Shields v. Citytrust Bancorp, Inc.

United States Court of Appeals for the Second Circuit · 1994 · Corporations

25 F.3d 1124 (2d Cir. 1994)

Updated August 22, 2026

CorporationsSecurities fraudPleadingScienterRule 9(b)Section 10(b)Rule 10b-5Section 20

Facts

Shields, a Citytrust shareholder, alleged that Citytrust and two senior executives misrepresented the bank's financial condition by praising the health of its loan portfolio, asserting the adequacy of loan loss reserves, and making optimistic earnings projections. She claimed Citytrust was actually vulnerable because some loans used shared appreciation rights instead of usual collateral and that defendants concealed the resulting exposure to declining real estate values. Citytrust later announced a $40 million charge to increase loan loss reserves, projected large non-performing loans, and later announced further reserve additions and elimination of its dividend. Shields alleged these later disclosures showed the earlier statements were fraudulent.

Issue

Whether Shields's second amended complaint adequately pleaded scienter with the particularity required by Rule 9(b) for a Section 10(b) and Rule 10b-5 securities fraud claim. Also, whether defendants waived their Rule 9(b) objection by answering the original complaint before the amended complaint was filed.

Rule

In a securities fraud action under Section 10(b) and Rule 10b-5, Rule 9(b) requires the complaint to specify the allegedly fraudulent statements, identify the speaker, state when and where the statements were made, and explain why they were fraudulent. Although scienter may be averred generally, the plaintiff must allege facts giving rise to a strong inference of fraudulent intent, either by alleging facts showing motive and opportunity to commit fraud or by alleging strong circumstantial evidence of conscious misbehavior or recklessness. Conclusory assertions that defendants knew or should have known, and allegations amounting only to fraud by hindsight or misguided optimism, are insufficient.

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Redstone Community Bank, based in Columbus, Ohio, told investors in February that its commercial real-estate reserve levels were adequate and that earnings should improve through the year. In July, after an internal portfolio review, the bank announced a large reserve increase and a yearly loss, and shareholder Nina Patel sued, alleging the February statement must have been fraudulent because the later write-down proved management knew the truth all along.

Should the court find that Nina adequately pleaded scienter under Rule 9(b)?

Explanation. Rule 9(b) requires facts creating a strong inference of fraudulent intent. Under the majority opinion, a plaintiff cannot merely contrast optimistic earlier statements with later adverse developments and infer fraud from hindsight. Without particularized facts showing the defendants knew, or recklessly disregarded, contrary current information when they spoke, the complaint is insufficient.