The Supreme Court voted 8-to-1 to basically make it easier for companies and their executives to get shareholder lawsuits dismissed. Well, that's what it seemed to say. Tellabs, a maker of equipment for fiber optic networks, was sued for overly optimistic statements made by senior executives concerning the company’s finances. A federal district judge found that while the statements were misleading, there wasn't enough evidence to show that investors were deliberately misled. From the NYT:
The law requires shareholders to “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” That state of mind — the intention “to deceive, manipulate or defraud” — is known as scienter. Congress provided virtually no guidance on how to calculate a “strong inference” of scienter, leaving the appeals courts around the nation to impose different rules about how much evidence the investors needed to prevent their complaints from being dismissed. A central issue in the cases was the amount of weight that the courts must give to alternative explanations provided by defendants.
In allowing the case against Tellabs to proceed, a federal appeals court in Chicago rejected stiffer standards adopted by other appeals courts and found that the investors had provided enough evidence to show the company’s intention to defraud. The court said it would permit the complaint to proceed if “a reasonable person could infer that the defendant acted with the required intent.” But the Supreme Court said that was not enough. Writing for the court, Justice Ruth Bader Ginsburg said that judges considering whether to dismiss a case at the outset must give credit to explanations offered by companies and their executives.
Got that? Seems kind of bleak for shareholder lawsuits. But Peter Lattman at the WSJ's Law Blog asked a bunch of legal hotshots and found the reaction to be pretty ho-hum.
--Carter Phillips, Sidley Austin (represented Tellabs): Plaintiffs who have real claims will still be able to bring them. The plaintiffs in these cases are large institutions with the resources and interest to determine whether fraud has been committed. What this ends is the ability to see a stock price fall and file a lawsuit the next day.
--David Kistenbroker, Katten Muchin: This is not a landmark shift in the law. It really only serves to more clearly articulate the law as put on the books by Congress. This doesn’t preclude access to court by shareholders, but does more clearly explain their responsibilities and standards that they must meet in order to bring suit.
--Joe Grundfest, Securities Law Professor, Stanford Law School: While the decision is clearly a victory for defendants, it is not as thorough a thrashing of the plaintiffs as some plaintiff lawyers had feared. In ruling that the “inference of scienter must be more than merely plausible or reasonable - it must be cogent and at least as compelling as any opposing inference of nonfraudulent intent” the opinion unfortunately leaves room for lower courts to reason “gee, the story in support of scienter seems as cogent as the story in opposition to scienter, and that’s good enough.” The danger then is that the language devolves into the equivalent of baseball’s rule of “a tie goes to the runner.”