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Second Circuit Addresses Collective Scienter

By Edward J. Fuhr, Terence J. Rasmussen, and Steven M. Haas

The Second Circuit recently issued an important decision in Teamsters Local 445 Freight Div. Pension Fund v. Dynex Capital Inc., 531 F.3d 190 (2d Cir. 2008) (“Dynex“), which has significant implications for securities class action litigation and the continuing fallout from the crisis in the credit markets. The decision addressed the issue of collective scienter, or whether a corporation can commit securities fraud when none of its individual agents acted with fraudulent intent.

The court rejected the expansive doctrine of collective scienter urged by the plaintiff and held that the plaintiff had failed to satisfy the heightened pleading requirements of the Private Securities Litigation Reform Act (“Reform Act”). In particular, the court held that the inference of fraud urged by the plaintiff was weaker than the competing inference that the poor performance of certain asset-backed securities was the result of general market malaise. The opinion should prove significant in the many subprime mortgage and other lawsuits that have been filed in the wake of the ongoing credit crisis.

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