Pleading Scienter for Delegated Internal Control Failures:
Commentary on Puchtler v. Barclays PLC (2d Cir. 2025)

I. Introduction

This commentary examines the United States Court of Appeals for the Second Circuit’s summary order in Puchtler v. Barclays PLC, No. 25‑995 (2d Cir. Dec. 5, 2025), affirming the dismissal of a putative securities class action arising out of Barclays’ over‑issuance of its VXX exchange-traded note (“ETN”). Although issued as a non‑precedential summary order under Second Circuit Local Rule 32.1.1, the decision provides a useful, concrete application of the Supreme Court’s and Second Circuit’s stringent standards for pleading scienter under the Private Securities Litigation Reform Act of 1995 (“PSLRA”).

The case sits at the intersection of three themes:

Post‑settlement regulatory consequences (loss of “well‑known seasoned issuer” status);
Operational control failures in complex financial products (over‑issuance of a volatility‑linked ETN); and
The high PSLRA bar for pleading scienter against senior executives and, by extension, the corporation.

The Second Circuit affirmed the district court’s Rule 12(b)(6) dismissal, but did so on a narrow ground: failure to plead scienter with the “strong inference” required by the PSLRA. The Court expressly declined to reach the district court’s alternative holdings on materiality and loss causation.

Because the order is non‑precedential, it does not establish a “new rule of law” in a formal sense. Its significance lies instead in its reaffirmation and sharpening of existing scienter doctrine in a modern, operational‑failure context: even where internal controls fail catastrophically and cause large market dislocations, plaintiffs must still allege particularized facts linking senior executives to contemporaneous awareness of the specific control failure, not just general awareness of regulatory constraints.

II. Factual and Procedural Background

A. The Parties and Product

The named plaintiff, Michael Puchtler, sued individually and on behalf of a putative class of similarly situated investors. He is a short seller of Barclays’ VXX ETN, a derivative security designed to provide exposure to the CBOE Volatility Index (“VIX”), a measure of expected volatility in the S&P 500. Because the VIX itself is merely a numerical index and not tradeable, issuers such as Barclays create tradeable products—like VXX ETNs—that track it.

The defendants are:

Barclays PLC and Barclays Bank PLC (the corporate issuer entities); and
Three senior executives (the “Individual Defendants”):
- James E. Staley,
- Tushar Morzaria, and
- C.S. Venkatakrishnan.

Plaintiff brought federal securities fraud claims under:

Section 10(b) of the Securities Exchange Act of 1934,
SEC Rule 10b‑5, and
Section 20(a) (control‑person liability).

B. Loss of WKSI Status and Over‑Issuance of VXX ETNs

Following a 2017 settlement with the SEC, Barclays lost its status as a “well‑known seasoned issuer” (WKSI). This change had significant implications for how Barclays could register and issue securities in the U.S.:

As a WKSI, Barclays could register securities and pay SEC registration fees on a “pay‑as‑you‑go” basis, enjoying greater flexibility and speed.
Once Barclays lost WKSI status, it had to pre‑register a specific quantity of securities and pay all related SEC fees upfront before offering them.

The core factual allegation is that Barclays failed to put in place internal controls capable of tracking how many securities it had issued against its pre‑registered limit. As a result, it over‑issued VXX ETNs beyond what had been registered with the SEC.

On March 14, 2022, Barclays notified regulators of this over‑issuance and immediately suspended further sales and issuances of the VXX ETN. This suspension generated a sharp market distortion:

The VXX ETN’s market price rose to more than 140% of its indicative (fair) value;
Short sellers—who had sold VXX ETNs short, betting on price declines—faced large losses when they were forced to cover their positions at artificially inflated prices.

C. The Complaint and District Court’s Dismissal

Puchtler alleged that the Individual Defendants:

Knew of, or recklessly disregarded, the lack of internal controls to track securities issuances post‑WKSI loss; and
Made material misstatements or omissions about the sufficiency of Barclays’ internal controls.

The district court (Liman, J., S.D.N.Y.) granted defendants’ motion to dismiss under Rule 12(b)(6), dismissing the complaint with prejudice on three grounds:

Many alleged misstatements were immaterial as a matter of law;
The complaint failed to plead scienter with sufficient particularity under the PSLRA; and
The complaint did not adequately allege loss causation.

D. The Appeal and Scope of Second Circuit Review

On appeal, Puchtler argued that the complaint adequately pled:

Material misstatements and omissions about internal controls;
Scienter (intent or recklessness) as to those misstatements; and
Loss causation connecting the alleged fraud to his and the class’s losses.

