Ten Things We Know and Ten Things We Don't Know About the
Private Securities Litigation Reform Act of 1995
Written Testimony of Joseph A. Grundfest and Michael A. Perino
before the Subcommittee on Securities of the Committee on Banking,
and Urban Affairs, United States Senate, on July 24, 1997
Ten Things We Know and Ten Things We Don't Know
About the Private Securities Litigation
Reform Act of 1995
JOINT WRITTEN TESTIMONY OF
JOSEPH A. GRUNDFEST AND MICHAEL A. PERINO
Stanford Law School
Subcommittee on Securities
of the Committee on Banking, Housing, and Urban Affairs
United States Senate
on July 24, 1997
Joseph A. Grundfest is the William A. Franke Professor of
Law and Business and Crocker Faculty Scholar at Stanford Law
School. He joined Stanford's faculty in 1990 after having
served for more than four years as a Commissioner of the United
States Securities and Exchange Commission. While at the SEC,
Professor Grundfest dealt extensively with matters related
to the enforcement of the federal securities laws, regulation
of novel financial instruments, takeovers, corporate governance,
market volatility, and internationalization of U.S. capital
Professor Grundfest's scholarship in the areas of corporate
law, securities regulation, and litigation has been published
in the Harvard, Yale, and Stanford Law Reviews. Professor
Grundfest is listed as one of the 100 most influential attorneys
in the United States by the National Law Journal. He is principal
investigator for Stanford Law School's Securities Class Action
Clearinghouse which has been nominated by the Smithsonian
Institution for the 1997 Computerworld-Smithsonian Award as
one of the five most important applications of information
technology to society by an educational institution in 1997.
Professor Grundfest's work on Internet-related matters also
includes posting of the first hypertext Supreme Court brief
and the first preliminary registration statement for a major
issuer, Yahoo! Inc.
Prior to joining the SEC, Professor Grundfest served as counsel
and senior economist for legal and regulatory matters at the
President's Council of Economic Advisors. An attorney and
economist, Professor Grundfest has also practiced law with
Wilmer, Cutler & Pickering, and has served as an economist
with the Brookings Institution and the Rand Corporation.
Professor Grundfest holds a bachelor's degree in economics
from Yale University (1973) and completed the M.Sc. program
in mathematical economics and econometrics at the London School
of Economics (1972). His law degree is from Stanford (1978),
where he also completed all requirements for a doctorate in
economics, but for the dissertation (1978).
Professor Grundfest directs the Roberts Program in Law, Business
and Corporate Governance at Stanford Law School which presents
Director's College as an annual executive education program.
He has served on the New York Stock Exchange's Legal Advisory
Board, on a rules committee of the United States District
Court for the Northern District of California, and has been
elected to membership of the American Law Institute. Professor
Grundfest received the John Bingham Hurlbut Award for Excellence
in Teaching as well as the Associated Students of Stanford
University award as the best professor at the Stanford Law,
Business, and Medical Schools. Professor Grundfest was selected
as a National Fellow by the Hoover Institution, was awarded
a John M. Olin Faculty Fellowship, and is an Adjunct Scholar
of the American Enterprise Institute. Professor Grundfest
is admitted to practice in California and in the District
Current as of 07/23/97
Michael A. Perino is a Lecturer and Co-Director of the Roberts
Program in Law, Business, and Corporate Governance at Stanford
Law School. Mr. Perino's primary areas of scholarly interest
are securities regulation and litigation, civil procedure,
class actions, and complex litigation. Prior to coming to
Stanford, Mr. Perino received his LL.M. degree from Columbia
Law School, where he was valedictorian, a James Kent Scholar,
and the recipient of the Walter Gellhorn Prize for outstanding
proficiency in legal studies. Mr. Perino was also formerly
associated with the New York law firm of Cadwalader, Wickersham
& Taft, where he handled primarily securities actions and
other complex federal litigation. He is a member of the New
Mr. Perino has written numerous articles on securities fraud
and class action litigation, including: (1) Securities
Litigation Reform: The First Year's Experience (A Statistical
and Legal Analysis of Securities Fraud Litigation Under the
Private Securities Litigation Reform Act), Working
Paper No. 140, John M. Olin Program in Law and Economics Working
Paper Series, Stanford Law School (Feb. 1997) (with Joseph
A. Grundfest); (2) Class Action Chaos? The Theory of
the Core and an Analysis of Opt Out Rights in Mass Tort Class
Actions, 46 Emory L.J. ___ (forthcoming 1997); (3)
The Pentium Papers: A Case Study of Institutional Investor
Activism in Litigation, 38 Arizona L. Rev. 559 (1996)
(with Joseph A. Grundfest); and (4) A Strong Inference
of Fraud? An Early Interpretation of the 1995 Private Securities
Litigation Reform Act, 1 Securities Reform Act Litigation
Reporter 397 (1996).
