Seventh Circuit Condemns Reliance On Anonymous Sources In Securities Fraud Cases.By William G. McGuinness, Douglas H. Flaum, Gregg L. Weiner, Stephanie Goldstein David B. Hennes, Israel David and Michael B. de Leeuw In our recent memorandum, "Supreme Court Establishes Standard for Reviewing 'Strong Inference' of Scienter [Latin, Knowingly.] Guilty knowledge that is sufficient to charge a person with the consequences of his or her acts. The term scienter refers to a state of mind often required to hold a person legally accountable for her acts. in Securities Fraud Cases," we discussed the Supreme Court's decision in Tellabs, Inc. v. Makor Issues & Rights, Ltd., which held that a securities fraud complaint may survive a motion to dismiss "only if a reasonable person would deem the inference of scienter [the required state of mind] cogent COGENT - COmpiler and GENeralized Translator and at least as compelling as any opposing inference one could draw from the facts alleged." The Court concluded that, in enacting the Private Securities Litigation Reform Act The Private Securities Litigation Reform Act of 1995 (PSLRA) implemented several significant substantive changes affecting certain cases brought under the federal securities laws, including changes related to pleading, discovery, liability, class representation and awards fees and ("PSLRA PSLRA Private Securities Litigation Reform Act PSLRA Public Service Labour Relations Act (Canada) "), Congress had displaced the usual standard applied to motions to dismiss in which any and all potential inferences from the facts alleged are drawn solely in plaintiffs' favor. In a decision released last Friday, July 27, Higginbotham v. Baxter Int'l, Inc., No. 06-1312, the Seventh Circuit applied the Tellabs standard to scienter allegations based on information from anonymous or confidential sources and stock trading activity. The Seventh Circuit's assessment of both types of allegations suggests that the Tellabs standard will have a real impact in weeding out cases brought with insufficiently specific allegations at the beginning of the litigation An action brought in court to enforce a particular right. The act or process of bringing a lawsuit in and of itself; a judicial contest; any dispute. When a person begins a civil lawsuit, the person enters into a process called litigation. . Most significantly, the Baxter decision is harshly critical of what has become common practice since the enactment of the PSLRA - the use of anonymous or confidential sources of information in securities fraud complaints. The Seventh Circuit determined that, at least as far as scienter allegations are concerned, "facts" attributed to anonymous accusers will almost never suffice to establish a compelling inference of scienter because concealing the source's identity inherently frustrates the court's ability to determine what opposing inferences may be drawn. While the court did not exclude the possibility that under certain circumstances allegations attributed to anonymous sources could bolster other allegations of scienter, anonymous source allegations will be "discounted" and that "[u]sually that discount will be steep. The Seventh Circuit's sweeping condemnation of the use of anonymous sources is particularly striking because the Supreme Court's opinion in Tellabs itself observed in passing that the complaint in that case had relied heavily on such sources but did not suggest any view as to the validity of that practice under the new standard it announced. Indeed, prior to Tellabs, federal courts had held the practice to be acceptable to varying degrees. Baxter thus suggests that, in light of Tellabs, the time is ripe for other circuits to reconsider the treatment of allegations made by confidential sources in securities fraud cases. While the Baxter decision was focused on the element of scienter, the court's broader rejection of plaintiffs' rationale for the use of confidential sources - the need to protect sources from the possibility of retaliatory re·tal·i·ate v. re·tal·i·at·ed, re·tal·i·at·ing, re·tal·i·ates v.intr. To return like for like, especially evil for evil. v.tr. To pay back (an injury) in kind. treatment - strongly suggests that courts may now more generally revisit how to deal with confidential sources in securities cases. The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Fried Frank Harris Shriver shrive v. shrove or shrived, shriv·en or shrived, shriv·ing, shrives v.tr. 1. To hear the confession of and give absolution to (a penitent). 2. & Jacobson One New York Plaza One New York Plaza is an office building in New York City, built in 1969, and is located at the intersection of South and Whitehall Streets (). It is the southernmost of all Manhattan skyscrapers. New York New York, state, United States New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of NY 10004 UNITED STATES United States, officially United States of America, republic (2005 est. pop. 295,734,000), 3,539,227 sq mi (9,166,598 sq km), North America. The United States is the world's third largest country in population and the fourth largest country in area. 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