Liberty University Law Review
Liberty University Law Review
Volume 11 Issue 1
Article 4
September 2016
And Then It Was Gone: a Critique of Section 10(B) Collective
And Then It Was Gone: a Critique of Section 10(B) Collective
Scienter Pleading in the Sixth Circuit's Bondali Decision
Scienter Pleading in the Sixth Circuit's Bondali Decision
Brock K. Bales
Follow this and additional works at:
https://digitalcommons.liberty.edu/lu_law_review
Recommended Citation
Recommended Citation
Bales, Brock K. (2016) "And Then It Was Gone: a Critique of Section 10(B) Collective Scienter Pleading in
the Sixth Circuit's Bondali Decision," Liberty University Law Review: Vol. 11 : Iss. 1 , Article 4.
Available at:
https://digitalcommons.liberty.edu/lu_law_review/vol11/iss1/4
A N D T H E N I T W A S G O N E : A C R I T I Q U E O F S E C T I O N
1 0 ( * ) C O L L E C T I V E S C I E N T E R P L E A D I N G I N T H E S I X T H
C I R C U I T S B O N D A L I D E C I S I O N
B r o c k K . B a le s
A B S T R A C T
W e ll . . . w e a r e [ a ll] a g a in st fr a u d , a r e n t w e ?
B u t h o w d o w e c h a n n e l o u r s h a r e d r e p u ls io n o f fr a u d in t o a n e ffe c tiv e le g a l s ta n d a r d ? T h is N o te p o s its th a t p le a d in g c o lle c tiv e s c ie n te r u n d e r a S e c tio n 1 0 ( b ) a n d R u le 1 0 b -5 is a ste p in th e w r o n g d ir e c tio n . A ste p o p p o site th a t o f th e m a jo r ity o f c ir c u it c o u r ts . T h e S ix th C ir c u it sh o u ld a b a n d o n its c o lle c tiv e s c ie n te r p le a d in g s ta n d a r d fo llo w in g its r e c e n t d e c isio n in B o n d a li v . Y u m ! B r a n d s , I n c ., a n d a d o p t a fe lic ito u s le g a l sta n d a r d lik e th e S e c o n d o r S e v e n th C ir c u its.
T h e iss u e o f c o lle c tiv e s c ie n te r
is b e s t d e s c r ib e d w ith a q u e s tio n : if n o s in g le in d iv id u a l e m p lo y e e o r o ffic e r w ith in a c o r p o r a tio n p o ss e ss e s th e s c ie n te r n e c e ss a r y fo r p le a d in g c o r p o r a te lia b ility u n d e r R u le 1 0 b - 5 a n d th e P r iv a te S e c u r itie s L itig a tio n R e fo r m A c t (P S L R A ), m a y a p la in tiff su r v iv e a m o tio n to d is m is s b y p le a d in g th e c o lle c tiv e s c ie n te r o f m a n y in d iv id u a ls w ith in th e c o r p o r a tio n ? C o lle c tiv e s c ie n te r a g g r e g a te s th e c o lle c tiv e k n o w le d g e o f a c o r p o r a tio n s e m p lo y e e s fo r th e p u r p o s e o f p le a d in g th a t th e c o r p o r a te d e fe n d a n t p o s se s se d th e r e q u isite sc ie n te r fo r a S e c tio n 1 0 ( b ) a n d R u le 1 0 b -5 p r iv a te c a u s e o f a c tio n .
C o lle c tiv e s c ie n te r is a u se le ss a d d e n d u m to a n a lr e a d y c o m p lic a te d p le a d in g a n a ly sis, a n d it c r e a te s d is u n ity a m o n g th e c ir c u it c o u r ts . C o n g r e ss in te n tio n a lly r a is e d th e b a r fo r p le a d in g c o r p o r a te se c u r itie s fr a u d w ith th e P S R L A s st r o n g in fe r e n c e la n g u a g e , a n d th e S u p r e m e C o u r t in te n tio n a lly lim it e d th e s c o p e o f th e p r iv a te c a u s e o f a c tio n it c r e a te d . C o lle c tiv e s c ie n te r is a ju d ic ia l c o n str u c t d e sig n e d to c ir c u m v e n t th e h e ig h te n e d p le a d in g sta n d a r d ,
N o tes a n d C o m m e n ts E d ito r, L IB E R T Y U N IV E R SIT Y L A W R E V IE W , V o lu m e 1 1 . J.D . C a n d id a te , L ib erty U n iv e rsity S c h o o l o f L a w (2 0 1 7 ); B S , B u sin e ss A d m in istra tio n : F in a n c e , L ib e rty U n iv e rsity , 2 0 1 4 . S o li D e o G lo ria . A ll I a m an d e v e r h o p e to b e I o w e to m y d a rlin g p a re n ts a fa th e r w h o ta u g h t m e h o w th e m in d th in k s, a n d a m o th e r w h o ta u g h t m e h o w th e h ea rt c a re s.
a n d a s s u c h , it is c o n tr a r y to c o n g r e s sio n a l in te n t a n d S u p r e m e C o u r t p r e c e d e n t in lim itin g th e S e c tio n 1 0 ( b ) p r iv a te c a u se o f a c tio n .
T h e S ix th C ir c u it sh o u ld r e ta in a fo c u s o n th e s tr o n g in fe r e n c e la n g u a g e to th e e x c lu s io n o f in q u ir in g in to c o lle c tiv e s c ie n te r . T h e p la in tiff w o u ld p le a d th e r e q u ir e d s ta te o f m in d o f th e c o r p o r a tio n its e lf in a c c o r d a n c e w ith th e s tr o n g in fe r e n c e la n g u a g e a s th e S e c o n d C ir c u it h e ld in T e a m s te r s L o c a l 4 4 5 F r e ig h t D iv isio n P e n s io n F u n d v . D y n e x C a p ita l, In c ., a n d th e S e v e n th C ir c u it h e ld in T e lla b s, In c . v . M a k o r Is su e s a n d R ig h ts , L td . W h e n s p e c ific in d iv id u a l o ffic e r s c a n n o t b e n a m e d fo r th e im p u ta tio n o f s c ie n te r to th e c o r p o r a tio n , it is m u c h s im p le r to a r g u e th a t th e s in g u la r d e fe n d a n t , th e c o r p o r a tio n , m a d e m iss ta te m e n ts w h ic h , in th e e n d , it d id th r o u g h its e m p lo y e e s r a th e r th a n to in q u ir e in to w h e th e r m u lt ip le in d iv id u a ls c a n b e lo c a te d in th e c o r p o r a tio n w h o to g e th e r p o s se ss th e r e q u isite s c ie n te r to p le a d S e c tio n 1 0 ( b ) lia b ility . I n th is m a n n e r , th e la n g u a g e o f t h e P S L R A a s in g u la r d e fe n d a n t a n d a s tr o n g in fe r e n c e sta n d a r d m a in ta in s its fu ll e ffe c t w ith o u t c o n fu s io n .
I. I N T R O D U C T IO N
W e ll . . . w e a r e [ a ll] a g a in s t fr a u d , a r e n t w e ? B u t h o w d o w e c h a n n e l o u r s h a r e d r e p u ls io n o f fr a u d in t o a n e ffe c tiv e le g a l s ta n d a r d ? T h is N o te p o s its th a t p le a d in g c o lle c tiv e s c ie n te r u n d e r a S e c tio n 1 0 ( b )
!
a n d R u le 1 0 b
-5
"
is a s te p to o fa r in th e w r o n g d ir e c tio n . M o s t c ir c u it c o u r ts a g r e e th a t c o lle c tiv e s c ie n te r is n o t th e p r o p e r m e a n s o f p le a d in g c o r p o r a te s c ie n te r w h e n th e p la in tiff c a n n o t id e n tify a s p e c ific in d iv id u a l c o r p o r a te o ffic e r .
#
R a th e r , th e fo c u s s h o u ld b e o n r e s p o n d e a t s u p e r io r lia b ility a n d th e s t r o n g in fe r e n c e la n g u a g e o f th e P r iv a te S e c u r it ie s L itig a tio n R e fo r m A c t
2 . M ilto n V . F re e m an , C o n feren ce o n C o d ifica tio n o f th e F ed era l S ecu rities L a w s: A d m in istra tiv e P ro ced u re s, 2 2 B U S. L A W . 7 9 3 , 9 2 2 (1 9 6 7 ) (s ta tem e n t m a d e b y S u m n er P ik e u p o n a p p ro v in g S e ctio n 1 0 (b )).
3 . S e c u ritie s E x ch an g e A ct o f 1 9 3 4 , c h . 4 0 , tit. I, § 1 0 (co d ified a s a m e n d ed a t 1 5 U .S .C . § 7 8 j(b ) (2 0 1 1 )).
(b ) T o u se o r e m p lo y , in co n n e c tio n w ith th e p u rc h a se o r sa le o f a n y se c u rity re g iste re d o n a n a tio n a l sec u rities ex ch a n g e o r a n y se c u rity n o t so re g iste red , o r a n y se c u ritie s-b ase d sw a p a g re e m en t[,] a n y m a n ip u la tiv e o r d e c ep tiv e d ev ic e o r c o n tr iv a n c e in c o n tra v e n tio n o f su c h ru le s a n d re g u la tio n s as th e C o m m issio n m a y p resc rib e as n e ce ssa ry o r a p p ro p riate in th e p u b lic in te rest o r fo r th e p ro te c tio n o f in v e sto rs.
Id .
( P S L R A ) .
$
T w o c ir c u its r e je c t c o lle c tiv e s c ie n te r , a n d th r e e c ir c u its r e je c t c o lle c tiv e s c ie n te r a s a m a tte r o f e m p h a s iz in g th e s tr o n g in fe r e n c e la n g u a g e o f th e P S L R A .
%
T h e la tte r a p p e a r s to b e c lo s e s t to S u p r e m e C o u r t p r e c e d e n t.
&
T h e S ix th C ir c u it s ta n d s a lo n e in its a d o p tio n o f th e c o lle c tiv e s c ie n te r s t a n d a r d .
'
I t is th e p o s itio n o f th is N o te th a t th e S ix th C ir c u it s h o u ld a b a n d o n c o lle c tiv e s c ie n te r a fte r its r e c e n t d e c is io n in B o n d a li v . Y u m ! B r a n d s , I n c .
A fte r p r o v id in g a b a c k g r o u n d fo r th e c o lle c tiv e s c ie n te r is s u e , th is N o te w ill s u p p o r t its p o s itio n w ith th e fo llo w in g a r g u m e n ts : c o lle c tiv e s c ie n te r d o e s n o t c o m p o r t w ith c o n g r e s s io n a l in te n t c ir c u m s c r ib in g c o r p o r a te lia b ility u n d e r S e c tio n 1 0 ( b ) th r o u g h th e P S L R A ;
th e s tr o n g in fe r e n c e s ta n d a r d a s a d o p te d b y th e S e c o n d a n d S e v e n th C ir c u its p r o v id e s a b e tte r s o lu tio n to th e r e s p o n d e a t s u p e r io r p r o b le m th a n c o lle c tiv e s c ie n te r ; t h e s tr o n g in fe r e n c e fo c u s c o m p o r ts w ith c o n g r e s s io n a l in te n t ;
c o lle c tiv e s c ie n te r d o e s little to s o lv e th e r e s p o n d e a t s u p e r io r u n d e r in c lu s io n p r o b le m ;
!
c o lle c tiv e s c ie n te r c r e a te s c o n fu s io n w h e n tr y in g to le v e l it a g a in s t th e la n g u a g e o f th e P S L R A ;
"
a n d th e S ix th C ir c u its c o lle c tiv e s c ie n te r p r e c e d e n t la c k s th e s ta b ility th a t a llo w s c o r p o r a tio n s to m a n a g e th e ir e x p o s u r e to r is k .
