It’s controversial whether Federal Rule of Civil Procedure 9(b), which applies where a party is “allegating fraud,” sometimes applies to securities claims that do not have scienter as an element and therefore do not necessarily sound in fraud.  Many courts, perhaps most, have held that Rule 9(b) does apply where the alleged facts on which the claim is based entail fraud, as is often the case where a plaintiff brings a rule 10b-5 claim (that is, a basic federal securities fraud claim, to enforce section 10(b) of the Securities Exchange Act of 1934) and also, based on a subset of the same allegations, a claim for violation of section 11 of the Securities Act of 1933 (for a not-necessarily-intentional material misstatement in a registration statement).

Every now and again, however, a court takes an additional, erroneous step, and applies the particularity requirements of the Private Securities Litigation Reform Act of 1995 to one of these semi-fraud situations.  The Ninth Circuit did this last month, without discussion of the point, in Rubke v. Capitol Bancorp, Inc., 551 F.3d 1156, 1162 (9th Cir. 2009), which I have previously criticized for a different misstatement of the law.  (It’s only fair to note that both of these misstatements were apparently made without scienter.)

The pleading standards of the PSLRA that require the plaintiff to plead with particularity all alleged misstatements or omissions and facts supporting a strong inference of scienter fall within section (b) of the PSLRA, which amends the Securites Exchange Act of 1934 and is codified as 15 U.S.C. § 78u–4.  These pleading provisions, as codified at § 78u–4(b)(1) & (2), both expressly define the extent of their reach as “any private action arising under this chapter,” that is, chapter 2B of of title 15,  which codifies the 1934 Act, as amended.  See 15 U.S.C. § 78a (“This chapter may be cited as the ‘Securities Exchange Act of 1934.’ “).  Section 10(b) is codified within that chapter as § 78j(b).  The PSLRA does contain a section amending the 1933 Act as well, but that section, section (a), does not contain an analogous section on pleading falsity or scienter.  (The 1933 Act is codified as chapter 2A, 15 U.S.C. §77a et seq.)  Thus there really isn’t any plausible argument that the particularity requirements apply to 1933 Act claims.

The Fifth Circuit showed yesterday that it is possible to apply the PSLRA pleading standards without filling up dozens of pages of F.3d.  The plaintiff-appellant in Brunig v. Clark, — F.3d. — No. 08-20059, 2009 WL 376907 (Feb. 17, 2009), had been the defendant-respondent’s lawyer.  He had agreed to accept as his fee an interest in mineral leases, and later expected sale proceeds, from property owned by his client.  The dispute arose when the client sent the plaintiff a bill for operating expenses on the property and, when the bill wasn’t paid, a notice of default.

Brunig isn’t a class action, it has nothing to do with a drop in the price of any stock, and it isn’t the sort of case that Congress was was worried about when it enacted the PSLRA.  Although Brunig doesn’t say anything about congressional purpose, it does manage to keep a simple case simple, despite the statute.  The complaint, according to the court, is “prolix,” despite being, at fifty-six pages, on the slim side for a securities fraud complaint, at least in my experience.   By comparison with the Brunig court’s handiwork, however, the charge is justified.  In five paragraphs, the court states the elements of the Rule 10b-5 claim, assesses the complaint’s sufficiency as to both the PSLRA particularity requirements (misstatement/omission and scienter), and reverses the district court’s dismissal of the claim.  While it doesn’t break new legal ground, to my mind it doesn’t exclude anything important, either.  With equal efficiency, the court affirms the dismissal of a Securities Act claim and a RICO claim, and reverses a sanctions order.  Compliements to Judge Higginbotham, who wrote for the court.