Lead Opinion
delivered the opinion of the Court.
This Court has long recognized that meritorious private actions to enforce federal antifraud securities laws are an essential supplement to criminal prosecutions and civil enforcement actions brought, respectively, by the Department of Justice and the Securities and Exchange Commission (SEC). See, e. g., Dura Pharmaceuticals, Inc. v. Broudo,
Exacting pleading requirements are among the control measures Congress included in the PSLRA. The PSLRA requires plaintiffs to state with particularity both the facts constituting the alleged violation, and the facts evidencing scienter, i. e., the defendant’s intention “to deceive, manipulate, or defraud.” Ernst & Ernst v. Hochfelder,
Congress left the key term “strong inference” undefined, and Courts of Appeals have divided on its meaning. In the case before us, the Court of Appeals for the Seventh Circuit held that the “strong inference” standard would be met if the complaint “allege[d] facts from which, if true, a reasonable person could infer that the defendant acted with the required intent.”
I
Petitioner Tellabs, Inc., manufactures specialized equipment used in fiber optic networks. During the time period relevant to this case, petitioner Richard Notebaert was Tel-labs’ chief executive officer and president. Respondents (Shareholders) are persons who purchased Tellabs stock between December 11, 2000, and June 19, 2001. They accuse
Beginning on December 11,2000, the Shareholders allege, Notebaert (and by imputation Tellabs) “falsely reassured public investors, in a series of statements . . . that Tellabs was continuing to enjoy strong demand for its products and earning record revenues,” when, in fact, Notebaert knew the opposite was true. Id., at 94-95, 98. From December 2000 until the spring of 2001, the Shareholders claim, Notebaert knowingly misled the public in four ways.
The first public glimmer that business was not so healthy came in March 2001 when Tellabs modestly reduced its first quarter sales projections. Ibid. In the next months, Tel-labs made progressively more cautious statements about its projected sales. On June 19, 2001, the last day of the class period, Tellabs disclosed that demand for the TITAN 5500 had significantly dropped. Id., at 593. Simultaneously, the company substantially lowered its revenue projections for the second quarter of 2001. The next day, the price of Tellabs stock, which had reached a high of $67 during the period, plunged to a low of $15.87. Ibid.
On December 3,2002, the Shareholders filed a class action in the District Court for the Northern District of Illinois. Ibid. Their complaint stated, inter alia, that Tellabs and Notebaert had engaged in securities fraud in violation of § 10(b) of the Securities Exchange Act of 1934, 48 Stat. 891, 15 U. S. C. §78j(b), and SEC Rule 10b-5,17 CFR §240.10b-5 (2006), also that Notebaert was a “controlling person” under § 20(a) of the 1934 Act, 15 U. S. C. §78t(a), and therefore derivatively liable for the company’s fraudulent acts. See App. 98-101, 167-171. Tellabs moved to dismiss the complaint on the ground that the Shareholders had failed to plead their case with the particularity the PSLRA requires. The District Court agreed, and therefore dismissed the complaint without prejudice. App. to Pet. for Cert. 80a-117a; see Johnson v. Tellabs, Inc.,
The Shareholders then amended their complaint, adding references to 27 confidential sources and making further, more specific, allegations concerning Notebaert’s mental state. See
The Court of Appeals for the Seventh Circuit reversed in relevant part.
The Court of Appeals recognized that the PSLRA “unequivocally raise[d] the bar for pleading scienter” by requiring plaintiffs to “plea[d] sufficient facts to create a strong inference of scienter.” Id., at 601 (internal quotation marks omitted). In evaluating whether that pleading standard is met, the Seventh Circuit said, “courts [should] examine all of the allegations in the complaint and then ... decide whether collectively they establish such an inference.” Ibid. “[W]e will allow the complaint to survive,” the court next and critically stated, “if it alleges facts from which, if true, a reasonable person could infer that the defendant acted with the required intent.... If a reasonable person could not draw such an inference from the alleged facts, the defendants are entitled to dismissal.” Id., at 602.
