Scienter (almost) required for 1933 act securities suits

It just got a lot harder to successfully sue preparers of financial statements and their auditors under the 1933 Securities Act. In Fait v. Regions Financial Corporation, et al., the Second Circuit upheld a District Court ruling that threw out a case having remarkably common facts.

The case involves allegations that financial statements were not reasonably prepared in accordance with Generally Accepted Accounting Principles (GAAP) based on readily-available information. The plaintiffs did not allege that the issuer and its auditors did not believe the financial statements were appropriate, or that there was fraud or intentional misconduct.

The Second Circuit concludes that no liability could be established, even if the plaintiff’s allegations were true, as follows:

Although sections 11 and 12 refer to misrepresentations and omissions of material fact, matters of belief and opinion are not beyond the purview of these provisions. However, when a plaintiff asserts a claim under section 11 or 12 based upon a belief or opinion alleged to have been communicated by a defendant, liability lies only to the extent that the statement was both objectively false and disbelieved by the defendant at the time it was expressed.”

Although the Court said that it was not requiring a scienter standard for pleading, it is hard to see how the practical effect could be anything but such a requirement. This article provides additional information.

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