Second Circuit Affirms Dismissal Of Securities Class Action Against CBS Due To Plaintiffs' Failure To Plead Scienter And Reliance

In City of Omaha v. CBS Corp., No. 11-2575, 2012 U.S. App. LEXIS 9535 (2d Cir. May 10, 2012), the United States Court of Appeals for the Second Circuit reaffirmed its decision in Fait v. Regions Financial Corp., 655 F.3d 105 (2d Cir. 2011) [see our prior blog article here], which held that statements regarding goodwill and loan loss reserves were "opinions" that could only be actionable under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Securities & Exchange Commission Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder, if defendants did not genuinely believe the statements to be true at the time they were made. Separately, the Court also held that plaintiffs' complaint did not sufficiently allege reliance upon a fraudulently inflated price where the alleged "red flags" purportedly indicating the need for earlier review of CBS' goodwill were matters of public knowledge and thus were already incorporated into the price of the stock. This decision is notable for its recognition that the presumption that publicly available information, if material, necessarily affects the price of an efficiently traded stock, which typically is used by plaintiffs to support securities fraud complaints, can also be used by defendants to defeat securities fraud complaints.

In City of Omaha, plaintiffs alleged that CBS Corp. ("CBS") and various members of CBS' management made statements about CBS's goodwill and its general financial condition that were knowingly or recklessly false. Specifically, plaintiffs alleged that, prior to an announcement by CBS in October 2008 that it was to perform an interim impairment test on its existing goodwill (and that, as a result, it expected to incur a non-cash impairment charge of approximately $14 billion), defendants knew about facts that indicated such a test was necessary at an earlier date. The United States District Court for the Southern District of New York dismissed the amended complaint, holding that plaintiffs "failed to cite a point, factually or temporally, when the defendants' actions added up to something more than an exercise of real-time accounting judgment." City of Omaha v. CBS Corp., No. 08 Civ. 10816, 2011 U.S. Dist. LEXIS 57647, at *12 (S.D.N.Y. May 24, 2011).

The Second Circuit affirmed. The Court relied upon its earlier decision in Fait, in which the Second Circuit held that estimates of goodwill and loan loss reserves are inherently subjective and thus constitute...