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The Supreme Court’s Impact on Securities Class Actions: An Empirical Assessment of Tellabs


Stephen J. Choi


New York University School of Law

Adam C. Pritchard


University of Michigan Law School

June 23, 2011

Journal of Law, Economics, & Organization, 2011
U of Michigan Law & Economics, Olin Working Paper No. 09-016
NYU Law and Economics Research Paper No. 09-34

Abstract:     
How does Supreme Court precedent affect lower court decisions when there is asymmetric probability of appellate review? Using securities fraud class actions filed between 2003 and 2007, we study the impact of a widely-followed Supreme Court decision from that period, Tellabs, Inc. v. Makor Issues & Rights, Ltd. Tellabs clarified the law with respect to one of the most contested issues in securities litigation: pleading scienter. The Tellabs decision reversed a lenient Seventh Circuit reasonableness standard for pleading scienter, but replaced it with a standard that is nonetheless relatively generous to plaintiffs. Would the Supreme Court’s directive cause the dismissal rates in the lower courts to converge? Looking at opinions resolving motions to dismiss decided before and after that decision, we find that Tellabs correlates with a significantly lower dismissal rate on scienter grounds in circuits previously applying a higher preponderance standard for scienter, particularly the Ninth Circuit. By contrast, we find no significant shift in the courts previously applying the lower reasonableness standard in our basic model. Looking at judicial characteristics that might explain the higher dismissal rates in the preponderance circuits, we find that judges who have substantial business caseloads or who were nominated by Republican presidents became substantially less likely to dismiss on scienter grounds after Tellabs. Consistent with the greater difficulty involved in obtaining dismissal, Tellabs correlates with an increase in low value settlements in the Ninth Circuit. Conversely, Tellabs also correlates with a decrease in low value settlements in circuits that previously applied the more lenient Seventh Circuit standard. Overall, we conclude that Tellabs led to increased uniformity in how lower courts apply pleading standards, but its effect is muted by the asymmetry of the right to appeal.

Number of Pages in PDF File: 49

Keywords: Private Securities Litigation Reform Act of 1995 (PSLRA), Tellabs, Inc., Supreme Court

JEL Classification: K22, K41

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Date posted: August 18, 2009 ; Last revised: July 23, 2013

Suggested Citation

Choi, Stephen J. and Pritchard, Adam C., The Supreme Court’s Impact on Securities Class Actions: An Empirical Assessment of Tellabs (June 23, 2011). Journal of Law, Economics, & Organization, 2011; U of Michigan Law & Economics, Olin Working Paper No. 09-016; NYU Law and Economics Research Paper No. 09-34. Available at SSRN: http://ssrn.com/abstract=1457085 or http://dx.doi.org/10.2139/ssrn.1457085

Contact Information

Stephen J. Choi
New York University School of Law ( email )
40 Washington Square South
New York, NY 10012-1099
United States
Adam C. Pritchard (Contact Author)
University of Michigan Law School ( email )
625 South State Street
Ann Arbor, MI 48109-1215
United States
734-647-4048 (Phone)
734-647-7349 (Fax)

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