The private securities litigation Reform act of 1995: Rebalancing litigation risks and rewards for class action plaintiffs, defendants and lawyers

Business Lawyer

Volumn 51, Issue 4, 1996, Pages 1009-1066

  Phillips, Richard M ^a   Miller, Gilbert C ^a  

^a Kirkpatrick and Lockhart Nicholson Graham LLP   (United States)

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EID: 21444442914     PISSN: 00076899     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Conference Paper

References (488)

1. Pub. L. No. 104-67, 109 Stat. 737 (to be codified as amended in scattered sections of 15 U. S. C.).
2. Id. at 765;
3. See 141 CONG. REC. H 15, 214 (daily ed. Dec. 20, 1995) (presidential veto).
4. 15 U. S. C. §§ 77a-bbbb (1994 & West Supp. 1996).
5. Id. §§ 78a-eee.
6. S. Rep. No. 98, 104th Cong., 1st Sess. 5-9 (1995)
7. Reprinted in 1996 U. S. C. C. A. N. 679, 683-88 [hereinafter Senate Report].
8. Section 10 (b) of the Exchange Act makes it unlawful for any person, in connection with the purchase or sale of a security, to use "any manipulative or deceptive device or contrivance in contravention of rules" of the Securities and Exchange Commission. 15 U. S. C. § 78 j (b) (1994).
9. Rule 10b-5, 17 C. F. R. § 240. 10b-5 (1995), proscribes untrue statements of material fact and material omissions, as well as other fraudulent practices, in connection with purchases and sales of securities.
10. Section 11 of the Securities Act, 15 U. S. C. § 77k (1994), provides a private remedy for persons who acquire a security if any part of the registration statement for the security contains a material misstatement or omission. Section 12 (2) of the Securities Act
11. Id. § 777 (2), provides a private remedy for persons who purchase a security pursuant to a prospectus or oral communication that is materially false or misleading.
12. Id. § 78aa.
13. One plaintiffs' class action lawyer rather famously observed: "I have the greatest practice... in the world.... I have no clients."
14. William P. Barret, I Have No Clients, FORBES, Oct. 11, 1993, at 52.
15. H. R. Co. N'F. Rep. No. 369, 1 04th Cong., 1st Sess. 32 (1995)
16. Reprinted in 1996 U. S. C. C. A. N. 679, 731 [hereinafter Conference Report].
17. Harry Lewis, a retired lawyer, is reputed to have been lead plaintiff" in 300 to 400 suits.
18. Andrew Leigh, Being a Plaintiff Sometimes Amounts to a Profession, INVESTOR'S Bus. DAILY, Nov. 1, 1991, at 8.
19. Evidence adduced at the Senate hearings indicated that more than one in five actions was filed within 48 hours of negative news. Securities Litigation Reform Proposals: Hearings on S.240, S. 667, and H. R. 1058 Before the Subcomm. on Securities of the Senate Comm. on Banking, Housing, and Urban Affairs, 104th Cong., 1st Sess. 118 (1995) [hereinafter Senate Hearings] (statement of Senator Peter Domenici). Melvyn Weiss, a noted securities litigator who frequently represents plaintiffs in securities class actions, provided information that, over a period of three years, out of 229 Rule 10b-5 actions filed by his firm, 157 were filed within 10 days of a major adverse disclosure to the market by the defendant corporation.
20. Set Private Litigation Under the Federal Securities Laws: Hearings Before the Subcomm. on Securities of the Senate Comm. on Banking, Housing, and Urban Affairs, 103d Cong., lst Sess. 7-8 and Exhibit 1 (1993) (letter from Melvyn I. Weiss to Senator Donald W. Riegle).
21. In re Philip Morris Sec. Litig., 872 F. Supp. 97 (S. D. N. Y. 1995)
22. aff'd in part and rev'd in part, 75 F.3d 801 (2d Cir. 1996).
23. Id. at 98.
24. FED. R. Civ. P. 11. Other examples of precipitous class action filings are legion.
25. See Hershfang v. Citicorp, 767 F. Supp. 1251, 1259 (S. D. N. Y. 1991) ("Read as a whole, the complaint creates the strong impression that when Citicorp announced a cut in dividends, the plaintiffs counsel simply stepped to the nearest computer console, conducted a global Nexis search, pressed the 'Print' button, and filed the product as their complaint.");
26. Ferber v. Travelers Corp., 785 F. Supp. 1101, 1106 (D. Conn. 1991) ("[T]he court finds it peculiar that four of the lawsuits consolidated in this action were filed around 10:00 a.m. on the first business day following Travelers' announcement of the loss reserve increase.
27. Most of the complaints are virtually identical (including typographical errors).").
28. Because these speculative suits generally appeared to lack merit when filed, they were often characterized in the congressional hearings as "frivolous."
29. See SENATE REPORT, supra note 5, at 6-7, 14.
30. Brent Bowers & Udayan Gupta, Shareholder Suits Beset More Small Companies, Wall St. J., Mar. 9, 1994, at B1.
31. Senate Hearings, supra note 13, at 109 (testimony of George Sollman on Behalf of the American Electronics Association).
32. Mark Hoffman, Rule of Law: Why Class Action Attorneys Stalk High-Tech Companies, WALL ST. J., Jan. 18, 1995, at A15. A partial list of some of the high-tech class action defendants includes Intel, Apple, Sun Microsystems, Compaq, Hewlett-Packard, Exabyte, Silicon Graphics, and Adaptec.
33. Senate REPORT, supra note 5, at 8-10 (citations omitted).
34. Id. at 15-16 (citations omitted).
35. Id. at 21 (citations omitted).
36. See generally id. at 21-22 (citations omitted).
37. Id. at 9 (citations omitted).
38. Id. at 15;
39. See also Fed R. Civ. P. 9 (b).
40. Fed. R. Civ. P. 9 (b).
41. See Decker v. GlenFed, Inc. (In re GlenFed, Inc. Sec. Litig.), 42 F.3d 1541, 1547 (9th Cir. 1994) (en banc).
42. Fed. R. Civ. P. 12 (b) (6).
43. Fed. R. Civ. P. 11.
44. Senate Report, supra note 5, at 20.
45. 17 C. F. R. § 229. 512 (h) (3) (1995);
46. See also Joseph P. Monteleone & Nicholas Conca, Directors and Officers Indemnification and Liability Insurance: An Overview of Legal and Practical Issues, 51 Bus. Law. 573 (1996).
47. Conference Report, supra note 11, at 33.
48. 15 U. S. C. A. §§ 77z-l (3) (B), 78u-4 (3) (B) (West Supp. 1996).
