(Article from Securities Law Alert, Year in Review 2017)
For more information, please visit the Securities Law Alert Resource Center
First Circuit: Alleging Defendants’ Knowledge of Undisclosed Facts Is Insufficient to Plead Scienter; Plaintiffs Must Also Allege Defendants Knew or Should Have Known the Omissions Would Mislead Investors
On April 7, 2017, the First Circuit held that defendants’ alleged knowledge of undisclosed facts is not sufficient, standing alone, to raise an inference of scienter. Brennan v. Zafgen, 853 F.3d 606 (1st Cir. 2017). Rather, plaintiffs must also allege that defendants “knew or should have known that their failure to disclose those facts risked misleading investors.”
Fourth Circuit: Allegations Sufficient to Raise an Inference of the Speaker’s Knowledge of a Statement’s Falsity Do Not, Standing Alone, Satisfy the Scienter Pleading Requirement
On November 15, 2017, the Fourth Circuit held that allegations raising an inference of a CEO’s knowledge of a statement’s falsity were not “sufficient to show that [the CEO] acted intentionally or recklessly to deceive, manipulate, or defraud.” Maguire Fin. v. PowerSecure Int’l, 876 F.3d 541 (4th Cir. 2017). The Fourth Circuit reasoned that “scienter and knowledge with respect to misrepresentation are distinct components of the requisite analytical framework.” The court stated that “[t]o conflate the two … would read the scienter element out of the analysis in contravention of the … exacting pleading standard” established by the PSLRA.