Securities Law | Expert Legal Commentary
October 19, 2007
Makor: “Strong Inference” of Scienter – A New Standard, But No New Results
Tellabs, Inc. v. Makor Issues & Rights, Ltd.
By
Joel B. Ginsberg
The Tellabs tale really has two parts – part one is a Supreme Court decision, which ultimately remanded the case back to the 7th Circuit to apply its ruling, and part two is the subsequent 7th Circuit decision. The Supreme Court decision in Tellabs Inc. v. Makor Issues & Rights Inc., 127 S.Ct. 2499, 2511 (2007), set forth a new standard for proving scienter in cases alleging violation of Section 10(b) of the Securities Exchange Act of 1934, but many analysts questioned the wisdom of a standard they said would require the court to engage in a “mini-trial” even before discovery. Those concerns were given legs in the 7th Circuit’s opinion on remand – the court essentially came right out and found fraud against the corporate defendant before the case had really even begun.
To continue reading this article, subscribe now
It's FREE and only takes seconds
1 The PSLRA demands that a plaintiff “state with particularity facts giving rise to a strong inference that the defendants acted with the required states of mind.” 15 USC §78u-4(b)(2).
2The Federal Rules of Civil Procedure, Rule 12(b)(6), provides that a defendant can move for dismissal of the entire case, even before filing an initial responsive pleading, on the basis that the complaint fails to state a claim upon which relief can be granted.
3 See, e.g., Skubella v. Checkfree Corp., 2008 WL 1902118 (N.D. Ga. 2008); Goodman Life Income Trust v. Jabil Circuit Inc., 2008 WL 977357 (M.D. Fla. 2008); Grand Lodge of Pa. v. Peters, 2008 AL 697340 (M.D. Fla. 2008).
4The Supreme Court had already rejected this argument in Tellabs I, saying: “While it is true that motive can be a relevant consideration, and personal financial gain may weigh heavily in favor of a scienter inference, we agree with the Seventh Circuit that the absence of a motive allegation is not fatal.”
5495 F.3d 753 (7th Cir. 2007).
