Legal Memorandum: Scienter Requirement in Securities Fraud Claims

Issue: What is the requisite scienter required in making untrue or misleading statements in connection with the sale of securities?

K.S.A. 17-12a501(2) provides as follows:

            It is unlawful for a person, in connection with the offer, sale, or purchase of a security, directly or indirectly:

. . .

(2) to make an untrue statement of a material fact, or omit to state a material fact necessary in order to make a statement made, in the light of the circumstances under which it is made, not misleading.

It is clear from the literal language of 17-12a501(2) that the statute is modeled upon and is nearly identical to federal Rule 10b-5.  Compare 17-12a501(2) with Rule 10b-5(ii). 

The federal Rule 10b-5 provides:

It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,

(i) To employ any device, scheme, or artifice to defraud,

(ii) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or

(iii) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,

in connection with the purchase or sale of any security.

(emphasis added).

The Kansas counterpart, K.S.A. 17-12a501 provides;