Mr. Perino is also one of the principal developers of Stanford
Law School's Securities Class Action Clearinghouse which has
been nominated by the Smithsonian Institution for the 1997
Computerworld-Smithsonian Award as one of the five most important
applications of information technology created by an educational
institution in 1997.
Ten Things We Know and Ten Things We Don't Know
About the Private Securities Litigation Reform Act of 1995
By Joseph A. Grundfest*
and Michael A. Perino**
Mr. Chairman and members of the Subcommittee, we are honored
by the invitation to appear before you today and to participate
in these hearings. These hearings are, we understand, intended
to explore the effects of the Private Securities Litigation
Reform Act of 1995 (the "Reform Act" or "Act"),1 and the potential
need for further federal legislation establishing uniform
federal standards governing private securities fraud litigation.
The Reform Act is now roughly nineteen months old. Like most
toddlers of comparable age, there is much we know about its
origins, evolution, and character, but there is also much
we do not know. Indeed, at this relatively early stage of
the statute's development, uncertainties regarding its future
application and interpretation dominate the horizon. It is
therefore important to approach the issues pending before
the Committee with an appropriate sense of humility and respect
for the unknown.
To aid the Subcommittee in its inquiry and to help emphasize
the uncertainties in our current state of knowledge, we have
organized our testimony in three parts. Part I
discusses ten important things that we can measure and describe
about the operation of class action litigation in the wake
of the Reform Act. Part II
describes ten important things we do not currently know about
the Reform Act, including matters that will take several more
years of litigation to resolve. Part III
addresses the question of uniform federal standards and concludes
that, notwithstanding uncertainties regarding the future effects
of the Reform Act, the time is ripe for Congress to consider
and to adopt suitably crafted uniform federal standards governing
private securities fraud litigation affecting securities traded
on national markets.
Much of the information reported in this testimony exists
only because of the substantial efforts of a hardworking team
at Stanford Law School who have built the first Designated
Internet Site for the posting of litigation materials on the
World Wide Web. This site, which can be viewed at http://securities.stanford.edu, was
nominated by the Smithsonian Institution as one of the five
best applications of information technology by an educational
institution in 1997. As of July 22, 1997, the site lists 202
companies that have been sued in federal securities class
actions governed by the Reform Act, together with the full
text of more than 100 complaints, as well as myriad briefs,
decisions, opinions, and orders relating to securities fraud
class action litigation in federal and state court. The site
has recently been described as the on-line "mecca" for information
on securities class action lawsuits.2
The innovative efforts of the judges of the United State
District Court for the Northern District of California who
adopted Local Rule 23-3 also deserve special mention.3 Rule 23-3 is
the first rule of court that requires Internet posting of
specified class action litigation documents. This Rule imposes
exceedingly low costs on litigants, dramatically enhances
the transparency of the litigation process, and substantially
adds to the public's ability to understand and monitor class
action litigation. All of these consequences are consistent
with Congress' stated desire to enhance public scrutiny and
awareness of securities fraud class action activity.4 We hope that this Committee will expand the scope
of its inquiry to consider the substantial benefits that information
technology can bring to bear on the securities fraud class
action litigation process, as well as other areas of the law.
