June 4, 2010

Whither Collective Scienter?

Under the collective scienter theory, it is possible for a plaintiff to adequately plead scienter with respect to a corporate defendant even where the plaintiff is unable to adequately plead scienter with respect to any individual corporate employee who made a false statement. There is a circuit split on the issue, with the Second Circuit and Seventh Circuit adopting the theory and the Fifth Circuit rejecting the theory. That leaves a lot of room for district courts in other circuits to come to their own conclusions.

In City of Roseville Employees' Retirement System v. Horizon Lines, Inc., 2010 WL 1994693 (D. Del. May 18, 2010), the court considered the potential liability of the corporate defendants (Horizon and a wholly-owned subsidiary) for making false statements related to a price fixing conspiracy. Certain of the corporate defendants' officers had already plead guilty to price fixing. The court declined to apply the collective scienter theory, finding that the Third Circuit's rejection of group pleading (i.e., the presumption that the senior officers of a company are collectively responsible for any misrepresentations contained in the company's public statements) made the appellate court unlikely to adopt collective scienter. Instead, the court followed the Fifth Circuit's requirement that there must be "a showing that at least one individual officer who made, or participated in the making of, a false or misleading statement did so with scienter."

The officers who had plead guilty to criminal charges were not alleged to have made any public statements on behalf of the corporate defendants. Nevertheless, the plaintiffs argued that these officers "participated" in the making of the statements because the corporations must have obtained the false data from them. As a result, the plaintiffs argued, the scienter of these officers should be imputed to the corporations. The plaintiffs provided no facts to support their assertion about the source of the false data and the court declined to find that corporate scienter had been adequately established.

Holding: Complaint dismissed with prejudice as to certain defendants.

Posted by Lyle Roberts at June 4, 2010 10:59 PM | TrackBack
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