U.S. Supreme Court Construes "Strong Inference" of Scienter Requirement Under PSLRA in Favor of Defendants

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U.S. Supreme Court Construes “Strong Inference” of Scienter Requirement Under PSLRA in Favor of Defendants

The Private Securities Litigation Reform Act (“PSLRA”) was enacted in 1995 as a check against abusive private federal securities fraud lawsuits, and requires plaintiffs bringing such suits to meet exacting pleading requirements. On June 21, 2007, the United States Supreme Court decided Tellabs, Inc. v. Makor Issues & Rights Ltd., ___ S.Ct. ___, 2007 WL 1773208, a class action alleging that defendants engaged in securities fraud in violation of Section 10(b) of the

Securities Exchange Act and SEC Rule 10b-5. In Tellabs, the Court resolved a disagreement among the federal Courts of Appeals whether, and to what extent, a court must consider

competing inferences in determining whether a plaintiff’s securities fraud complaint gives rise to a “strong inference” that the defendants acted with “scienter,” meaning that they intended to “deceive, manipulate or defraud,” as required under the PLSRA’s heightened pleading

requirements, 15 U.S.C. § 78u-4(b)(2).

The Supreme Court ruled that in determining whether a complaint’s scienter allegations are sufficient to survive a motion to dismiss under the PLSRA, a court must review and compare all competing inferences arising from the allegations; thus, the court “must consider not only

inferences urged by plaintiff, ... but also competing inferences rationally drawn from the facts alleged.” The Court stated further that “[t]o qualify as ‘strong’ within the intendment of [PLSRA] § 21D(b)(2), we hold, an inference of scienter must be more than merely plausible or

reasonable—it must be cogent and at least as compelling as any opposing inference of nonfraudulent intent.”

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Published In: Securities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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