The Ubiquity of Greed: A Contextual Model for Analysis of Scienter

Abstract

Currently, there is no standard judicial approach or analytical rubric for gauging the extent to which allegations of greed are indicative of scienter in civil securities fraud cases. The Private Securities Litigation Reform Act of 1995 (PSLRA) requires that the complaint state “with particularity” facts giving rise to a “strong inference” that the defendant acted with the scienter required for the cause of action. Uniformly referred to in tandem as “motive and opportunity,” the presence of a motive behind the fraud, combined with the perpetrator’s opportunity to commit it has long been a method for establishing intent. As part of a motive and opportunity pleading, some plaintiffs have contended that greed - in the form of perpetuating a prestigious executive position, ensuring a gainful bonus, or maintaining the appearance of corporate profitability - is a bona fide motive evidencing scienter. Such allegations have met disparate and somewhat unreasoned fates. From the over one hundred reported Circuit Court cases interpreting the strong inference standard in a variety of factual settings this article proposes a framework for more orderly analysis of the sufficiency of allegations of corporate and personal avarice. Guided by a well-established model for consideration of insider trading, the contextual model identifies three dimensions - referred to as magnitude, timing, and atypicality - that can heighten ordinary profit-seeking activities to suspicious or unusual conduct, a motive that properly can give rise to a strong inference of scienter.