In a much-anticipated recent opinion, Teamsters Local 445 Freight Division Pension Fund v. Dynex, 2008 U.S. App. LEXIS 13449, the Second Circuit has held that a plaintiff may plead a cause of action against a corporation under federal securities laws without pleading scienter as to a specifically named individual, as long as the pleaded facts “create a strong inference that someone whose intent could be imputed to the corporation acted with the requisite scienter.” However, emphasizing the stringent pleading requirements for securities fraud claims, the Second Circuit reversed a prior district court opinion and held that the plaintiff had failed to satisfy that standard.
In Dynex, the plaintiff, a securities purchaser, had brought claims against both corporate and individual defendants for violations of sections 10(b) and 20(a) of the Exchange Act. The district court, finding that the plaintiff had “aptly described a pattern of reckless corporate behavior” but “failed to link that behavior to any culpable individuals,” dismissed the complaints against the individual defendants, but not the corporations. Defendants appealed, arguing that the dismissal of claims against the individuals precluded as a matter of law an inference of scienter on the part of the corporations, and that permitting such a pleading would be equivalent to endorsing the doctrine of “collective scienter”.
However, the Second Circuit rejected the defendants’ reasoning, emphasizing the distinction between proof and pleading requirements. To demonstrate liability on the part of a corporation, it noted, the plaintiff must still “prove that an agent of the corporation committed a culpable act with the requisite scienter, and that the act (and accompanying mental state) are attributable to the corporation.” For pleading purposes, on the other hand, the complaint need not identify the corporate agent who acted with the requisite scienter. The court, citing the recent Seventh Circuit opinion in Tellabs, explained that “it is possible to draw a strong inference of corporate scienter without being able to name the individuals who concocted and disseminated the fraud.” For example, if a corporation issued a public factual statement that was blatantly fraudulent, a strong inference of corporate scienter could arise “since so dramatic an announcement would have been approved by corporate officials sufficiently knowledgeable about the company to know that the announcement was false.” Nonetheless, in practical terms, commentators question how often plaintiffs will be able to satisfy the detailed securities fraud pleading requirements without identifying the particular individuals involved.
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