On January 17, 2008, while most of us in the securities litigation and arbitration field were focused on the Supreme Court’s decision in Stoneridge, the Wall Street Journal Law Blog kept its eye on all the balls in the air and reported on the 7th Circuit decision in the remand of Tellabs.
In an opinion written with Judge Posner’s customary felicity of language, the 7th Circuit held that the plaintiffs had adequately pled scienter in conformity with the requirements of the Private Securities Litigation Reform act. The issue before the 7th Circuit was whether plaintiffs’ allegation of securities fraud created the “strong inference” of scienter, as defined by the Supreme Court in its Tellabs opinion, under the PSLRA.
Judge Posner wrote that, under the Supreme Court’s test, “first the inference must be cogent, and second, it must be as cogent as the opposing inference, that is, the inference of lack of scienter.” In what may have been a subtle swipe at the PSLRA, Judge Posner further noted that “[t]o judges raised on notice pleading, the idea of drawing a ‘strong inference’ from factual pleadings is mysterious.”
Judge Posner then proceeded to do exactly that. After an extensive review of the allegedly misleading statements, the Court noted that the critical question was whether the statements were “merely careless mistakes at the management level based on false information fed it from below, rather than of an intent to deceive or a reckless indifference to whether the statements were misleading.”
The Court concluded that it was “exceedingly unlikely” that the statements were careless mistakes and not based on either an intent to deceive or a reckless indifference. The statements involved Tellabs’ flagship product and its successor. The court found it hard to credit that no member of senior management knew that the statements were false. The defendants had not yet told a plausible story to dispel the Court’s incredulity.
In dismissing the defendants’ arguments of lack of motive, the Court wrote that the inference of corporate scienter was more likely than the opposite. The Court held that “it is p[ossible to draw a strong inference of corporate scienter without being able to name the individuals who concocted and disseminated the fraud.”
In dealing with the requirement that the inference be cogent, the Court held that “if there are only two possible inferences, and one is much more likely than the other, it must be cogent.”
Despite the fears of some, it does appear that it is possible to plead allegations sufficient to draw a strong inference of scienter under the PSLRA ? at least in the 7th Circuit. One can only hope that other courts follow suit.