Cornelia I. Crowell GST Trust v. Possis Medical, Inc.

Citations: 519 F.3d 778; 2008 U.S. App. LEXIS 5901; 2008 WL 746682Docket: 07-1840

Court: Court of Appeals for the Eighth Circuit; March 21, 2008; Federal Appellate Court

SummaryOriginalCytator Case TreatmentBackward CitatorAnalysis

EnglishEspañolSimplified EnglishEspañol Fácil

Cornelia I. Crowell GST Trust (Crowell Trust) appeals the dismissal of its class action lawsuit against Possis Medical, Inc., Robert G. Dutcher, and Eapen Chacko for alleged securities fraud. The Eighth Circuit Court of Appeals affirms the district court's ruling, which determined that Crowell Trust's complaint did not meet the heightened pleading standards set by the Private Securities Litigation Reform Act (PSLRA). The complaint arose after Possis Medical's public statements regarding the potential benefits of the AngioJet catheter system, which were later contradicted by unfavorable results from the AiMI study, leading to a significant drop in the company's stock value. The district court concluded that Crowell Trust failed to adequately demonstrate misrepresentations or omissions of material facts, causation, scienter, or economic harm, which are necessary elements to survive a motion to dismiss under Rule 12(b)(6). The court's decision not to allow an amendment was based on the conclusion that such an amendment would be futile, warranting de novo review.

Crowell Trust's allegations of misrepresentation lack the necessary specificity required to support its claims. General assertions that defendants made knowingly false statements are inadequate. To satisfy heightened pleading standards in securities cases, a plaintiff must detail the "who, what, when, where, and how" of misleading statements. Crowell Trust cites anonymous statements from three former employees of Possis Medical, suggesting awareness of issues with the AiMI study prior to public disclosure. However, the Trust does not demonstrate that the executives responsible for the alleged misleading statements were aware of these rumors, nor does it clarify how the employees obtained this information.

Furthermore, Crowell Trust fails to provide sufficient facts to suggest intentional or reckless wrongdoing, or "scienter," by Possis Medical. Scienter can be established through evidence of intent to deceive, severe recklessness, or motive and opportunity. The cumulative effect of Crowell Trust's allegations—including anonymous testimony, the significance of the AiMI study, and stock sales by executives—does not convincingly indicate scienter. The anonymous testimony does not imply intentional or reckless conduct, and the Trust does not explain how lower-level employees could access critical information about the study. As a result, the details provided do not adequately support Crowell Trust's claims regarding scienter, as established in relevant case law.

Crowell Trust contends that the AiMI study's significance to Possis Medical supports an inference of scienter, suggesting that executives were aware of its negative results before making positive statements about the study. Previous cases, such as In re Ancor Commc'ns, found similar inferences valid when executives had knowledge of critical contract risks. However, Crowell Trust's claims lack evidence of executive involvement in the AiMI study's design or administration, weakening the inference of scienter. Additionally, Crowell Trust argues that insider stock sales provide motive and opportunity for suspected fraud; however, such sales are not inherently suspicious unless they are significantly out of line with previous practices and timed to benefit from undisclosed information. The Court noted that Crowell Trust did not contextualize the alleged suspicious sales and overlooked that some insider holdings increased during the same period. The Court upheld the district court's dismissal of Crowell Trust's claims, concluding there was no false or misleading statement or scienter established. Furthermore, Crowell Trust failed to show how it could amend its complaint to meet heightened securities pleading standards, leading to the denial of leave to amend based on futility. Consequently, the district court's dismissal of Crowell Trust's claims was affirmed.