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Jackson v. Abernathy

United States Court of Appeals for the Second Circuit

April 22, 2020, Argued; May 27, 2020, Decided

No. 19-1300-cv


Per Curiam:

This is a case about collective intent — or lack thereof. Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act") forbids a company or an individual from making a materially misleading statement to shareholders. But liability for such a statement requires proof that it was made with fraudulent intent. Where a defendant is an individual, demonstrating such intent is often straightforward. Where the defendant is a corporation, however, a plaintiff must show that the misstatement was not a case of mere mismanagement, but rather the product of collective fraudulent conduct. As a result, a plaintiff must plead facts that raise a strong inference of collective corporate scienter.

Plaintiff-Appellant Ronald Jackson argues that his proposed amended complaint makes that showing here. According to Jackson, the defendants — two manufacturers [*3]  of medical equipment — intentionally misled shareholders about the quality of one of their surgical gown products through a series of fraudulent misstatements. He asserts that the companies' malintent is clear because a handful of employees internally raised alarm that the surgical gown had failed several quality-control tests. But while Jackson's allegations support a strong inference that those employees knew of issues with the surgical gown, Jackson has not alleged facts sufficient to impute their knowledge to the corporate entities. And because Jackson has otherwise failed to plead facts tending to show that senior executives must have known that the challenged statements were false, we conclude that Jackson's proposed amended complaint does not raise a strong inference of collective corporate scienter.

I. Background

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2020 U.S. App. LEXIS 16754 *; 960 F.3d 94

RONALD JACKSON, individually and on behalf of all others similarly situated, Plaintiff-Appellant, v. ROBERT E. ABERNATHY, STEVEN E. VOSKUIL, KIMBERLY-CLARK CORPORATION, THOMAS J. FALK, MARK A. BUTHMAN, AVANOS MEDICAL, INC., Defendants-Appellees, HALYARD HEALTH, INC., Defendant.

Prior History:  [*1] Appeal from the United States District Court for the Southern District of New York. No. 16-cv-5093, Laura Taylor Swain, Judge. Appellant Ronald Jackson appeals the denial of his motion to file an amended securities fraud complaint against the manufacturers of an allegedly defective surgical gown. The district court (Swain, J.) denied Jackson's motion as futile because he failed to raise a strong inference of scienter against any of the defendants. On appeal, Jackson pursues only his claims against the corporate defendants. We affirm the district court's order, concluding that Jackson cannot raise a strong inference of collective corporate scienter by (1) relying on the knowledge of employees unconnected to the challenged statements or (2) pleading that the challenged statements concerned a key product with which the company's senior management would be expected to be familiar.

Jackson v. Avanos Med., Inc., 2019 U.S. Dist. LEXIS 55969 (S.D.N.Y., Mar. 31, 2019)

Disposition: AFFIRMED.


scienter, gown, imputed, senior, fraudulent, misstatements, surgical

Securities Law, Securities Exchange Act of 1934 Actions, Implied Private Rights of Action, Elements of Proof, Civil Procedure, Appeals, Standards of Review, Abuse of Discretion, Pleadings, Amendment of Pleadings, Leave of Court, De Novo Review, Postoffering & Secondary Distributions, Heightened Pleading Requirements, Elements of Proof, Scienter