In In re VeriFone Holdings, Inc. Securities Litigation (http://cdn.ca9.uscourts.gov/datastore/opinions/2012/12/21/11-15860.pdf), the Ninth Circuit weighed in on the proper analysis for determining whether a plaintiff in a securities action has properly pled scienter. After the Private Securities Litigation Reform Act of 1995 (PSLRA), federal courts looked to the specific individual allegations in the complaint to determine whether the plaintiff had pled the requisite strong inference of scienter. In Tellabs, the Supreme Court clarified the scienter analysis and required that the federal courts take a "holistic" approach -- that is, to determine whether the complaint and all of its allegations as whole create a strong inference of scienter. Particularly after a subsequent Supreme Court decision in Matrixx Initiatives, at least some federal courts had begun taking the view that only the holistic approach was proper; in other words, courts should not look at the individual allegations one by one to determine whether any individually create a strong inference of scienter. The Nonth Circuit in VeriFone set this debate to rest in the Ninth Circuit at least, holding that courts should undertake the individual review of allegations for scienter and then step back and look at the complaint as a whole to determine if the standards are met. The Ninth Circuit referred to this as a two step approach. At first look, it seems that the Ninth Circuit approach is plaintiff friendly. They have two opportunities to plead scienter: either through individual allegations so powerful that they create a strong inference of scienter or based upon the allegations of the complaint taken as a whole. Indeed, a holistic approach only might lead a court to reject even a powerful individual allegation because taken together with all of the rest of the facts before it, there are off-setting facts that suggest an innocent explanation.
But, as a practical matter, the Ninth Circuit approach may not be so plaintiff friendly after all. The approach allows defendants to focus courts' attention on the individual allegations and pick each apart. If a defendant can successfully do so, it seems unlikely in most instances that a court is going to find a strong inference of scienter from a bunch of individual allegations that, standing alone, don't amount to enough. The exercise of going through the first step may advantage defendan