A federal district (trial level) court recently ruled that an investors’ class action lawsuit can proceed. The investors allege management knowingly understated the publicly held company’s environmental liabilities.

Class Action Complaint Met Pleading Requirements
Federal law requires security fraud claims be pleaded with some specificity. The company argued the allegations in the investors’ complaint did not meet that requirement. While the Court agreed to dismiss some allegations, the Court allowed the case to proceed as to others, ruling the investors provided sufficient specific allegations as to some matters that, if proved, would establish the investors could recover damages caused by management knowingly understating the company’s environmental liabilities.

Ruling Limited to the Pleadings
In making the ruling, the Court considered only the Complaint filed on behalf of the investors and the arguments of the competing lawyers. The Court made no effort to determine if the investors had proof that management knowingly understated liabilities.

Estimating environmental liabilities is very difficult. Proving that management made representations about the company’s environmental liabilities when management knew the liabilities would be greater is even more difficult. Still, the Court ruled the investors’ class action lawsuit could proceed, because some of the allegations of knowingly understating environmental liabilities met the requirements of federal law.