One To Watch (The Tellabs Case - Part II)
For those of you following the Tellabs case, the Supreme Court heard oral argument from the parties on March 28, 2007. (For those of you unfamiliar with the Tellabs case follow this link overregd.lindquist.com/2007/01/articles/litigation-trends/one-to-watch-supreme-court-to-raise-curtain-on-securities-fraud-proof/ to a brief explanation of the facts and holding in the case and the potential significant impact on securities fraud pleading). While the Court has obviously not yet reached a decision, questions posed by the Court to counsel for the parties may likely signal key issues the Court may already be considering in whatever decision is ultimately reached.
Of note, at several points during arguments made by both sides, the Court inquired as to whether the parties believed Congress intended for a new standard to be created under the "strong inference" language of the PSLRA and how that standard, if indeed new, would be applied at various points in the proceeding. More than one Justice inquired whether the burden to sustain a federal securities law case would be higher at the pleading stage yet lower at the summary judgment stage or when presented in instructions to the jury. This lead the Court to raise the issue of whether differing standards would necessarily invoke constitutional concerns under the Seventh Amendment.
Further, recall that the Seventh Circuit Court of Appeals, in dismissing a securities fraud claim against one defendant (executive of Tellabs) but allowing a fraud claim as plead against another defendant (executive of Tellabs) adopted the "middle-ground" approach applied by several of the other circuits in determining whether a strong inference" of scienter was established by allegations in the complaint. This approach, which, as articulated by the Seventh Circuit, requires a court to examine all of the allegations in a complaint and then decide whether collectively they establish such an inference, came under scrutiny during oral argument. Likewise, another issue raised several times during argument was whether the required showing of strong inference of scienter under the PSLRA altered the Rule 12(b)(6) dismissal standard such that allegations in a complaint need not always be taken as true, particularly where the allegations, and the Court's ability to take judicial notice of facts beyond those pled in the complaint, could conceivably undercut as well as support an inference of scienter.
Again, the longstanding ramifications of the Court's decision in this case will undoubtedly have a significant impact on federal securities fraud pleading for years to come - that is, of course, unless the Court crafts an opinion in such a way so as to resolve the dispute without reaching the seminal question of what a party must do to adequately plead a strong inference of scienter, thereby saving the issue for another day.
Only time will tell. Stay tuned!
