In re Silicon Graphics, Inc, 97-16204

• Decision Date: 25 August 1999
• Docket Number: N,No. 97-16204,97-16204
• Citation: 183 F.3d 970
• Parties: (9th Cir. 1999) In re SILICON GRAPHICS INC. SECURITIES LITIGATION. EDMUND J. JANAS, Plaintiff-Appellant, v. EDWARD R. McCRACKEN; MICHAEL RAMSAY; ROBERT K. BURGESS; THOMAS J. OSWALD; TERUYASU SEKIMOTO; FOREST BASKETT; STEPHEN GOGGIANO; WILLIAM M. KELLY; LUCILLE SHAPIRO; SILICON GRAPHICS, INC., Defendants-Appellees. DEANNA BRODY; ANDREA S. DONALD; ISRAEL BUCK; RUTH BUCK; DENISE STRUTHERS; THOMAS G. DI CICCO IRA; STEVEN B. EWALL; ROSALYN GOLAINE; JERRY KRIM; MARY ANNE BEKE; HERMAN GROSSMAN; SAMUEL J. REINER; DENNIS LUCAS, Plaintiffs-Appellants, v. EDWARD R. McCRACKEN; MICHAEL RAMSAY; ROBERT K. BURGESS; THOMAS J. OSWALD; TERUYASU SEKIMOTO; FOREST BASKETT; STEPHEN GOGGIANO; WILLIAM M. KELLY; LUCILLE SHAPIRO; SILICON GRAPHICS, INC., Defendants-Appellees. o. 97-16240
• Court: U.S. Court of Appeals — Ninth Circuit

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183 F.3d 970 (9th Cir. 1999) In re SILICON GRAPHICS INC. SECURITIES LITIGATION. EDMUND J. JANAS, Plaintiff-Appellant,
v.
EDWARD R. McCRACKEN; MICHAEL RAMSAY; ROBERT K. BURGESS; THOMAS J. OSWALD; TERUYASU SEKIMOTO; FOREST BASKETT; STEPHEN GOGGIANO; WILLIAM M. KELLY; LUCILLE SHAPIRO; SILICON GRAPHICS, INC., Defendants-Appellees. DEANNA BRODY; ANDREA S. DONALD; ISRAEL BUCK; RUTH BUCK; DENISE STRUTHERS; THOMAS G. DI CICCO IRA; STEVEN B. EWALL; ROSALYN GOLAINE; JERRY KRIM; MARY ANNE BEKE; HERMAN GROSSMAN; SAMUEL J. REINER; DENNIS LUCAS, Plaintiffs-Appellants,
v.
EDWARD R. McCRACKEN; MICHAEL RAMSAY; ROBERT K. BURGESS; THOMAS J. OSWALD; TERUYASU SEKIMOTO; FOREST BASKETT; STEPHEN GOGGIANO; WILLIAM M. KELLY; LUCILLE SHAPIRO; SILICON GRAPHICS, INC., Defendants-Appellees. No. 97-16204, No. 97-16240 UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT Argued and Submitted June 11, 1998, San Francisco, California
Filed July 2, 1999
Amended August 4, 1999
Amended Concurring and Dissenting Opinion August 25, 1999.

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Paul F. Bennett, Gold Bennett & Cera, San Francisco, California, for plaintiff-appellant Edmund J. Janas; Leonard B. Simon, Milberg Weiss Bershad Hynes & Lerach, San Diego, California, for plaintiffs-appellants Deanna Brody, et al.

Richard H. Walker, General Counsel, Securities and Exchange Commission, Washington, D.C., for amicus curiae Securities and Exchange Commission.

Jonathan C. Dickey, Gibson, Dunn & Crutcher, LLP., Palo Alto, CA, for amicus curiae American Electronics Association.

Bruce G. Vanyo, Wilson Sonsini Goodrich & Rosati, Palo Alto, California, for defendants-appellees.

Appeal from the United States District Court for the Northern District of California, Fern M. Smith, District Judge, Presiding. D.C. No. CV-96-0393-FMS.

Before: BROWNING and SNEED, Circuit Judges, and RHOADES,¹ District Judge.

Opinion by Judge Sneed; Concurrence and Dissent by Judge Browning

SNEED, Circuit Judge:

This case requires us to interpret the Private Securities Litigation Reform Act of 1995 ("PSLRA").² Congress enacted the PSLRA to deter opportunistic private plaintiffs from filing abusive securities fraud claims, in part, by raising the pleading standards for private securities fraud plaintiffs. See, e.g., H.R. REP. CONF. NO. 104-369, at 32-41 (1995); see also 15 U.S.C. S 78u-4(b)(1), (2) (1997). In doing so, Congress generated a flood of litigation and commentary regarding the proper interpretation of these standards. Much of this litigation deals specifically with the pleading issue now before us, i.e., what must a plaintiff allege in order to satisfy the requirement that he state facts giving rise to a "strong inference" of there quired state of mind? See 15 U.S.C. S 78u-4(b)(2) (requiring that the complaint "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind").

Due to the nature of this litigation, we shall depart somewhat from the customary form of opinions of this Court by discussing generally what we hold to be the pleading standard under the PSLRA.

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Thereafter, we will set forth the facts of this case and then apply that standard to those facts.

I.

