Private Securities Litigation Reform Act
Congress enacted the Private Securities Litigation Reform Act (“PSLRA”) in 1995. The PSLRA is intended to stop abusive litigation in which trial lawyers would file suit to extract settlements from issuers and others. It made a series of very technical changes to the law.
Before the PSLRA, a trial lawyer (i.e., plaintiff’s counsel) could file a lawsuit with the flimsiest claim and demand that the defendant company (i.e., the issuer), along with its investment bank and accountants, produce millions of documents. The lawyer’s goal would be to make the cost of defending the case so expensive as to force the defendants to settle, even if there was no merit to the case. To stop this abuse, the PSLRA made a number of changes to the procedures for bringing a private lawsuit.
Heightened Pleading Standard – It is no longer good enough to for a trial lawyer simply to assert that the defendant did something wrong. The plaintiff must identify specific events, such as alleging defendant’s untrue statements of material fact, which if proved in court, would constitute fraud.
Automatic Stay of Discovery –Defendants need not produce documents that the trial lawyers have demanded if the defendants believe that the trial lawyer has not brought a valid lawsuit. After a plaintiff files a lawsuit, defendants usually ask the court to throw out the lawsuit in a “motion to dismiss,” arguing that the suit has no merit. The automatic discovery stay means that while the court decides the motion to dismiss, the defendants need not produce the documents that the plaintiff’s trial lawyers have demanded.
Both of these provisions are designed to prevent trial lawyers from filing lawsuits and going on “fishing expeditions” as part of an effort to demand a fat settlement.
The PSLRA did not change the standards of securities fraud or somehow make it easier to for people to harm investors. Congress intended that the PSLRA would allow meritorious cases to proceed in court and to that investors truly harmed by fraud would be compensated. In addition, the PSLRA included a provision requiring outside auditors of a public company to notify the SEC if they found evidence of serious financial wrongdoing and if the company’s board of directors had declined to take appropriate action.
Investment Advisers Act of 1940 Sec Litigation Uniform Standards Act