The U.S. Supreme Court's decision in the Tellabs, Inc. and Richard Notebaert v. Makor Issues & Rights, Ltd., et al., Sup. Ct. No. 06-484, will make it more difficult for plaintiffs to bring class-action securities lawsuits against mutual funds. The case involves the heightened pleading requirements of the Private Securities Litigation Reform Act (PSLRA). Specifically, the opinion gives a meaning to the term "strong inference" that will make it harder for class-action securities complaints to survive motions to dismiss.

Justice Ruth Bader Ginsburg wrote the opinion and stated that the District Court "must engage in a comparative evaluation; it must consider, not only inferences urged by the plaintiff, as the Seventh Circuit did, but also competing inferences rationally drawn from the facts alleged. An inference of fraudulent intent may be plausible, yet less cogent than other, nonculpable explanations for the defendant's conduct. To qualify as "strong" within the intendment of §21D(b)(2), we hold, an inference of scienter must be more than merely plausible or reasonable -it must be cogent and at least as compelling as any opposing inference of nonfraudulent intent."

She stated that the Supreme Court establish the following prescriptions:

First, faced with a Rule 12(b)(6) motion to dismiss a §10(b) action, courts must, as with any motion to dismiss for failure to plead a claim on which relief can be granted, accept all factual allegations in the complaint as true.

Second courts must consider the complaint in its entirety, as well as other sources courts ordinarily examine when ruling on Rule 12(b)(6) motions to dismiss, in particular, documents incorporated into the complaint by reference, and matters of which a court may take judicial notice.

Third, in determining whether the pleaded facts give rise to a "strong" inference of scienter, the court must take into account plausible opposing inferences.

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