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Cornelia I. Crowell GST Trust v. Possis Medical, Inc.: SEC - dismissal of securities fraud proper under PSLRA pleading requirements, especially scienter1 The Honorable Richard W. Goldberg, United States Court of International
Trade, sitting by designation.
2 The Honorable James M. Rosenbaum, United States District Judge for the
District of Minnesota.
United States Court of Appeals
FOR THE EIGHTH CIRCUIT
Cornelia I. Crowell GST Trust, *
Plaintiff-Appellants, * Appeal from the United States
* District Court for the District
v. * of Minnesota
Possis Medical, Inc., Robert *
G. Dutcher, and Eapen Chacko, *
Submitted: January 17, 2008
Filed: March 21, 2008
Before COLLOTON and SHEPHERD, Circuit Judges, and GOLDBERG,1 Judge.
Appellant Cornelia I. Crowell GST Trust (“Crowell Trust”) appeals the district
court’s2 dismissal of its class action against Possis Medical, Inc., Robert G. Dutcher,
and Eapen Chacko (collectively “Possis Medical”) for alleged securities fraud.
Crowell Trust argues that the district court erred in determining that its pleading failed
to meet the heightened pleading standards of the Private Securities Litigation Reform
Act (“PSLRA”). 15 U.S.C. § 78u-4 (2000). Alternatively, Crowell Trust argues that
the district court erred in not granting leave to amend its complaint. For the following
reasons, we affirm the district court’s dismissal.
Possis Medical is a corporation largely focused on the production of the
AngioJet, a non-surgical catheter system designed to remove blood clots with minimal
vascular trauma. In 2001, Possis Medical began a clinical trial (the “AiMI study”) to
determine whether the AngioJet could be utilized in a wider range of medical
procedures. During the AiMI study, Possis Medical made several public statements
regarding the study’s potentially favorable impact on company revenues. In August
of 2004, Possis Medical released the AiMI study results which did not support
expanded AngioJet usage. Upon the release of this information, the value of Possis
Medical stock dropped considerably. Based on this decline and upon the statements
made by Possis Medical, Crowell Trust attempted to bring a class action against
Possis Medical for alleged securities fraud. The district court found Crowell Trust’s
pleading insufficient and dismissed the complaint without granting leave to amend.
II. STANDARD OF REVIEW
We review de novo a district court’s dismissal of an amended complaint. See
Fla. State Bd. of Admin. v. Green Tree, 270 F.3d 645, 661 (8th Cir. 2001).
Ordinarily, the decision of whether to allow a plaintiff leave to amend a complaint is
within the district court’s discretion, however, when the court denies leave on the
basis of futility, it means the district court has reached the legal conclusion that the
amended complaint could not withstand a motion to dismiss under Rule 12(b)(6) of
the Federal Rules of Civil Procedure, and appellate review of this legal conclusion is
also de novo. See In re Senior Cottages of America, 482 F.3d 997, 1001 (8th Cir.
A. Dismissal of Crowell Trust’s Complaint
To survive a Rule 12 motion to dismiss, a securities plaintiff must point to:
(1) misrepresentations or omissions of material fact or acts that operated
as a fraud or deceit in violation of the rule;
(2) causation, often analyzed in terms of materiality and reliance;
(3) scienter on the part of the defendants; and
(4) economic harm caused by the fraudulent activity occurring in
connection with the purchase and sale of a security.
In re K-Tel Int’l, Inc. Sec. Litig., 300 F.3d 881, 888 (8th Cir. 2002). The district court
found that Crowell Trust’s pleading failed to establish that Possis Medical had
misrepresented a material fact or acted with the required scienter. We agree.
As for as the misrepresentation prong, Crowell Trust’s pleading did not provide
the level of detail necessary to support its allegation. “[R]ote allegations that the
defendants knowingly made false statements of material fact” alone are insufficient.
In re Navarre Corp. Sec. Litig., 299 F.3d 735, 745 (8th Cir. 2002). To meet the
heightened pleading standards, a securities plaintiff often must plead the “who, what,
when, where and how” of the misleading statements or omissions. K-Tel, 300 F.3d
at 890. Here, Crowell Trust points to the anonymous statements of three former
Possis Medical employees alleging that they were aware that the AiMI study was not
going as well as anticipated prior to the public disclosure of this information. Crowell
Trust does not allege that the executives actually making the allegedly false or
misleading statements had heard these rumors. Crowell Trust does not even allege
facts which demonstrate how the anonymous Possis Medical employees had gained
access to this information. As a result, even if we assume that the statements made
by Possis Medical did not contain sufficient cautionary language as to fall under
PSLRA’s safe harbor, nothing within Crowell Trust’s pleading provides the detail
necessary to support its allegation.
