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Southland Sec. Corp. v. INSpire Ins. Solutions Inc.

United States Court of Appeals for the Fifth Circuit

March 31, 2004, Filed

No. 02-10558

Opinion

 [*359]  GARWOOD, Circuit Judge:

Plaintiffs Southland Securities Corporation, Jeffrey Fielkow, Rick Taylor, William Wares, Ron Rumpler, and William White (plaintiffs) appeal the district court's dismissal, pursuant to Fed. R. Civ. P. 9(b) and the Private Securities Litigation Reform Act (PSLRA), of their securities fraud complaint. We affirm in part and reverse in part and remand. 1 

 [**2]  Background

INSpire Insurance Solutions, Inc. ("INSpire"), the corporate defendant in this case, provided policy and claims administration to the property and casualty insurance industry and offered outsourcing and software services. In this securities-fraud class action, the defendants are INSpire; Millers Mutual Fire Insurance Company, allegedly the original parent corporation and largest shareholder of INSpire (see note 1 above); F. George Dunham (Dunham), the President, CEO and Chairman of the Board of INSpire during the class period; Ronald O. Lynn (Lynn), Executive Vice President and CIO during the class period; Terry G. Gaines (Gaines), Executive Vice President, CFO, and Treasurer during the class period; Robert K. Agazzi (Agazzi), Executive Vice President of Software and Systems during the class period; Jeffrey W. Robinson (Robinson), Executive Vice President of Outsourcing and later President and COO during the class period; and William J. Smith (Smith), President and COO from May 1, 1998 to January 7, 2000, (collectively defendants).  [*360]  INSpire was established in 1995 as a wholly owned subsidiary of Millers, and remained such until August 1997 when Millers spun it off through an initial [**3]  public offering (IPO) of 8.25 million shares, Millers retaining 43.7 percent of INSpire's outstanding shares. Plaintiffs generally contend that defendants engaged in a fraudulent scheme to deceive investors about the company's performance for the purpose of inflating the price of INSpire stock for their own financial benefit. The proposed plaintiff class consisted of all those who acquired INSpire common stock between January 28, 1998, and October 14, 1999.

The plaintiffs' Second Amended Complaint (Complaint), from the dismissal of which this appeal is taken, alleges that the defendants committed securities fraud by knowingly, or with severe recklessness, touting INSpire's software products 2 and contracts despite the software's critical flaws; issuing inaccurate earnings and revenue estimates; and violating Generally Accepted Accounting Principles (GAAP) by failing to timely classify receivables as uncollectible, improperly capitalizing software development costs, and failing to write down goodwill associated with purchases of software assets. The plaintiffs allege these misleading statements were made in forward-looking statements, press releases, and other corporate documents,  [**4]  and relied upon by analysts in their reports. The plaintiffs further allege defendants made stock sales based on insider information, pointing to these sales as evidence of scienter. The plaintiffs seek to recover damages on behalf of all persons who acquired Inspire stock between January 28, 1998 and October 14, 1999.

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365 F.3d 353 *; 2004 U.S. App. LEXIS 5902 **; Fed. Sec. L. Rep. (CCH) P92,803

SOUTHLAND SECURITIES CORPORATION, on behalf of Itself and All Others Similarly Situated; ET AL, Plaintiffs, JEFFREY A. FIELKOW; RICK TAYLOR; WILLIAM WARES; RON RUMPLER; WILLIAM WHITE, Plaintiffs-Appellants, versus INSPIRE INSURANCE SOLUTIONS INC, ET Al, Defendants, INSPIRE INSURANCE SOLUTIONS INC; F. GEORGE DUNHAM, III; ROBERT K. AGAZZI; TERRY G. GAINES; RONALD O. LYNN; JEFFREY W. ROBINSON; WILLIAM J. SMITH, III; MILLERS MUTUAL FIRE INSURANCE COMPANY, Defendants-Appellees.

Subsequent History: As Corrected April 20, 2004. As Revised April 20, 2004.

Rehearing denied by Southland Secs. Corp. v. Inspire Ins. Solutions Inc., 2004 U.S. App. LEXIS 11716 (5th Cir. Tex., May 25, 2004)

Prior History:  [**1]  Appeal from the United States District Court for the Northern District of Texas. 4:00-CV-355-Y. Tery R Means, US District Judge.

Southland Secs. Corp. v. Inspire Ins. Solutions, Inc., 2002 U.S. Dist. LEXIS 26659 (N.D. Tex., Mar. 31, 2002)

Disposition: Affirmed in part, reversed in part, and remanded.

CORE TERMS

allegations, scienter, individual defendant, software, stock, particularity, analysts, misleading, shares, sales, strong inference, earnings, state of mind, omission, forward-looking, percent, amended complaint, district court, class period, announcement, give rise, contracts, reckless, insider, press release, misstatements, documents, pleaded, traded, plaintiffs'

Civil Procedure, Appeals, Standards of Review, De Novo Review, Defenses, Demurrers & Objections, Motions to Dismiss, Failure to State Claim, Dismissal, Involuntary Dismissals, Failure to State Claims, Pleadings, Heightened Pleading Requirements, General Overview, Fraud Claims, Securities Law, Express Liabilities, Misleading Statements, Civil Liability Considerations, Securities Litigation Reform & Standards, Postoffering & Secondary Distributions, Securities Exchange Act of 1934 Actions, Heightened Pleading Requirements, Exchanges & Other Markets, Trading by Exchange Members, Group Pleading Doctrine, Group Published Information, Business & Corporate Law, Management Duties & Liabilities, Causes of Action, Fraud & Misrepresentation, Torts, Vicarious Liability, Agency Relationships, Intentional Torts, Types, Elements of Proof, Scienter, Insider Trading, Motive & Opportunity, Implied Private Rights of Action, Causation, Deceptive & Manipulative Devices, Safe Harbor, Disclosures, Third Party Forecasts, Contracts Law, Affirmative Defenses, Fraud & Misrepresentation, Criminal Law & Procedure, Acts & Mental States, Mens Rea, Recklessness, Secondary Liability, Controlling Persons, Antitrust & Trade Law, Clayton Act, Defenses