Tellabs v. Makor Issues & Rights, Ltd: The Weighing Game

Abstract

In 1995, in response to abusive securities litigation, Congress passed the Private Securities Litigation Reform Act, or the PSLRA, as it is commonly known. The PSLRA heightened pleading requirements for plaintiffs alleging securities fraud. One of the provisions of the PSLRA requires plaintiffs to allege scienter, or a wrongful state of mind, by a strong inference. This "strong inference" language would be the source of much debate and confusion among the courts.

However, the final definition of scienter was settled by the Court in Tellabs v. Makor Issues & Rights, where the Supreme Court said for plaintiffs to allege a strong inference of scienter, the court must weigh both culpable and nonculpable inferences to determine whether the inference of scienter is at least as compelling as any opposing inference according to a reasonable person. The Tellabs decision established a uniform pleading rule. The Court justified its heightened pleading rule by relying on concerns of excessive and abusive securities fraud litigation. However, this concern is largely unsubstantiated. In addition, the Court's standard infringes on the Seventh Amendment right to a jury trial. The Court should have adopted the probable cause approach as advocated by Justice Stevens in dissent. The Court's standard, while not insurmountable, in light of recent interpretations, makes it much harder for an injured investor plaintiff to survive a motion to dismiss.

Keywords: Pleading, Securities Fraud, Scienter