The Second Circuit affirmed but chose a narrow path: it held that scienter was not adequately pled and affirmed on that basis alone, explicitly declining to reach materiality and loss causation. That narrowness matters practically: the Court is signaling that, regardless of how one might view materiality or loss causation for short sellers in this context, the complaint fails at the threshold scienter stage.

III. Summary of the Second Circuit’s Opinion

The Second Circuit’s reasoning can be distilled into three core points:

PSLRA Scienter Standard Reaffirmed. The Court reiterated the Supreme Court’s rule in Tellabs: a plaintiff must plead with particularity facts giving rise to a “strong inference” of scienter that is at least as cogent and compelling as any non‑fraudulent inference.
No Particularized Allegations Linking Executives to the Control Failure. The complaint alleged only that the Individual Defendants understood the consequences of losing WKSI status and that an internal working group existed. It did not allege:
- that the Individual Defendants were directly informed of the lack of controls;
- that they received reports or red flags from the working group;
- that they directed anyone to forego implementing controls; or
- that anyone with knowledge of the control failure communicated it to them.
Non‑culpable Inference Is More Plausible. Given those gaps, the Court found a consistent, non‑culpable inference more compelling: the executives understood the general regulatory consequences of losing WKSI status and delegated implementation to a working group, which then failed to implement adequate controls. Because the complaint did not plausibly allege their contemporaneous awareness of the working group’s failure, the scienter inference was weaker than the innocent explanation.

On that basis, the Second Circuit held that the complaint did not create the requisite “strong inference” of scienter and therefore failed under the PSLRA. The judgment of dismissal was affirmed.

IV. Analysis

A. Precedents and Doctrinal Framework Applied

The Second Circuit’s analysis is anchored in well‑established Supreme Court and circuit‑level precedents. These authorities frame how scienter must be pled, particularly in cases involving alleged failures of internal controls.

1. Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007)

Tellabs is the seminal decision on the PSLRA’s scienter pleading requirement. The statute, 15 U.S.C. § 78u‑4(b)(2)(A), demands that a securities fraud complaint “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.”

The Second Circuit quotes and applies the core Tellabs principles:

The inference of scienter must be “more than merely plausible or reasonable—it must be cogent and at least as compelling as any opposing inference of nonfraudulent intent.”
The court must consider plausible, nonculpable explanations for the defendant’s conduct, not just plaintiff‑favorable inferences.
The analysis is “inherently comparative”: a court asks whether, taken collectively and as true, the allegations support an inference of scienter that is at least as strong as any innocent explanation.

In Puchtler, the Court follows this template exactly:

It identifies the competing inferences: scienter vs. delegation/oversight failure.
It finds the non‑culpable inference (delegation to a working group that failed) more cogent and compelling.
It thus concludes that the PSLRA’s “strong inference” threshold is not met.

2. ECA, Local 134 IBEW Joint Pension Trust of Chicago v. JP Morgan Chase Co., 553 F.3d 187 (2d Cir. 2009)

ECA articulates the Second Circuit’s approach to what counts as scienter, including recklessness, and lists canonical ways plaintiffs can plead it. The Puchtler panel quotes ECA for two key propositions:

Recklessness as scienter. In this Circuit, “recklessness is a sufficiently culpable mental state for securities fraud,” in addition to actual intent to deceive.
Four non‑exclusive pathways to pleading scienter. The Court repeats ECA’s familiar list of circumstances that can support a strong inference of scienter:
- Defendants benefitted in a concrete and personal way from the purported fraud;
- They engaged in deliberately illegal behavior;
- They knew facts or had access to information suggesting that their public statements were not accurate; or
- They failed to check information they had a duty to monitor.

In Puchtler, the plaintiff essentially tried to proceed under the third and fourth routes:

That the executives knew facts or had access to information (via the WKSI consequences and the working group) indicating a lack of internal controls; and
That they failed to monitor or check that the necessary controls were actually implemented.

The Court rejects these inferences because the complaint did not allege any concrete facts showing:

that the executives actually received information about the control failures; or
that red flags were so obvious and pervasive that failure to act constituted reckless disregard.

3. Novak v. Kasaks, 216 F.3d 300 (2d Cir. 2000) and Rolf v. Blyth, Eastman Dillon & Co., 570 F.2d 38 (2d Cir. 1978)

Novak provides the Second Circuit’s classic formulation of recklessness in securities fraud:

Recklessness is “an extreme departure from the standards of ordinary care... to the extent that the danger was either known to the defendant or so obvious that the defendant must have been aware of it.”

