Willful Blindness Can Establish Scienter—But Not Here: Third Circuit Tightens Pleading for 10b‑5 Opinion, Diligence, and Omission Claims in Handal v. Innovative Industrial Properties

Introduction

This precedential decision from the United States Court of Appeals for the Third Circuit addresses the contours of securities fraud pleading under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b‑5 in the aftermath of corporate trauma. The case involves Innovative Industrial Properties, Inc. (IIPR), a publicly traded REIT focused on cannabis-related properties, which was defrauded by a tenant, Kings Garden, through falsified reimbursement draw requests for capital improvements. After IIPR sued Kings Garden in state court and disclosed the dispute, shareholders brought a putative class action alleging that IIPR and several executives made materially false or misleading statements across five categories and did so with scienter. The District Court dismissed with prejudice, and the Third Circuit affirmed.

Handal clarifies several critical aspects of 10b‑5 jurisprudence:

How to parse statements about diligence and monitoring that are couched with qualifiers like “typically” and “in some instances.”
How to analyze praise and “brand” commentary as opinion statements under the Supreme Court’s Omnicare framework.
How to assess “omission” liability under Rule 10b‑5(b) in light of the Supreme Court’s 2024 Macquarie decision and the Third Circuit’s knowledge requirement.
Who “makes” a statement under Janus when a corporate press release is at issue.
Most notably, the court adopts the principle—long recognized in other circuits—that willful blindness or egregious refusal to investigate obvious red flags can, in appropriate cases, satisfy the scienter requirement; but it finds the allegations here fall short.

Parties: Plaintiffs-Appellants Alejandro Handal and Stephen R. Forrester (putative class representatives) sued IIPR and certain officers (CEO Paul Smithers, CFO Catherine Hastings, Executive Chairman Alan D. Gold, and VP of Investments Benjamin C. Regin). The District Court (D.N.J., Judge Padin) dismissed. On appeal, the Third Circuit (Chief Judge Chagares, Judges Montgomery-Reeves and McKee) affirmed.

Summary of the Opinion

The court held that most challenged statements were not actionably false or misleading when made:

Evaluation and diligence statements: Not actionable. IIPR’s filings said acquisitions are “typically” subject to diligence closing conditions and that IIPR “relies on” its management to conduct diligence. The complaint did not plausibly allege falsity at that level of generality.
Ongoing monitoring statements: Not actionable. IIPR said it reviews publicly available information and, “in some instances,” conducts site visits. Plaintiffs did not allege portfolio-wide contradiction of those qualifiers, and the nonpublic, tenant-submitted draw requests fell outside what IIPR said it reviews.
Statements of praise and reputation: Largely non-actionable opinions under Omnicare. Plaintiffs did not plausibly allege that speakers knew of contradictory facts or failed to conduct an “expected inquiry” before offering their general opinions.
Reimbursement statements:
- April 14, 2022 press release: Actionably false as a factual assertion because it said IIPR’s reimbursements “relate only to verified, qualified improvements” and “never” to anything else, which was not true given later-discovered fraud.
- May 5, 2022 earnings call amounts: Not false and not misleading by omission. The amounts paid were accurate, and plaintiffs did not plausibly allege contemporaneous knowledge that would render the omission of fraud misleading.
July 13, 2022 Form 8‑K (rent default): Not misleading. Disclosing the tenant’s default did not trigger a duty to also disclose an unfinished fraud investigation or the tenant principal’s litigation history.

Scienter failed as to the only actionable misstatement (the April 14 press release). The “maker” of that statement was the corporation (IIPR) under Janus. Plaintiffs did not allege with particularity that any individual actor had scienter that could be imputed to IIPR. The court expressly recognized that willful blindness can, in some cases, supply scienter, but the allegations here showed—at most—negligence or poor processes, not an “egregious refusal to see the obvious.” The court again declined to adopt the corporate scienter doctrine and held that, even if recognized, it would not apply on these facts. With no primary 10b‑5 violation, the Section 20(a) control-person claim necessarily failed.

