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WASHINGTON � The Supreme Court on Thursday made it easier for corporate defendants to seek and win dismissal of lawsuits filed by investors alleging stock fraud or market manipulation. By an 8-1 majority, the court raised the threshold that plaintiffs must cross in initial pleadings to show that defendants had the intention to deceive or defraud. Justice Ruth Bader Ginsburg, writing for the majority in Tellabs v. Makor Issues & Rights, said the plaintiffs’ inferences about the defendant’s knowledge of wrongdoing must be “cogent, and at least as compelling as any opposing inference of non-fraudulent intent.” The court rejected a more lax standard, which required only that plaintiffs allege facts from which “a reasonable person” could infer fraudulent intent. The ruling on a crucial threshold question in securities litigation came in a lawsuit originally filed in 2002 by shareholders of Tellabs Inc., an Illinois firm that makes equipment for fiber optic networks. They claimed the company and its president, Richard Notebaert, made false statements to deceive the public about the value of Tellabs stock. The company won dismissal of the suit in the Northern District of Illinois, but the Seventh Circuit U.S. Court of Appeals reinstated the case, finding that the plaintiffs had made sufficiently strong allegations about Notebeart’s state of mind The Tellabs decision was the second win this week for defendants seeking to limit class action litigation brought by investors. In Credit Suisse v. Billing on Monday, the court ruled that securities law trumped antitrust law in this area, thereby precluding antitrust lawsuits � which can result in treble damages � against companies on issues regulated by the Securities and Exchange Commission. The Tellabs decision won praise from the business community as a win that strengthens the Private Securities Litigation Reform Act, passed by Congress in 1995 to protect companies from frivolous litigation.
The Tellabs decision was the second win this week for defendants seeking to limit class action litigation brought by investors.

“By adopting a standard that weeds out baseless allegations of securities fraud, today’s Supreme Court decision will go a long way in reducing abusive securities class actions, discouraging blackmail settlements, and providing greater certainty for the financial industry and investors,” said Robin Conrad, executive vice president of the National Chamber Litigation Center, in a statement. “Plaintiffs’ burden under the law is high,” says Karen Hirschman, a securities litigator at Vinson & Elkins. “This decision demonstrates the willingness of the Court to enforce the intent of Congress, despite its impact on plaintiffs’ ability to get past the motion-to-dismiss stage.” Some members of the plaintiffs bar say that the ruling could have been much worse and that legitimate lawsuits will still be able to meet the new standard and get past the dismissal stage. “We don’t bring cases that would not meet this standard,” says Barbara Hart, of Labaton Sucharow & Rudoff in New York, who specializes in filing securities fraud and antitrust cases against companies for investors. “I’m certain some defendants will try to take advantage of the ruling, but it’s perfectly acceptable.” Stanford Law School professor Joseph Grundfest says, “While the decision is clearly a victory for defendants, it is not as thorough a thrashing of the plaintiffs as some plaintiff lawyers had feared.” Jon Haber of the American Association for Justice (formerly known as the Association of Trial Lawyers of America) says the ruling was narrow and “should not be seen as a green light for federal courts to shut the courthouse doors to the valid claims of defrauded shareholders.” Justices Antonin Scalia and Samuel Alito wrote separate concurring opinions to argue for a higher threshold for plaintiffs, but they joined the judgment of the court. Justice John Paul Stevens was the lone dissenter, arguing instead for a standard similar to the “probable cause” requirement in criminal law. Also Thursday, the court issued decisions in Rita v. United States, upholding its recent decisions on sentencing guidelines, and Tennessee Secondary School Athletic Association v. Brentwood Academy, which said recruitment rules for sports teams could be imposed on private schools without violating the First Amendment. The court thus ended the week with nine cases left to decide for the term � including closely watched cases from Seattle and Louisville on the use of race as a factor in making public school class assignments. The court will sit again on Monday and probably one or two more days next week before recessing for the summer. Tony Mauro is the U.S. Supreme Court correspondent for Legal Times, a Recorder affiliate based in Washington, D.C. His e-mail address is [email protected].

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