Eleventh Circuit Acknowledges Split, Sides With Majority in Approving Heightened Pleading Standard for Nonfraud Securities Claims Under FRCP 9(b)

Per Wagner v. First Horizon Pharmaceutical Corp., 464 F.3d 1273 (11th Cir. Sep 18, 2006):

The question presented to us . . . regards whether there are circumstances when Federal Rule of Civil Procedure 9(b) would require nonfraud securities claims to be pled with particularity. Our sister circuits are split on this matter. Compare Cal. Pub. Employees' Ret. Sys. v. Chubb Corp., 394 F.3d 126, 161 (3d Cir.2004); Rombach v. Chang, 355 F.3d 164, 171 (2d Cir.2004); Lone Star Ladies Inv. Club v. Schlotzsky's, Inc., 238 F.3d 363, 368 (5th Cir.2001); In re Stac Elecs. Sec. Litig., 89 F.3d 1399, 1404-05 (9th Cir.1996), with In re NationsMart Corp. Sec. Litig., 130 F.3d 309, 314-15 (8th Cir.1997). In line with the majority of circuits to address the matter, we hold that Rule 9(b) applies when the misrepresentation justifying relief under the Securities Act is also alleged to support a claim for fraud under the Exchange Act and Rule 10(b)-5.

Rule 9(b) requires that, "[i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." Fed.R.Civ.P. 9(b). The rule requires this particularity in order to "alert[ ] defendants to the precise misconduct with which they are charged and [to] protect[ ] defendants against spurious charges of immoral and fraudulent behavior." Durham v. Bus. Mgmt. Assocs., 847 F.2d 1505, 1511 (11th Cir.1986) (quotations omitted). "[T]he rule ensures that the defendant has sufficient information to formulate a defense by putting it on notice of the conduct complained of ... [and] protects defendants from harm to their goodwill and reputation." Harrison v. Westinghouse Savannah River Co., 176 F.3d 776, 784 (4th Cir.1999) (quotations omitted). The twin purposes of providing notice and protecting reputation guide our decision in determining the scope of Rule 9(b)'s reach.

We acknowledge that Federal Rule of Civil Procedure 8(e) allows a plaintiff to plead in the alternative and note that separate counts of the complaint must be read separately. Thus, if a complaint were to state properly a claim for battery and fraud, the allegations surrounding the fraud claim would have to be stated with particularity whereas the allegations surrounding the battery claim would need be stated only in accordance with notice pleading standards. However, the §§ 11 and 12(a)(2) claims in this case are different from the previous hypothetical in that the complaint alleges that the misrepresentation at issue in the nonfraud claims are also the beginning of--or otherwise part of--the predicate fraud for the Rule 10(b)(5) securities fraud claim.

We conclude that a § 11 or § 12(a)(2) claim must be pled with particularity when the facts underlying the misrepresentation at stake in the claim are said to be part of a fraud claim, as alleged elsewhere in the complaint. It is not enough to claim that alternative pleading saves the nonfraud claims from making an allegation of fraud because the risk to a defendant's reputation is not protected. It would strain credulity to claim that Rule 9(b) should not apply in this allegation: The defendant is a no good defrauder, but, even if he is not, the plaintiff can still recover based on the simple untruth of the otherwise fraudulent statement. Nor is it enough to present a general disclaimer in an attempt to immunize the nonfraud claims from the Rule 9 requirements, for the same common sense reasons. The purpose of the rule is to protect a defendant's good will and reputation when that defendant's conduct is alleged to have been fraudulent.