Analysis

Precedents Cited and Their Influence

Private Securities Litigation Reform Act (PSLRA) (15 U.S.C. § 78u‑4(b)(1)-(2)): Requires particularized pleading of falsity and a “strong inference” of scienter. The court enforced this statement-by-statement, demanding the “who, what, when, where, and how.”
Basic, Matrixx, and Tellabs: Reaffirm the elements of 10b‑5 and the “strong inference” standard, which must be at least as compelling as non-fraudulent explanations.
Central Bank and Stoneridge: 10b‑5 targets manipulation and deception, not corporate mismanagement, negligence, or aiding and abetting. This cabined plaintiffs’ attempts to convert diligence/oversight failures into securities fraud.
Santa Fe Industries v. Green: No federal securities claim without deception; again, mismanagement alone is insufficient.
Oran v. Stafford: Courts may judicially notice SEC filings; there is no duty to disclose absent a recognized source of duty (insider trading, statute, or the need to make prior statements not misleading). Handal relies on Oran to reject a duty to stuff an 8‑K about rent default with unproven fraud allegations.
Macquarie Infrastructure v. Moab Partners (2024): Rule 10b‑5(b) requires tethering any omission theory to specific “statements made.” The court invoked Macquarie to emphasize that omission claims must be grounded in identified statements and contemporaneous knowledge.
Omnicare (opinion liability): The court applied Omnicare to Section 10(b) claims, consistent with prior Third Circuit precedent, to hold that general praise or brand commentary are opinions that are actionable only if insincere, contain false embedded facts, or omit material inquiry/knowledge that conflicts with what a reasonable investor would take from the opinion.
Janus (who “makes” a statement): The “maker” is the person/entity with “ultimate authority” over the statement. This was pivotal to attribute the April 14 press release to IIPR, not to the CFO who was a public contact or drafter.
Williams v. Globus and Kline: Omission liability hinges on facts “then known” to the speaker; the court reinforced that contemporaneous knowledge is essential for half-truth liability.
Avaya: Reiterates how repeated, focused analyst questions and confident denials may support scienter if what the speaker knew made the risk of misleading “obvious.” The court distinguished Avaya, finding the one-off press release responding to a short-seller report (that did not focus on the reimbursement issue at all) materially different.
Willful blindness authorities adopted: The court explicitly aligned the Third Circuit with other circuits (Second, Fifth, Sixth, Eighth, Ninth) that hold willful blindness—“an egregious refusal to see the obvious, or to investigate the doubtful”—can support scienter when it bears on facts that render a statement false or misleading. It cites, among others, Novak, PR Diamonds, Shanahan, New Mexico SIC, Plotkin.
Corporate scienter (not adopted): The court again declined to accept or reject the doctrine, echoing Hertz and Rahman, and noted that even where recognized it is reserved for “exceedingly rare” cases with “dramatically false” statements (citing the Second and Ninth Circuits).
Section 20(a): Following City of Edinburgh and Aetna, derivative control-person liability fails without a predicate 10b‑5 violation.

Legal Reasoning

The court proceeds in three steps: falsity/omissions; scienter; Section 20(a).

1) Falsity and Omissions

Parsing qualifiers in diligence/monitoring disclosures: IIPR’s SEC filings said purchases are “typically” subject to diligence and that it “relies on” management for diligence. For monitoring, IIPR said it reviews public information and “in some instances” conducts site visits. The court read these words exactly as written. To show falsity, plaintiffs needed portfolio-wide allegations contradicting “typically” or “in some instances,” not tenant-specific failings. They did not provide those allegations. Nor did they show that draw requests fell within the “public” information IIPR said it reviewed.
Opinion statements under Omnicare: General praise—“top producer,” “distinguished brand,” “proud to continue to partner,” or commentary about a dividend signaling long-term prospects—were treated as opinions, not concrete facts about the reimbursement programs or site-specific work. Plaintiffs did not allege that speakers knew of conflicting facts or failed to conduct an “expected inquiry” into known areas of potential contradiction. The court emphasized the generality of the statements and their distance from the later-discovered fraud.
Reimbursement statements—facts versus opinions:
- April 14 press release: A factual assertion that reimbursements “relate only to verified, qualified improvements” and “never” to anything else was false as a matter of fact given the later-discovered fraud. Under Rule 10b‑5(b) and Omnicare, this is a factual misstatement, not an opinion.
- May 5 dollar amounts: The numeric disbursement totals were accurate. Plaintiffs’ omission theory failed because there were no well-pled facts showing contemporaneous knowledge of fraud that would have rendered the figures misleading.
8‑K on July rent default: No falsity and no omission liability. Disclosing a payment default did not obligate IIPR to disclose an ongoing, incomplete investigation or a principal’s litigation history absent a duty to disclose. The court reiterated that such duties are narrow and were not triggered here.
Macquarie and the meaning of “omit”: Tying omission liability to identified “statements made,” the court also underscored that “omit” implies leaving out known information at the time of speaking. Without contemporaneous knowledge, there is nothing to “omit.”

