The 2nd Circuit agreed with a district court finding that a plaintiff need show actionable scienter by individual defendants in order to show corporate scienter. The panel concluded, however, that while even though the lack of individual scienter did not preclude a similar finding against the corporate entity, the plaintiffs in this instance failed to show the requisite fraudulent intent by other means. As the court stated, "Although there are circumstances in which a plaintiff may plead the requisite scienter against a corporate defendant without successfully pleading scienter against a specifically named individual defendant, the plaintiff here has failed to do so."
The district court held that the allegations that the corporation systematically disregarded various indicia of borrowers' creditworthiness in order to quickly consummate large volumes of loans and ignored signs that the bond collateral was defective after the loans were originated were sufficient to infer scienter on the part of the corporation itself. However, the 2nd Circuit panel stated that the complaint "lacks even an allegation that these data had been collected into reports that demonstrated that loan origination practices were undermining the collateral’s performance. Accordingly, they have not raised an inference of scienter based on knowledge of or access to information."
The court also found that claims of a duty to monitor or a motive and opportunity to commit fraud failed to show corporate scienter. The court cited that "they have not specifically identified any reports or statements that would have come to light in a reasonable investigation and that would have demonstrated the falsity of the allegedly misleading statements." Additionally, the "proffered motive is the same desire to maintain the appearance of profitability that we have consistently rejected as insufficient in securities fraud pleading."
The appeals panel stated that the complaint "fails to allege the existence of information that would demonstrate that the statements made to investors were misleading" and did not allow the court to "infer that someone whose scienter is imputable to the corporate defendants and who was responsible for the statements made was at least reckless toward the alleged falsity of those statements. "
The court found that the inferences raised in the complaint were not "at least as compelling as the competing inference" and that "the statements either were not misleading or were the result of merely careless mistakes at the management level based on false information fed it from below."