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Courts Raise Specter Of ‘Collective’ Scienter

Martinek Paul J. | September 19, 2006

In a potentially ominous development for corporations, a handful of decisions by federal judges in New York have strayed from the traditional rule that a company can’t be found to have had fraudulent intent—known in the law as scienter—unless the individual making a false or misleading material statement actually had such an intent.

Under a new theory of “collective scienter,” fraudulent intent can be imputed to the corporation by aggregating the intent of employees who had nothing to do with a false corporate statement. At its most extreme, the knowledge of a janitor who came across a discarded document in the trash in a remote office could be the basis of finding that a corporation knew a statement was false.

The theory has been flatly rejected by two federal circuit courts: the 5th Circuit in New Orleans and the 9th Circuit in San Francisco. But the 6th Circuit in Cincinnati “seemed to apply the collective scienter... To get the full story, subscribe now.