A court must consider a securities fraud complaint under 15 U.S.C.S. § 78j(b) in its entirety, as well as other sources courts ordinarily examine when ruling on Fed. R. Civ. P. 12(b)(6) motions to dismiss, in particular, documents incorporated into the complaint by reference, and matters of which a court may take judicial notice. The inquiry is whether all of the facts alleged, taken collectively, give rise to a strong inference of scienter, not whether any individual allegation, scrutinized in isolation, meets that standard.
Shareholders of a corporation brought a securities fraud action against the officer of the corporation, alleging that the officer deceived the public concerning the value of the corporation's stock. The shareholders contended that their allegations were sufficient to establish a strong inference that the officer acted with the intent to deceive, manipulate, or defraud, as required by § 78u-4(b)(2).
The officer argued that the shareholders failed to allege any financial motive of the officer to support scienter and offered vague and ambiguous allegations. Upon the grant of a writ of certiorari, the officer challenged the judgment of the Court of Appeals which held that the shareholders sufficiently pleaded scienter under 15 U.S.C.S. § 78u-4(b)(2). The judgment holding that scienter was sufficiently alleged was vacated, and the case was remanded for further proceedings.
Can a plaintiff alleging fraud simply plead facts that would lead a reasonable person to make an inference that the defendant had the requisite intent?
The U.S. Supreme Court held that, while the shareholders' allegations plausibly permitted an inference of the requisite scienter (scienter is the state of knowing something, whether the thing known is general or specific to some purpose) further analysis was required to determine whether the inference of fraudulent intent was a powerful or cogent inference which was at least as compelling as any opposing inference of nonfraudulent intent.
The strong inference of scienter required by § 78u-4(b)(2) was not required to be irrefutable or even the most plausible inference, but the strength of the inference could not be evaluated in a vacuum and consideration of plausible, nonculpable explanations for the officer's conduct was required. Further, any lack of pecuniary motive on the part of the officer did not by itself preclude a finding of scienter, and any ambiguities in the shareholders' allegations were relevant but not determinative.