plaintiff alleged that defendant intentionally omitted to disclose that it was going to issue a bond and that its purchase of a target company depended upon the successful issuance of such bond. See id. at 209. The court held that plaintiff adequately met the scienter requirement under its "knowing misrepresentation" standard. See id.
We agree with the Norwood and Friedberg courts' interpretations of the PSLRA. The Act's legislative history suggests that it was intended at least to surpass the Second Circuit's "motive and opportunity" and "recklessness" standards. The Conference Committee report states that because the committee did not intend to codify the Second Circuit's scienter pleading standards, it left out "certain language relating to motive, opportunity, and recklessness." 141 Cong. Rec. H13, 702 n.23 (1995).
The Friedberg court thus properly adopted the "conscious behavior" standard from the Second Circuit to meet the PSLRA's scienter requirement since the Conference Committee Report retained the "conscious behavior" pleading approach but eliminated the "motive and opportunity" and "recklessness" standards. See Friedberg, 959 F. Supp. at 49-50. Moreover, under Second Circuit case law, the "conscious behavior" standard is more difficult to pass than the "motive and opportunity" or "recklessness" standards. See id. This approach is consistent with the Norwood court's "knowing misrepresentation" standard since each requires the plaintiff to allege facts which give rise to a strong inference or constitute strong circumstantial evidence of either knowing or conscious behavior.
Applying this "conscious behavior" standard to the instant case, we find that Plaintiff has adequately pled scienter as required by the PSLRA. In addition to alleging that Wonderware benefited from purchasing SSE with inflated shares of Wonderware stock while intentionally withholding material information, Plaintiff here also alleges that three executives at Wonderware sold 129,570 shares of Wonderware stock for over $ 4.6 million while in possession of material, non-public information. Accepting Plaintiff's figures, as we must for present purposes, the three individual defendants sold 71.9%, 14.9% and 10.6% of their holdings respectively. The Friedberg court found a plaintiff's allegation that five insiders collectively sold only 12% of their holdings, but two of the individuals sold 33% and 50% of their holdings adequate to plead scienter under the "conscious behavior" standard. See Friedberg, 959 F. Supp. at 51. The court also distinguished the case from In re Apple Computer Sec. Litig., 886 F.2d 1109 (9th Cir. 1994) and In re Worlds of Wonder Sec. Litig., 35 F.3d 1407 (9th Cir. 1994), two cases which Defendants cite to support their position that insider trading of only a portion of holdings does not create a strong inference of scienter. As the Friedberg court noted, Apple Computer and Worlds of Wonder were both decided on motions for summary judgment after defendants had been able to explain any questionable trading; they were not decided on motions to dismiss. See id.
Defendants also cite Acito v. Imcera Group, Inc., 47 F.3d 47, 54 (2d Cir. 1995)(finding insider's sales of 11% of holdings insufficient to plead scienter), in maintaining that alleging insider trading in small amounts does not establish scienter. However, in Acito only one defendant engaged in trading compared with three defendants in our case, and he only sold 11% of his holdings on inside information compared with sales of 71.2%, 14.9% and 10.6% of holdings in our case. Id.
Finally, Defendants claim that allegations of insider trading alone are not enough to create a strong inference of scienter. However, Plaintiff does not rest his scienter pleading solely upon allegations of insider trading. Plaintiff alleges not only that corporate insiders at Wonderware traded in significant quantities on material, non-public information, but that Wonderware purchased SSE with approximately $ 7 million of inflated Wonderware stock while intentionally withholding adverse, material information. Thus, Plaintiff has alleged facts constituting strong circumstantial evidence of Defendants' "conscious behavior," meeting the PSLRA's standard for pleading scienter.
The court denies Defendants' motion to dismiss since Plaintiff has adequately pled securities fraud as required under Third Circuit law and under the Private Securities Litigation Reform Act of 1995. Plaintiff's allegations adequately constitute a § 10(b) and Rule 10b-5 claim under a duty to disclose theory. Additionally, Plaintiff does identify specific, actionable statements which were rendered misleading by Defendants' omissions. The "bespeaks caution" doctrine does not render Defendants' omissions immaterial as a matter of law, and Plaintiff has adequately pled scienter as required under the PSLRA.
AND NOW, this 8th day of September, 1997, upon consideration of the Defendants' Motion to Dismiss, and Plaintiff's response thereto, it is hereby ORDERED that said Motion is DENIED.
BY THE COURT:
J. CURTIS JOYNER, J.