49. Id. § 78u-4 (b) (2).
50. Id. §§ 77z-l (b), 78u-4 (b) (3).
51. Id. §§ 77z-l (c), 78u-4 (c).
52. Id.
53. Id. § 78u-4 (a) (8).
54. Id. §§ 77z-l (a) (4), 78u-4 (a) (4).
55. Id. §§ 77z-l (a) (3) (B) (vi), 78u-4 (a) (3) (B) (vi).
56. Id. §§ 77z-1 (a) (6), 78u-4 (a) (6).
57. 17 C. F. R. § 230. 175 (1995);
58. See also SENATE REPORT, supra note 5, at 16.
59. Kaufman v. Trump's Castle Funding (In re Donald J. Trump Casino Sec. Litig.), 7 F.3d 357, 371 (3d Cir. 1993)
60. Cert, denied, 114 S. Ct. 1219 (1994);
61. See also Senate Report, supra note 5, at 16-17.
62. 15 U. S. C. A. §§ 77z-2 (c) (l), 78u-5 (c) (l) (West Supp. 1996).
63. Id. §§ 77z-2 (c) (2), 78u-5 (c) (2).
64. Id. § 78u-4 (g) (3).
65. Id.
66. Id. § 78u-4 (e) (l).
67. 18 U. S. C. § 1964 (c) (1994 & West Supp. 1996).
68. Id.
69. See also Senate Report, supra note 5, at 19.
70. For a discussion on the legislative process surrounding the adoption of the Reform Act
71. See John W. Avery, Securities litigation Reform: The Long and Winding Road to the Private Secruities Litigation Reform Act of 1995, 51 Bus. LAW. 355, 347-53 (1996).
72. 15 U. S. C. A. § 78j-l (a) (West Supp. 1996).
73. 114 S. Ct. 1439 (1994).
74. 15 U. S. C. A. § 78t (f) (West Supp. 1996).
75. Id.
76. These firms are Arthur Anderson & Co., Coopers & Lybrand, Deloitte & Touche, Ernst & Young, KPMG Peat Marwick, and Price Waterhouse.
77. Gitenstein & Pincus, Strategies for Hill Success; Public Case Must Be Made for Law, LEGAL Times, Feb. 12, 1996, at 534.
78. S. 3181, 102d Cong., 1st Sess. (1992).
79. H. R. 417, 103d Cong., 1st Sess. (1993).
80. S. 1976, 103d Cong., 2d Sess. (1994).
81. See Avery, supra note 52, at 347.
82. H. R. 10, 104th Cong., 1st Sess. (1995).
83. Id.
84. Id.
85. Id.
86. Common Sense Legal Reform Act: Hearings on H. R. 10 Before the Subcomm. on Telecommunications and Finance of (he House Oman, on Commerce, 104th Cong., lst Sess. 1-156 (1995) [hereinafter House Hearings].
87. The ABA's Litigation Section opposed most of the proposed legislative reforms and urged the President's veto while the Business Section generally supported the reforms.
88. H. R. 1058, 104th Cong., lst Sess. (1995). H. R. 10 was split into two sections with Title II renamed H. R. 1058.
89. 141 CONG. Rec. H2863-64 (daily ed. Mar. 8, 1995).
90. Id. at H2760 (daily ed. Mar. 7, 1995)
91. H2818 (daily ed. Mar. 8, 1995).
92. S. 240, 104th Cong., lst Sess. (1995).
93. 501 U. S. 350 (1991).
94. Lampfarose because the Exchange Act does not specify any limitation period for private securities fraud actions under § 10 (b). Historically, federal courts had borrowed analogous state statutes of limitations and applied them to § 10 (b).
95. Id. at 355. In Lampf, the Supreme Court concluded that the limitations period for § 10 (b) actions should be borrowed from §§ 9 (e) and 18 (e) of the Exchange Act, which both provide that "[n]o action shall be maintained to enforce any liability created under this section, unless brought within one year after the discovery of the facts constituting the violation and within three years after such violation. "
96. Id. at 360 n. 6.
97. Senate Hearings, supra note 13.
98. Id. at iii-iv.
99. Id. at iv-v.
100. Id. at v-vi.
101. Id. at 229 (statement of Arthur Levitt, Chairman, SEC).
102. Id. at 247.
103. Id.
104. Id. at 247-57.
105. Id. at 249-50.
106. Id. at 257.
107. Central Bank of Denver, N. A. v. First Interstate Bank of Denver, N. A., 114 S. Ct. 1439 (1994).
108. Brian Hartman, Senate Banking Committee Wraps Up Securities Litigation Reforms, STATES News Service: Committee Markups, May 25, 1995.
109. Id.
110. Id.
111. 141 Cong. Rec. D799 (daily ed. June 28, 1995).
112. Adopting Second Circuit pleading standards, S. 240, 104th Cong., lst Sess. (1995), provided that, in an antifraud action, plaintiffs must plead with particularity facts giving rise to a "strong inference" that the defendants acted with the requisite fraudulent intent.
113. Id.
114. Second Circuit case law permits plaintiffs to satisfy this requirement by alleging facts (1) establishing "a motive to commit fraud and an opportunity to do so", or (2) constituting circumstantial evidence of either reckless or conscious behavior.
115. See ZVI Trading Corp. Employees' Money Purchase Pension Plan and Trust v. Ross (In re Times Warner Sec. Litig.), 9 F.3d 259, 269, 271 (2d Cir. 1993)
116. Cert, denied, 114 S. Ct. 1397 (1994).
117. Senator Specter's amendment incorporated this Second Circuit case law into the new S. 240 pleading standard.
118. Id.
119. See CONFERENCE REPORT, supra note 11.
120. Id. at 43-46.
121. Id. at 41.
122. Id. at 39-40.
123. 141 CONG. Reg. S17. 997 (daily ed. Dec. 5, 1995).
124. Id. at H14, 055 (daily ed. Dec. 6, 1995).
125. Id. at H15, 214 (daily ed. Dec. 20, 1995).
126. Id. at H15, 215.
127. Id.
128. Id.
129. Id. at H14, 041 (daily ed. Dec. 6, 1995).
130. Id. at H15, 223-24 (daily ed. Dec. 20, 1995).
131. Id. at S19, 180 (daily ed. Dec. 22, 1995).
132. 421 U. S. 723 (1975).
133. Id. at 739.
134. Id at 740-41.
135. 114 S. Ct. 1439, 1454 (1994).
136. Id.
137. Decker v. GlenFed, Inc. (In re GlenFed, Inc. Sec. Litig.), 42 F.3d 1541, 1556 (9th Cir. 1994) (en banc) (Norris, J., concurring).
138. Id.
139. Ralph K. Winter, Paying Lawyers, Empowering Prosecutors, and Protecting Managers: Raising the Cost of Capital in America, 42 Duke L. J. 945, 950 (1993).
140. Id.
141. Id. at 952.
142. Senate Hearings, supra note 13, at 229 (opening statement of Arthur Levitt, Chairman, SEC).
143. Id.
144. Senate Hearings, supra note 13, at 239 (statement of Dr. Charles C. Cox).
145. Id.
146. John Shad, Introduction to Securities Class Actions: Abuses and Remedies 1 (1996).
147. Other former SEC Commissioners have been of a similar mind.
148. See Senate Hearings, supra note 13, at 49-50 (statement off. Carter Bresse, Jr.) ("Unfortunately, the current private securities litigation system is severely out of balance" and "imposes enormous costs on market participants and society, as a whole.");
149. See also Joseph A. Grundfest, Why Disimply?, 108 Harv. L. Rev. 727 (1995).
150. Senate Hearings, supra note 13, at 2 (statement of Senator Christopher Dodd).
151. But see Clinton Vetoes Private Securities Act, UNITED Press Int'l, Dec. 20, 1995.
152. Ralph Nader was quoted as saying: "President Clinton did the right thing by standing with consumers on Main Street and against the unscrupulous elements in the financial industries."
