The Tellabs decision, construing the PSLRA’s “strong inference” of scienter requirement, continues to have a significant impact on pleading requirements in securities damage actions. The Sixth Circuit is the latest circuit to conclude that the Supreme Court’s decision reduced the pleading burden on securities plaintiffs in that circuit. Frank v. Dana Corp., No. 07-235 (6th Cir. Decided Nov. 19, 2008).

Dana is a securities class action brought initially against Dana Corp., a now-bankrupt auto parts manufacturer, and two of its officers, claiming securities fraud. Specifically, the complaint claims that Michael Burns and Robert Richter, Dana’s Chief Executive Officer and Chief Financial Officer, respectively, misled investors by reporting strong earnings, declaring positive financial outlooks, and touting sound internal accounting procedures, none of which were true. In addition, for each quarter during the class period of April 21, 2004 through October 7, 2005, plaintiffs claim that the two officer defendants executed false SOX Section 302 certifications.

The Sixth Circuit reversed the decision of the district court which had granted defendants’ motion to dismiss for failure to comply with the pleading standards of the Private Securities Litigation Reform Act. The district court held that plaintiffs were required to “establish an inference of scienter that is more plausible and powerful than competing inferences of defendants’ state of mind.”

The Sixth Circuit began its analysis by noting that, in Tellabs, Inc. v. Makor Issues & Rights, Ltd., 127 S.Ct. 2499 (2007), the Supreme Court prescribed a specific three-step analysis to be followed in assessing whether the allegations of a complaint adequately plead a strong inference of scienter as required by the PSLRA. First, the factual allegations in the complaint must be accepted as true. Second, the court must consider the complaint in its entirety. In this regard, all of the allegations must be examined and the court must determine whether the inference of scienter is “cogent and compelling, thus strong in light of other explanations,” the Circuit Court concluded, quoting Tellabs. Finally, in assessing whether the facts pled give rise to a strong inference, the court must consider the opposing inferences. Under this test the complaint will survive if a reasonable person would conclude that the inference of scienter is at least as compelling as any opposing inferences.

Here, the district court properly applied the first two prongs of the Tellabs test, but not the third, according to the Circuit Court. In analyzing the final prong of the test, the district court used the standard adopted by the Sixth Circuit in its 2001 en banc decision in Helwig v. Vencor, Inc., 251 F.3d. 540 (6th Cir. 2001) (en banc). In that decision, discussed here, the Circuit Court concluded that the strong inference standard “‘means that plaintiffs are entitled only to the most plausible of competing inferences,’” quoting from Helwig. The standard adopted in that case is “no longer good law” after Tellabs, the Sixth Circuit concluded.

Dana is the latest circuit court decision construing Tellabs. As in the Ninth Circuit, the Sixth Circuit concluded that the equipoise test adopted by the Supreme Court reduced the pleading burden on securities law plaintiffs as to the scienter element in that circuit. Other circuits, such as the Second, have combined the Tellabs test with their prior jurisprudence which focuses on the pre-PSLRA motive and opportunity test. Overall Tellabs continues to have an impact on securities damage actions.

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