2) Scienter

The scienter analysis centered on the only actionable misstatement: the April 14 press release.

Maker under Janus: The corporation, not an individual executive, “made” the press release. Being a drafter or a listed media contact does not confer ultimate authority; attribution and voice pointed to the company as speaker.
No individual scienter pled with particularity: Plaintiffs alleged “should have known” oversight failures, at most negligence. The court demanded more than generalized imputations of knowledge, finding no particularized facts that any individual recognized red flags and willfully refused to investigate.
Adoption of willful blindness as a path to scienter, but not on these facts: The court joined other circuits in holding that willful blindness—“an egregious refusal to see the obvious, or to investigate the doubtful”—can demonstrate scienter when the ignored facts are those that render a statement false or misleading. However, plaintiffs did not allege that any IIPR actor confronted obvious red flags bearing on the April 14 assertion and deliberately chose not to investigate before speaking. The complaint identified poor processes and missed irregularities but no deliberate avoidance or motive to remain blind to IIPR’s own victimization.
Corporate scienter (again) not adopted and would not apply: Even if recognized, this is not the “exceedingly rare” case of a “dramatically false” statement from which corporate scienter could be inferred without tying it to an individual’s state of mind.
Avaya distinguished: Unlike the CFO’s repeated, confident denials in response to focused analyst questions in Avaya, the Blue Orca report never targeted the reimbursement issue for Kings Garden; IIPR issued a single, same-day response. With a one-off statement and no showing that IIPR knew facts making falsity obvious, the stronger inference was nonculpable ignorance.

3) Section 20(a) Control-Person Liability

Derivatives claims under Section 20(a) fail in the absence of a primary Section 10(b)/Rule 10b‑5 violation. Because scienter was not adequately pled for the sole actionable misstatement, there is no predicate violation, and the 20(a) claim was properly dismissed.

Impact

Adoption of willful blindness as scienter: The Third Circuit’s express endorsement of willful blindness as a route to scienter is the headline development. Future plaintiffs now have a recognized doctrinal hook, but the bar remains high: they must plead, with particularity, the red flags confronted, the decision not to investigate, and why that non-investigation makes the falsehood or half-truth reckless. Mere negligence, bad outcomes, or ex post discoveries will not suffice.
Text matters—qualifiers protect process disclosures: Issuers who use “typically,” “in some instances,” and precise scopes (e.g., “publicly available information”) substantially reduce exposure for broad process statements. Plaintiffs seeking to challenge such language must plead portfolio-wide contradictions, not tenant-specific anecdotes.
Opinion liability remains narrow: General praise, reputation, and “brand” statements—especially when not tied to a specific operational claim—will rarely be actionable, absent well-pled allegations of known contradictory facts or a failure to conduct an expected inquiry into known potential conflicts.
Beware “always/only/never” absolutes in rapid responses to short-seller reports: The only false statement here was an absolute claim about reimbursements “only” relating to verified, qualified improvements and “never” to anything else. Issuers should avoid categorical assertions when processes are imperfect or when facts are not yet fully vetted.
Omissions after Macquarie: Plaintiffs must anchor omissions to specific “statements made” and show contemporaneous knowledge. Absent that, half-truth theories will fail.
Janus “maker” analysis for press releases: Corporate press releases will generally be statements of the corporation. Plaintiffs cannot lightly pin 10b‑5(b) liability on individual executives based on drafting or PR roles; they must plead facts establishing ultimate authority or rely on other subsections (a)/(c) with appropriate allegations.
Corporate scienter remains unsettled in the Third Circuit and hard to invoke: The court again declined to adopt the doctrine and signaled that even where recognized, it will be confined to exceptional, obvious falsehoods.
Duties to disclose stay narrow: A routine 8‑K about a rent default did not create a duty to disclose an ongoing fraud investigation. This is a reminder that not every material fact must be disclosed; the duty arises only in defined circumstances.
Practical implications for REITs and reimbursement programs: Issuers should strengthen controls around reimbursement draw requests and third-party verification, but absent specific promises about such controls, process failures alone do not equal securities fraud.