153. Id. Mr. Nader did not explain why so many liberal Democratic Senators and Representatives had suddenly decided to stand with "unscrupulous elements in the financial industries" and against "consumers on Main Street."
154. Id.
155. SEC Chairman Arthur Levitt testified that he himself had turned down a "dozen or so... invitations" to serve on the board of entrepreneurial companies "because they could not adequately insure their directors."
156. Senate Hearings, supra note 13, at 229 (statement of Arthur Levitt).
157. Chairman Levitt added that "countless colleagues in business have had the same experience" and that, in his opinion, the inability of so many qualified people to serve was "among the most lamentable problems of all."
158. Id.
159. The Chairman and CEO of Deloitte & Touche testified that "[a]ccounting firms are responding to the onslaught of litigation by engaging in increasingly aggressive risk management, declining to provide services to potential clients-such as new companies and highgrowth companies-that present a high 'litigation risk.' "
160. Securities Litigation Reform: Hearings Before the Subcomm. on Telecommunication and Finance of the House Comm. on Energy and Commerce, 103d Cong., 2d Sess. 194, 207 (1994) (statement of J. Michael Cook).
161. See Senate Hearings, supra note 13, at 111 (statement of George Sollman on behalf of the American Electronics Association).
162. In its concept release on forward-looking information, the Commission noted that the "threat of mass shareholder litigation" has had adverse effects, especially in "chilling... disclosure of forward-looking information. "
163. Safe Harbor for Forward-Looking Statements, Securities Act Rel. No. 7101, 57 S. E. C. 1999 (Oct. 13, 1994).
164. Former SEC Chairman Breeden testified that "[b]ased on conversations with potential issuers of securities all over the world, the fear of litigation inhibits foreign firms from participating in the U. S.market[s]."
165. House Hearings, supra note 68, at 221, 224 (statement of Richard C. Breeden).
166. SEC Chairman Levitt expressed this concern in his testimony.
167. See id. at 195, 196 (statement of Arthur Levitt).
168. See, e.g., Bateman Eichler, Hill Richards, Inc. v. Berner, 472 U. S. 299, 310 (1985) (stating that private sector actions are a "necessary supplement" to the SEC's enforcement regime) (citations omitted).
169. A study of securities class actions settled between July 1991 and June 1993 indicates that investors recovered only 7 percent of their losses. Frederick C. Dunbar & Vinita M. Juneja, Recent Trends II: What Explains Settlements in Shareholder Class Actions?, National Economic Research Assoclvtes (1993) [hereinafter Recent TRENDS II]. The Senate Staff found that securities class action recoveries tend to be only about 10 percent of legally recoverable damages.
170. SUBCOXLM. ON SECURITIES OF THE Senate Comm. on Banking, Housing, and Urban Affairs, Staff Report on Private Securities LITIGATION 30-31
171. Reprinted in Abandonment of the Private Right of Action for Aiding and Abetting Securities Fraud/Staff Report on Private Securities Litigation: Hearing Before the Subcomm. on Securities of the Senate Comm. on Banking, Housing, and Urban Affairs 103d Cong., 2d Sess., 171 (1994) [hereinafter Senate Staff REPORT]. Senate Staff Report at 30-31. And a sampling of recoveries in cases in which the State of Wisconsin Investment Board was a plaintiff showed that the cases settled for only approximately 11 percent of the total amount of damages sought.
172. Id. at 31 n. 70.
173. Senate Staff Report, supra note 131, at 59-60.
174. Senate Hearings, supra note 13, at 28 (opening Comments of Senator Robert F. Bennett).
175. This decline is in addition to the drop in price the stock has already experienced as a result of any corrective disclosure.
176. Roberta Romano, The Shareholder Suit: Litigation Without Foundation?, J. L. Econ. & Organization 55, 67 (1991).
177. Id.
178. The President-Elect of the National Venture Capital Association testified that when an emerging growth company is sued in a class action, its stock becomes "moribund." Shareholders are then forced to wait out the litigation process before their shares revive or sell at prices that do not reflect the company's true value and potential. Senate Hearings, supra note 13, at 63 (statement of James F. Morgan).
179. Janet Cooper Alexander, Do the Merits Matter? A Study of Settlements in Securities Class Actions, 43 Stan. L. Rev. 497, 577 (1991).
180. Winter, supra note 113, at 952.
181. Romano, supra note 135, at 84 ("[Shareholder litigation is a weak, if not ineffective, instrument of corporate governance.").
182. An additional reason that securities class action suits have little deterrent effect is that financial penalties are seldom imposed on the managers who are sued because settlements are paid by D&O insurers and the corporate defendants. Firms do not adjust management's compensation as a result of losses incurred through litigation in response to lawsuits.
183. Id.
184. Senate Hearings, supra note 13, at 264 (statement of Dr. Charles C. Cox).
185. See Basic Inc. v. Levinson, 485 U. S. 224, 231 (1988);
186. Superintendent of Ins. v. Bankers Life & Casualty Co., 404 U. S. 6, 13 n. 9 (1971).
187. See Craighead v. E. F. Hutton & Co., 899 F.2d 485, 493 (6th Cir. 1990) ("section 10 (b) and Rule 10b-5 should be liberally construed");
188. Securities Inv. Protection Corp. v. Vigman, 764 F.2d 1309, 1313 (9th Cir. 1985) ("When considering a section 10 (b) and Rule 10b-5 claim for relief, the court should liberally construe that claim in order to effectuate the policies underlying the federal securities laws.");
189. G. A. Thompson & Co. v. Partridge, 636 F.2d 945, 961 n. 32 (5th Cir. 1981) ("Rule 10b-5 should be liberally construed to effectuate the purposes of the 1934 Act.").
190. Specific procedures for managing class actions are set forth in Rule 23. These procedures require that the court approve the plaintiffs representing the class, review the fairness of any settlement to class members, and approve any award of attorneys' fees to the plaintiffs' lawyers from settlement funds.
191. Fed. R. P. 23.
192. The fraud on the market theory was accepted by the Supreme Court in Basic, 485 U. S. at 224.
193. See In re Clearly Canadian Sec. Litig., 875 F. Supp. 1410, 1415 (N. D. Cal. 1995).
194. Id.
195. See, e.g., Simer v. Rios, 661 F.2d 655, 674 n. 35 (7th Cir. 1981)
196. Cert, denied, 456 U. S. 917 (1982) ("Those cases involving large scale fraud in the area of securities, or antitrust cases, particular pose the difficulties of certifying a class where representation and reliance vary as to each class member.")
