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Makor Issues & Rights, Ltd. v. Tellabs, Inc. | 513 F.3d 702 (2008)
Congress enacted the Private Securities Litigation Reform Act to limit frivolous securities fraud lawsuits. The act requires a complaint to establish a strong inference of a defendant’s intent to defraud. In Makor Issues and Rights, Limited versus Tellabs, Incorporated, the Seventh Circuit considered whether a complaint may satisfy the reform act’s standards even if other plausible inferences exist.
Tellabs, Incorporated was a manufacturer of fiber optic systems used by telephone companies. Between 2000 and 2001, Tellabs’s CEO, Richard Notebaert, made several optimistic public statements about customer demand for the company’s two main products and the company’s stable financial health. But soon after, Tellabs revised its financial projections downward and announced that sales had fallen significantly. After these announcements, Tellabs’s stock price plummeted.
A group of Tellabs stockholders sued the company in federal district court, alleging that Tellabs had defrauded the stockholders in violation of Securities and Exchange Commission Rule 10(b)(5). The stockholders claimed that Notebaert knew his optimistic statements were false when he made them. The district court granted Tellabs’s motion to dismiss, holding that the complaint failed to establish the strong inference of Notebaert’s intent to defraud, or scienter, required by the reform act’s pleading standards.
The Seventh Circuit reversed and held that, based on the complaint, a reasonable person could infer that Notebaert acted with scienter. But the Seventh Circuit didn’t consider other opposing inferences that could’ve been drawn from the pleaded facts. The Supreme Court granted cert and vacated the Seventh Circuit’s judgment. The Court declared a new standard under which a complaint alleging securities fraud must create an inference of scienter that a reasonable person would believe is cogent and is at least as compelling as any opposing inference of nonfraudulent intent. The Court remanded the case to the Seventh Circuit for further consideration of such opposing inferences.
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