711 F.3d 754
7th Cir.2013Background
- Plaintiffs allege Boeing, its CEO McNerney, and head of commercial airplanes Carson committed Section 10(b) fraud and Rule 10b-5 misstatements related to the 787 Dreamliner delays.
- Allegations hinge on May 3 statements about stress-test results and a June First Flight timeline, followed by a June 23 postponement due to an anomaly.
- District court dismissed the initial complaint under Rule 12(b)(6); later, a second amended complaint was filed with additional confidential-source allegations.
- Investigator notes purportedly tied to a Boeing engineer Singh were later found unsubstantiated; Singh denied involvement and the engineer’s access to internal files was disputed.
- The district court dismissed the second amended complaint with prejudice; defendants sought sanctions for Rule 11 violations, which the appellate court later addressed; ultimately, the judgment was affirmed in part, vacated in part, and remanded for sanctions decision.
- The Private Securities Litigation Reform Act requires sanctions findings on final adjudication, and the court remanded to consider Rule 11 sanctions amount against plaintiffs’ lawyers.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Was there a strong inference of scienter in the second amended complaint? | Plaintiffs rely on confidential-source allegations and internal emails. | Defendants show lack of substantiation, no verified internal communications. | No strong inference; dismissal affirmed for lack of scienter. |
| Did Singh’s unverified confidential-source allegations defeat the claim? | Confidential source would have provided access to relevant emails. | Singh’s role and access were false or unverified; source unreliable. | Plaintiffs’ Singh allegations were fatal; second complaint dismissed with prejudice. |
| Should Rule 11 sanctions be imposed on plaintiffs’ lawyers? | Appeals lacked sanctions motion; no final denial of sanctions. | Rule 11 violations evidenced by misleading confidential-source assertions. | Appellate court remands to district court to determine sanctions amount; sanctions to be decided under 15 U.S.C. §78u-4(c). |
| Is there appellate jurisdiction to review sanctions despite absence of a sanctions order? | No explicit order denying sanctions, so no appeal. | PSLRA requires sanctions findings in final adjudication; order exists. | Appellate jurisdiction confirmed; remand for sanctions decision. |
Key Cases Cited
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (U.S. 2007) (strong-inference standard for scienter)
- Ernst & Ernst v. Hochfelder, 425 U.S. 185 (U.S. 1976) (necessity of scienter for Rule 10b-5 claims)
- Slayton v. American Express Co., 604 F.3d 758 (2d Cir. 2010) (requires strong inference for forward-looking statements under PSLRA)
- Makor Issues & Rights, Ltd. v. Tellabs Inc., 513 F.3d 702 (7th Cir. 2008) (treats strong inference as cogent and at least as compelling as opposing inference)
- In re VeriFone Holdings, Inc. Securities Litigation, 704 F.3d 694 (9th Cir. 2012) (evaluate scienter with emphasis on evidence and reasonable inferences)
- In re Scholastic Corp. Securities Litigation, 252 F.3d 63 (2d Cir. 2001) (application of scienter pleading standards under PSLRA)