Securities Law | Expert Legal Commentary
May 21, 2008
Seventh Circuit Looks at Corporate Scienter and Scheme Liability Rules in Pugh v. Tribune Co.
Pugh, et al. v. Tribune Company, et al.
By
Joel B. Ginsberg
At the heart of these two consolidated cases is the clear, admitted, egregious fraud perpetrated by employees of a subsidiary of the Tribune Company. The plaintiffs in both cases (a securities case and an ERISA case) tried to extend liability for those fraudulent acts up through the corporate ranks of the Tribune Company, arguing that higher-ups knew or should have known of the fraud while it was happening. Unfortunately for the plaintiffs, their allegations were based primarily on conclusory statements, speculative inferences and tenuous links. Their cases were dismissed with prejudice early in the litigation, and the 7th Circuit affirmed those dismissals, as discussed below. There has been, and still is, a split among jurisdictions as to the proper standard for proving corporate scienter for purposes of corporate liability under Section 10(b) of the 1934 Act. In Pugh, the 7th Circuit dismisses the collective scienter approach relied upon by a minority of courts and applies the more traditional, majority rule requiring individual scienter by officials who contributed to the public statements at issue in some meaningful way. Also, notably, in Pugh, the 7th Circuit became the first federal court to apply the U.S. Supreme Court’s ruling regarding scheme liability in Stoneridge Investment Partners LLC v. Scientific-Atlanta Inc., 128 S.Ct. 761 (2008).
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1See, e.g., In re Motorola Secs. Litig., No. 03 Civ. 287, 2004 WL 203769 (ND Ill. Sept. 9 2004) (dismissing the claims against individual defendants because plaintiff failed to allege that they had individual scienter, but upholding the complaint against Motorola because of general knowledge within the company); City of Monroe Employees Retirement Sys. V. Bridgestone Corp., 387 F.3d 467 (6th Cir. 2004) (finding that Bridgestone as a company had the requisite scienter based on the knowledge of employees who did not allegedly make the false statements and who were not even senior personnel).
2 See, e.g. In re Apple Computer Inc., 127 Fed. Appx 296 (9th Cir. 2005) (“A corporation is deemed to have the requisite scienter for fraud only if the individual corporate officer making the statement has the requisite level of scienter at the time that he or she makes the statement.); Southland Secs Corp. v. INSpire Ins. Solutions Inc., 365 F.3d 353 (5th Cir. 2004) (specifically adopting the traditional approach and rejecting the collective scienter approach).
3 See, e.g. In re Sonus Networks Inc. Secs. Litig., No. 04 Civ. 10294, 2006 WL 1308165 (D. Mass. May 10, 2006) (finding that the intent of the mid-management level controller could be imputed to the company); In re NUI Secs. Litig., 314 F. Supp. 2d 388 (D.N.J. 2004) (imputing to the company the knowledge of the associate general counsel).
4Claims against one Newsday-Hoy defendant, Raymond Jansen, were thrown out for the opposite reason – though he made some of the public statements, there was no evidence that he knew of or participated in the fraud. Indeed, he was the only Newsday-Hoy defendant who did not plead guilty to fraud.
