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.Continue Reading Pleading Corporate Scienter: Does Janus Inform the Analysis?