Speech Without Speakers: Eliminating Artificial Barriers to Pleading Corporate Scienter in Securities Fraud Claims

Authors

Jennifer Ligansky, Fordham University School of Law

Keywords

Securities fraud, 10b–5, Private Securities Litigation Reform Act, PSLRA, pleading scienter, heightened standard, corporation defendant, speaker approach, speech approach, strict respondeat superior, history and purpose of the PSLRA, securities regulation, circuit split, Securities Exchange Act

Abstract

To successfully plead securities fraud claims under Rule 10b–5, the Private Securities Litigation Reform Act (“PSLRA”) requires that plaintiff-investors raise a “strong inference” that the defendant acted with scienter when issuing a false statement. But pleading scienter presents a challenging issue when the defendant is not a person, but an entity. When the defendant is a corporation, U.S. Circuit Courts of Appeals have adopted different approaches for determining whether the plaintiff has pleaded a strong inference of scienter. Some circuits hold that plaintiffs can raise a strong inference of corporate scienter only if the complaint identifies a speaker who knew her statement was false. Other circuits hold that, in certain instances, plaintiffs can successfully plead corporate scienter without identifying an individual who acted with scienter. In these cases, a plaintiff raises a strong inference of corporate scienter by identifying a dramatically false statement about the company’s core operations. When a corporation issues a statement about a core operation that is so dramatically false, it is reasonable to infer that the corporate officials who made such statements knew they were false.

This Note argues that this latter approach, although a correct application of the PSLRA, is unnecessarily limited to dramatically false statements about a company’s core operations. Instead, courts should analyze whether a dramatically false statement raises a strong inference of corporate scienter on a case-by-case basis. The reasoning underlying this approach, that corporate officials likely know the truth when they issue dramatically false statements concerning core products, applies with equal force when the statement concerns any subject that substantially impacts the company’s financial condition and future prospects. Expanding this approach will properly allow plaintiffs to raise a strong inference of scienter against companies that issue dramatically false statements touting the growth and success of their emerging products, even though such products are not yet “core” to the company’s operations.

Recommended Citation

Jennifer Ligansky, Note, Speech Without Speakers: Eliminating Artificial Barriers to Pleading Corporate Scienter in Securities Fraud Claims, 29 Fordham J. Corp. & Fin. L. 765 (2024).