Tellabs, Confidential Witnesses And The Eighth Circuit

The circuit courts continue to evolve their view of the Supreme Court’s test under Tellabs, Inc. v. Makor Issues & Rights, Ltd., 127 S. Ct. 2499 (2007), construing the PSLRA’s “strong inference” of scienter requirement. Last week, the Ninth Circuit resolved the question of whether inferences of scienter of senior executives can be drawn from the core operations of a company, as discussed here.

The Eighth Circuit recently considered the application of Tellabs in Western Pa. Electrical Employees Benefits Fund v. Ceridian Corp., No. 07-2707 (8th Cir. Sept. 11, 2008). There, the court reviewed a ruling by the district court dismissing a financial fraud complaint. The District Court concluded that plaintiffs had failed to plead a strong inference of scienter as required by Section 21D(b)(2) of the Reform Act as to the individual defendants. The ruling was made prior to the Supreme Court’s decision in Tellabs.

The Eighth Circuit affirmed the district court. The Court began by noting that under Tellabs, the complaint as a whole must be considered to determine whether there is a strong inference of scienter which is at least as cogent as any opposing inference. Although the District Court examined the question of meeting the PSLRA strong inference test by examining each allegation, rather than discussing the complaint as a whole, this was not necessarily inappropriate.

The Circuit Court went on to review each allegation in the complaint which it characterized as a jumble of accounting allegations that were not necessarily related. The Court concluded its review of the District Court’s decision by looking at the allegations collectively as required by Tellabs.

Two points are of interest. First, in a prior ruling applying Tellabs, the Eighth Circuit combined the Supreme Court’s equipoise test with its prior jurisprudence with the Second Circuit motive and opportunity test. Crowell v. Possis Medical, Inc., No. 07-1840 (8th Cir. Mar. 21, 2008). In Ceridian however, the Circuit Court did not discuss the “motive and opportunity test.”

Second, in analyzing the plaintiffs’ allegations, the Court considered those from confidential witnesses. Those allegations identified the job title of the witness and provide some detail about the prior position. In reviewing those allegations however, the Court assumed that the use of information from confidential sources is appropriate under the Reform Act without discussion. Other circuit courts have found allegations from confidential witnesses adequate under the Reform Act requirement that “all facts” must be pled only if certain conditions are met. Compare, Makor Issues & Rights, Ltd. v. Tellabs, Inc., 513 F.3d 702 (7th Cir. 2008) (requiring sufficient detail to evaluate the information) with Higginbotham v. Baxter International, Inc., 495 F.3d 753 (7th Cir. 2007) (rejecting the use of such witnesses were there was insufficient information about the person).

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