The Locus of Corporate Scienter

Abstract

Consider the following scenario: A corporation issues an earnings report containing various misrepresentations regarding its financial status. These fraudulent misrepresentations cause injury to the current shareholders of the corporation and intimate a much larger, systematic fraud conceived at the core of the corporation’s “numbers driven” culture. After the fraud is discovered, the corporation’s stock price plummets, setting off the legal equivalent of a five-alarm fire; both criminal prosecutors and the civil plaintiffs’ bar comb through the wreckage for a responsible party. The chief executive officer of the corporation is indicted, convicted, and sentenced to twenty-five years in prison for her part in the fraud, and her personal wealth is disgorged for the benefit of injured shareholders. On the civil side, a class action suit proceeds against a number of defendants, including the issuer corporation, pursuant to Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The defense attorneys representing the corporation seek dismissal of the suit on the grounds that the corporation did not possess the requisite scienter for a finding of liability. A corporation, by definition, is a “body formed and authorized by law to act as a single person although constituted by one or more persons and legally endowed by various rights and duties.” From a jurisprudential standpoint, this seemingly straightforward dictionary definition is a paradoxical Gordian Knot with which courts and commentators have struggled for centuries. It is in the realm of offenses requiring specific intent that this theoretical struggle is played out most dramatically. Given the epistemological conundrum of ascribing liability to a lifeless entity, three questions inevitably arise: (1) How does one properly attribute an “act” to a corporation; (2) How does one properly ascribe intent to a corporation; and (3) Must the imputed corporate action and the imputed corporate intent intersect in one individual actor? This Article addresses the latter two questions and attempts to furnish a workable solution to them in the context of civil securities fraud cases.