A Case-By-Case Approach to Pleading Scienter Under the Private Securities Litigation Reform Act of 1995

Securities fraud litigation under Rule lOb-5 threatens all publicly traded companies: according to the Stanford Securities Class Action Clearinghouse, in 1998 a securities fraud lawsuit was filed for nearly every day that the stock markets were open. Some of these lawsuits appear to be frivolous, triggered by inevitable fluctuations in stock prices (so-called "fraud by hindsight" complaints), while others represent legitimate efforts at private enforcement of the securities laws. Disposition on the pleadings is a critical defense strategy for all securities lawsuits. Securities fraud lawsuits that withstand a 12(b)(6) motion almost always settle, regardless of the actual merits of the case or the probability of success at trial, because of the massive discovery and defense costs associated with such suits.

Because Rule lOb-5 requires a showing of scienter, a mental state embracing "intent to deceive, manipulate, or defraud," defendants can often successfully dispose of a securities fraud case before being forced to settle by challenging the plaintiff's scienter pleading. For these reasons, the standard for pleading scienter is an appropriate context in which to balance the competing interests of eliminating abusive claims and permitting meritorious ones.