Supreme Court Enforces Strict Pleading Standard for Private Securities Actions

Warren Stern, John Savarese, George Conway, and Garrett Moritz of Wachtell, Lipton, Rosen & Katz have released this Memorandum assessing the Supreme Court’s recent ruling in Tellabs, Inc. v. Makor Issues & Rights, Ltd.  In Tellabs, the Memo explains, “[s]ecurities class action defendants . . . won an important battle in the fight against meritless litigation,” for the Court has held that, in order to survive a motion to dismiss, a securities fraud plaintiff must now plead facts establishing a “cogent and compelling” basis to conclude that defendants intended to deceive.  The circuits had split on the pleading standard for securities fraud plaintiffs; and, the Memo explains, by rejecting the relatively lax standard set forth by the Seventh Circuit, the Court has adhered to the pleading requirements set forth in the Private Securities Litigation Reform Act of 1995.  The Memo concludes:

Tellabs is a welcome development for defendants facing costly securities fraud litigation.  It recognizes, as the Supreme Court put it, that “[p]rivate securities actions . . . if not adequately contained, can be employed abusively to impose substantial costs on companies and individuals whose conduct conforms to the law,” and that the Reform Act must be interpreted to carry out Congress’s intent “to curb frivolous, lawyer-driven litigation.”

The full Memorandum is available here.