Johnson v. Tellabs, Inc.

United States District Court for the Northern District of Illinois · 2004 · Corporations

303 F. Supp. 2d 941 (2004)

Updated August 22, 2026

CorporationsSecurities fraudPleading standardsControl person liabilityInsider tradingPSLRARule 9(b)scienter

Facts

Purchasers of Tellabs stock during the class period alleged that Tellabs and several officers misled investors about demand for the TITAN 5500, the availability and demand for the TITAN 6500, the prospects of SALIX technology, and Tellabs' financial condition. The SAC added 27 confidential sources and alleged practices including channel stuffing, backdating sales, and other efforts to conceal declining demand, especially for the TITAN 5500. Plaintiffs also relied on public statements in press releases, analyst calls, annual reports, and SEC filings, plus insider stock sales by Birck and Kohler. The court evaluated whether the SAC adequately pleaded actionable misstatements and scienter as to each defendant under the PSLRA.

Issue

Did the Second Amended Complaint plead with the particularity required by Rule 9(b) and the PSLRA actionable securities fraud under Section 10(b) and Rule 10b-5, including a strong inference of scienter as to each individual defendant? If not, could plaintiffs nevertheless maintain derivative claims under Sections 20(a) and 20A?

Rule

In a securities fraud action, the complaint must specify each misleading statement, why it was misleading, and, for allegations made on information and belief, all particular facts on which that belief is formed. The PSLRA requires particularized facts giving rise to a strong inference that each defendant acted knowingly or recklessly, and group pleading does not satisfy scienter pleading. Forward-looking statements are actionable only if made with actual knowledge of falsity, unless protected by the PSLRA safe harbor; vague optimism and puffery are not actionable; and Sections 20(a) and 20A require an underlying primary securities-law violation.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Investors sue North Shore Signal Systems, a networking company based in Chicago, after it reported strong quarterly sales. The complaint quotes a press release and alleges on information and belief that the sales number was inflated by improper shipments to distributors, but it does not identify which shipments were improper, which customers were involved, or the facts on which that belief is based.

Should the court likely dismiss the Section 10(b) claim for failure to plead falsity adequately?

Explanation. The PSLRA requires plaintiffs to specify each misleading statement, explain why it is misleading, and, for allegations made on information and belief, state with particularity all facts on which that belief is formed. A bare claim that revenue was inflated by improper shipments, without identifying the underlying facts, customers, or transactions, is insufficient.