What Do You Know? A Statutory and Precedential Approach to Corporate Scienter

Abstract

Every year, hundreds of private lawsuits alleging violations of Section 10(b)’s antifraud provision of the Securities Exchange Act are filed in federal courts. These litigations have a substantial impact on the national economy, with millions of dollars at stake in most lawsuits. While the Supreme Court has clarified many questions of ambiguity within the Private Securities Litigation Reform Act of 1995 (PSLRA), the Court has not opined on the scienter requirement for claims involving a corporate defendant. A circuit split has thus developed surrounding “corporate scienter.” When permitted, this doctrine allows a plaintiff to meet the PSLRA’s pleading requirement by alleging one person had the requisite state of mind and another person committed the fraudulent act. The corporate scienter doctrine therefore allows the plaintiff to more easily bring a lawsuit against a corporate defendant, leading to the potential for forum shopping and inequitable results among defendants. I examine the current circuit split, which was fractured even more after the Sixth Circuit’s recent creation of a new pleading standard. After examining the current approaches to corporate scienter, I study the text and structure of the PSLRA to argue for a new approach to corporate scienter. My suggested approach would require plaintiffs to demonstrate that an executive officer made or approved a fraudulent statement and that that officer had actual knowledge of the statement’s falsity. Such an approach comports with prior, related case law and the structure of the statute.