LIABILITY IN SECURITIES FRAUD DAMAGE ACTIONS: Part IX – Tellabs: Pleading a “Strong Inference of Scienter”

This begins the second segment of a multipart occasional series reviewing the potential impact of three Supreme Court cases on securities fraud damage actions.  The first part, concluded in the July 24, 2007 entry, discussed Stoneridge Inv. Partners, LLC. v. Scientific-Atlanta, Inc. and Motorola, Inc., No. 06-43, which is to be decided next term, and involves the scope of Section 10(b).  The second part, beginning with this entry, discusses the Supreme Court’s recent decision in Tellabs, Inc.  v.  Makor Issues & Rights, Ltd., No. 06-484, 2007 WL 1773208 (June 21, 2007) (“Tellabs”) regarding the requirements for pleading a strong inference of scienter.  The third and concluding part, coming in the future, will discuss Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336, 345 (2005), which concerned loss causation.

Tellabs, decided by the Supreme Court on June 21, 2007, construed Section 21D(b)(2) of the Exchange Act. The Section requires the securities fraud plaintiff to “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind” in a complaint for damages.  While the question of what constitutes a “strong inference” may seem at first to be little more than an arcane pleading question, the decision in Tellabs belies this notion.  Indeed, the Court’s decision fundamentally alters the manner in which motions to dismiss are considered and may perhaps ultimately change the way in which securities cases are brought.