Private Securities Litigation Reform Act of 1995
Securities Litigation Reform: The Genesis of the Private Securities Litigation Reform Act of 1995
John W. Avery, 51(2): 335–78 (Feb. 1996)
On December 22, 1995, the U.S. Senate voted to override President Clinton's veto of the Private Securities Litigation Reform Act of 1995, concluding the long and often rancorous legislative effort to bring about sweeping changes to private litigation under the federal securities laws. Although the act does not clearly achieve its goal of bringing meaningful reform to the system of private litigation, one thing seems clear—it will take many years of litigation to resolve the many uncertainties the act creates. This Article reviews the issues underlying the litigation reform effort and the legislative process leading to the enactment of the bill. The Article also analyzes the various provisions of the act and their apparent intent.
The Future of the Private Securities Litigation Reform Act: Or, Why the Fat Lady Has Not Yet Sung
John C. Coffee, Jr., 51(4): 975–1007 (Aug. 1996)
Much commentary on the Private Securities Litigation Reform Act of 1995 has assumed that the legislation represents a fait accompli, with its meaning and importance fixed, for better or worse. The Reform Act contains, however, many ambiguities and hiatuses that will provide the federal courts with ample room for interpretation of a far-reaching type. In addition, SEC rulemaking could have a decisive impact on the meaning of the Reform Act. Adaptive responses to the legislation by those effected are also likely and unpredictable in their impact. Until these processes are further along, determination of the significance of the Reform Act will be premature.
The Private Securities Litigation Reform Act of 1995: Rebalancing Litigation Risks and Rewards for Class Action Plaintiffs, Defendants and Attorneys
Richard M. Phillips and Gilbert C. Miller, 51(4): 1009–69 (Aug. 1996)
Following extensive hearings, Congress became persuaded that speculative securities class action suits were undermining the integrity and fairness of the private securities litigation system. Congress responded by enacting the Private Securities Litigation Reform Act of 1995. The Reform Act increases the litigation risks for plaintiffs and their class action counsel while reducing the risks and costs for defendants. This rebalancing is achieved through a number of statutory amendments to the Securities Act and Exchange Act that implement procedural and substantive changes at various stages of the litigation process. If the Reform Act works as intended, it will be substantially more difficult for plaintiffs and their class action counsel to maintain speculative securities fraud suits while permitting meritorious suits to go forward.
Forward-Looking Information—Navigating in the Safe Harbor
Carl W. Schneider and Jay A. Dubow, 51(4): 1071–1100 (Aug. 1996)
This Article reviews the safe harbor for forward-looking statements created by the Private Securities Litigation Reform Act of 1995. It describes the safe harbor and focuses on perceived needs for the safe harbor, the protections it creates, the many interpretative problems it raises, and the remaining risks for which it provides no protection. Additionally, it explores other bases of defense in the pre- Reform Act law which remain available to defendants.
Pleading Reform, Plaintiff Qualification and Discovery Stays Under the Reform Act
John F. Olson, David C. Mahaffey, and Brian E. Casey, 51(4): 1101–56 (Aug. 1996)
By enacting the Private Securities Litigation Reform Act of 1995, Congress has clearly established the public policy that the growth of private securities class action lawsuits of questionable merit, often pursued at significant agency cost, is harmful to the economic well-being of the nation. This Article discusses some of the abuses Congress sought to address with the Reform Act. It also describes some of the Reform Act's solutions, including the new heightened pleading requirements, the discovery stay provisions, and the "most adequate plaintiff" provision.
The Reform of Joint and Several Liability Under the Private Securities Litigation Reform Act of 1995: Proportionate Liability, Contribution Rights and Settlement Effects
Donald C. Langevoort, 51(4): 1157–75 (Aug. 1996)
As part of the Private Securities Litigation Reform Act of 1995, Congress substituted a system of proportionate damage liability instead of joint and several liability for those defendants whose violations were not "knowing" ones. To assure that proportionality is respected, Congress also changed the law relating to contribution and settlement bars. This Article explores both the policy justifications offered for these changes and the statutory language chosen to accomplish them.
"Simplicity and Certainty" in the Measure of Recovery Under Rule 10b-5
Robert B. Thompson, 51(4): 1177–1201 (Aug. 1996)
The measure of recovery in a securities fraud case necessarily requires deciding whether a plaintiff should recover for any change in price of the security due to market movements as well as any change in price due to the fraud. The conference report accompanying the Private Securities Litigation Reform Act of 1995 states the bill limits damages to those caused by fraud and not by other market conditions. The bill itself, however, does not do this and generally confuses this separation by focusing on a somewhat different effect—change in price due to market overreaction to disclosures correcting the fraud (the "crash" effect). Even as to this more narrow element, the effect of the bill is incomplete and difficult to fit into any broader theory about what damages should be recoverable, leaving a bill whose only unifying theme is to benefit defendants.
