Securities Regulation Daily Wrap Up, FRAUD AND MANIPULATION—U.S.: Petition asks High Court to clarify scienter pleading standards, (May 7, 2026)

By Anne Sherry, J.D.

The petition argues that the PSLRA doesn’t allow using the core operations doctrine to plead scienter.

Challenging a Second Circuit judgment, a group of petitioners argues that there is now a five-to-five circuit split on whether the core operations doctrine provides a basis for pleading scienter under the PSLRA. Hain Celestial Group and several individuals ask the Supreme Court for certiorari to settle this question and to clarify whether a plaintiff may plead scienter by alleging that executives generally receive information through routine communications, without specifying the contents of those communications (Petition for Writ of Certiorari, The Hain Celestial Group, Inc. v. Gimpel, No. 25-1255 (May 1, 2026)).

Scienter holding. The complaint alleged that the defendants made false statements in connection with Hain’s channel-stuffing practices. Vacating the district court’s dismissal of the lawsuit, the Second Circuit determined that the defendants made a series of material misstatements and did so with scienter. The court could infer from the complaint’s motive allegations and confidential witness statements that the defendants knew or should have known that their financial statements were incorrect and that the implications of the channel-stuffing practices contradicted their statements about Hain’s financial success and inventory levels.

While stopping short of endorsing the core operations doctrine, the appeals court assumed that the size of the alleged fraud and its importance to Hain’s operations provided extra support to the plaintiffs’ other scienter allegations. “We have not … clearly affirmed the validity of the core-operations doctrine following the passage of the PSLRA, although we have suggested that the doctrine can provide supplemental support for allegations of scienter, even if they cannot establish scienter independently,” the court explained (internal quotations omitted).

Cert petition. In asking the Supreme Court to grant certiorari, the petitioners noted that the Second Circuit is home to more securities cases than any other and that its decision deepened two circuit splits. First, the circuits are divided five-to-five on whether the core operations doctrine provides a basis for pleading scienter under the PSLRA. Second, three circuits now permit an inference of scienter from the fact that executives generally access information through routine communications like internal reports or customer calls, while six circuits do not.

The Second Circuit’s stance on both issues endorses “easy-to-replicate pleading tactics the PSLRA forbids,” the petition argues. The PSLRA demands particularity, but the core operations doctrine invites generality, allowing courts to infer that an executive would have or must have known a statement was misleading based on allegations that the subject was important to the company. The alleged misstatements accounted for only 2.4 percent of Hain’s overall net sales during the time period, petitioners observe: “If that is enough to invoke the core operations doctrine, it is difficult to imagine a case in which plaintiffs would not be able to invoke the doctrine as a shortcut to pleading scienter.”

The core operations doctrine also violates the PSLRA’s requirement that scienter be pleaded for each defendant and each violation, according to the petition. Inferring scienter from an issue’s general importance presumes shared knowledge across all defendants collectively. In this case, the respondents were able to establish scienter as to some defendants against whom they alleged little or no defendant-specific knowledge.

Similarly, according to the petition, the Second Circuit was incorrect to infer scienter from allegations that executives received weekly reports and customer calls, in the absence of any allegation of what information these reports and calls provided. The petitioners argue that “since virtually every executive receives reports and makes calls, allegations like these would support an inference of scienter in virtually every case.” Moreover, inferring fraud based on receiving reports and speaking to customers effectively penalizes companies for engaging in basic oversight of their business.

The case is No. 25-1255.

Attorneys: Elizabeth Barchas Prelogar (Cooley LLP) for The Hain Celestial Group, Inc., Irwin D. Simon, Pasquale Conte, John Carroll and Stephen J. Smith.

Companies: The Hain Celestial Group, Inc.; Rosewood Funeral Home

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