U.S. Chamber Challenges 'Collective Knowledge' in Securities Fraud Cases

WASHINGTON, D.C.-Allowing a corporation to be held liable under securities fraud law by accepting "collective knowledge" of misconduct is inappropriate according to a friend-of-the-court brief filed today by the National Chamber Litigation Center (NCLC).

"The lower court has allowed collective knowledge-pieces of information from here and there, with no actual proof of wrongdoing-to justify corporate fraud liability in securities cases," stated NCLC Senior Vice President Robin Conrad. "Collective knowledge is problematic because it means a corporation can be held liable if multiple employees' knowledge can be compiled in hindsight to manufacture a state of mind no individual actually had."

In Teamsters Local 445 Freight Division Pension Fund v. Dynex Capital, Inc. et al., the U.S. District Court for the Southern District of New York determined that Dynex could be held liable for securities fraud based on the knowledge of multiple employees, rather than the state of mind of the individual corporate official who allegedly made the false or misleading statement. NCLC argues that plaintiffs should not be able to establish a fraudulent intent of a corporation based on the aggregated knowledge of its employees. The case stems from pieced together allegations that Dynex, a specialty finance company, misrepresented the nature of collateral for bonds it underwrote.

"This is another outrageous securities lawsuit with little merit but the potential for a large settlement," Conrad said. "The collective knowledge theory of the lower court could place significant burdens on American businesses, and present courts with complex questions about whose knowledge can be attributed to a company when employees have conflicting views."

NCLC, the public policy law firm of the U.S. Chamber of Commerce, is a membership organization that advocates fair treatment of business in the courts and before regulatory agencies. The U.S. Chamber of Commerce is the world's largest business federation representing more than 3 million businesses and organizations of every size, sector, and region.

/nclc

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07-12