Effect on 10b-5 Damages of the 1995 Private Securities Litigation Reform Act: A Forward-Looking Assessment
Jonathan C. Dickey and Marcia K. Mayer, 51(4): 1203–19 (Aug. 1996)
This Article considers how section 21D of the Private Securities Litigation Reform Act of 1995 is likely to affect damage assessments in securities class actions and other rule 10b-5 cases. Graphs are used to illustrate how this new "bounce-back" rule will reduce or even eliminate damages in cases where a stock suffers only a short-term price decline. This theoretical presentation is supplemented with analyses of investor losses and plaintiffs' claims in shareholder class actions that settled from 1991 to 1994. The empirical evidence suggests that, except perhaps in bull markets, the law will have at most a modest impact on damages in the vast majority of cases.
A New Standard for Aiders and Abettors Under the Private Securities Litigation Reform Act of 1995
Lewis D. Lowenfels and Alan R. Bromberg, 52(1): 1–12 (Nov. 1996)
Generally speaking, during the past twenty years, the elements to be proved to establish an action for aiding and abetting securities violations by private parties or by the SEC have been same: (i) a primary violation by another person; (ii) some degree of the defendant's knowledge of the primary violation, recklessness, or other scienter; and (iii) substantial assistance by the defendant. The Supreme Court's decision in Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A ., 511 U.S. 164 (1994), eliminated damage actions brought by private parties for aiding and abetting securities violations. The Private Securities Litigation Reform Act of 1995 unequivocally reaffirmed the SEC's authority to maintain civil enforcement actions in court against aiders and abettors. The central thesis of this Article is that the Reform Act (i) will require the second element of aiding and abetting to scale upward to a "knowing" or full scienter requirement, eliminating the constructive knowledge in the form of recklessness and "should have known," which had previously sufficed in some cases and (ii) will require the third element of aiding and abetting to scale upward to require the SEC to prove that the actions and/or inactions of the alleged aider and abettor were a substantial proximate causal factor of the primary violation and loss, eliminating the "but for" causation which had previously sufficed in some SEC cases.
The Boundaries of the "In Connection With" Requirement of Rule 10b-5: Should Advertising Be Actionable as Securities Fraud?
Francesca Muratori, 56(3): 1057 (May 2001)
The content of advertising has traditionally been the domain of consumers and the companies enticing them to make purchases, often stretching the truth in the process. Consumers, long familiar with those techniques, understand that ads are not the province of hard facts. Those relationships may be poised to undergo change in the wake of the Second Circuit's holding in In re Carter-Wallace Securities Litigation . Issuer liability to stockholders who claim a trading decision was based on allegedly misleading advertising expands the boundaries of the "in connection with" element of Rule 10b-5 and imposes uncertainty on the conduct of business.
Don't Call Me a Securities Law Groupie: The Rise and Possible Demise of the "Group Pleading" Protocol in 10b-5 Cases
William O. Fisher, 56(3): 991 (May 2001)
The group pleading protocol permits securities law plaintiffs to name individuals as defendants in 10b-5 lawsuits without specifically alleging their participation in preparing the statements on which plaintiffs sue. This Article traces the development of this protocol in the Ninth and Second Circuits, focusing on which defendants are within the "group" and what kinds of corporate communications are "group- published." The Article then proceeds to discuss abuse of the protocol by decisions viewing it as a rule of substantive law rather than a pleading shortcut, and cases improperly applying the protocol to scienter pleading. The article concludes with sections addressing: (i) the effect of Central Bank and primary liability law on group pleading; (ii) whether group pleading survives the Private Securities Litigation Reform Act; and (iii) how much common sense lies behind the factual assumptions on which the protocol is based.
The Fiduciary Duties of Institutional Investors in Securities Litigation
Craig C. Martin & Matthew H. Metcalf, 56(4): 1381 (Aug. 2001)
The Private Securities Litigation Reform Act of 1995 was enacted to expand the role of institutional investors in securities litigation in the hopes that such involvement would serve to moderate what were widely perceived as abusive litigation practices in this area. However, these institutional investors must also observe their significant fiduciary obligations under the Employee Retirement Income Security Act. The Article discusses the redefined role of institutional investors in securities litigation in light of both of these pieces of legislation and examines some potential benefits and unique concerns that institutional investors must now consider when a securities fraud claim arises.