I. Ten Things We Know About the Reform Act
There has been intense interest in the effects of the Reform
Act on securities class actions. We are aware of three empirical
studies that examine securities fraud class action filings
subsequent to the Reform Act, including a study we co-authored.5 We continue to update our data as new cases are
filed and as litigation progresses, and we caution that all
empirical analyses of the Reform Act are subject to revision
as we gain additional experience with the Reform Act and its
provisions. Accordingly, we emphasize that the data discussed
below speak only as to the time periods specified and that
analysis of more recent experience could lead to materially
1. The total volume of litigation is little changed in the
post-Reform Act period.
As detailed more fully in the separate written testimony
of Michael A. Perino,6 passage of
the Reform Act does not appear to be correlated with an unusual
decline in the overall volume of securities litigation relative
to the rate of litigation observed from 1991 through 1995.
While it is too early in the life history of the Act to draw
any reliable conclusions about long-term effects on filing
rates, analysis of litigation activity through June 30, 1997,
reveals that the overall number of companies sued in securities
class actions appears to be roughly equivalent to the number
sued prior to the Reform Act. In 1996, 150 issuers were sued.7
Absent certain one-time effects that depressed the volume
of litigation filed in the first quarter of that year, we
have estimated that 163 issuers would have been sued.8 Data collected in the first six months of 1997
suggests an annualized total of 194 issuers sued in 1997.9
How do these figure compare to the years immediately preceding
passage of the Act? On average, in the last five years prior
to the Reform Act litigation was being filed at a rate of
approximately 176 defendant issuers per year in federal court,
although the number of issuers sued varied from a low of 153
to a high of 220.10
Thus, post-Reform Act litigation rates are well within the
range observed prior to the Reform Act.
2. State court class action securities fraud litigation
against publicly-traded issuers has become a material factor
in the litigation process since passage of the Act. These
cases were rare prior to the Act's passage.
The relative stability of the aggregate litigation rate masks
a significant shift of activity from federal to state court.
In the first eighteen months after the Reform Act, a total
of ninety-two issuers were sued in state court proceedings.11 As detailed in Mr. Perino's separate testimony,
there has been some decline in state court filings in 1997,
but overall approximately ninety-two of 238 post-Reform Act
litigations (38.6%) involve at least some state component.
There is widespread agreement that these figures represent
a substantial increase in state court litigation.12 Two phenomena
seem to explain the bulk of this shift. First, there appears
to be a "substitution effect" whereby plaintiffs' counsel
file state court complaints when the underlying facts appear
not to be sufficient to satisfy new, more stringent federal
pleading requirements, or otherwise seek to avoid the substantive
or procedural provisions of the Act. Second, plaintiffs appear
to be resorting to increased parallel state and federal litigation
in an effort to avoid federal discovery stays or to establish
alternative state court venues for the settlement of federal
In addition to this increase in state class action activity,
Figure 1 suggests that there has been a significant shift
in the kinds of defendants appearing in state litigation.
Prior to the Reform Act, most state cases (approximately 89%)
alleging fraudulent activity in connection with the purchase
or sale of securities involved non-publicly-traded securities.14 By contrast, the vast majority of state court
class actions filed since the Reform Act (81.5%) involve securities
that trade on national markets.15 These cases
typically involve allegations that the price of the company's
securities was inflated due to misrepresentations or omissions
affecting transactions on national markets, precisely the
kinds of claims that were most often filed in federal court
prior to the Act. In 1997, these actions continue to be filed
in state court, despite overall declines in state filings.
The sudden increase in the appearance of these cases in state
court strongly supports the inference that the shift in forum
selection was driven by the passage of the Reform Act.
3. Plaintiffs are alleging accounting fraud and trading
by insiders more frequently than before the Act's effective
Along with the shift to state court, one of the most significant
effects associated with passage of the Reform Act are the
changes in the style of litigation that has evolved in response
to the Reform Act's requirements
In particular, there has been a significant increase in the
number of federal complaints alleging trading by insiders
during the period when the fraud was allegedly alive in the
market and a significant increase in the number of cases alleging
misrepresentations or omissions in financial statements as
the basis for liability. Approximately 59% of a sample of
post-Reform Act federal complaints allege a misrepresentation
or omission in financial statements.16 Allegations of misstated financials account for
67.4% of Section 10(b) complaints involving publicly-traded
companies.17 In sharp contrast, similar allegations are found
in only 34% of pre-Reform Act cases.18
Allegations of trading by insiders now appear in about 57%
of post-Reform Act cases, whereas these allegations are found
in only 21% of pre-Reform Act cases. Alleged trading by insiders
is particularly important in cases against high technology
companies, appearing in 73% of those cases, but that statistic
must be interpreted with caution because of the prevalence
of option-based compensation in the high technology sector.
