The future of the Private Securities Litigation Reform Act: Or, why the fat lady has not yet sung

Business Lawyer

Volumn 51, Issue 4, 1996, Pages 975-1007

  Coffee, John C ^a  

^a Och Spine at New York Presbyterian Hospitals

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EID: 21444453477     PISSN: 00076899     EISSN: None     Source Type: Journal    
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References (271)

1. Pub. L. No. 104-67, 109 Stat. 737 (1995) (to be codified in scattered sections of 15 U. S. C.).
2. H. R. Conf. Rep. No. 369, 104th Cong., 1st Sess. (1995), reprinted in 1996 U. S. C. C. A. N. 730 [hereinafter HOUSE REPORT].
3. See, e.g., Shannon v. United States, 114 S. Ct. 2419, 2426 (1994).
4. 467 U. S. 837 (1984).
5. Id. at 844.
6. Id. at 843.
7. 15 U. S. C. A. § 78u-4 (b) (West Supp. 1996).
8. Id. § 77z-2.
9. 141 CONG. Rec. H15, 214 (daily ed. Dec. 20, 1995).
10. 15 U. S. C. A. § 78u-4 (West Supp. 1996).
11. Id. § 78u-4 (b) (l).
12. Shapiro v. UJB Fin. Corp., 964 F.2d 272, 285 (3d Cir.)
13. Cert, denied, 506 U. S. 934 (1992)
14. (quoting In re Craftmatic Sec. Litig., 890 F.2d 628, 645 (3d Cir. 1990)). Shapiro also required the complaint to set forth the facts on which a belief was formed when the pleading was based on information and belief.
15. Id. at 284-85.
16. See Letter from Dean John Sexton of New York University Law School to President William J. Clinton (Dec. 13, 1995)
17. In 2 Sweeping Reform: Litigating and Bespeaking Caution Under the New Securities Laws 282-83 (PLI Corp. Law & Practice Handbook Series No. B-924 1996) [hereinafter SWEEPING Reform]. The author's own letters are also reprinted in this volume, but they refrained from criticizing the Reform Act's pleading standards and focused solely on its safe harbor provision.
18. Id. at 285-92.
19. 17 C. F. R. § 240. 10b-5 (1995).
20. 15 U. S. C. A. § 78u-4 (b) (2) (West Supp. 1996).
21. For example, it will not apply to §§ 11 or 12 of the Securities Act of 1933 (1933 Act), or § 16 (b) of the 1934 Act. 15 U. S. C. A. § 77k (1994 & West Supp. 1996);
22. Id. §§ 771, 78p (b).
23. & See Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1128 (2d Cir. 1994) (holding particularized facts must raise "strong inference of fraud."). The Second Circuit's approach has been more or less adopted by at least three other circuits.
24. See Tuchman v. DSC Comm. Corp., 14 F.3d 1061, 1068 (5th Cir. 1994);
25. Greenstone v. Cambex Corp., 975 F.2d 22, 25 (1st Cir. 1992);
26. DiLeo v. Ernst & Young, 901 F.2d 624, 629 (7th Cir.)
27. Cert, denied, 498 U. S. 941 (1990).
28. See Decker v. GlenFed, Inc. (In re GlenFed Inc. Sec. Litig.), 42 F.3d 1541, 1547 (9th Cir. 1994);
29. Adam v. Silicon Valley Bancshares, 884 F. Supp. 1398, 1403 (N. D. Cal. 1995).
30. See House Report, supra note 2, at 31-49.
31. San Leandro Emergency Medical Group Profit Sharing Plan v. Philip Morris Co., Inc., 75 F.3d 801, 813 (2d Cir. 1996);
32. See also Shields, 25 9F.3d at 1128.
33. In particular, the First, Fifth and Seventh Circuits appear to follow some variant of the Second Circuit's rule.
34. See Tuchman, 14 F.3d at 1068;
35. Greenstone, 975 F.2d at 25;
36. DiLeo, 901 F.2d at 629;
37. Fujisawa Pharmaceutical Co., Ltd. v. Kapcor, 814 F. Supp. 720, 728 (N. D. 111. 1993).
38. 141 Cong. Rec. S17, 959-61 (daily ed. Dec. 5, 1995) (statement of Senator Specter). The Specter Amendment provided that a "strong inference" could be raised by "alleging facts to show the defendant had both motive and opportunity to commit fraud, or by alleging facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness by the defendant."
