Arguing for an Interpretation of the “‘Strong Inference’ of Scienter” Requirement under the Private Litigation Reform Act of 1995 Consistent with Congress’s Intention to Limit Frivolous “Strike Suits” under Section 10(b) of the Securities Exchange Act of 1934
On June 21, 2007, the United States Supreme Court issued its decision in the case of Tellabs, Inc. v. Makor Issues & Rights, Ltd., 127 S. Ct. 2499 (2007). Agreeing with NELF, the Court rejected a Seventh Circuit pleading standard that would have encouraged frivolous private securities fraud actions. Justice Ginsburg delivered the opinion of the Court, joined by Chief Justice Roberts and Justices Kennedy, Souter, Thomas and Breyer. The decision construes the requirement in the Private Securities Litigation Reform Act of 1995 (“PSLRA”) that, for a securities fraud complaint under Section 10(b) of the Securities Exchange Act of 1934 to survive a motion to dismiss, the allegations of the complaint must create a “strong inference” of scienter, or fraudulent intent. The Seventh Circuit decision under review allowed claims to proceed provided plaintiffs alleged facts from which a reasonable person could infer fraudulent intent. The Supreme Court held that, under the “strong inference” requirement, the inference of scienter “must be more than merely plausible or reasonable—it must be cogent and at least as compelling as any opposing inference of nonfraudulent intent.” Justices Scalia and Alito filed concurring opinions in which each adopted NELF’s proposed interpretation of the “strong inference” requirement as necessitating an inference of fraudulent intent that is more plausible than the inference of innocent intent. As Justice Scalia reasoned, there is “no indication that [the PSLRA] was meant to relax the ordinary rule under which a tie goes to the defendant.” Both concurring Justices acknowledged, however, that the Court’s test would likely lead to the same results as a practical matter. Justice Stevens dissented from the opinion of the Court, arguing for a probable-cause standard.
On June 21, 2007, the United States Supreme Court issued its decision in the case of Tellabs, Inc. v. Makor Issues & Rights, Ltd., 127 S. Ct. 2499 (2007). Agreeing with NELF, the Court rejected a Seventh Circuit pleading standard that would have encouraged frivolous private securities fraud actions. Justice Ginsburg delivered the opinion of the Court, joined by Chief Justice Roberts and Justices Kennedy, Souter, Thomas and Breyer. The decision construes the requirement in the Private Securities Litigation Reform Act of 1995 (“PSLRA”) that, for a securities fraud complaint under Section 10(b) of the Securities Exchange Act of 1934 to survive a motion to dismiss, the allegations of the complaint must create a “strong inference” of scienter, or fraudulent intent. The Seventh Circuit decision under review allowed claims to proceed provided plaintiffs alleged facts from which a reasonable person could infer fraudulent intent. The Supreme Court held that, under the “strong inference” requirement, the inference of scienter “must be more than merely plausible or reasonable—it must be cogent and at least as compelling as any opposing inference of nonfraudulent intent.” Justices Scalia and Alito filed concurring opinions in which each adopted NELF’s proposed interpretation of the “strong inference” requirement as necessitating an inference of fraudulent intent that is more plausible than the inference of innocent intent. As Justice Scalia reasoned, there is “no indication that [the PSLRA] was meant to relax the ordinary rule under which a tie goes to the defendant.” Both concurring Justices acknowledged, however, that the Court’s test would likely lead to the same results as a practical matter. Justice Stevens dissented from the opinion of the Court, arguing for a probable-cause standard.
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