Should Congress Repeal Securities Class Action Reform?

By Adam C. Pritchard

The Private Securities Litigation Reform Act of 1995 was designed to curtail class action lawsuits by the plaintiffs’ bar. In particular, the high‐technology industry, accountants, and investment bankers thought that they had been unjustly victimized by class action lawsuits based on little more than declines in a company’s stock price. Prior to 1995, the plaintiffs’ bar had free rein to use the discovery process to troll for evidence to support its claims. Moreover, the high costs of litigation were a powerful weapon with which to coerce companies to settle claims.

The plaintiffs’ bar and its allies in Congress have called for a repeal or modification of the PSLRA. This paper evaluates the operation of class action lawsuits before and after the act. The hard evidence does not support repealing the PSLRA. In fact, securities class actions are being filed at a record pace. And although a higher percentage of these lawsuits is being dismissed now than before the act, the ones that survive lead to larger settlements.

The PSLRA raised the standard required before plaintiffs’ attorneys could drag a defendant company through the expense of discovery. The lawsuits that meet this higher standard are likely to be less frivolous and are consequently worth more in settlement negotiations. The combination of higher settlements and a smaller percentage of such cases getting to trial suggests that the class action lawsuits under the PSLRA are doing a more cost‐effective job of deterring corporate fraud. This conclusion is bolstered by the fact that post‐PSLRA complaints have more particularized allegations that are more highly correlated with factors related to fraud. In short, the PSLRA is working well, although not as well as intended, and there do not appear to be grounds to either repeal or significantly amend it. A better course for reform would be to change the damages remedy in securities fraud class actions to focus on deterrence.