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Messy Mental Markers: Inferring Scienter from Core Operations in Securities Fraud Litigation

48 Pages Posted: 14 Jul 2011 Last revised: 16 Feb 2012

Michael J. Kaufman

Loyola University Chicago School of Law

John M. Wunderlich

Institute for Investor Protection

Date Written: February 15, 2012


In all aspects of the law, proving that a defendant acted with a particular mental state is messy. Direct evidence of the complex inner workings of the mind is virtually nonexistent. Accordingly, litigants, juries, and judges often must infer a mental state from external “markers,” such as circumstantial evidence.

The search for mental markers is particularly messy in the area of securities fraud litiga-tion. To obtain remedies for violations of the federal securities laws, victims typically must plead and prove that the perpetrators acted with “scienter.” As variously defined by the Supreme Court, scienter is a mental state that embraces an intent to deceive, but also includes recklessness or even deliberate recklessness. To make matters more complicated, the Private Securities Litigation Reform Act requires victims of securities fraud to allege with particularity facts that give rise to a “strong inference of scienter.” In Tellabs Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 324 (2007), the Supreme Court interpreted this require-ment, holding that a securities fraud complaint is viable only if “a reasonable person would deem the inference of scienter cogent and at least as compelling as any opposing inference one could draw from the facts alleged.” Since Tellabs, the federal courts have been mired in threshold litigation about the sufficiency of scienter allegations, often demanding an un-suitable degree of particularity and reading Tellabs to invite a laborious evidentiary weighing process at the initial pleading stage.

In this Article, we attempt to lend clarity and precision to one key aspect of this judicial attempt to evaluate markers of scienter: the core operations inference. We demonstrate that the federal courts should recognize that the inference of scienter is strong where senior of-ficers make misleading statements regarding matters within their company’s core operations. An allegation that a senior officer made a material misrepresentation about matters within the organization’s core operations is a remarkably clear marker of intentional or reckless behavior. We also show that the core operations inference is consistent with the design of the federal securities laws, and with the Supreme Court’s most recent securities fraud decisions, properly understood. Equipped with the core operations inference, therefore, federal courts should be able efficiently to resolve a significant part of litigation over the issue of scienter in securities fraud cases.

Suggested Citation

Kaufman, Michael J. and Wunderlich, John M., Messy Mental Markers: Inferring Scienter from Core Operations in Securities Fraud Litigation (February 15, 2012). Loyola University Chicago School of Law Research Paper No. 2011-017. Available at SSRN: or

Michael J. Kaufman

Loyola University Chicago School of Law ( email )

25 E. Pearson
Chicago, IL 60611
United States
312-915-7143 (Phone)

John M. Wunderlich (Contact Author)

Institute for Investor Protection ( email )

25 E Pearson Street
Chicago, IL 60611
United States


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