The risk must be of such a nature and degree that, considering the nature and purpose of the actor's conduct and the circumstances known to him, its disregard involves a gross deviation from the standard of conduct that a law-abiding person would observe in the actor's situation. However, that test is only met if a culpable mental state has been shown, namely, an awareness of the risk and a conscious disregard of the risk that a harmful result will occur from the actor's conduct. Within a year after the Hochfelder decision, the Seventh Circuit adopted a test for recklessness that echoed the Model Penal Code's definition, reflecting each of its elements, although reversing the order in which they were recited. The first trap is found in the dual meaning of the word recklessness. The way to avoid this trap is to remain mindful at all times in analyzing scienter under 10b-5 that evidence of some form of intent must be found.
Conscious disregard is the lowest level of intent that can pass muster.
Thus, allegations or proof of mere failure to take action or failure to learn facts, standing alone, must be found wanting. Rather, evidence of conscious disregard of the risk of fraud would have to be shown. A second trap can be found within the Sundstrand formulation itself. But since the latter reading is the test for negligence and does not require conscious behavior, it would not suffice under Hochfelder . Most courts, like Baesa , have appreciated this and have read the Sundstrand test, as did the court in Baesa , to require a mental awareness.