In its June 21 decision in Tellabs Inc. et al. v. Makor Issues & Rights Ltd. et al., the Supreme Court raised the standard for private securities fraud actions, making it harder for investors to sue under federal securities laws.

The Supreme Court vacated a 7th Circuit decision against Naperville, Ill.-based Tellabs, a telecommunications product manufacturer, saying plaintiffs had not met requirements of the Private Securities Litigation Reform Act of 1995, which states evidence must show “a strong inference that the defendant acted with the required state of mind,” i.e., intent to “deceive, manipulate or defraud.”

In an 8-1 decision written by Justice Ruth Bader Ginsberg, the Court defined “strong inference” as “more than merely plausible or reasonable–it must be cogent and at least as compelling as any opposing inference of nonfraudulent intent.”

Tellabs shareholders brought the suit in 2002 over incidents taking place between December 2000 and spring 2001. They alleged then-president and CEO Richard Notebaert lied to investors about demand for certain Tellabs products, falsely represented financial reports and overstated revenue projections in order to drive up stock prices. The case will now return to a lower court which will decide whether the suit can survive the standards set forth by the Supreme Court.

In a statement to the press, Tellabs general counsel James Sheehan said, “Tellabs applauds the Supreme Court decision. We are encouraged that the Supreme Court recognized that the 7th Circuit's decision was incorrect. The Supreme Court has also appropriately established a strict standard to be applied in sending the case back for further review.”