A Lingering Thought On Tellabs

As I read the opinion, I find myself favoring a position that was not endorsed by any of the nine Justices. It seems to me that the the Court got it right with respect to what a “strong inference” requires–that is, that “the inference of scienter must be more than merely plausible or reasonable–it must be cogent and at least compelling as any opposing inference of nonfraudulent intent.” After all, Congress used the word “strong” and not “stronger” or “strongest” in section 21D(b)(2). It is indeed comparative, as both Scalia and Ginsburg concede, but the most natural reading of the statute, at least to me, seems to be the one adopted by the majority.

However, I think that Justice Alito raises a very interesting point in his opinion concurring in the judgment. The way the statute reads, it seems that the strong inference can only be created by facts and allegations that were stated in the complaint with particularity. As relevant here, section 21D(b)(2) requires that a plaintiff “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” In other words, the facts that give rise to the “strong inference” must also be those facts that were pled with particularity.

Indeed, section 21D(b)(2) seems to serve two related purposes: first, that the facts pled are legally sufficient to get the plaintiff to the next stage under the heightened pleading standard; and second, that the defendant has notice of the facts giving rise to the strong inference. It seems to me that, to the extent a court can consider facts and allegations pled without particularity in determining whether the “strong inference” standard has been met, it does not give the defendant adequate notice of those facts in advance of discovery. In other words, it seems that the majority opinion gives due regard to the first purpose of section 21D(b)(2), but ignores the second purpose when, as Justice Alito argues, it permits the courts to consider “holistically” all allegations and facts, including those pled without particularity, in determining whether the “strong inference” of scienter standard has been met. I will concede, however, that it is possible that the Court did not truly engage Alito on this issue as the majority opinion never expressly says (but does hint) that non-particularized allegations may be considered.

These are just some initial thoughts on the case, and I am by no means committed to this position. But I did find Justice Alito’s opinion particularly interesting and there does not seem to be much commentary in the blogosphere on the Tellabs case. I certainly welcome your comments on my post as securities regulation is not my area of expertise.

UPDATE (6/23/07): I have done some more thinking on the case, and it seems to me that the differing approaches between the dissenting, concurring, and majority approaches to the definition of “strong inference” is not all that important as a practical matter. In fact, it would only make a difference when the competing inferences are in equipose, which would not be all that often. The much more important question, and the one addressed by Justice Alito in detail, is whether non-particularized allegations can be included in a court’s assessment of whether a “strong inference” in fact exists. Thus, to the extent the Court answers that question, it is surprising that only Justice Alito spends any time engaging the majority on that issue.