39. The full text of the Specter Amendment, which was passed by the full Senate by a vote of 57 to 42 on June 28, 1995
40. Is set forth in 2 Sweeping Reform, supra note 13, at 795-98.
41. House Report, supra note 2, at 41.
42. Id. at 48 n. 23.
43. Id.
44. 141 Cong. Rec. S17, 934 (daily ed. Dec. 5, 1995).
45. Id. at S17, 960.
46. Id.
47. Id.
48. Bank One Chicago, N. A. v. Midwest Bank & Trust Co., 116 S. Ct. 637, 646 (1996) (Scalia, J., concurring);
49. See also Wisconsin Pub. Intervenor v. Mortier, 501 U. S. 597, 617 (1991) (Scalia, J., concurring) (stating legislative history is "unreliable... as a genuine indicator of congressional intent").
50. Bank One Chicago, 116 S. Ct. at 642.
51. See, in particular, the concurring opinion of Justice Stevens.
52. Id. at 643-45 (Stevens, J., concurring).
53. Shannon v. United States, 114 S. Ct. 2419 (1994).
54. Id. at 2426.
55. Id.
56. Id. (quoting International Bhd. of Elec. Workers, Local Union No. 474 v. NLRB, 814 F.2d 697, 712 p. C. Cir. 1987).
57. 141 CONG. Rec. H15, 214 (daily ed. Dec. 20, 1995).
58. Id. at S19, 149 (daily ed. Dec. 22, 1995).
59. Id. at S19, 150.
60. See, e.g., San Leandro Emergency Medical Group Profit Sharing Plan v. Philip Morris Co., Inc., 75 F.3d 801, 814 (2d Cir. 1996) (affirming dismissal of the complaint against all senior executives of Philip Morris, except an executive who had sold substantial shares). For other cases in which suspicious trading by defendants has given rise to the requisite inference of fraud
61. See Rubinstein v. Collins, 20 F.3d 160, 169-70 (5th Cir. 1994);
62. Greenstone v. Cambex Corp., 975 F.2d 22, 26 (1st Cir. 1992);
63. Schneider v. Vennard {In re Apple Computer Sec. Litig.), 886 F.2d 1109, 1117 (9th Cir. 1989)
64. Cert, denied, 496 U. S. 943 (1990).
65. *9 (D. Minn. Sept. 27, 1995);
66. Ferber v. Travelers Corp., 802 F. Supp. 698, 713-14 (D. Conn. 1992).
67. 1996 U. S. Dist. LEXIS 7179 (CD. Cal. May 21, 1996). One other case has also addressed the Reform Act's pleading standards and, without discussion, applied both prongs of the Second Circuit's standard. In Zeid v. Kimberley, 1996 WL 310124, Civ. No. 96-20136 (N. D. Cal. June 6, 1996), the court dismissed the complaint (but with leave to replead) after finding that it failed to "include 'facts constituting circumstantial evidence of either reckless or conscious behavior."
68. *7
69. (quoting ZVI Trading Corp. Employees' Money Purchase Pension Plan and Trust v. Ross (In re Time Warner Sec. Litig.), 9 F.3d 259, 269 (2d Cir. 1993)).
70. The principal factual difference between Zeid and Chanlal, which each involved the allegedly premature recognition of income on consignment sales, was that there was no allegation of insider stock sales prior to disclosure of the adverse developments in
71. See supra text accompanying note 24.
72. *37 (emphasis added) (citation omitted).
