Tellabs, Inc. v. Makor Issues & Rights, Ltd.

Supreme Court of the United States · 2007 · Corporations

CorporationsSecurities fraudPleadingScienterPSLRA§ 10(b)Rule 10b-5PSLRA

Facts

Shareholders alleged that during the class period Tellabs and CEO Richard Notebaert misled investors about product demand, product readiness, financial results, channel stuffing, and revenue projections. They claimed these statements falsely portrayed strong demand and revenues when demand for key products was weakening and one next-generation product was not ready for delivery. After Tellabs gradually reduced projections and then disclosed a significant drop in demand, its stock price fell sharply. The amended complaint added references to confidential sources and more specific allegations about Notebaert's mental state, but the sufficiency of scienter pleading remained disputed.

Issue

Under 15 U.S.C. § 78u-4(b)(2), what must a court do to determine whether a complaint states with particularity facts giving rise to a "strong inference" that the defendant acted with scienter? Specifically, must the court consider competing nonculpable inferences, and how strong must the scienter inference be for the complaint to survive dismissal?

Rule

On a Rule 12(b)(6) motion in a private § 10(b) action governed by the PSLRA, a court must accept factual allegations as true, consider the complaint as a whole and other ordinarily examinable materials, and determine whether all alleged facts collectively give rise to a strong inference of scienter. In making that determination, the court must consider plausible opposing nonculpable inferences as well as plaintiff-favoring inferences. A complaint survives only if a reasonable person would deem the inference of scienter cogent and at least as compelling as any opposing inference drawn from the facts alleged.

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Investors sue Redwood Signal Systems and its chief executive, Lena Ortiz, in federal court in Seattle under Rule 10b-5. The complaint alleges detailed internal emails and meeting notes showing Ortiz was told that a major product launch had failed, yet she publicly said the launch was proceeding successfully; the same allegations also support an innocent inference that she believed the engineering problems had already been fixed before she spoke.

On the defendants' Rule 12(b)(6) motion, what is the correct approach to whether scienter has been adequately pleaded?

Explanation. Under the majority's rule, the court must conduct a comparative evaluation of competing inferences. The complaint survives only if a reasonable person would find the inference of scienter cogent and at least as compelling as any opposing nonfraudulent inference. It is not enough that scienter is merely plausible, and considering opposing inferences does not improperly usurp the jury. (Derived from Tellabs, Inc. v. Makor Issues & Rights, Ltd. (n.d.).)