necessitated multiple amendments and restatements of its published financial statements. The Securities and Exchange Commission began investigating Ceridian's accounting practices in early 2004. Later that year, numerous class action complaints were filed against Ceridian and three former corporate officers. The complaints accused defendants of securities fraud that injured investors by artificially inflating Ceridian's reported earnings and stock price, violating Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b) and 78t(a), and SEC Rule 10b-5, 17 C.F.R. § 240.10b-5. After the actions were consolidated and lead plaintiffs' counsel selected, the district court¹ dismissed the amended consolidated complaint for failure to state a claim because plaintiffs failed to "state with particularity facts giving rise to a strong inference that the defendant[s] acted with the required state of mind," as required by the Private Securities Litigation Reform Act ("PSLRA"), codified at 15 U.S.C. § 78u-4(b)(2). In re Ceridian Corp. Sec. Litig., 504 F.Supp.2d 603 (D.Minn.2007). Two weeks later, the Supreme Court clarified this pleading requirement in Tellabs, Inc. v. Makor Issues & Rights, Ltd., ___ U.S. ___, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007). Plaintiffs timely appealed without asking the district court to reconsider its ruling in light of Tellabs. After careful review of the lengthy complaint, we conclude that the district court's thorough and well-reasoned opinion was consistent with both Tellabs and controlling Eighth Circuit decisions. Therefore, we affirm.

I.

The PSLRA did not prescribe a standard of fault for private damage actions under § 10(b) and Rule 10b-5. Rather, Congress imposed a heightened requirement for pleading "the required state of mind." 15 U.S.C. § 78u-4(b)(2). In Tellabs, the Supreme Court confirmed that the substantive standard continues to be "scienter, i.e., the defendant's intention `to deceive, manipulate, or defraud,'" 127 S.Ct. at 2504, quoting Ernst & Ernst v. Hochfelder, 425 U.S. 185, 194 n. 12, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976); see Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., ___ U.S. ___, 128 S.Ct. 761, 768, 169 L.Ed.2d 627 (2008). In this circuit (and others), a plaintiff may satisfy the scienter element with proof of severe recklessness, that is, "highly unreasonable omissions or misrepresentations that . . . present a danger of misleading buyers or sellers which is either known to the defendant, or is so obvious that the defendant must have been aware of it." Fla. State Bd. of Admin. v. Green Tree Fin. Corp., 270 F.3d 645, 654 (8th Cir.2001) (quotation omitted). The Supreme Court again left this recklessness issue unresolved in Tellabs. 127 S.Ct. at 2507 n. 3. Accordingly, our prior decisions that scienter includes severe recklessness continue to be controlling. See Cornelia I. Crowell GST Trust v. Possis Med., Inc., 519 F.3d 778, 782 (8th Cir.2008).

Prior to Tellabs, we frequently applied the PSLRA's "strong inference" pleading requirement without defining the quantum of pleaded facts that gives rise to an inference that is "strong." See Kushner v. Beverly Enters., Inc., 317 F.3d 820, 827 (8th Cir.2003) ("Congress did not codify any particular methods of satisfying" this heightened pleading requirement); Green Tree, 270 F.3d at 654-60 (noting disagreement among other circuits but declining to adopt a particular formulation); In re Navarre Corp. Sec. Litig., 299 F.3d 735, 745 (8th Cir.2002) (same). The district court accurately summarized our prior decisions on this issue: "`Strong' means `strong.' Under the [PSLRA], it is not sufficient for the facts alleged to give rise to a weak or plausible or even reasonable inference of scienter." 504 F.Supp.2d at 615.

In resolving a conflict among other circuits, the Supreme Court in Tellabs both confirmed the district court's plain-meaning observation that "strong means strong," and added an additional hurdle for Eighth Circuit plaintiffs to overcome to satisfy this pleading requirement. Not only must a plaintiff state with particularity facts giving rise to an inference of scienter that is strong when viewed in isolation, the inference "must be more than merely plausible or reasonable—it must be cogent and at least as compelling as any opposing inference of nonfraudulent intent." 127 S.Ct. at 2504-05 (emphasis added). We must of course consider the district court's decision in light of this supervening controlling decision.

