A Major Victory For Defendants In Securities Class Actions: Tellabs, Inc. v. Makor Issues & Rights, Ltd.

Article by Kevin P. Muck, Felix S. Lee and Gaurav Mathur

On June 21, 2007, the U.S. Supreme Court handed down a decision that provides welcome news to any public company, officer or director facing the prospect of a securities class action lawsuit. In Tellabs, Inc. v. Makor Issues & Rights, Ltd., the Court resolved a significant and long-standing split on how courts should interpret the "strong inference" of scienter pleading standard set forth in the Private Securities Litigation Reform Act of 1995 ("Reform Act") for securities fraud actions. After emphasizing that "securities fraud actions… if not adequately contained, can be employed abusively to impose substantial costs on companies and individuals whose conduct conforms to the law," the Court made clear that courts must be vigilant in scrutinizing – and filtering – such actions at the pleading stage. In particular, the Court held that a securities fraud complaint may survive dismissal only if the inference of scienter arising