On November 26, 2008, the US Court of Appeals for the
Ninth Circuit affirmed the dismissal of a securities fraud
lawsuit brought by Glazer Capital Management against
InVision Technologies, Inc. and two of its executive
officers. In Re InVision Technologies, Inc. Securities
Litigation, U.S.D.C., N.D. Cal., C-04-3181. Click here to read the Ninth Circuit’s opinion.
A team from Fenwick & West LLP led by Susan Muck
represented InVision in the Northern District of California
and the United States Court of Appeals for the Ninth
Circuit. The decision is significant in several respects.
First, the decision rejects application of the collective
scienter theory on the facts alleged.
Second, the decision makes it more difficult for plaintiffs
to base securities fraud claims on regulatory proceedings
or settlements absent factual allegations demonstrating
a strong inference of scienter by the named defendants.
Third, the decision rejects an officer's SOX certification
as evidence of scienter absent facts showing the officer
was severely reckless.
Finally, the decision rejects "personal profit" as a basis
for pleading scienter of an officer for merger-related
On March 15, 2004, InVision announced that it would
be acquired by General Electric for $50 per share. The
merger agreement included InVision's representation
that it was "in compliance in all material respects with
all laws" and in particular, with the books and records
requirements and anti-bribery provisions of the Securities
Exchange Act (including the FCPA). The agreement was
signed by InVision's CEO, among others.
A few months later, InVision announced that it was
conducting an internal investigation into possible
violations of the FCPA and had reported the
investigation to the DOJ and SEC. InVision warned that
the investigation could delay or cause the termination
of the merger. Following the announcement, InVision's
stock price fell by $6, and plaintiff filed a class action
alleging that InVision had misrepresented that it was in
compliance with the FCPA.
Ultimately, the GE merger was consummated on the
terms originally disclosed. InVision entered into a nonprosecution
agreement with the Department of Justice
and agreed to pay an $800,000 fine in connection with
alleged FCPA violations. In addition, InVision entered
into a settlement agreement with the SEC, which
alleged that InVision had authorized payments to
foreign sales agents despite knowing there was a "high
probability" that those funds would be used to make
improper payments to local government officials.
Significance of the Ninth Circuit's Opinion
Collective Scienter Inapplicable
The Court first addressed the question of whether
plaintiff was required to plead facts indicating that the
CEO, who had signed the merger agreement containing
the alleged misstatements, acted with scienter, or
whether Glazer could instead rely on a theory of
"collective scienter." The "collective scienter" theory
permits a plaintiff to allege "a strong inference of
corporate scienter without being able to name the
individuals who concocted and disseminated the
fraud." Although the Court noted that Ninth Circuit
law "does not foreclose the possibility that, in certain
circumstances, some form of collective scienter
pleading might be appropriate," the Court rejected
collective scienter given the nature of the alleged
misstatements and facts alleged:
[Under plaintiff's theory,] so long as any employee
at InVision had knowledge of the violation of any
law, scienter could be imputed to the company as
a whole. This result would be plainly inconsistent
with the pleading requirements of the PSLRA.
As a result, the Court held that plaintiff was required to
plead scienter with respect to the specific individual who
made the alleged misstatement.
FCPA Violations Do Not Satisfy Standard for Pleading
In an era in which FCPA investigations are on the rise,
the InVision decision should make it more difficult for
plaintiffs to plead securities fraud lawsuits that piggyback
on the disclosure of FCPA investigations or similar
regulatory proceedings. Absent the application of
collective scienter, plaintiffs will have to plead specific
facts demonstrating that the individuals responsible
for the alleged misstatements knew about the FCPA
violations. As the Ninth Circuit noted, this will be difficult
because "the surreptitious nature of the transactions
creates an equally strong inference that the payments
would have been deliberately kept secret – even within
the company." Indeed, the alleged improper payments
"were not, by their nature, the type of transaction of
which it would be 'hard to believe' senior officials were
unaware." The Court also noted that the DOJ and SEC
settlements were insufficient to raise an inference
of scienter, since the mere fact that someone at the
company may have had actual knowledge of improper
transactions was insufficient to raise a strong inference
that the defendant officers had such knowledge.
Sox Certifications Do Not Plead Scienter
Since the enactment of SOX, plaintiffs in securities
fraud lawsuits routinely attempt to show scienter by
pointing to SOX certifications signed by company
executives. Glazer attempted this, arguing that the
officers' SOX certifications were sufficient to infer
defendants' knowledge of FCPA violations. The Court disagreed. Following decisions in other circuits, the
Ninth Circuit held for the first time that a SOX certification
"is only probative of scienter if the person signing the
certification was severely reckless in certifying the
accuracy of the financial statements."
"Personal profit" Insufficient to Plead Scienter
Glazer attempted to raise an inference of scienter by
arguing that the officers were motivated to make false
statements because they would profit personally from
the merger. Joining several other circuits, the Ninth
Circuit held that evidence of a personal profit motive on
the part of officers and directors contemplating a merger
is insufficient to raise a strong inference of scienter.
Susan S. Muck, Partner, Securities Litigation Group,
Felix S. Lee, Partner, Litigation Group,
Christopher S. Walton, Associate, Litigation Group,
©2008 Fenwick & West LLP. All Rights Reserved.
This update is intended by Fenwick & West LLP to
summarize recent developments in the law. It is not
intended, and should not be regarded, as legal advice.
Readers who have particular questions about these
issues should seek advice of counsel.