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. 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.

Background to the ‘KBC Asset Management’ Case

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.