Law School Case Brief
Tellabs, Inc. v. Makor Issues & Rights, Ltd. - 551 U.S. 308, 127 S. Ct. 2499 (2007)
To determine whether a plaintiff in a securities fraud action under 15 U.S.C.S. § 78j(b) has alleged facts that give rise to the requisite strong inference of scienter, a court must consider plausible nonculpable explanations for a defendant's conduct, as well as inferences favoring the plaintiff. The inference that the defendant acted with scienter need not be irrefutable, i.e., of the smoking-gun genre, or even the most plausible of competing inferences. The inference of scienter must be more than merely reasonable or permissible--it must be cogent and compelling, thus strong in light of other explanations. A complaint survives only if a reasonable person would deem the inference of scienter cogent and at least as compelling as any opposing inference one could draw from the facts alleged.
Respondent shareholders of a corporation brought a securities fraud action against petitioner officer of the corporation, alleging that the officer deceived the public concerning the value of the corporation's stock. The shareholders contended that their allegations were sufficient to establish a strong inference that the officer acted with the intent to deceive, manipulate, or defraud, as required by § 78u-4(b)(2). The officer argued that the shareholders failed to allege any financial motive of the officer to support scienter and offered vague and ambiguous allegations. The United States Court of Appeals for the Seventh Circuit held that the shareholders sufficiently pleaded scienter under 15 U.S.C.S. § 78u-4(b)(2).
Were the allegations sufficiently pleaded?
The U.S. Supreme Court held that while the shareholders' allegations plausibly permitted an inference of the requisite scienter, further analysis was required to determine whether the inference of fraudulent intent was a powerful or cogent inference which was at least as compelling as any opposing inference of nonfraudulent intent. The strong inference of scienter required by § 78u-4(b)(2) was not required to be irrefutable or even the most plausible inference, but the strength of the inference could not be evaluated in a vacuum and consideration of plausible, nonculpable explanations for the officer's conduct was required. Further, the Court held that any lack of pecuniary motive on the part of the officer did not by itself preclude a finding of scienter, and any ambiguities in the shareholders' allegations were relevant but not determinative. The Court stated that provided that the shareholders satisfied the congressionally prescribed means of making an issue, the case would fall within the jury's authority to assess the credibility of witnesses, resolve any genuine issues of fact, and make the ultimate determination whether the officer and, by imputation, the corporation, acted with scienter. Under the Court's construction of the "strong inference" standard, a plaintiff is not forced to plead more than she would be required to prove at trial. A plaintiff alleging fraud in a § 10(b) action must plead facts rendering an inference of scienter at least as likely as any plausible opposing inference. At trial, she must then prove her case by a "preponderance of the evidence." Stated otherwise, she must demonstrate that it is more likely than not that the defendant acted with scienter. The judgment holding that scienter was sufficiently alleged was vacated and the case was remanded for further proceedings.
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