Conclusion — Securities Class Actions: Current And Emerging Trends
In previous installments of this series, we have discussed actions taken by Congress and the courts to curtail perceived abuses in filing and litigating securities damage suits, primarily class actions. The goal of these limitations has been to weed out frivolous suits, while permitting those with merit to proceed.
Congress acted on the perception of abusive litigation in passing the PSLRA, which contains substantive and procedural limitations. A key part of those limitations is the pleading requirements. In part, those requirements were drawn from the “particularity” requirements of Federal Rule of Civil Procedure 9(b). In part, they were based on the pleading standard for scienter crafted by the Second Circuit requiring that a “strong inference” be pled. Collectively, these requirements present significant pleading requirements which must be met before a complaint can move forward in discovery.
The Supreme Court, which has long expressed concern about abuses in bringing securities class actions, has also imposed limitations on these actions. In Central Bank, for example, the Court constricted the reach of Section 10(b), the antifraud weapon of choice in most cases, by concluding that the Section does not cover aiding and abetting. In Stoneridge, the Court reaffirmed that conclusion, rejecting scheme liability for transactions it saw as more appropriately regulated by state law, rather than the federal securities laws.
The Court also bolstered pleading requirements by reinterpreting its classic decision in Conley and Federal Civil Rule 8(a) on what is required to plead a complaint. Last term’s Twombley decision added a new plausibility test which the securities law plaintiff must meet in addition to the requirements of the PSLRA. The Court also added pleading and proof requirements in Dura regarding loss causation and interpreted the PSLRA’s “strong inference” of scienter requirement in Tellabs as rewriting a portion of Federal Civil Rule 12(b)(6) regarding a motion to dismiss. Overall, these decisions have clearly tightened the already stringent pleading requirements for these cases.
There is little doubt that the actions of Congress and the High Court have had the desired impact. In 2007, fewer securities class actions were filed than the prior year. At the same time in 2007, there were more cases filed than in any other post-PSLRA year other than 2006.
Billion dollar settlements were also down in 2007. Last year, there was only one settlement over $1 billion, compared to three the prior year. However, the mean settlement amount in 2007 was the highest since the passage of the PSLRA. At the same time, there is an increasing number of settlements in the $20 million to $30 million range.
Some commentators have argued that the reduced number of cases is the result of less fraud. Others have argued that it may be the result of market volatility and less fraud. Once commentator has noted that the number of smaller cases that tend to have limited damage claims, small class periods and which are often quickly settled has diminished substantially. Those cases tend to be associated with so-called “strike suits” – the kind Congress and the courts have sought to weed out.
The reduced number of cases being filed each year, while consistent with the “less fraud” and “market volatility” theories, may also reflect the increased substantive and procedural requirements for bringing and maintaining these cases. Those limitations may be weeding out non-meritorious cases, a point consistent with the finding that there has been a substantial reduction in the number of actions which appear to be “strike suits.” At the same time, the increased settlement value of the cases suggests that those which have been brought may be more meritorious. Overall, these points suggest that the actions of Congress and the courts may be having the desired impact – weeding out non-meritorious cases, while permitting those with merit to proceed.