United States: Sixth Circuit Clarifies Standard For Pleading "Collective Knowledge" Scienter In Securities Fraud Cases

A recently issued decision from the Sixth Circuit adopts a modified "collective knowledge" theory for determining corporate scienter and clarifies the standard for pleading corporate scienter in a securities fraud action. The decision pares back the Circuit's more expansive position in an earlier decision that permitted knowledge of all of the corporation's officers and employees to be imputed to the corporation. The decision also highlights for senior executives of public corporations the importance of internal review and oversight of public statements.

The On October 10, 2014, in Ansfield v. Omnicare, Inc., No. 13-5597 ("Omnicare"), a three-judge panel for the U.S. Court of Appeals for the Sixth Circuit clarified the standard in securities fraud suits for alleging the necessary element of "scienter," or the mental state embracing intent to deceive, manipulate or defraud, with respect to corporate defendants. In Omnicare, the plaintiffs alleged that a corporation and several corporate officers, employees and agents had committed securities fraud by making various material misrepresentations and omissions in public and in SEC filings regarding the corporation's compliance with Medicare and Medicaid regulations. In several years of the corporation's SEC filings, the corporation had stated that it believed it was complying in all material respects with federal, state and local law, and further that its billing practices materially complied with applicable state and federal requirements. However, plaintiffs alleged that the corporation had conducted three internal audits that showed that the corporation's billing and records practices were not in compliance with Medicare and Medicaid regulations, rendering those statements fraudulent.

The panel noted that a securities fraud suit must plead facts to show the following six elements: (1) a material misrepresentation or omission by the defendant, (2) scienter, (3) a connection between the misrepresentation or omission and the purchase or sale of a security, (4) reliance upon the misrepresentation or omission, (5) economic loss and (6) loss causation. The panel ruled that there are different standards for a misrepresentation that concerns "hard information" than for one concerning "soft information." A misrepresentation regarding historical or factual and objectively verifiable information (hard information) is actionable if a plaintiff pleads facts to show the statement was objectively false and the defendant acted with at least recklessness. However, a misrepresentation concerning soft information, such as predictions or opinions, is actionable only if the plaintiff pleads facts to show that the statement was made with knowledge that the statement was false and for the purpose of deceiving, manipulating or defrauding the public.

While the panel found that the Omnicare plaintiffs were able to plead facts adequately showing the first element, it nevertheless held that the Omnicare plaintiffs were unable to meet the heightened particularity standard for pleading scienter for any of the named corporate officers, employees and agents (or, ultimately, the corporation itself). Allegations against the individual defendants "on information and belief" that such individuals had received the results of the audits at issue were not sufficiently particular. Likewise, alleging only generally that the audits that were conducted "revealed fraud and compliance issues," and that a compliance officer raised "compliance related concerns" to the attention of corporate executives and officers, did not meet plaintiffs' heightened pleading standard of alleging with particularity "that Person A did Act B at Time C." Slip op. at 33.

After examining the allegations against the individual defendants, the Omnicare panel then analyzed the standard for pleading scienter as it relates to a corporate defendant. It noted that the heightened standard for pleading scienter in securities fraud cases can be even more complicated when considering a defendant that is itself a corporation "because there is the additional question of whose knowledge and state of mind matters." Slip op. at 20. The panel first surveyed the predominant views on corporate scienter in securities fraud cases in its sister circuits. It noted that the Fifth and Eleventh Circuits had adopted a narrow view of corporate scienter, in keeping with common law fraud principles, by allowing scienter to be imputed to a corporation only upon examining the state of mind of specific individual corporate officials who make, issue, furnish information for or approve false or misleading statements. In contrast, the Second, Sixth, Seventh and Ninth Circuits had all held to varying degrees that some form of collective knowledge may be imputed to a corporate defendant for purposes of finding scienter. In other words, under a broader collective view of corporate scienter, knowledge of a corporate officer, agent or employee may be imputed to a corporation even though that officer, agent or employee did not actually make or approve the false or misleading statement at issue.

In Omnicare, the Sixth Circuit panel noted that neither approach, at least when taken to its logical extreme, would be ideal. In its attempt to find middle ground, the panel scaled back on the dicta contained in its prior scienter ruling, in which it had stated that "knowledge of a corporate officer or agent acting within the scope of [his] authority is attributable to a corporation." Slip op. at 23 (quoting City of Monroe Emps. Ret. Sys. v. Bridgestone Corp., 399 F.3d 651, 688 (6th Cir. 2005)). The panel noted that reading that decision too broadly could expose corporations to liability beyond Congress's intent, and that a statement made by a low-level employee, perhaps even in a different country, could needlessly cause a corporation to face liability. Determining that such a result runs contrary to Congress's heightened pleading standard for scienter in securities fraud cases, the Sixth Circuit panel adopted the following test:

The state(s) of mind of any of the following are probative for purposes of determining whether a misrepresentation made by a corporation was made by it with the requisite scienter under Section 10(b):...

(a) The individual agent who uttered or issued the misrepresentation;

(b) Any individual agent who authorized, requested, commanded, furnished information for, prepared (including suggesting or contributing language for inclusion therein or omission therefrom), reviewed, or approved the statement in which the misrepresentation was made before its utterance or issuance; or

(c) Any high managerial agent or member of the board of directors who ratified, recklessly disregarded, or tolerated the misrepresentation after its utterance or issuance. Slip op. at 24.

Satisfied that the above test mitigated some of the Sixth Circuit's earlier statements as to imputing the knowledge of agents at all levels to corporate defendants, the Sixth Circuit panel further stated that the above test "largely prevents corporations from evading liability through tacit encouragement and willful ignorance" (a potential issue with the Fifth and Eleventh Circuits' more narrow tests), and would further not provide corporate insulation "if lower-level employees, contributing to the misstatement, knowingly provide false information to their superiors with the intent to defraud the public. As a result, corporations that willfully permit or encourage the shielding of bad news from management will potentially be liable." Slip op. at 25.

Although the Sixth Circuit panel agreed with plaintiffs that the corporation's public statements and omissions were both material and false or misleading, the panel still held that the plaintiffs had failed to plead adequately and with particularity facts sufficient to show scienter, both as to the individual defendants and the corporation itself, and affirmed the lower court's dismissal of the plaintiffs' claims.

While the Sixth Circuit panel explicitly adopted its formulation of a modified "collective knowledge" theory for determining corporate scienter in securities fraud cases, it remains to be seen whether any other circuit will endorse it or whether the Supreme Court will ultimately weigh in to resolve the split among the circuits.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.