In Re Advanta Corp. Securities Litigation, U.S. Ct. of Appeals, 3rd Circuit (1999)
Author: Bram

Cause of action: The following is a class action cause of action for false and misleading statements (fraud).

Procedural History: District Court granted dismissal for failure to adhere to the guidelines of FRCP 9(b) and of the Private Securities Reform Act of 1995.  (the D.C. also, after dismissing the 3 claims, gave PL's 30 days to amend their complaints which they failed to do, instead deciding to stand on their old complaint.  Judge denied PL's request.)  This court affirms.

Facts: The allegations of false and misleading statements base come from a $20M loss the company announced 3/17/97.  PL's claim company failed to disclose its change in practice of raising initial interest rates on new credit card holders to a specific amount.  Two statements (Point and Alter) allegedly contradict one another as to the raised rate.  Three others pointed the company in a "positive portrayal", which, in combination with the other two, resulted in the detrimental reliance of PL stockholders to purchase Advanta stock or not to sell the stock they had.

Issue(s): Under FRCP 9(b), did PL's properly plead their cause of action of false and misleading statements by alleging the statements were enough to specifically give rise to the possibility DF could be found liable?

Court's Rationale/Reasoning: Scienter for Reform Act for pleading requirements: must have a strong inference DF acted as to the charge by showing motive and an opportunity to do so or facts consisting of circumstantial evidence of either reckless or conscious behavior.  DF's argue the Reform Act establishes a pleading standard which is more stringent than the above 2nd Circuit standard, that being specifying each statement along with the reasons they are misleading, and full particularity of all facts relating to an accusation.

The court believes in regards to the scienter aspect, the Reform Act resembles the pleading standard set forth by the 2nd Circuit, as it is "echoed by FRCP 9(b)."  However, the pleading requirement under the Reform Act is a raised standard, and the one that applies.

The Point statement is not held under the standard of safe-harbor, as it was a forward looking statement, which is okay unless there is an intent to defraud or mislead.  The accusation under this protection is too broad to call under scope, so it does not pass muster under this test.  PL's argue the Alter statement, which allegedly contradicts Point's statement, prove the allegations b/c Point, as company spokesperson, likely had actual knowledge of the lower raised rates, or even if she didn't know the company did and approved her statements by silence.

However, the standard for review of the pleading is not reached, as there are no specific facts to support an inference that Point or any other employee of DF had knowledge of her statement's falsity.  The only thing that's true is the statement itself.

As for the positive portrayal statements, under the Act, liability does not attach when statements are contradictory of one another.  There must be factual proof to support these allegations, identifying the statements were knowingly made, or at the very least, a "should have known" standard.  The reckless standard also is raised here to a level which is of "extreme departure from the standards of ordinary care...presents a danger of misleading buyers or sellers that is known to DF (or they should have known)."  None of the allegations do any such thing; at the most they represent an aggressive business policy.

As to the last allegation, the court held there was no strong inference of scienter (knowledge) required by the Reform Act.

Rule: When fraud allegations do not specifically point to proof of such an allegation, then the scienter is not proven.  When the scienter is not proven, there is no pleading which can be accepted by a court of law.  See FRCP 9(b)

Holding: No.  The Point statement was protected by the safe-harbor provision, and the remaining claims in count I failed to comply with the pleading requirements of the Reform Act, and the last 2 claims are derivative of the first.  Thus the claims were properly dismissed.