Justices question Tellabs lawsuit
May tighten rules on stockholder actions
Thursday, March 29, 2007
WASHINGTON -- U.S. Supreme Court justices signaled Wednesday
that they might tighten the standards for securities lawsuits,
questioning shareholder accusations that Naperville-based
Tellabs Inc. fraudulently inflated revenue.
During oral arguments several justices said a lower court
decision allowing the suit was not in line with a 1995 federal
law that set new requirements on investor claims.
"I hope we're going to recognize that Congress thought it was
doing something," Justice Anthony Kennedy said.
The case could help companies win early dismissal of shareholder
suits and avoid the expense of mounting a full-scale defense.
It marks the court's first look at a linchpin of the 1995 law,
its requirement that complaints create a "strong inference" that
company officials had reason to know they were doing something
The justices left little doubt that they read the 1995 law as
creating significant new hurdles at the initial stage of
litigation. Chief Justice John Roberts said the law
"established a very different standard" from traditional rules
that govern complaints filed in federal court. Justice Antonin
Scalia said Congress "established an entry qualification for
getting you into court."
The challenge for the court might be to square that
congressional intent with the right to a jury trial in the
Constitution's 7th Amendment. Several justices said they were
concerned about the implications of excluding cases that
otherwise would be strong enough to go to a jury.
"I don't see a way of avoiding this 7th Amendment problem,"
Justice Stephen Breyer said.
The suit, which seeks class-action status, accuses the
telecommunications equipment-maker of improperly booking revenue
for the fourth quarter of 2000 and making false projections for
2001. The suit says former Chief Executive Richard Notebaert
told analysts and the public in 2000 and 2001 that the market
was strong for the company's top-selling Titan 5500, a device
for managing phone-network traffic, even though he knew demand
Breyer said the complaint was not specific enough in places. He
said a reference to an "early '01" internal report on the Titan
5500 market left open the possibility that it was produced after
Notebaert and Tellabs disclosed slow sales.
The shareholders' lawyer, Harvard law professor Arthur Miller,
argued that the complaint as a whole provided ample reason to
believe that Notebaert deceived the public about sales
"You're the CEO. You don't know that your flagship product is
drying up?" Miller said.
Miller drew some support from Justice Ruth Bader Ginsburg, who
suggested that shareholders should be able to invoke an undated
document in their complaint.