9th Circuit Rejects Collective Scienter

Must a fraud plaintiff plead facts showing that the particular individual who made allegedly actionable misstatements acted with scienter in order to recover against a corporate defendant? The 9th Circuit, in Glazer Capital Management LP v. Magistri (In re Invision Technologies Inc. Securities Litigation), joined the list of circuit courts that have answered "yes" to that question (for a discussion of other cases, click here).

The 9th Circuit did not quite rule out any situation in which there could be a finding of corporate scienter absent actionable individual intent, but it certainly indicated that this would require highly unusual circumstances, in which "a company’s public statements were so important and
so dramatically false that they would create a strong inference that at least some corporate officials knew of the falsity upon publication.

The case arose from a merger between Invision, a maker of explosive detection systems, and General Electric. In the merger agreement, attached as an exhibit to Invision's Form 10-K, the company warranted to GE that it was "in compliance in all material respects with all laws" in general, and with the books and records and anti-bribery provisions of the Exchange Act in particular. Subsequently, the company disclosed violations of the Foreign Corrupt Practices Act.

The court expressed skepticism about collective scienter in this factual situation, stating that if "the doctrine of collective scienter excuses Glazer from pleading individual scienter with respect to these legal warranties, then it is difficult to imagine what statements would not qualify for an exception to individualized scienter pleadings."

The panel then found that the CEO, who signed the merger agreement, lacked the requisite intent because the pleadings did not indicate any knowledge of the FCPA violations at the time of the merger agreement. The payments in question were not "the type of transaction of which it would be `hard to believe' senior officials were unaware," stated the court (for a discussion of the "core operations" inference, click here). Absent other particularized indications of fraud, the fact that the officers signed Sarbanes-Oxley certifications and could profit from the merger were insufficient to show individual scienter.