Southland Securities Corp. v. INSpire Insurance Solutions: The Fifth Circuit Brusquely Rejects the Group Pleading Doctrine in Light of the Private Securities Litigation Reform Act

Recent Development by Jeremy T. Grabill

Southland Securities Corporation sued INSpire Insurance Solutions (INSpire) and its executive officers for securities fraud on behalf of a purported class of investors who acquired INSpire stock between January 28, 1998, and October 14, 1999. Specifically, the plaintiffs alleged that INSpire and its officers violated sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (Exchange Act) and Securities and Exchange Commission (SEC) Rule 10b-5 in numerous misleading statements and pointed to the officers' opportunistic sales of INSpire stock as evidence of scienter. The complaint was ultimately dismissed in its entirety by the United States District Court for the Northern District of Texas due to its reliance on the “group pleading” doctrine and its resulting failure to plead fraud with sufficient particularity as required by Rule 9(b) of the Federal Rules of Civil Procedure (FRCP) and the Private Securities Litigation Reform Act (PSLRA or Act).

The plaintiffs appealed to the United States Court of Appeals for the Fifth Circuit, and the court determined the effect of the PSLRA on the practice of group pleading, a question of first impression in the circuit, and indeed a question that had yet to be decided by any federal circuit court. In reversing a narrow part of the district court's dismissal of the plaintiffs' claims against INSpire and its Chief Executive Officer (CEO) F. George Dunham (Dunham), the court nevertheless held that the PSLRA requires that each defendant's role in an alleged fraud be pled with specificity, thus foreclosing the practice of group pleading. Southland Sec. Corp. v. INSpire Insurance Solutions, Inc., 365 F.3d 353, 364-65 (5th Cir. 2004).


About the Author

Jeremy T. Grabill. J.D. candidate 2006, Tulane University School of Law; B.A. 1999, Cornell University.

Citation

79 Tul. L. Rev. 1101 (2005)