In adopting its standard for the survival of a complaint, the Seventh Circuit explicitly rejected a stiffer standard adopted by the Sixth Circuit, i. e., that “plaintiff's are entitled only to the most plausible of competing inferences.” Id., at 601, 602 (quoting Fidel v. Farley,
II
Section 10(b) of the Securities Exchange Act of 1934 forbids the “use or employ, in connection with'the purchase or sale of any security ... , [of] any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [SEC] may prescribe as necessary or appropriate in the public interest or for the protection of investors.” 15 U. S. C. §78j(b). SEC Rule 10b-5 implements § 10(b) by declaring it unlawful:
“(a) To employ any device, scheme, or artifice to defraud,
“(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made ... not misleading, or
“(c) To engage in any act, practice, or course of business' which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.” 17 CFR §240.10b-5.
Section 10(b), this Court has implied from the statute’s text and purpose, affords a right of action to purchasers or sellers of securities injured by its violation. See, e. g., Dura Pharmaceuticals,
In an ordinary civil action, the Federal Rules of Civil Procedure require only “a short and plain statement of the claim showing that the pleader is entitled to relief.” Fed. Rule Civ. Proc. 8(a)(2). Although the rule encourages brevity, the complaint must say enough to give the defendant “fair notice of what the plaintiff’s claim is and the grounds upon which it rests.” Dura Pharmaceuticals,
Courts of Appeals diverged on the character of the Rule 9(b) inquiry in § 10(b) cases: Could securities fraud plaintiffs allege the requisite mental state “simply by saying that sci-enter existed,” In re GlenFed, Inc. Securities Litigation,
Setting a uniform pleading standard for § 10(b) actions was among Congress’ objectives when it enacted the PSLRA. Designed to curb perceived abuses of the § 10(b) private action — “nuisance filings, targeting of deep-pocket defendants, vexatious discovery requests and manipulation by class action lawyers,” Dabit,
Under the PSLRA’s heightened pleading instructions, any private securities complaint alleging that the defendant made a false or misleading statement must: (1) “specify each statement alleged to have been misleading [and] the reason or reasons why the statement is misleading,” 15 U. S. C. § 78u-4(b)(l); and (2) “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind,” § 78u-4(b)(2). In the instant case, as earlier stated, see supra, at 317, the District Court and the Seventh Circuit agreed that the Shareholders met the first of the two requirements: The complaint sufficiently specified Notebaert’s alleged misleading statements and the reasons why the statements were misleading.
The “strong inference” standard “unequivocally raise[d] the bar for pleading scienter,”
Ill
A
We 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. See Leatherman v. Tarrant County Narcotics Intelligence and Coordination Unit,
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. See 5B Wright & Miller § 1357 (3d ed. 2004 and Supp. 2007). The inquiry, as several Courts of Appeals have recognized, is
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 Seventh Circuit expressly declined to engage in such a comparative inquiry. A complaint could survive, that court said, as long as it “alleges facts from which, if true, a reasonable person could infer that the defendant acted with the required intent”; in other words, only “[i]f a reasonable person could not draw such an inference from the alleged facts” would the defendant prevail on a motion to dismiss.
The strength of an inference cannot be decided in a vacuum. The inquiry is inherently comparative: How likely is it that one conclusion, as compared to others, follows from the underlying facts? To determine whether the plaintiff
Tellabs contends that when competing inferences are considered, Notebaert’s evident lack of pecuniary motive will be dispositive. The Shareholders, Tellabs stresses, did not allege that Notebaert sold any shares during the class period. See Brief for Petitioners 50 (“The absence of any allegations of motive color all the other allegations putatively giving rise to an inference of scienter.”). While it is true that motive can be a relevant consideration, and personal financial gain may weigh heavily in favor of a scienter inference, we agree with the Seventh Circuit that the absence of a motive allegation is not fatal. See
Tellabs also maintains that several of the Shareholders’ allegations are too vague or ambiguous to contribute to a strong inference of scienter. For example, the Shareholders alleged that Tellabs flooded its customers with unwanted products, a practice known as “channel stuffing.” See supra, at 315. But they failed, Tellabs argues, to specify whether the channel stuffing allegedly known to Notebaert was the illegitimate kind (e. g., writing orders for products customers had not requested) or the legitimate kind (e. g., offering customers discounts as an incentive to buy). Brief for Petitioners 44-46; Reply Brief 8. See also id., at 8-9 (complaint lacks precise dates of reports critical to distinguish legitimate conduct from culpable conduct). But see
IV
Accounting for its construction of §21D(b)(2), the Seventh Circuit explained’that the court “th[ought] it wis[e] to adopt an approach that [could not] be misunderstood as a usurpation of the jury’s role.”
