Prior to the PSLRA, plaintiffs could proceed with minimal evidence of fraud, and then use pretrial discovery to seek further proof.
That set a very low barrier to initiate litigation, which encouraged the filing of weak or entirely-frivolous suits.
In other words, PSLRA was specifically intended to make it more difficult to initiate securities litigation (frivolous or otherwise) because plaintiffs would supposedly be forced to present evidence of fraud before any pretrial discovery has taken place.
Congress specifically pointed to the reluctance of judges to impose Section 11 sanctions as an additional reason for the passage of the legislation.
It allows judges to decide the most adequate plaintiff in class actions by favoring institutional investors with large dollar amounts at stake.
[2] 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.
The majority of securities fraud claims are brought pursuant to Section 10(b) of the Exchange Act (codified at 15 U.S.C.
Even if the plaintiff has a relatively weak case, the expected value of going to trial will put the defendant under pressure to settle.
The defense bar generally contends that lower pleading standards allow more frivolous lawsuits and extorted settlements that primarily benefit plaintiff lawyers, not shareholders.
On the other hand, the plaintiffs' bar claims that higher pleading standards enable corporate executives to loot their companies and to defraud innocent shareholders with impunity.
The PSLRA also requires a plaintiff to allege that the defendant acted with the required state of mind and knew the challenged statement was false at the time it was made or was reckless in not recognizing that the statement was false (the legal term of art for that state of mind is scienter).
The United States Supreme Court, in an opinion written by Justice Ruth Bader Ginsburg and issued June 21, 2007, interpreted the standard.
However, after the Supreme Court's decision in Dura Pharmaceuticals v. Broudo, it is now clear that a plaintiff must allege loss causation in its complaint.
Under Dura, such cases are often dismissed because, in most instances, the analyst's dishonesty never comes to light until after the price of the stock in question has declined substantially.
By then, the "bad facts" about the company have already been absorbed by the market and so plaintiffs cannot show that the disclosure of the analyst's dishonesty caused any further decline in the stock price.
The Board of Directors or subunit is consequently obligated to notify the Securities and Exchange Commission of such notification by auditors within one day.
Prominent liberals in the Democratic Party like Senators Tom Harkin, Ted Kennedy, Claiborne Pell, and Carol Moseley Braun voted in favor of the legislation, but many conservative-to-moderate Democrats such as Senators John Breaux, Robert Byrd, Fritz Hollings, and Sam Nunn and Representatives such as John Murtha and Gene Taylor voted against it.
Its principal authors in the House were Representatives Thomas Bliley, Jack Fields and Christopher Cox.