So What Exactly Is The "PSLRA?"

When involved in a securities class action lawsuit as either a plaintiff or defendant, one frequently hears references made to the “PSLRA.” The PSLRA was enacted in 1995 and changed the manner in which class actions brought under the federal securities laws are litigated. The PSLRA introduced several substantive changes related to pleading, discovery, liability, class representation and feeand-expense awards. Because the acronym is so
often tossed around in the midst of case discussions, this article is intended to explain and clarify just what the PSLRA is and what it requires.

To begin with, PSLRA is short for the Private Securities Litigation Reform Act of 1995. The PSLRA became law on December 22, 1995, when the United States Senate overrode President Clinton’s veto of the bill. The purported purposes of the statute were to increase investor awareness of securities litigation, make such litigation more efficient and deter what was perceived to be the potential for meritless class actions brought under the Securities Act of 1933 and the Securities Exchange Act of 1934. Since adoption of the PSLRA over a decade ago, scholars have disagreed on its impact. Some suggest that the PSLRA completely revamped the field of securities class actions. Others comment that it has had little impact on the ultimate outcome of cases, the amount of settlements or the number of cases being filed. What cannot be disputed, however, is that the PSLRA has imposed important guidelines that must be followed by plaintiffs, including stricter pleading requirements, mandating a stay of discovery, and providing courts with specific criteria for the selection of lead plaintiffs. 

Heightened Pleading Requirements

In an attempt to inhibit the filing of claims based on “information and belief” alone, the PSLRA increased the amount of information a plaintiff must provide in the initial complaint in three areas: (1) pleading fraud “with particularity;” (2) demonstrating a strong inference of “scienter;” and (3) adequately alleging “loss causation.” Pleading fraud with particularity means that if a plaintiff claims that a company has made false or misleading statements, the plaintiff must identify the fraudulent statements, specify who made them, and where and when they were made. In addition to identifying these statements, plaintiffs must also state the reasons why, in their view, such statements were false or misleading.

The second increased pleading requirement, “scienter,” is a technical term that describes the required “state of mind” that must be possessed by a defendant in order for him or her to be found liable. Plaintiffs bringing a securities class action must allege that defendants acted “with scienter”— which is to say defendants must have acted at a time when they knew the statements they made were false or defendants were highly reckless given, for example, their high positions in a company in not investigating the truth of such statements prior to issuing them. The United States Supreme Court, since 1995, has fleshed out this definition further by now requiring that plaintiffs show a “cogent inference” of this intent to defraud. This means that the explanation that defendants knew their statements were false must be at least as plausible as any alternative explanation given by defendants.

The PSLRA also requires that plaintiffs plead with more detail how the alleged misstatements or omissions of fact caused their losses— this is known as “loss causation.” For instance,as the seminal Supreme Court case of Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005) has now defined, plaintiffs need to demonstrate that when a prior statement is revealed to have been inaccurate, the relevant company stock price was adversely affected as a consequence.

These are extremely difficult pleading standards to meet at such an early stage of litigation, where the investors and their counsel are typically only privy to publicly made statements. Therefore, before filing a securities class action, investors, through their legal counsel, must thoroughly investigate the allegations of securities fraud to gather as many pertinent facts as they can to support their claims.  If the facts stated do not support the claims made, the courts will dismiss a case.

Stay of Discovery

Perhaps the most well-known provision of the PSLRA is the statute’s stay of discovery provision, known as the “PSLRA Stay.” This term refers to the PSLRA’s mandate that no discovery is allowed until after a court rules on a defendant’s motion to dismiss. Meaning that while the motion to dismiss is pending, a plaintiff may not serve the defendant with any document requests,interrogatories or requests for admission, nor may a plaintiff conduct depositions. Congress intended for this measure to save defendants from costly production of documents and hours spent defending depositions when a case may ultimately be dismissed. However, in some circumstances, plaintiffs are afforded an opportunity to persuade the court to allow discovery because evidence needs to be preserved or because undue prejudice will be caused.

Appointing a Lead Plaintiff

The PSLRA dramatically changed the procedure for appointing a “lead plaintiff” in a securities class action. As discussed in the August 2008 Scott + Scott LLP Newsletter, being appointed as lead plaintiff enables an investor to control the direction of the litigation. Prior to enactment of the PSLRA, lead plaintiff status was typically bestowed on the first plaintiff to file a complaint, thus creating incentives for plaintiffs to “race to the courthouse.” Recognizing the potential for unsophisticated investors to be named lead plaintiffs and the potential for abuse of the process, the PSLRA now prescribes that the most adequate party to be appointed as the lead plaintiff should be the investor or group of investors that has the largest financial stake in the case, the investor who has suffered the largest monetary loss as a result of defendants’ fraud. As a result, institutional investors, such as a public and labor pension fund, are frequently appointed lead plaintiffs, which was Congress’ intention.  Congress wantedto encourage institutional investors to seeklead plaintiff status because institutional investors are more sophisticated and with more at stake, they are more likely to want to ensure a just outcome for the class. Under the PSLRA, the appointed lead plaintiff is then permitted to select and retain counsel,who likewise must be approved by the court.

Initiating and litigating securities class actions is difficult and cannot be done without sound counsel. In many respects, the PSLRA has provided credence to class actions that courts deem to have met the higher standards. It is important for institutional investors to seek capable counsel and to monitor the progress of successfully litigated securities class actions in order to be informed of circumstances in which they are able to participate and entitled to obtain a share of recovered losses.


newsletter_aug2008.jpg Source : Scott+Scott September 2008 Newsletter