Note: Clear Support or Cause for Suspicion? A Critique of Collective Scienter in Securities Litigation

By Kevin M. O’Riordan. Full text here.

This Note takes the position that emerging collective scienter theory may bar courts from attributing liability for securities fraud under SEC Rule 10b-5 directly to a corporation. Recent developments under the Private Securities Litigation Reform Act (PSLRA) seek to strengthen pleading standards in securities litigation by requiring that a plaintiff plead a strong inference of scienter on the part of a corporate defendant to survive a motion for dismissal. Federal district and appellate court decisions demonstrate the recent increasing support for collective scienter, a theory which allows a plaintiff to plead that one employee made a material misstatement while another had the requisite scienter. This Note examines representative cases applying the weak and strong forms of collective scienter and finds that each case misinterpreted the case law upon which it relied. Where case law fails to demonstrate the theory’s viability, comparative analogies to established legal concepts further call into question the feasibility of collective scienter. This Note contends, by analogy to the group pleading doctrine, that the strong version of collective scienter fails to comport with the PSLRA’s strong inference standard. Further, this Note finds that weak collective scienter’s expansion of standard corporate liability—normally attributed by common law agency principles—is unwarranted and unfeasible as a policy matter. Finally, this Note recommends a return to the application of respondeat superior in determining corporate liability.