The rise in these kinds of allegations is consistent with
the theory that plaintiffs are increasingly attempting to
rely on such allegations to satisfy the Reform Act's strong
inference pleading requirement.19
The relatively small number of cases that allege false forward-looking
information as the sole basis for liability (only 6.5% of
cases involving publicly-traded companies) also suggests that
the new pleading standards are affecting which actions plaintiffs
are choosing to file in federal court because these actions
are much less likely to satisfy the heightened pleading standard.20
4. Companies tend to be sued after larger stock price declines.
A significant stock price decline over a short period of
time may be a necessary but insufficient condition leading
to class action securities fraud litigation. Prior to the
Reform Act, the average stock price decline preceding the
filing of a Section 10(b) claim was about 19%.21 During 1996,
the average decline in these cases jumped to 31%.22
This increase in one-day stock price declines observed around
the end of the class period is consistent with the theory
that plaintiffs must, on average, demonstrate more dramatic
wrongdoing in the post-Reform Act environment in order to
satisfy the new federal pleading standard. Further statistical
analysis is necessary to support this conjecture. For example,
it would be valuable to know whether the average stock price
decline associated with 1997 federal litigation and post-Reform
Act state filings that have no parallel federal claims are
systematically smaller than those associated with 1996 federal
5. Technology companies continue to be disproportionately
frequent targets of litigation.
High technology companies were among the most vocal proponents
of securities litigation reform,23 in large
part because experience prior to the Reform Act indicated
that high-technology companies were involved in a disproportionately
large number of securities fraud class action cases. The Reform
Act has done little to change the percentage of defendants
sued in securities fraud class actions in 1996 that are high
technology issuers. High technology companies represent 34%
of all issuers sued in federal court in that time period.24
That statistic is not materially different from the pre-Reform
6. In 1996, larger companies were being sued less frequently
than before passage of the Reform Act.
The average company sued in a federal securities fraud class
action in 1996 had a market capitalization of $529.3 million.26
Prior to the Reform Act, the average market capitalization
was $2,080 million.27 This decline
appears to be attributable almost exclusively to a reduction
in litigation naming issuers with market capitalization in
excess of $5.0 billion. Prior to the Reform Act, these large
corporations represented about 8.4% of federal court activity,
but very few of these companies appear to have been sued in
This new pattern in defendant selection is consistent with
our observation that the preponderance of post-Reform Act
litigation involves allegations of accounting irregularities
and trading by insiders.29 Larger, more
established firms are less likely sources for material accounting
irregularities or statistically significant trading by insiders.
Larger firms are therefore less likely to be named as defendants.
In addition, in 1996 the stock market experienced a substantial
increase in value, with much of the market's strength centered
on the most well-capitalized issuers. That price pattern is
also consistent with a shift toward litigation targeting smaller
7. Since passage of the Reform Act the "race to the courthouse"
The empirical evidence collected to date suggests that the
"race to the courthouse," which was one of Congress' primary
concerns in passing the Reform Act, had slowed somewhat.31 Even though
some issuers are still sued within days of significant stock
price drops, these typically involve more dramatic instances
of alleged fraud.32
Overall, however, the average time between the end of the
class period and the filing of the first complaint has risen
from forty-nine days to seventy-nine days.33 This change appears to be driven largely by two
provisions of the Reform Act. First, the creation of the lead
plaintiff provision has reduced plaintiffs' attorneys' incentives
to be the first to file a class action complaint against an
issuer. Second, the Act's heightened pleading requirement
may require plaintiffs to engage in more extensive investigation
and more careful drafting prior to filing a complaint.
8. Institutional investors are only rarely stepping forward
to become lead plaintiffs. They are often vigorously attacked
by traditional plaintiffs' counsel when they do so.