197. Fed. R. Civ. P. 8 (a) (2).
198. Williams v. United Credit Plan, Inc., 526 F.2d 713, 714 (5th Cir. 1976).
199. Tuchman v. DSC Communications Corp., 14 F.3d 1061, 1067 (5th Cir. 1994).
200. Geisler v. Petrocelli, 616 F.2d 636, 640 (2d Cir. 1980).
201. See, e.g., Heisman v. Giordano, 343 F. Supp. 1258, 1259 (E. D. Pa. 1972) ("[A]ll that is required is... a short and plain statement of the claim.... The interstices are to be filled in by the liberal discovery procedures of the federal rules.").
202. Fed. R. Civ. P. 12 (b) (6).
203. Celotex Corp. v. Catrctt, 477 U. S. 317 (1986).
204. Conley v. Gibson, 355 U. S. 41, 45-46 (1957) (citations omitted).
205. See, e.g., DiMella v. Gray Lines, Inc., 836 F.2d 718, 721 (1st Cir. 1988) (dismissing complaint "on the ground that there were no specific facts alleged was inconsistent with the modest pleading requirements" of Rule 8 (a)).
206. Under the liberal amendment policy of Rule 15 (a), a motion for leave to amend should not be denied unless there is "undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, [or] undue prejudice to the opposing party by virtue of the allowance of the amendment."
207. Foman v. Davis, 371 U. S. 178, 182 (1962).
208. See supra text accompanying notes 145-48.
209. See TSC Indus., Inc. v. Northway, Inc., 426 U. S. 438, 450 (1976) (citations omitted) (materiality determinations require "delicate assessments of the inferences a 'reasonable shareholder' would draw from a given set of facts and the significance of those inferences to him, and these assessments are peculiarly ones for the trier of fact.");
210. Huddleston v. Herman & Machean judgrnent aff'd in part and rev'd in part, 459 U. S. 375 (1983)
211. F.2d 534, 546 (5th Cir. 1981) (scienter "is a question of fact");
212. Jordan v. Duff & Phelps, Inc., 815 F.2d 429, 441 (7th Cir. 1987)
213. Cert, dismissed, 485 U. S. 901 (1988) ("causation is a question for the jury");
214. Schneider v. Vennard (In re Apple Computer Sec. Litig.), 886 F.2d 1109, 1113 (9th Cir. 1989)
215. Cert, denied, 496 U. S. 943 (1990) (citations omitted) (in a securities fraud action, "[m]ateriality and scienter are both fact-specific issues which should ordinarily be left to the trier of fact.").
216. See Alexander, supra note 137, at 544 ("[A] Rule 10b-5 claim almost inevitably survives a motion to dismiss";
217. "Some peripheral claims may be eliminated and amended complaints may be required, but the lawsuit itself survives.");
218. See also DUNBAR, Recent Trends II, supra note 131 (between 1991 and 1993 only 11 to 16% of securities class actions were dismissed on motion).
219. In the vast majority of Ninth Circuit cases, motions to dismiss are either denied, or, if granted, are granted with leave to amend. According to a 1993 study of some 280 cases over a two year period, only five cases in the Ninth Circuit were dismissed without leave to amend.
220. See RECENT Trends II supra note 131, at Tables 5, 6, and 7.
221. Fed. R. Civ. P. 9 (b).
222. See, eg., Decker v. GlenFed, Inc. (In re GlenFed, Inc. Sec. Litig.), 42 F.3d 1541, 1547 (9th Cir. 1994) ("We conclude that plaintiffs may aver scienter generally, just as the rule states-that is, simply by saying that scienter existed.").
223. Id. (Norris, J., concurring).
224. Empirical data indicates that the settlement rate for securities class actions is much higher than for civil litigation generally. For example, "[o]f 5, 147 private securities actions... pending in federal courts in 1987, only 224 (less than 5 percent) went to trial."
225. Alexander, supra note 137, at 525. Of that number, only two were securities class actions involving public corporations.
226. Id. One of the largest plaintiffs' law firms in the field testified that it had not tried a securities class action in three years although it filed such suits on an average once every four days.
227. Senate Hearings, supra note 13, at 6 (opening statement of Senator Christopher Dodd).
228. See, e.g., Janet Cooper Alexander, The Value of Bad News in Securities Class Actions, 41 UCLA L. Rev. 1421, 1423 n. 3 (1994) (in a recent study of 91 class actions, settlements ranged from about S4.4 million dollars to S6.2 million dollars);
229. Romano, supra note 135, at 61 (average recovery in 39 settlements of $9 million dollars).
230. One study found that the average fee awarded to the plaintiffs' lawyers in securities class actions over a recent two-year period was S2.4 million dollars. The authors concluded that "[a]verage revenues of this magnitude provide sufficient incentive for the entry of competent, motivated attorneys."
231. Frederick C. Dunbar & Vinita M. Juneja, Making Securities Class Actions More Responsive to the Modem Shareholder, in SECURITIES CLASS ACTIONS: ABUSES and Remedies 185 (1994).
232. The testimony of J. Michael Cook, Chairman and Chief Executive Officer of Deloitte & Touche, is typical. He stated that, because of the enormous damages claimed in securities fraud class actions and the difficulty most jurors have in understanding complex financial and accounting issues, once plaintiffs' claim survived a motion to dismiss, he "had little choice: I am forced to settle cases in which I believe our firm did nothing wrong." House Hearings, supra note 68, at 205 (statement of J. Michael Cook).
233. Alexander, supra note 137, at 531.
234. See, e.g., In re Warner Communications Sec. Litig., 618 F. Supp. 735, 746 (S. D. N. Y. 1985) (defendant's lawyer stated that "if we lost [at trial] it could very well have meant bankruptcy. That is what the damages could have been if left to a jury.").
235. D&O policies routinely exempt losses from adjudications of dishonesty. If a claim is settled, courts prohibit insurers from seeking an adjudication of guilt to avoid the claim's payment. Similarly, indemnification is generally not available if the defendant goes to trial and loses on the merits. A settlement, by contrast, does not implicate the federal policy against indemnification for judgments in securities fraud cases or state statutory provisions to the same effect.
236. In her seminal study of securities fraud class actions, Professor Alexander found that the cases in her study "were in effect resolved at a flat percentage of the potential damages-an amount that could have been predicted on the day the case was filed, without years of costly litigation. "
237. Alexander, supra note 137, at 522. This finding caused her to conclude that "the merits did not matter because it is implausible to assume that the cases settled for the same percentages because they were all of equal merit."
238. Id.
239. See also Grundfest, supra note 121, at 743 (referring to three studies suggesting that in up to 60 percent of observed settlements, "the merits may not have mattered at all in the resolution of the litigation. ").
240. 15 U. S. C. A. § 77z-l (West Supp. 1996).
241. Id. § 78u-4.
242. Id.
243. Id. §§ 77z-1 (a) (3) (A), 78u-4 (a) (3) (A).
244. Id.
245. Id. §§ 77z-l (a) (3) (B) (i), 78u-4 (a) (3) (B) (i).
246. Id. §§ 77z-l (a) (3) (B) (iii), 78u-4 (a) (3) (B) (iii). Class members can aggregate their holdings to create the largest financial stake thereby defeating a single investor with a larger individual share ownership.
247. This presumption can only be rebutted by evidence (for which discovery may be taken) that such person or group "will not fairly and adequately protect the interests of the class, or is subject to unique defenses that render such plaintiff incapable of adequately representing the class."
