England’s First Section 90A FSMA Opinion Serves as Guide for U.S. Circuit Split
England’s approach to corporate scienter, with modification, could serve as a workable guide for resolving the U.S. corporate scienter debate.
By: Jacob Anthony Nikituk, Staff member
Is a corporation to blame when its agents make public misrepresentations that harm investors? The answer depends on who knows what. Before 2007, the United Kingdom had no statutory remedy for violation of its continuous disclosure rules. When the European Union issued its Transparency Directive, the U.K. Government transposed it into domestic law by enacting Section 90A of the Financial Services and Markets Act (FSMA). Section 90A and Schedule 10A assign liability to issuers — companies that trade securities on a U.K. securities market — when investors suffer losses resulting from untrue or misleading published statements, so long as a person discharging managerial responsibilities (PDMR or PDMRs) knows the statement to be untrue or misleading.
There’s one problem: the English courts have yet to opine on a case alleging a violation of Section 90A FSMA, creating uncertainty for litigants as to how the statutory regime works in practice. This will change as soon as the courts release their opinion in the HP/Autonomy Litigation. The outcome could serve as a beneficial data point for the United States in resolving its corporate scienter circuit split.
Discourse in the United States
Under Rule 10b-5 — the U.S. securities rule targeting fraudulent activity by corporations and their agents — the Supreme Court defines scienter as “a mental state embracing intent to deceive, manipulate, or defraud.” In the United States, courts disagree as to how this doctrine applies to corporations.
Specifically, the circuits diverge on the answers to the following questions: (1) whose scienter should a court impute to a corporation; (2) how much emphasis should a court place on the maker or issuer of the misrepresentation; and (3) should a court aggregate knowledge of multiple agents to establish a corporation’s scienter?
Some circuits adopt the respondeat superior approach, assigning liability to corporations only if the officers making the statement acted with the requisite scienter. Others recognize a collective scienter approach, allowing plaintiffs to aggregate multiple employees’ knowledge to establish a corporation’s scienter. Other circuits combine aspects of both the respondeat superior and collective scienter theories.
The conflicting approaches in this three-way circuit split promote forum-shopping, allow for abusive litigation practices, support evasive corporate policies, and create uncertainty for litigants. As federal securities class actions involving Rule 10b-5 continue to rise, the United States should look to foreign jurisdictions for guidance.
By leveraging England’s corporate scienter framework — a foreign jurisdiction with similar securities markets, a similar legislative framework, and similar policy goals — Congress can resolve this circuit split and balance the concerns of investors and corporations.
Challenges Under Section 90A FSMA
The English corporate scienter framework provides clarity for courts, reducing much of the uncertainty created under the divergent U.S. regimes. FSMA explicitly states the elements of a Section 90A claim: (1) the issuer published an untrue or misleading statement to the market; (2) a PDMR knew the statement was untrue or misleading; and (3) the plaintiff reasonably relied on the statement to his or her detriment.
However, who qualifies as a PDMR? Schedule 10A defines PDMRs as directors (or persons occupying the position of a director), members (only if members manage the issuer’s affairs), and senior executives involved in the misstatement (only if there are no imputable directors or members).
Despite enhanced clarity, English courts have yet to interpret the statute’s meaning, creating various uncertainties. Schedule 10A expressly includes de jure directors — individuals formally registered as directors of the company — in its listing of imputable agents. Nonetheless, it is unclear whether courts will impute knowledge of de facto directors — individuals performing the duties of a director without a formal title — to issuers. The plain language of FSMA seemingly allows plaintiffs to impute de facto directors; however, English courts have yet to confirm this.
Additionally, the English approach prohibits courts from imputing the knowledge of senior executives to issuers if the issuers already have imputable directors or members. This feature ignores the reality of corporations: senior executives, through their involvement in day-to-day management tasks, have a more detailed understanding of the affairs of the issuer than do directors.
Another point of uncertainty under the English approach is the status of collective scienter. The language of FSMA does not expressly prohibit courts from aggregating knowledge of multiple PDMRs, but the English courts have yet to rule on this issue.
The trial in the HP/Autonomy Litigation ended in early 2020, and the court will probably release its opinion in early 2021. Scholars, practitioners, and litigants eagerly await this decision to help resolve these issues.
Data Point for the United States
When England releases its first opinion involving Section 90A FSMA, the United States should use the statutory framework as a guide. Further, it should modify the approach to fit the realities of U.S. corporations and resolve its corporate scienter discrepancies.
By implementing a listing of imputable agents similar to Schedule 10A FSMA, Congress can provide additional clarity for courts and litigants. First, Congress should narrow its listing of imputable agents to the most senior levels of authority within the corporate entity: directors (including de facto directors) and senior executives.
This better aligns with the reality that senior executives involve themselves more in the types of activities that provide them with knowledge of the business. It would prevent courts from imputing knowledge of rogue low-level employees to corporations. Also, it would discourage corporations from implementing “see no evil, hear no evil” policies that compartmentalize information between various departments.
Additionally, Congress should allow courts, in rare circumstances, to aggregate the knowledge of directors, de facto directors, and senior executives. In mid-2020, the Second Circuit held that in “exceedingly rare instance[s],” a statement may be “so dramatic that collective corporate scienter may be inferred.” This approach would balance the goals of Congress to create a heightened pleading standard while preserving meritorious claims.
Shortly, England will have its answers to many of the questions presented here. These answers just might serve as the key to providing clarity for U.S. federal securities law.
Jacob Anthony Nikituk is a second-year student at Columbia Law School and a Staff Member of the Columbia Journal of Transnational Law. He graduated from the University of Pittsburgh in 2017 with a Master of Science in Accounting and in 2016 with a Bachelor of Science in Business Administration. Before attending law school, Jacob worked as a Certified Public Accountant and Certified Fraud Examiner at Ernst & Young LLP.