In its first application of the Supreme Court’s Tellabs opinion issued last summer, the First Circuit Court of Appeals recently affirmed the dismissal of securities fraud claims against various actors associated with defaulted bonds issued by the now-defunct Bradford College. ACA Fin. Guar. Corp. v. Advest, Inc., No. 07-1367 (Jan. 10, 2008).

The action was brought by purchasers and insurers of Bradford College bonds, upon which the college defaulted only two years after issuance, against the college’s officers and directors and the bond underwriters. Chief among the allegations was that the defendants, in connection with the bond offering, misrepresented the college’s projected commitment to financial aid spending for certain academic years. Affirming the District Court’s dismissal, the First Circuit invoked Tellabs to hold that the plaintiffs’ scienter allegations failed “to establish an inference of scienter that is cogent and at least as compelling as available competing inferences of non-fraudulent conduct.”

Notably, the First Circuit also found that under Tellabs, the Private Securities Litigation Reform Act (“PSLRA”) did not modify the liberal standards for amending complaints set forth under the Rule 15(a) of the Federal Rules of Civil Procedure. In doing so, the court sided with the views of the D.C. Circuit and the Ninth Circuit that Congress did not pass the PLSRA with the intent of changing the policy of Rule 15(a) of permitting leave to amend whenever justice so requires. As the First Circuit noted, the Sixth Circuit takes an opposing view that such an application of Rule 15(a) impermissibly frustrates the purpose of the PLSRA.

The First Circuit's full opinion is available here.

For additional analysis of Tellabs and subsequent developments, click here.