#
If c o r p o r a tio n s a r e to o r ie n t th e ir b e h a v io r w h e n fa c e d w ith a c a u s e o f a c tio n a s fa c t s e n s itiv e a s s e c u r itie s fr a u d , th e p le a d in g s ta n d a r d m u s t b e s t a b le a n d c o h e r e n t. B y a b a n d o n in g c o lle c tiv e s c ie n te r , th e S ix th C ir c u it w o u ld a lig n its p le a d in g s t a n d a r d w ith th e c o n g r e s s io n a l in te n t o f th e P S L R A a n d th e S u p r e m e C o u r ts in te n tio n a l r e s tr ic tio n o f th e S e c tio n 1 0 ( b ) p r iv a te c a u s e o f a c tio n .
II . B A C K G R O U N D
A p e r s o n is a p e r s o n n o m a tte r h o w b ig , $
a n d u n fo r tu n a te ly , a n y s iz e p e r s o n is c a p a b le o f n a u g h tin e s s . B y c r e a tin g th e p e r s o n o f th e
6 . P riv a te S ec u rities L itig a tio n R efo rm A c t, 1 0 9 S ta t. 7 3 7 (1 9 9 5 ); se e in fra P a rt II. 7 . S ee in fra P a rt IV .
8 . S ee in fra S e c tio n II.E . 9 . S ee in fra S e c tio n IV .C .
1 0 . B o n d a li v . Y u m ! B ra n d s , In c., 6 2 0 F . A p p x 4 8 3 (6 th C ir. 2 0 1 5 ). 1 1 . S ee in fra S e c tio n II.C .
c o r p o r a tio n , %
th e A m e r ic a n le g a l s y s te m fa c e s th e p r o b le m s o f a c r e a to r . I t m u s t u n d e r s ta n d w h a t it h a s c r e a te d a n d le a r n h o w to r e g u la te its o fte n o ffic io u s a n d c o m p le x o ffs p r in g . S a d ly , th e p a s t d e c a d e is r ip e w ith e x a m p le s o f c o r p o r a te fr a u d .
&
T h e E n r o n s a n d W o r ld C o m s o f th e w o r ld h a v e le ft th e A m e r ic a n p u b lic in a w e o f th e p o te n tia l o f c o r p o r a te d e p r a v ity .
'
A lo n g w ith th e c r e a tio n o f h e ig h te n e d fr a u d p le a d in g s ta n d a r d s u n d e r t h e P S L R A , it is th is p u b lic o u tc r y th a t is , a t le a s t in p a r t, r e s p o n s ib le fo r t h e r is e o f c o lle c tiv e s c ie n te r th e o r y u n d e r th e ju d ic ia lly c r e a t e d S e c tio n 1 0 ( b ) p r iv a te c a u s e o f a c tio n .
B u t th e ju s tifia b le d e s ir e to h o ld a c o r p o r a tio n lia b le w e n t to o fa r w h e n it d e v e lo p e d c o lle c tiv e s c ie n te r .
A . C o lle c tiv e S c ie n te r a n d D e fin itio n s o f T e r m s
A c o r p o r a tio n is a s in g le p e r s o n c r e a te d b y le g a l fic tio n th a t r e p r e s e n ts a c o lle c tiv e o f in d iv id u a ls .
T h e is s u e o f c o lle c tiv e s c ie n te r
is b e s t d e s c r ib e d w ith a q u e s tio n : if n o s in g le in d iv id u a l e m p lo y e e o r o ffic e r w ith in a c o r p o r a tio n p o s s e s s e s th e sc ie n te r n e c e s s a r y fo r p le a d in g c o r p o r a te lia b ility u n d e r R u le 1 0 b - 5 a n d th e P S L R A ,
!
m a y a p la in tiff s u r v iv e a m o tio n to d is m is s
"
b y p le a d in g th e c o lle c tiv e s c ie n te r o f m a n y in d iv id u a ls w ith in th e c o r p o r a tio n ? C o r p o r a te s c ie n te r is th e k n o w le d g e o f w r o n g d o in g b y th e c o r p o r a tio n its e lf th a t is n e c e s s a r ily d e r iv e d fr o m its e m p lo y e e s o r
1 7 . 1 U .S .C . § 1 (2 0 1 2 ) sta te s, In d e term in in g th e m e a n in g o f a n y A c t o f C o n g re ss, u n le ss th e c o n te x t in d ica te s o th e rw ise . . . th e w o rd s p er so n a n d w h o e v e r in clu d e c o rp o ra tio n s, c o m p a n ie s . . . a s w e ll a s in d iv id u als . . . . S ee C o rp o ra tio n , B L A C K S L A W D IC T IO N A R Y (1 0 th e d . 2 0 1 4 ).
1 8 . P a tric ia S . A b ril & A n n M . O la zá b a l, T h e L o cu s o f C o rp o ra te S cien ter, 2 0 0 6 C O LU M . B U S. L . R E V . 8 1 , 1 2 1 -2 2 (2 0 0 6 ).
1 9 . A sh le y S . K irc h e r, N o te , C o rp o ra te C rim in a l L ia b ility V e rsu s C o rp o ra te S e cu ritie s F ra u d L ia b ility : A n a ly zin g th e D iv erg en ce in S ta n d a rd s o f C u lp a b ility , 4 6 A M . C R IM . L . R E V . 1 5 7 , 1 7 2 (2 0 0 9 ); see g e n era lly M a ria n n e M . Je n n in g s, A P rim e r o n E n ro n : L e sso n s F ro m A P erfect S to rm o f F in a n cia l R ep o rtin g, C o rp o ra te G o v ern a n ce a n d E th ica l C u ltu re F a ilu res, 3 9 C A L. W .L . R E V . 1 6 3 (2 0 0 3 ).
2 0 . O R io rd a n , su p ra n o te 2 0 , a t 1 6 2 3 .
2 1 . 1 U .S .C . § 1 ; B u rw e ll v . H o b b y L o b b y S to re s, In c ., 1 3 4 S . C t. 2 7 5 1 (2 0 1 4 ) (a ffirm in g th e le g a l rig h ts o f c o rp o ra tio n s a s p e o p le in term s o f fre e sp ee c h a n d re lig io u s rig h ts); C itize n s U n ite d v . F E C , 5 5 8 U .S . 3 1 0 (2 0 1 0 ) (affirm in g a b ro a d c o n c ep tio n o f c o rp o ra te p e rso n h o o d ); A b ril & O la zá b a l, su p ra n o te 1 8 , a t 8 4 -8 5 , 1 0 3 ; K irc h e r, su p ra n o te 1 9 .
2 2 . 1 7 C .F .R . § 2 4 0 .1 0 b -5 (2 0 1 1 ).
d ir e c to r s .
#
T h e la w o f a g e n c y m a k e s it c le a r th a t th e k n o w le d g e o f a s in g le c o r p o r a te o ffic e r a c tin g w ith in th e s c o p e o f h is e m p lo y m e n t is im p u te d to th e c o r p o r a tio n .
$
T h e r e fo r e , if a p la in tiff c a n id e n tify a c o r p o r a te a c to r w h o c o m m itte d fr a u d w h ile a c tin g w ith in th e s c o p e o f h is e m p lo y m e n t, th e c o r p o r a tio n m a y b e h e ld lia b le fo r th e fr a u d .
%
C o lle c tiv e s c ie n te r r e fe r s to th e a g g r e g a tio n o f t h e s c ie n te r p o s s e s s e d b y a g r o u p o f e m p lo y e e s in a c o r p o r a tio n .
&
O n ly o n e c ir c u it a d o p te d c o lle c tiv e s c ie n te r , le a v in g a n u n r e s o lv e d c ir c u it s p lit.
'
B . S ta tu to r y R o o ts o f C o lle c tiv e S c ie n te r
C o lle c t iv e s c ie n te r th e o r y d id n o t d e v e lo p in a v a c u u m ; it is th e p r o d u c t o f a c o m p lic a te d le g is la tiv e a n d ju d ic ia l b a c k g r o u n d . S e c u r itie s r e g u la tio n c a m e in to b e in g o n th e h e e ls o f th e G r e a t D e p r e s s io n w ith th e S e c u r itie s E x c h a n g e A c t o f 1 9 3 4 ( 1 9 3 4 A c t ) a n d th e c r e a tio n o f S e c u r itie s a n d E x c h a n g e C o m m is s io n ( S E C ).
!
T h e 1 9 3 4 A c t a n d th e S E C w e r e m e a n t to c u r b c o r p o r a te c o r r u p tio n .
!
I n te r m s o f fr a u d r e g u la tio n , th e h e a r t o f th e 1 9 3 4 A c t is S e c tio n 1 0 ( b ) .
!
S e c tio n 1 0 (b ) d e fe n d s a g a in s t fr a u d b y p r o h ib itin g th e u s e o f m a n ip u la tiv e o r d e c e p tiv e d e v ic e s in c o n n e c tio n w ith th e p u r c h a s e o r s a le o f a n y s e c u r ity .
!!
T h e p u r p o s e o f S e c tio n 1 0 ( b ) is p r im a r ily d e te r r e n c e ,
!"
a n d S e c tio n 1 0 (b ) fin d s its c o n s titu tio n a l te e t h in th e C o m m e r c e C la u s e .
!#
S e c tio n 1 0 ( b ) is n o n s e lf- o p e r a tiv e !$
w ith o u t r e g u la tio n s p r o v id e d b y th e S E C ,
!%
b u t it is s till th e 1 9 3 4 A c ts g e n e r a l
2 5 . 4 T H O M A S L E E H A Z E N , T R E A T ISE O N T H E L A W O F S E C U R IT IE S R E G U L A T IO N 4 3 (W es t P ra c titio n e rs E d . 6 th ed . 2 0 0 9 ) (q u o tin g In re M a rsh & M c C le n n a n C o s. S e c. L itig ., 5 0 1 F . S u p p . 2 d 4 5 2 , 4 8 1 (S .D .N .Y 2 0 0 6 )).
2 6 . Id . a t 4 3 -4 4 . 2 7 . Id . 2 8 . Id . a t 4 4 . 2 9 . Id . a t 4 4 -4 5 .
3 0 . S ee E rn st & E rn st v . H o c h fe ld e r, 4 2 5 U .S . 1 8 5 , 1 9 4 -9 5 (1 9 7 6 ); Ju stin M a ro c c o , C o m m e n t, W h en W ill It F in a lly E n d : T h e E ffectiv e n ess o f th e R u le 1 0 b -5 P riv a te A ctio n a s a F ra u d -D e terren c e M ec h a n ism P o st-Ja n u s, 7 3 L A . L . R E V . 6 3 3 , 6 3 5 (2 0 1 3 ).
3 1 . O R io rd a n , su p ra n o te 2 0 , a t 1 5 9 9 . 3 2 . 1 5 U .S .C . § 7 8 j(b ).
3 3 . 1 5 U .S .C . § 7 8 j(a )(1 ).
3 4 . A b ril & O la z á b a l, su p ra n o te 1 8 , a t 1 0 1 ; B ra d le y J. B o n d i, D a n g ero u s L ia iso n s: C o lle ctiv e S c ie n ter in S E C E n fo rce m en t A c tio n s, 6 N .Y .U . J.L . & B U S. 1 , 2 4 (2 0 0 9 ).
3 5 . 1 5 U .S .C . § 7 8 j; 3 H A Z E N ,su p ra n o te 2 5 , a t 5 2 3 . 3 6 . M a ro cc o , su p ra n o te 3 0 , a t 6 3 6 .
a n tifr a u d p r o v is io n . !&
W ith little a d o , th e S E C g a v e S e c tio n 1 0 ( b ) o p e r a tio n w ith th e S E C s b r o a d a n ti- fr a u d p r o v is io n , R u le 1 0 b - 5 .
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R u le 1 0 b - 5 p r o v e d to b e a p o w e r fu l a n t ifr a u d w e a p o n .
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S till, n e ith e r S e c tio n 1 0 ( b ) n o r R u le 1 0 b - 5
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p r o v id e s fo r a p r iv a te c a u s e o f a c tio n .
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A c c o r d in g ly , th e C o u r t c o n s tr u c te d a S e c tio n 1 0 (b ) p r iv a te c a u s e o f a c tio n .
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T h e p r iv a te c a u s e o f a c tio n its e lf is n o t q u e s tio n e d .
