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Fourth Circuit: Shareholders Face High Bar In Demonstrating Scienter
A recent decision of the U.S. Court of Appeals for the Fourth Circuit analyzed the "scienter" requirement that a shareholder must meet to prevail under the federal securities laws in showing that the company or its executives fraudulently induced the shareholder to buy or retain shares. KBC Asset Management v. DXC Technology Co., No. 20-1718 (4th Cir., Dec. 1, 2021). The company or executives act with "scienter" only when they have a certain fraudulent state of mind, intending to mislead or being extremely careless about misleading shareholders. As the Fourth Circuit decision shows, shareholders must meet a high bar in demonstrating scienter to avoid early dismissal of the case. The decision also shows the fact-intensive approach courts use to distinguish fraudulent statements from those that, even if mistaken, were made innocently.
KBC Asset Management Background
DXC is a publicly traded IT company. Throughout 2017, the company successfully used cost-cutting measures to achieve its financial goals. In February 2018, DXC issued a press release touting its continued financial success. By November 2018, however, it had revised its projected revenue guidance to shareholders downward by around $800 million. The company's share price dropped as a result.
The plaintiffs in this case were a group of shareholders who had acquired shares in DXC between February and November 2018. The plaintiffs alleged that the company knew, contrary to its public statements in February 2018, that its cost-cutting measures during the course of 2018 would inhibit its ability to generate revenue. The plaintiffs claimed DXC and its two principal executives fraudulently induced the plaintiffs to acquire stock through its material misstatements and omissions about the company's financial health. The plaintiffs brought federal securities fraud claims against the company and the two executives under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5.
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