Where to Point the Finger: Omnicare's Attempt to Rectify the Collective Scienter Debate

INTRODUCTIONOver the past three years, an overwhelming majority of securities fraud class action claims have alleged section 10(b) and Rule 10b-5 violations.1 Financial scandals result in lawsuits brought by true victims and opportunistic plaintiffs alike.2 To distinguish meritorious and frivolous suits, Congress established the Private Securities Litigation Reform Act ("PSLRA") in 1995, which heightened the pleading requirements in securities fraud cases.3 Unfortunately, Congress failed to define explicitly the requirements for pleading a defendant's mental state, otherwise known as scienter.4Although the concept of scienter is well established, the circumstances in which it is imputed to a corporation is unsettled.5 The federal circuits are split on the applicability of a theory known as collective scienter to the pleading standards of securities fraud cases.6 Collective scienter attaches corporate liability by aggregating the mental states of numerous agents within a corporation, regardless of whether those employees had any role in the alleged fraud. 7 Numerous circuits have rejected collective scienter, looking no further than the state of mind of the corporate officials who make or issue alleged fraudulent statements to analyze scienter.8Recently, in 2014 in In re Omnicare, Inc. Securities Litigation ("Omnicare II"), the U.S. Court of Appeals for the Sixth Circuit set forth a new approach to corporate scienter. 9 Combining the theories of several other circuits, the Sixth Circuit laid out a hybrid collective scienter rule in order to rectify the ideological flaws in each circuit's stance.10 The Sixth Circuit's new theory of corporate scienter liability has established a "middle-ground" in the collective scienter debate, and made the issue ripe for U.S. Supreme Court review.11This Note argues that the Omnicare II ruling, with a small change, should serve as the prevailing standard for corporate scienter.12 Part I provides an overview of corporate scienter and the competing scholarly stances on the issue.13 Part II discusses both the traditional and somewhat unclear positions on collective scienter adopted throughout the federal circuits. 14 Part III examines the Sixth Circuit's position on corporate scienter leading up to Omnicare II, and how the court's new approach relates to other circuits.15 Finally, Part IV argues that the Omnicare standard is ideal for undecided circuits, but the term "high managerial agent" in its standard must be further defined in order to avoid ambiguities in securities fraud pleading.16I. PLEADING SCIENTER AND ITS COMPETING THEORIESAn enduring tension between accountability and legitimacy in federal securities claims underlies the various scienter approaches among the feder- al circuits.17 This Part provides a historical overview of securities fraud and section 10(b) jurisprudence, and the competing approaches of collective scienter resulting therefrom.18 Section A discusses both the Securities Exchange Act of 1934 (the "Exchange Act") and the Private Securities Litigation Reform Act, explaining the role of each statute in the perceived need for pleading collective scienter.19 Section B analyzes the competing stances on collective scienter, and the corresponding deficiencies that courts and scholars have identified.20A. The Exchange Act and Pleading Under the PSLRACongress enacted the Exchange Act to ensure full disclosure by publicly traded corporations and to provide investors with complete and accurate information about potential investments.21 Section 10(b) of the Exchange Act broadly declares it unlawful to engage in any deceptive or manipulative conduct in connection with the purchase or sale of securities.22 Pursuant to authority granted by the Exchange Act, the Securities and Exchange Commission ("SEC") created Rule 10b-5, which makes employment of manipulative devices or fraudulent practices illegal. 23 Specifically, the rule polices false statements or omissions of material fact that serve to mislead the public in the purchase and sale of securities. …