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A s w ill b e c o m e c le a r , th e p r iv a te c a u s e o f a c tio n c a n b e d iffic u lt to p le a d ,
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b u t it is p u r p o s e fu lly s o . "$
3 8 . 3 H A Z E N ,su p ra n o te 2 5 , a t 5 2 0 .
3 9 . 1 7 C .F .R . § 2 4 0 .1 0 b -5 ; M ilto n V . F re e m a n , C o llo q u iu m F o re w o rd , 6 1 F O R D H A M L . R E V . S 1 , S 1 -S 2 (1 9 9 3 ); M a ro c c o , su p ra n o te 3 0 , a t 6 3 3 -6 3 4 .
4 0 . 3 H A Z E N ,su p ra n o te 2 5 , a t 5 2 1 . 4 1 . 1 7 C .F .R . § 2 4 0 .1 0 b -5 (2 0 1 1 ).
It sh a ll b e u n la w fu l fo r a n y p e rso n , d irec tly o r in d ire c tly , b y th e u se o f a n y m e a n s o r in s tru m e n ta lity o f in te rsta te c o m m e rce , o r o f th e m a ils o r o f a n y fa c ility o f a n y n a tio n a l se c u ritie s e x c h a n g e,
(a ) T o e m p lo y a n y d e v ice , sc h e m e , o r a rtific e to d e fra u d ,
(b ) T o m ak e a n y u n tru e sta te m e n t o f a m a te ria l fa ct o r to o m it to sta te a m a te ria l fa c t n e ce ssa ry in o rd er to m a k e th e sta te m en ts m a d e , in th e lig h t o f th e c irc u m sta n c e s u n d e r w h ic h th e y w ere m a d e , n o t m islea d in g , o r
(c ) T o e n g a g e in a n y a c t, p ra c tic e , o r c o u rse o f b u sin ess w h ic h o p era te s o r w o u ld o p e ra te a s a fra u d o r d e c eit u p o n a n y p e rso n , in c o n n ec tio n w ith th e p u rch a se o r sa le o f a n y se cu r ity .
Id .
4 2 . Ja n u s C a p ita l G rp ., In c . v . F irst D er iv a tiv e T ra d ers, 1 3 1 U .S . 2 2 9 6 , 2 3 0 1 (2 0 1 1 ) (A lth o u g h n e ith e r R u le 1 0 b -5 n o r § 1 0 (b ) ex p ressly c rea tes a p riv a te rig h t o f a c tio n , th is C o u rt h as h e ld th a t a p r iv a te rig h t o f a c tio n is im p lie d u n d er § 1 0 (b ).) (q u o tin g S u p e rin te n d e n t o f In s. o f N . Y . v . B an k ers L ife & C a su a lty C o ., 4 0 4 U .S . 6 , 1 3 , n . 9 (1 9 7 1 )).
4 3 . S to n erid g e In v . P a rtn e rs, L L C . v . S c ien tific -A tla n ta , In c ., 5 5 2 U .S . 1 4 8 , 1 5 7 , 1 6 3 -6 5 (2 0 0 8 ); T e lla b s, In c . v . M a k o r Issu e s & R ig h ts, L td ., 5 5 1 U .S . 3 0 8 , 3 1 3 (2 0 0 7 ); S u p e rin te n d en t o f In s. o f N e w Y o r k v . B a n k e rs L ife & C a su a lty C o ., 4 0 4 U .S . 6 , 1 3 n .9 (1 9 7 1 ); see 3 H A Z E N , su p ra n o te 2 5 , a t 5 2 2 -2 3 ; O R io rd a n , su p ra n o te 2 0 , a t 1 5 9 9 . T h e first ca se to im p o se a p riv a te c a u se o f a c tio n u n d e r § 1 0 (b ) w a s K ar d o n v . N a tio n a l G y p su m C o ., 6 9 F . S u p p . 5 1 2 , 5 1 3 -1 4 (1 9 4 6 ) (a llo w in g a p riv a te c a u se o f a ctio n w h e re th re e d efe n d a n ts u se d fra u d u len t m isre p re sen ta tio n co n v in c ed th e p la in tiffs to s ell th e ir sto c k to th em fo r m u c h le ss th a n fa ir m a rk e t v a lu e ). S ee a lso E rn st, 4 2 5 U .S . a t 1 9 6 n .1 6 .
4 4 . E rn st, 4 2 5 U .S . a t 1 9 6 (sta tin g th a t th e e x iste n c e o f a p riv a te c a u se o f a c tio n fo r v io latio n s o f [§ 1 0 (b ) a n d R u le 1 0 b -5 ] is n o w w ell es ta b lis h ed ) (c itin g B lu e C h ip S tam p s v . M a n o r D ru g S to res, 4 2 1 U .S . 7 2 3 , 7 3 0 (1 9 7 5 )); see g en e ra lly O R io rd a n , su p ra n o te 2 0 , a t 1 5 9 9 . T h e S u p re m e C o u rt p re scrib e s th a t th e e lem e n ts o f th is p riv a te c a u se o f a c tio n sh o u ld star t w ith th e la n g u a g e o f § 1 0 (b ). E rn st, 4 2 5 U .S . a t 1 9 6 -9 7 (c itin g B lu e C h ip S ta m p s v . M a n o r D ru g S to res, 4 2 1 U .S . 7 2 3 , 7 5 6 (1 9 7 5 )).
C . S e c tio n 1 0 (b ) a n d R u le 1 0 b -5 P r iv a te C a u se o f A c tio n
A lth o u g h th e p r iv a te c a u s e o f a c tio n e x is ts , th e S u p r e m e C o u r t h a s lim ite d its s c o p e .
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In S to n e r id g e I n v . P a r tn e r s, L L C v . S c ie n tific A tla n ta , I n c ., th e S u p r e m e C o u r t la id o u t th e g e n e r a lly a c c e p te d e le m e n ts o f a S e c tio n 1 0 (b ) a n d R u le 1 0 b - 5 p r iv a te c a u s e o f a c tio n a s fo llo w s : "( 1 ) a m a te r ia l m is r e p r e s e n ta tio n o r o m is s io n b y th e d e fe n d a n t ; ( 2 ) s c ie n te r ; (3 ) a c o n n e c tio n b e tw e e n th e m is r e p r e s e n ta tio n o r o m is s io n a n d th e p u r c h a s e o r s a le o f a s e c u r ity ; ( 4 ) r e lia n c e u p o n th e m is r e p r e s e n ta tio n o r o m is s io n ; ( 5 ) e c o n o m ic lo s s ; a n d (6 ) lo s s c a u s a tio n ."
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F o r p u r p o s e s o f th is N o te , th e m a in e le m e n t fo r c o n s id e r a tio n is e le m e n t tw o : s c ie n te r . S c ie n te r is " a m e n ta l s t a te e m b r a c in g in te n t to d e c e iv e , m a n ip u la te , o r d e fr a u d .
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T h e r e q u is ite
W e q u ite a g ree th a t if C o n g ress h a d le gisla ted th e e lem en ts o f a p riv a te ca u se o f a ctio n fo r d a m a g es, th e d u ty o f th e Ju d icia l B ra n ch w o u ld b e to a d m in iste r th e la w w h ich C o n gre ss en a c ted ; th e Ju d ic ia ry m a y n o t c irc u m sc rib e a rig h t w h ic h C o n g re ss h as c o n fe rred b e c au se o f a n y d isa g re e m en t it m ig h t h a v e w ith C o n g re ss a b o u t th e w isd o m o f c rea tin g so e x p an siv e a lia b ility . B u t a s w e h a v e p o in te d o u t, w e a re n o t d e a lin g h e re w ith a n y p riv a te rig h t c re a te d b y th e e x p re ss la n g u a g e o f § 1 0 (b ) o r o f R u le 1 0 b -5 . N o la n g u a g e in e ith e r o f th o se p ro v isio n s sp e a k s at all to th e c o n to u rs o f a p riv a te c a u se o f ac tio n fo r th e ir v io latio n . H o w e v er fle x ib ly w e m ay c o n stru e th e la n g u a g e o f b o th p ro v isio n s, n o th in g in su c h c o n stru ctio n m ilita te s a g a in st th e B irn b a u m ru le . W e a re d ea lin g w ith a p riv a te ca u se o f a c tio n w h ich h a s b ee n ju d ic ia lly fo u n d to e x ist, a n d w h ic h w ill h a v e to b e ju d icia lly d elim ite d o n e w a y o r a n o th e r u n le ss a n d u n til C o n g re ss ad d res ses th e q u e stio n . G iv e n th e p e cu lia r b le n d o f leg isla tiv e , a d m in istra tiv e , a n d ju d ic ia l h isto ry w h ic h n o w su rro u n d s R u le 1 0 b -5 , w e b e lie v e th a t p rac tic a l fa c to rs to w h ic h w e h a v e a d v e rted , a n d to w h ic h o th e r c o u rts h a v e refe rre d , a re e n title d to a g o o d d e a l o f w eig h t.
B lu e C h ip S ta m p s v . M a n o r D ru g S to re s, 4 2 1 U .S . 7 2 3 , 7 4 8 -4 9 (1 9 7 5 ) (e m p h a sis a d d e d ). T h e B irn b a u m ru le lim its th e p o ten tia lly b ro a d lia b ility an d e x te n siv e litig a tio n p ro v id ed b y lib era l d isc o v e ry p ro v isio n s b y p erm it[tin g ] e x c lu sio n p rio r to tria l o f th o se p la in tiffs w h o w ere n o t th e m selv e s p u rc h a se rs o r se lle rs o f th e sto c k in q u estio n . Id . a t 7 4 1 -4 2 .
4 6 . 1 0 9 S T A T . 7 3 7 . T itle I o f th e P riv a te S ec u ritie s L itig a tio n R e fo rm A c t o f 1 9 9 5 is R e d u c tio n o f A b u siv e L itig a tio n . Id . S e e in fra S ec tio n II.C .
4 7 . 3 H A Z E N ,su p ra n o te 2 5 , a t 5 2 2 -2 3 .
4 8 . S to n erid g e In v . P a rtn e rs, L L C v . S cie n tific -A tla n ta , 5 5 2 U .S . 1 4 8 , 1 5 7 (2 0 0 8 ); B o n d a li, 6 2 0 F . A p p x a t 4 8 9 (c itin g S to n erid g e In v . P a rtn ers, 5 5 2 U .S . a t 1 5 7 ); K B C A sse t M g m t. N .V . v . O m n ic a re , In c ., 7 6 9 F .3 d 4 5 5 , 4 6 9 (2 0 1 4 ); 3 H A Z E N ,su p ra n o te 2 5 , 5 3 1 -3 2 ; see g e n era lly G la z er C a p ita l M g m t., L P v . M a g istri, 5 4 9 F .3 d 7 3 6 , 7 4 1 (9 th C ir. 2 0 0 8 ); S o u th la n d S e c. C o rp . v . In sp ire In s. S o ls., In c., 3 6 5 F .3 d 3 5 3 , 3 6 2 (5 th C ir. 2 0 0 4 ); O R io rd a n , su p ra n o te 2 0 , a t 1 6 0 0 .
s c ie n te r fo r a S e c tio n 1 0 (b ) a c tio n n e e d n o t b e s h o w n o n ly b y p r o o f o f n e g lig e n c e ; r e c k le s s n e s s c a n b e s u ffic ie n t to s h o w s c ie n te r a s w e ll.
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S c ie n te r m a y b e s h o w n b y c ir c u m s ta n tia l e v id e n c e .
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F o r a s h a r e h o ld e r to w ith s ta n d a m o tio n p u r s u a n t to F e d e r a l R u le o f C iv il P r o c e d u r e 1 2 ( b ) (6 )
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in a S e c tio n 1 0 (b ) s u it, a p la in tiff fa c e s a h ig h e r p le a d in g th r e s h o ld t h a n a g e n e r a l F R C P 9 ( b )
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T h e P S L R A ##
g o e s b e y o n d th e p a r tic u la r ity p le a d in g r e q u ir e m e n ts o f F R C P 9 (b ) .
