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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 theory” in a...

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