The Tellabs Excuse (A Recap)(Part 4)

We are conducting a recap of the Supreme Court's analysis in Tellabs and, a year later, examining the lower court interpetation of the case.

We noted that one consequence of the decision was the command to consider all inferences of scienter raised by plaintiff.  As a result, some circuits expanded the factors that they would be willing to consider, including an inference of knowledge of "core operations" as a result of a defendant's position within the company.

The second thing accomplished by the reasoning in Tellabs has been a more rigorous approach to assessing the facts pled in the complaint.  Courts essentially must take all of the facts alleged by plaintiff, go through them, discount those where the inference is particularly weak (or even non-existence), then stand back and generally ask whether they collectively give rise to an inference of scienter that is at least as likely as any contrary inference.  The approach takes the analysis from an almost entirely subjective determination to one that balances competing inferences.  The 9th Circuit in South Ferry, 542 F.3d 776, largely took this approach.  See also Dorsey v. Portfolio Equities, Inc, 540 F.3d 333 (5th Cir. 2008)("This case presents similar special circumstances that, when considered together, lend themselves to a sufficient inference of scienter.").  

This does not mean that all circuits have accepted this approach.  Indeed, the 8th Circuit has construed Tellabs as raising the barrier for establishing scienter.  See In re: Ceridian Corporation Securities Litigation, 542 F.3d 240 (8th Cir. 2008)(“In resolving a conflict among other circuits, the Supreme Court in Tellabs both confirmed the district court's plain-meaning observation that "strong means strong," and added an additional hurdle for Eighth Circuit plaintiffs to overcome to satisfy this pleading requirement. Not only must a plaintiff state with particularity facts giving rise to an inference of scienter that is strong when viewed in isolation, the inference "must be more than merely plausible or reasonable -- it must be cogent and at least as compelling as any opposing inference of nonfraudulent intent.’").

Moreover, some circuits pay only lip service to the need to consider facts alleged by plaintiff in toto.  Thus, in Ley v. Visteon Corp., 2008 FED App. 0360P (6th Cir. Oct. 6, 2008), the court considered each factor (certification, insider trading, insider statements, accounting irregularities, reporting practices, motive and opportunity) one at a time and disregarded each.  Only at the very end of the analysis, in apparent obeisance to Tellabs, did the court utter the incantation that "[w]hile we consider Plaintiffs' allegations in total when determining whether Plaintiffs sufficiently plead scienter, we address each argument individually in this opinion for purposes of clarity."  In fact, there was nothing in the opinion that suggested the court examined the inferences collectively and weighed them against competing inferences.

The Eight Circuit more or less did the same thing in In re: Ceridian Corporation Securities Litigation, 542 F.3d 240 (8th Cir. 2008) (after examining each fact pled by plaintiff, court noted that Viewed collectively, the complaint's allegations fail to state with particularity facts that give rise to a strong and cogent inference that any of the defendants acted with intent to defraud or were severely reckless. More compelling is the opposing inference that Ceridian and the controlling officer defendants should have known about the many accounting errors affecting many areas of the corporation.").

So we have a post-Tellabs division in the circuits.  For those circuits hostile to securities class action cases (with the 8th Circuit apparently the most hostile), the analysis has really not changed since Tellabs.  Courts continue to go through the facts pled by plaintiff and explain why each particular allegation does not raise an inference of scienter, without really considering the allegations as a group.  Likewise, the circuits still wrestling with whether knowledge of core operations can be considered or whether weight can be given to statements from anonymous sources are failing to implement the dictates of Tellabs.

For those circuits that more fairly adhere to the reasoning in Tellabs, the analysis of the scienter issue has become more inclusive and more objective.  In the case of the 9th Circuit, the standard for determining scienter under the PSLRA has softened significantly from the Silicon Graphic days.  Presumably, as the circuits become more sanguine about the Supreme Court's intent in Tellabs, this will become the predominate view.