In pleading a Section 10b/Rule 10b-5 claim, it is well established that a plaintiff must establish a “strong inference” of scienter.  In the Third Circuit, a strong inference may be established by:  (1) alleging facts to show that the defendants had both motive and opportunity to commit fraud; and/or (2) alleging facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness.  In the past decade, the Third Circuit has several reported decisions discussing the scienter pleading requirement against individual officers or directors of the corporation.  There is little guidance, however, on what a plaintiff must plead to establish a strong inference of scienter against the corporate entity. 

Recently, the Third Circuit discussed the scienter pleading standard against corporations.  In the unreported decision of City Of Roseville Employees’ Retirement System v. Horizon Lines, Inc., Civil Action No. 10-2788 (3d Cir. Aug. 24, 2011), the Third Circuit noted that the PSLRA places a weighty burden on plaintiffs and the corporate entity’s scienter cannot be based on the scienter of an individual.  In that case, the District Court applied the Fifth Circuit’s approach, in which the court recognized that statements of executive officers may be attributed to a corporation when they are made pursuant to their authority within the company.  The plaintiffs, in contrast, contended that it may plead scienter against the corporation without successfully pleading a claim against an individual when the facts establish that the corporation adopted false statements.   

The Third Circuit disagreed with the plaintiffs and did not adopt the District Court’s reasoning.  The Court first distinguished the cases relied upon by the plaintiff by holding that the allegations against the corporation in those cases were extraordinary because the statements were so dramatic that the announcement would have been approved by the corporate officials sufficiently knowledgeable about the company to know that the announcement was false.  In affirming the District Court judgment, the Third Circuit noted that the plaintiff’s allegations were not “extraordinary” enough to plead scienter against the corporate defendant.  The Third Circuit held that, as a result, it did not need to address or adopt any particular approach but that the facts alleged could not survive a motion to dismiss, even if it were possible to plead scienter against a corporation without pleading scienter against an individual. 

Although unreported, the Horizon Lines decision could require plaintiffs to provide extraordinary facts establishing the extreme fallacy of the statements to plead scienter against a corporation.  However, because there is little guidance on the pleading requirement to establish scienter against corporation, defense attorneys could move to dismiss a plaintiff’s complaint where the plaintiff has not alleged significant and extraordinary facts of falsity.