|  | | 2006 News and Press Releases | | |
HEADLINE NEWS:
Determining Fraudulent Intent Splits Courts
Pamela A. MacLean
The National Law Journal. December 4, 2006
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EXCERPT: Should plaintiffs' lawyers have to name a specific executive with fraudulent intent in order to proceed with a shareholder securities fraud suit against the company, or is it enough to hold a firm to account if any employee had the requisite guilty knowledge?
Federal appeals courts have conflicting opinions about whether fraudulent intent must be determined by the state of mind of individual corporate officials or whether the collective knowledge of a corporation's employees will suffice. The concept of 'collective scienter,' or guilty knowledge, as a basis for corporate liability has been rejected in the past two years by the 5th and 9th U.S. circuit courts of appeals but embraced by the 6th. And district judges in Illinois, New Jersey and New York are giving more credence to the concept of collective scienter. An appeal pending in the 2d Circuit may clarify whether the issue dies or heads for the Supreme Court. In re Dynex Capital, Inc. Securities Litigation, 2006 WL 314524. If the 2d Circuit joins the 6th and broadens the use of collective scienter, it could greatly expand the potential for corporate liability in shareholder class actions, despite the higher pleading standards imposed in 1995 by the Private Securities Litigation Reform Act, said Joseph Sacca, with Skadden, Arps, Slate, Meagher & Flom in New York. 'This is a critical defense theory for companies, said Jeffrey Goldfarb of Akin Gump Strauss Hauer & Feld's Dallas office, a specialist in securities and appellate litigation. 'It would not surprise me if the Supreme Court took this up at some point. There is clearly disarray and it clearly is an important issue....It is heavily litigated and involves important public policy.' Plaintiffs' lawyers consider it significant as well. 'What's at stake is the ability to plead a securities fraud case where you have evidence and alleged specific facts about corporate misconduct but do not yet have sufficient information to identify a particular officer,' said Joel Laitman, with Schoengold Sporn Laitman & Lometti in New York and a plaintiffs' counsel in the Dynex case. … In the Dynex appeal, Judge Harold Baer Jr. refused to dismiss the suit against Dynex, but allowed an appeal to the 2d Circuit on the issue pointing to differing opinions from the circuit, the most recent suggesting approval of collective scienter. |
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