## Facts

- A revocable living trust sued Western Union and certain executives in a putative securities-fraud class action under Exchange Act § 10(b) and SEC Rule 10b-5.
- Western Union operates a global money-transfer business exposed to fraud and money-laundering risks through third-party agents.
- The complaint alleged that, during the class period (Feb. 24, 2012–May 2, 2017), defendants made public statements in filings and communications describing Western Union’s AML/anti-fraud compliance programs, internal controls, and compliance culture as strong and effective.
- The complaint alleged these statements were materially misleading because Western Union’s AML and anti-fraud controls were deficient and the company faced significant, undisclosed regulatory exposure.
- In 2017, Western Union announced settlements with federal agencies (including DOJ and FTC), involving penalties and compliance undertakings; the stock price dropped after related disclosures.
- Plaintiff alleged the settlements and disclosures revealed the “truth,” and that earlier statements inflated the stock price, causing investor losses when the price declined.
- The district court dismissed under Rule 12(b)(6), holding the complaint did not plead scienter with the particularity and “strong inference” required by the PSLRA.
- Plaintiff appealed.

## Issues

1. Whether the complaint alleged particularized facts that, taken collectively, created a PSLRA “strong inference” that defendants acted with intent to defraud or with recklessness regarding allegedly misleading AML/anti-fraud compliance statements.

## Decision

- The Tenth Circuit affirmed dismissal.
- The court held the complaint did not plead facts supporting a strong inference of scienter that was cogent and at least as compelling as nonfraudulent inferences.
- Regulatory investigations and later settlements, without particularized contemporaneous facts showing defendants knew their statements were misleading when made, did not satisfy the PSLRA standard.

## Legal Principles

- A § 10(b)/Rule 10b-5 plaintiff must plead scienter; under the PSLRA, the complaint must state with particularity facts giving rise to a “strong inference” that the defendant acted with the required state of mind.
- Under Tellabs, a strong inference exists only if a reasonable person would find it cogent and at least as compelling as any opposing, nonculpable inference.
- In the Tenth Circuit, scienter may be shown by intent to deceive, manipulate, or defraud, or by recklessness amounting to an extreme departure from ordinary care that presents an obvious risk of misleading investors.
- Allegations of regulatory scrutiny, investigations, or subsequent enforcement settlements do not, by themselves, establish that earlier statements were made with scienter.
- Generalized assertions that compliance issues were “core” to the business are insufficient absent specific allegations tying particular executives to contemporaneous information contradicting their public statements.
- Pleading that juxtaposes later adverse outcomes with earlier optimistic statements, without particularized facts of contemporaneous knowledge, amounts to impermissible “fraud by hindsight.”

## Conclusion

The court affirmed dismissal because the complaint’s allegations—centered on regulatory scrutiny and later settlements—did not supply particularized, contemporaneous facts linking the executives to knowledge (or reckless disregard) that their compliance-related statements were misleading, and therefore did not create the PSLRA-required strong inference of scienter.


Smallen Revocable Living Tr. v. W. Union Co., 950 F.3d 1297 (10th Cir. 2020)