73. *39. The court stressed that the Senate Banking Committee Report indicated that the Committee did not wish to "adopt a new and untested pleading standard mat would generate additional litigation. "
74. *39
75. (citing S. Rep. No. 98, 104th Cong., 1st Sess., at 15 (1995)
76. Reprinted in 1996 U. S. C. C. A. N. 679, 694).
77. Chantal's projected revenues for 1995 "represented nearly an 8000% increase in revenues from fiscal 1994."
78. Id.
79. * 10.
80. * 9.
81. * 40.
82. * 35
83. *19 (S. D. N. Y. 1996)
84. *37 (S. D. N. Y. 1995)));
85. See also Acito v. LMCERA Group, Inc., 47 F.3d 47 (2d Cir. 1995) (rejecting claim that requisite motive was shown by insiders' desire to increase compensation).
86. * 42.
87. *44;
88. * 54 (2d Cir. 1995) (requiring that insider transactions be "unusual" and out of line with prior trading pattern to satisfy required standard).
89. *49.
90. * 46. The court noted that the strength of the complaint's allegations would have to be corresponding greater under this prong.
91. Id.
92. The court made clear that an accounting violation standing along would not constitute strong circumstantial evidence of conscious misbehavior or recklessness.
93. *47
94. (citing Dannenberg v. PaineWebber, Inc. (In re Software Toolworks, Inc. Sec. Litig.)
95. F.3d 615, 627 (9th Cir. 1994)). The determinative factor for the court may have been the corporation's own self interest in completing a substantial private placement without disclosure. For similar, findings that violations of accounting rules can raise an inference of fraud
96. See Malone v. Microdyne Corp., 26 F.3d 471, 478-79 (4th Cir. 1994)
97. In re Chambers Development Sec. Litig., 848 F. Supp. 602, 620 (W. D. Pa. 1994).
98. 15 U. S. C. A. § 78u-4 (b) (3) (A) (West Supp. 1996) (emphasis added).
99. 1996 WL 310124, Civ. No. 96-20136 SW (N. D. Cal. June 6, 1996).
100. * 8.
101. See Blakenship v. Hearst Corp., 519 F.2d 418, 429 (9th Cir. 1975);
102. Gray v. First Winthrop Corp., 133 F. R. D. 39, 40 (N. D. Cal. 1990);
103. Twin City Fire Ins. Co. v. Employers Ins. of Wausau, 124 F. R. D. 652, 653 (D. Nev. 1989).
104. Section 101 of the Act adds § 27 (b) to the 1933 Act and § 21D (b) (3) to the 1934 Act, which each stay discovery during the pendency of a motion to dismiss. 15 U. S. C. A. § 77z-l (West Supp. 1996);
105. Id. § 78u-4. Both these stays are subject to an "undue prejudice" limitation.
106. Id. § 77 z-(f);
107. Id. § 78u-5 (f) (emphasis added).
108. HOUSE Report, supra note 2, at 44 (emphasis added). For the conflicting statutory language
109. See § 15 U. S. C. A. § 77z-2 (c) (l) (A) (West Supp. 1996);
110. Id. § 78u-5 (c) (l) (A).
111. See supra text accompanying note 43.
112. 15 U. S. C. A. § 77z-2 (c) (l) (A) (i) (West Supp. 1996);
113. Id. § 78u-5 (c) (l) (A) (i).
114. Isquith v. Middle S. Util., Inc., 847 F.2d 186, 203 (5th Cir.)
115. Cert, denied, 488 U. S. 926 (1988);
116. See Kline v. First W. Gov't Sec., Inc., 24 F.3d 480, 489 (3d Cir.)
117. Cert, denied, 115 S. Ct. 613 (1994).
118. HOUSE REPORT, supra note 2, at 43 (emphasis added).
119. Id. at 43-44 (emphasis added).
120. 15 U. S. C. A. §§ 77z-1 (b) (1), 78u-4 (b) (3) (B) (West Supp. 1996). Unlike the heightened pleading requirements of the Reform Act, these stay provisions apply to the 1933 Act as well as the 1934 Act.