248. Id.
249. Conference Report, supra note 11, at 34.
250. Id. at 34. The premise that institutional investors make the most adequate plaintiffs is derived from a law journal article.
251. See Elliot J. Weiss & John S. Beckcrman, Let the Money Do the Monitoring: How Institutional Investors Can Reduce Agency Costs in Securities Class Actions, 104 Yale LJ. 2053 (1995).
252. The Conference Report thus emphasizes that the most adequate plaintiff provision is not intended to confer any new fiduciary duty on institutional investors and that courts should not impose such duty. Conference Report, supra note 11, at 34.
253. * 18 (N. D. Ca. Feb. 2, 1996) (certifying the plaintiff Colorado Public Employees' Retirement Association as class representative).
254. 15 U. S. C. A. § 78u-4 (b) (West Supp. 1996).
255. Fed. R. Civ. P. 9 (b).
256. Id.
257. See Dennis v. General Imaging, Inc., 918 F.2d 496, 507 (5th Cir. 1990);
258. Seattle-First Nat'l Bank v. Carlstedt, 800 F.2d 1008, 1010 (10th Cir. 1986);
259. Zerman v. Ball, 735 F.2d 15, 22 (2d Cir. 1984).
260. See Romani v. Shearson Lehman Hutton, 929 F.2d 875, 878 (1st Cir. 1991);
261. Decker v. Massey-Ferguson, Ltd., 681 F.2d 111, 114 (2d Cir. 1982).
262. See Shields v. Citytrust Bancorp., Inc., 25 F.3d 1124, 1128 (2d Cir. 1994);
263. O'Brien v. National Property Analysts Partners, 936 F.2d 674, 676 (2d Cir. 1991);
264. Ross v. A. H. Robins Co., 607 F.2d 545, 558 (2d Cir. 1979)
265. Cert, denied, 446 U. S. 946 (1980).
266. See, e.g., ZVI Trading Corp. Employee's Money Purchase Pension Plan Trust v. Ross (In re Time Warner Inc. Sec. Litig.), 9 F.3d 259, 268-69 (2d Cir.)
267. Cert, denied, 114 S. Ct. 1397 (1994).
268. * Tuchman v. DSC Communications Corp., 14 F.3d 1061, 1068 (5th Cir. 1994) (citations omitted) ("To plead scienter adequately, a plaintiff must set forth specific facts that support an inference of fraud.");
269. Greenstone v. Cambex Corp., 975 F.2d 22, 25 (1st Cir. 1992) ("The courts have uniformly held inadequate a complaint's general averment of the defendant's 'knowledge' of material falsity, unless the complaint also sets forth specific facts that make it reasonable to believe that the defendant knew that a statement was materially false or misleading.");
270. DiLeo v. Ernst & Young, 901 F.2d 624, 629 (7th Cir.)
271. Cert, denied, 498 U. S. 941 (1990) ("Although Rule 9 (b) does not require 'particularity' with respect to the defendants' mental state, the complaint still must afford a basis for believing that the plaintiffs could prove scienter.").
272. Decker v. GlenFed, Inc. (In re GlenFed, Inc. Sec. Litig.), 42 F.3d 1541, 1545 (9th Cir. 1994) (en banc). The Third and Tenth Circuits also have applied less strict pleading standards under Rule 9 (b).
273. See Cramer v. General Tel. & Elecs. Corp., 582 F.2d 259, 273 (3d Cir. 1978)
274. Cert, denied, 439 U. S. 1129 (1979) ("The second sentence of Rule 9 (b) requires only that 'intent, knowledge, and other condition of mind... be averred generally.");
275. Seattle-First Nat'l Bank v. Carlstedt, 800 F.2d 1008, 1011 (10th Cir. 1986) (citations omitted) (" 'Rule 9 (b) does not... require... any particularity in connection with an averment of intent, knowledge, or condition of mind.' ").
276. GlenFed, 42 F.3d at 1547. The Ninth Circuit stated that "[t]he Second Circuit's test may or may not have the effect of deterring or weeding out 'strike suits," but that" [w] hether the test has such an effect is beside the point..." because courts are "not permitted to add new requirements to Rule 9 (b) simply because we like the effects of doing so."
277. Id. at 1546.
278. The court prophetically added that "[t]his is a job for Congress."
279. Id.
280. Conference Report, supra note 11, at 41.
281. 15 U. S. C. A. § 78u-4 (b) (l) (West Supp. 1996).
282. See, e.g., In re Craftmatic Sec. Litig., 890 F.2d 628, 645 (3d Cir. 1990) (A party in a securities fraud action may base its allegations on information and belief when the matter alleged is particularly within the knowledge of the adverse party and the pleader includes a statement of facts upon which the belief is predicated.).
283. 15 U. S. C. A. § 78u-4 (b) (2) (West Supp. 1996).
284. The Conference Committee expressly stated that it did not codify the Second Circuit's case law because it intended to strengthen existing pleading standards. CONFERENCE REPORT, supra note 11, at 41.
285. Presumably, the Conference Committee was concerned that the motive and opportunity test might be too easily met. As noted elsewhere herein, that test had been incorporated in the Specter amendment and defeated on the Senate floor.
286. See, e.g., SEC v. Burns, 816 F.2d 471, 474 (9th Cir. 1987) (citations omitted) ("Proof of scienter is often based on inferences from circumstantial evidence.").
287. See also United States v. Hawkins, 905 F.2d 1489, 1496 (11th Cir. 1990)
288. Cert, denied, 498 U. S. 1038 (1991) ("The Government need not produce direct proof of scienter in a fraud case, however; circumstantial evidence of criminal intent can suffice.").
289. Conference Report, supra note 11, at 37 (citations omitted).
290. Id.
291. Rule 26 (b) (1) provides: "Parties may obtain discovery regarding any matter, not privileged, which is relevant to the subject matter involved in the pending action, whether it relates to the claim or defense of the party seeking discovery or to the claim or defense of any other party." FED. R. Civ. P. 26 (b) (1).
292. Rule 26 (b) (2) authorizes a court to impose limitations on discovery for "good cause." To show "good cause," however, the defendants must show more than an apparently meritorious claim for dismissal under Rule 12 (b) (6) of the Federal Rules, or that discovery will involve inconvenience and expense.
293. See Twin City Fire Ins. Co. v. Employers Ins. of Wausau, 124 F. R. D. 652, 653 (D. Nev. 1989);
294. Fed. R. Civ. P. 26 (b) (2).
295. *1 (S. D. N. Y. May 7, 1991) (stay "should not be granted routinely simply on the basis that a motion to dismiss has been filed");
296. Moss v. Hollis, [1990 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 95, 443, at 97, 259-60 (D. Conn. June 29, 1990)
297. ("Had the Federal Rules contemplated that a motion to dismiss under Fed. R. Civ. P. 12 (b) (6) would stay discovery, they would contain such a provision. ").
298. 15 U. S. C. A. §§ 77z-l (b), 78u-4 (b) (3) (West Supp 1996).
