Tellabs, Without Excuses

We have a post on the Harvard Corporate Governance Blog that addresses what we are labeling the "Tellabs Excuse."  This is the phenomena of courts taking the Supreme Court's opinion in Tellabs (the one that interpreted the "strong inference" language in the PSLRA) and using it improperly as an excuse either to dismiss a securities case or to push the law in an inappropriate direction. 

In Higginbotham v. Baxter, the Seventh Circuit ostensibly relied on Tellabs to take the extraordinary position that, in most cases, information provided by anonymous witnesses to support allegations of fraud in a complaint will be disregarded.  Nothing in Tellabs justifies that approach.  Thus, it is a Tellabs Excuse.

Other courts, however, get the case right.  In that regard, we note Communications Workers of Am. Plan v. Csk Auto Corp., 2007 U.S. Dist. LEXIS 72424  (D. Arizona Sept. 27, 2007) where the court concluded:

• As explained in the Court's previous order, facts alleged in Plaintiff's First Complaint gave rise to some inference of scienter. The Court concluded that the inference was not strong, however, because the Court readily could see non-fraudulent explanations for the various facts alleged in the First Complaint. Incompetence or negligence on the part of Defendants could explain many of the allegations, and such an explanation was as plausible as an inference of bad intent. The Supreme Court has now made clear, however, that a tie goes to the Plaintiff. If the Plaintiff presents facts from which an inference of scienter may be drawn, and that inference is as likely as any nonculpable explanation, the complaint will survive a Rule 12(b)(6) challenge under the PSLRA.

Not that the court necessarily agreed with the reasoning in Tellabs.  See Id. at n.2.  But it understood the Supreme Court's edict and applied it properly.  The same cannot be said for the Seventh Circuit in Baxter.