Tellabs On Remand: An Opinion Which Raises Significant Questions

Tellabs On Remand: An Opinion Which Raises Significant Questions


On remand, the Seventh Circuit held in Makor Issues & Rights, Ltd. v. Tellabs, Inc., 513 F.3d 702 (Jan. 17, 2008), that plaintiff had pled a strong inference of scienter within the meaning of the Private Securities Litigation Reform Act (PSLRA) as interpreted by the Supreme Court. The court also appears to have modified its earlier decision on the use of confidential sources, this time authorizing their use. At the same time, the Circuit Court's opinion raises important questions about the manner in which it applied the teaching of the high court as to what constitutes a "strong inference" of scienter.
 
Mr. Gorman writes: Under the Supreme Court’s standard, according to the Seventh Circuit, the pleader must meet a two part test: “So first the inference must be cogent, and second it must be as cogent as the opposing inference, that is, the inference of lack of scienter.” The “comparison is not essential, and obviously is not contemplated by the Reform Act.” Rather, the question is whether the complaint gives rise to a strong inference of scienter since “Congress does not believe that weak complaints should put a defendant to the expense of discovery in a securities-fraud case . . .” And, in any event, the defendant can typically be expected to have some alternative explanation of the facts, according to Judge Posner, writing for the panel.
 
The court then turned to the question of corporate liability. While the rule of respondeat superior can result in entity liability for the acts of its agents, the court noted that “[a] routine invocation of respondeat superior … would, if applied to a securities fraud that requires scienter, attribute to a corporation a state of mind that none of its employees had.” In securities cases it is more appropriate to look to the state of mind of the “individual corporate official or officials who make or issue the statement . . .”
 
Following this principle, the Seventh Circuit rejected the group pleading doctrine. Under that judicially-created presumption, statements in group-published documents such as annual reports, are attributable to officers and directors who control the company. “As we held in our first opinion, the doctrine is inconsistent with the ‘strong inference’ requirement.” [footnotes omitted]