Crowell Trust also fails to “set forth facts that give a strong reason to believe
that there was reckless or intentional wrongdoing,” or scienter, on the part of Possis
Medical. Navarre, 299 F.3d at 745 (emphasis omitted). Scienter can be established
in three ways: (1) from facts demonstrating a mental state embracing an intent to
deceive, manipulate, or defraud; (2) from conduct which rises to the level of severe
recklessness; or (3) from allegations of motive and opportunity. See K-Tel., 300 F.3d
at 893–94. The relevant inquiry is “whether all the facts alleged, taken collectively,
give rise to a strong inference of scienter, not whether any allegation, scrutinized in
isolation meets that standard.” Tellabs, Inc. v. Makor Issues & Rights, Ltd., __ U.S.
__, 127 S. Ct. 2499, 2502 (2007). According to Crowell Trust, the anonymous
former employee testimony, the importance of the AiMI study to the company, and
a series of stock sales made by Possis Medical executives support its scienter
allegation. However, even when these factors are considered collectively, we find that
they do not establish a clear and cogent inference that Possis Medical acted with the
First, the anonymous testimony offered by Crowell Trust does not establish
intentional or severely reckless conduct by Possis Medical. As noted, all that the
Court can infer from the proffered testimony, even accepting the allegations as true,
is that several lower level employees had heard rumors that the AiMI study was not
going as anticipated. Crowell Trust, however, fails to provide any information
regarding how employees at this level of the company would have access to the AiMi
study information. This level of detail fails to provide meaningful support to Crowell
Trust’s scienter allegation. See, e.g., Cal. Pub. Employees Ret. Sys. v. Chubb, 394
F.3d 126, 155 (3d Cir. 2004) (explaining the level of particularity necessary to support
reliance on confidential sources).
Crowell Trust also argues that the overarching importance of the AiMI study
to Possis Medical supports an inference of scienter. According to Crowell Trust, the
fact that the AiMI study was vital to the company’s future supports an inference that
Possis Medical executives were aware of its negative results prior to making
statements discussing the study’s potentially positive impact. Some courts have found
this rationale sufficient to support an inference of scienter. See, e.g., In re Ancor
Commc’ns, Inc. Sec. Litig., 22 F. Supp. 2d 999, 1004–05 (D. Minn. 1998). In Ancor,
a securities plaintiff alleged that Ancor had committed securities fraud by overstating
its income estimates by ignoring the strong likelihood that a critical contract would
be cancelled. Id. at 1001. The Ancor court found scienter could be imputed because
not only was the contract vital to the company, but the contracting parties had been
sufficiently aware of the potential for cancellation as to include an escape clause to
accommodate such an outcome. Id. at 1005. By contrast, Crowell Trust’s claim
relates to the AiMI study, an independent clinical study conducted at several off-site
locations. No facts have been alleged related to the executives’ involvement in either
its design or ongoing administration which would support a similarly strong inference.
As such, the importance of the study to Possis Medical does little to establish scienter.
Lastly, Crowell Trust argues that a series of stock sales by Possis Medical
“insiders” establishes sufficient motive and opportunity to support the requested
inference. However, this argument also fails as “[i]nsider stock sales are not
inherently suspicious; they become so only when the level of trading is ‘dramatically
out of line with prior trading practices at times calculated to maximize the personal
benefit from the undisclosed information.’” Navarre, 299 F.3d at 747 (quoting In re
Vantive Corp. Sec. Litig., 283 F.3d 1079, 1092 (9th Cir. 2002)). Here, Crowell Trust
failed to provide information from which the Court could place the allegedly
suspicious stock sales within any meaningful context. Additionally, Crowell Trust’s
focus on these stock sales is limited as it only examines one segment of the larger
transactional history. Throughout the allegedly suspicious period, several of the
insiders’ holdings actually increased if the ownership of both stock and stock options
is considered. In considering the anonymous former employee testimony, the
importance of the AiMI study to Possis Medical, and the insider stock sales, the Court
finds that the district court did not err in dismissing Crowell Trust’s pleading for
failing to establish a false or misleading statement or scienter on the part of Possis
B. Refusal to Grant Leave to Amend
Generally, “parties should not be allowed to amend their complaint without
showing how the complaint could be amended to save the meritless claim.” Wisdom
v. First Midwest Bank, 167 F.3d 402, 409 (8th Cir. 1999). On appeal, Crowell Trust
has failed to demonstrate any meaningful basis upon which it could amend its
complaint to comply with the heightened securities pleading standards. Crowell
Trust’s only argument is that Possis Medical’s answer somehow admits that the AiMI
study data was received several months prior to its disclosure to the investing public.
Even accepting this admission argument, it is difficult to see how this would help
Crowell Trust’s pleading to survive a Rule 12 motion. All of the statements alleged
by Crowell Trust to be false or misleading occurred prior to the date Possis Medical
allegedly admitted to receiving the AiMI study data. All of the stock transactions
viewed by Crowell Trust as “suspicious” had already occurred as well. As Crowell
Trust did not establish how its complaint could be amended, the district court did not
err in denying leave to amend on the basis of futility.
For the reasons set forth above, the district court’s dismissal of Crowell Trust’s
cause of action is AFFIRMED.
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Michael E. Douglas, Attorney at Law, Saint Paul MN. All Rights
Minnesota Law Firm representing Personal Injury, Car / Auto Accident, Workers Compensation, Medical Malpractice, Social Security Disability claims.
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