This draws from Rolf and underscores that not every failure of oversight is “reckless” in the PSLRA sense. Securities fraud recklessness is “highly unreasonable” conduct, involving an extreme departure from ordinary care.

In Puchtler, the Court implicitly applies this stringent standard: while Barclays’ control failure was serious in hindsight, the complaint lacked allegations:

that the danger (i.e., absence of tracking controls) was known to the executives; or
that it was so obvious that they “must have been aware” of it at the time of the alleged misstatements.

The Court therefore treats the situation as, at most, a serious internal failure—not the kind of extreme departure from ordinary care that suffices for recklessness under Novak/Rolf.

4. Teamsters Local 445 Freight Division Pension Fund v. Dynex Capital Inc., 531 F.3d 190 (2d Cir. 2008)

Although not central to the holding, the panel cites Teamsters for corporate scienter doctrine:

“When the defendant is a corporate entity, ... the pleaded facts must create a strong inference that someone whose intent could be imputed to the corporation acted with the requisite scienter.”

In other words, a plaintiff must connect scienter to some specific individual (or limited set of individuals) whose state of mind can be attributed to the corporation, not merely allege a vague “corporate knowledge.”

In Puchtler, this plays out via the failure to link the internal “working group” to the Individual Defendants. The complaint:

Recognized that a working group existed to deal with post‑WKSI issues;
Alleged that “certain personnel” understood the consequences of the WKSI loss; but
Did not allege that the group’s knowledge or inaction is attributable to any identified individual whose intent can be imputed to the corporation.

The Court therefore finds that corporate scienter cannot be pled simply by asserting that some subgroup in the organization might have known something, without linking that knowledge to decision‑makers or speakers.

B. The Court’s Legal Reasoning

1. The Scienter Inquiry Under the PSLRA

The Court first restates the PSLRA requirement:

Plaintiff must plead “with particularity facts giving rise to a strong inference” of scienter.
“Strong inference” means an inference “cogent and at least as compelling” as any non‑fraudulent inference.
The court must evaluate all allegations collectively, not in isolation.

Applying this framework, the Court looks at:

What the complaint does allege; and
What the complaint does not allege but would reasonably be expected to include if the asserted inferences were sound.

2. What the Complaint Alleges

The complaint alleges that:

The Individual Defendants were aware that Barclays had lost WKSI status as a result of a 2017 SEC settlement.
They understood that losing WKSI status imposed “additional responsibilities” and stricter registration requirements.
A working group was formed within Barclays to address the consequences of the WKSI loss and manage registration/issuance issues.
In hindsight, Barclays failed to develop “necessary internal controls” to track how many securities it had issued.
This failure led to over‑issuance of VXX ETNs and subsequent market dislocation when issuance was suspended.

Based on these circumstances, plaintiff argued it is reasonable to infer that the Individual Defendants:

Either knew of the lack of controls; or
Were at least reckless in not ensuring that such controls existed.

3. What the Complaint Fails to Allege

The Second Circuit emphasizes several key gaps:

No allegation that management regularly met with the working group.
No allegation that the working group communicated to management an ongoing lack of controls.
No allegation that any Individual Defendant instructed subordinates not to implement controls.
No allegation that anyone with first‑hand knowledge of the control failures informed the named executives during the class period.

In essence, the complaint rested on a chain of generalized inferences:

Executives knew Barclays lost WKSI status and that this triggered more stringent registration obligations;
An internal working group existed to handle those obligations;
Barclays later over‑issued VXX ETNs, which implies controls were inadequate; and
Therefore the executives must have known, or been reckless in not knowing, that the controls were deficient when they spoke.

The Court finds this chain too attenuated under the PSLRA, because it:

Relies heavily on hindsight (because we now know the controls failed); and
Lacks particularized allegations tying executives to contemporaneous red flags or direct knowledge.

4. The Non‑culpable Inference: Delegation and Operational Failure

The Court articulates the competing non‑fraudulent inference:

It is plausible that the Individual Defendants, aware of the WKSI status change, delegated implementation of new tracking controls to the working group.
The working group then failed to institute effective controls or to monitor sufficiently.
The executives were not contemporaneously aware that the controls were deficient at the time of the alleged misstatements.

Because the complaint contains no allegations to bridge the gap between the working group’s failure and the executives’ knowledge, the Court holds that:

The non‑culpable inference (delegation plus operational breakdown) is at least as plausible—and in context, more plausible—than an inference of scienter; and
Under Tellabs, that is fatal to the complaint at the pleading stage.

This reasoning reinforces a critical PSLRA principle: organizational complexity and delegation do not, by themselves, establish scienter at the top of the house, even where the delegated function fails disastrously.

