Securities are financial products that can be bought as investments in a business. They frequently take the shape of bonds, debentures, stocks, notes, and other financial instruments. In general, securities can be transferred, and they can be exchanged on a stock exchange like the New York Stock Exchange.
In contrast to other financial instruments, securities do not themselves have inherent worth; instead, they reflect ownership interests in other things.
What Effects Did the 1995 Private Securities Law Reform Act Have?
It is specifically stated in the Private Securities Law Reform Act of 1995, 15 USC 78u – 4(b)(2), what a private investor must initially prove to bring a claim for a violation of 10(b) of the Securities and Exchange Act of 1934.
Suppose someone intentionally misrepresents or omits substantial facts (as opposed to just opinions) in connection with the acquisition or sale of securities and does so to defraud. In that case, the investor has a private cause of action for a civil remedy against that person.
The Private Securities Litigation Reform Act was created to stop frivolous, fraudulent, or unjustified lawsuits from being brought, as these can be expensive and slow down the functioning of the judicial system.
Additionally, it decreased the danger of litigation for several businesses that frequently faced cases of this nature.
However, plaintiffs must adhere to a stricter pleading requirement under the PSLRA to file a lawsuit. To put it another way, PSLRA was intentionally designed to make it more difficult to bring a securities lawsuit (frivolous or not), as plaintiffs would allegedly be required to provide proof of fraud before any pretrial discovery.
PSLRA was also passed to “give Section 11 teeth.” Congress cited this issue as one of the main justifications for the legislation’s enactment and judges’ resistance to applying Section 11 sanctions.
There are some new restrictions on securities class action lawsuits under the PSLRA. It enables judges to select the best plaintiff in class actions by giving institutional investors with significant financial stakes the upper hand.
Investors must get complete information on any proposed settlements, including the cost of attorneys’ fees. Judges can examine attorney conflicts of interest, and bonus payments to favored plaintiffs are prohibited.
Initially, the PSLRA was created as a component of Newt Gingrich’s Contract With America. Representatives Thomas Bliley, Jack Fields, and Christopher Cox served as the bill’s primary authors in the House. Senators Pete Domenici and Chris Dodd sponsored the legislation in the Senate.
The Private Securities Litigation Reform Act: An Overview
To obtain compensation for losses allegedly experienced as a result of a company’s or an individual’s conduct relating to the purchase, sale, or manipulation of the price of securities, a shareholder may bring a securities fraud claim in federal court.
Before the Private Securities Litigation Reform Act, it was reasonable for plaintiffs to bring a claim whenever the stock price fluctuated dramatically.
In these cases, the plaintiffs hope the discovery procedure will turn up some possible fraud. After it was passed in 1995, plaintiffs had to present specific fraudulent statements made by the defendant and claim that the statements were made intentionally or recklessly. Additionally, the plaintiffs had to demonstrate that the claimed deception caused them to lose money.
Former President Bill Clinton first vetoed the Private Securities Litigation Reform Act, but the U.S. Senate overrode him, and on December 22, 1995, the Act was signed into law. The law was designed to improve the efficiency of securities litigation and raise investor knowledge of it. It was primarily intended to prevent what was thought to be an overabundance of baseless class action lawsuits made possible by the Securities Act of 1933 and the Securities Exchange Act of 1934.
Legal experts have differed on the effects of the Private Securities Litigation Reform Act since its implementation. According to certain legal authorities, the scope of securities class lawsuits has been substantially restructured. Other legal experts claim that it hasn’t affected how these lawsuits turn out in the end, how much money is paid out in settlements, or even how many cases are filed.
Nevertheless, the Private Securities Litigation Reform Act introduced stringent rules that plaintiffs must abide by, including stricter pleading requirements, mandatory discovery stays, and precise criteria for selecting lead plaintiffs in class actions.
The U.S. Congress passed the PSLRA into law despite President Bill Clinton’s veto. The U.S. House of Representatives approved the law 319 to 100, and the U.S. Senate 68 to 30.
Only four Republicans—William Cohen, John McCain, Richard Shelby, and Arlen Specter—voted against the bill in the Senate, while every Republican in the House supported it. Numerous conservative-to-moderate Democrats, including Senators John Breaux, Robert Byrd, Fritz Hollings, and Sam Nunn, as well as Representatives John Murtha and Gene Taylor, opposed the bill. Still, prominent liberal Democrats like Senators Tom Harkin, Ted Kennedy, Claiborne Pell, and Carol Moseley Braun supported it. Another one of Bill Clinton’s 37 vetoes was successfully overridden by Congress to become legislation during his administration.
What Can a Harmed Investor Get Back?
What can be recovered in a civil lawsuit against another person for security fraud is quite clear under the Private Securities Law Reform Act of 1995.
A recovery typically only has two choices:
- The difference between the purchase price or sale price of the securities paid for by the plaintiff and the average trading price of the same security during the 90 days following the defendant’s material misrepresentation or omission, or
- Cancellation of the sale in its entirety and the return of the funds transferred for the purchase of the securities.
Background: Overview of Section 10(b) and Rule 10b-5 Securities Fraud Actions
Shareholders have the right to file a private lawsuit in federal court under the Securities Exchange Act of 1934 (often known as the “Exchange Act” or the “1934 Act”) to seek compensation for losses they suffered as a result of securities fraud.
Most securities fraud lawsuits are filed per Section 10(b) of the Exchange Act or, additionally, per SEC Rule 10b-5, which the SEC issued by the power vested in it by Congress under the Exchange Act. Federal securities fraud cases shall be abbreviated as “Rule 10b-5 cases” or “Rule 10b-5 actions” for ease of reference.
According to the Supreme Court, to succeed in a Rule 10b-5 action, the plaintiff must allege and demonstrate the following elements:
- The defendant engaged in “scienter,” which is commonly understood to mean that the defendant intended to make the material misrepresentation or omission or acted recklessly in making the misrepresentation or omission;
- The material misrepresentation or omission was made “in connection with the purchase or sale of a security;”
- The plaintiff who was allegedly the victim of the fraud; and
- The defendant made the misrepresentation or omission.
Do I Need an Attorney to Handle My Private Securities Issue?
Each factor has been hotly contested in hundreds of cases over the past 70 years, and the courts have applied the six elements in a myriad of diverse factual scenarios.
You are strongly advised to speak with a bankruptcy attorney or securities lawyer if you think someone is personally accountable to you for securities fraud or if an investor is suing you for securities fraud. Your attorney can defend your rights and clarify complicated securities-related legal issues.