The Private Securities Litigation Reform Act became law on December 22, 1995 when the Senate overrode President
Clinton’s December 19, 1995 veto of the measure (Pub. Law 104-67, 109 Stat. 737). The House of representatives
overrode the President’s veto on December 20, 1995 by a vote of 319 to 100. The vote in the Senate was 68 to 30.
The Act was passed to combat perceived abuses in the securities litigation process.
The legislation alters control of investor cases brought as class actions, encourages voluntary disclosures, provides
sanctions in certain circumstances if claims are unsupported, limits liability proportionate to responsibility, and contains
audit requirements designed to provide added protections against fraud. The reform movement grew out of a
congressional belief that frivolous strike suits alleging securities law violations were increasing the cost of raising
capital and chilling corporate disclosures to investors. The Private Securities Litigation Reform Act reflects a
congressional desire to reassert legislative control over securities fraud litigation. Congress has sought to restore
the securities litigation system’s ability to promote “public and global” confidence in the nation’s capital markets, deter
wrongdoing, and guarantee that corporate directors, officers, auditors, lawyers and others properly perform their jobs.
Class Action Procedures
The Act implements procedural protections designed to discourage frivolous securities litigation. It establishes the
concept of the "most adequate plaintiff" as lead plaintiff in a securities class action, creating the rebuttable presumption
that the plaintiff with the largest financial interest in the relief being sought by the class is the most adequate The
“most adequate plaintiff” will, with court approval, select and retain counsel to represent the class. A plaintiff seeking
to serve as a class representative must certify that he or she has reviewed the complaint and authorized its filing.
The legislation additionally calls for better disclosure of settlement terms to class members.
To encourage corporate executives to offer investors more meaningful information, the Reform Act creates a safe
harbor for forward-looking statements, such as earnings projections. With a nod to the judicially crafted “bespeaks
caution" doctrine, Congress has acted to protect forward-looking statements from liability as long as they are
accompanied by "meaningful cautionary statements" identifying important factors that could cause actual results
to differ materially from those in the projection. The safe harbor embraces both oral and written projections.
Other provisions of the Act are designed to give victims of abusive securities lawsuits the opportunity to recover
their attorneys’ fees at the conclusion of an action. This fee shafting is accomplished through the vehicle of Rule
11 of the Federal Rules of Civil Procedure, which governs all pleadings, written motions, and other papers filed
with the court. The Act creates a rebuttable presumption that the appropriate sanction for the substantial failure
of a complaint to comply with Rule 11 is an award to the opposing party of the reasonable attorney’s fees and
other expenses incurred in the action. The Act gives courts discretion to require security for payment of costs
in class actions.
A "fair share" system of proportionate liability in private securities litigation has been adopted to largely replace
joint and several liability. Congressional conferees believed existing practices under the joint and several liability
system created coercive pressure for innocent parties to settle meritless claims rather than risk exposing
themselves to liability for a disproportionate share of the damages in a given case.
Under another provision of the Act providing for auditor disclosure of corporate fraud, accountants are affirmatively
required to search for, attempt to detect fraud, and report it to management. If management does not correct it,
the matter would have to be passed on to government regulators.
Aiding and Abetting
It is also important to note what the Reform Act did not do. While giving the SEC the explicit authority to bring
actions against those who aid and abet violations of the securities laws, the Act does not extend an express
right of action to private investors for aiding and abetting. This inaction with regard to private investors leaves
intact the U.S. Supreme Court ruling that there is no implied private right of action for aiding and abetting under
the antifraud provisions contained in Exchange Act Rule 10b-5. Central Bank of Denver v. First Interstate Bank
(US Sup. Ct. 1994), 1993-1994 CCH Dec. 98,178.
Statute of Limitations
Further, although urged to do so by regulators and commentators, Congress declined to extend the
one-year/three-year statute of limitations for securities fraud adopted by the U.S. Supreme Court in Lampf,
Pleva, Lipkind, Prupis & Petigrow v. Gilbertson (US Sup.- Ct. 1991), 1991 CCH Dec. 96,034. For over forty years,
federal courts had held that the statute of limitations for private rights of action under Rule10b-5 was the statute
of limitations determined by applicable state law. In the 1991 Lampf case, the Court announced a uniform federal
limitations period for Rule l0b-5 under which an action must be commenced within one year after discovery of the
facts constituting the violation and within three years after the violation. The Act leaves this uniform limitations
According to Congressman Bliley, the legislation does not change standards of liability under the securities laws.
Unlike the bill passed by the House, the Act does not codify recklessness as a standard of liability under the
securities laws, said Mr. Bliley, that question is left to the courts. (Cong. Record, Dec. 6, 1995, p. 14040).
The Act also contains the following provisions:
· Discovery rules are changed to minimize costs incurred during the pendency of a motion to dismiss or a
motion for summary judgment;
· An undertaking for attorney fees and costs may be required of attorneys or parties in class actions;
· The standard for pleading securities fraud is codified;
· In an action for money damages, a written interrogatory may be submitted to the jury on the issue of
state of mind at the time of the violation;
· Damages are limited to losses caused by fraud and not by other market conditions;
· Securities fraud is removed as a predicate offense in a civil action under RICO;
· Purchasers of securities suing under Securities Act civil liability provisions must prove that the alleged
misstatements or omissions actually caused their loss; and
· The SEC must study and report on protections for senior citizens and qualified retirement plans.
The main provisions of the Act apply to any private action commenced after December 22, 1995.
The provisions pertaining to auditor disclosure of corporate fraud apply to annual reports for periods starting
in 1996 for registrants that file quarterly reports and to annual reports for periods starting in 1997 for all
This is a broad overview of the PSLRA. It is not intended to be a definitive statement of all of the provisions
of the legislation. As such, it should not be construed as “legal advice.”