Securities Roundtable: Discussing the U.S. Supreme Court's decision In Tellabs, Inc. v. Makor

'Originally published in California Lawyer,

October 2007.'

Securities law enforcement in the United States is in flux.

This month's roundtable discusses the U.S. Supreme

Court's decision in Tellabs, Inc. v. Makor (127 S.

Ct. 2499 (2007)), the Court's upcoming consideration of

Stoneridge Investment Partners v. Scientific-Atlanta,

Inc. (127 S. Ct. 1873 (2007)), Brocade CEO Greg

Reyes's criminal conviction for stock options backdating,

and the SEC's new initiative on insider trading by hedge

funds. The panelists are Scott Fink and Daniel Floyd of Gibson,

Dunn & Crutcher; Mark Conley and Bruce Vanyo of Katten

Muchin Rosenman; Jeff Lawrence of Coughlin Stoia Geller Rudman

& Robbins; and Michael Torpey and Robert Varian of Orrick,

Herrington & Sutcliffe. The roundtable was moderated by

Custom Publishing Editor Chuleenan Svetvilas and reported by

Krishanna DeRita for Barkley Court Reporters.

MODERATOR: What are the implications of the U.S.

Supreme Court decision in Tellabs v. Makor

?

LAWRENCE: Tellabs cleared up some

confusion in a couple of different Circuits. The lower courts

are still working it out, but they did set out a standard that

says in essence, if the plaintiffs or the complaint gets

reasonably close, the tie goes to the plaintiffs. So

Tellabs helped in terms of pleading, at least in the

Sixth Circuit, and the Ninth Circuit.

TORPEY: The test is "a reasonable

person would deem the inference of scienter cogent and at least

as compelling as any opposing inference."

FLOYD: And it's got to be powerful

regardless of how it compares to other inferences. If you look

at the Ninth Circuit, they have pretty consistently said that

even if you have five or six facts that in and of themselves

aren't sufficient for scienter, collectively they might

lead to a strong inference of scienter. The Supreme Court

turned that around and said it's not enough that you have a

single fact or even facts that might, standing alone and taken

as true, lead to a strong inference. You have to look at all of

them to see that they may have a dilutive effect.

CONLEY: The holistic notion was discussed

in the context of the comparative approach, where you are

supposed to compare the competing inferences of the plaintiff

and the defendant and it can be deductive instead of just

additive.

VANYO: That's what the courts have been

doing all along. I think the decision is not going to have much

of an impact. Virtually every circuit has spoken multiple times

on this and I don't think they are going to go back,

reexamine and change what they've done in the past.

FINK: My view is that this arms the

defendants with the ability to point to not only facts that

negate inference from the complaint, but facts that negate

inference from documents that can be judicially noticed. I

often represent accountants, and in many of the cases there are

allegations in judicially noticeable documents that the

management was lying to and concealing information from the

accountants. In those kinds of cases, it's very difficult

to argue that it is at least as compelling an inference that

the accountants were in on the fraud as they were being

deceived.

VARIAN: I think there are good things and

bad things for the defense side. The opinion is very clear that

when you go through this netting process, you look at all the

allegations in the complaint and you reach substantially beyond

the complaint. That's a plus. On the negative side, there

are lots of decisions over the years that make it pretty clear

that stock sales, even substantial stock sales, won't

support scienter. I think some of the language in the opinion

may erode that authority.

FLOYD: The Court was just laying out

general rules. The courts can take different approaches on

individual fact patterns depending on how they view securities

class actions. But I think the Supreme Court established a

basic useful framework for defendants that must be

followed.

TORPEY: Most of the defense bar was

disappointed by the decision.We were hoping for something a lot

stronger. One issue is: If there are two competing inferences,

neither of which is strong, and the plaintiff's is at least

as compelling as the one that the defense raises, some think

you can read Tellabs to say the plaintiff wins.

VANYO: I don't think they win in that

circumstance. The inference has to, on its own merit, have

sufficient strength.

FINK: We went into Tellabs with

the strongest test being that it had to be the most compelling

inference, and you had to do a comparative analysis, and that

meant 51/49. Then you had other circuits that said we don't

have to do a comparative analysis at all, and we got a test

that says 50/50. We now have a test that says 50/50. But the

victory is that it has to be a comparative analysis. There were

Circuits that said we don't have to consider the facts that

negate inference.We do now.

TORPEY: All that's true, but I was

hoping for better. This is the end of the game in terms of

substantial jurisprudence on the test.We are going to move on

to other things. We won't see very many Circuit decisions

on this anymore and we won't see any more Supreme Court

decisions on it.

MODERATOR: What's at stake in Stoneridge

Investment Partners v. Scientific Atlanta, which will be

argued in the Court's fall term?

LAWRENCE: What's at stake is basically

allowing accountants or underwriters or any other people who

are directly involved in committing fraud the ability to avoid

liability by simply not making a statement. There are a lot of

cases, Enron being one of them, where you have people

who are directly involved in the scheme to defraud who, if

Stoneridge is allowed to stand, are going to escape

liability.

FINK: I think the impact on the accountants

will be very small. In most cases where accountants get sued,

it's because they have made affirmative statements in audit

opinions in a 10-K. So the cases are direct, primary liability

cases.

LAWRENCE: Accountants are sued now for the

statements they make at the 10-K, but that's because they

say we didn't make a statement on review. Depending upon

how Stoneridge comes out, it may change that.

TORPEY: There are a lot of obstacles that

will stop the plaintiffs bar from adding a lot of collateral

players as defendants, regardless of what...