On June 22, 2015, the Eighth Circuit Court of Appeals handed down an important opinion affirming dismissal of a securities fraud class action against our clients, the former CEO and CFO of Patriot Coal Corporation. Podraza, et al. v. Whiting, No. 14-947 (8th Cir. June 22, 2015). HeplerBroom LLC partner Glenn E. Davis was on the briefs.

Plaintiffs alleged that Patriot Coal, under defendants’ direction, had fraudulently capitalized certain environmental remediation facilities’ costs rather than treating them as current expenses, which if properly disclosed would have negatively impacted Patriot’s bottom line. When the accounting treatment changed, Patriot was required is issue a restatement of its financial statements and its stock price fell dramatically. Under the Private Securities Litigation Reform Act (PSLRA), 15 U.S.C. § 78u-4, the District Court dismissed the class complaint for failure to meet the stringent pleading requirements to show a strong inference of fraudulent intent (scienter). The Eighth Circuit agreed with District Judge Stephen N. Limbaugh, Jr. that the “allegations here are largely premised upon hindsight”; possible mismanagement but “not severe recklessness.”   This case is noteworthy for its continuation of the Eighth Circuit’s consistent enforcement of the heightened pleading requirements of the PSLRA, and as authority that GAAP violations, standing alone, without a strong showing of fraudulent intent do not constitute securities fraud. The accounting treatment judgments at issue were the subject of extended negotiations with the SEC and supported by Patriot’s independent auditors.