Did the Private Securities Litigation Reform Act Work?

In 1995 Congress passed the Private Securities Litigation Reform Act (the PSLRA or the Act) to address abuses in securities fraud class ac-tions. In the wake of Enron, WorldCom, Adelphia, and other high pro-file securities frauds, critics suggest that the law made it too easy to es-cape liability for securities fraud and thus created a climate in which frauds are more likely to occur. Others claim that the Act has largely failed because it did little to deter plaintiffs’ lawyers from filing nonmeri-torious cases. This article employs a database of the 1449 class actions filed from 1996 through 2001 to explore whether the Act achieved several of its primary goals—discouraging the filing of nonmeritorious suits, re-ducing litigation risk for high technology issuers, and reducing the “race to the courthouse” whereby class actions were filed soon after significant stock price declines, apparently with very little prefiling investigation.The picture that emerges from studying these data is that the PSLRA did not work as intended. This article demonstrates that as many, if not more, class actions are filed after the Act as before. High technology is-suers remain at significantly greater risk than issuers in other industries. There is statistically significant evidence, however, that suggests that the Act improved overall case quality at least in the circuit that most strictly interprets one of the Act’s key provisions, a heightened pleading stand-ard. The data also demonstrate that Congress did not achieve its goal of increasing the filing delay in class actions. Actions are filed as quickly now as they were before the Act’s passage. Nonetheless, that too may provide indirect evidence that plaintiffs’ attorneys are selecting more ap-parent cases of fraud that require less prefiling investigation.

The full text of this Article is available to download as a PDF.