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T h e P S L R A r e q u ir e s th a t a p la in tiff in a S e c tio n 1 0 (b ) a c tio n p r o v e th a t t h e d e fe n d a n t a c te d w ith a p a r tic u la r s ta te o f m in d . . . w ith r e s p e c t to e a c h a c t o r o m is s io n
5 0 . 3 H A Z E N ,su p ra n o te 2 5 , a t 5 3 6 ;4 H A Z E N , su p ra n o te 2 5 , a t 4 0 -4 1 . T h e S u p re m e C o u r t a sse rts th a t th e in te n tio n a l a n d w illfu l la n g u a g e o f § 1 0 (b ) a n d R u le 1 0 b -5 , e sp e cia lly m a n ip u la tiv e , sh o w e d th a t C o n g ress d id n o t a d o p t a n e g lig e n c e sta n d a rd o f lia b ility , a n d th e C o u rt re je c ts th e g lo ss th a t th e C o m m issio n so u g h t to im p o se o n th e la n g u a g e th a t it w as ju st th e d a m a g in g e ffe c t o n th e sh a re h o ld e rs th a t m a tte red to C o n g re ss, n o t th e w h e th e r th e c o n d u c t w a s k n o w in g o r in te n tio n a l. E rn st, 4 2 5 U .S . a t 1 9 8 -2 0 0 . W h eth er re c k les sn e ss is e n o u g h u n d er § 1 0 (b ) a n d R u le 1 0 b -5 , th e S u p re m e C o u rt le ft u n d e c id ed . Id . a t 1 9 3 -9 4 n .1 2 (sta tin g th a t th e C o u rt n e e d n o t a d d re ss h e re th e q u estio n o f w h e th e r, in so m e c irc u m sta n c e s re c k les s b e h a v io r is su ffic ien t fo r c iv il lia b ility u n d e r § 1 0 (b ) a n d R u le 1 0 b -5 .); O R io rd a n , su p ra n o te 2 0 , a t 1 6 0 1 n .3 2 (2 0 0 7 ). T h e S u p re m e C o u rt a g a in a v o id e d d ec id in g w h e th e r o r n o t re c k le ssn e ss sa tisfie d th e sc ien te r e le m e n t o f § 1 0 (b ) in T ella b s, In c., 5 5 1 U .S . at 3 1 9 n .3 . D es p ite th is, [e ]v er y C o u rt o f A p p e a ls th a t h as c o n sid er ed th e issu e h a s h eld th a t a p la in tiff m a y m e e t th e sc ie n te r r eq u ire m en t b y s h o w in g th a t th e d e fen d a n t a c te d in te n tio n a lly o r re c k le ssly , th o u g h th e C irc u its d iffer o n th e d e g re e o f re c k le ssn e ss re q u ire d . Id . (c itin g O ttm a n n v . H a n g e r O rth o p e d ic G rp ., In c., 3 5 3 F .3 d 3 3 8 , 3 4 3 (2 0 0 3 )). R eg a rd le ss o f w h e th er re c k le ssn e ss is en o u g h , th e S u p re m e C o u rt h o ld s th a t C o n g re ss c le a rly in ten d e d to c irc u m sc rib e in te n tio n a l c o n d u ct. E rn st, 4 2 5 U .S . a t 2 0 1 , 2 0 8 , 2 1 4 .
5 1 . 4 H A Z E N , su p ra n o te 2 5 , a t 3 9 -4 0 (sta tin g th a t a ll C irc u its a g re e th at sc ien te r m a y b e sh o w n b y c irc u m sta n tia l ev id en c e , b u t th e co u rts a re sp lit o n w h eth er m o tiv e a n d o p p o rtu n ity sta n d in g a lo n e a re su ffic ie n t). T h e S u p re m e C o u rt g a v e g u id a n c e h e re b y h o ld in g th a t m o tiv e a n d o p p o rtu n ity is a fa c to r in th e a n a ly sis th a t is n o t b y itse lf d isp o sitiv e . S ee M a k o r, 4 3 7 F .3 d a t 6 0 1 ; T ella b s, In c., 5 5 1 U .S . a t 3 2 5 ; 4 H A Z E N , su p ra n o te 2 5 , a t 2 8 .
5 2 . F E D .R . C IV .P .1 2 .
5 3 . F E D . R . C IV . P . 9 . F ra u d o r M ista k e; C o n d itio n s o f M in d . In a lle g in g fra u d o r m ista k e, a p a rty m u st sta te w ith p a rtic u la rity th e c irc u m sta n c es co n s titu tin g fra u d o r m ista k e. M a lice , in te n t, k n o w le d g e , a n d o th e r c o n d itio n s o f a p e rso n 's m in d m a y b e a lle g e d g en e ra lly . Id . P lea d in g a su rv iv a b le F R C P 9 (b ) c a u se o f a c tio n is a lre ad y d ifficu lt, b u t ju st lik e th e P S L R A , it is p u rp o se fu lly so . S ee g en e ra lly 2 7 A .L .R . F e d . 4 0 7 . T h e p u rp o se s o f th e ru le a re : to a p p rise o th e r p a rty o f c la im , [t]o p e rm it d ra ftin g o f re sp o n siv e p le a d in g , [t]o p ro te c t in d iv id u a ls fro m b a se le ss c la im s, a n d [t]o m in im ize n u m b er o f strik e su its. Id .
5 4 . 4 H A Z E N , su p ra n o te 2 5 , a t 2 0 -2 1 ; O R io rd a n , su p ra n o te 2 0 , a t 1 6 0 1 -0 2 . F o r th e S e co n d C irc u it, th e P S L R A o n ly ra ise d th e b a r fo r p le a d in g p a rtic u la rity , n o t th e re q u ire m en ts fo r p le a d in g th e sc ie n te r re q u irem e n t. 3 H A Z E N ,su p ra n o te 2 5 , a t 2 2 .
5 5 . P riv a te S ec u rities L itig a tio n R efo rm A c t, 1 0 9 S ta t. 7 3 7 (1 9 9 5 ).
. . . [ a n d to ] s ta te w ith p a r tic u la r ity fa c ts g iv in g r is e to a s tr o n g in fe r e n c e th a t th e d e fe n d a n t a c te d w ith th e r e q u ir e d s ta te o f m in d .
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T h e p u r p o s e o f th e P S L R A w a s t o c u r b s h o o t fir s t a n d a s k q u e s tio n s la te r
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litig a tio n th a t h a d b e c o m e r a m p a n t a n d e c o n o m ic a lly d a m a g in g to c o r p o r a tio n s .
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$ [ t] h e s tr o n g in fe r e n c e s ta n d a r d u n e q u iv o c a lly r a is e [ d ] th e b a r fo r p le a d in g s c ie n te r ,
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a n d it w a s m e a n t to p r o m o te g r e a te r u n ifo r m it y a m o n g th e C ir c u its .
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T h e p u r p o s e o f th e P S L R A is to c la r ify th e p le a d in g r e q u ir e m e n ts o f S e c tio n 1 0 ( b ) la w s u its a n d to m a k e it h a r d e r fo r a p la in tiff to m e e t th e p le a d in g r e q u ir e m e n ts .
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C o n g r e s s in te n d e d th e s t ro n g in fe r e n c e th r e s h o ld o f th e P S L R A to b e d iffic u lt to s a tis fy .
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T h e S u p r e m e C o u r t h a s b e e n c a r e fu l to r e s t r a in th e p r iv a te c a u s e o f a c tio n a n d m a in ta in h e ig h te n e d p le a d in g r e q u ir e m e n ts .
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D . P le a d in g U n d e r th e P S L R A a n d C o r p o r a tio n s a s P e r s o n s G a v e B ir th to
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T h e h ig h P S L R A th r e s h o ld s p a r k e d th e c o lle c tiv e s c ie n te r d e b a te b e c a u s e it r a is e d th e th r e s h o ld fo r p le a d in g a R u le 1 0 b - 5 c a u s e o f a c tio n th a t c o u ld s u r v iv e .
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B a s ic a lly , a c o r p o r a tio n is a s in g le p e r s o n c r e a te d b y le g a l fic tio n ,
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b u t a c o r p o r a tio n is a g r o u p o f in d iv id u a ls th a t le g a lly a c t a s o n e e n tity .
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A c o r p o r a tio n is b o th o n e a n d m a n y , a n d s o th e p r o b le m is , h o w
5 7 . P riv a te S ec u rities L itig a tio n R e fo rm A c t, 1 0 9 S ta t. 7 3 7 , 7 4 7 (1 9 9 5 ) (e m p h a sis a d d e d ); 4 H A Z E N , su p ra n o te 2 5 , a t 3 7 . T h e P S L R A b a sic a lly a d o p te d th e S e c o n d C irc u its v ie w th a t p le ad in g a stro n g in fe re n c e o f sc ie n te r re q u ire s p le a d in g fa c ts w ith p a rtic u la rity . Id .
5 8 . O R io rd a n , su p ra n o te 2 0 , a t 1 6 1 4 .
5 9 . Id . a t 1 6 0 0 , 1 6 2 3 (2 0 0 7 ). S e e T e lla b s, In c., 5 5 1 U .S . a t 3 2 3 -2 4 . 6 0 . T ella b s, In c., 5 5 1 U .S . 3 0 8 .
6 1 . Id . a t 3 2 1 (q u o tin g M a k o r, 4 3 7 F .3 d a t 6 0 1 ).
6 2 . Id . (c ita tio n s o m itte d ); see 4 T H O M A S L E E H A Z E N , T R E A T ISE O N T H E L A W O F S E C U R IT IE S R E G U L A T IO N 2 7 (W e st P ra c titio n e rs E d . 6 th e d . 2 0 0 9 ). T h e P S L R A d o e s n o t p ro v id e sp ec ific sta tu to ry g u id e lin es a s to sc ie n te r, a n d a s su ch , th e c o u rts m u st d e te rm in e w h eth e r th e p le a d in g sta n d a rd s h a v e b e e n m e t o n a c a se -b y -ca se b a sis. Id .
6 3 . O R io rd a n , su p ra n o te 2 0 , a t 1 6 2 3 ; 4 H A Z E N ,su p ra n o te 2 5 , a t 3 7 -3 8 . 6 4 . Id . a t 1 6 2 3 .
6 5 . S ee S to n erid ge In v . P a rtn e rs, L L C , 5 5 2 U .S . a t 1 6 4 -6 5 ; see in fra S e ctio n II.E . 6 6 . O R io rd a n , su p ra n o te 2 0 , a t 1 6 0 2 .
d o e s o n e p r o p e r ly a s c rib e in te n t to a c o r p o r a tio n ; a n d . . . [ m ] u s t th e im p u te d c o r p o r a te a c tio n a n d th e im p u te d c o r p o r a te in te n t in te r s e c t in o n e in d iv id u a l a c to r ?
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T h e c o u r ts d e v ia te in a n s w e r in g th e s e q u e s tio n s . %
T h e is s u e is fu r th e r c o m p lic a te d b y th e m o d e r n c o r p o r a te s tr u c tu r e , w h ic h m a k e s it h a r d fo r a p la in tiff to lo c a t e a s in g le in d iv id u a l w h o c o m m itte d th e fr a u d u le n t a c t a n d a ls o p o s s e s s e d th e r e q u is ite s c ie n te r .
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T h e d u a l n a tu r e o f th e c o r p o r a tio n e n tity a n d a g g r e g a te o f in d iv id u a ls a ffe c ts h o w th e p la in tiff m u s t p le a d s c ie n te r .
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E s s e n t ia lly , w h e th e r a c o r p o r a tio n is a n e n tity o r a n a g g r e g a te o f in d iv id u a ls d e te r m in e s w h e th e r a ty p e o f r e s p o n d e a t s u p e r io r lia b ility a r g u m e n t o r a c o lle c tiv e k n o w le d g e th e o r y o f lia b ility , lik e c o lle c tiv e s c ie n te r , is p r o p e r . U n d e r a th e o r y o f r e s p o n d e a t su p e r io r , a s in g le in d iv id u a l in th e c o r p o r a tio n m u s t h a v e e n g a g e d in th e a lle g e d m is r e p r e s e n ta tio n a n d a ls o p o s s e s s e d th e r e q u is ite s c ie n te r fo r th e p u r p o s e s o f a S e c tio n 1 0 (b ) a c tio n .
