Tellabs, Inc. v. Makor Issues & Rights, Ltd.
Supreme Court of the United States
March 28, 2007, Argued ; June 21, 2007, Decided
[*313] [**2504] Justice Ginsburg delivered the opinion of the Court.
This Court has long recognized that meritorious private actions to enforce federal antifraud securities laws are an essential supplement to criminal prosecutions and civil enforcement actions brought, respectively, by the Department of Justice and the Securities and Exchange Commission (SEC). See, e.g., Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 345, 125 S. Ct. 1627, 161 L. Ed. 2d 577 (2005); J. I. Case Co. v. Borak, 377 U.S. 426, 432, 84 S. Ct. 1555, 12 L. Ed. 2d 423 (1964). [****10] Private securities fraud actions, however, if not adequately contained, can be employed abusively to impose substantial costs on companies and individuals whose conduct conforms to the law. See Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71, 81, 126 S. Ct. 1503, 164 L. Ed. 2d 179 (2006). As a check against abusive litigation by private parties, Congress enacted the Private Securities Litigation Reform Act of 1995 (PSLRA), 109 Stat. 737.
Exacting pleading requirements are among the control measures Congress included in the PSLRA. The PSLRA requires plaintiffs to state with particularity both the facts constituting the alleged violation, and the facts evidencing scienter, i.e., the defendant's intention "to deceive, manipulate, or defraud." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 194, 96 S. Ct. 1375, 47 L. Ed. 2d 668, and n. 12 (1976); see 15 U.S.C. § 78u-4(b)(1),(2). [*314] This case concerns the latter requirement. As set out in § 21D(b)(2) of the PSLRA, plaintiffs must "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2).
Congress left the key term [****11] "strong inference" undefined, and Courts of Appeals have divided on its meaning. In the case before us, the Court of Appeals for the Seventh Circuit held that the "strong inference" standard would be met if the complaint "allege[d] facts from which, if true, a reasonable person could infer that the defendant acted with the required intent." 437 F.3d 588, 602 (2006). That formulation, we conclude, does not capture the stricter demand Congress sought to convey in § 21D(b)(2). It does not suffice that a reasonable factfinder plausibly could infer from the complaint's allegations the requisite state of mind. Rather, to determine whether a complaint's scienter allegations can survive threshold inspection for sufficiency, a court governed by § 21D(b)(2) must engage in a comparative evaluation; it must consider, not only inferences urged by the plaintiff, as the Seventh Circuit did, but also competing inferences rationally drawn from the facts alleged. An [***188] inference of fraudulent intent may be plausible, yet less cogent than other, nonculpable explanations for the defendant's conduct. To qualify as "strong" within the intendment of § 21D(b)(2), we hold, an inference of scienter [****12] must be [**2505] more than merely plausible or reasonable--it must be cogent and at least as compelling as any opposing inference of nonfraudulent intent. Read The Full CaseNot a Lexis Advance subscriber? Try it out for free.
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551 U.S. 308 *; 127 S. Ct. 2499 **; 168 L. Ed. 2d 179 ***; 2007 U.S. LEXIS 8270 ****; 75 U.S.L.W. 4462; Fed. Sec. L. Rep. (CCH) P94,335; 20 Fla. L. Weekly Fed. S 374
TELLABS, INC., et al., Petitioners v. MAKOR ISSUES & RIGHTS, LTD., et al.
Prior History: [****1] ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE SEVENTH CIRCUIT.
Makor Issues & Rights, Ltd. v. Tellabs, Inc., 437 F.3d 588, 2006 U.S. App. LEXIS 1865 (7th Cir. Ill., 2006)
Disposition: Vacated and remanded.
scienter, strong inference, allegations, give rise, particularity, state of mind, courts, pleading requirements, Seventh Amendment, heightened, misleading, channel, cases, opposing inferences, motion to dismiss, reasonable person, private security, securities fraud, discovery, prescribe, requisite, stuffing, survive, infer, alleged facts, ambiguities, customers, frivolous, investors, lawmaking
Securities Law, Civil Liability Considerations, Securities Litigation Reform & Standards, General Overview, Postoffering & Secondary Distributions, Securities Exchange Act of 1934 Actions, Heightened Pleading Requirements, Elements of Proof, Scienter, Implied Private Rights of Action, Deceptive & Manipulative Devices, Express Liabilities, Civil Procedure, Pleadings, Complaints, Requirements for Complaint, Heightened Pleading Requirements, Fraud Claims, Misleading Statements, Elements of Proof, Defenses, Demurrers & Objections, Motions to Dismiss, Failure to State Claim, Motive & Opportunity, Constitutional Law, Bill of Rights, Fundamental Rights, Trial by Jury in Civil Actions