Legal Definitions - scienter action

A scienter action is a type of lawsuit where the plaintiff (the person bringing the suit) must prove that the defendant (the person being sued) acted with scienter, meaning they acted knowingly or had knowledge of a specific fact or danger. In such cases, merely proving that the defendant's actions caused harm is not enough; the plaintiff must also demonstrate that the defendant possessed a particular state of mind – awareness or knowledge – regarding the harmful nature of their actions or a dangerous condition.

• Example 1: Fraudulent Misrepresentation in a Sale

  Imagine a car dealership sells a used car to a customer, explicitly stating that the vehicle has never been involved in a major accident. However, the dealership's service records clearly show that the car had previously sustained significant structural damage in a collision, and the sales manager was aware of these records. If the customer later discovers the car's history and sues the dealership for fraud, this would be a scienter action. The customer would need to prove not only that the dealership made a false statement and that they relied on it, but crucially, that the dealership (through its sales manager) knew the statement was false when it was made.

• Example 2: Landlord's Knowledge of a Dangerous Property Condition

  Consider a landlord who receives multiple complaints from tenants over several months about a severely deteriorating balcony railing in an apartment building, with reports of it being loose and unstable. Despite these warnings, the landlord takes no action to repair or secure the railing. If a tenant later leans on the railing and it collapses, causing them to fall and sustain injuries, their lawsuit against the landlord would likely be a scienter action. The tenant would need to demonstrate that the landlord had actual knowledge of the dangerous condition of the railing and failed to address it, rather than just being negligent in not discovering it.

• Example 3: Corporate Misconduct and Securities Fraud

  Suppose a pharmaceutical company's executives are aware that clinical trials for a new drug revealed serious, undisclosed side effects that could harm patients. Despite this knowledge, they intentionally omit this critical information from public disclosures and regulatory filings to ensure the drug's approval and boost stock prices. When investors purchase shares based on these misleading statements and suffer financial losses after the truth comes out, their lawsuit against the company and its executives would be a scienter action. The investors would need to prove that the executives acted with knowledge of the false or misleading nature of their statements when they made them, intending to deceive the public.