%!
R e s p o n d e a t s u p e r io r lia b ility fo r a c o r p o r a tio n h a s its r o o ts in c o m m o n la w .
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E s s e n tia lly , a c o r p o r a tio n is lia b le fo r th e c r im in a l a c ts o f its a g e n ts w h e n th e y a r e a c tin g w ith in th e s c o p e o f th e ir e m p lo y m e n t.
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S o m e c o n s id e r r e s p o n d e a t s u p e r io r ty p e lia b ility b o th o v e r in c lu s iv e a n d u n d e r in c lu s iv e .
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R e s p o n d e a t s u p e r io r is o v e r in c lu s iv e b e c a u s e a w h o le c o r p o r a tio n c a n b e h e ld lia b le fo r th e r o g u e a c tio n s o f a s in g le c r im in a l a g e n t.
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S till, th e c o n c e p t o f h o ld in g a c o r p o r a tio n lia b le fo r th e
6 9 . Id . a t 8 5 ; 4 H A Z E N ,su p ra n o te 2 5 , at 3 6 .
7 0 . K irc h e r, su p ra n o te 1 9 , a t 1 5 7 n .5 ; see in fra S e c tio n II.E .
7 1 . A b ril & O la z á b a l, su p ra n o te 1 8 , a t 1 2 1 ; K irch er, su p ra n o te 1 9 , at 1 5 9 .
7 2 . T h e re a re tw o v ie w s o f th e c o rp o ra tio n th a t a ffe c t p le a d in g co rp o ra te scie n te r. F irst, u n d e r th e n o m in a list v ie w , a c o rp o ra tio n is a c o lle c tiv e o f in d iv id u a ls u n d e r th e u m b rella o f th e e n tity c o rp o ra tio n . A b ril & O la z á b a l, su p ra n o te 1 8 , a t 1 0 3 ; O R io rd a n , su p ra n o te 2 0 , a t 1 6 0 3 . U n d er th is v iew , a c o rp o ra tio n is ju st a n a g g re g a te o f in d iv id u a ls . A b r il & O la z á b a l, su p ra n o te 1 8 , a t 1 0 3 . S e c o n d , in c o n tra st, th e rea lists v ie w a c o rp o ra tio n as a u n iq u e e n tity a p a rt fro m th e in d iv id u a ls th a t m ak e it u p . Id . a t 1 0 4 ; O R io r d a n , su p ra n o te 2 0 , at 1 6 0 3 . R e a lists v ie w c o rp o ra tio n s a s e n tities th a t c a n b e h e ld in d iv id u a lly lia b le. A b ril & O la zá b a l, su p ra n o te 1 8 , a t 1 0 4 ; O R io rd a n , su p ra n o te 2 0 , at 1 6 0 3 . W h e th e r a c o u rt ta k e s a re a list o r a n o m in alist v ie w w ill a ffe ct its a p p ro a c h to c o lle c tiv e sc ie n ter, b ec a u se it w ill e ith er se e a c o rp o ra tio n a s a sin g le e n tity o r a n a g g reg a te o f m a n y in d iv id u a ls.
7 3 . A b ril & O la z á b a l, su p ra n o te 1 8 , a t 1 4 4 .
7 4 . B ra d le y J. B o n d i, D a n g ero u s L ia iso n s: C o lle ctiv e S c ie n ter in S E C E n fo rc em en t A c tio n s, 6 N .Y .U . J.L . & B U S. 1 , 5 (2 0 0 9 ).
7 5 . K irc h e r, su p ra n o te 1 9 , a t 1 5 8 .
a c ts o f s in g le e m p lo y e e d o e s n o t s e e m to b e w ith o u t s u p p o r t. %&
I t is u n d e r in c lu s iv e b e c a u s e r e s p o n d e a t s u p e r io r r e q u ir e s a s in g le c u lp a b le a c to r to p o s s e s s th e r e q u is ite s c ie n te r , a n d it is o ft e n v e ry d iffic u lt, g iv e n th e m o d e r n c o r p o r a te s tr u c tu r e , to id e n tify a s in g le c u lp a b le a c to r .
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It is th is u n d e r in c lu s io n th a t p r o p a g a te d th e c o lle c tiv e k n o w le d g e th e o r ie s a s a w a y to s o lv e th e s in g le a c to r d iffic u lty u n d e r r e s p o n d e a t s u p e r io r , a n d a s s u c h , c o lle c tiv e s c ie n te r is a n in h e r e n tly e x p a n s iv e th e o r y o f lia b ility . U n d e r a c o lle c tiv e k n o w le d g e th e o r y , th e s c ie n te r o f o n e in d iv id u a l e m p lo y e e m a y in te r s e c t w ith th e a c t o f r e p r e s e n ta tio n b y a n o th e r in d iv id u a l e m p lo y e e w h o d id n o t p o s s e s s s c ie n te r fo r th e p u r p o s e s o f im p u tin g lia b ility to th e c o r p o r a tio n .
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I n th is w a y , a c o lle c tiv e k n o w le d g e th e o r y a g g r e g a te s th e k n o w le d g e a n d s ta te s o f m in d o f th e in d iv id u a ls th a t m a k e u p th e c o r p o r a tio n s o th a t th e w h o le c o r p o r a tio n p o s s e ss e s th e r e q u is ite s c ie n te r to s a tis fy th e P S L R A .
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T h e p u r p o s e is to r e m e d y th e u n d e r in c lu s io n p r o b le m o f r e s p o n d e a t s u p e r io r b y a llo w in g th e e le m e n ts o f a S e c tio n 1 0 (b ) c a u s e o f a c tio n to in te r s e c t in m o r e th a n o n e in d iv id u a l.
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W h ile c o lle c tiv e k n o w le d g e th e o r ie s a d d r e s s t h e u n d e r in c lu s io n p r o b le m , th e y d o little to s o lv e th e o v e rin c lu s io n p r o b le m . U n d e r c o lle c tiv e k n o w le d g e th e o r ie s , a p la in tiff c a n a v o id th e s in g le c u lp a b le d e fe n d a n t is s u e , b u t th e d o o r is s till le ft o p e n fo r a s in g le r o g u e a c to r p r o d u c in g fa ls e in fo r m a tio n th a t is th e n p u b lis h e d d o w n th e lin e b y a n u n w ittin g e m p lo y e e o r o ffic e r o f th e c o r p o r a tio n . B e c a u s e c o lle c tiv e s c ie n te r is a n e x p a n s iv e th e o r y o f lia b ility , it is c o n tr a r y to th e p u r p o s e o f th e P S L R A .
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E . S u p r e m e C o u r t G u id a n c e o n C o lle c tiv e S c ie n te r a n d S e c tio n 1 0 ( b )
T h e S u p r e m e C o u r t c u ltiv a te d a p r o v e r b ia l ju d ic ia l o a k tr e e o u t o f th e c o n g r e s s io n a l a c o r n o f S e c tio n 1 0 ( b ) a n d R u le 1 0 b - 5 .
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C o n s id e r th e fo llo w in g c a s e s . It w ill b e c o m e c le a r th a t th e S u p r e m e C o u r t s tr ic tly lim its
7 8 . T h e m a ssiv e c o rp o ra te c o n g lo m e ra te , E x x o n M o b ile , w a s h e ld lia b le to th e tu n e o f b illio n s o f d o lla rs b e ca u se o f th e a c tio n s o f sin g le d ru n k ta n k e r ca p ta in . E x x o n S h ip p in g C o . v . B a k e r, 5 5 4 U .S . 4 7 1 (2 0 0 8 ).
7 9 . A b ril & O la z á b a l, su p ra n o te 1 8 , a t 1 1 3 .
8 0 . A b ril & O la zá b a l, su p ra n o te 1 8 , a t 1 1 5 -1 6 ; see P riv a te S e c u ritie s L itig a tio n R e fo rm A ct, 1 0 9 S ta t. 7 3 7 , 7 4 6 -4 7 (1 9 9 5 ).
8 1 . S ee P riv a te S e cu r ities L itig a tio n R efo rm A ct, 1 0 9 S ta t. 7 3 7 , 7 4 6 -4 7 (1 9 9 5 ). 8 2 . O R io rd a n , su p ra n o te 2 0 , a t 1 6 0 5 .
th e S e c tio n 1 0 (b ) c a u s e o f a c tio n a n d m a in ta in s th e d iffic u lty o f p le a d in g a s u r v iv a b le c a u s e o f a c tio n .
1 . S to n e r id g e
In S to n e r id g e I n v . P a r tn e r s , L L C v . S c ie n tific -A tla n ta , I n c ., &#
th e S u p r e m e C o u r t e x p lo r e d t h e r e a c h o f th e S e c tio n 1 0 (b ) p r iv a te c a u s e o f a c tio n
&$ in th e c o n te x t o f a s c h e m e p r o d u c e d b y C h a r te r C o m m u n ic a tio n s , I n c ., to fr a u d u le n tly m a n ip u la te its q u a r te r ly r e p o r ts to m e e t m a r k e t a n a ly s t e x p e c ta tio n s .
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S to n e r id g e In v e s tm e n t P a r tn e r s , L L C , le d th is c la s s a c tio n b e c a u s e o f th e a ffe c t th e s c h e m e h a d o n C h a r te r s s t o c k p r ic e .
&& T h e q u e s tio n b e fo r e th e C o u r t w a s th e lia b ility o f t w o c o r p o r a tio n s , S c ie n tific -A tla n ta , I n c ., a n d M o to r o la , In c ., w h o p a r tic ip a te d in C h a r te r s s c h e m e .
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T h e s c h e m e w e n t lik e th is : C h a r te r w a s s e t t o m is s its p r o je c te d o p e r a tin g c a s h flo w s b y m illio n s o f d o lla r s .
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In o r d e r to m a k e u p th is d iffe r e n c e a n d m e e t e x p e c ta tio n s , C h a r te r r e - c o n tr a c te d w ith M o to r o la a n d S c ie n tific -A tla n ta to p u r c h a s e c e r ta in d ig ita l c a b le c o n v e r te r b o x e s fo r tw e n ty d o lla r s m o r e th a n u s u a l p r ic e .
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In c o n s id e r a tio n , M o t o r o la a n d S c ie n tific - A tla n ta w o u ld o v e r p a y fo r a d v e r tis in g p r o v id e d b y C h a r te r , a n d in th is w a y , th e d e a l h a d n o e c o n o m ic s u b s ta n c e .
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T h e r u b w a s th a t C h a r te r w a s a b le to m e e t its e a r n in g s e x p e c ta tio n s b y c a p ita liz in g th e e x c e s s iv e c o s ts o f p u r c h a s in g th e c o n v e r te r b o x e s a n d in c r e a s in g its r e v e n u e s b e c a u s e o f th e a d d itio n a l a d v e r tis in g b o u g h t b y M o to r o la a n d S c ie n tific - A tla n ta , b u t th is s c h e m e v io la te d G A A P p r in c ip le s .
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M o to r o la a n d S c ie n tific - A tla n ta a g r e e d to th e s c h e m e ,
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b u t d id n o t p a r tic ip a te in p r e p a r in g o r d is s e m in a tin g C h a r te r s fin a n c ia l s ta te m e n t s .
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T h e S u p r e m e C o u r t g r a n te d c e r tio r a r i to d e c id e w h e n , if e v e r , a n in ju r e d in v e s to r m a y r e ly u p o n § 1 0 ( b ) to r e c o v e r fr o m a p a r ty th a t n e ith e r m a k e s a p u b lic m is s ta te m e n t n o r v io la te s a d u ty to d is c lo s e b u t d o e s p a r tic ip a te in a s c h e m e to v io la te § 1 0 ( b ) .
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8 5 . S to n erid g e In v . P a rtn ers, L L C v . S c ie n tific-A tla n ta , In c., 5 5 2 U .S . 1 4 8 (2 0 0 8 ). 8 6 . Id . a t 1 5 2 .
