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February 17, 2006


And in the "Why-do-these-homosexuals-keep-sucking-my-cock" department, the ever-frustrating Wall Street Journal recently featured this op-ed (paid sub req'd):

Private Insecurities

by Kenneth M. Lehn

We just marked the 10th anniversary of the Private Securities Litigation Reform Act (PSLRA), which attempted to curb abuses in securities class-action litigation by eliminating so-called "professional plaintiffs" and instituting more-stringent pleading standards. While the PSLRA has discouraged some meritless lawsuits, the evidence suggests that our private securities-litigation system still needs additional reform.

Take a look at the numbers. Since the passage of the PSLRA, the size of securities class-action settlements and the number of companies involved in this litigation have grown substantially. Data compiled by Laura Simmons and Ellen Ryan of Cornerstone Research show that the total inflation-adjusted value of securities class-action settlements increased to $9.6 billion in 2005 from $150 million in 1997. Over the same period, the average inflation-adjusted size of settlements increased over sevenfold, to $78 million from $10.7 million. These increases are largely driven by the proliferation of "mega-settlements" in excess of $100 million, such as last year's WorldCom settlement of more than $6 billion.

Data compiled by the Stanford Law School and Cornerstone Research also show that the percentage of listed companies that were defendants in federal securities class-actions has increased rather steadily from 0.8% in 1996 to 1.5% in 1997, and to over 2% in each year between 1998 and 2005. A disproportionate amount of post-PSLRA class-action suits have been targeted at companies that are large or and have volatile stock prices. Some 60% of the companies in the Dow Jones Industrial Index have been sued in securities class-actions since 1999, including Proctor & Gamble, Johnson & Johnson, Pfizer and Intel, which have remarkable records at creating shareholder value. None of them were defendants in the period from 1995 to 1999.

Almost one-third of the companies in the Nasdaq Biotech Index and more than one-half of the firms in the Nasdaq Internet Index have been targets of federal class-action securities lawsuits since the enactment of the PSLRA. Insofar that some, if not most, of these suits are driven more by the volatility of these companies' stock prices than they are by fraud, these suits have a disruptive effect on important high-growth industries.

And Lyle Roberts of the 10b-5 Daily chimes in with his own commentary on the op-ed

What is missing, one might suggest, is a proposed reform addressing the economic incentives driving plaintiffs' attorneys to bring securities class actions.

Absolutely! The PSLRA, which made it much, much harder to bring a securities fraud class action, is clearly ineffective because those damn plaintiffs' attorneys keep filing lawsuits! I can't think of anything else that might have contributed to size of settlements, the number of filings against tech companies with volatile stock prices, or the number of filings against biotech companies! Unless, of course, it's the fact that the entire market for new IPOs was rigged during the 1990s. Or, you know, unless it's because the number of biotech companies misreporting their scientific results got so bad that the SEC started coordinating with the FDA to come up with new disclosure rules. Or, unless it's because this country saw seven of the ten largest bankruptcies from 2001 to 2003, and the names on that list include Enron, Worldcom, Global Crossing, and Adelphia.

The PSLRA raised the bar for bringing securities fraud actions so high that the courts dismissed a case against Bernard Ebbers of Worldcom, but by gum, yes, the problem is too many lawsuits. Never mind that fraud behind the curtain, because, if no one sued, well, no one would ever know.

(cross posted to Fantasy Life)


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The whole tort reform movement truly disgusts me. It's an excruciatingly blatant money-grab and seeks to eliminate the only remedy we have against corporate malfeasance. Law enforcement is a joke; it's a major event when corprate chieftains face actual jail time for their crimes. We're enshrining corporations as citizens, and stripping any semblance of citizenship from actual human beings.

We're not talking about medical malpractice or toxic torts here--A LOT of secuirities suits are strikes suits against companies in order to force a settlement, thereby hurting the current shareholders of the company. This really is one area where the conservatives are correct.

Justin -- leaving aside the question whether there really are "a lot" of strike suits (especially today, with the PSLRA in place), the question is really more this: Can we measure the merit, or not, of securities fraud lawsuits based upon the number of filings, especially since 1998, when (we know) fraud was absolutely rampant?

There is also the question whether the PSLRA is really blocking strike suits, or blocking meritorious ones. And there's certainly plenty of reason to think good suits are being kept out of court. For instance, though the number of financial restatements has climbed year over year, and the number of cases alleging financial fraud has grown, the number of cases brought against accountants has dropped drastically -- because the PSLRA made it very hard to bring such suits.

Finally, I would submit that it is no coincidence that the PSLRA was passed at the end of 1995 -- and within a few years, Wall Street fraud was the worst this country has seen since the Great Depression.

iocaste--I would tend to agree that measuring the number of filings in itself tells us nothing about whether the suits are meritorious or not.

I clicked through your posts on the subject and found them interesting, although I tend to disagree. My short response is that an essential element of fraud is knowledge, and it the compaint does not allege even that, there can be no fraud. A complaint in any fraud case needs to allege fraud with specifity, right? The problem is that the securities law definition of fraud was being expanded to actions which weren't really fraud.

I'm not quite sure I followed your connections between Enron et al and the PSLRA, or specifically, how the fraud in Enron, for example, relates to the PSLRA. Are you saying that the PSLRA encouraged accounting firms to hide fraud because of the reduced threat of civil liability?

I enjoyed your site and will read more when I have time.

Justin - glad you liked the site :-).

Yes, you do need to show knowledge. The problem is that the PSLRA raised the bar for how much detail you need to put in a complaint, and barred all discovery until after a motion to dismiss. What that comes down to is that you need to show knowledge, and you need to do it with specificity, and you have only the public record on which to do it. Which usually means you have to show that the fraud was just so obvious and big that no one could have missed it. Except that most courts reject that kind of reasoning out of hand -- which is what happened in the Worldcom case, for example. And that means that a lot of fraud goes by.

Plus, courts are particularly skeptical that auditors participate in fraud, and the bar is higher. And there's even less public information about auditors, so it's often quite impossible to plead a case against them unless you get a whistleblower.

As for PSLRA and Enron, yes, that's what I mean. After 1995, there was a feeling in corporate America that the era of securities fraud lawsuits was over. And Coffee's article - I link to it in one of my posts - explains how gatekeepers (lawyers, accountants) in particular were insulated. And that contributed to the frauds. I wouldn't ever say that it was the sole cause, but it was a factor.

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