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Scienter - Further Readings

defendant act court person

[Latin, Knowingly.] Guilty knowledge that is sufficient to charge a person with the consequences of his or her acts.

The term scienter refers to a state of mind often required to hold a person legally accountable for her acts. The term often is used interchangeably with MENS REA, which describes criminal intent, but scienter has a broader application because it also describes knowledge required to assign liability in many civil cases.

Scienter denotes a level of intent on the part of the defendant. In Ernst and Ernst v. Hochfelder, 425 U.S. 185, 96 S. Ct. 1375, 47 L. Ed. 2d 668 (1976), the U.S. Supreme Court described scienter as "a mental state embracing intent to deceive, manipulate, or defraud." The definition in Ernst was fashioned in the context of a financial dispute, but it illustrates the sort of guilty knowledge that constitutes scienter.

Scienter is relevant to the pleadings in a case. Plaintiffs and prosecutors alike must include in their pleadings allegations that the defendant acted with some knowledge of wrongdoing or guilt. If a legislative body passes a law that has punitive sanctions or harsh civil sanctions, it normally includes a provision stating that a person must act willfully, knowingly, intentionally, or recklessly, or it provides similar scienter requirement. Legislative bodies do not, however, always refer to scienter in statutes.

In the Ernst case, the investors in a brokerage firm brought suit against an accounting firm after the principal investor committed suicide and left a note revealing that the brokerage firm was a scam. The investors brought suit for damages against the brokerage firm's accounting firm under sections 10(b) and 10b-5 of the Securities Exchange Act of 1934 (15 U.S.C.A. § 78a et seq.), which makes it unlawful for any person to engage in various financial transgressions, such as employing any device, scheme, or artifice to defraud, or engaging in any act, practice, or course of business that operates as a FRAUD or deceit upon any person in connection with the purchase or sale of any security.

Significantly, the Securities Exchange Act does not mention any standard for intent. The courts had to decide whether a party could make a claim under the act against a person without alleging that the person acted intentionally, knowingly, or willfully.

The investors in Ernst did not allege that the accounting firm had an intent to defraud the investors. Rather, they alleged only that the accounting firm had been negligent in its accounting and that the NEGLIGENCE constituted a violation of the Securities Exchange Act. The Supreme Court ruled that an allegation of negligent conduct alone is insufficient to prove a violation of the Securities Exchange Act. According to the Court, the language in the act reflected a congressional intent to require plaintiffs to prove scienter on the part of the defendant to establish a claim under the act.

Most courts hold that reckless conduct may also constitute scienter. The definition of reckless includes conduct that reasonable persons know is unsafe or illegal. Thus, even if a defendant did not have actual knowledge that his behavior was criminal, scienter may be implied by his reckless actions.

In some cases the level of scienter required to find a defendant liable or culpable may fluctuate. In Metge v. Baehler, 762 F.2d 621 (1985), a group of investors brought suit against a bank, alleging that the bank had aided and abetted a securities fraud operation. To establish a defendant's liability for aiding and abetting a securities fraud transaction, the plaintiff must prove that there was a SECURITIES LAW violation, that the defendant knew about the violation, and that the defendant substantially assisted in the violation. In sending the case back to the trial court, the U.S. Court of Appeals for the Eighth Circuit stated that in a case alleging aiding and abetting, more scienter is required if the plaintiff has little proof that the defendant substantially assisted in the violation. The court noted that the bank seemed blameworthy only because it failed to act on possible suspicions of impropriety and that the bank had no duty to notify the plaintiffs about the actions of others. In such a case, the court advised that "an alleged aider-abettor should be found liable only if scienter of the high 'conscious intent' variety can be proved. Where some special duty of disclosure exists, then liability should be possible with a lesser degree of scienter."

In some cases or claims, a plaintiff need not prove that the defendant acted with any scienter. These cases or claims are based on STRICT LIABILITY statutes, which impose criminal and civil liability without regard to the mental state of the defendant. For example, a statute that prohibits the sale of cigarettes to minors may authorize punishment for such a sale even if the seller attempted to verify the buyer's age and believed that the buyer was not a minor. Courts have held that a legislative body may not authorize severe punishment for strict liability crimes because severe punishment is generally reserved for intentional misconduct, reckless conduct, or grossly negligent conduct.

In United States v. Wulff, 758 F.2d 1121 (1985), the U.S. Court of Appeals for the Sixth Circuit declared that the felony provision of the MIGRATORY BIRD TREATY Act, 16 U.S.C.A. § 703 et seq., was unconstitutional because it made the sale of part of a migratory bird a felony without proof of scienter. According to the court, eliminating the element of criminal intent in a criminal prosecution violates the DUE PROCESS CLAUSE of the FIFTH AMENDMENT to the U.S. Constitution unless the penalty is relatively small and the conviction does not gravely besmirch the reputation of the defendant. The penalty in the act authorized two years in prison and a $2,000 fine, and the court considered that punishment too onerous to levy against a person who had acted without any scienter.

CROSS-REFERENCES

Aid and Abet.

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