Eleventh Circuit Securities Fraud Claims in the Wake of Tellabs

This past June, the U.S. Supreme Court rendered a landmark decision concerning the threshold for pleading scienter in securities fraud cases. Tellabs, Inc. v. Makor Issues & Rights, Ltd., 127 S.Ct. 2499 (2007). Tellabs clarified the language of the Private Securities Litigation Reform Act (PSLRA) in holding that courts must "engage in a comparative evaluation" and consider "competing inferences rationally drawn from the facts alleged." Tellabs also directed federal courts to view each complaint "holistically," rather than isolating each allegation.

Tellabs provides defendants of securities fraud claims more fodder to work with at the motion to dismiss stage. District Courts in the Eleventh Circuit have applied the Tellabs heightened pleading standard in dismissing securities fraud claims.

Middle District of Florida

The Middle District of Florida recently cited to Tellabs in denying corporate officers’ motions to dismiss a securities fraud class action but granting an independent auditor’s motion to dismiss. In re FARO Techs. Sec. Litig., No. 6:05-cv-1810-Orl-22DAB (M.D. Fla. Sept. 18, 2007). The court ruled that the second amended complaint remedied the deficiencies of the previous complaint as against the officers but failed to raise a strong inference of scienter against the auditor. FARO thus provides useful guidelines for pleading standards against corporate officers as opposed to an independent auditor.

Another Middle District decision applied Tellabs in dismissing the plaintiffs’ securities fraud claims. In re: Winn-Dixie Stores, Inc. Sec. Litig., No. 3:04-cv-71-J-33MCR (M.D. Fla. Dec. 4, 2007). The court found that prior Eleventh Circuit cases were consistent with the Tellabs heightened pleading standard. The court applied Tellabs in conjunction with Garfield v. NDC Health Corp., 466 F.3d 1255 (11th Cir. 2006) in dismissing the claims.

Southern District of Florida

The Southern District of Florida dismissed securities fraud claims in three recent cases: Instituto de Prevision Militar v. Merrill Lynch & Co., Inc., No. 05-2272 (S.D. Fla. Sept. 28, 2007); Garcia v. Santa Maria Resort, Inc., No. 07-10017 (S.D. Fla. Nov. 15, 2007); and Cordova v. Lehman Brothers, Inc., No. 05-21169 (S.D. Fla. Dec. 7, 2007). In Instituto de Prevision Militar, the court held that innocent inferences were "at least slightly more compelling" than an inference of scienter. In Garcia, the court found that the allegations did not meet the Tellabs standard because (1) the complaint did not identify which defendant made which representations, and (2) disclaimers in the purchase contracts negated any compelling inference of intent to defraud. Most recently, in Cordova, the court dismissed the securities fraud claims because innocent, non-culpable inferences were "at least slightly more compelling" than an inference of scienter.

Unresolved Issues

While Eleventh Circuit courts have uniformly construed Tellabs as a heightened pleading standard for scienter, it is unclear what effects (if any) Tellabs will have on (1) alleging statements made by confidential witnesses; (2) group pleading requirements; and (3) class certification standards.