Congress created the lead plaintiff provision and early class
notification process to curb the race to the courthouse, to
lessen the use of so-called "professional plaintiffs," and
to lessen the influence of plaintiffs' attorneys on the prosecution
of class actions. These provisions were designed to encourage
greater institutional investor participation in class action
litigation by giving the lead plaintiff the power to control
the course of the action, including the selection of lead
So far, institutions have not expressed a great willingness
to serve as lead plaintiffs. Only a handful of major institutions
have stepped forward in post-Reform Act class actions.35 In those
cases, the institutions have faced significant opposition
from the traditional plaintiffs' bar, who typically allege
that the institution is unsuitable to serve as lead plaintiff
because their sophistication makes them atypical of the class
as a whole or because they are susceptible to unique defenses.36 The traditional
plaintiffs' bar has also vigorously attacked institutional
investors' choices of counsel when those institutions have
not selected members of the traditional plaintiffs' bar.37 Despite this opposition, courts have generally
been willing to appoint institutions that volunteer to be
lead plaintiff and have approved the institutions' choice
9. Cases are taking longer to litigate and involve more
pretrial motions practice.
Empirical evidence suggests that prior to the Reform Act
the median time between filing and settlement in securities
class actions was 21.7 months.39 It is too early to determine whether the Reform
Act will effect this statistic; however, early evidence suggests
that pre-trial proceedings in post-Reform Act cases are taking
longer. The increasing length of pre-trial procedures is a
necessary consequence of the procedural reforms the Act contains.
The early notification procedures, the lead plaintiff provision,
and the discovery stay pending resolution of any motion to
dismiss have all tended to build significant delays into pre-trial
practice. Moreover, some courts appear to be moving quite
deliberately in interpreting the Act's novel provisions, especially
the new heightened pleading standard. That tendency has also
slowed down prosecution of these cases.
10. The Milberg Weiss firm has become more dominant as plaintiffs'
class action counsel since passage of the Reform Act.
It was generally understood that prior to passage of the
Reform Act a single law firm, Milberg Weiss Bershad Hynes
& Lerach ("Milberg Weiss"), played a dominant role as plaintiffs'
class action counsel. Milberg Weiss' appearance ratio nationwide
stood at approximately 31% prior to the Reform Act.40
Since passage of the Reform Act, Milberg Weiss appears to
have become even more dominant in the class action securities
process. Aggregating parallel federal and state activity,
Milberg Weiss' appearance ratio in 1996 stood at about 59%
nationwide and 83% in California.41 Milberg Weiss' increased significance can be
explained by the fact that: (1) it is likely the best capitalized
plaintiffs' firm and therefore best able to finance the delays
associated with slower procedures under the Reform Act; (2)
it has the most diversified portfolio of plaintiffs' claims
and is therefore better able to absorb the risk associated
with litigation under the new regime; and (3) it is best situated
to internalize the externalities associated with the need
to invest to create new precedent interpreting the Reform
Act's novel provisions.
II. Ten Things We Don't Know About the Reform Act
While there is much that we know about the Reform Act, our
knowledge is typically constrained to factors related to the
early phases of the litigation. Even there, however, we observe
significant splits among federal district courts that have
been called upon to interpret key Reform Act provisions. The
practical implications of these splits at the lower court
level are difficult to predict and will probably take several
years of litigation to resolve at the appellate level. Accordingly,
it is safe to conclude that the uncertainties regarding the
future evolution of the Reform Act dominate our current knowledge
of the Reform Act's effects.
1. How will the courts interpret the Act's requirement that
complaints "state with particularity all facts" on
which an allegation of fraud is based?
