Since the Depression, American capital markets have operated under the provisions of the Securities Act of 1933 (the “Securities Act”) and the Securities Exchange Act of 1934 (the “Exchange Act”). The purpose of those bills was . . . to protect the investing public and honest business; . . . to prevent further exploitation of the public; . . . to place adequate and true information before the investor; to protect honest enterprise; . . . [and] to restore the confidence of the investor . . .
S. Rep. No. 47, 73rd Cong., 1st Sess., at 1 (1933). In particular, Section 10-b of the Exchange Act and its Rule 10b-5, 17 C.F.R. § 240.10b-5, deterred fraudulent conduct by insuring that companies were punished when they misrepresented or exaggerated information to affect the price of their stock.
The Securities Exchange Commission (“SEC”) does not collect investment losses for defrauded investors; therefore, private causes of action under the Securities Act and the Exchange Act have played an important role in supplementing the enforcement powers of the SEC. Private enforcement of the federal securities laws provides a necessary supplement to SEC action by affording relief to those injured by violations of the securities laws and by serving as a deterrent to future wrongdoing. In re M.D.C. Holdings Sec. Litig., No. CV 89-0090 E (M), 1990 WL 454747, at *5 (S.D. Cal. 1990) (citing J.I. Case Co. v. Borak, 377 U.S. 426, 432 (1964)).
The longstanding protection afforded by the Securities Act and the Exchange Act has convinced Americans of the safety and soundness of American capital markets, as evidenced by the enormous amount of private capital infused into the American capital markets each year. Indeed, more capital was raised in initial public offerings by emerging high-tech firms in 1995 than ever before — $8.4 billion. High Stakes Winners Meet the Get-Incredibly-Rich-Quick Crowd, Time, February 19, 1996, at 42. Nonetheless, in December, 1995, over the veto of President Clinton, Congress passed the most sweeping revision of the federal securities laws since the New Deal, the Private Securities Litigation Reform Act of 1995, 15 U.S.C.A. § 77z, 78u-4 (West Supp. 1996) (the “PSLRA”). William S. Lerach, et al., Changes in Private Litigation: Securities Class Action Litigation Under the Private Securities Litigation Reform Act of 1995, (the “ALI-ABA Presentation”) SC09 ALI-ABA 439, 443 (1997). Congress acknowledged that Private securities litigation is an indispensable tool with which defrauded investors can recover their losses without having to rely upon government action. Such private lawsuits promote public and global confidence in our capital markets and help to deter wrongdoing and to guarantee that corporate officers, auditors, directors, lawyers and others properly perform their jobs.
Statement of Managers, The “Private Securities Litigation Reform Act of 1995,” (the “Statement of Managers”), p. 1. The stated purpose of the PSLRA was to “return the securities litigation system to that high standard.” Id.
The passage of the PSLRA was fraught with controversy, representing one of the most contentious lobbying efforts in history. Proponents of the PSLRA, consisting primarily of venture capitalists, corporate interests, and accounting firms, argued that these drastic departures from traditional securities law were necessary to impede “meritless” private lawsuits and to encourage officials of public companies to publish statements about their companies’ prospects without fear of shareholder lawsuits. Opponents of the PSLRA, including numerous consumer protection groups, argued that those who lobbied for the legislation were motivated solely by their desire to protect themselves from meritorious lawsuits. For example, in comments submitted to the Securities Exchange Commission on May 1, 1996, the American Association of Retired Persons, the Consumer Federation of America and the National Council of Individual Investors observed that “[w]hile the Act was touted as a way to eliminate frivolous lawsuits, its practical repercussion is that many investors with meritorious claims will be denied access to the courts.” Letter from Martin Corry, Director, Federal Affairs, American Association of Retired Persons, et al., to Jonathan G. Katz, Secretary, Securities and Exchange Commission (May 1, 1996). In his veto message, President Clinton observed that the bill would “have the effect of closing the courthouse door on investors who have legitimate claims.” 141 Cong. Rec. H15214 (daily ed. December 20, 1995). Despite these concerns, Congress overrode President Clinton’s veto of the PSLRA on December 22, 1995, the Senate voting to do so with only one member present. 141 Cong. Rec. S19180 (daily ed. December 22, 1995).
The PSLRA includes several provisions that represent significant departures from traditional securities law, including a heightened pleading requirement, a statutory “safe harbor” for certain “forward-looking” statements, a proportionate liability provision, and mandatory sanctions under Rule 11 under certain circumstances. Each of these provisions makes it more difficult for lost investments to be recovered by investors. In addition, the PSLRA also contains substantial procedural provisions, such as the “lead plaintiff” provisions and the automatic discovery stay provisions. This paper which Martin Chitwood delivered at a CLE program several years ago discusses the key provisions of the PSLRA, focusing on the legislative history of the PSLRA and judicial interpretation of the PSLRA.