Private Securities Litigation Reform Act of 1995

The Private Securities Litigation Reform Act of 1995, Pub. L. 104-67, 109 Stat. 737 (codified as amended in scattered sections of 15 U.S.C.) ("PSLRA") implemented several substantive changes in the United States, affecting certain cases brought under the federal securities laws, including changes related to pleading, discovery, liability, class representation, and awards fees and expenses.

The PSLRA was designed to limit frivolous securities lawsuits. Prior to the PSLRA, plaintiffs could proceed with minimal evidence of fraud and then use pretrial discovery to seek further proof. This set a very low barrier to initiate litigation, which encouraged the filing of weak or entirely frivolous suits. Defending against these suits could prove extremely costly, even when the charges were unfounded, so defendants often found it cheaper to settle than fight and win. Under the PSLRA, however, plaintiffs are required to meet a heightened pleading standard before they can initiate a suit. In other words, PSLRA was specifically intended to make it more difficult to initiate securities litigation (frivolous or otherwise) because plaintiffs were supposedly going to be forced to present evidence of fraud before any pretrial discovery has taken place.

Also, PSLRA was enacted to "give teeth to Rule 11". In fact, Congress specifically pointed to the reluctance of judges to impose Rule 11 sanctions as a primary reason for the passage of the legislation. Unfortunately judges still use the old rules regarding Rule 11 and are therefore still "reluctant to impose sanctions". This can be clearly seen in the recent decision by Judge Katherine Failla in the case of Zagami v. Cellceutix Corporation et al. Judge Failla asserts in her opinion that, "The operative question is whether the argument is frivolous, i.e., the legal position has ‘no chance of success,’..." Then, despite the fact that she found every one of the plaintiffs numerous claims to be either fallacious or insufficient to support a cause of action under the law; she nevertheless determined that none of those claims violated the "objective unreasonableness" standard traditionally used in determining whether a Rule 11 violation has occurred. The "objective unreasonableness" standard obviously does not take into account the heightened pleadings requirement of PSLRA.

The PSLRA does impose some new rules on securities class action lawsuits. It allows judges to decide the most adequate plaintiff in class actions. It mandates full disclosure to investors of proposed settlements, including the amount of attorneys' fees. It bars bonus payments to favored plaintiffs and permits judges to scrutinize lawyer conflicts of interest.

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