THE PSLRA PLEADING STANDARD: THIS COURT'S INTERPRETATION

We hold that a private securities plaintiff proceeding under the PSLRA must plead, in great detail, facts that constitute strong circumstantial evidence of deliberately reckless or conscious misconduct. Our holding rests, in part, on our conclusion that Congress intended to elevate the pleading requirement above the Second Circuit standard requiring plaintiffs merely to provide facts showing simple recklessness or a motive to commit fraud and opportunity to do so. We hold that although facts showing mere recklessness or a motive to commit fraud and opportunity to do so may provide some reasonable inference of intent, they are not sufficient to establish a strong inference of deliberate recklessness. In order to show a strong inference of deliberate recklessness, plaintiffs must state facts that come closer to demonstrating intent, as opposed to mere motive and opportunity. Accordingly, we hold that particular facts giving rise to a strong inference of deliberate recklessness, at a minimum, is required to satisfy the heightened pleading standard under the PSLRA. We think that our holding represents the best way to reconcile Congress' express adoption of the Second Circuit's so-called "strong inference standard" with its express refusal to codify that circuit's case law interpreting the standard. However, we are mindful that not all courts share our view.

A.

Other Interpretations

There is widespread disagreement among courts as to the proper interpretation of the PSLRA's heightened pleading requirement. See 15 U.S.C. S 78u-4(b)(1), (2). To date, the Second, Third and Sixth Circuits are the only other courts of appeals to address the issue squarely. See In re Comshare, Inc. Sec. Litig.,180 F.3d 542(6th Cir.1999) (holding that "plaintiff may survive a motion to dismiss by pleading facts that give rise to a `strong inference' of recklessness"); In re Advanta Corp. Sec. Litig., 180 F.3d 525 (3d Cir.1999) (holding that "it remains sufficient for plaintiffs plead [sic] scienter by alleging facts `establishing a motive and an opportunity to commit fraud, or by setting forth facts that constitute circumstantial evidence of either reckless or conscious behavior'"); Press v. Chemical Inv. Serv. Corp., 166 F.3d 529 (2d Cir. 1999) (holding that a plaintiff "must either (a) allege facts to show that `defendants had both motive and opportunity to commit fraud' or (b) allege facts that `constitute strong circumstantial evidence of conscious misbehavior or recklessness'"). Of the district courts considering the issue, roughly sixty percent (some twenty cases) have followed the Second Circuit, while the others have interpreted the PSLRA as adopting some higher standard.

Generally, the district courts have taken three different approaches: (1) apply the Second Circuit standard requiring plaintiffs to plead mere motive and opportunity or an inference of recklessness, see e.g., Epstein v. Itron v. Inc., 993 F. Supp. 1314 (E.D. Wash. 1998); Robertson v. Strassner, 32 F. Supp. 2d 443, 447 (S.D. Tex. 1998); In re Wellcare Management Group, Inc. Sec. Litig., 964 F. Supp. 632 (N.D.N.Y. 1997); (2) apply a heightened Second Circuit standard rejecting motive and opportunity, but accepting an inference of recklessness, see e.g., Myles v. MidCom Communications, Inc., No. C96-614D (W.D. Wash. Nov. 19, 1996); Queen Uno Ltd. Partnership v. Coeur d'Alene Mines Corp., 2 F.Supp2d 1345(D. Colo. Apr. 13, 1998); or (3) reject the Second Circuit standard and accept only an inference of conscious conduct, see e.g., Voit v. Wonderware Corp., 977 F.Supp.2d 363 (E.D. Pa. 1997); Powers v. Eichen, 977 F.Supp. 1031 (S.D. Cal. 1997); Friedberg v. Discreet Logic Inc., 959 F. Supp. 42 (D. Mass. 1997); Norwood Venture Corp. v. Converse, Inc., 959 F. Supp. 205, 209 (S.D.N.Y. 1997). For further discussion

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of the cases, see, e.g., Richard H. Walker and J. Gordon Seymour, Recent Judicial and Legislative Developments Affecting the Private Securities Fraud Class Action, 40 ARIZ. L. REV. 1003 (1998).

We embrace the approach requiring a strong inference of deliberate recklessness which lies between the second and third approaches. We do this because we believe that Congress intended to bar those complaints that fail to raise a strong inference of intent or deliberateness. The "deliberate recklessness" standard best serves the PSLRA's purpose. The PSLRA text and legislative history support our conclusion.

B.

The Bases for Our Interpretation

To determine the proper pleading standard under the PSLRA, we turn first to the text of the statute. If the language is plain and its meaning clear, that is the end of our inquiry. See Northwest Forest Resource v. Glickman, 82 F.3d 825, 831 (9th Cir. 1996).

1. The Plain Language of the PSLRA

The PSLRA provides, in pertinent part:

(b) Requirements for securities fraud actions . . . (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.

15 U.S.C. S 78u-4(b)(2) (bold emphasis in original; underline emphasis added). Under this provision, the mental state required for securities fraud liability is distinct from the level of pleading required to infer that mental state. Therefore, we must make two separate determinations: (1) what is the required state of mind; and (2) what constitutes a strong inference of that state of mind.

a. Required state of mind

The "required state of mind" in S 78u-4(b)(2) refers to the scienter requirement applicable to the underlying securities fraud claim brought by the plaintiff. In this case, Brody brought her securities fraud action under S 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, which establishes a private cause of action for securities fraud. See 17 C.F.R. S 240.10b-5. Therefore, we look to S10(b) for the required state of mind.³

The Supreme Court has defined "scienter" in the context of S10(b) as a "mental state embracing intent to deceive, manipulate, or defraud." See Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193-94 n.12, 96 S. Ct. 1375, 1381 n.12, 47 L. Ed. 2d 668 (1976). In Hochfelder, the Supreme Court addressed the question of whether a civil action for damages under S10(b) would lie for negligent conduct. It decided that no conduct -- negligent or otherwise -- is actionable under S10(b) unless plaintiffs make a...