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Tellabs, Inc. v. Makor Issues & Rights, Ltd. - 551 U.S. 308, 127 S. Ct. 2499 (2007)

Rule:

A court must consider a securities fraud complaint under 15 U.S.C.S. § 78j(b) in its entirety, courts ordinarily examine when ruling on Fed. R. Civ. P. 12(b)(6) motions to dismiss, in particular, documents incorporated into the complaint by reference, and matters of which a court may take judicial notice. The inquiry is whether all of the facts alleged, taken collectively, give rise to a strong inference of scienter, not whether any individual allegation, scrutinized in isolation, meets that standard. 

Facts:

Petitioner Tellabs, Inc., manufactured specialized equipment for fiber optic networks. Respondents (Shareholders) purchased Tellabs stock between December 11, 2000, and June 19, 2001. They filed a class action, alleging that Tellabs and petitioner Notebaert, then Tellabs' chief executive officer and president, had engaged in securities fraud in violation of § 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5, and that Notebaert was a "controlling person" under the 1934 Act, and therefore derivatively liable for the company's fraudulent acts. The shareholders alleged that Notaebert made representations to public investors that Tellabs was still in demand and its profits were high when in fact, Notaebert was aware that the company’s condition was the opposite. Tellabs moved to dismiss the complaint on the ground that the Shareholders had failed to plead their case with the particularity the Private Securities Litigation Reform Act of 1995 (PSLRA) requires. The District Court agreed, dismissing the complaint without prejudice. The Shareholders then amended their complaint, adding references to 27 confidential sources and making further, more specific, allegations concerning Notebaert's mental state. The District Court again dismissed, this time with prejudice. The Shareholders had sufficiently pleaded that Notebaert's statements were misleading, the court determined, but they had insufficiently alleged that he acted with scienter. 

Issue:

Is a further analysis 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?

Answer:

Yes.

Conclusion:

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, 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.

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