121. See Kaufman v. Trump's Castle Funding (In re Donald J. Trump Casino Sec. Litig.), 7 F.3d 357, 364 (3d Cir. 1993)
122. Cert, denied, 114 S. Ct. 1219 (1994);
123. Ferber v. Travelers Corp., 802 F. Supp. 698 (D. Conn. 1992).
124. 15 U. S. C. A. § 77-2 (c) (l) (A) (West Supp. 1996).
125. Id. § 77-2 (c) (l) (B).
126. See HOUSE Report, supra note 2, at 44 ("A cautionary statement that misstates historical facts is not covered by the safe harbor.").
127. 15 U. S. C. A. § 77z-2 (c) (l) (A) (West Supp. 1996).
128. Id. § 77z-2 (c) (l) (B);
129. Id § 78u-5 (c) (l) (B).
130. HOUSE REPORT, supra note 2, at 43, notes that"[t]he Conference Committee safe harbor like the Senate safe harbor, is based on aspects of SEC Rule 175 and the judicial [sic] created 'bespeaks caution' doctrine."
131. See supra note 55 and accompanying text.
132. For cases requiring that warnings be "tailored to the specific future projections, estimates, or opinions, "
133. See Kaufman v. Trump's Castle Funding (In re DonaldJ. Trump Casino Sec. Litig.), 7 F.3d 357, 371-72 (3d Cir. 1993)
134. Cert, denied, 114 S. Ct. 1219 (1994).
135. 15 U. S. C. A. § 77z-2 (c) (l) (A) (i) - (ii) (West Supp. 1996). Clause (i) provides that a forward-looking statement cannot result in private liability if it is "identified as a forward-looking statement, and is accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward looking statement."
136. Id.
137. See 2 SWEEPING REFORM, supra note 13, at 127.
138. HOUSE REPORT, supra note 2, at 44. Referring to subsection (c) (l) (A) (ii), the Statement of Managers states: "Courts may continue to find a forward-looking statement immaterial... on other grounds."
139. Id. (emphasis added). To clarify this point, the Conference Committee included language in the safe harbor provision that no liability attaches to forward-looking statements that are "immaterial."
140. Id. This explanation that a forward-looking statement could be "immaterial... on other grounds" implies that it is also immaterial under clause (i) when properly qualified by meaningful cautionary statements.
141. Id.
142. Id. at 43.
143. Id. at 44.
144. Id.
145. See 17 C. F. R. § 229. 303 (1995). The modern framework for MD&A disclosures was first outlined in a 1987 Concept Release. Concept Release on Management's Discussion and Analysis of Financial Condition and Operations, Securities Act Release No. 6711
146. 52 Fed. Reg. 13, 715 (Apr. 17, 1987) (interpreting the MD&A disclosure obligation). It was then extended in a 1989 Interpretative Release.
147. Management's Discussion and Analysis of Financial Condition and Results of Operations;
148. Certain Investment Company Disclosures, Securities Act Release No. 6835, 54 Fed. Reg. 22, 427 (May 18, 1989) [hereinafter Interpretative Release].
149. 15 U. S. C. A. § 77z-2 (d) (West Supp. 1996);
150. Id. § 78u-5 (d).
151. Compare ZVI Trading Corp. Employees' Money Purchase Pension Plan (In re Time Warner Inc. Sec. Litig.), 9 F.3d 259, 268 (2d Cir. 1993)
152. Cert, denied, 114 S. Ct. 1397 (1994)
153. With Backman v. Polaroid Corp., 910 F.2d 10, 16-18 (1st Cir. 1990) (en banc);
154. See also Dennis J. Block et al., A Post-Polaroid Snapshot of the Duty to Correct Disclosure, 1991 COLUM. Bus. L. Rev. 139 (1991).
155. 17 C. F. R. § 229. 303 (1995).