Independent Directors as Securities Monitors
Hillary A. Sale, 61(4):1375-1412 (August 2006)
This paper considers the role of independent directors of public companies as securities monitors. Rather than engaging in the debate about whether independent directors are good or bad, important or unimportant, the paper takes their existence and basic governance role as a given, focusing instead on what recent statements from Securities and Exchange Commission officials indicating an increased focus on independent directors and their role in preventing securities fraud. The paper notes that the SEC believes that independent directors are on the board to act, at least in part, as securities monitors. This securities monitor role is another aspect of the information-forcing-substance disclosure model that the SEC has used to achieve improved corporate governance. Although directors face heightened risk when they draft or sign disclosure documents, they also have an ongoing responsibility to be informed of developments within the company, ensure good processes for accurate disclosures, and make reasonable efforts to assure that disclosures are adequate. Independent directors with expertise should be involved in reviewing and, sometimes, drafting statements. All directors, however, should be fully aware of the company's press releases, public statements, and communications with security holders and sufficiently engaged and active to question and correct inadequate disclosures. In addition to defining the role of independent directors as securities monitors, the article reviews the liability independent directors might face under private causes of action and contrasts it with the SEC's enforcement powers and remedies. The article describes some of the SEC's prior statements that emphasize the role of independent directors as securities monitors and the importance of their providing both guidance and check and balance.
Applying Stoneridge to Restrict Secondary Actor Liability Under Rule 10b-5
Todd G. Cosenza, 64(1): 59-78 (November 2008)
Although the U.S. Supreme Court's decision in Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., was widely viewed as a sweeping rebuke of the application of "scheme" liability to secondary actors, the Court's decision also raised some questions regarding the precise scope of secondary actor liability under section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. There is an obvious tension between the Court's holding that the secondary actors in Stoneridge could not be held liable because their "deceptive acts, which were not disclosed to the investing public, [were] too remote to satisfy the element of reliance" and its pronouncement that "[c]onduct itself can be deceptive" and could therefore satisfy a Rule 10b-5 claim. In particular, the question of what type of conduct satisfies the element of reliance in a claim against a secondary actor who assists in the drafting of a company's public disclosures remains open to interpretation.
This Article first discusses the general standards of section 10(b) liability and the Supreme Court's decision in Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A. The next part of the Article compares the judicial standards of secondary actor liability under Rule 10b-5(b)—the bright line, substantial participation, and creator standards—that emerged in the post- Central Bank era. It then discusses Stoneridge and the Court's recent rejection of secondary actor "scheme" liability under Rule 10b-5(a) and (c). Finally, it reviews recent applications of Stoneridge and analyzes the implications of these decisions going forward.
Damages and Reliance Under Section 10(b) of the Exchange Act
Joseph A. Grundfest; 69(2): 307-392 (February 2014)
A textualist interpretation of the implied private right of action under section 10(b) of the Exchange Act concludes that the right to recover money damages in an aftermarket fraud can be no broader than the express right of recovery under section 18(a) of the Exchange Act. The Act’s original legislative history and recent Supreme Court doctrine are consistent with this conclusion, as is the Act’s subsequent legislative history. Section 18(a), however, requires that plaintiffs affirmatively demonstrate actual “eyeball or eardrum” reliance as a precondition to recovery and does not permit a rebuttable presumption of reliance. Accordingly, if the Exchange Act is to be interpreted as a “harmonious whole,” with the scope of recovery under the implied section 10(b) private right being no greater than the recovery available under the most analogous express remedy, section 18(a), then section 10(b) plaintiffs must either demonstrate actual reliance as a precondition to recovery of damages, or the U.S. Supreme Court should revisit Basic, as suggested by four Justices in Amgen, and overturn Basic’s rebuttable presumption of reliance. A textualist approach thus provides a rationale for either distinguishing or reversing Basic that avoids the complex debate over the validity of the efficient market hypothesis, an academic dispute that the Court is not optimally situated to referee.
State Section 11 Litigation in the Post-Cyan Environment (Despite Sciabacucchi)
Michael Klausner, Jason Hegland, Carin LeVine, and Jessica Shin; 75(2): 1769-1790 (Spring 2020)
In Cyan, Inc. v. Beaver County Employees Retirement Fund, the U.S. Supreme Court held that the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”) preserved state courts’ jurisdiction to adjudicate cases brought under the Securities Act of 1933, with defendants having no right to remove a case to federal court. The result of this decision has been a dramatic increase in section 11 cases litigated in state court, often with a parallel case brought in federal court against the same defendants based on the same alleged misstatements.
Loss Causation and the Materialization of Risk Doctrine in Securities Fraud Class Actions
Richard A. Booth; 75(2): 1791-1814 (Spring 2020)
In the context of a claim for securities fraud under SEC Rule 10b-5, most federal circuit courts have ruled or recognized that loss causation can be proven by an event that demonstrates an earlier statement by a defendant company to be false. In other words, corrective disclosure need not take the form of speech. Rather, a statement can be shown to be false by the materialization of a risk that was concealed by the company, and investors can be compensated for any losses they suffer as a result. Although this doctrine is well established, its ultimate effect is to overcompensate investors, thus encouraging excessive securities litigation and chilling voluntary disclosure.