Complex Concepts Simplified

Section 10(b) and Rule 10b‑5: These anti-fraud provisions prohibit making untrue statements of material fact or omitting material facts necessary to make what was said not misleading, when connected to buying or selling securities.
PSLRA pleading standards: Plaintiffs must specify the exact statements, why they are misleading, and particular facts that strongly suggest the speaker acted with intent to deceive or with extreme recklessness.
Scienter: The mental state requirement; more than negligence. It means intent to deceive or an extreme departure from ordinary care that makes deception obvious.
Willful blindness: Deliberately avoiding learning the truth despite clear warning signs. The Third Circuit now recognizes that willful blindness can satisfy scienter—if the avoided facts are those that make the statement false or misleading.
Omnicare and opinions: Opinions are actionable only if the speaker didn’t genuinely believe them, if they embed false facts, or if they omit material information about the basis for the opinion that conflicts with what a reasonable investor would infer.
Janus “maker” rule: The “maker” of a statement is the person or entity with ultimate authority over it. Being a drafter or spokesperson isn’t enough if the statement is attributed to the company.
Corporate scienter: A theory allowing attribution of scienter to a corporation without tying it to a specific individual. The Third Circuit has not adopted it and suggests it applies, if at all, only in rare, obvious cases.
Duty to disclose: Companies must disclose information in limited circumstances. They must not omit facts necessary to keep what they say from being misleading, but they do not have to disclose every material fact, and there is no general duty to update absent specific predicates.
“Omission” under 10b‑5(b): An omission requires leaving out information the speaker knew at the time. Without contemporaneous knowledge, there is nothing to omit.
Triple-net leases and reimbursement draws: In triple-net leases, tenants pay most property expenses. Reimbursement arrangements allocate capital improvement funds; tenants submit “draw requests” with supporting documentation to be reviewed before disbursement.
Short-seller reports: Publications that critique a company and argue its share price is too high. They often prompt issuer responses; sweeping responses can create risk if phrased as absolutes.

Conclusion

Handal delivers several important clarifications in Third Circuit securities law. The court:

Adopts the principle that willful blindness can establish scienter under Section 10(b) and Rule 10b‑5, aligning with other circuits, while emphasizing the high bar to plead it.
Reaffirms the narrow, context-dependent nature of opinion liability under Omnicare, particularly for generalized praise and reputation statements.
Insists on precision in reading issuer disclosures, giving legal effect to qualifying language like “typically” and “in some instances,” and rejecting attempts to convert tenant-level failures into portfolio-wide falsity.
Underscores post‑Macquarie limits on omission claims: plaintiffs must identify the “statements made” and allege contemporaneous knowledge of the omitted facts.
Applies Janus to attribute corporate press releases to the issuer, not to individual executives absent allegations of ultimate authority.
Declines, again, to embrace corporate scienter and signals the doctrine’s narrowness even where recognized.

For issuers, especially those responding to short-seller critiques or describing due diligence and monitoring processes, Handal is both a caution and a shield: avoid categorical “always/only/never” claims you cannot verify, but know that qualifying language, faithful adherence to context, and the absence of contemporaneous knowledge substantially mitigate 10b‑5 exposure. For plaintiffs, the decision spotlights the PSLRA’s rigor: to survive dismissal, one must plead specific false statements, contemporaneous contradictory knowledge (or willful blindness to it), and a strong inference of scienter that is at least as compelling as nonfraudulent explanations. As such, Handal will likely shape the pleading and defense of securities class actions in the Third Circuit for years to come.