Should Congress Repeal Securities Class Action Reform?

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The Private Securities Litigation Reform Actof 1995 was designed to curtail class action lawsuitsby the plaintiffs' bar. In particular, the high-technologyindustry, accountants, and investmentbankers thought that they had beenunjustly victimized by class action lawsuits basedon little more than declines in a company's stockprice. Prior to 1995, the plaintiffs' bar had freerein to use the discovery process to troll for evidenceto support its claims. Moreover, the highcosts of litigation were a powerful weapon withwhich to coerce companies to settle claims.

The plaintiffs' bar and its allies in Congress havecalled for a repeal or modification of the PSLRA.This paper evaluates the operation of class actionlawsuits before and after the act. The hard evidencedoes not support repealing the PSLRA. In fact,securities class actions are being filed at a recordpace. And although a higher percentage of theselawsuits is being dismissed now than before the act,the ones that survive lead to larger settlements.

The PSLRA raised the standard required beforeplaintiffs' attorneys could drag a defendant companythrough the expense of discovery. The lawsuitsthat meet this higher standard are likely to be lessfrivolous and are consequently worth more in settlementnegotiations. The combination of highersettlements and a smaller percentage of such casesgetting to trial suggests that the class action lawsuitsunder the PSLRA are doing a more cost-effectivejob of deterring corporate fraud. This conclusionis bolstered by the fact that post-PSLRA complaintshave more particularized allegations thatare more highly correlated with factors related tofraud. In short, the PSLRA is working well,although not as well as intended, and there do notappear to be grounds to either repeal or significantlyamend it. A better course for reform would be tochange the damages remedy in securities fraudclass actions to focus on deterrence.

Adam C. Pritchard

Adam C. Pritchard is assistant professor of law at the University of Michigan Law School and a visiting assistant professor of law at the Georgetown University Law Center.