Tellabs, Inc. v. Makor Issues & Rights, Ltd.

Brief Fact Summary.

Respondent brought a class action lawsuit against Petitioner, its chief executive officers and other officers. The complaint, which alleged a scheme to defraud investors, alleged that the chief executive misled the public in four ways. The district court dismissed the complaint, as well as an amended complaint, for failure to plead with particularity. The court of appeals reversed, in part, holding that the complaint sufficiently alleged the requisite scienter of the chief executive officer. The Supreme Court granted certiorari.

Synopsis of Rule of Law.

To satisfy the requirement of stating with particularity facts that give rise to a “strong” inference that a defendant acted with the required state of mind, an inference of scienter must be cogent and at least as compelling as any opposing inference.

Facts.

Respondent owned stock in Petitioner corporation. Respondent brought a class action lawsuit against Petitioner, its chief executive officers and other officers, based on allegations of a scheme to deceive investors. The complaint alleged that  Petitioners violated a federal securities regulation statute that required that a complaint alleging a scheme to defraud state with particularity facts that give rise to a strong inference that defendant acted with the necessary state of mind. Respondent’s complaint alleged that the chief executive misled the public in four ways. The district court dismissed the complaint, as well as an amended complaint, which contained additional references to confidential sources and specifically referred to the chief executive officer’s mental state. The district court dismissed the complaints for failure to plead with particularity. The court of appeals reversed, in part, holding that the complaint sufficiently alleged the requisite scienter of the chief executive officer. The Supreme Court granted certiorari.

Issue.

Did the Seventh Circuit Court of Appeals correctly determine that a complaint states with particularity facts giving rise to a strong inference of scienter as long as it alleges facts from which a reasonable person can infer that the defendant acted with the requisite intent?

Held.

No. The Seventh Circuit Court of Appeals did not correctly determine that a complaint states with particularity facts giving rise to a strong inference of scienter as long as it alleges facts from which a reasonable person can infer that the defendant acted with the requisite intent.

Concurrence.

Justice Scalia

Although concurring in the judgment, Justice Scalia argued that the test for a strong inference of scienter should be whether the inference of scienter was more plausible that the inference of innocence.

Justice Alito

Concurring in the judgment, Justice Alito also argued that the only those facts alleged with particularity should be properly considered in determining whether the allegations of scienter are sufficient, and that the test for a strong inference of scienter should be whether the inference of scienter was more plausible that the inference of innocence.

Discussion.

A complaint that alleged fraudulent intent states with particularity facts giving rise to a strong inference of the requisite scienter if it is cogent and at least as compelling as any opposing inference of nonfraudulent intent.