South-Western Legal Studies in Business

Securities Fraud Claim Must Make Strong Inference of Scienter
Description The Supreme Court held that, under the Private Securities Litigation Reform Act, plaintiffs claiming securities fraud must make a strong inference of scienter in initial pleadings for the suit to proceed. The inference must be at least as strong as the alternative inference offered by defendants.
Topic Securities Law
Key Words Securities Fraud; Private Securities Litigation Reform Act; Scienter
C A S E   S U M M A R Y
Facts Shareholders of Tellabs, who purchased stock during a particular time period, accused the company and its CEO of a scheme to deceive the investing public about the true value of the company’s stock. Plaintiffs contend that the CEO falsely assured investors that Tellabs was going to enjoy strong growth, when he knew the opposite to be true. During the time period in question, as negative news became available, the stock price dropped from a high of $67 to $16. The class action suit claims securities fraud. The district court agreed that, under the Private Securities Litigation Reform Act (PSLRA), plaintiffs must plead their case with the particularity required by the law, not make general assertions. The filing was amended, but the court rejected this as failing to show that the CEO acted with scienter. The appeals court reversed, holding that plaintiffs had sufficiently alleged that the CEO acted with the requisite state of mind. Tellabs appealed.

Vacated and remanded. In determining whether a securities fraud complaint gives rise to a “strong inference” of scienter, within the meaning of the PSLRA, the court must consider alternative inferences that may be drawn from the statements and information involved. The fact that a plaintiff claims scienter is not sufficient, the plaintiff must provide a cogent and compelling inference of scienter that is at least as strong as the opposing inference of non-fraudulent intent. The PSLRA is intended to curb abuse of private securities actions. It does so by imposing substantive controls such as heightened pleading requirements.

Citation Tellabs, Inc. v. Makor Issues & Rights, Ltd., 127 S.Ct. 2499 (Sup. Ct., 2007)

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