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Where a defendant is a corporation, this requires pleading facts that give rise to a strong inference that someone whose intent could be imputed to the corporation acted with the requisite scienter. Ascribing a state of mind to a corporate entity is a difficult and sometimes confusing task. This is true not because collective intent is an oxymoron, but because the hierarchical and differentiated corporate structure often muddies the distinction between a deliberate fraud and an unfortunate (yet unintentional) error caused by mere mismanagement. In response to this problem, most courts look to the discrete roles played by the corporate actors who are connected to the alleged misrepresentation to determine which (if any) fall within the locus of a company's scienter. Under this approach, the most straightforward way to raise a strong inference of corporate scienter is to impute it from an individual defendant who made the challenged misstatement. The scienter of the other officers or directors who were involved in the dissemination of the fraud may also be imputed to the corporation, even if they themselves were not the actual speaker. But a shareholder need not always identify the individuals responsible for the fraudulent statement. In exceedingly rare instances, a statement may be so dramatic that collective corporate scienter may be inferred.
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 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.
Did Jackson's proposed amended complaint raise a strong inference of collective corporate scienter?
In this Securities Exchange Act of 1934 action, the court affirmed the denial of Jackson’s motion to file an amended complaint alleging that two manufacturers of medical equipment intentionally misled shareholders about the quality of one of their surgical gown products through a series of fraudulent misstatements because while Jackson’s allegations supported a strong inference that employees knew of issues with the surgical gown, Jackson had not alleged facts sufficient to impute their knowledge to the corporate entities.