Amending Pleadings in Securities Fraud Litigation After Tellabs

Abstract

The Tellabs decision, like shifting tectonic plates, has created shockwaves across securities litigation. Tellabs has altered the pleading balance in some circuits, called into question plaintiffs' ability to establish scienter by alleging either motive-and-opportunity or facts which constitute circumstantial evidence of recklessness, and impaired the use of confidential sources. And now, as this Article shows, Tellabs has infuenced the standard for amending a securities fraud complaint.

Before Tellabs some of the federal circuits split over whether the Private Securities Litigation Reform Act (PSLRA) altered the traditional liberal amendment policy embodied in Civil Rule of Procedure 15. Circuits constricting Rule 15 relied on the PSLRA’s purpose of avoiding strike suits. Circuits applying Rule 15 unchanged noted the absence of any mention in the PSLRA of Rule 15. After Tellabs, some courts used the decision to resolve the issue. Notably, the First Circuit has interpreted Tellabs to mean that the Rules are to be applied as written in securities fraud cases and thus Rule 15 was unaffected by the PSLRA. Other federal district courts have used Tellabs's policy warnings about frivolous securities litigation to constrict Rule 15.

This Article shows that a liberal amendment policy in securities fraud litigation is consistent with the Rules, the PSLRA, and Supreme Court precedent. The Rules require that amendments be freely given, and nothing in the PSLRA or Tellabs can reasonably be construed to change that. Other examples of heightened pleading, such as Rule 9(b) and Bell Atlantic v. Twombly, illustrate that an alteration in pleading rules does not automatically change Rule 15. This Article further shows that constricting Rule 15, in contravention to its plain text, encroaches on Congress's role and the purpose of the Civil Rules Advisory Committee. Moreover, the PSLRA and the Supreme Court sought balance in the securities fraud pleading and limiting a securities fraud plaintiff's ability to amend the complaint ruins that balance. Further still, a liberal amendment policy is necessary in light of the continuing confusion surrounding securities fraud pleading that Congress and the Supreme Court has yet to remedy.