299. CONFERENCE REPORT, supra note 11, at 37. To ensure that relevant evidence will not be lost, the Act makes it unlawful for any person named as a defendant willfully to alter or destroy relevant evidence.
300. U. S. C. A. §§ 77z-l (b), 78u-4 (b) (3) (C) (West Supp. 1996).
301. There is some risk that the Reform Act's stay provisions may be applied in contexts that Congress did not envision. For example, in one recent case, a magistrate judge in the U. S. District Court for the Soumern District of California prevented a corporate plaintiff from taking discovery to support its motion for a preliminary injunction in the context of a contest for control of the plaintiffs board of directors. Relying on the new Reform Act stay provisions, the judge ruled that discovery could not go forward until the defendants' motion to dismiss was resolved.
302. *3 (S. D. Cal. Jan. 19, 1996).
303. 15 U. S. C. A. §§ 77z-l (c), 78u-4 (c) (West Supp. 1996);
304. Fed. R. Civ. P. 11.
305. Fed. R. Civ. P. 11.
306. Id.
307. A search performed by the Congressional Research Service at the request of Senator Phil Gramm, Chairman of the Senate Securities Subcommittee, revealed that Rule 11 sanctions had been imposed only three times in the entire history of Rule 1 Ob-5 litigation.
308. Senate Hearings, supra note 13, at 425.
309. Fed. R. Civ. P..
310. Id. 11 (advisory committee's note).
311. Conference Report, supra note 11, at 39.
312. A recent study undertaken by Jenner & Block concludes that motions for Rule 11 sanctions have declined by 34 percent because adoption of the 1993 amendments.
313. See Laura Duncan, Sanctions Litigation Declining, ABA J., Mar. 1995, at 12.
314. Conference REPORT, supra note 11, at 39.
315. See Jennings v. Joshua Indep. School Dist., 948 F.2d 194, 199 (5th Cir. 1991) (holding that sanction does not need to entirely compensate victims);
316. Jackson v. Law Firm of O'Hara, Ruberg, Osborne & Taylor, 875 F.2d 1224, 1229 (6th Cir. 1989) (because deterrence is the principal purpose of Rule 11, courts should impose the least severe sanction that will act as a deterrent).
317. Conference Report, supra note 11, at 39.
318. Id.
319. 15 U. S. C. A. §§ 77z-1 (c) (2), 78u-4 (c) (2) (West Supp. 1996).
320. Conference Report, supra note 11, at 40.
321. Id. at 39-40;
322. U. S. C. A. §§ 77z-l (c) (3) (A) (i), 78u-4 (c) (3) (A) (i) (West Supp. 1996).
323. Conference Report, supra note 11, at 40.
324. Id.
325. U. S. C. A. §§ 77z-1 (c) (3) (B), 78u-4 (c) (3) (B) (West Supp. 1996).
326. 15 U. S. C. A. §§ 77z-l (c) ((3) (C), 78u-4 (c) ((3) (C) (West Supp. 1996).
327. Id. § 78u-4 (a) (8).
328. Id. § 77k (e) (1994).
329. Id. §§ 78i (e), 78r (a).
330. Conference Report, supra note 11, at 41.
331. Id. at 40-41.
332. Id. at 33.
333. See generally id. Because Congress was convinced that financial rewards encouraged the riling of speculative class action lawsuits, the Reform Act also prohibits broker-dealers or persons associated with them from soliciting or accepting remuneration for assisting a lawyer in obtaining the representation of any person in any private action under Securities Act or the Exchange Act. 15 U. S. C. § 78o (c) (8) (1994).
334. 15 U. S. G. A. § 77z-1 (a) (2) (A) (West Supp. 1996);
335. Id. § 78u-4 (a) (2) (A).
336. Id.
337. Id.
338. Id. §§ 77z-1 (a) (4), 78u-4 (a) (4).
339. Id. §§ 77z-l (a) (3) (B) (vi), 78u-4 (a) (3) (B) (vi);
340. Conference Report, supra note 11, at 35.
341. The lodestar approach originated with the Third Circuit's decision in Lindy Bros. Builders, Inc. v. American Radiator & Standard Sanitary Corp., 487 F.2d 161 (3d Cir. 1973), but has subsequently been followed in other circuits.
342. See McCann v. Coughlin, 698 F.2d 112 (2d Cir. 1983);
343. Johnson v. Georgia Highway Express, Inc., 488 F.2d 714 (5th Cir. 1974);
344. Moore v. Jas. H. Matthews & Co., 682 F.2d 830 (9th Cir. 1982);
345. Kerr v. Screen Extras Guild, Inc., 526 F.2d 67 (9th Cir. 1975)
346. Cert, denied sub. nom, Perkins v. Screen Extras Guild, Inc., 425 U. S. 951 (1976).
347. See, e.g., In re Oracle Sec. Litig., 131 F. R. D. 688, 689 (N. D. Cal. 1990) (the lodestar method is "unworkable" and "thoroughly discredited by experience");
348. See also In re Activision Sec. Litig., 723 F. Supp. 1373 (N. D. Cal. 1989).
349. Conference Report, supra note 11, at 36.
350. Id.
351. 15 U. S. C. A. §§ 77z-l (a) (6), 78u-4 (a) (6) (West Supp. 1996).
352. Conference Report, supra note 11, at 36.
353. See Paul, Johnson, Alston & Hunt v. Graulty, 886 F.2d 268, 273 (9th Cir. 1989) (noting that the ordinary range for the plaintiffs' attorneys' fees is 20-30% and that "25% has been a proper benchmark figure");
354. Kirkorian v. Borelli, 695 F. Supp. 446, 457 (N. D. Cal. 1988) (normal range of 20-30%, benchmark of 25%);
355. Court Awarded Attorney Fees, Report of the Third Circuit Task Force, 108 F. R. D. 237, 247 n. 32 (3d Cir. 1985) (range of 20-25 percent);
356. John C. Coffee, Jr., Understanding the Plaintiffs Attorney: The Implications of Economic Theory for Private Enforcement of Law Through Class and Derivative Actions, 86 Colum. L. REV. 669, 679 n. 26 (1986) (stating that historically courts award 20-30% of recoveries below S1 million dollars and a declining percentage of awards over that amount).
357. The Reform Act further provides that, unless otherwise ordered, funds disgorged as the result of an action brought by the SEC in federal court or as a result of any SEC administrative action cannot be distributed as payment for attorneys' fees or expenses incurred by private parties seeking distribution of the disgorged funds. 15 U. S. C. A. §§ 77t, 78u (d) (West Supp. 1996). The rationale is that these funds are created by government agency litigation and, therefore, that private lawyers should not be paid from the funds.
358. Id. §§ 77z-1 (a) (7), 78u-4 (a) (7) (West Supp. 1996).
359. Id.
360. Id.
361. Id.
362. Id.
363. Conference Report, supra note 11, at 43.
364. 17 C. F. R. § 230. 175 (1995). The analog for the Exchange Act is Rule 3b-6
365. Id. § 240. 3b-6.
366. The SEC issued a concept release in October 1994 seeking comment on whether its safe-harbor rules were effective and how they could be made more so.