5. No “Core Operations” or “Must Have Known” Shortcut

Though not explicitly named in the order, the Court’s analysis is consistent with its longstanding skepticism toward:

“Core operations” arguments (i.e., that because an issue is central to a company’s business, executives must have known about misstatements regarding it); and
“Must have known” or “should have known” inferences detached from specific facts.

Here, although VXX was an important Barclays product and the WKSI status change was undoubtedly significant, the Court refuses to infer executive‑level scienter merely from:

The importance of the issue; or
The ultimate magnitude of the over‑issuance problem.

Instead, the Court requires concrete linkage: reports, emails, meetings, directives, or other facts showing what specific executives knew, when they knew it, and how that clashes with their public statements.

C. Likely Impact and Practical Significance

1. Formal Precedential Effect: None, but Persuasive Guidance

The opinion is explicitly a summary order without precedential effect under Second Circuit Local Rule 32.1.1. It may be cited, but it does not bind future panels the way a published opinion does.

Nonetheless, its practical influence is likely to be significant in several ways:

District courts and litigants frequently look to summary orders for guidance on how existing doctrine is applied to specific fact patterns.
The decision illustrates, in a modern financial‑products context, how high the PSLRA bar remains for pleading scienter based on alleged internal control failures.

2. Implications for Cases Involving Internal Controls and Operational Failures

The case will be particularly relevant in future suits alleging:

Misstatements about internal controls or risk management (including post‑SOX and post‑Dodd‑Frank disclosures);
Regulatory non‑compliance after loss of a special regulatory status (like WKSI); and
Operational mishaps in complex financial instruments (ETNs, structured notes, derivatives, etc.).

Key practice takeaways for plaintiffs:

Allegations that controls subsequently failed are not enough.
General awareness of a regulatory change (e.g., loss of WKSI) does not create a strong inference that executives knew of specific implementation failures.
Plaintiffs must plead fact‑specific links:
- Who within the company understood the control deficiencies;
- How and when that information was relayed (or should have been relayed) to senior management; and
- What specific red flags were so obvious that ignoring them amounted to recklessness.

For defendants, the case underscores the protective value, at the pleading stage, of:

Documenting reasonable delegation of specialized compliance tasks to dedicated teams or working groups;
Maintaining clear reporting lines and governance structures, which can support arguments that executives reasonably relied on subordinates absent contrary red flags; and
Framing failures as operational negligence or oversight lapses rather than deliberate or reckless misconduct.

3. Effects on Short‑Seller Securities Litigation

This case arose from losses suffered by short sellers who were harmed when VXX’s market price disconnected sharply from its indicative value after Barclays halted issuances. Although the Court did not reach loss causation, its scienter analysis may chill certain short‑seller suits:

Short‑seller plaintiffs often identify substantial price distortions arising from complex financial products.
Puchtler illustrates that even when such distortions are dramatic (e.g., 140% premium to indicative value), courts will still insist on rigorous scienter pleading against executives.

Thus, plaintiffs relying on post‑hoc revelations about product design, risk, or controls must be especially careful to plead contemporaneous executive knowledge and not merely the fact that the product later malfunctioned or the market mispriced it.

4. Reinforcing the PSLRA’s “Gatekeeping” Role

Puchtler is another data point in the Second Circuit’s application of the PSLRA as a robust screening mechanism. In combination with cases like Tellabs, ECA, and Novak, it reinforces that:

Securities class actions cannot proceed past the motion‑to‑dismiss stage based only on:
- a serious internal failure, and
- a hindsight inference that executives “must have known.”
Absent concrete, particularized allegations of executive awareness or recklessness, even large‑scale breakdowns will be characterized as:
- “operational failures,”
- “oversight lapses,” or
- “delegation that went wrong,”
rather than securities fraud.

V. Complex Concepts Simplified

To make the legal and financial concepts more accessible, this section explains key terms used in the opinion.

1. Scienter

“Scienter” refers to the defendant’s mental state in a securities fraud case. Under Section 10(b)/Rule 10b‑5, it means:

Intent to deceive, manipulate, or defraud; or
Recklessness, defined as an extreme departure from ordinary standards of care, such that the defendant either knew of the danger or it was so obvious that they must have been aware of it.

Under the PSLRA, a plaintiff must plead facts that support a strong inference that defendants acted with such a mental state.

