Tellabs, Inc. v. Makor Issues & Rights, Ltd – a uniform test for pleading scienter in securities fraud cases

The purpose of this paper is to discuss the US Supreme Court's recently enunciated uniform test in Tellabs for determining whether factual allegations in a federal securities fraud complaint give rise to a “strong inference of scienter,” as required by the Private Securities Litigation Reform Act of 1995 (PSRLA).

The paper discusses the way the decision steers a middle course among several recent circuit court approaches and redraws the semantic battle lines for future motions to dismiss securities‐fraud claims under §10(b) of the 1934 Act, but still leaves unresolved some embedded conceptual problems with the heightened pleading requirements under PSRLA.

The findings of the study are that the Court's opinion embraces a robust new vocabulary, calling for “cogent” and “compelling” inferences that solidly hold their own against alternative explanations, but the Court refused to employ the PSLRA's particularily requirement as a screen to remove vague or ambiguous allegations from the scienter analysis.

The full significance of Tellabs for future cases is still not completely clear, but the Supreme Court's enunciation of a uniform national standard for evaluating §10(b) pleadings will almost certainly embolden lower courts eager to assert their role as gatekeepers maintaining stringent standards for admission to the federal courts.

The paper provides practical guidance based on a recent court decision from an experienced securities lawyer.