Congress, as creator of federal statutory claims, has power to prescribe what must be pleaded to state the claim, just as it has power to determine what must be proved to prevail on the merits. It is the federal lawmaker’s prerogative, therefore, to allow, disallow, or shape the contours of— including the pleading and proof requirements for — § 10(b) private actions. No decision of this Court questions that authority in general, or suggests, in particular, that the Seventh Amendment inhibits Congress from establishing whatever pleading requirements it finds appropriate for federal statutory claims. Cf. Swierkiewicz v. Sorema N. A.,
Our decision in Fidelity & Deposit Co. of Md. v. United States,
In the instant case, provided that the Shareholders have satisfied the congressionally “prescribe^]... means of making an issue,” Fidelity & Deposit Co.,
* * *
While we reject the Seventh Circuit’s approach to §21D(b)(2), we do not decide whether, under the standard we have described, see supra, at 322-326, the Shareholders’ allegations warrant “a strong inference that [Notebaert and Tellabs] acted with the required state of mind,” 15 U. S. C. § 78u-4(b)(2). Neither the District Court nor the Court of Appeals had the opportunity to consider the matter in light of the prescriptions we announce today. We therefore vacate the Seventh Circuit’s judgment so that the case may be reexamined in accord with our construction of §21D(b)(2).
The judgment of the Court of Appeals is vacated, and the case is remanded for further proceedings consistent with this opinion.
It is so ordered.
Notes
The Shareholders brought suit against Tellabs executives other than Notebaert, including Richard Birck, Tellabs’ chairman and former chief executive officer. Because the claims against the other executives, many of which have been dismissed, are not before us, we focus on the allegations as they relate to Notebaert. We refer to the defendant-petitioners collectively as “Tellabs.”
See, e. g.,
We have previously reserved the question whether reckless behavior is sufficient for civil liability under § 10(b) and Rule 10b-5. See Ernst & Ernst v. Hochfelder,
Nothing in the PSLRA, we have previously noted, casts doubt on the conclusion “that private securities litigation [i]s an indispensable tool with which defrauded investors can recover their losses” — a matter crucial to the integrity of domestic capital markets. See Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit,
Justice Scalia objects to this standard on the ground that “[i]f a jade falcon were stolen from a room to which only A and B had access,” it could not “possibly be said there was a ‘strong inference’ that B was the thief.” Post, at 329 (opinion concurring in judgment) (emphasis in original). We suspect, however, that law enforcement officials as well as the owner of the precious falcon would find the inference of guilt as to B quite strong— certainly strong enough to warrant further investigation. Indeed, an inference at least as likely as competing inferences can, in some cases, warrant recovery. See Summers v. Tice,
Justice Alito agrees with Justice Scaua, and would transpose to the pleading stage “the test that is used at the summary-judgment arid judgment-as-a-matter-of-law stages.” Post, at 335 (opinion concurring in
The Seventh Circuit held that allegations of scienter made against one defendant cannot be imputed to all other individual defendants.
The Seventh Circuit raised the possibility of a Seventh Amendment problem on its own initiative. The Shareholders did not contend below that dismissal of their complaint under § 210(b)(2) would violate their right to trial by jury. Cf. Monroe Employees Retirement System v. Bridgestone Corp.,
In numerous contexts, gatekeeping judicial determinations prevent submission of claims to a jury’s judgment without violating the Seventh Amendment. See, e. g., Daubert v. Merrell Dow Pharmaceuticals, Inc.,
Any heightened pleading rule, including Fed. Rule Civ. Proc. 9(b), could have the effect of preventing a plaintiff from getting discovery on a claim that might have gone to a jury, had discovery occurred and yielded substantial evidence. In recognizing Congress’ or the Federal Rule makers’ authority to adopt special pleading rules, we have detected no Seventh Amendment impediment.
Concurrence Opinion
concurring in the judgment.