2. PSLRA and “Strong Inference”

The Private Securities Litigation Reform Act of 1995 (PSLRA) heightened pleading standards in securities fraud cases. For scienter, it requires that complaints:

Allege specific facts, not just conclusions, about what defendants knew or should have known; and
Support an inference of scienter that is at least as strong as any innocent explanation when all allegations are viewed together.

This makes it more difficult for weak or speculative lawsuits to survive past the motion‑to‑dismiss stage.

3. WKSI (Well‑Known Seasoned Issuer)

A “well‑known seasoned issuer” is a public company that meets certain size and filing requirements and thus benefits from streamlined registration procedures under SEC rules. WKSI status allows:

Use of automatic shelf registration statements;
Greater flexibility in timing and content of securities offerings; and
“Pay‑as‑you‑go” registration fees, rather than paying all fees upfront for a predetermined issuance amount.

Losing WKSI status subjects the issuer to stricter, more cumbersome registration procedures, including the need to specify in advance the amount of securities to be issued and to pay the fees upfront.

4. ETN, VXX, and VIX

VIX: An index calculated by the CBOE that measures the market’s expectation of near‑term volatility of the S&P 500. It is not itself tradeable.
ETN (Exchange-Traded Note): A debt instrument issued by a financial institution and traded on an exchange, designed to give investors exposure to a particular index or strategy, such as VIX.
VXX ETN: Barclays’ ETN intended to track VIX (or a related volatility strategy). It trades on exchanges, and its market price should, under normal conditions, be close to its indicative or “fair” value derived from the underlying index.

When Barclays stopped issuing new VXX ETNs, the supply in the market became constrained, leading its price to spike well above fair value.

5. Short Selling

Short selling is an investment strategy where:

An investor borrows shares or notes and sells them on the market at the current price.
The investor later aims to buy the same security back at a lower price, return it to the lender, and keep the difference as profit.

If the price instead rises significantly, the short seller faces potentially large losses, as they must buy back at a higher price to close their position. In Puchtler, short sellers of VXX were harmed when the price surged to 140% of indicative value.

6. Internal Controls (in this context)

“Internal controls” refers broadly to systems, processes, and procedures that a company uses to:

Accurately track business activities (such as securities issuances);
Ensure compliance with laws and regulations; and
Prevent or detect errors and irregularities.

Here, the alleged failure involved not having adequate systems to:

Track the number of VXX ETNs being issued; and
Ensure that total issuances did not exceed the quantity registered with the SEC.

7. Loss Causation

“Loss causation” requires a plaintiff to show a causal connection between the alleged misrepresentation and the economic loss suffered. It is akin to “proximate cause” in tort law.

In securities fraud, this generally means showing that:

The truth about the misrepresentation was revealed to the market (a “corrective disclosure”); and
The revelation caused the security’s price to move in a way that produced the plaintiff’s loss.

The district court found loss causation not sufficiently pled, but the Second Circuit did not reach that issue, because it disposed of the case at the scienter stage.

VI. Conclusion

Puchtler v. Barclays PLC is a concise but instructive Second Circuit decision illustrating the continued rigor of PSLRA scienter pleading requirements in the context of internal control failures and complex financial products.

Key takeaways include:

No shortcut from operational failure to fraud. Catastrophic control failures and dramatic market distortions (such as a 140% premium to indicative value) do not by themselves establish that executives acted with scienter.
Delegation is not equivalent to reckless disregard. Where executives delegate implementation of regulatory requirements to a working group, plaintiffs must allege specific facts showing that:
- executives were informed of control deficiencies; or
- the deficiencies were so obvious that ignoring them constituted an extreme departure from standards of care.
Particularity remains paramount. General allegations that executives “were aware of the consequences” of losing WKSI status, or that “certain personnel” understood those consequences, are insufficient. The complaint must link knowledge of the problem to the individuals who made the challenged statements.
Corporate scienter requires attribution to specific actors. Courts will not presume that “the corporation” knew of a problem simply because a subgroup within the organization did. Plaintiffs must connect scienter to individuals whose state of mind may fairly be imputed to the corporate entity.

Although the order is not precedential, it operationalizes the Supreme Court’s Tellabs framework and the Second Circuit’s own ECA, Novak, and Teamsters precedents in a contemporary, high‑stakes setting involving ETNs, short sellers, and post‑settlement regulatory burdens. Practitioners should treat Puchtler as a clear reminder that, in securities fraud litigation alleging internal control deficiencies, pleading facts that specifically tie senior management to contemporaneous awareness (or extreme recklessness) will often make the difference between survival and dismissal at the pleading stage.

Pleading Scienter for Delegated Internal Control Failures: Commentary on Puchtler v. Barclays PLC (2d Cir. 2025)