Private Securities Litigation Reform Act (PSLRA) Overview

What Is the Private Securities Litigation Reform Act (PSLRA)?

The Private Securities Litigation Reform Act (PSLRA) is a piece of legislation passed by Congress in 1995 to stem the filing of frivolous or unwarranted securities lawsuits. The Private Securities Litigation Reform Act increased the amount of evidence that plaintiffs are required to present before filing a securities fraud case with the federal courts. It also changed the way securities class action lawsuits are handled by giving judges the authority to determine plaintiffs and to take other actions to reduce legal system abuses.

The purpose of the Private Securities Litigation Reform Act was to prevent unwarranted, flimsy, or fraudulent lawsuits from being filed, which can be expensive and tie up the efficiency of the legal system. It also reduced litigation risk for certain companies who faced these types of lawsuits on a regular basis.

Understanding the Private Securities Litigation Reform Act (PSLRA)

A shareholder may file a securities fraud claim in federal court in order to recover damages believed to be sustained as a result of the actions of a firm or individuals related to the sale, trading, or price manipulation of securities. Before the Private Securities Litigation Reform Act, plaintiffs could reasonably file a lawsuit simply when the price of a stock changed significantly. In these cases, plaintiffs would anticipate that the discovery process would reveal some potential fraud. After it was enacted in 1995, plaintiffs were required to bring forth particular fraudulent statements made by the defendant and to allege that the fraudulent statements were reckless or intentional. The plaintiffs also had to prove that they suffered a financial loss as a result of the alleged fraud.

Former President Bill Clinton initially vetoed the Private Securities Litigation Reform Act, but the U.S. Senate eventually overrode his veto and the Act became law on December 22, 1995. The law was intended to increase investor awareness regarding securities litigation, as well as to make such litigation more efficient. Most importantly, it was meant to deter what was perceived to be an abundance of meritless class action lawsuits made possible under the Securities Act of 1933 and the Securities Exchange Act of 1934.

Since the adoption of the Private Securities Litigation Reform Act, legal scholars have disagreed on its impact. Some legal scholars have argued that it has helped to completely restructure the scope of securities class actions. Other legal scholars suggest that it has had very little impact on the ultimate outcome of these kinds of cases, the amount of money awarded via settlements, or even the number of cases being filed. Regardless, the Private Securities Litigation Reform Act has imposed strict guidelines that must be followed by plaintiffs, including more rigorous pleading requirements, mandating stays of discovery, and providing courts with specific criteria for the selection of lead plaintiffs of class actions.