Patrick A. Klingman, of counsel to SFMS, was the co-author of an amici curiae brief that was recently filed with the U.S. Supreme Court in Tellabs, Inc. v. Makor Issues & Rights, Ltd. (“Tellabs”) on behalf of the National Conference on Public Employee Retirement Systems (“NCPERS”) and the National Association of Shareholder and Consumer Attorneys (“NASCAT”). Intended to provide the Court with a perspective broader than that of just the litigants to an appeal, amicus curiae (meaning “friend of the court”) briefs are often submitted by organizations or individuals with an interest in an issue to be decided by the Court.
In Tellabs, the Seventh Circuit Court of Appeals had determined that, even under the exacting pleading standards governing securities fraud complaints, once a complaint has sufficiently alleged facts supporting a “strong inference” of an intent to commit securities fraud, the pleading standards have been met and the Complaint should not be dismissed. In this respect, the Seventh Circuit disagreed with some other Courts of Appeals, which had held that the “strong inference” should be weighed against competing inferences presented by the corporate defendants. The issue before the Court is the proper manner in which allegations in a securities fraud complaint should be evaluated and whether that evaluation includes the weighing of competing inferences. The amici curiae brief submitted by NCPERS and NASCAT argues that the Seventh Circuit was correct and that there should be no weighing of competing inferences once a complaint has sufficiently alleged a “strong inference” of wrongful intent.
Of the several amicus curiae briefs submitted in support of the corporate defendants, it is interesting to note that the U.S. Securities and Exchange Commission (“SEC”), reversing over 40 years of arguments and positions in support of expanding investors’ rights, argued for reversal of the Seventh Circuit’s decision. The SEC argued that a court reviewing a securities fraud complaint should weigh competing inferences and absolve a corporate defendant if “there is a substantial possibility that the defendant acted without [intent to commit fraud].” Considering that the federal securities laws prohibit plaintiff-investors from conducting any discovery (such as requesting documents and taking depositions) prior to a court’s decision that the pleading standards have been met, the standard advocated by the SEC would be particularly onerous. For the sake of deterring securities fraud, engendering confidence in the securities markets, and providing a means of compensation to defrauded investors, it is hoped that the Supreme Court will affirm the Seventh Circuit’s decision.