Sets Securities Suit Standard
By Mark H. Anderson
The Wall Street Journal
Thursday, June 21, 2007
WASHINGTON -- The U.S. Supreme Court, ruling 8-1
in favor of Tellabs Inc., Thursday endorsed a high pleading
standard for class-action securities lawsuits.
The opinion, by Justice Ruth Bader Ginsburg, will make it harder
to file lawsuits on behalf of investors alleging they lost money
due to securities fraud. The holding requires plaintiffs'
attorneys, when filing a lawsuit, to show that companies or
corporate officers had a "cogent" intent to commit securities
The ruling is the latest in a string of Supreme Court opinions
limiting shareholder lawsuits against companies. Monday, the
Supreme Court ruled that Wall Street underwriting practices are
immune from civil antitrust lawsuits. Last year, the Supreme
Court closed a loophole that had made it easier to get some
securities lawsuits heard in a state court, despite
congressional reforms that aimed to steer those cases to a
The Tellabs decision seeks to better define "scienter," a legal
term in securities law that defines the standard for what is
required to show a corporate defendant knew about or intended to
commit securities fraud. "To qualify as strong .... we hold an
inference of scienter must be more than merely plausible or
reasonable," Justice Ginsburg wrote. "It must be cogent and at
least as compelling as any opposing inference of nonfraudulent
Justice Ginsburg said the pleading standard the court was
announcing Thursday wasn't higher than what must be proven
during the trial phase of a case. In explaining this, she said
a new case must show it was "at least as likely" that a
defendant meant to commit fraud while at trial the standard to
prove guilt requires proof that "it is more likely than not."
The ruling dealt with provisions in the 1995 Public Litigation
Securities Reform Act, which requires plaintiffs to plead a
"strong inference" that that a company or its officers intended
to defraud investors before legal discovery can take place while
lower standards apply after discovery and during a trial.
Congress, in passing the law, meant to create a high threshold
prior to legal discovery for private securities lawsuits that
corporations and Wall Street have long said are abusive attempts
to extract out-of-court settlements.
The Supreme Court ruling overturns a 7th U.S. Circuit Court of
Appeals holding that set a lower pleading standard.
The case against Tellabs alleged the company and its officers
illegally inflated its stock price prior to releasing revised
revenue projections for 2001's second quarter. After winning in
lower courts, Tellabs lost in the 7th U.S. Circuit Court of
Appeals in Chicago, which ruled the lawsuit could proceed
against it and a former executive.
Justice John Paul Stevens dissented. Two justices -- Justice
Antonin Scalia and Samuel Alito -- filed concurring opinions
that offered different legal reasoning but supported the outcome
of the majority opinion.
The case is Tellabs Inc. v. Makor Issues & Rights Ltd.
--The Associated Press contributed to this article.
Write to Mark H. Anderson at