Reese v. Malone

A court should conduct a holistic scienter analysis to determine whether a party has pled sufficient facts in order to give rise to a strong inference of scienter.

In 2006, there were leaks from two different BP Alaska (“BP”) pipelines. The spills were five months apart. BP shareholders filed a class action complaint, alleging that BP “knowingly, or with deliberate recklessness, made false and misleading statements about the condition of the pipelines and BP’s pipeline maintenance and leak detection practices prior to and in the wake of the first spill.” The shareholders wanted relief under the Securities Exchange Act of 1934, for losses that the shareholders incurred after the second spill and the subsequent shutdown that led to a drop in BP’s share price by four percent. BP filed a motion to dismiss, which the district court granted because the shareholders had not pled facts “sufficient to show that the challenged [BP] statements gave rise to a strong inference of scienter.” The Ninth Circuit held that when considering the “allegations holistically and accept them to be true,…the inference that BP was, at the very least, deliberately reckless as to the false or misleading nature of their public statements is ‘at least as compelling as any opposing inference.’” The holistic scienter analysis is comprised of two steps. The court first “determines whether any of the allegations, standing alone, are sufficient to create a strong inference of scienter.” Next, “if no individual allegation is sufficient, the court is to conduct a ‘holistic’ review of the same allegations to determine whether the insufficient allegations combine to create a strong inference of intentional conduct or deliberate recklessness.” The panel held that BP was “deliberately reckless as to the misleading nature of their public statements” because BP was “aware of corrosive conditions for over a decade, and yet chose not to address them,” thus intentionally misleading the public. REVERSED in part and AFFIRMED in part.