It seems that legal trade publications may have finally tired of reporting on the mass layoffs at big firms as they have — day after day — for the past several months. Either that, or the numbers of daily layoffs at major law firms have decreased enough since late February and early March to appear less newsworthy. See e.g., Martha Neil, March Mayhem: Law Firm Layoffs in 1 Week Total Nearly 1,500, Mar. 4, 2009. In any case, I find it a welcome respite.
Instead, (in what I would call a trend for the better) reports of how lawyers are dealing with the current financial crisis and reshaping their practices accordingly are finding their way to publications' front pages. For example, last Tuesday the Daily Journal (subscription required) featured former San Diego City Attorney Mike Aguirre discussing his ambition to develop his new law firm into the "center of credit derivative litigation." According to the article, "[Aguirre] wants nothing short of effecting regulatory reforms, he said. 'I've never been interested in putting on blinders and doing litigation in the abstract,' he said. 'Long term solutions need to be hammered out in Congress." And, according to a founding partner at a successful securities litigation boutique, also in San Diego, "'[C]ertainly, given the credit crisis and mortgage meltdown we are experiencing now, there is more than enough opportunities to represent victims. There is certainly enough fraud to go around these days.'" See Pat Broderick, Former City Attorney Pins Hope on Derivatives, L.A. Daily Journal, Mar. 17, 2009, at 1.
Coincidentally, on Friday, Division One of the Fourth Appellate District Court of Appeal (in only the second published California case to even address the topic) ruled on the somewhat controversial "group pleading doctrine" in the context of state securities litigation. See Bains III v. Moores, No. D052533, 2009 WL 723530 (Cal. Ct. App. Mar. 20, 2009). "The doctrine, where applicable, allows a party to attribute collective statements made by a company to individual members of the company's board of directors." Id. at *15.
The facts of the case revolve around allegedly fraudulent accounting and financial statements made by Peregrine Systems, Inc. Id. at *1.
In short, the plaintiffs in Moores filed suit against three former directors of Peregrine Systems, Inc. alleging accounting and financial fraud under California Blue Sky Laws as well as common law theories of fraud and deceit. The trial court granted summary judgment in favor of the defendants because the plaintiffs failed to identify information from which a jury could find that the defendants knew about the alleged fraud. Id. at *15, *1. The plaintiffs argued that the group pleading doctrine should apply; therefore, any fraudulent statements that the company may have made could be imputed to the defendants. The Court disagreed.
The Court held "that the group published information doctrine, or group pleading doctrine, as its alternative name suggests, is a pleading device that has no application in the summary judgment context." Thus, "'the group pleading doctrine' does not apply in determining whether a party has present sufficient evidence of its claims to avoid summary judgment, under California law." Id. at *19.
The only other published California case dealing with the group pleading doctrine is Kamen v. Lindly, 91 Cal. App. 4th 197 (2001). There, the Kamen court adopted the Ninth Circuit's view of the group pleading doctrine, or group published information doctrine. The Ninth Circuit developed the doctrine as follows:
In cases of corporate fraud where false and misleading information is conveyed in prospectuses, registration statements, annual reports, press releases or other ‘group-published information,’ it is reasonable to presume that these are the collective actions of the officers. Under such circumstances, a plaintiff fulfills the particularity requirement of [Rule 9(b) of the Federal Rules of Civil Procedure (28.U.S.C.) ] by pleading the misrepresentations with particularity and where possible the roles of the individual defendants in the misrepresentations. Moores, No. D052533, 2009 WL 723530, at *16.
And, subsequent decisions extended the doctrine to apply to outside directors in addition to officers, who are responsible for day-to-day operation of the company. Id.
The Court agrees with the decision in Kamen based on the rationale that it is difficult for a plaintiff to obtain enough information regarding the perpretrators of corporate fraud to plead fraud with the requisite heightened particularity. But the court in Kamen only addressed the doctrine with regard to the sufficiency of the pleadings. Id. at *17. Here, in Moores, the Court must address it in the context of an evidentiary motion.
In explaining its decision, the Court first notes that the "rationale for invoking the doctrine is less compelling in the context of a summary judgment when discovery is complete." Id. at *18. Second, the Court points out that there is a circuit split as to whether the doctrine should even apply at all because of the stringent pleading requirements adopted in the Private Securities Litigation Reform Act of 1995 ('PSLRA'). (The PSLRA requires that allegations of fraud based on information and belief must "state with particularity all facts on which that belief is formed." 15 USC § 78u-4(b)(1).). Given these factors, the Court concludes "that the doctrine is one that applies, if at all, only in determining the sufficiency of a plaintiff's pleadings." Id. at *19.
Overall, although it appears that the group pleading doctrine is recognized under California law, its future seems rather uncertain.
