"Strong inference" in Securities Fraud means at least as strong as other possiblities
Another victory for companies who face shareholder suits was handed down yesterday, following up on the Credit Suisse ruling earlier this week.
In Tellabs, Inc. v. Makor Issues & Rights, Ltd., the U.S. Supreme Court clarified pleadings requirements set forth in the Private Securities Litigation Reform Act ( PSLRA). The PSLRA heightens the pleading requirements for suits alleged fraud under the §10b of the Securities Exchange Act or Exchange Commission Rule 10-5, requiring particularity for claims of fraud and scienter. Specifically, it requires that plaintiffs “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.”
The Court held that these standards require a district court to weigh the competing inferences of fraud and innocence arising from the alleged facts, and that the inference of scienter must be “cogent and at least as compelling as any opposing inference of nonfraudulent intent.” In making such comparison, the district court may consider “omissions and ambiguities” as weighing against scienter.
The opinion was authored by Justice Ginsberg, with five justices joining. Justice Scalia concurred in the outcome, but asserted that a “strong inference” would require the any inference of scienter to be more compelling than that of no fraudulent conduct. Justice Alito also concurred, arguing that the weighing of facts should include only those facts alleged with particularity. Justice Stevens dissented, urging that a “probably cause” standard like that employed in criminal cases be the test.
As ever when it happens, I find myself amazed to be in agreement with Justices Scalia (and now Alito) on anything. However, it does seem that if we accept that the intent of the PSLRA was to limit opportunistic suits, the “strong inference” should outweigh other possibilities, and specific facts, rather than conclusory allegations, should be what determined the inferences.
However, with the frank acknowledgement that “omissions and ambiguities” are relevant to determining the relative weight of the inferences, this opinion does offer defendants some real teeth.
Blawgletter predicts the ruing will "enhance the importance, and improve the quality, of story-telling in securities fraud pleadings." Telling the client's story is a concept always near and dear to my heart. I may have to think about a seminar on tellig the story in pleadings.
