Thursday, January 26, 2006

Seventh Circuit Addresses Scienter Standards

Finally. The Seventh Circuit has spoken. All the other numbered Circuits (i.e. not Federal or D.C.) had long ago set their scienter pleading standards for the PSLRA, but somehow the Seventh just never got the chance. Well, you can stop holding your breath now, because it has happened. The opinion, which was authored by Judge Diane Pamela Wood, and joined by veteran Judge Kenneth Francis Ripple and recent George W. Bush appointee and once-rumored Supreme Court nominee Judge Diane S. Sykes, has something for both future plaintiffs and defendants to rejoice and complain about.

What did they hold? Well, in a nutshell, the Panel rejected the Ninth Circuit standard for the "required state of mind," choosing to instead go with the other Circuits, once again leaving the Ninth all alone. As for the "strong inference" standard, they picked the middle path already chosen by six Circuits, meaning that courts "should examine all of the allegations" in the complaint, and then decide "whether collectively they establish an inference."

The Panel was also concerned about "usurpation of the jury's role," holding that "instead of accepting only the most plausible of competing inferences as sufficient," "we will allow the complaint to survive if it alleges facts from which, if true, a reasonable person could infer that the defendant acted with the required intent." However, the court largely rejected the group pleading doctrine for scienter, saying that "plaintiffs must create this inference with respect to each individual defendant in multiple defendant cases."

Result: Dismissal affirmed in part, and reversed in part.

You can read Makor v. Tellabs, issued January 25, 2006, here and you can even listen to the oral argument here. If these links stop working, simply go here and search for the case. As of print time, it is not even in Lexis yet.

Nugget: "Motive and opportunity may be useful indicators, but nowhere in the statute does it say that they are either necessary or sufficient."

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