8 7 . Id . a t 1 5 2 -5 3 . 8 8 . Id . a t 1 5 2 . 8 9 . Id . a t 1 5 3 . 9 0 . Id . a t 1 5 3 .
9 1 . S to n erid g e In v . P a rtn e rs, L L C , 5 5 2 U .S . a t 1 5 4 . 9 2 . Id . a t 1 5 4 -5 5 .
9 3 . Id . a t 1 5 4 . 9 4 . Id .
T h e C o u r t q u o te d th e la n g u a g e o f b o th S e c tio n 1 0 ( b ) a n d R u le 1 0 b - 5 , a n d c la r ifie d t h a t R u le 1 0 b -5 e n c o m p a s s e s o n ly c o n d u c t a lr e a d y p r o h ib ite d b y § 1 0 ( b ) .
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T h e C o u r t th e n d e s c r ib e d th e e x is te n c e o f th e S e c tio n 1 0 ( b ) p r iv a te c a u s e o f a c tio n a n d its s ix e le m e n ts .
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T h e C o u r t n o te d a p r e v io u s h o ld in g ,
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a n d s ta te d th a t [ t]h e § 1 0 (b ) im p lie d p r iv a t e r ig h t o f a c tio n d o e s n o t e x te n d to a id e r s a n d a b e tto r s . T h e c o n d u c t o f a s e c o n d a r y a c to r m u s t s a tis fy e a c h o f th e e le m e n ts o r p r e c o n d itio n s fo r lia b ility ; a n d w e c o n s id e r w h e th e r th e a lle g a tio n s h e r e a r e s u ffic ie n t to d o s o .
T h e C o u r t h e ld th a t th e p la in tiff d id n o t s h o w th a t it r e lie d o n th e a c ts o r s t a te m e n ts o f M o to r o la a n d S c ie n tific -A tla n ta .
T h e C o u r t e n g a g e d in th e th r e e - tie r e d a n a ly s is : F ir s t, th e p la in tiff m u s t d e m o n s tr a te th a t it r e lie d o n th e d e c e p tiv e a c ts o f th e d e fe n d a n ts .
T h is p la in tiff c o u ld n o t d e m o n s tr a te th a t, b e c a u s e th e d e fe n d a n ts d id n o t c o m m u n ic a te th e ir d e c e p tiv e a c ts to th e p u b lic o r in v e s to r s .
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W ith o u t k n o w le d g e o f th e a c ts , t h e p la in tiff c o u ld n o t r e ly o n th e m .
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S e c o n d , th e C o u r t r e je c te d th e c o n c e p t o f sc h e m e lia b ility , b e c a u s e if p la in tiffs w e r e a b le to r e ly n o t o n ly o n d is s e m in a te d m is s ta te m e n ts , b u t a ls o o n th e tr a n s a c tio n s th e s ta te m e n ts r e fle c t , th e e ffe c t w o u ld r e a c h th e w h o le m a r k e tp la c e in w h ic h th e is s u in g c o m p a n y d o e s b u s in e s s .
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T h is th e C o u r t w o u ld n o t a llo w . $
E s s e n tia lly , a S e c tio n 1 0 ( b ) p r iv a te c a u s e o f a c tio n d o e s n o t r e a c h a ll c o m m e r c ia l tr a n s a c tio n s th a t a r e fr a u d u le n t a n d a ffe c t th e p r ic e o f a s e c u r ity in s o m e a tt e n u a te d w a y .
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T h is lim ita t io n o n lia b ilit y s u p p o r ts th e
9 7 . S to n erid g e In v . P a rtn e rs, L L C , 5 5 2 U .S . a t 1 5 6 -5 7 .
9 8 . Id . at 1 5 7 (c itin g S u p e rin te n d e n t o f In s . o f N e w Y o rk v . B a n k e rs L ife & C a su a lty C o ., 4 0 4 U .S . 6 , 1 3 n .9 (1 9 7 1 )); see su p ra S e ctio n II.D .
9 9 . C en t. B a n k , N .A . v . F irst In te rsta te B a n k , N .A ., 5 1 1 U .S . 1 6 4 , 1 8 0 (1 9 9 4 ).
1 0 0 . S to n erid g e In v . P a rtn e rs, L L C ., 5 5 2 U .S . a t 1 5 8 ; 3 T H O M A S L E E H A Z E N , T R E A T ISE O N T H E L A W O F S EC U R IT IE S R E G U LA T IO N 5 0 7 -0 8 , 5 0 7 n .5 (W e st P ra c titio n e rs E d . 6 th e d . 2 0 0 9 ) (c itin g C e n tra l B a n k o f D e n v e r v . F irst In tersta te B a n k o f D e n v e r, 5 1 1 U .S . 1 6 4 (1 9 9 4 ) (h o ld in g th a t th e re is n o im p lie d re m e d y fo r a id ers a n d a b e tto rs)).
1 0 1 . S to n erid g e In v . P a rtn e rs, L L C , 5 5 2 U .S . a t 1 5 8 -5 9 . 1 0 2 . Id . a t 1 5 9 .
1 0 3 . Id . 1 0 4 . Id .
1 0 5 . Id . a t 1 5 9 -6 0 .
p o lic y o f p r e v e n tin g p la in tiffs fr o m e x to r t[ in g ] s e ttle m e n ts fr o m in n o c e n t c o m p a n ie s .
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T h ir d , b e c a u s e t h e S e c tio n 1 0 (b ) p r iv a te c a u s e o f a c tio n is a ju d ic ia l c o n s tr u c t a n d it is th e d u ty o f C o n g r e s s to d e c id e th e e x te n t o f th e c a u s e o f a c tio n , th e C o u r t s ta te d th a t it is c a r e fu l to r e s tr a in th e c a u s e o f a c tio n to p r e v e n t th e e x te n s io n o f fe d e r a l r e g u la tio n w ith o u t c o n g r e s s io n a l in te n t.
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T h e h e ig h te n e d p le a d in g r e q u ir e m e n ts s u p p o r t th e fa c t th a t C o n g r e s s in te n d e d th e S e c tio n 1 0 ( b ) c a u s e o f a c tio n to b e r e s tr a in e d .
T h e C o u r t fin is h e d its a n a ly s is b y n o tin g th a t th e S E C e n fo r c e m e n t p o w e r is n o t w ith o u t te e th
a n d th a t s o m e s e c o n d a r y a c to r s lik e a c c o u n ta n ts a n d u n d e r w r ite r s c a n b e h e ld lia b le u n d e r c e r ta in c ir c u m s ta n c e s .
B e c a u s e th e a c ts o f M o to r o la a n d S c ie n tific - A tla n tic w e r e th a t o f s u p p lie r s a n d c u s to m e r s in t h e m a r k e tp la c e o f g o o d s a n d s e r v ic e s , n o t in v e s tm e n t s e c u r itie s , th e C o u r t h e ld th a t th e d e fe n d a n ts w e r e n o t lia b le to th e p la in tiffs .
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T h e p la in tiffs c a n n o t h o ld s u p p lie r s a n d c u s to m e r s lia b le fo r th e fin a n c ia l s ta te m e n ts o f a n o th e r c o m p a n y w h e n th e y h a v e n o c o n tr o l o v e r p r e p a r in g its fin a n c ia l s ta te m e n ts a n d d is c lo s u r e s u n d e r S e c tio n 1 0 ( b ) .
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T h e S u p r e m e C o u r t a ffir m e d th e d is m is s a l o f th e M o to r o la a n d S c ie n tific -A tla n tic b y th e E ig h th C ir c u it C o u r t o f A p p e a ls .
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U ltim a te ly , S to n e r id g e s ta n d s fo r th e p r o p o s itio n th a t a p la in tiff m u s t s h o w r e lia n c e o n th e a c ts a n d s ta te m e n ts o f t h e d e fe n d a n t in a s u r v iv a b le S e c tio n 1 0 ( b ) c a u s e o f a c tio n . F u r th e r m o r e , it d e m o n s tr a te d th e S u p r e m e C o u r ts u n w illin g n e s s to e x te n d c o r p o r a te lia b ility u n d e r s e c u r itie s r e g u la tio n w ith o u t c o n g r e s s io n a l in te n t. S to n e r id g e s h o w s th e lim ita tio n o n th e lia b ilit y o f p a r tic ip a tin g a c to r s w h o a r e n o t r e s p o n s ib le fo r d is c lo s u r e s to th e p u b lic . A c c o r d in g ly , p a r tic ip a tin g a c to r s lik e M o to r o la a r e n o t
1 0 8 . Id . a t 1 6 3 (c itin g B lu e C h ip S ta m p s, 4 2 1 U .S . a t 7 4 0 ). In B lu e C h ip , tw o g ro u n d s fo r su p p o r t o f th e p u b lic p o licy a g a in st v e x a tio u s litig a tio n a re g iv en . F irst, th e v a lu e o f th e la w su it a t th e p lea d in g a n d d isco v e ry sta g e m a y b e w o rth m o re to th e p la in tiff th a n a n a ctu a l tr ail w h e re th e p la in tiff m a y lo se d ra stica lly o u tw e ig h s th e v a lu e to th e d e fen d a n t c o rp o ra tio n w h o w ill su ffer b u sin ess d isru p tio n p u rely b e ca u se o f th e p e n d in g su it. B lu e C h ip S ta m p s, 4 2 1 U .S . a t 7 4 0 . T h e C o u rt h a s n o in te rest in a llo w in g strik e su its b y la w y e rs try in g sh a k e d o w n c o rp o ra tio n s. Id . at 7 4 0 -4 1 (1 9 7 5 ). S e co n d , th e B irn b a u m ru le th a t p rev en ts m y ria d s o f la w su its b o u g h t b y th o se w h o d id n o t b u y sto c k b u t w o u ld h a v e if n o t fo r th e d e fe n d a n ts c o n d u ct p ro te cts v a lid lim its o n lia b ility . Id . a t 7 4 3 -4 9 (1 9 7 5 ); se e D R .S E U SS, su p ra n o te 1 6 .
1 0 9 . S to n erid g e In v . P a rtn e rs, L L C ., 5 5 2 U .S . a t 1 6 4 -6 5 . 1 1 0 . Id . a t 1 6 5 .
1 1 1 . S ee 3 H A Z E N ,su p ra n o te 2 5 , a t 5 1 8 -1 9 . 1 1 2 . S to n erid g e In v . P a rtn e rs, L L C , 5 5 2 U .S . a t 1 6 6 . 1 1 3 . Id . a t 1 6 6 -6 7 .
r e s p o n s ib le fo r th e d is c lo s u r e s m a d e b y a n o th e r c o r p o r a tio n e v e n th o u g h M o to r o la w a s in v o lv e d in th e s a m e fr a u d u le n t s c h e m e a s C h a r te r . T h e d iffe r e n c e is c o n tr o l.
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2 . M a k o r I ss u e s & R ig h ts L td .
In T e lla b s, I n c . v . M a k o r I s su e s & R ig h ts L td ., t h e S u p r e m e C o u r t p r o v id e d g u id a n c e o n p le a d in g a s tr o n g in fe r e n c e o f s c ie n te r .
% T h e C o u r t h e ld th a t m o tiv e a n d o p p o r tu n ity to c o m m it fr a u d a r e n o t b y th e m s e lv e s d is p o s itiv e , b u t a r e s till fa c to r s in s a tis fy in g h e ig h te n e d p le a d in g r e q u ir e m e n ts .
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A s tr o n g in fe r e n c e o f s c ie n te r is d r a w n fr o m m a n y p la u s ib le in fe r e n c e s in c lu d in g o p p o s in g o n e s , b u t in o r d e r fo r th e in fe r e n c e o f s c ie n te r to b e s tr o n g , it m u s t b e c o g e n t, n o t m e r e ly p la u s ib le .
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A c c o r d in g ly , T o q u a lify a s s tr o n g . . . [th e C o u r t] h [ e ] ld , a n in fe r e n c e o f s c ie n te r m u s t b e m o r e th a n m e r e ly p la u s ib le o r r e a s o n a b le it m u s t b e c o g e n t a n d a t le a s t a s c o m p e llin g a s a n y o p p o s in g in fe r e n c e o f n o n fr a u d u le n t in te n t.
