Abstract
Amid much hue and cry, in 1995, Congress passed the Private Securities Litigation Reform Act ("PSLRA," "Reform Act," or "the Act"). The battle over reform had been waged for years. Proponents of the Act promised to put an end to vexatious strike suits and thus reduce the cost of capital formation; critics countered that the proposed law would eliminate all but the most egregious securities fraud suits, thereby shielding corporate wrongdoers and depriving deserving plaintiffs of their day in court. The bill had its checkered history in legislative committee, and, ultimately, the PSLRA was enacted over President Clinton's veto on December 22, 1995.
What was it about this particular law that was so polemical? In great part, the dispute centered around the Act's new, heightened pleading standards that empower judges to dispose of spurious securities fraud claims at a very early stage of the litigation. No longer would professional class action plaintiffs be able to extort large settlements out of securities issuers simply by commencing a costly lawsuit based on a hunch that disappointing corporate performance must have been caused by fraud. On the other hand, of course, the concern was that these new statutory standards had set a barrier so high that few plaintiffs would ever be able to vindicate even meritorious claims. According to some, the procedural changes adopted by the Act threatened to "throw the baby out with the bathwater."
The eventual promulgation of the PSLRA did not put an end to the ongoing struggle between opposing points of view - it simply set the stage for the controversy to continue in the courts. In the several years since the passage of the Act, the word "erratic" perhaps best describes the case law. Early district court opinions seemed to follow the lead of the divisive legislative debate, with discordant results and disparate rationales. Finally, the suits to which the Act applies have begun to wind their way into the Courts of Appeal, and authoritative judicial interpretation of the pleading requirements is beginning to take shape. From a wide variety of initial outcomes and applications, we have now reached what might be called a "middle ground."