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(The news featured
below is a selection from the news covered in Federal Securities Law Reporter,
which is distributed to subscribers of Federal
Securities Law Reporter.)
7th
Circuit Reaches Same Result in Tellabs
The
7th Circuit again found that fraud allegations against Tellabs Inc. raised the
required strong inference of scienter under the Private Securities Litigation
Reform Act. The U.S. Supreme Court reversed the 7th Circuit panel's earlier
decision in June 2007 (Tellabs v. Makor Issues & Rights, Ltd., Inc. (¶94,335).
Applying the high court's more rigorous standard for scienter pleading, the
appellate panel again found that the investor allegations were sufficient.
The complaint against Tellabs, a maker of equipment used in fiber optics
network, arose from statements made primarily by CEO Richard Notebaert about
demand for the company's principal product, a switching system. In its first
review of the case, the 7th Circuit concluded that "Instead of accepting
only the most plausible of competing inferences as sufficient at the pleading
stage, we will allow the complaint to survive if it alleges facts from which, if
true, a reasonable person could infer that the defendant acted with the required
intent."
The Supreme Court rejected the 7th Circuit view, concluding that
To determine whether the plaintiff has alleged facts giving rise to the
requisite "strong inference," a court must consider plausible
non-culpable explanations for the defendant's conduct, as well as inferences
favoring the plaintiff. The inference that the defendant acted with scienter
need not be irrefutable, but it must be more than merely
"reasonable" or "permissible" --it must be cogent and
compelling, thus strong in light of other explanations. A complaint will
survive only if a reasonable person would deem the inference of scienter
cogent and at least as compelling as any plausible opposing inference one
could draw from the facts alleged.
The
high court did not determine, however, whether the allegations were actionable
under this standard and remanded the case to the appeals court. Circuit Judges
Wood and Sykes, who were on the first panel, were joined by Judge Posner, who
wrote for the court. The inferences of non-culpable conduct were "highly
implausible" and "very unlikely," according to Judge Posner. He
observed "that no member of the company's senior management who was
involved in authorizing or making public statements about the demand for the
5500 and 6500 knew that they were false is very hard to credit, and no plausible
story has yet been told by the defendants that might dispel our
incredulity."
The court finally concluded that the inferences of fraudulent intent were
cogent. The fact that the allegations were based in part on statements of
confidential witnesses was not determinative.
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