156. 60 S. E. C. 2695 (Dec. 22, 1995).
157. Id. Bank of Boston failed to disclose "material facts and known trends and uncertainties [in its Form 10-Q] concerning the deterioration of its loan portfolio which [it] reasonably could expect would have a material unfavorable impact on its financial condition and results from operation. "
158. Id.
159. Although the Bank of Boston decision is the only litigated decision, the SEC has also entered into a series of recent setdements involving MD&A disclosure.
160. See In re Gibson Greetings, Inc., Exchange Act Release No. 36357, 60 S. E. C. 1154 (Oct. 11, 1995);
161. In re Shared Medical Systems, Exchange Act Release No. 33632, 56 S. E. C. 199 (Feb. 17, 1994);
162. In re Presidential Life Corp., Exchange Act Release No. 31934, 53 S. E. C. 1563 (Mar. 1, 1993);
163. In re Caterpillar Inc., Exchange Act Release No. 30532, 51 S. E. C. 147 (Mar. 31, 1992).
164. Morris Simkin, SEC Disclosure Requirements: MD&A: When to Include Forward-Looking Statements, N. Y. L. J., May 16, 1996, at 5.
165. Interpretative Release, supra note 66.
166. 485 U. S. 224 (1988).
167. Alfus v. Pyramid Technology Corp., 764 F. Supp. 598, 608 (N. D. Cal. 1991);
168. See Morris v. Newman (In re Convergent Technologies Sec. Litig.), 948 F.2d 507, 516 (9th Cir. 1991);
169. Halkin v. VeriFone Inc. (In re VeriFone Sec. Litig.), 784 F. Supp. 1471, 1483 (N. D. Cal. 1992)
170. aff d, 11 F.3d 865 (9th Cir. 1993).
171. Suzanne J. Romajas, The Duty to Disclose Forward-Looking Information: A Look at the Future of MD&A, 61 FORDHAM L. REV. S245, S261 n. 120 (1993).
172. But see Shaw v. Digital Equip. Corp., 82 F.3d 1194 (1st Cir. 1996) (reversing in part dismissal by district court of antifraud action with regard to forward-looking statements).
173. See Ferber v. Travelers Corp., 802 F. Supp. 698, 713-14 (D. Conn. 1992);
174. * 9 (D. Minn. Sept. 27, 1995).
175. See supra note 39 and accompanying text.
176. See In re Caterpillar Co., Exchange Act Release No. 30532, 51 S. E. C. 147 (Mar. 31, 1992).
177. House Report, supra note 2, at 44.
178. Fed R. Civ. P. 12 (b) (6).
179. See San Leandro Emergency Medical Group Profit Sharing Plan v. Philip Morris Co., Inc., 75 F.3d 801, 808-09 (2d Cir. 1996);
180. * 78 (1st Cir. May 7, 1996).
181. See San Lendro Emergency Medical Croup, 75 F.3d at 808-09.
182. * 21 (D. N. H. Mar. 18, 1996).
183. 15 U. S. C. A. § 77z-2 (West Supp. 1996);
184. Id. § 78u-5 (referring to a motion to dismiss);
185. See also id. § 77z-2 (f);
186. Id. § 78u-5 (f) (authorizing a special stay "during the pendency of any motion by a defendant for summary judgment" based on the safe harbor).
187. Id. § 77z-2 (e);
188. Id. § 78u-5 (e).
189. 467 U. S. 837 (1984).
190. As with all important decisions, there are variant interpretations of its holding and methodology.
191. See Antonin Scalia, Judicial Deference to Administrative Interpretations of Law, 1989 DUKE LJ. 511, 512-513 (1989).
192. From time to time, there have been hints of a modest retreat by the Court from the high water mark of judicial deference in Chevron.
193. See INS v. Cardoza Fonseca, 480 U. S. 421, 446-48 (1987).
194. Charon, 467 U. S. at 842-43.
195. These suggestions were informally made, either as a form of technical assistance that the SEC normally provides to the Congress or through suggestions made by individual Commissioners. They are not, for the most part, reflected in the House or Senate hearings.
