Supreme Court Clarifies Securities Fraud Standards

In a new 8-1 decision favorable to issuers, the U.S. Supreme Court has interpreted the pleading requirements for securities fraud claims under section 10(b) of the Securities Exchange Act as imposing a heightened burden on allegations concerning a defendant’s state of mind.

The opinion in Tellabs, Inc. v. Makor Issues & Rights Ltd., 06-484 (June 21, 2007) clarifies the provision of the Private Securities Litigation Reform Act of 1995 ("PSLRA") that obligates securities fraud plaintiffs to allege "facts giving rise to a strong inference" that the defendant acted with "scienter"—a mental state embracing recklessness or the intent to deceive, manipulate or defraud. Resolving multiple lower court interpretations of the "strong inference" standard, the Supreme Court concludes in Tellabs that the inference of scienter must be more than merely reasonable or permissible, and that it is not sufficient for a plaintiff merely to plead facts from which recklessness or intent could be inferred.