The United States Court of Appeals for the Second Circuit affirmed the district court’s dismissal of a securities class action complaint against defendants, a mining and metallurgy corporation and its officers and directors, for failing to adequately plead scienter. On appeal, plaintiffs argued that the district court erred in finding that the complaint did not adequately plead scienter based on two theories: “motive and opportunity” and “core operations.”

First, the Second Circuit concluded that the district court properly found that the complaint alleged only motives that are “generally possessed by most corporate directors and officers” and insufficient to survive a motion to dismiss. Plaintiffs also argued that an individual defendant-shareholder had a unique motive to commit fraud because he had pledged “a significant percentage of his personal interest” as collateral for the corporation’s debts. The Second Circuit did not reach the question of whether such a commitment of personal assets could establish a motive to commit fraud; instead, it determined that the complaint did not plead the relevant facts with sufficient particularity.

Next, the Court stated that it had not yet addressed whether the “core application” doctrine survived the enactment of the Private Securities Litigation Reform Act. The Court declined to decide the question, and determined that even if the “core operations” theory applied, the complaint had not pled that the illegal conduct—anticompetitive practices with respect to certain customers—dealt with a “significant” part of the business.

Frederick v. OAO, No. 11-3666-cv (2d Cir. Apr. 11, 2012).