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18.3 Securities—Knowingly

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A defendant acts knowingly when [he] [she] [it] makes an untrue statement [with the knowledge that the statement was false] [or] [with reckless disregard for whether the statement was true]. A defendant acts knowingly if [he] [she] [it] omits necessary information [with the knowledge that the omission would make the statement false or misleading] [or] [with reckless disregard for whether the omission would make the statement false or misleading].

["Reckless" means highly unreasonable conduct that is an extreme departure from ordinary care, presenting a danger of misleading investors, which is either known to the defendant or is so obvious that the defendant must have been aware of it.]


See 15 U.S.C. § 78j(b) (unlawful to use deceptive device in connection with purchase or sale of a security); SEC Rule 10b–5, 17 C.F.R. § 240.10b–5 (2004) (unlawful to use a device to defraud, to make an untrue statement of material fact, or to engage in a fraudulent act in connection with the purchase or sale of a security).

This instruction addresses the element of "scienter," which was developed in Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193, reh’g denied, 425 U.S. 986 (1976). In Nelson v. Serwold, 576 F.2d 1332, 1337 (9th Cir. 1978), the court found that Congress intended Section 10(b) to reach both knowing and reckless conduct, and it interpreted the Ernst & Ernst decision as merely eliminating negligence as a basis for liability.

The Ninth Circuit defined "recklessness" in the context of Section 10(b) and Rule 10b–5 in Hollinger v. Titan Capital Corp., 914 F.2d 1564, 1569 (9th Cir.1990) (en banc), and In re Software Toolworks, Inc., 50 F.3d 615, 626 (9th Cir.1994). Recklessness satisfies the scienter requirement, except as to forward-looking statements under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, where actual knowledge that the statement was false or misleading is required. In re Daou Systems, Inc. Sec. Litig.,411 F.3d 1006, 1021 (9th Cir.2005); see 15 U.S.C. § 78u-5(c)(1)(B). See also Sec. Exch. Comm’n v. Todd, 642 F.3d 1207, 1215, 1217-19 (9th Cir.2011). As to a forward-looking statement outside the PSLRA’s safe harbor provisions, see In re Oracle Corp. Sec. Litig., 627 F.3d 376, 388 (9th Cir.2010).

The PSLRA entitles a defendant to require the court to submit an interrogatory to the jury regarding the defendant’s state of mind at the time of the alleged violation of the securities laws. 15 U.S.C. § 78u-4(d).

Approved 1/2012