Writer-Analyst
CCH, Inc.
The SEC filed an amicus brief in Tellabs Inc. v. Makor Issues & Rights, Ltd., a fraud pleadings standard case under consideration by the U.S. Supreme Court. The Commission brief squarely rejected the 7th Circuit's holding (published at ¶93,642 in CCH's Federal Securities Law Reporter) that "we will allow the complaint to survive if it alleges facts from which, if true, a reasonable person could infer that the defendant acted with the required intent." According to the SEC, this approach "erroneously diluted" the Private Securities Litigation Reform Act requirement that fraud complaints must “state with particularity facts giving rise to a strong inference that the defendant acted with the requisite state of mind."
The brief stated that "Congress did not merely require a plaintiff to allege particular facts from which an inference of scienter could be drawn, but instead required a plaintiff to allege particular facts that `giv[e] rise' to a `strong' inference of scienter." The 7th Circuit's "reasonable person" standard failed to meet this requirement, concluded the SEC, because a "strong inference of scienter plainly requires something considerably more than a `reasonable' inference (or a permissible inference by a reasonable person)."
The Commission brief also asserted that the dismissal of the complaint as inadequately pleaded would not unconstitutionally interfere with the role of the jury under the Seventh Amendment. As stated by the SEC, the PSLRA pleading requirement "merely imposes a threshold legal hurdle that a plaintiff must surmount in order to state a claim (and thereby obtain discovery); it does not trench upon the jury’s prerogative to resolve disputed issues of fact."