Tellabs, Inc v. Makor Issues & Rights, Ltd.
Makor Issues & Rights sued Tellabs alleging various violations of the Securities Exchange Act. In 1995, Congress passed the Private Securities Litigation Reform Act (PSLRA), which requires complaints of securities fraud to include specific facts about the allegedly fraudulent behavior. Under the PSLRA, a securities fraud complaint must not only specify the defendant's allegedly misleading statements, it must also specify a set of facts that give rise to "a strong inference that the defendant acted with the required state of mind.”
The district court dismissed the plaintiffs’ complaint after finding that the plaintiffs had failed to meet the PSLRA’s pleading threshold. The Seventh Circuit Court of appeals affirmed in part and reversed in part, holding that a securities fraud complaint should not be dismissed if "it alleges facts from which, if true, a reasonable person could infer that the defendant acted with the required intent." It also held that, in deciding whether a “strong inference” of the particular state of mind has been properly pleaded, courts should not consider competing inferences of an innocent state of mind that could also be drawn from the facts pleaded, as such a consideration might usurp the role of the jury and present a constitutional problem.
Whether, and to what extent, a court must consider or weigh competing inferences in determining whether a complaint asserting a claim of securities fraud has alleged facts sufficient to establish a "strong inference" that the defendant acted with scienter, as required under the Private Securities Litigation Reform Act of 1995.