In a decision that appears to settle a conflict existing within its circuit, the Second Circuit Court of Appeals recently held that the Private Securities Litigation Reform Act of 1995 ("PSLRA") did not alter the standard for pleading scienter in securities fraud actions brought in the Second Circuit.
Prior to the enactment of the PSLRA, a plaintiff who asserted a securities fraud action in the Second Circuit was required to plead a "strong inference" of scienter by showing either (a) motive and opportunity to commit fraud, or (b) strong circumstantial evidence of recklessness or conscious misbehavior.
While several district courts within the Second Circuit adhered to this formulation after the enactment of the PSLRA, others did not. Rather, those district courts opined that Congress intended to fortify the Second Circuit requirements for pleading scienter, and held that pleading motive and opportunity, without more, no longer raised a strong inference of scienter. See In re Health Management Sys., Inc. Sec. Litig., 1998 WL 283286 (S.D.N.Y. June 1, 1998); In re Glenayre Tech., Inc. Sec. Litig., 982 F. Supp. 294 (S.D.N.Y. 1997); In re Baesa Sec. Litig., 969 F. Supp. 238 (S.D.N.Y. 1997). Still other district courts held that recklessness had to be "conscious"-- approximating actual intent -- in order to raise a strong inference of scienter. See Novak v. Kasaks, 997 F. Supp. 425 (S.D.N.Y. 1998).
Without addressing the conflict directly, the Second Circuit stated that the PSLRA "heightened the requirement for pleading scienter to the level used by the Second Circuit," and thus affirmed that scienter may be pleaded by way of motive and opportunity or strong circumstantial evidence of recklessness or conscious misbehavior.
Press v. Chemical Inv. Servs. Corp., 166 F.3d 529 (2d Cir. 1999).