City of Dearborn Heights Act 345 Police & Fire Retirement System v. Waters Corp.
2011 U.S. App. LEXIS 1065
| 1st Cir. | 2011Background
- This is a securities fraud class action under Section 10(b) and Rule 10b-5 against Waters Corp and executives Berthiaume and Ornell for alleged failure to disclose a March 2007 Japanese regulation change reducing demand; class period July 24, 2007 to January 22, 2008.
- Japanese sales ~10% of Waters' global revenue; the March 2007 regulation change was asserted to reduce demand in Japan.
- Insiders sold 637,500 Waters shares for over $42 million during the class period; Waters repurchased substantial shares during the period.
- Waters’ third quarter results exceeded forecasts; fourth quarter results missed earnings due to higher costs and a new Japanese regulation change disclosure in January 2008.
- Plaintiff alleged omissions and statements were misleading and sought to show a strong inference of scienter under the PSLRA; the district court dismissed, which the First Circuit affirmed on different reasoning.
- The First Circuit analyzes whether the alleged facts support a strong inference of scienter and affirms dismissal, holding no strong inference despite insider activity and regulatory changes.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether plaintiffs pled a strong inference of scienter | Waters insiders knew of regulatory change and manipulation implied by omissions. | Any non-disclosure did not present a strong inference of scienter; the facts permit nonfraudulent explanations. | No strong inference; district court affirmed. |
| Whether insider trading supports scienter | Insider sales (Berthiaume 6.08%, Ornell 83.24% of possible) indicate scienter when near price highs. | Sales were not unusual; trading history not shown; not probative of scienter. | Insider trading did not establish a strong inference of scienter. |
| Whether statements about Japan and market prospects were misleading | Omissions about regulatory change rendered statements about Japan and prospects misleading. | Statements were not knowingly false; risks were disclosed or adequately warned; inference of scienter weak. | Statements not shown to be misleading with requisite scienter. |
| Whether district court properly dismissed the 10(b) claim and derivative 20(a) claim | Pleading meets PSLRA strong-inference standard; district court erred in dismissal. | Dismissal was appropriate given lack of strong scienter; 20(a) derivative claim likewise deficient. | District court's dismissal affirmed. |
Key Cases Cited
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (U.S. 2007) (strong inference standard for scienter)
- Greebel v. FTP Software, Inc., 194 F.3d 185 (1st Cir. 1999) (recklessness standard; materiality linked to scienter)
- ACA Fin. Guar. Corp. v. Advest, Inc., 512 F.3d 46 (1st Cir. 2008) (special PSLRA scienter pleading framework)
- In re Cabletron Sys., Inc. Sec. Litig., 311 F.3d 11 (1st Cir. 2002) (insider trading evidence; context matters)
- City of Philadelphia v. Fleming Cos., 264 F.3d 1245 (10th Cir. 2001) (materiality and inference of scienter interrelation)
- New Jersey Carpenters Pension & Annuity Funds v. Biogen Idec, Inc., 537 F.3d 35 (1st Cir. 2008) (materiality as relevant to scienter pleading)
- Ezra Charitable Trust v. Tyco Int'l, Ltd., 466 F.3d 1 (1st Cir. 2006) (warnings of risks undermine scienter inference)
- SEC v. Platforms Wireless Int'l Corp., 617 F.3d 1072 (9th Cir. 2010) (two-part objective/subjective test for scienter)