Zagg, Inc. Securities Litigation v. Zagg, Inc.
2015 U.S. App. LEXIS 14499
| 10th Cir. | 2015Background
- Securities class action against ZAGG, Inc. and former CEO Pedersen alleging omissions in SEC filings and a secret succession plan; claim under §10(b) and Rule 10b–5 and §14(a) based on Pedersen’s pledged shares collateral in a margin account.
- Pedersen pledged about half of his ~18.9% ZAGG stake (over 2 million shares) as margin collateral; margin calls led to multiple share sales.
- SEC filings (two Form 10-Ks and two proxy statements) disclosed ownership but omitted the pledged-shares footnote required by Item 403(b) of Regulation S-K.
- Pedersen disclosed margin calls via Form 144 and Form 4 after each event; ZAGG later adopted a policy prohibiting margin pledges by officers.
- District court dismissed for lack of particularized facts showing scienter; plaintiffs appeal only as to Pedersen and ZAGG regarding §10(b) and Rule 10b–5; no viable claim
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether complaint shows strong inference of scienter under PSLRA | Plaintiffs contend omissions and filings imply intent or recklessness | Defendants argue absence of cogent scienter given disclosures and timing | No strong inference; scienter not adequately pled |
| Whether omission of pledged shares in Item 403(b) disclosures supports scienter | Claim argues failure to disclose pledged shares shows knowledge and intent to mislead | Bare violation of Item 403(b) not enough without other facts showing knowledge of omission | Insufficient to establish strong inference of scienter |
| Whether Form 4/144 filings and timing create an inference of deceit | Inconsistent statements and secret filing suggest intent to deceive | No inconsistency; Form 144 disclosed margin call; filing method not revealing of deceit | No cogent scienter from filings; not strongly persuasive |
| Whether Recklessness standard is met given omission | Omission presents obvious materiality; reckless disregard should be inferred | Standard not met; lack of particularized facts; disclosures post-date do not prove recklessness | Recklessness not shown; not strong inference of scienter |
Key Cases Cited
- Halliburton Co. v. Erica P. John Fund, Inc., 573 U.S. 258 (Supreme Court 2014) (reaffirmed Tellabs framework and scienter standards in PSLRA context)
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (Supreme Court 2007) (set forth strong-inference standard for scienter under PSLRA)
- In re Level 3 Communications, Inc. Sec. Litig., 667 F.3d 1331 (10th Cir. 2012) (holistic, total-allegations approach to scienter; require strong inference)
- Adams v. Kinder-Morgan, Inc., 340 F.3d 1083 (10th Cir. 2003) (supports that pleading must link facts to scienter beyond mere knowledge)
- City of Philadelphia v. Fleming Cos., 264 F.3d 1245 (10th Cir. 2001) (recklessness requires more than knowledge of potentially material facts)
- In re Gold Resource Corp. Sec. Litig., 776 F.3d 1103 (10th Cir. 2015) (GAAP/controls violations alone insufficient for scienter absent other facts)
- Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981 (9th Cir. 2009) (notes on plausibility and scienter in pleading)
- Nakkhumpun v. Taylor, 782 F.3d 1142 (10th Cir. 2015) (high recklessness standard under PSLRA)
- Dronsejko v. Thornton, 632 F.3d 658 (10th Cir. 2011) (articulates heightened pleading standard for scienter)