The Seventh Circuit explained that two principles established in Tellabs governed the appeal: (1) a complaint will survive a motion to dismiss only if a reasonable person would deem the inference of scienter cogent or at least as compelling as any opposing inference one could draw from the facts alleged; and (2) in applying this standard, the court must take into account plausible opposing inferences.
Applying this pleading standard, the Seventh Circuit held that:
[W]e must discount allegations that the complaint attributes to the five ‘confidential
witnesses’ . . . it is hard to see how information from anonymous sources could be
deemed ‘compelling’ or how we could take into account plausible opposing inferences.
Perhaps these confidential witnesses have axes to grind. Perhaps they are lying, perhaps
they don’t even exist.
The court further explained that “anonymity conceals information that is essential to the sort of comparative evaluation required by Tellabs. To determine whether a ‘strong’ inference of scienter has been established, the judiciary must evaluate what the complaint reveals and disregard what it conceals.” Because the identity of witnesses will ultimately have to be disclosed through discovery, concealing names at the complaint stage does not protect informers from disclosure. Concealing the identity of witnesses “does nothing but obstruct the judiciary’s ability to implement the PSLRA.”
The opinion is likely to lead to a new round of supplemental briefing in pending securities class actions across the country and indicates that, at least in cases brought within the Seventh Circuit, the use of confidential witnesses who have no intention of being revealed will not aid plaintiffs in surviving a motion to dismiss.
The Seventh Circuit’s full opinion can be found here. Prior posts concerning the Tellabs decision can be found here and here.
