Supreme Court Vacates 7th Circuit’s Tellabs Decision
The U.S. Supreme Court ruled 8-1 Thursday to strengthen Private Securities Litigation Reform Act curbs on “nuisance filings” by investors, in a case involving Tellabs. The 7th U.S. Circuit Court of Appeals used an “erroneously low standard” to decide if investors filing a 2002 class action against Tellabs satisfied a PSLRA standard requiring that “strong inference” existed to suggest Tellabs and then-CEO Richard Notebaert knowingly defrauded shareholders, Justice Samuel Alito said in a concurring opinion. Such a “strong inference” for knowing fraud (known as scienter) must be “cogent and at least as compelling as any opposing inference one could draw from facts alleged,” Supreme Justice Ruth Bader Ginsburg wrote for the U.S. Supreme Court, which vacated and remanded the 7th Circuit decision in Tellabs v. Makor.
Sign up for a free preview to unlock the rest of this article
Communications Daily is required reading for senior executives at top telecom corporations, law firms, lobbying organizations, associations and government agencies (including the FCC). Join them today!
Concurring Justice Antonin Scalia said the “strong inference” definition should be stronger still. “I fail to see how an inference that is merely ‘at least as compelling as any opposing inference’ can conceivably be called… ‘a strong inference,'” Scalia said: “The test should be whether the inference of scienter… is more plausible than the inference of innocence.” But dissenting Justice John Paul Stevens said the Supreme Court decision will be difficult to apply and inconsistent with the PSLRA statute: “It is most unlikely that Congress intended us to adopt a standard that makes it more difficult to commence a civil case than a criminal case,” he said.
Tellabs lauded the decision in a statement, saying it believes Congress intended “such a rigorous standard” in passing PSLRA. “We are confident that the complaint brought by Millberg Weiss against Tellabs will ultimately be found to be without merit.”
Shareholders filed for class action against Tellabs December 3, 2002, in the Northern District Court of Illinois. They alleged Tellabs and Noteabaert violated the Securities Exchange Act when the CEO’s sunny predictions for the company didn’t pan out. The court dismissed the case without prejudice, finding that the shareholders failed to argue with the particularity PSLRA demands. The court then dismissed an amended version with prejudice, declaring the plaintiffs did not prove Noteabaert’s statements were knowingly misleading. Reversing that decision, the 7th Circuit said the shareholders did prove the defendant’s scienter.