I fail to see how an inference that is merely “at least as compelling as any opposing inference,” ante, at 314, can conceivably be called what the statute here at issue requires: a “strong inference,” 15 U. S. C. § 78u-4(b)(2). If a jade falcon were stolen from a room to which only A and B had access, could it possibly be said there was a “strong inference” that B was the thief? I think not, and I therefore think that the Court’s test must fail. In my view, the test should be whether the inference of scienter (if any) is more plausible than the inference of innocence.
The Court’s second assertion (also true) is that “an inference at least as likely as competing inferences can, in some cases, warrant recovery.” Ante, at 324, n. 5 (citing Summers v. Tice,
The Court and the dissent criticize me for suggesting that there is only one reading of the text. Ante, at 324-325, n. 5; post, at 336, n. 1 (Stevens, J., dissenting). They are both mistaken. I assert only that mine is the natural reading of the statute (i. e., the normal reading), not that it is the only
It is unremarkable that various Justices in this cáse reach different conclusions about the correct interpretation of the statutory text. It is remarkable, however, that the dissent believes that Congress “implicitly delegated significant lawmaking authority to the Judiciary in determining how th[e] [strong-inference] standard should operate in practice.” Post, at 335. This is language usually employed to describe the discretion conferred upon administrative agencies, which need not adopt what courts would consider the interpretation most faithful to the text of the statute, but may choose some other interpretation, so long as it is within the bounds of the reasonable, and may later change to some other interpretation that is within the bounds of the reasonable. See Chevron U. S. A. Inc. v. Natural Resources Defense Council, Inc.,
With the above exceptions, I am generally in agreement with the Court’s analysis, and so concur in its judgment.
The Court suggests that “the owner of the precious falcon would find the inference of guilt as to B quite strong.” Ante, at 324, n. 5. If he should draw such an inference, it would only prove the wisdom of the ancient maxim “aliquis non debet esse Judex in propria causa” — no man
Concurrence Opinion
concurring in the judgment.
I agree with the Court that the Seventh Circuit used an erroneously low standard for determining whether the plaintiffs in this case satisfied their burden of pleading “with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” 15 U. S. C. § 78u-4(b)(2). I further agree that the case should be remanded to allow the lower courts to decide in the first instance whether the allegations survive under the correct standard. In two respects, however, I disagree with the opinion of the Court. First, the best interpretation of the statute is that only those facts that are alleged “with particularity” may properly be considered in determining whether the allegations of scienter are sufficient. Second, I agree with Justice Scalia that a “strong inference” of scienter,
I
On the first point, the statutory language is quite clear. Section 78u-4(b)(2) states that “the complaint shall, with respect to each act or omission alleged to violate this chapter, state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” Thus, “a strong inference” of scienter must arise from those facts that are stated “with particularity.” It follows that facts not stated with the requisite particularity cannot be considered in determining whether the strong-inference test is met.
In dicta, however, the Court states that “omissions and ambiguities” merely “count against” inferring scienter, and that a court should consider all allegations of scienter, even nonparticularized ones, when considering whether a complaint meets the “strong inference” requirement. Ante, at 326. Not only does this interpretation contradict the clear statutory language on this point, but it undermines the particularity requirement’s purpose of preventing a plaintiff from using vague or general allegations in order to get by a motion to dismiss for failure to state a claim. Allowing a plaintiff to derive benefit from such allegations would permit him to circumvent this important provision.
Furthermore, the Court’s interpretation of the particularity requirement in no way distinguishes it from normal pleading review, under which a court naturally gives less weight to allegations containing “omissions and ambiguities” and more weight to allegations stating particularized facts. The particularity requirement is thus stripped of all meaning.
Questions certainly may arise as to whether certain allegations meet the statutory particularity requirement, but where that requirement is violated, the offending allegations cannot be taken into account.
I would also hold that a “strong inference that the defendant acted with the required state of mind” is an inference that is stronger than the inference that the defendant lacked the required state of mind. Congress has provided very little guidance regarding the meaning of “strong inference,” and the difference between the Court’s interpretation (the inference of scienter must be at least as strong as the inference of no scienter) and Justice Scalia’s (the inference of scienter must be at least marginally stronger than the inference of no scienter) is unlikely to make any practical difference. The two approaches are similar in that they both regard the critical question as posing a binary choice (either the facts give rise to a “strong inference” of scienter or they do not). But Justice Scalia’s interpretation would align the pleading test under §78u-4(b)(2) with the test that is used at the summary-judgment and judgment-as-a-matter-of-law stages, whereas the Court’s test would introduce a test previously unknown in civil litigation. It seems more likely that Congress meant to adopt a known quantity and thus to adopt Justice Scalia’s approach.
