(Mis)Judging Intent: The Fundamental Attribution Error In Federal Securities Law

This article examines the element of scienter (fraudulent intent) in claims of federal securities fraud under Section 10(b) of the Exchange Act and, more specifically, the U.S. Supreme Court’s decision in Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007) from a social psychological perspective. The field of social psychology has documented a pervasive phenomena, the Fundamental Attribution Error, the failure of decision makers to consider situational explanations, including the force of environments and social and situational norms on human conduct. In light of robust social psychological research on the Fundamental Attribution Error, legal concepts such as intent, intentionality, mens rea, and scienter should be reexamined and reconstructed. In Tellabs, the Supreme Court instructed federal courts to dismiss federal securities complaints, unless a reasonable person would deem the inference of scienter to be cogent, and at least as compelling as any opposite inference one could draw from factual allegations in the complaint. The Courts of Appeals are divided, however, on whether this framework applies at summary judgment. When viewed from a social psychological perspective, Tellabs promotes effective judicial decision making. Tellabs broadens the epistemic goal of decision making to include consideration of both dispositional and situational factors. When federal courts explicitly consider alternative explanations and causes of the defendants’ actions, jurists are more likely to consider situational explanations and avoid the Fundamental Attribution Error, resulting in more accurate decisions. Tellabs, therefore, offsets the tendency to over-attribute fraudulent intent to conduct appearing unreasonable only in hindsight