196. HOUSE REPORT, supra note 2, at 44.
197. 15 U. S. C. A. §§ 77uz-2 (g), 78u-5 (g) (West Supp. 1996).
198. 15 U. S. C. §§ 77e, 77k, 77/(1994 & West Supp. 1996).
199. 15 U. S. C. A. §§ 77z-2 (h), 78u-5 (h) (West Supp. 1996).
200. Id. §§ 77z-2 (a), 78u-5 (a).
201. The Statement of Managers does direct the SEC to consider additional safe harbors for non-qualifying issuers. HOUSE REPORT, supra note 2, at 31-49. This direction is hardly exhaustive of subsection (g) 's scope, but it can be cited as showing that the draftsmen were primarily focused on forward-looking statements.
202. Both the House and Senate have passed legislation that contains a broad grant of exemptive authority for the SEC. In the Senate, S.1815 ("Securities Investment Promotion Act of 1996") was passed by unanimous consent on June 27
203. In the House, H. R. 3005 ("Securities Amendments of 1996")
204. Passed by a vote of 407-8 on June 19, 1996.
205. See BNA PENSIONS & BENEFITS DAILY, July 9, 1996 (available on LEXIS, News Library, Curnws File).
206. Unlike the Securities Exchange Act of 1934, the Securities Act of 1933 does not provide that federal courts have exclusive subject matter jurisdiction, and thus claims arising under the 1933 Act can be asserted in state court.
207. Ariz. Rev. Stat. Ann. § 44-1991 (1989).
208. See Rosier v. First Fin. Corp., 889 P.2d 11, 15 (Ariz. Ct. App. 1994).
209. But see Rosenthal v. Dean Witter Reynolds, Inc., 908 P.2d 1095, 1102 (Colo. 1995) (en banc) (requiring proof of scienter).
210. Ariz. Rev. Stat. Ann. § 13-230 I (D) (4) (r) (1989 & West Supp. 1995);
211. Id. § 13-2314 (A);
212. See also DeJonghe v. E. F. Hutton & Co., Inc., 830 P.2d 862, 867 (Ariz. Ct. App. 1991) (affirming civil RICO recovery based on securities fraud and for negligent supervision).
213. Section 28 (a) of the Securities Exchange Act of 1934 has long been read to preclude awards of punitive damages. 15 U. S. C. § 78bb (a) (1994).
214. See Richard D. Gamblin & Paul H. Stephenson III, Punitive Damages and the Federal Securities Act: Recovery Via Pendent Jurisdiction, 47 Miss. LJ. 743, 749 (1976).
215. See Basic Inc. v. Levinson, 485 U. S. 224, 241-47 (1988). Circuits disagree about the scope of this doctrine, with some applying it only to efficient markets.
216. See Mirken v. Wasserman, 858 P.2d 568, 570 (Cal. 1993).
217. Id.
218. Id. at 571-72 n. 3
219. (citing Gaffin v. Teledyne, Inc., 611 A.2d 467, 474-75 (Del. 1992));
220. Kahler v. E. F. Hutton & Co., 558 So.2d 144, 145 (Fla. Dist. Ct. App. 1990);
221. Peil v. Speiser, 806 F.2d 1154, 1163 n. 17 (3d Cir. 1986) ("[N]o state courts have adopted the [fraud-onthe-market] theory, and thus direct reliance remains a requirement of a common law securities fraud claim.").
222. One intermediate appellate court did adopt the "fraud on the market" doctrine.
223. See Rosenthal v. Dean Witter Reynolds, Inc., 883 P.2d 522, 526 (Colo. Ct. App. 1994).
224. The Colorado Supreme Court reversed, however, deciding that the question had been "unnecessarily addressed." Rosenthal v. Dean Witter Reynolds, 908 P.2d 1095, 1106 (Colo. 1996).
