The Second Circuit vacated and remanded a district court’s decision denying defendants’ motion to dismiss a putative securities fraud class action filed against a financial service company, its subsidiary and two executive officers. The complaint alleged that the defendant companies systematically originated defective loans despite clear signs that borrowers were not creditworthy, publicly misrepresented the companies’ reasons for restating their loan loss reserves, and concealed the faulty underwriting procedures employed in their loan approval process. The District Court granted the individual defendants’ motion to dismiss the complaint for failure to adequately plead scienter, but denied that motion as to the corporate defendants.
On appeal, the Second Circuit rejected defendants’ argument that plaintiff could not, as a matter of law, plead scienter against the corporate defendants because it had failed to plead scienter against the individual executive officer defendants. To the contrary, the Second Circuit ruled that a plaintiff could satisfy the Private Securities Litigation Reform Act’s scienter pleading standard with respect to a corporate defendant by pleading facts creating a “strong inference” that someone whose intent could be imputed to the company acted with the requisite scienter—even if the actor is not specifically identified and named as a defendant. However, after analyzing the plaintiff’s allegations, the Second Circuit ruled that plaintiff had not satisfied this burden either with respect to the individual defendants or any other employee or agent of the corporate defendants. (Teamsters Local 445 Freight Div. Pension Fund. V. Dynex Capital Inc., 531 F.3d 190 (2d Cir. June 26, 2008))