U.S. Supreme Court

Court Raises Bar for Securities Suits

The U.S. Supreme Court has set a high pleading standard for private securities litigation.

The court’s 8-1 opinion written by Justice Ruth Bader Ginsburg requires plaintiffs to show that the defendants had a “cogent” intent to commit securities fraud, the Wall Street Journal (sub. req.) reports.

The Associated Press reports that the strict standard set by the court can result in early dismissal of investor lawsuits.

The opinion overturns a ruling by the 7th U.S. Circuit Court of Appeals based in Chicago that had set a lower pleading standard. It is the latest of several Supreme Court opinions limiting shareholder suits, the Wall Street Journal says.

The Private Securities Litigation Reform Act requires suits alleging securities fraud to specify facts supporting “a strong inference that the defendant acted with the required state of mind.”

Ginsburg wrote that an inference of awareness of wrongdoing must be “more than merely plausible or reasonable–it must be cogent and at least as compelling as any opposing inference” of a lack of intent.

Some lawyers involved in the case told the Wall Street Journal’s Law Blog that although the opinion appears to favor defendants, it nonetheless rejected a more extreme position they had advanced.

“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,” Joseph Grundfest, a Stanford Law School professor, told the blog.

The ruling is in a suit filed against Tellabs Inc. by investors who claimed the high-tech company misled them about demand for its products.

The decision is Tellabs v. Makor Issues & Rights, No. 06-484 (PDF).

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