225. See infra note 125. Other recent decisions have assumed that the doctrine does not apply outside the context of the federal securities laws.
226. See, e.g., Antonson v. Robertson, 141 F. R. D. 501, 508 (D. Kansas 1991);
227. Bunch v. KMART Corp. 898 P.2d 170, 172 (Okla. Ct. App. 1995).
228. See Rosenthal, 908 P.2d at 1100-04 (Colo. 1996);
229. Weatherly v. Deloitte & Touche, 905 SAW 2d 642, 648-49 (Tex. Ct. App. 1995) ("Texas Securities Act does not require the buyer to prove reliance on the seller's misrepresentations or omissions").
230. In Rosenthal, although the Colorado Supreme Court refused to adopt or reject the "fraud on the market" doctrine, it actually reinstated the class action, reversing the lower court and finding that it was sufficient for the plaindffs to plead that the defendants' misstatements or omissions had caused them harm. Rosenthal, 908 P.2d at 1103-04.
231. See Neil Lewis, California Measure Could Trump U. S. Law on Securities Suits, N. Y. TIMES, Apr. 30, 1996, at A13. (describing ballot initiative that would authorize a class action under a provision paralleling Rule 10b-5 against both primary violators and those aiding or "assisting" the fraud). The California initiative would also allow plaintiffs' lawyers to solicit clients and would deny the state authority to limit punitive damages.
232. Id.
233. 472 U. S. 797 (1985).
234. Id. at 814-23. Federal courts have found that in a class action covering residents of multiple states, variations in state law are likely to "swamp any common issues and defeat [the] predominance" requirement of Rule 23 of the Federal Rules of Civil Procedure.
235. See Castano v. American Tobacco Co., 84 F.3d 734 (5th Cir. 1996);
236. Georgine v. Amchem Prod., 83 F.3d 610 (3d Cir. 1996).
237. BMW of N. Am., Inc. v. Gore, 116 S. Ct. 1589, 1597-98 (1996).
238. The BMW decision may breathe new life into the Supreme Court's decision in Healy v. Beer Institute, 491 U. S. 324, 335-36 (1989), which held that the Commerce Clause constrained a state from imposing its own policy choices on, or restricting the "autonomy" of neighboring states.
239. See BMW, 116 S. Ct. at 1597 ("We think it follows from these principles of state sovereignity and comity that a State may not impose economic sanctions on violators of its laws with the intent of changing tortfeasors' lawful conduct in other States").
240. This language, however, occasioned sharp dissent.
241. Most securities class actions are certified under Fed. R. Civ. P. 23 (b) (3). To certify such a class action, the federal court must find that there are both common issues of law or fact, which the class members share, and that these issues "predominate" over individual issues. State class action rules typically parallel Rule 23 and thus require a similar finding of "predominance." A court, however, may certify a class action with respect to particular issues only.
242. Id.
243. Such a proceeding seems feasible only in "large claimant" class actions in which the individual damages are substantial (as, for example, they are in some limited partnership cases that are today tried in state courts). In a "small claimant" class action where the individual damages are modest but the class is large, it is unlikely that the individual claimants will seek to prove either reliance or their individual damages.
244. See Rosenthal v. Dean Witter Reynolds, Inc., 908 P.2d 1095, 1105 (Colo. 1996) (applying Colorado Blue Sky statute to offer and sale in Pennsylvania where defendants issued Offering Statement in Colorado).
245. Such classes have been certified in the mass tort context, but typically these classes have been "setdement classes," which are certified "for settlement purposes" only. The Supreme Court has, of course, permitted a nationwide class to be certified in state court, provided that actual notice and a right to opt out is given to all class members.
246. See Phillips Petroleum Co. v. Shutts, 472 U. S. 797 (1985). Some recent decisions, however, have tightened the standards for certification and rejected the proposed class when the action would represent a nationwide class and involve the substantive laws of most states.