367. See Safe Harbor for Forward-Looking Statements, Securities Act Release No. 7101, 57 S. E. C. 1999 (Oct. 13, 1994). The SEC, however, has thus far taken no action in response to comments received.
368. 17 C. F. R. §§ 230. 175 (b) (1), 240.3b-6 (b) (l) (1995).
369. Id. §§ 230. 175 (a), 240.3b-6 (a).
370. A number of federal circuits have adopted the bespeaks caution doctrine.
371. See Romani v. Shearson Lehman Hutton, 929 F.2d 875 (1st Cir. 1991);
372. I. Meyer Pincus &. Assoc, v. Oppenheimer & Co., 936 F.2d 759 (2d Cir. 1991);
373. Kaufman v. Trump's Castle Funding (In re Donald J. Trump Casino Sec. Litig.), 7 F.3d 357 (3d Cir. 1993)
374. Cert, denied, 114 S. Ct. 1219 (1994);
375. Rubinstein v. Collins, 20 F.3d 160 (5th Cir. 1994);
376. Sinay v. Lamson & Sessions Co., 948 F.2d 1037 (6th Cir. 1991);
377. Moorhead v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 949 F.2d 243 (8th Cir. 1991);
378. Miller v. Pezzani (In re Worlds of Wonder Sec. Litig.), 35 F.3d 1407 (9th Cir 1994)
379. Cert, denied, 116 S. Ct. 185 (1995);
380. Saltzberg v. TM Sterling/Austin Assoc, Ltd., 45 F.3d 399 (11th Cir. 1995).
381. TSC Indus., Inc. v. Northway, Inc., 426 U. S. 438, 449 (1976);
382. Basic Inc. v. Levinson, 485 U. S. 224, 231-32 (1988).
383. See, e.g., Donald J. Trump Casino, 7 F.3d at 371-72.
384. The definition of "forward-looking statement" covers: (i) financial items including projections of revenues, income and earnings, capital expenditures, dividends, and capital structure; (ii) management's statement of future business plans and objectives; (iii) statements made in SEC required disclosures, including management's discussion, analysis, and results of operations; and (iv) any statement disclosing the assumptions underlying the forwardlooking statement. 17 C. F. R. §§ 230. 175 (c), 240.175 (c) (1995).
385. The Reform Act provides that the court shall stay discovery (unrelated to the applicability of the safe harbor exemption) during the pendency of any motion by the defendant for summary judgment based on the ground that the complaint relates to a forward-looking statement to which the safe harbor is applicable. This specific stay provision, included within die safe harbor rules, is a narrower version of the Reform Act's more comprehensive stay provision, discussed below, that applies to all private actions under the Securities Act and Exchange Act. 15 U. S. G. A. §§ 77z-2 (f), 78u-5 (f) (West Supp. 1996).
386. Id. §§ 77z-2 (c), 78u-5 (c).
387. Conference Report, supra note 11, at 43-44.
388. Id. at 44.
389. Id.
390. Id.
391. Id.
392. If the forward-looking statement is made by a business entity, then the plaintiff must prove that the statement was made by or with the approval of an executive officer of the entity with actual knowledge by that officer that the statement was false or misleading. 15 U. S. C. A. §§ 77z-2 (c), 78u-5 (c) (West Supp. 1996).
393. See, e.g., Hillson Partners Ltd. Partnership v. Adage, Inc., 42 F.3d 204 (4th Cir. 1994).
394. * 4 (4th Cir. Mar. 20, 1995).
395. 15 U. S. C. A. §§ 77z-2 (c) (2), 78u-5 (c) (2) (West Supp. 1996).
396. Id.
397. Id. §§ 77z-2 (c) (2) (B), 78u-5 (c) (2) (B).
398. Id. §§ 77z-2 (a), 78u-5 (a).
399. For example, the safe harbors are unavailable to issuers who, within the previous three years, have violated the antifraud provisions of the securities laws, or are subject to a Commission cease and desist order, or issue penny stock. The safe harbors are unavailable for forward-looking statements made in connection with initial public offerings, tender offers, going private transactions, roll-up transactions, or offerings by blank check companies, partnerships, limited liability companies or direct participation investment programs. The safe harbors are further unavailable for forward-looking statements included in financial statements prepared in accordance with Generally Accepted Accounting Standards, investment company registration statements, or reports of beneficial ownership under § 13 (d) of the Exchange Act.
400. Id.
401. §§ 77z-2 (b), 78u-5 (b).
402. Conference Report, supra note 11, at 46.
403. Id.
404. 15 U. S. C. A. §§ 77z-2 (d), 78u-5 (d) (West Supp. 1996).
405. See Backman v. Polaroid Corp., 910 F.2d 10 (1st Cir. 1990);
406. ZVI Trading Corp. Employees' Money Purchase Pension Plan and Trust v. Ross (In re Time Warner Inc. Sec. Litig.), 9 F.3d 259 (2d Cir. 1993)
407. Cert, denied, 114 S. Ct. 1397 (1994);
408. Stransky v. Cummins Engine Co., Inc., 51 F.3d 1329 (7th Cir. 1995).
409. House Hearings, supra note 68.
410. Several of the express liability provisions of the securities laws (§§ 11 (e), (f) and 15 of the Securities Act and § 20 (a) of the Exchange Act) specifically provide for joint and several liability. The remaining express liability provisions (§ 12 (2) of the Securities Act and §§ 9 (e) and 18 (a) of the Exchange Act) have been interpreted to reach the same result because they provide that "any" violator is liable for specified damages.
411. See generally 3 ALAN R. BROMBERG & Lewis D. Lowenfels, Securities Fraud & Commodities Fraud § 8.5, at 585 (1996).
412. Joint and several liability has also been extended to the implied private right of action under Rule 10b-5.
413. See, e.g., TBG, Inc. v. Bendis, 36 F.3d 916, 927 (10th Cir. 1994) ("Liability in Rule 10b-5 cases is strictly joint and several and is never allocated among the individual defendants in deciding the plaintiffs claim.").
414. The Supreme Court held in Musick, Peeler & Garrett v. Employers Ins. of Wausau, 508 U. S. 286 (1993), that the defendants in Rule 10b-5 actions may seek contribution from other responsible parties. If one or more of these parties were insolvent, then the remaining solvent defendants would have to bear the entire burden of the insolvent party's share of the judgment.
415. One study has shown that settlements in securities fraud class actions are about 50 percent higher when outside advisors such as accounting firms, law firms, and underwriters are named as the defendants.
416. Dunbar & Juneja, supra note 167, at 210.
417. Conference Report, supra note 11, at 37.
418. Id. at 37-38.
419. Id. at 38.
420. 15 U. S. C. A. §§ 78u-4 (g) (West Supp. 1996). The Reform Act's proportionate liability rules are an outgrowth of the comparative fault doctrine in negligence law. That doctrine, applied to all forms of aggravated conduct short of intentional injury, rests on the premise that liability should be borne by those who are culpable in proportion to their fault.
421. Edward J. Yodowitz & Steven J. Kolleeny, Changing The Standard Of Joint And Several Liability To A Proportionate Liability Rule, in Securities Class Actions: Abuses and Remedies, at 34 (1996).
