Northern District Of Texas Sets Benchmark For Securities Fraud Cases

On September 13, 2000, Judge Barbara Lynn (N.D. Tex.) dismissed a securities fraud class action

and issued an opinion that will have implications for future securities fraud cases. In Zishka v.

American Pad & Paper Co. et al., No. 3:98-CV-0660-m, 2000 WL 1310529 (N.D. Tex. Sept.

13, 2000), plaintiffs sought to recover damages on behalf of shareholders who purchased stock of

the company over a one-and-a-half year period. The 137-page complaint alleged that the

company, certain individual directors and officers, certain investors and underwriters, and the

company's lender made misrepresentations and omissions as part of a conspiracy that arose out of

the company's initial public offering. Plaintiffs also made allegations regarding the company's new

acquisitions and accounting fraud allegations related to the company's LIFO Reserve accounting.

The opinion dismissing the case was the first opinion by Judge Lynn interpreting the

Private Securities Litigation Reform Act of 1995 ("PSLRA") and related securities fraud issues.

The decision establishes strong precedent for attacking similar complaints at the motion-to-dismiss stage. For instance, plaintiffs alleged that the individual defendants had signed corporate

documents that allegedly contained misrepresentations. Representing the eight individual

directors and officers, attorneys from Jones, Day, Reavis & Pogue argued that this was

insufficient to state a claim. The Court agreed, holding that "[t]his Court rejects the notion of

'group pleading,' and 'group publication' and concludes that such concepts, if previously

sustainable, did not survive the adoption of the PSLRA. . . . To comply with the PSLRA,

Plaintiffs thus must plead with particularity their allegations against each individual Defendant." It

was also insufficient for plaintiffs to plead, as they did, that certain investment funds must have

known the "true facts" merely because the funds owned a substantial amount of stock, and

because several fund employees were directors of Ampad. As the Court stated, "Plaintiffs must

allege what each of the [ ] Defendants knew, who specifically knew it, and when they learned it."

Plaintiffs also argued that scienter was established as to certain outside directors because

they were employed by funds that had invested in the company. The Court held, however, that

"[t]he fact that they are employees of Bain Capital, which sponsored funds which owned

substantial stock in Ampad, is, as a matter of...