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Makor Issues & Rights, Ltd. v. Tellabs, Inc.

United States Court of Appeals for the Seventh Circuit
513 F.3d 702 (2008)


Richard Notebaert, president and CEO of Tellabs, Inc. (defendant) made a series of optimistic public statements about Tellabs’ financial health between December 2000 and June 2001. Notebaert said the demand for the company’s flagship product was strong, and that the company’s next-generation product was ready for delivery. He repeated these claims on several occasions, and also released financial data supporting his positive projections. By late spring 2001, Tellabs had revised its sales projections downward. In June 2001, the company announced that sales for the flagship product had fallen significantly. Tellabs’ stock price promptly fell 75 percent. A group of Tellabs stockholders (plaintiffs) who had purchased their stock between December 2000 and June 2001 sued the company, alleging that Notebaert had known the optimistic statements were false when he made them. The complaint alleged that Tellabs had defrauded the shareholders in connection with their stock purchase, in violation of SEC Rule 10b-5. The complaint cited more than 20 anonymous sources and pled detailed facts. The trial court granted Tellabs’ motion to dismiss the case on the grounds that the shareholders had not pled facts giving rise to a strong inference of scienter, as required by the Private Securities Litigation Reform Act of 1995 (PSLRA). The court of appeals reversed, holding that the complaint could cause a reasonable person to conclude that Notebaert acted with fraudulent intent. The Supreme Court vacated that ruling and promulgated a new standard: a complaint under Rule 10b-5 will survive a motion to dismiss only if a reasonable person would deem the inference of scienter to be cogent and at least as compelling as any opposing inference one could draw from the facts alleged. The case was remanded to the appellate court for evaluation under that standard.

Rule of Law


Holding and Reasoning (Posner, J.)

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