Second Circuit Scienter

When the Second Circuit (OK, OK all you bowtied appellate geeks, a Panel of the Second Circuit) speaks out on scienter, you had better listen. You see, they say that the “appropriate lens for understanding Plaintiffs' allegations is to evaluate whether they assert the kind of "conscious recklessness" that we have found to create a strong inference of scienter.” That’s because “the requisite inference of intent may not be based on the types of motives shared by virtually all public companies and corporate insiders, but rather may arise where the complaint sufficiently alleges that the defendants: (1) benefited in a concrete and personal way from the purported fraud; (2) engaged in deliberately illegal behavior; (3) knew facts or had access to information suggesting that their public statements were not accurate; or (4) failed to check information they had a duty to monitor."

So, since “Plaintiffs' Complaint lacks adequate allegations that Defendants were undertaking the challenged transactions for motives other than long-term profitability through the cultivation of major clients,” and it “also does not sufficiently allege that Defendants were undertaking the challenged transactions with contemporaneous knowledge that its transactions with Enron and other prominent clients were illegal under generally accepted accounting principles or were proceeding in a manner that easily can be foreseen to result in harm,” the dismissal is affirmed.

You can read the unpublished Fadem v. Citigroup, issued February 6, 2006, at 165 Fed. Appx. 928.

Nugget: “Because we agree that the issue of scienter was not adequately pleaded, we need not reach the issue of the sufficiency of Plaintiffs' allegations of falsity.”