Corporate Securities Law Blog

The March 17, 2008 issue of The National Law Journal features a special article by Sheppard Mullin partner John Stigi and associate Martin White analyzing how lower courts have applied the Supreme Court’s decision in Tellabs Inc. v. Makor Issues & Rights Ltd., 127 S. Ct. 2499 (2007), in light of pre-existing precedent within the various circuits.  As previously reported here, the Supreme Court in Tellabs addressed the heightened requirements for pleading scienter enacted in the Private Securities Litigation Reform Act of 1995.  Rejecting a relaxed “reasonable inference” approach adopted by the Seventh Circuit, the Supreme Court held that a securities fraud complaint will survive dismissal only if, based upon its factual allegations, the inference of defendant’s scienter is “cogent and at least as compelling as any opposing inference.”  As Stigi and White explain in The National Law Journal:

Overall, the decisions to date from all circuits since Tellabs suggest that courts are applying a more stringent pleading standard.  . . .  This result should not be particularly surprising, however.  The 2d, 3d and 7th circuits appear to recognize Tellabs as materially heightening the requirements for pleading scienter.  In the 1st, 6th and 9th circuits, where Tellabs’ “tie goes to the plaintiff” rule on competing inferences can be viewed as lowering the bar for plaintiffs, because competing inferences rarely are “precisely in equipoise” (Tellabs, 127 S. Ct. at 2514 (Scalia, J., concurring)), the difference between “tie goes to the defendant” and “tie goes to the plaintiff” is not practically important.

For further information, please contact John Stigi at (213) 617-5589.