N.D. Ill. Notes Intracircuit Split Re whether the PSLRA Applies to Section 14(a) Exchange Act Cases

Per In re JPMorgan Chase & Co. Securities Litigation, Slip Copy, 2007 WL 4531794 (N.D. Ill. Dec. 18, 2007):

Plaintiffs argue that (1) negligence is not a state of mind, and therefore does not require a pleading of particular facts to give strong inference, and (2) even if it were, the pleadings are sufficient. There seems to be some discrepancy on how a 14(a) negligence allegation should be treated under 15 U.S.C. § 78u-4(b) (2). The Seventh Circuit has not ruled on whether the PSLRA applies to Section 14(a) cases. The district courts in this circuit have been split on the issue. In Blau v. Harrison, Judge Hibbler stated that “Plaintiffs' Section 14(a) allegations are not required to meet the PSLRA particularity requirement because these claims are based on averments of negligence.” 2006 U.S. Dist. LEXIS 18785 (N.D.Ill., 2006). Judge Hibbler reasoned that because the Seventh Circuit ruled that Rule 9(b) pleading requirements were not applicable to negligence claims, the PSLRA heightened requirements would not be applicable either. Id.; Kennedy v. Venrock Assocs., 348 F.3d 584, 593 (7th Cir.2003). Judge Leinenweber disagreed with the ruling in Blau, concluding that “the Seventh Circuit's opinion in [ Kennedy ] ... never addressed the PSLRA at all,” but only stated that Rule 9(b)'s heightened pleading standards did not apply to Section 14(a) claims unless those claims charged fraud, as opposed to negligence. Beck v. Dobrowski, et al ., 2007 U.S. Dist. LEXIS 84093 (N.D.Ill.2007). Judge Leinenweber found that this analysis was inapplicable to the PSLRA, because Rule 9(b) was “expressly limited to claims of fraud or mistake,” whereas the PSLRA encompasses negligence claims as well. Id. Judge Leinenweber states the following, specifically finding that negligence constitutes a “state of mind”:

The Court concludes that the PSLRA governs Plaintiff's claim. Although the Seventh Circuit has not decided whether the PSLRA applies to Section 14(a) cases, the statutory language is unambiguous. All relevant sections of the Act commence with the phrase, “in any private action arising under this chapter,” 15 U.S.C. § 78u-4(b)(1),(2). & (4) (emphasis added). The Act contains no exceptions based on considerations of scienter or previous common law causation rules. Indeed, the Act's pleading standard provisions are to the contrary. Section(b)(2) applies to actions for money damages requiring proof of only “a particular state of mind.” Since negligence is a state of mind, the language of Section (b) (2) by its terms encompasses negligence-based securities actions.