Today Judge Rakoff dismissed a class action securities case arising out of allegations that a hedge fund manager gave his fund inside information about a public company. The fund bought shares of the company, and the proposed class consisted of plaintiffs who sold at around the same time. As is typical, Judge Rakoff issued a short-form order and indicated that an opinion would follow. The oral argument transcript suggests that the case was dismissed because it lacked specifics as to when or whether the tip was actually passed:
What you’re saying, as near as I can tell, is because there were some telephone calls between people who had previously exchanged inside information, and because after those telephone calls there was some trading, there is a basis as a matter of pleading, consistent with the PSLRA and the case law and Rule 9(b), to infer that some specific piece of inside information about what would happen to a particular stock was given. I don’t see anything in the case law that supports that.
Judge Rakoff went on to observe that the PSLRA may be “lousy policy, but it’s the law”:
The result of the PSLRA is that many suits that are meritorious get knocked out, because Congress has decided that in order to prevent un-meritorious suits from somebody, we’re going to place on plaintiffs a very substantial burden, and you’re going to have to somehow or another discover X, Y, Z, Q and R, and if you can’t do it, too bad for you. That may be lousy policy, but that’s the law. . . . [T]he point is that Congress determined, in effect, or so the argument goes, we’re only going to let plaintiffs bring securities class actions where they have done a lot of homework in advance so we know in advance it’s a viable lawsuit. And every plaintiff’s lawyer from time [immemorial] faced with that kind of situation says you’re asking the impossible; how can I possibly find out something that’s exclusively within my adversary’s knowledge without discovery? And the answer that Congress gave, which may or may not be satisfactory in a broader sense, but they’re the boss so to speak, is that this is the price that has to be paid to prevent what they perceive was a lot of frivolous lawsuits that were extortionate because once you get to discovery, it’s so expensive . . . that you have to settle.
A previous post on the case is here.