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Aldridge v. A.T. Cross Corp. - 284 F.3d 72 (1st Cir. 2002)


Scienter, which is a requirement for liability under 15 U.S.C.S. § 78j(b) and 17 C.F.R. § 240.10b-5 (2001), is a mental state embracing intent to deceive, manipulate, or defraud. To win a case under 15 U.S.C.S. § 78j(b), the plaintiff must show either that the defendants consciously intended to defraud, or that they acted with a high degree of recklessness.


In early 1998, the A.T. Cross Corporation, a venerable New England maker of fine pens and pencils, entered the personal electronic devices market by offering pen-based computing products through its Pen Computing Group (PCG). The stars of its new line were the CrossPad and its later-introduced smaller cousin, the CrossPad XP. Cross had high hopes for its new product line and expressed those hopes publicly in September 1997 by saying it expected to report a minimum of $25 million in profitable sales for PCG in 1998. However, by late 1999 Cross had discontinued the product line and suffered losses that year of $ 24.3 million, which essentially eliminated profits from the $ 24.8 million in sales on the PCG products in 1998. Michael Aldridge brought a securities action in April 2000 as a putative class action on behalf of those who purchased Cross common stock between September 17, 1997 and April 22, 1999 (the class period). An amended complaint asserted claims against the company, four officers of the company, and certain trusts which own part of Cross. The complaint alleged violations of section 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78j(b) (2000), and Rule 10b-5 under that Act, 17 C.F.R. § 240.10b-5 (2001), against the company, the individual defendants, and the trusts. It also alleged a section 20(a) claim against the individual and trust defendants as "controlling persons." On a Rule 12(b)(6) motion by the defendants, the district court dismissed the action.


Did the district court err in dismissing the putative class action filed by Michael Aldridge, on behalf of those who purchased common stock during the stated class period, alleging that defendants made misleading statements concerning the corporation's financial condition in violation of federal securities laws, including Section 10(b) of the Securities and Exchange Act of 1934?


Yes, as regards the claims against the individual defendants and the company.


The United States Court of Appeals reversed the dismissal of the claims against the individual defendants and the company. However, the Court affirmed the order with regard to the trust shareholders. The Court held that the purchaser properly alleged securities fraud with regard to the corporation and the officers, because Aldridge provided sufficient factual support for the allegations of fraud a strong inference of the requisite scienter. It was reasonable to infer from the officers' statements that the corporation offered its customers price protection guarantees, but improperly failed to disclose the guarantees in the corporation's financial statements. However, the Court ruled that in the absence of evidence of actual control, the ability of the trusts as controlling shareholders to appoint directors was insufficient to impose controlling person liability on the trusts.

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