Chapter 16 - § 16.9 • DEFENSES TO CLAIMS UNDER RULE 10b-5

• Jurisdiction: Colorado

§ 16.9 • DEFENSES TO CLAIMS UNDER RULE 10b-5

§ 16.9.1—Requirement To Plead With Particularity

In addition to denial of the elements, defendants frequently claim that the plaintiffs failed to plead the alleged fraud with the specificity required in Rule 9(b) of the Federal Rules of Civil Procedure.²⁰³ Rule 9(b) "require[s], at a minimum, that the plaintiff identify the speaker of the allegedly fraudulent statements."²⁰⁴

In Breard v. Sachnoff & Weaver, Ltd.,²⁰⁵ the court stated:

"[I]n all averments of fraud or mistake, the circumstances . . . shall be stated with particularity. Malice, intent, knowledge, and other condition of mind of a person may be averred generally." . . . Fraud allegations must allege precise statements or omissions made and specify the time, place, speaker and content of the alleged misrepresentations. [Citations omitted.] Further, it must be clearly stated what the defendant obtained as a consequence of the fraud.

The specificity requirement is further enhanced by the PSLRA. In In re Health Management Systems, Inc. Securities Litigation,²⁰⁶ the court granted the defendants' motion to dismiss because, among other things, the court noted that all of the material allegations of the complaint were prefaced with the phrase, "upon information and belief." According to the court, the PSLRA provides that when allegations are made "' on information and belief, the complaint shall state with particularity all facts on which that belief is formed.'"²⁰⁷ The complaint at issue was "devoid of any such particularity."²⁰⁸

§ 16.9.2—Waiver

Waiver is generally prohibited under the securities laws, although a knowledgeable waiver of claims based on past acts is permissible. The waiver, or ratification, must be an action taken with knowledge of all material facts.

§ 16.9.3—Mitigation Of Damages

The plaintiffs are required to mitigate their damages, and failure to do so might lessen any award.

§ 16.9.4—In Pari Delicto

In pari delicto can be used as a defense in a case when the defendant can show that the plaintiff was at fault with the defendant in the transaction. After the Supreme Court's decision in Bateman Eichler, Hill Richards Inc. v. Berner,²⁰⁹ the previously popular defense of in pari delicto will likely be available in only the most egregious cases, when the plaintiffs involvement in the fraudulent scheme placed him or her in the role of a joint conspirator with the defendants. Bateman held that the in pari delicto defense is available only...