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Court 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 fraud.

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 federal venue.

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 intent."

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