247. See In re Rhone-Poulenc Rorer Inc., 51 F.3d 1293, 1299 (7th Cir.)
248. Cert denied, 116 S. Ct. 184 (1995);
249. Castano v. American Tobacco Co., 84 F.3d 734 (5th Cir. 1996).
250. See supra note 14 and accompanying text.
251. 15 U. S. G. A. §§ 77z-2 (a) (l), 77u-5 (a) (l) (West Supp. 1996).
252. Id. §§ 77z-2 (b) (2) (A), 77u-5 (b) (2) (A).
253. Id. §§ 77z-2 (b) (l) (A), 77u-5 (b) (l) (A).
254. Id. §§ 77z-2 (b) (2) (D), 78u-5 (b) (2) (D).
255. See supra notes 92-96 and accompanying text.
256. 5 U. S. C. A. §§ 77k (f), 78u-4 (g) (West Supp. 1996).
257. 15 U. S. C. § 77k (1994 & West Supp. 1996).
258. Section 21D (g) of the 1934 Act, 15 U. S. C. A. § 78u-4 (g) (West Supp. 1996), states that joint and several liability shall be imposed "only if the trier of fact specifically determines that such covered person knowingly committed a violation of the securities laws."
259. See id. §§ 77z-2 (b) (2) (A), 78u-5 (b) (2) (A) (excluding forward-looking statements "included in a financial statement prepared in accordance with generally accounting accepted principles.").
260. See Robert A. Prentice & John H. Langmore, Beware of Vaporware: Product Hype and the Securities Fraud Liability of High-Tech Companies, 8 HARV. J. L. & Tech. 1 (1994).
261. Willard Carleton et al., Securities Class Action Lawsuits: A Descriptive Study, Ariz. L. Rev. (forthcoming 1996).
262. 116 S. Ct. 873 (1996).
263. See Joel Seligman, The Merits Do Matter: A Comment on Professor Grundfest's "Disimplying Private Rights of Action Under the Federal Securities Laws: The Commission's Authority," 108 Harv. L. REV. 438, 446 (1994) (noting the trend toward dismissal of securities cases on motion before trial).
264. This doctrine also has a long history. See Donald C. Langevoort, Disclosures that "Bespeak Caution," 49 Bus. Law. 481 (1994).
265. See George A. Akerlof, The Market for "Lemons": Quality Uncertainty and the Market Mechanism, 84 Q. J. ECON'. 488, 499-500 (1970) (employing the used car market to illustrate how institutions can develop to counteract the effects of quality uncertainty).
266. This may reflect the fact, however, that commercial consumers have contractual remedies that investors lack and can simply rescind their commitments to purchase if delivery is delayed.
267. Many would dispute such a characterization of the plaintiffs bar.
268. See, e.g., Scligman, supra note 147. Nor is it this author's own assessment. My own view is that it is a hopeless task to ask what percentage of securities class actions are "frivolous," because at the time of their filing few class actions are either frivolous or meritorious in the eyes of the plaintiffs' lawyers. Only once the plaintiff has obtained some opportunity for discovery can the plaintiff form an accurate assessment of the action's likely merit. Thus, the optimal reform would probably combine a high pleading standard at a delayed point with a brief opportunity for discovery. In this light, one attraction of the Second Circuit's "motive and opportunity" standard, which as a practical matter focuses on insider sales, is that this factor can be identified at low cost to the plaintiffs lawyer because such sales do usually come to light as a result of § 16 (b) of the 1934 Act.
269. The leading such indicator is Marksman Partners, L. P. v. Chantal Pharmaceutical Corp., 1996 U. S. Dist. LEXIS 7179 (CD. Cal. May 21, 1996), which fully adopted the Second Circuit's "motive and opportunity" and "strong circumstantial evidence" pleading standards. Another respect in which courts have tempered the Act's pleading standards is by granting leave to replead.
270. See Zeid v. Kimberley, 1996 WL 310124, Civ. No. 96-20136 (N. D. Cal. June 6, 1996);
271. See also supra notes 54-56 and accompanying text.