The Supreme Court released its decision in Tellabs Inc. v. Makor Issues and Rights Ltd., ruling against the plaintiffs and in favor of defendant, Tellabs. The New York Times published summary of the opinion today.
The 8-1 decision by Justice Ruth Bader Ginsburg is a slight setback for the plaintiffs’ bar in securities litigation but hardly the victory opponents of shareholder securities litigation might have hoped for.
In her majority opinion, Justice Ginsburg clarifies what kinds of allegations are sufficient to meet the Private Securities Litigation Reform Act’s (PSLRA) pleading standard of a “strong inference” of scienter (intent to deceive). The Court rejected the 7th Circuit’s standard in the lower court opinion that a strong inference is created if a “reasonable person could infer” that the defendant acted with the required state of mind. The court found this standard too permissive in light of the PSLRA’s intention to create a heightened pleading standard. To qualify as “strong”, the Court held, “an inference must be more than merely plausible or reasonable — it must be cogent and at least as compelling as any opposing inference of non-fraudulent intent.” Because the lower courts had evaluated the plaintiffs’ complaint against an inappropriate standard, the Court remanded the case.
Importantly, however, the majority opinion also rejected the defendant’s position that plaintiffs’ failure to show any monetary gain to the individual defendant (the corporation’s CEO) negated a strong inference of scienter. The majority also rejected the position of Justices Scalia and Alito in concurring opinions that to survive a motion to dismiss the inference of scienter must be more plausible (rather than as plausible) as any competing explanation.
Overall, the Tellabs opinion is a welcome clarification of the pleading standard created by the PSLRA. It is less favorable to plaintiffs’ than the 7th Circuit’s standard but much more generous than the standard sought by defendant and embraced, to some extent, by Justices Scalia and Alito.