Scienter And The SEC

The U.S. Supreme Court’s decision to hear a case on the pleading standards for scienter (i.e., fraudulent intent) has received little media attention . . . until today. The New York Times has an article on the SEC’s recent activities related to private securities litigation, including the agency’s decision to file an amicus brief in the Tellabs case in support of the defendants.

In their brief, the SEC/DOJ rejected the “reasonable person” test applied by the U.S. Court of Appeals for the Seventh Circuit in evaluating whether the “strong inference” of scienter pleading standard was met. Instead, “a court should determine whether, taking the alleged facts as true, there is a high likelihood that the conclusion that the defendant possessed scienter follows from those facts.” If the same facts both support and negate an inference of scienter, “the court should consider the relative strength of both inferences, because, where there is a substantial possibility that the defendant acted without scienter, the inference of scienter will not be ‘strong.'”

Quote of note (New York Times): “Critics said that the moves signaled a major retrenchment from the post-Enron changes and showed that a lobbying push by big companies, Wall Street firms and the accounting industry was gaining traction as they seek to roll back what they see as onerous regulation and excessive investor litigation. But Christopher Cox, the chairman of the commission, said in an interview Monday that both efforts were in the best interests of investors because they aimed at preventing the accounting industry from further consolidation and at limiting what he called ‘fraudulent lawsuits,’ including some he said were filed by ‘professional plaintiffs.'”

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