Courts continue to struggle with the question of how to determine the scienter (i.e., fraudulent intent) of a defendant corporation. Should a court examine the collective knowledge of the corporation’s employees (collective scienter theory) or should it look to the state of mind of the individual corporate official or officials who made the false or misleading statement (which some courts have found is required under the common law of agency)? As The 10b-5 Daily has noted, between these two positions is a weaker version of the collective scienter theory that allows a plaintiff to establish the scienter of a defendant corporation by showing that a management-level employee of the corporation acted with knowledge or recklessness, even if that employee was not an individual defendant and did not make any alleged false statements.
The weaker version of the collective scienter theory, however, suffers from a lack of judicial uniformity as to exactly which employees can have their state of mind imputed to the corporation. One possible definition can be found in a recent decision – Hill v. The Tribune Co., 2006 WL 2861016 (N.D. Ill. Sept. 29, 2006) – dismissing a securities class action. The court found that a “corporation’s scienter is generally limited to being based on knowledge or scienter of a senior officer or director of the corporation, or an employee involved in issuing the alleged misrepresentation.” Because the plaintiffs were unable to “adequately allege that those responsible for [Tribune’s] SEC filings and press releases recklessly relied on the circulation figures that were provided” by lower-level employees, the court held that the defendant corporation’s scienter was not adequately alleged.