A major showdown is looming before the U.S. Supreme Court within weeks over the issue of what must be pleaded to demonstrate scienter under Rule 10b-5. Section 21D(b)(2) of the Securities Exchange Act of 1934 requires the plaintiff to “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.”

On March 28, the Court is scheduled to hear Tellabs Inc. v. Makor Issues and Rights Ltd., No. 06-484, in which the 7th U.S. Circuit Court of Appeals took an unusually permissive view of what this standard requires. Since the Private Securities Litigation Reform Act (PSLRA) was passed in 1995, each federal circuit has developed its own interpretation, and they differ significantly. Uncharacteristically, the U.S. Securities and Exchange Commission and the solicitor general have filed an amicus brief asking the Supreme Court to reverse the decision of the 7th Circuit and impose a higher pleading standard.

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