Pleading Around the Private Securities Litigation Reform Act: Reevaluating the Pleading Requirements for Market Manipulation Claims – Note by Damian Moos

From Volume 78, Number 3 (March 2005)

In 1995, Congress enacted the Private Securities Litigation Reform Act of 1995 (“PSLRA”) to address the serious flaws in the private securities litigation system. Courts, Congress, and many commentators agreed that the chief evil plaguing the system was strike suits, suits “based on no valid claim, brought either for nuisance value or as leverage to obtain a favorable or inflated settlement.” Strike suits prevailed in private securities claims because, irrespective of the merits of the claim, it was usually less costly for defendants to settle than fight the allegations. Plaintiffs’ attorneys realized that defendants would settle and took advantage of the situation, sometimes filing claims based on bad news rather than evidence of wrongdoing. Congress stepped in to put an end to these abusive strike suits by enacting the PSLRA, which, among other things, raised the pleading standards for private securities claims, stopped plaintiffs from abusing the discovery process to force settlements, and made the threat of sanctions under Federal Rule of Civil Procedure 11 (“Rule 11”) more imposing.

In an attempt to avoid the PSLRA, plaintiffs began filing their securities claims in state courts. The shift to state courts undermined the PSLRA’s goal of deterring strike suits, because the safeguards of the PSLRA only applied to federal claims. In response, Congress passed the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”) to stop the movement to state courts. The SLUSA preempted state law causes of action for securities fraud and market manipulation and made securities class actions brought in state courts removable to federal courts. Thus, Congress slammed shut the state court back door.



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