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

Abstract

Using a sample of 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. This decision 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 decision with respect to pleading scienter, but replaced it with a standard that is nonetheless relatively generous to plaintiffs. Looking at opinions resolving motions to dismiss decided before and after that decision, we find that Tellabs correlates with a significantly lower dismissal rate in circuits previously applying a higher preponderance standard in determining scienter, including the Ninth Circuit. We also find that the number of dismissal decisions before defendants obtain a final motion to dismiss increased after Tellabs in the Ninth Circuit. Perhaps because of the greater difficulty and time involved in obtaining dismissal, Tellabs correlates with an increase in nuisance settlements in the Ninth Circuit. In contrast, Tellabs also correlates with a decrease in nuisance settlements in circuits that previously applied the more lenient Seventh Circuit standard.