Section 10(b). Joseph Jett worked for Kidder, Peabody & Co, a financial services firm owned by General Electric Co (GE). Over a three-year period, Jett allegedly engaged in a scheme to generate false profits at Kidder, Peabody to increase his

Question

performance-based bonus-es. When the scheme was discovered, Daniel Chill and other GE shareholders who had bought stock in the previous year filed a suit in a federal district court against GE. The shareholders alleged that GE had engaged in securities fraud in violation of Section 10(b). They claimed that GE's interest in justifying its investment in Kidder, Peabody gave GE "a motive to willfully blind itself to facts casting doubt on Kidder's purported profitability." On what basis might the court dismiss the shareholders' complaint? Discuss fully.

Answer 1

Section 10(b)
The district court dismissed the complaint, and the plaintiffs appealed. The U.S. Court of Ap-peals for the Second Circuit affirmed. Both courts reasoned that GE's motive was not enough to establish scienter. The appellate court explained, "If scienter could be pleaded on that basis alone, virtually every company in the United States that experiences a downturn in stock price could be forced to defend securities fraud actions." GE "obviously would want to justify its in-vestment in Kidder and have that investment appear profitable, but such a generalized motive, one which could be imputed to any publicly-owned, for-profit endeavor, is not sufficiently con-crete for purposes of inferring scienter."