T h is a t le a s t a s c o m p e llin g a n a ly s is is n o t a b r ig h t lin e r u le ; r a th e r it a p p e a r s to s tr ik e a b a la n c e b y r e q u ir in g m o r e th a n s p e c u la tiv e o r r e a s o n a b le in fe r e n c e s b u t n o t im p o s in g a r e q u ir e m e n t fo r u n e q u iv o c a l a lle g a tio n s o f a s m o k in g g u n .
A lth o u g h u n d e r th is s t a n d a r d th e tie g o e s to th e p la in tiff,
th e s ta n d a r d is s till q u ite h ig h b e c a u s e th e C o u r t r e je c te d a m o r e lib e r a l p le a d in g s ta n d a r d .
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3 . J a n u s C a p ita l G r o u p , I n c .
In Ja n u s C a p ita l G r o u p , I n c . v . F ir st D e r iv a tiv e T r a d e r s , "
th e S u p r e m e C o u r t p r o v id e d g u id a n c e o n w h a t it m e a n s fo r a c o r p o r a tio n to m a k e a s t a te m e n t p u r s u a n t to R u le 1 0 b - 5 .
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S im p ly p u t, [ o ]n e m a k e s a s ta te m e n t
1 1 6 . Id . a t 1 6 6 -6 7 .
1 1 7 . T ella b s, In c. v . M a k o r Issu e s & R ig h ts L td ., 5 5 1 U .S . 3 0 8 , 3 1 3 (2 0 0 7 ).
1 1 8 . T ella b s, In c., 5 5 1 U .S . at 3 2 5 ; M a k o r, 4 3 7 F .3 d a t 6 0 1 ; 4 H A Z E N , su p ra n o te 2 5 , a t 2 8 ; see a lso N o v a k v . K a sa k s, 2 1 6 F .3 d 3 0 0 (2 0 0 0 ).
1 1 9 . T ella b s, In c., 5 5 1 U .S . a t 3 1 4 ; 4 H A Z E N , su p ra n o te 2 5 , a t 2 8 . 1 2 0 . T ella b s, In c., 5 5 1 U .S . a t 3 1 4 ; 4 H A Z E N , su p ra n o te 2 5 , a t 2 9 .
1 2 1 . 4 H A Z E N , su p ra n o te 2 5 , a t 2 9 (q u o tin g A C A F in a n cia l G u a ra n ty C o rp . v . A d v est, In c ., 5 1 2 F .3 d 4 6 , 5 9 (1 st C ir. 2 0 0 8 )); see a lso T ella b s, In c ., 5 5 1 U .S . a t 3 2 3 -2 4 .
1 2 2 . T ella b s, In c., 5 5 1 U .S . a t 3 3 0 (S c a lia, J., c o n c u rrin g ); 4 H A Z E N , su p ra n o te 2 5 , a t 3 0 . 1 2 3 . T ella b s, In c., 5 5 1 U .S . a t 3 2 8 -2 9 . T h e p rese n ce o f in q u iry n o tic e o r re d fla g s o f m a te ria l m issta te m e n ts ca n b e th e b a sis fo r p le ad in g su ffic ie n t re ck lessn ess to e sta b lish sc ie n te r. 4 H A Z E N ,su p ra n o te 2 5 , a t 3 0 (c itin g K a tz v . Im a g e In n o v atio n s H o ld in g s, In c ., 5 4 2 F . S u p p . 2 d 2 6 9 (S .D .N .Y . 2 0 0 8 )).
b y s ta tin g it. $
T h e s ta te m e n t m a k e r is th e p e r s o n o r e n tity w ith u ltim a te a u th o r ity o v e r th e s ta te m e n t . . . . W ith o u t c o n tr o l, a p e r s o n o r e n tity c a n m e r e ly s u g g e s t w h a t to s a y , n o t m a k e a s ta te m e n t in its o w n r ig h t. O n e w h o p r e p a r e s o r p u b lis h e s a s ta te m e n t o n b e h a lf o f a n o th e r is n o t its m a k e r .
%
I n o th e r w o r d s , th e s p e e c h w r ite r d o e s n o t c o n tr o l th e c o n te n t o f th e s p e e c h ; t h e s p e a k e r c o n tr o ls th e c o n te n t o f th e s p e e c h , a n d , th e r e fo r e , it is th e s p e a k e r w h o ta k e s th e b la m e .
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T h e S u p r e m e C o u r t r e a s o n e d th a t its J a n u s r u le w a s s u p p o r te d b y its d e c is io n in S to n e r id g e w h e r e o n ly th o s e w ith c o n tr o l
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o v e r th e s ta te m e n ts , n o t a id e r s a n d a b e tto r s , a r e lia b le fo r th e s t a te m e n ts .
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I II . C O L L E C T IV E S C IE N T E R : O F F T H E B E A T E N P A T H
A . A g e n c y L a w P e r sp e c tiv e
T h e m o s t b a s ic fo r m o f c o r p o r a te lia b ility is c o m m o n la w a g e n c y . A g e n c y is th e fid u c ia r y r e la tio n s h ip th a t a r is e s w h e n o n e p e r s o n ( a p r in c ip a l) m a n ife s ts a s s e n t to a n o th e r p e r s o n (a n a g e n t) th a t th e a g e n t s h a ll a c t o n th e p r in c ip a l's b e h a lf a n d s u b je c t to th e p r in c ip a l's c o n tr o l, a n d th e a g e n t m a n ife s ts a s s e n t o r o th e r w is e c o n s e n ts s o to a c t.
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T h e e le m e n t o f c o n tr o l is th e m o s t im p o r ta n t e le m e n t fo r a d is c u s s io n o n c o lle c tiv e
1 2 6 . Ja n u s C a p ita l G rp ., In c., 5 6 4 U .S . a t 1 4 2 .
1 2 7 . Id . a t 1 4 2 . A c c o rd in g ly , R u le 1 0 b -5 's p riv a te rig h t o f a c tio n d o es n o t in clu d e su its a g a in st a id ers a n d a b etto rs. Id .
1 2 8 . Id . a t1 4 0 . S o m e a rg u e th a t th e S u p re m e C o u rts h o ld in g in Ja n u s all b u t d estro y s th e d ete rre n t e ffe c t o f R u le 1 0 b -5 . S ee M a ro c c o , su p ra n o te 3 0 , a t 6 3 4 . T h e a u th o r d isa g re e s. H e b e lie v e s th a t th is sh o w s a m o v e b y th e S u p re m e C o u rt to p u ttin g e m p h a sis o n th e c o n tro l p a rt o f th e lia b ility a n a ly sis. Id . a t 6 6 2 -6 3 .
1 2 9 . A d isc u ssio n in v o lv in g th e in terre lated n e ss o f c o n tr o l p e rso n lia b ility u n d e r 1 5 U .S .C .S . § 7 8 t(a ) w o u ld b e a n in te re stin g c o m m e n t o r n o te, b u t su ch a d isc u ssio n is b ey o n d th e sc o p e o f th is n o te. Ja n u s b rie fly d isc u sse s c o n tr o l p e rso n liab ility in th e c o n tex t o f a w h o lly o w n e d su b sid ia ry . Ja n u s C a p ita l G rp ., In c., 5 6 4 U .S . a t 1 4 1 n .5 . A ll th a t is n e c e ssa ry fo r th is N o te is th a t a p la in tiff sta tes a c la im a g a in st th e c o n tro lle d e n tity in o rd e r to h o ld th e d efe n d a n t lia b le a s a c o n tro l p erso n . Id .; see L ia b ility o f B ro k e ra g e F irm , S e cu ritie s U n d erw riter, In v estm en t A d v iso r, o r S im ila r E n tity , o r In d iv id u a l A ffilia ted w ith S u ch E n tity , a s "C o n tro l P e rso n " U n d e r § 1 5 o f S ecu rities A ct (1 5 U .S .C .A . § 7 7 o ) a n d § 2 0 (a ) o f S e cu rities E x ch a n g e A c t (1 5 U .S .C .A . § 7 8 t(a )), 1 8 6 A .L .R . F E D . 1 6 9 (2 0 0 3 ).
1 3 0 . Ja n u s C a p ita l G rp ., In c., 5 6 4 U .S . a t 1 4 3 -4 4 ; S to n e rid g e In v . P a rtn ers, L L C ., 5 5 2 U .S . a t 1 5 2 -5 3 .
s c ie n te r . !
A c c o r d in g ly , th e p le a d in g a n a ly s is u n d e r th e P L S R A s h o u ld b e d e m a r c a te d s u c h th a t o n ly th o s e in c o n tr o l a r e h e ld lia b le fo r fr a u d .
W h ile th e S u p r e m e C o u r t d o e s n o t g r a ft a ll c o m m o n la w p r in c ip le s in to S e c tio n 1 0 (b ) , it a p p e a r s c le a r th a t th e C o u r t c o n s id e r s th e d o c tr in e o f r e s p o n d e a t s u p e r io r in te g r a l to u n d e r s ta n d in g S e c tio n 1 0 ( b ).
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U n d e r r e s p o n d e a t s u p e r io r , it is n o t s o m u c h a p p a r e n t
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o r a c tu a l !#
a u th o r ity o f th e a g e n t a s it is th e e m p lo y m e n t r e la tio n s h ip b e tw e e n p r in c ip a l a n d a g e n t th a t p r o d u c e s lia b ility .
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T h e p r in c ip a ls lia b ility d e p e n d s o n w h e th e r th e e m p lo y e e a c te d w ith in th e s c o p e o f th e ir e m p lo y m e n t.
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T h e r e s u ltin g lia b ility is b o th v ic a r io u s a n d s tr ic t in th e s e n s e th a t th e e m p lo y e r d id n o th in g w r o n g b u t is s till lia b le . Ju d g e L e a r n e d H a n d d e s c r ib e d th e r e s p o n d e a t s u p e r io r b a s e d c o r p o r a te lia b ility a s im p u t[ in g ] to th e c o r p o r a tio n . . . th e m e n ta l c o n d itio n o f its a g e n ts .
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I n th e c o n te x t o f c o r p o r a te lia b ility , im p u ta tio n e n c o u r a g e s a c o r p o r a te e m p lo y e r to s t r u c t u r e its e lf fo r e ffic ie n t c o n tr o l o f e m p lo y e e s a n d c o m m u n ic a tio n c h a n n e ls b e tw e e n p r in c ip a l a n d a g e n t.
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1 3 2 . S ee su p ra . S e c tio n II.E .
1 3 3 . M a k o r, 5 1 3 F .3 d a t 7 0 8 (c itin g A T & T v . W in b a c k & C o n se rv e P ro g ra m , In c ., 4 2 F .3 d 1 4 2 1 , 1 4 2 9 -3 3 (3 d C ir. 1 9 9 4 )). C o m m o n la w a g e n c y sp a w n ed th e th eo ry o f re sp o n d e a t su p erio r. B o n d i, su p ra n o te 7 4 , a t 5 .
1 3 4 . R E ST A T E M E N T (T H IR D ) O F A G E N C Y § 2 .0 1 -2 .0 2 (A M .L A W IN ST . 2 0 0 6 ). 1 3 5 . Id . § 2 .0 3 .
1 3 6 . B o n d i, su p ra n o te 7 4 , a t 5 .
1 3 7 . Id . a t 5 ; R E ST A T EM E N T (T H IR D ) O F A G E N C Y § 2 .0 4 (A M .L A W IN ST . 2 0 0 6 ). 1 3 8 . U n ite d S ta te s v . N ea rin g , 2 5 2 F . 2 2 3 , 2 3 1 (S .D .N .Y .1 9 1 8 ).
R e s p o n d e a t s u p e r io r p r o v id e s a s u ffic ie n t a n d e ffe c tiv e le g a l s ta n d a r d fo r h o ld in g a c o r p o r a tio n lia b le fo r th e fr a u d u le n t a c tio n s o f its e m p lo y e e s . C o lle c tiv e s c ie n te r g o e s to o fa r b e y o n d th e a n a ly s is o f r e s p o n d e a t s u p e r io r b y lo s in g th e fo c u s o n th e c o n tr o l e x e r c is e d b y th e c o r p o r a tio n .
