This Article presents an empirical study of changes in shareholder wealth resulting from the Ninth Circuit Court of Appeals decision in In re Silicon Graphics Inc. Securities Litigation, which interpreted the pleading provision established in the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). Congress passed the Reform Act as part of an ongoing effort to protect corporations from abusive suits alleging "fraud by hindsight." In such suits, plaintiffs claimed that a sudden drop in a company's stock price was evidence that the issuer and its management covered up the bad news that led to the price drop. The Reform Act discourages such suits by requiring complaints alleging fraud to "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." Courts have interpreted the Reform Act's pleading standard in diverse ways. The Ninth Circuit's interpretation in Silicon Graphics is the most stringent, requiring plaintiffs to allege facts that would show the defendants were "deliberately reckless" in making the misrepresentation that gave rise to the fraud claim. This pleading standard allows courts to dismiss fraud suits at an early stage if the court deems they lack merit, but it also increases the risk courts will dismiss meritorious suits as well.
Pritchard, Adam C. "In re Silicon Graphics Inc.: Shareholder Wealth Effects Resulting from the Interpretation of the Private Securities Litigation Reform Act's Pleading Standard." M. F. Johnson and K. K. Nelson, co-authors. S. Cal. L. Rev. 73, no. 4 (2000): 773-810.