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Arizona District Court Rules that “Tie Goes to the Plaintiff” in CSK Auto Litigation

December 20, 2007
Corporate Governance Newsletter

A securities class action victory in the District of Arizona is rare. However, the court recently denied motions to dismiss the complaint filed by the Communications Workers of America Plan for Employees’ Pensions and Death Benefits against CSK Auto Corp. and its former officers and directors.

The complaint alleges that certain of CSK’s executives (namely the former CEO and CFO) issued false statements about the company’s income, earnings, and internal controls, causing the company’s stock to trade at artificially inflated prices. The auto parts maker has since restated its financial statements issued during the class period and admitted to material errors in its accounting for inventory and vendor allowances. The complaint also alleges that CSK insiders sold off nearly 500,000 shares of CSK stock for insider trading proceeds of over $8 million.

Judge David G. Campbell heard oral argument on the motion to dismiss and issued an opinion that interpreted and applied the recent United States Supreme Court Tellabs decision. The court’s analysis centered around the issue of pleading a strong inference of intent to commit securities fraud under the Private Securities Litigation Reform Act of 1995. Judge Campbell’s opinion emphasized the four guiding principles recognized in Tellabs for deciding a motion to dismiss: (1) all factual allegations in the complaint must be taken as true; (2) all allegations in the complaint must be considered collectively in deciding whether the complaint pleads a strong inference of intent; (3) the court must take into account plausible opposing inferences; and (4) the inference of intent must be cogent and at least as likely as any plausible opposing inference. The Arizona court also acknowledged that “[t]he Supreme Court has now made clear [] that a tie goes to the Plaintiff.”

In applying the Tellabs standards and denying the defendants’ motion to dismiss, Judge Campbell held “that Plaintiff has alleged facts giving rise to a cogent inference of scienter that is as plausible as an inference of nonculpability.”

Added plaintiffs’ attorney Bill Doyle, “Public shareholders benefit when the courts properly apply the Tellabs standard to meritorious securities fraud claims, as the Court did in the CSK litigation.”

Commc’ns Workers of Am. Plan for Employees’ Pensions and Death Benefits v. CSK Auto Corp., No. CV06-1503, 2007 U.S. Dist. LEXIS 72424 (D. Ariz. Sept. 27, 2007); Tellabs, Inc. v. Makor Issues & Rights, Ltd.,127 S. Ct. 2499 (2007).

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