The New Securities Class Actions: Federal Obstacles, State Detours

Richard H. Walker
David M. Levine
Adam C. Pritchard, University of Michigan Law School


The year 1995 will long be remembered as the year in which Congress first tackled the thorny issue of tort reform. Rarely has such an issue so inflamed passions and captured the attention of lawyers, legislators and legal experts alike. While proponents of tort reform have complained of a broad range of claimed abusive practices in tort lawsuits, the debate in 1995 focused on a relatively narrow category of cases-class action lawsuits alleging securities law violations. The Private Securities Litigation Reform Act of 1995 (the “Reform Act” or the “Act”) represents the culmination of extensive lobbying efforts by accountants, securities firms, and the high-technology industry to curtail what they perceived to be abusive securities class action litigation. These entities felt that they had been unjustly victimized by lawsuits alleging “fraud by hindsight.” In such suits, a sudden drop in a company’s stock price was claimed to be evidence that the issuer and its agents had been covering up the bad news that led to the price drop. A central theme of the legislative history is that plaintiffs’ lawyers, rather than faithfully representing investors, were acting for their own benefit. Critics of securities class actions alleged that plaintiffs’ lawyers were filing suits against “deep pocket” defendants-whether or not there was actual fraud-solely for their settlement value. Moreover, the critics charged, plaintiffs’ lawyers were taking an exorbitant share of these settlements for themselves, leaving defrauded investors with only a fraction of the damages that the investors had suffered. Proponents of securities class actions countered that plaintiffs’ lawyers serve an essential role in deterring fraud. Putting obstacles in the enforcement of the securities laws by plaintiffs’ attorneys would cause investors to lose confidence in the markets. We do not take sides in the debate and express no views on the accuracy of these competing characterizations of the role of plaintiffs’ lawyers. A brief review of the legislative history makes clear, however, that Congress did take sides, crediting the arguments of critics who asserted that plaintiffs’ lawyers were the central problem with private securities litigation. Thus, the enactment of the Reform Act can be seen as an attempt by Congress to erect obstacles in the path of the plaintiffs’ bar.