## Facts

- Tellabs, Inc., a manufacturer of fiber-optic network equipment, made public statements during a seven-month period describing strong product demand and robust financial performance.
- Shareholders who purchased Tellabs stock during that period filed a putative class action under § 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, also alleging controlling-person liability against the company’s CEO, Richard Notebaert.
- The complaint alleged Tellabs and Notebaert made materially false or misleading upbeat statements that concealed a serious decline in demand for Tellabs’ primary product line.
- After information allegedly revealing weaker demand became public, Tellabs’ stock price fell sharply.
- Because the claims required proof of a wrongful state of mind, the Private Securities Litigation Reform Act of 1995 (PSLRA) required plaintiffs to plead, with particularity, facts giving rise to a “strong inference” of scienter.

## Issues

1. Under the PSLRA’s “strong inference” requirement for scienter, must a court consider competing nonfraudulent inferences when deciding a motion to dismiss?
2. How strong must the pleaded inference of scienter be to satisfy the PSLRA?

## Decision

- The Supreme Court vacated the judgment and remanded.
- The Court held that, to qualify as “strong,” an inference of scienter must be more than plausible or reasonable; it must be cogent and at least as compelling as any opposing inference of nonfraudulent intent.
- The Court ruled that courts must consider the complaint in its entirety and evaluate all plausible inferences, including nonculpable explanations.
- The Court rejected a standard that would allow the case to proceed whenever scienter is merely one reasonable inference, and also rejected a standard demanding certainty or probability.

## Legal Principles

- Under the PSLRA, a securities-fraud complaint must plead particularized facts that give rise to a “strong inference” the defendant acted with scienter (intent to deceive, manipulate, or defraud).
- On a motion to dismiss, courts must accept pleaded factual allegations as true.
- Scienter must be assessed holistically: allegations are considered collectively, not in isolation.
- Courts must weigh plausible nonfraudulent explanations against the inference of scienter.
- The complaint survives only if a reasonable person would find the scienter inference cogent and at least as compelling as any opposing nonfraudulent inference.

## Conclusion

The Court defined the PSLRA’s “strong inference” pleading standard to require a comparative evaluation of competing inferences and permitted dismissal unless the alleged facts collectively support a cogent scienter inference at least as compelling as innocent explanations.


Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007)