Dissenting Opinion
dissenting.
As the Court explains, when Congress enacted a heightened pleading requirement for private actions to enforce the federal securities laws, it “left the key term ‘strong inference’ undefined.” Ante, at 314. It thus implicitly delegated significant lawmaking authority to the Judiciary in determining how that standard should operate in practice. Today the majority crafts a perfectly workable definition of the term, but I am persuaded that a different interpretation would be both easier to apply and more consistent with the statute.
The basic purpose of the heightened pleading requirement in the context of securities fraud litigation is to protect defendants from the costs of discovery and trial in unmeritori
In addition to the benefit of its grounding in an already familiar legal concept, using a probable-cause standard would avoid the unnecessary conclusion that “in determining whether the pleaded facts give rise to a ‘strong’ inference of scienter, the court must take into account plausible opposing inferences.” Ante, at 323 (emphasis added). There are times when an inference can easily be deemed strong without any need to weigh competing inferences. For example, if a known drug dealer exits a building immediately after a
If, using that same methodology, we assume (as we must, see ante, at 322, 326) the truth of the detailed factual allegations attributed to 27 different confidential informants described in the complaint, App. 91-93, and view those allegations collectively, I think it clear that they establish probable cause to believe that Tellabs’ chief executive officer “acted with the required intent,” as the Seventh Circuit held.
Accordingly, I would affirm the judgment of the Court of Appeals.
The meaning of a statute can only be determined on a case-by-case basis and will, in each case, turn differently on the clarity of the statutory language, its context, and the intent of its drafters. Here, in my judgment, a probable-cause standard is more faithful to the intent of Congress, as expressed in both the specific pleading requirement and the statute as a whole, than the more defendant-friendly interpretation that Justice Scalia prefers. He is clearly wrong in concluding that in divining the meaning of this term, we can merely “read the language for what it says,” and that it is susceptible to only one reading. Ante, at 331 (opinion concurring in judgment). He argues that we “must be content to give ‘strong inference’ its normal meaning,” ibid., and yet the “normal meaning” of a term such as “strong inference” is surely in the eye of the beholder. As the Court’s opinion points out, Courts of Appeals have divided on the meaning of the standard, see ante, at 314, 322, and today, the Members of this Court have done the same. Although Justice Scalia may disagree with the Court’s reading of the term, he should at least acknowledge that, in this case, the term itself is open to interpretation.
The “channel stuffing” allegations in ¶¶ 62-72 of the amended complaint, App. 110-113, are particularly persuasive. Contrary to petitioners’ arguments that respondents’ allegations of channel stuffing “are too vague or ambiguous to contribute to a strong inference of scienter,” ante, at 325, this portion of the complaint clearly alleges that Notebaert himself had specific knowledge of Illegitimate channel stuffing during the relevant time period, see, e. g., App. Ill, ¶ 67 (“Defendant Notebaert worked directly with Tellabs’ sales personnel to channel stuff SBC”); id,., at 110-112 (alleging, in describing such channel stuffing, that Tellabs took “extraordinary” steps that amounted to “an abnormal practice in the industry”; that “distributors were upset and later returned the inventory” (and, in the case of Verizon’s chairman, called Tellabs to complain); that customers “did not want” products that Tellabs sent and that Tellabs employees wrote purchase orders for; that “returns were so heavy during January and February 2001 that Tellabs had to lease extra storage space to accommodate all the returns”; and that Tellabs “backdat[ed] sales” that actually took place in 2001. to appear as having occurred in 2000). If these allegations are actually taken as true and viewed in the collective, it is hard to imagine what competing inference could effectively counteract the inference that Notebaert and Tellabs "'acted with the required state of mind.'” Ante, at 329 (opinion of the Court) (quoting 15 U. S. C. §78u-4(b)(2)).