Section 21(D)(b)(1) of the Reform Act provides that:
the complaint shall specify each statement alleged to have
been misleading, the reason or reasons why the statement
is misleading, and, if an allegation regarding the statement
or omission is made on information and belief, the complaint
shall state with particularity all facts on which
that belief is formed. (emphasis supplied)
A major question raised by this provision relates to the
vigor with which courts will interpret the statutory language
calling for an articulation of all facts upon which
a plaintiffs' information or belief underlying a complaint
is based. For example, the court in In re Silicon Graphics,
Inc. Securities Litig., Fed. Sec. L. Rep. ¶99,468
(CCH), 1997 WL 285057 (N.D. Cal. May 23, 1997), held that
plaintiffs' allegations in a 73-page amended complaint were
too generic and that in order to provide sufficiently detailed
information about alleged negative internal reports the allegations
"should include the titles of the reports, when they were
prepared, who prepared them, to whom they were directed, their
content, and the sources from which plaintiffs obtained this
information." Id. at 97,133.
The court also observed that the degree of specificity required
by the Reform Act was the subject of specific debate in Congress,
and quoted the statement of Rep. Dingell who expressed concern
on the record that, under the legislation as drafted, names
of confidential informants, employees, competitors, and others
who provided information leading to the filing of the case
would be required to be disclosed. Id. at 97,130-97,131.
The court found that Congress had enacted precisely the language
as to which Rep. Dingell had complained, and that plaintiffs
must plead the sort of information described by Rep. Dingell
to meet the requirements of the Reform Act.42 Id. at 97,131. Plaintiffs did not
meet this burden and the complaint was dismissed.
The only other case of which we are aware that has interpreted
this provision of the Reform Act is Zeid v. Kimberley,
a class action involving Firefox Communications, Inc.43 In Zeid,
the court held that when a complaint is based on "investigation
of counsel" rather than "information and belief" plaintiffs
are not required to state with particularity all facts upon
which their beliefs are formed. In such circumstances, however,
the court held that plaintiffs must meet the other strict
pleading requirements of the Reform Act. Specifically, the
court held that "Plaintiffs cannot rely on conclusory allegations
or tenuous inferences but instead, must allege with particularity:
(1) each statement, (2) why each statements is false, and
(3) as to each statement, facts giving rise to a strong inference
that Defendants acted with scienter."44
The court found that plaintiffs' 104-page complaint failed
to satisfy this standard and it was dismissed with prejudice.
If other courts follow either the Silicon Graphics
or Zeid holdings, we would expect to see an increase
in the percentage of defendants that prevail on motions to
dismiss and a decline in the volume of federal complaints
filed. At present, Silicon Graphics and Zeid
are on appeal to the Ninth Circuit and we have no information
as to whether these decisions will be upheld or modified or
whether they will be followed by other district courts or
courts of appeal. The interpretation of the "all facts" pleading
requirement is, we believe, a major uncertainty regarding
the evolution of the Reform Act.
2. How will the courts interpret the Reform Act's "strong
inference" pleadings standard? Will they adopt the Second
Circuit standard or move to a stricter standard?
Under the Reform Act, plaintiffs are now required to "state
with particularity facts giving rise to a strong inference
that the defendant acted with the required state of mind."45 The interpretation
of this standard has been the subject of considerable disagreement
among district courts. The debate focuses on whether the Reform
Act simply adopts the Second Circuit standard, or goes further.
Several courts have held that the Reform Act adopted the Second
Circuit pleading standard,46 while other
courts have found that the Reform Act standard goes beyond
the Second Circuit standard.47 No Court of Appeals has directly addressed this
issue. Accordingly, we are uncertain if, in the long run,
courts will adopt the Second Circuit standard or move to a
stricter standard such as that employed by the Silicon
Again, we expect that the resolution of this uncertainty
will materially affect the future evolution of federal securities
fraud litigation. The higher the standard courts set, the
more difficult it becomes for plaintiffs to withstand motions
to dismiss and the lower the volume of anticipated litigation
in the federal courts.
3. Will the forward-looking safe harbor successfully elicit
more forward-looking information?
Under the safe harbor provisions of the Reform Act,48 a company may not be held liable under the federal
securities laws for projections and other forward-looking
statements, either written or oral, that later prove to be
(A) the forward-looking statement 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;
or (ii) the statement is immaterial; or
(B) the plaintiff fails to prove that the forward-looking
statement was made with actual knowledge by that the statement
was false or misleading.
