RESPONDENT:Makor Issues & Rights, Ltd., et al.
LOCATION:Tellabs Inc. Corporate Headquarters
DOCKET NO.: 06-484
DECIDED BY: Roberts Court (2006-2009)
LOWER COURT: United States Court of Appeals for the Seventh Circuit
CITATION: 551 US 308 (2007)
GRANTED: Jan 05, 2007
ARGUED: Mar 28, 2007
DECIDED: Jun 21, 2007
Arthur R. Miller – for the respondents
Carter G. Phillips – for the petitioners
Kannon K. Shanmugam – Assistant to the Solicitor General, Department of Justice, for the United States, as amicus curiae, supporting the petitioners
Facts of the case
Several plaintiffs brought a class action securities fraud lawsuit against Tellabs, Inc., a manufacturer of equipment for fiber optic cable networks. The plaintiffs alleged that Tellabs had misrepresented the strength of its products and earnings in order to conceal the declining value of the company’s stock. Under the Private Securities Litigation Reform Act of 1995 (PSLRA), plaintiffs bringing securities fraud complaints must allege specific facts that give rise to a “strong inference” that the defendant intended to deceive investors (scienter).
The District Court dismissed the complaints. The court held that the plaintiff’s allegations were too vague to establish a “strong inference” of scienter on the part of Tellabs. On appeal, the U.S. Court of Appeals for the Seventh Circuit reversed one of the lower court’s dismissals. The Seventh Circuit ruled that a plaintiff need only allege “acts from which, if true, a reasonable person could infer that the defendant acted with the required intent.” The Court of Appeals decided to consider only the plausibility of the inference of a guilty mental state, and not any competing inferences of an innocent mental state. This decision was due in part to the court’s concern that weighing competing inferences was more properly the task of a jury. The Seventh Circuit’s ruling conflicted with those of other Courts of Appeals, which required plaintiffs to show that the inference of scienter supported by the alleged facts was more plausible than any competing inference of innocent intent.
In considering whether a securities fraud complaint alleges facts sufficient to establish a “strong inference” that the defendant acted with intent to deceive, as required by the Private Securities Litigation Reform Act of 1995, must a court also consider competing inferences of an innocent mental state that might be drawn from the same facts?
Media for Tellabs, Inc. v. Makor Issues & Rights, Ltd.
Audio Transcription for Opinion Announcement – June 21, 2007 in Tellabs, Inc. v. Makor Issues & Rights, Ltd.
John G. Roberts, Jr.:
In case 06-484, Tellabs Incorporated versus Makor Issues and Rights, Justice Ginsburg has our opinion.
Ruth Bader Ginsburg:
To curtail abusive securities for litigation, congress in 1995 enacted the Private Securities Litigation Reform Act (PSLRA).
Exacting, pleading requirements are among the PSLRA’s control measures.
The Act requires plaintiffs to state with particularity both the facts constituting the alleged violation and the facts evidencing scienter or state of mind i.e., the defendant’s intention “to deceive, manipulate, or defraud.”
The courts below agreed that plaintiff stated the facts constituting the violation with sufficient particularity.
This whole question reconfirms concerns the scienter requirement, in the words of Section 21D (b)(2) of the act “did the facts alleged in the complaint give rise to a strong inference that the defendant acted with an intent to defraud.”
Congress let the key term “strong inference” undefined, and the Courts of Appeals have divided over its meaning.
The petitioner’s here are Tellabs, a manufacturer of specialized equipment for fiber optic networks and Richard Notebaert, Tellabs’ Chief Executive Officer and President during the relevant time period.
Respondents are shareholders who purchase Tellabs’ stock between December 11, 2000 and June 19, 2001.
The shareholders accuse Notebaert and by imputation Tellabs’ of deceiving the investing public about the true value of Tellabs’ stock.
According to the shareholders, Notebaert made a series of false representation to investor in which he portrait Tellabs as continuing to enjoy a large demand for its products and as earning record revenues when in fact that companies prospects were glooming.
When Tellabs eventually disclosed the truth about its shrinking sales and earnings in June 2001 the price of Tellabs stock plummeted.
The shareholders then sued to recoup their losses.
Tellabs and Notebaert moved to dismiss the complaints on the ground that they didn’t plead intent to deceive with sufficient particularity.
The District Court granted the motion a holding that the facts alleged by the shareholders were to thin to generate a strong inference of scienter.
The Court of Appeals for the Seventh Circuit reversed, plaintiff’s measured up that to the PSLRA’s strong inference specification and the Appeals court said by alleging facts from which a reasonable person could infer that the defendant acted with fraudulent intent.
We granted certiorari to resolve the conflict among Federal Courts over the meaning of strong inference.
Taking account of the PSLRA’s twin goals curbing frivolous litigation while preserving investor’s ability to recover unmeritorious claims, we establish the following prescriptions.
First, faced with a Rule 12(b)(6) motion to dismiss a securities fraud action for failure to plead intent to defraud with sufficient particularity.
The District Court must as it generally does under that rule assume all facts alleged in the complaint to be true.
Second, courts must consider the complaint in its entirety they should determine whether all of the facts alleged taking collectively give rise to a strong inference of scienter not whether each and every allegation considered individually meets that standard.
Third, in making this determination courts must engage in a comparative examination, they must take into account plausible inferences from the alleged facts opposing those urged by the plaintiff.
The Seventh Circuit fells short in this third regard, the Appeals Court drew inferences favoring plaintiffs but decline to consider opposing inferences that one-sided approach we hold was erroneous.
The strong inference requirement will be met we rule only if a reasonable person would find the inference of scienter cogent and at least as compelling as any opposing inference of non-fraudulent intent one could draw from the facts alleged.
The Seventh Circuit limited in its inquiry because of an undue concern that comparative assessment of plausible inferences at the pleading stage would impinge upon the plaintiff’s Seventh Amendment Right to jury trial.
It is Congress’ prerogative that created federal statutory claims to prescribe both what must be pleaded to stay the claim and what must be proved to prevail on the merits.
Under our reading of the PSLRA’s “strong inference” language, a plaintiff alleging securities code is not forced to plead more than she would be required to prove at trial.
To survive a threshold motion to dismiss, she must plead backs rendering an inference of scienter at least as likely as any plausible opposing inference.
Then to prevail a trial she must prove by a preponderance of the evidence that is it’s more likely than not that the defendant acted with a culpable state of mind.
Neither the District Court nor the Court of Appeals had the opportunity to consider plaintiff’s complaint in light of the prescriptions we announced today.
Ruth Bader Ginsburg:
We therefore vacate the Seventh Circuit’s judgment and remand so that the case may be reexamined in accord with our construction of Congress’ strong interest specification.
Separate opinions concurring in the judgment have been filed by the Justices Scalia and Alito.
Justice Stevens has filed a dissenting opinion.