Reaction to the Ruling
Lawyers for both investors and companies found reasons to be encouraged by the Supreme Court's Tellabs decision.

"By rejecting the extreme positions advocated by defendants and [their supporters] that would have required plaintiffs to essentially prove their entire case at the pleading stage, the court struck a reasonable balance between preserving investors’ ability to recover on meritorious claims and curbing frivolous litigation," Stanley Bernstein, a lawyer with Bernstein Liebhard & Lifshitz who represents investors, told The Wall Street Journal.

Christopher Keller, a partner at Labaton Sucharow & Rudoff, a law firm that represents investors, told the SCAS Alert that the Tellabs ruling is “generally good” for investors because the justices did not adopt a more demanding standard, like that applied previously by the Sixth Circuit. In 2001, that court required plaintiffs to show that inferences that illustrate fraudulent intent are “the most plausible of competitive inferences.”

Likewise, Keller noted, the majority was not swayed by Justice Antonin Scalia's argument in a concurring opinion that the inference of wrongful intent must be “more plausible than the inference of innocence.”

Alston & Bird, a firm that represents corporate defendants, said in a client advisory that the ruling "preserves both the letter and the spirit of the reforms instituted by Congress" in the 1995 legislation. The firm emphasized the justices' ruling that courts must consider all "plausible nonculpable explanations for the defendant's conduct . . ."

Carter Phillips, a Sidley Austin partner who represented Tellabs, told Bloomberg News that the ruling was "about as good a standard as we could have gotten."

Thomas Gorman, a former SEC lawyer who is a partner with the firm of Porter, Wright, Morris & Arthur, said "the decision should not be viewed as a clear victory for either side." In a posting for his SEC Actions Web log, Gorman wrote that the ruling "reflects a balance between the competing interests Justice Ginsburg sought to reflect in her opinion, permitting meritorious [class actions] to proceed, while weeding out those that lack merit."

Joseph Grundfest, a securities law professor at Stanford Law School, expressed concern that lower courts may interpret the Tellabs standard as "the equivalent of baseball's rule of 'a tie goes to the runner.'"

"This approach would ignore the court's admonition that the inference of [intent] must be more than merely 'reasonable' or 'permissible'--it must be cogent and compelling, thus strong in light of other explanations. It is therefore unfortunately predictable that we will have a new series of lower court splits over the proper interpretation of Tellabs' pleading standard," Grundfest told the Journal.

"Holistic" Approach
Keller said the Tellabs ruling also is noteworthy because the majority made clear that courts should "consider the complaint in its entirety, as well as other sources courts ordinarily examine" when assessing whether investors have met the "strong inference" requirement.

"The inquiry . . . is whether all of the facts alleged, taken collectively, give rise to a strong inference of [fraudulent intent], not whether any individual allegation, scrutinized in isolation, meets that standard," Ginsburg wrote.

While this broader inquiry may help plaintiffs survive a motion to dismiss in some cases, Professor Cox said: "My guess is that a more holistic approach is more likely to help defendants."

According to Alston & Bird, a defendant's ability to rely on other source materials is "very important in these cases," particularly to help establish more favorable inferences. For instance, the firm noted that a defendant could present evidence of a lack of stock sales to show there was no financial motive to commit the alleged fraud.