LIABILITY IN SECURITIES FRAUD ACTIONS: Part XV: The Decision in Tellabs – The Seventh Circuit’s Decision
The Seventh Circuit’s decision in Makor Issues & Rights, Ltd. . Tellabs, Inc.
The Seventh Circuit affirmed in part and reversed in part in an opinion which discusses each of the four key issues (discussed in an earlier posts in this series — Part XIII and Part XIV) on which the circuits had split. Makor Issues & Rights, Ltd. . Tellabs, Inc.
Second, in considering the group pleading doctrine, the court noted that there is a significant amount of debate about the issue. It went on to conclude that “[w]hile we will aggregate the allegations in the complaint to determine whether it creates a strong inference of scienter, plaintiffs must create this inference with respect to each individual defendant … .”
The key holding by the court, however, involved the question of inferences. Initially, the court concluded that the best approach “is for courts to examine all the allegations in the complaint and then to decide whether collectively they establish … [a strong] inference. Motive and opportunity may be useful indicators, but nowhere in the statute does it say that they are either necessary or sufficient.” The court thus joined with those circuits which concluded that all inferences should be considered. At the same time, the court seemed to suggest that while the motive and opportunity prong of the Second Circuit test may be sufficient evidence of a strong inference, it is more important to consider all the evidence.
The court’s final conclusion, however, placed a different gloss on the “all evidence” test. Here, the court concluded that “we will allow the complaint to survive if it alleges facts from which, if true, a reasonable person could infer that the defendant acted with the required intent … .” Thus while the court’s “all inferences” interpretation of Section 21D(b)(2) is consistent with some other circuits, its “reasonable person” position rejects the conclusion of the Sixth Circuit, while creating a new approach to interpreting a “strong inference.”
Next: the opinion of the Supreme Court.