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Private Securities Litigation Reform Act

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Private Securities Litigation Reform Act

The Private Securities Litigation Reform Act of 1995 (PSLRA) was designed to prevent the "routine filing of lawsuits against issuers of securities and others whenever there is a significant change in an issuer's stock price, without regard to any underlying culpability of the issuer, and with only faint hope that the discovery process might lead eventually to some plausible cause of action…." H.R. Conf. Rep. No. 104-369 (1995), reprinted in 1995 U.S.C.C.A.N. 679, 730. The PSLRA established new rules for securities class actions and brought about several important changes affecting cases brought under the securities laws. This article provides a general overview of a few of the key provisions of the PSLRA. An experienced securities attorney at Kaufmann Gildin & Robbins LLP in New York, NY can provide you with more guidance regarding the PSLRA.

Heightened Pleading Standards

Not only must a complaint alleging securities fraud meet the requirements for pleading fraud with particularity under Federal Rule of Civil Procedure 9(b), it must also meet the requirements of the PSLRA. The PSLRA requires that any securities fraud claim "[s]pecify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed" 15 U.S.C. § 78u-4(b)(1). If a plaintiff fails to comply with these requirements, the complaint will be dismissed.

The PSLRA requires that a plaintiff allege that the defendant acted with the required state of mind (known as "scienter"), either knowingly or recklessly. The plaintiff must "with respect to each act or omission alleged to violate this chapter, state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2). In Tellabs, Inc. v. Makor Issues & Rights, Ltd., 2007 WL 1773208 (U.S. 2007), the Supreme Court held that the plaintiff would have to show a "cogent inference" of an intent to deceive or defraud.

Another heightened pleading requirement in the PSLRA is that the plaintiff "shall have the burden of proving that the act or omission of the defendant alleged to have violated this chapter caused the loss for which the plaintiff seeks to recover damages." 15 U.S.C. § 78u-4(b)(4). The plaintiff must sufficiently allege and prove that the defendant's misrepresentations caused the economic loss he or she suffered. See Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005).

Lead Plaintiff and Lead Counsel Selection in Class Actions

The PSLRA requires that a "lead plaintiff" be appointed to be in charge of the securities class action. 15 U.S.C. § 77z-1(a). Putative class members must receive "early notice" of the class action in order to find someone who is willing to be the lead plaintiff. 15 U.S.C. § 77z-1(a)(3)(A). This notice must provide substantive information about the claims and time period and the qualifications of the plaintiff who filed suit. The district court is tasked with appointing the lead plaintiff who will best represent the class members' interests.

Mandatory Stay of Discovery and Document Preservation

The purposes of the discovery stay provision are to protect defendants from the high cost and burden of discovery in a case that might be dismissed, and to prevent plaintiffs from filing a case without doing sufficient research and then relying on discovery to gather factual information to avoid dismissal. H.R. Conf. Rep. No. 104-369 (1995), reprinted in 1995 U.S.C.C.A.N. 731-2. When there is an ongoing government investigation of the defendant, some judges have lifted the discovery stay and ordered defendants to produce to the plaintiffs all documents they produced to the government pursuant to a subpoena. In addition to the discovery stay, the PSLRA also requires all parties to preserve all documents and other evidence. 15 U.S.C. § 78u-(4)(b)(3)(C).

Safe Harbor Provision

The PSLRA's safe harbor provision allows issuers to make oral and written forward-looking statements so long as they include "cautionary statements." This provision provides protection for forward-looking statements if they contain cautionary statements that identify factors that could cause actual results to substantially differ from the results described in the forward-looking statement or are immaterial forward-looking statements. 15 U.S.C. § 78u-5(c)(1)(A)(i)-(ii). Forward-looking statements include projections of revenue, statements of plans and objectives of management, including plans and objectives relating to the issuer's products and services and statements about future economic performance. 15 U.S.C. § 78u-5(i)(1).

Mandatory Rule 11 Analysis

Rule 11(b) of the Federal Rules of Civil Procedure provides that by signing a pleading and submitting it to the court the attorney is certifying that it is not being presented for an improper purpose, the legal claims or defenses are warranted, the factual allegations have evidentiary support and the denials of factual allegations are based on the evidence or lack of information. Rule 11(c) provides for sanctions if Rule 11(b) is violated. The PSLRA requires the court, after a final adjudication of the action, to make specific findings in the record about the parties' compliance with Rule 11. 15 U.S.C. § 78u-4(c)(1).


The PSLRA has a "bounce back" period for damages, which calculates damages by taking the value of the security on the date the plaintiff bought or sold it and the mean market value of the security during the 90-day period after any information correcting an allegedly false statement or omission was disclosed. This marks a change from the "out-of-pocket" losses that class members were typically given as damages in class actions under Section 10(b) of the Securities Exchange Act. The PSLRA also prohibits joint and several liability, which was generally recognized previously, in private securities lawsuits, except if the defendant knowingly violated the securities laws. 15 U.S.C. § 78u-4(f) et seq.


As discussed above, the PSLRA has several provisions that affect private securities litigation. Because of the complexity of these provisions, it is important to discuss your case with a lawyer at Kaufmann Gildin & Robbins LLP in New York, NY who has experience with securities litigation.

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