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B . S e c u r itie s E x c h a n g e C o m m iss io n P e r sp e c tiv e
S o m e a r g u e th a t th e S E C s u s e o f c o lle c tiv e s c ie n te r is in a d v is a b le . "
I f th e S E C s u s e o f c o lle c tiv e s c ie n te r is s u b o p tim a l, th e n its u s e b y th e c ir c u its is c a lle d in to q u e s tio n b e c a u s e th e p o lic y is s u e s a r e m u c h th e s a m e . T h e S E C r a r e ly c h a r g e s a c o r p o r a t io n fo r fr a u d w ith o u t c h a r g in g in d iv id u a ls in th e c o r p o r a tio n a s w e ll.
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T h e S E C p r e d is p o s itio n a g a in s t c o lle c tiv e s c ie n te r w h e n c h a r g in g c o r p o r a tio n s is a ffir m e d b y m o s t c ir c u it c o u r ts n o t u s in g c o lle c tiv e s c ie n te r .
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E v e n if c o lle c tiv e s c ie n te r w e r e w id e ly a c c e p te d , it is s u b o p tim a l fo r th e S E C to u s e c o lle c tiv e s c ie n te r fo r s e v e r a l p o lic y r e a s o n s . F ir s t, th e d is tin c tio n b e tw e e n th e n e g lig e n c e s ta n d a r d o f S e c tio n 1 7 ( a ) ( 2 ) a n d ( 3 ) a n d in te n tio n a l o r r e c k le s s s ta n d a r d s o f S e c tio n 1 0 (b ) a n d S e c tio n 1 7 (a )( 1 ) w o u ld b e c o n fla te d .
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T h e d is tin c tio n o f th e 1 9 3 4 A c ts m a n y s ta n d a r d s w o u ld b e ir r e le v a n t if S e c tio n 1 0 ( b ) w e r e e x te n d e d b y c o lle c tiv e s c ie n te r .
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S e c o n d , th e p u r p o s e o f th e 1 9 3 4 A c t a n d th e P S L R A to p r o m o te a c o r p o r a te e n v ir o n m e n t o f v o lu n t a r y d isc lo s u r e w o u ld b e im p a ir e d b e c a u s e in o r d e r to a v o id lia b ility u n d e r c o lle c tiv e s c ie n te r e v e r y e m p lo y e e o f a c o r p o r a tio n w o u ld h a v e to b e in te r v ie w e d b e fo r e a n y d is c lo s u r e c o u ld b e m a d e . E v e n th e n , a n u n k n o w n m is s ta te m e n t c o u ld s till s p a r k lia b ility .
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T h ir d , th e c e n tr a l te n a n t o f th e S E C is d e te r r in g c o r p o r a tio n s fr o m c o m m ittin g fr a u d .
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E ffe c tiv e d e te r r e n c e o n ly o c c u r s w h e n th e p r in c ip a l h a s c o n tr o l o v e r th e a g e n t w ith k n o w le d g e .
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B e c a u s e a c o r p o r a tio n m u s t
1 4 0 . S e e S to n erid g e In v . P a rtn e rs, L L C , 5 5 2 U .S . a t 1 6 6 -6 7 ; R E ST A T E M E N T (T H IR D ) O F A G E N C Y § 1 .0 1 (A M . L A W IN ST .2 0 0 6 ); R E ST A T E M E N T (S E C O N D ) O F A G E N C Y § 1 (A M . L A W IN ST . 1 9 5 8 ); R E ST A T E M E N T (F IR ST ) O F A G E N C Y § 1 (A M . L A W IN ST . 1 9 3 3 ); see su p ra S e c tio n s II.E .1 , II.E .3 .
1 4 1 . B o n d i, su p ra n o te 7 4 , a t 1 7 , 3 0 -3 1 . 1 4 2 . Id . a t 1 5 -1 6 .
1 4 3 . Id . a t 1 6 .
1 4 4 . Id . a t 1 8 -2 0 ; see E rn st, 4 2 5 U .S . a t 1 9 9 (1 9 7 6 ). 1 4 5 . B o n d i, su p ra n o te 7 4 , a t 1 8 -2 0 .
1 4 6 . Id . a t 2 1 -2 3 ; see su p ra S e c tio n II.C . 1 4 7 . B o n d i, su p ra n o te 7 4 , a t 2 4 .
m a k e d is c lo s u r e s to c o m p o r t w ith S E C r e q u ir e m e n ts , a c o r p o r a te o ffic e r w o u ld h a v e to in te r v ie w e v e r y e m p lo y e e w ith k n o w le d g e t o p r e v e n t a n y m is s ta te m e n t a n d im p u ta tio n o f s c ie n te r o f a n e m p lo y e e w h o h a d k n o w le d g e o f th e m is s ta te m e n t.
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A c o r p o r a tio n a n d th e S E C a r e n o t w e ll s u ite d to fin d th e k n o w le d g e a b le p e r s o n w it h o u t e x o r b ita n t c o s ts , a n d th e r e fo r e , d e te r r e n c e b e c o m e s in e ffe c tiv e d u e to t h e w e ig h t o f im p r a c tic a lity .
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I f th e S E C a n d a c o r p o r a tio n c a n n o t d o it , h o w c a n a c o u r t k n o w w h ic h p e o p le to lo o k fo r ? F o u r th , S E C e n fo r c e m e n t w o u ld b e c o m e u n p r e d ic ta b le u n d e r c o lle c tiv e s c ie n te r , a n d c o r p o r a tio n s w o u ld la c k r e m e d ia l s te p s to s o lv e p o te n tia l p r o b le m s .
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F u r th e r m o r e , p e n a ltie s s o u g h t b y th e S E C u n d e r th e 1 9 3 4 A c t w o u ld b e e v e n m o r e u n c e r ta in th a n th e y a r e n o w , a n d w ith o u t e v e n th e c u r r e n t le v e l o f c e r ta in ty , th e e ffe c tiv e n e s s o f th e A c ts d e te r r e n c e w o u ld w a n e .
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A s B r a d le y B o n d i c o n c lu d e s : T h e th e o r y o f c o lle c tiv e s c ie n te r is a r a d ic a l d e p a r tu r e fr o m th e p r in c ip le s o f c o r p o r a te lia b ility a n d r u n s c o n tr a r y to th e o b je c tiv e s o f th e fe d e r a l s e c u r itie s la w s .
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IV . C IR C U IT S P L IT O V E R V IE W
T h e c ir c u it s a r e g e n e r a lly s p lit in to tw o c a m p s : r e s p o n d e a t s u p e r io r a n d c o lle c tiv e s c ie n te r . T h e F ifth , S e v e n th , N in th , a n d E le v e n th C ir c u its a d h e r e to a ty p e o f c o m m o n la w r e s p o n d e a t s u p e r io r a n a ly s is th a t h a s e v o lv e d d u e to th e P S L R A la n g u a g e .
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W h ile n o t r e je c tin g c o lle c tiv e s c ie n te r p e r s e , th e S e c o n d C ir c u it fa lls in to th e r e s p o n d e a t su p e r io r c a m p b y r e je c tin g c o lle c tiv e s c ie n te r a s a m a tte r o f fo c u s .
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T h e fo c u s s h o u ld b e o n w h e th e r
A G E N C Y § 1 (A M . L A W IN ST .1 9 5 8 );R E ST A T E M E N T (F IR ST ) O F A G E N C Y § 1 (A M .L A W IN ST . 1 9 3 3 ); see su p ra S e c tio n s II.E .1 , II.E .3 .
1 4 9 . B o n d i, su p ra n o te 7 4 , a t 2 5 . 1 5 0 . Id . a t 2 6 .
1 5 1 . Id . a t 2 8 -3 0 . 1 5 2 . Id . 1 5 3 . Id . a t 3 0 .
1 5 4 . S ee su p ra P a rt II; S ec tio n IV .A .
-th e p la in tiff p le a d e d a s tr o n g in fe r e n c e o f s c ie n te r , #$
a n d th is d o e s n o t r e q u ir e t h a t th e p la in tiff id e n t ify s p e c ific in d iv id u a ls in e v e r y c a s e .
#% S o m e r e s p o n d e a t s u p e r io r c ir c u its th e F ifth a n d E le v e n th C ir c u its r e je c t c o lle c tiv e s c ie n te r o u tr ig h t.
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T h e c o lle c tiv e s c ie n te r c a m p c o n ta in s o n ly th e S ix th C ir c u it.
A . R E S P O N D E A T S U P E R IO R C IR C U IT S
T h e r e s p o n d e a t s u p e r io r #'
c ir c u its r e je c t c o lle c tiv e s c ie n te r a n d r e q u ir e a n e x u s o f s c ie n te r a n d m is s ta t e m e n t m a k in g th a t r e s id e s in a s in g le in d iv id u a l d e fe n d a n t w ith in th e d e fe n d a n t c o r p o r a tio n .
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1 . F ifth a n d E le v e n th C ir c u its
T h e F ifth C ir c u it r e je c te d c o lle c tiv e s c ie n te r in S o u th la n d S e c . C o r p . v . I n sp ir e I n s. S o ls ., In c .
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T h e c o u r t h e ld th a t
fo r p u r p o s e s o f d e te r m in in g w h e th e r a s ta te m e n t m a d e b y t h e c o r p o r a tio n w a s m a d e b y it w ith r e q u is ite R u le 1 0 (b ) s c ie n te r w e b e lie v e it a p p r o p r ia te to lo o k to th e s ta te o f m in d o f t h e in d iv id u a l c o r p o r a te o ffic ia l o r o ffic ia ls w h o m a k e o r is s u e t h e s ta te m e n t . . . r a th e r th a n g e n e r a lly to th e c o lle c tiv e k n o w le d g e o f a ll t h e c o r p o r a tio n s o ffic e r s a n d e m p lo y e e s a c q u ir e d in t h e c o u r s e o f th e ir e m p lo y m e n t.
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In P h illip s v . S c ie n tific -A tla n ta , In c ., th e E le v e n th C ir c u it h e ld th a t s c ie n t e r m u s t b e fo u n d w ith r e s p e c t to e a c h d e fe n d a n t a n d w it h r e s p e c t to
R a th e r th a n req u irin g a c o m p a n y to u n d e rta k e th e n e a rly im p o ssib le ta sk o f sy n th e sizin g th e k n o w le d g e o f its a g e n ts p rio r to m a k in g a p u b lic sta te m en t, se m i-stro n g -fo rm sc ien ter sim p ly re q u ire s th o se e x ec u tiv e s re sp o n sib le fo r th e statem e n t to e n su re th e statem e n t d o e s n o t c o n ta in in fo rm a tio n th a t c o n tr ad ic ts w h a t th e y k n o w to b e tru e . T h is is a re a so n a b le e x p e cta tio n . Id . a t 1 0 0 .
1 5 6 . M a k o r, 5 1 3 F .3 d a t 7 0 2 , 7 0 5 . 1 5 7 . S ee in fra S e c tio n IV .A .2 . 1 5 8 . S ee in fra S e c tio n IV .A .3 . 1 5 9 . S ee su p ra S e c tio n III.A .
1 6 0 . In R e O m n ic a re , In c . S e c . L itig ., 7 6 9 F .3 d 4 5 5 , 4 7 3 -7 4 (6 th C ir. 2 0 1 4 ).
1 6 1 . S o u th la n d S e c . C o rp . v . In sp ire In s. S o ls., In c ., 3 6 5 F .3 d 3 5 3 , 3 6 6 (5 th C ir. 2 0 0 4 ) (q u o tin g N o r d stro m , In c . v . C h u b b & S o n , In c ., 5 4 F .3 d 1 4 2 4 , 1 4 3 5 (9 th C ir. 1 9 9 5 )); se e In R e O m n ic a re, In c . S e c. L itig ., 7 6 9 F .3 d a t 4 7 4 .
