Court Rules That Plaintiffs Failed to Establish "Scheme Liability" in Securities Case

A group of investors in a software company that services the property management industry commenced an action alleging violations of federal securities law and breaches of state law fiduciary duties against directors and officers of the company and individuals who sold securities for the company. Specifically, plaintiffs alleged that certain defendants misled investors by failing to disclose the poor financial condition of the company and further alleged that even those board members who did not make public statements engaged in misconduct by approving new securities offerings knowing that the company was in bad financial condition. A group of director and officer defendants filed separate motions to dismiss. The US District Court for the District of Arizona ruled that the plaintiffs were not successful in establishing liability under Rules 10b-5(a) and (c), known as “scheme liability,” because the plaintiffs could not establish conduct beyond the officers’ alleged omissions related to the company’s securities offerings. The court rejected plaintiffs’ argument that the board approval of the offerings constituted misconduct because even if the directors knew the company was in poor financial condition, they still could have approved securities offerings without being part of a fraudulent scheme. Further, the court granted one defendant board member’s motion to dismiss on the ground that plaintiffs had failed to meet the Private Securities Litigation Reform Act’s specificity pleading requirement with respect to allegedly fraudulent statements and dismissed a claim against another officer for aiding and abetting a breach of fiduciary duty on the ground that such claim was derivative and plaintiffs did not have standing to bring the claim on behalf of the company.

Anderson v. McGrath, No. CV-11-01175, 2012 WL 5381406 (D.Ariz. Nov. 1, 2012).