Following is an article I wrote for Law360, which gave me permission to republish it here:

Among securities litigators, there is no consensus about the importance of developments in securities and corporate governance litigation.  For some, a Supreme Court decision is always supreme.  For others, a major change in a legal standard is the most

This year will be remembered as the year of the Super Bowl of securities litigation, Halliburton Co. v. Erica P. John Fund, Inc. (“Halliburton II”), 134 S. Ct. 2398 (2014), the case that finally gave the Supreme Court the opportunity to overrule the fraud-on-the-market presumption of reliance, established in 1988 in Basic v.

In defending a securities class action, a motion to dismiss is almost automatic, and in virtually all cases, it makes good strategic sense.  In most cases, there are only four main arguments:

  • The complaint hasn’t pleaded a false or misleading statement
  • The challenged statements are protected by the Safe Harbor for forward-looking statements
  • The

Public companies around the country labor under a misunderstanding:  that the Private Securities Litigation Reform Act’s Safe Harbor protects them from liability for their guidance and projections if they simply follow the statute’s requirements.  But the Safe Harbor is not so safe – because they think it goes too far, many judges go to great

The recurring and pervasive problem of flawed confidential witness (“CW”) allegations tops my list of the key issues in securities class action litigation.*  I don’t mean just notorious situations such as those recently at issue in the Lockheed, SunTrust, and Boeing securities class actions – which I discussed in an earlier post and

In our post in the immediate wake of the Supreme Court’s decision in Amgen Inc. v. Connecticut Retirement Plans, we concluded that rather than being a new threat to the defense of securities class actions, Amgen basically endorsed the status quo: In holding that plaintiffs do not need to establish that allegedly false statements

Two recent cases from the Southern District of New York discussed the application of the Supreme Court’s opinion in Janus to pleading corporate scienter in Reform Act cases.  Judge Pauley, in Pennsylvania Public School Employee’s Retirement System v. Bank of America Corporation, came to the conclusion that Janus does not inform the pleading of corporate scienter, although perhaps only on procedural grounds.  Judge Sullivan in In re UBS AG Securities Litigation, came to a similar result, while concluding that Janus put an end to the “group pleading doctrine.”  The cases highlight the difficulties courts face, on a motion to dismiss, in applying tests for scienter, when the issue is not the scienter of an individual defendant, but the scienter of a corporate defendant.  As a practical matter, that may mean that motions to dismiss for failure to adequately plead scienter of a corporate defendant may be more difficult to obtain.

Despite the view of some that “corporations are people too,” corporations cannot literally speak or think, and cannot therefore literally make a false statement or form an intent to defraud.  They speak and think only through their agents.  In the typical securities case, the individual director or officer defendants are the “agents” who both make a statement and allegedly know of its falsity.  But what of the case where the pleadings do not adequately allege that the individual defendants spoke with the requisite scienter, can the pleadings still demonstrate that the corporate defendant had any intent to defraud?

The Second Circuit, in Teamster’s Local 455 Freight Persian Fund v. Dynex Capital Inc.  observed that “it is possible to raise the required inference [of corporate scienter] without doing so with regard to a specific individual defendant.”  And in a well-known hypothetical, the Seventh Circuit, on remand, following the Supreme Court’s decision in Tellabs, hypothesized:

Suppose General Motors announced that it had sold one million SUVs in 2006 and the actual number was zero.  There would be a strong inference of corporate scienter, since so dramatic an announcement would have been approved by corporate officials sufficiently knowledgeable about the company to know that the announcement was false.

Inferring corporate scienter makes some sense in such a situation because what the court is really inferring is that someone who can be held responsible for making the statement knew that it was false.  This makes the corporate scienter inquiry very similar to the “core operations” inference, under which, courts can infer scienter in certain situations involving such blatant falsity that it would be “absurd to suggest” that management was without knowledge of the matter.


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