Opinion ID: 765192
Heading Depth: 3
Heading Rank: 1

Heading: The Plain Language of the PSLRA

Text: The PSLRA provides, in pertinent part: 9 (b) Requirements for securities fraud actions . . . (2) Required state of mind 10 In any private action arising under this chapter in which the plaintiff may recover money damages only on proof that the defendant acted with a particular state of mind, the complaint shall, with respect to each act or omission alleged to violate this chapter, state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind. 11 15 U.S.C. S 78u-4(b)(2) (bold emphasis in original; underline emphasis added). Under this provision, the mental state required for securities fraud liability is distinct from the level of pleading required to infer that mental state. Therefore, we must make two separate determinations: (1) what is the required state of mind; and (2) what constitutes a strong inference of that state of mind. 12
13 The required state of mind in S 78u-4(b)(2) refers to the scienter requirement applicable to the underlying securities fraud claim brought by the plaintiff. In this case, Brody brought her securities fraud action under S 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, which establishes a private cause of action for securities fraud. See 17 C.F.R. S 240.10b-5. Therefore, we look to S10(b) for the required state of mind. 3 14 The Supreme Court has defined scienter in the context of S10(b) as a mental state embracing intent to deceive, manipulate, or defraud. See Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193-94 n.12, 96 S. Ct. 1375, 1381 n.12, 47 L. Ed. 2d 668 (1976). In Hochfelder, the Supreme Court addressed the question of whether a civil action for damages under S10(b) would lie for negligent conduct. It decided that no conduct -- negligent or otherwise -- is actionable under S10(b) unless plaintiffs make a showing of scienter, i.e., intent to deceive, manipulate, or defraud. Id. at 193, 96 S. Ct. at 1381, 47 L. Ed. 2d 668. The Supreme Court reasoned that S10(b) makes unlawful the use of any manipulative or deceptive device or contrivance in contravention of SEC Rules. Hochfelder, 425 U.S. at 197, 96 S. Ct. at 1383, 47 L. Ed. 2d 668. As a result, the Court held that [t]he words `manipulative and deceptive' used in conjunction with `device or contrivance' strongly suggest that S 10(b) was intended to proscribe knowing or intentional misconduct. Id. (citations omitted) (emphasis added). 4 15 Although the Supreme Court concluded that S10(b) was intended to proscribe knowing or intentional conduct as opposed to negligent conduct, it noted that [i]n certain areas of the law recklessness is considered to be a form of intentional conduct for purposes of imposing liability for some act. Id. at 193-94 n.12, 96 S. Ct. at 1381 n.12, 47 L. Ed. 2d 668. Accordingly, the Supreme Court left open the question of whether, in some circumstances, reckless behavior is sufficient for civil liability under S10(b) and Rule 10b-5. Id. 16 After Hochfelder, but long before enactment of the PSLRA, we answered that question in the affirmative, holding that Congress intended the ambit of S10(b) to reach a broad category of behavior, including knowing or reckless conduct. Nelson v. Serwold, 576 F.2d 1332, 1337 (9th Cir. 1978). In Nelson, we declined to define recklessness, but our opinion indicates that we viewed it as a form of intentional, not merely negligent, conduct. We expressly acknowledged the Supreme Court's words in Hochfelder that [i]n certain areas of the law recklessness is considered to be a form of intentional conduct for purposes of imposing liability for some act. Id. (quoting Hochfelder, 425 U.S. at 193-94 n.12, 96 S. Ct. at 1381, n.12, 47 L. Ed. 2d 668). Moreover, we stated that the evidence supports a finding of recklessness, or some degree of intent not sufficiently aggravated to be characterized as `deliberate and cold-blooded.' Id. at 1338. Thus, we apparently followed the Supreme Court's guidance in Hochfelder that reckless behavior in the S10(b) context is merely a lesser form of intentional conduct. 17 In Hollinger v. Titan Capital Corp., 914 F.2d 1564 (9th Cir. 1990) (en banc), we again held that recklessness satisfies the element of scienter in a civil action for damages under S10(b) and Rule 10b-5. 914 F.2d at 1568-69. This time, we explicitly defined recklessness: 18 Today we adopt the standard of recklessness articulated by the Seventh Circuit in Sundstrand Corp. v. Sun Chem. Corp., 553 F.2d 1033, 1044-45 (7th Cir.), cert. denied, 434 U.S. 875, 98 S.Ct. 224, 54 L.Ed.2d 155 (1977) . . . [R]eckless conduct may be defined as a highly unreasonable omission, involving not merely simple, or even inexcusable negligence, but an extreme departure from the standards of ordinary care, and which presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious that the actor must have been aware of it. 19 Hollinger, 914 F.2d at 1569 (quoting Sundstrand Corp. v. Sun Chem. Corp., 553 F.2d 1033, 1045 (7th Cir. 1977)). Our definition of recklessness, as taken from Sundstrand, strongly suggests that we continued to view it as a form of intentional or knowing misconduct. 5 We used the words known and must have been aware, which suggest consciousness or deliberateness. Indeed, we expressly acknowledged our own prior statement that recklessness is a form of intent rather than a greater degree of negligence, see id. (citing Vucinich v. Paine, Webber, Jackson & Curtis Inc. , 739 F.2d 1434, 1435 (9th Cir.1984)), and the Supreme Court's statement that recklessness in the context of S10(b) is a form of intentional conduct, see id. at 1568 (quoting Hochfelder, 425 U.S. at 193-94 n.12, 96 S. Ct. at 1381, n.12, 47 L. Ed. 2d 668). 6 20 These cases indicate that recklessness only satisfies scienter under S10(b) to the extent that it reflects some degree of intentional or conscious misconduct. 7 To repeat, recklessness in the S10(b) context is, in the words of the Supreme Court, a form of intentional conduct. See Hochfelder, 425 U.S. at 193-94 n.12, 96 S. Ct. at 1381 n.12, 47 L. Ed. 2d 668. For this reason, we read the PSLRA language that the particular facts must give rise to a strong inference . . . [of] the required state of mind to mean that the evidence must create a strong inference of, at a minimum, deliberate recklessness. 21 We now turn to our second inquiry, i.e., what constitutes a strong inference of deliberate recklessness? 22
23 Again, we begin with the language of the statute because if the language is clear, we need inquire no further. See Glickman, 82 F.3d at 830-31. In this case, the statute is silent as to the central issue: the text of the PSLRA does not state whether motive and opportunity or circumstantial evidence of simple recklessness are sufficient to raise a strong inference of deliberate recklessness. The plain text of the PSLRA leaves it open for us to consider circumstantial evidence of recklessness and motive and opportunity as evidence of deliberate recklessness. However, it does not indicate whether they alone are enough to establish a strong inference of deliberate recklessness. In the absence of a clear command in the text, we turn to the legislative history for guidance. See id.