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Requiring stricter pleading of plaintiffs, a federal appeals court has ruled that complaints for securities fraud must trace stock purchases to specific false or misleading statements.
In the recent case In Re: Ariad Pharmaceuticals, Inc. Securities Litigation, the First Circuit held that plaintiffs cannot satisfy their pleading burden by "general allegations" when their purchases were traceable to fraudulent registrations under Section 11 of the Securities Act. When stock has been issued in multiple offerings, a plaintiff must plead that his or her shares were issued under a specific false or misleading registration statement.
According to the panel, a "general allegation that a plaintiff's shares are traceable to the offering in question is nothing more than a 'formulaic recitation' of that element."
The appeals court applied precedents in Bell Atlantic Corp. v. Twombly and Ashcroft v. Iqbal, concluding that a complaint must include "enough facts to state a claim to relief that is plausible on its face" and more than a mere "formulaic recitation of the elements of a cause of action." General allegations alone are not sufficient to avoid dismissal, the court said.
The First Circuit reasoned that the plaintiffs had not shown a clear connection to the allegedly fraudulent registration statement. Accordingly, the justices dismissed the Section 11 claim.
"In these circumstances, the complaint fails to give rise to a plausible inference that the plaintiffs' shares were issued as part of the January 2013 offering," they wrote. The alternative explanation being that could have come from the pool of shares that had been previously issued.
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