Second Circuit Reaffirms Stringent Standard for Pleading Corporate Scienter in Securities Fraud Class Actions

June 5, 2020

It is well-settled under the PSLRA’s heightened pleading standards that a securities fraud plaintiff must allege particularized facts giving rise to a strong inference of scienter.

However, courts have occasionally struggled to set forth clear standards for how this burden can be met with respect to a corporation (as opposed to an individual defendant). In a per curiam opinion issued last week, the Second Circuit provided important guidance on the standards for pleading corporate scienter, holding that—in all but “exceedingly rare instances”—the plaintiff must plead particularized facts connecting employees with knowledge of the underlying issues to the challenged misstatements.

Further, the Second Circuit also declined to adopt the so-called “core operations” doctrine, under which a plaintiff asks a court to assume that a company would be aware of all issues involving its key product, holding that “[s]uch a naked assertion, without more, is plainly insufficient to raise a strong inference of collective corporate scienter.” And, the Second Circuit also rejected the suggestion that a jury verdict finding that a company intentionally misled consumers in violation of consumer protection laws necessarily established scienter in the context of a securities fraud action.

This Memorandum provides an overview of the Second Circuit’s decision and its implications for courts resolving whether a plaintiff has adequately pleaded corporate scienter.