South Ferry LP v. Killinger
Ninth Circuit Court of Appeals
September 9, 2008
Cite as 06-35511

Fraud Case Remanded Pending Dismissal under Appropriate Standard of Determination

South Ferry LP and other shareholders of Washingtom Mutual, Inc. (WAMU) filed a putative class action suit against Kerry Killinger, Thomas Casey, Deanna Oppenheimer, WAMU, and certain other individuals for alleged securities violations associated with its mortgage lending business.

The complainants charged that the defendants with the following:

• They “made materially false or misleading statements” concerning WAMU’s ability to manage certain risk


• that the individual defendants repeatedly assured investors that WAMU could thrive in an environment where interest rates were increasing

According to South Ferry, WAMU was unprepared for the eventual interest rate volatility that it faced.

Based on court records, Washington Mutual, Inc. (WAMU) was a publicly traded financial services company. Killinger, Casey, and Oppenheimer were officers of WAMU, Killinger serving as Chairman of the Board of Directors, President, and CEO; Casey serving as Executive Vice-President and CFO; and Oppenheimer as President of WAMU’s consumer group. All of these were key management positions.

In response, the defendants moved to dismiss the complaint on May 17, 2005. However, the district court granted dismissal as to certain individual defendants, but not as to Killinger, Casey, Oppenheimer, or WAMU.

The district court concluded that South Ferry had satisfied the heightened scienter-pleading standards of the Private Securities Litigation Reform Act of 1995, (PSLRA) based on the ground that the remaining defendants had knowledge of WAMU’s difficulties because of the nature of the statements they were making and the nature of the specific alleged operational problems.

The district court held that under the PSLRA, South Ferry had to state the particular facts that states clearly that the defendants acted with the required state of mind. In a securities fraud action such as this, the required state of mind was “knowing” or “intentional” conduct.

The court cited the principle that it may be inferred that facts critical to a business’s “core operations” or important transactions are known to key company officers. However, the court granted certification of the defendants’ interlocutory appeal on the issue whether “scienter” properly was imputed based on the “core operations” principle.

During review, the Ninth Circuit court of appeals vacated in part, holding that the district court should determine on remand whether the complaint was subject to dismissal under the appropriate standard.

The court explained further that although a complaint that alleges management’s role in day-to-day operations, without the requisite scienter standard in some unusual circumstances in the core-operations inference, it may still raise the strong inference required by the PSLRA.

Likewise, the allegations regarding management’s role in a corporate structure and which false or misleading statements the management made may also create a strong inference of scienter when made “in conjunction with detailed and specific allegations about management’s exposure to factual information within the company”.

In short, the court held that allegations regarding management’s role in a company may be relevant and help to satisfy the PSLRA scienter requirement in three circumstances, cited by the court as follows:

1. that the allegations may be used in any form along with other allegations that, when read together, raise an inference of scienter that is cogent and compelling. This view takes such allegations into account when evaluating all circumstances together


2. that such allegations may independently satisfy the PSLRA where they are particular and suggest that the defendants had actual access to disputed information


3. that such allegations may conceivably satisfy the PSLRA standard in a more bare form, without accompanying particularized allegations, in rare circumstances where the nature of the relevant fact is of such prominence that it would be “absurd” to suggest that management was without knowledge of the matter.

The court held that securities fraud plaintiffs could rely on the “core operations” inference to satisfy the PSLRA’s heightened scienter pleading requirement where management’s role in a company, viewed together with other allegations, raises an inference of scienter that is “cogent and compelling”.

The court held further that such allegations may independently satisfy the PSLRA where “they are particular and suggest that management had actual access to the disputed information, and in rare cases where it would be ‘absurd’ to suggest that management was without knowledge of the matter in dispute”.

The Ninth Circuit court of appeals therefore vacated the judgment and remanded the action for further proceedings.