Pennsylvania Securities Act: must a plaintiff plead and prove scienter to recover for misrepresentations?

Mimi Investors, LLC v. Tufano,  2021 WL 5150053 (Pa. Super.) (unpublished), allocatur granted Apr. 26, 2022, appeal docket 57 MAP 2022

Mimi Investors sued Tufano and other directors and officers of ORCA Steel, a data storage company, pursuant to Section 1-401 of the Pennsylvania Securities Act, for losses incurred as a result of alleged misrepresentations on which Mimi Investors relied when it decided to loan funds to ORCA Steel in exchange for securities.  Section 1-401 provides:

It is unlawful for any person, in connection with the offer, sale or purchase of any security in this State, directly or indirectly:

(a) To employ any device, scheme or artifice to defraud;

(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading; or

(c) To engage in any act, practice or course of business which operates or would operate as a fraud or deceit upon any person.

Mimi Investors alleged that Defendants Tufano et al. represented that Steel ORCA had received more than 400 orders for computer data storage space in its newly- constructed data center and was about to close on a loan to fund new construction, and that Steel ORCA represented that it needed promissory notes from Mimi Investors and others to increase capital and secure financing in order to service the new orders. Mimi Investors further alleged that at the time defendants made these representations, they knew that the loan to fund the new construction was not viable because the orders received by Steel ORCA were not investment grade. Tufano et al. demurred, arguing, among other things, that Mimi Investors was required to plead scienter and had not done so in its amended complaint. The trial court overruled the demurrer, reasoning that although the federal courts had considered the issue of whether Section 1-401 requires scienter, the Pennsylvania appellate courts had not, so that it was not free and clear from doubt that the law would not permit recovery.

The Superior Court granted interlocutory review and affirmed the trial court. The court agreed with the trial court that because “our state appellate courts have not resolved the issue” the law concerning the need to plead scienter is not “clear and free from doubt” – i.e., the standard for granting a demurrer.  The Superior Court went on to conclude that even if scienter is required, “Mimi Investors has pleaded facts sufficient to satisfy the requirements of particularity in Pennsylvania law.” Slip op. at 10.

The Supreme Court has granted allocatur. The issue, rephrased for clarity, is:

Whether the Pennsylvania Securities Act of 1972 requires a plaintiff to plead and prove scienter by clear and convincing evidence in connection with an alleged violation of 70 P.L. § 1-401 regulating the purchase and sale of securities in the Commonwealth, and if so, did plaintiff-appellee sufficiently plead its fraud-based claims in its first amended complaint[?]


For more information, contact Kevin McKeon or Dennis Whitaker.