422. 15 U. S. C. A. § 78u-4 (g) (2) (A) (West Supp. 1996).
423. Id. § 78u-4 (g) (2) (B) (i).
424. Although the Supreme Court has never expressly so held, the circuit courts have ruled that scienter for Rule 10b-5 purposes embraces recklessness. Recklessness is usually defined as" 'a highly unreasonable omission, involving not merely simple, or even inexcusable negligence, but an extreme departure from the standards of ordinary care.' "
425. Sundstrand Corp. v. Sun Chemical Corp., 553 F.2d 1033, 1045 (7th Cir.)
426. Cert, denied, 434 U. S. 875 (1977)
427. (citing Franke v. Midwestern Oklahoma Dev. Auth., 428 F. Supp. 719 (W. D. Okla. 1976)).
428. 15 U. S. C. A. § 78u-4 (g) (3) (C) (West Supp. 1996).
429. Id. § 78u-4 (g) (8).
430. Id. § 78u-4 (g) (6).
431. Id. § 78u-4 (g) (4) (A) (i).
432. Id. § 78u-4 (g) (4) (A) (ii).
433. Id. § 78u-4 (g) (5).
434. Id. §§ 78u-4 (g) (7) (A), 78u-4 (g) (9).
435. Id § 78u-4 (g) (7) (B).
436. Id. §§ 78u-4 (g) (8), 78u-4 (g) (9).
437. See, e.g., Levine v. Seilon, Inc., 439 F.2d 328, 334 (2d Cir. 1971).
438. See Richardson v. MacArthur, 451 F.2d 35, 43 (10th Cir. 1971) (a stock's true value is its price on the date the fraud was or should have been discovered);
439. Harris v. American Inv. Co., 523 F.2d 220, 226 (8th Cir. 1975)
440. Cert, denied, 423 U. S. 1054 (1976) (the price after the market reacted to the revelation of securities fraud represented the true value of the stock);
441. Robert G. Newkirk, Sufficient Efficiency: Fraud on the Market in the Initial Public Offering Context, 58 U. CHI. L. Rev. 1393, 1417 (1991) ("[S]ome courts look at how the market price reacted when the fraud was revealed, and measure damages based on the difference between the pre-and post-information trading prices.").
442. See Baruch Lev & Meiring de Villiers, Stock Price Crashes and 10b-5 Damages: A Legal, Economic, and Policy Analysis, 47 STAN. L. Rev. 7, 10 (Nov. 1994) ("Recent theoretical work in financial economics suggests that in sharp price declines-both for individual securities and for the market as a whole-a portion of the price drop is often unrelated to fundamentals").
443. Id. ("[T]his standard practice in rule 10b-5 litigation may substantially overestimate the plaintiffs' damages by understating the value of the stock.").
444. 15 U. S. C. A. § 78u-4 (e) (l) (West Supp. 1996). The "mean trading price" of a security is defined to be an average of the daily trading price of that security determined as of the close of the market each day during the 90-day period.
445. Id. § 78u-4 (e) (3).
446. For example, if the plaintiff paid S50 for a security as to which there was a fraudulent misrepresentation or omission, and the security dropped in price to S40 on September 1 when the corrective information was revealed to the market, the plaintiffs damages would not be S10 but the difference between S50 and the mean price at which the security traded between September 1 and November 30.
447. If the plaintiff sells or repurchases the subject securities during the 90-day period, then damages are to be calculated based on the price of that transaction and the value of the security immediately after the dissemination of corrective information. 15 U. S. C. A. § 78u-4 (e) (2) (West Supp. 1996).
448. See, e.g., Wilson v. Ruffa & Hanover, P. C., 844 F.2d 81 (2d Cir. 1988).
449. Huddleston v. Herman & MacLean, 640 F.2d 534, 549 (5th Cir. 1981)
450. aff'd in part and rev'd in part on other grounds, 459 U. S. 375 (1983).
451. 15 U. S. C. A. § 78u-4 (b) (4) (West Supp. 1996).
452. Id. § 771 (2) (1994 & West Supp. 1996).
453. Senate Hearings, supra note 13.
454. 15 U. S. C. § 77 (1) (1994 & West Supp. 1996).
455. Id. § 77k.
456. Id. § 77l.
457. See International Data Bank, Ltd. v. Zepkin, 812 F.2d 149, 153 (4th Cir. 1987) ("The larger potential recovery under RICO enhances the 'settlement value' and 'nuisance' potential of a securities fraud action. ") (citations omitted).
458. House Hearings, supra note 68, at 205 (statement of Arthur Levitt).
459. 18 U. S. C. § 1964 (c) (1994 & West Supp. 1996).
460. Conference Report, supra note 11, at 47.
461. 18 U. S. C. § 1964 (c) (1994 & West Supp. 1996).
462. 15 U. S. C. A. § 78j-l (West Supp. 1996). The audit disclosure rules are included as Title III of the Reform Act and incorporate provisions of a bill proposed repeatedly since 1990 by Representative Ron Wyden (D-Ore.).
463. Id.
464. See American Institute of Certified Public Accountants (AICPA) Professional Standards, AU § 317 ("Illegal Acts by Clients");
465. AU § 334 ("Related Parties");
466. AU § 341 ("The Auditor's Consideration of an Entity's Ability To Continue as a Going Concern").
467. Moreover, Statement on Auditing Standard (SAS) No. 53 ("The Auditor's Responsibility to Detect and Report Errors and Irregularities") expressly requires audits to take into account the possibility of fraud and to provide "reasonable assurance" of detecting fraud that would have a material effect on the financial statements of the issuer.
468. 15 U. S. C. A. § 78j-l (a) (West Supp. 1996).
469. Conference Report, supra note 11, at 48.
470. 15 U. S. C. A. § 78j-l (b) (l) (West Supp. 1996).
471. Id.
472. Id. § 78j-1 (b) (2).
473. Id. § 78j-1 (b) (3).
474. Id.
475. Id. § 78j-l (d).
476. AICPA Professional Standard AU § 317.
477. Set Form 8-K, Item 4, 17 C. F. R. § 249. 308 (1995);
478. Regulation S-K, Item 304, 17 C. F. R. § 229. 304 (1995).
479. AICPA SEC Practices Section Reference Manual § 1000.08 (m).
480. 114 S. Ct. 1439 (1994).
481. Id. at 1449.
482. Senate Hearings, supra note 13, at 253 (statement of Arthur Levitt).
483. 15 U. S. C. A. § 78t (f) (West Supp. 1996).
484. Private Securities Litigation Reform Act of 1995, Pub. L. No. 104-67, § 106, 109 Stat. 737, 757-58.
485. Id.
486. ZVI Trading Corp. Employees Money Purchase Pension Plan and Trust v. Ross (In re Time Warner Inc. Sec. Litig.), 9 F.3d 259, 264 (2d Cir. 1993)
487. Cert, denied, 114 S. Ct. 1397 (1994).
488. Id. at 263. This is particularly true of class action litigation under Rule 10b-5 because Congress never created an express private right of action under § 10 (b) and, therefore, never established the parameters for private rights of action under that provision.