Thursday, June 21, 2007
The Court's task, as framed by Justice Ginsburg in her majority opinion, was to resolve the disagreement among the Circuits on whether, and to what extent, a court must consider competing inferences in determining whether a securities fraud complaint gives rise to a "strong inference" of scienter, the PSLRA requirement. The "strong inference" requirement "unequivocally raise[d] the bar for pleading scienter" and signalled Congress' purpose to promote greater uniformity among the Circuits, according to Justice Ginsburg. Thus, the Court must set forth a "workable construction of the strong inference standard ... geared to the PSLRA's twin goals: to curb frivolous, lawyer-driven litigation, while preserving investors' ability to recover on meritorious claims."
Justice Ginsburg thus proceeds to set forth the roadmap. First, as with any motion to dismiss, the court must accept all factual allegations in the complaint as true. Second, the court must consider the complaint in its entirety, as well as other sources courts ordinarily consider when ruling on motions to dismiss -- documents incorporated by reference and other matters of which the court may take judicial notice. The inquiry is whether all of the alleged facts, taken collectively, give rise to a strong inference of scienter. Third, in determining whether the pleaded facts give rise to a "strong" inference of scienter, the court must take into account plausible opposing inferences. The inference of scienter must be cogent and compelling, thus strong in light of other explanations. In sum, the court must ask: when the allegations are accepted as true and taken collectively, would a reasonable person deem the inference of scienter at least as strong as any opposing inference?
Justice Scalia and Justice Alito each wrote concurring opinions, expressing the view that "strong inference" required that the test should be whether the inference of scienter is more plausible than the inference of innocence because this is the natural reading of the statute. Justice Stevens was the lone dissenter, arguing that the standard should be analogous to the probable-cause standard from criminal law.
In my view, the majority opinion was quite predictable and, indeed, inflicted probably the least amount of damage on plaintiffs, given the statute and the pro-business tendencies of this Court. Under the majority's test, the plaintiff "only" has to demonstrate that the inference of scienter was at least as likely as any plausible opposing inference. In contrast, if Justices Scalia and Alito had their way, the "strong inference" test would have constructed an even higher obstacle to private securities fraud cases, requiring that the inference of scienter be more plausible than the contrary inference. These days, the majority's rejection of that view can count as a victory.