We review the district court's dismissal of a securities fraud complaint under the PSLRA de novo, considering the complaint in its entirety and accepting its fact allegations as true, but also considering "plausible opposing inferences." In re NVE Corp. Sec. Litig., 527 F.3d 749, 751-52 (8th Cir.2008). In resolving the Tellabs case on remand from the Supreme Court, Judge Posner observed, "To judges raised on notice pleading, the idea of drawing a `strong inference' from factual allegations is mysterious." Makor Issues & Rights, Ltd. v. Tellabs Inc., 513 F.3d 702, 705 (7th Cir.2008). But as the Seventh Circuit recognized, it is an inquiry that must be made, however awkward or unusual, because it has been mandated by Congress to remedy widespread abuses of the Rule 10b-5 class action device.

II.

Plaintiffs' consolidated complaint accuses Ceridian, Chief Executive Officer Ronald Turner, Chief Financial Officer John Eickhoff, and Controller Loren Gross of "a massive accounting scheme to inflate Ceridian's financial results and its stock price" by exploiting a weak or corrupt system of internal controls to commit numerous violations of Generally Accepted Accounting Principles (GAAP). The complaint alleges that Ceridian announced that it was restating its financial statements five times in 2004 and 2005,² and that it calibrated the restatements to "leak this information in bits and pieces to walk the stock price down, thereby avoiding the catastrophic impact of a single cumulative disclosure of massive accounting violations." As a result, Ceridian's initial reported earnings were significantly overstated from the third quarter of 2003 through the third quarter of 2004. Plaintiffs seek to represent investors who purchased Ceridian stock between April 17, 2003, when Ceridian announced its results for the first quarter of 2003, and March 17, 2005, when Ceridian announced that would be restating its financial statements for the first three quarters of 2004.³

The district court described the case as "a sprawling jumble of a securities-fraud action . . . based on dozens, if not hundreds, of accounting errors—errors of many different types committed by many different employees over many different years." 504 F.Supp.2d at 606. The restatements resulted from a variety of unrelated errors and rule changes involving numerous accounting issues—when to recognize revenues from the sale and servicing of stored value cards used by retailers; when to expense rather than capitalize the cost of internally-developed software; may up-front services revenues be recognized before the contract is accepted by the customer and various costs related to those services have been incurred; were "special restructuring charges" over-reserved in the 1980s and 1990s and were other accruals misstated; the failure to maintain records required to treat derivatives as "cash-flow hedges" under special hedge accounting rules; improperly offsetting trade receivables against customer advances and customer deposits against related liabilities; misclassifying a vendor account payable as a reduction in liabilities rather than an asset; misclassifying receivables as current assets; how to account for revenues from transactions involving third-party vendors; whether to recognize revenues from year-end sales of equipment not yet delivered and accepted; misclassifying operating expenses as selling, general, and administrative or research and development expenses; failing to accelerate the amortization of a trademark not being used; failure to recognize rent increases on a straight-line basis over the term of the lease; and improperly accounting for acquisitions made in the UK in 1995 and in Canada in 1998. The district court's opinion summarized these errors and the five restatements in detail. See 504 F.Supp.2d at 606-10.

III.

The district court first rejected plaintiffs' primary contention "that the sheer number of violations, and the magnitude of the restatements, give rise to an inference that defendants were at least severely reckless." Id. at 616. Section 10(b) and Rule 10b-5 prohibit fraud, not accounting malpractice, the court correctly observed. "If one makes a list of the numerous alleged GAAP violations—and then, with respect to each violation on the list, looks for specific allegations in the complaint linking one of the individual defendants to the violation—one will almost invariably come up empty handed." Id. at 617 (emphasis in original). This analysis is consistent with our prior decisions applying the PSLRA. See Kushner, 317 F.3d at 831 ("Allegations of GAAP violations are insufficient to state a securities...