In Tellabs Inc. v. Makor Issues & Rights Ltd., 127 S. Ct. 2499 (2007), the U.S. Supreme Court provided guidance for applying a critical pleading requirement contained in the Private Securities Litigation Reform Act of 1995 (PSLRA). In the eight months since Tellabs, several courts of appeals and numerous district courts from all circuits have had the opportunity to apply Tellabs to securities fraud complaints. This article looks at how the lower courts have applied Tellabs in light of pre-existing precedent within the various circuits.
In 1995, Congress enacted the PSLRA in response to evidence of “abusive practices committed in private securities litigation.” H.R. Conf. Rep. No. 104-369, at 31, reprinted in 1995 U.S.C.C.A.N. 730. Among the many reforms Congress enacted in this legislation were “more stringent pleading requirements to curtail the filing of meritless lawsuits.” Id. at 41. Congress intended this new, more stringent pleading standard to be “uniform” in order to address the “distinctly different standards among the circuits” in applying then-existing pleading requirements. Id. One of the elements of the new pleading standard was a requirement that the plaintiff in a private action asserting a violation of � 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. 78j(b), “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind,” i.e., scienter. 15 U.S.C. 78u-4(b)(2). The PSLRA, however, did not define “strong inference” or otherwise provide guidance as to what facts and circumstances alleged in a complaint might give rise to a strong inference of a defendant’s scienter.