There are two prongs to the safe harbor under the Reform
Act. The first prong applies to statements that are identified
as forward-looking, but are accompanied by "meaningful cautionary
statements." We know of no decisions interpreting what constitutes
a "meaningful cautionary statement."49
The second prong provides that no liability shall attach
to any forward-looking statement unless the statement was
made with actual knowledge of falsity or that it was misleading.
The court in Silicon Graphics found that the
standard of pleading scienter to establish liability for a
forward-looking statement is the same standard to be applied
to establish scienter for a false or misleading statement.
Id. at 95,963.
Even with the safe harbor provisions of the Reform Act, companies
may be avoiding disseminating forward-looking information
because of uncertainty regarding judicial interpretation of
the safe harbor and because of fear regarding state court
litigation where, plaintiffs will argue, no such safe harbor
is available. Substantially more litigation experience may
therefore be necessary in order to determine whether the Reform
Act will have its intended effect on the disclosure of forward-looking
4. What effect will the Reform Act have on pretrial dismissal
The Reform Act has only been in effect for nineteen months.
It is often many months after a complaint is filed before
a motion to dismiss is decided by the court, and only a small
sample of cases have proceeded to the motion to dismiss stage.
Our data suggest that although more than 200 securities fraud
class actions have been filed in federal court since the effective
date of the Reform Act, only sixteen motions to dismiss (8%
of the population) in such cases that have been decided by
the courts. Of these, six motions to dismiss were granted,50 four were granted with leave for plaintiffs to
amend the complaint,51 and two were
granted in part.52 Four motions
to dismiss have been denied with respect to the company defendant.53
We expect that it will require another year or two of litigation
experience in order to draw more reliable conclusions about
the effect the Reform Act has had on pretrial dismissal rates.
Even then, those estimates may be unstable because of the
previously described uncertainties regarding the interpretation
of key Reform Act provisions.
5. What effect will the Reform Act have on settlement amounts?
Very few securities class action fraud cases go to trial.
The large majority of federal class action securities litigation
filed prior to the Reform Act was resolved by settlement.
One study reported that 87.6% of the securities class actions
filed from April 1988 through September 1996 ended in a settlement.54
Another study found that the median time between filing and
settlement was 21.7 months.55
Because the Reform Act has been in effect for only a year
and a half, it is too soon to expect substantial settlement
activity to have occurred. We are aware of only a handful
of settlements of cases brought under the Reform Act, thus
the results from these settlements are not necessarily indicative
of future trends. One study which analyzed five settlements
in post-Reform Act cases found that the settlements were,
on average, over 40% higher than pre-Reform Act settlements.56 However,
the study cautioned that due to the small sample of cases,
the results were not statistically significant. We expect
that it will take several years of additional experience before
we are able to draw more reliable conclusions as to the effect
of the Reform Act on settlement behavior or settlement amounts.
6. How will the Reform Act influence the incentive to litigate
class action securities fraud claims?
As noted above, only a very small percentage of securities
class action fraud cases have gone to trial and the overwhelming
majority that were not dismissed at the pleading stage or
on a motion for summary judgment have settled out of court.
The provisions of the Reform Act, including higher pleading
standards, automatic discovery stays, safe harbor provisions,
damage limitations, and elimination of joint and several liability
for unknowing violations, could give defendants more incentive
to litigate class action claims than under pre-Reform Act
standards. It is far too soon, however, to be able to discern
any such effect in the data.
7. How will the courts interpret the Reform Act's proportionate
Under the Reform Act, defendants who did not knowingly commit
a violation are "liable solely for the proportion of the judgment
that corresponds to the percentage of the responsibility."57 There are
no decisions of which we are aware that interpret the proportionate
liability provisions of the Reform Act. This is not surprising
because these provisions usually are not considered by courts
until late in the litigation process, after motions to dismiss
and motions for summary judgment are decided. It often takes
several years for a securities class action to reach this
One hypothesis is that the new proportionate liability standards
may make certain defendants more willing to face a trial on
the merits. However, without any decisions interpreting the
proportionate liability provisions, it is too early to determine
what impact they will have on post-Reform Act litigation.
8. Will state courts ultimately prove to be hospitable environments
for the litigation of class action securities fraud claims?
Before 1996, securities fraud class action lawsuits were
rarely filed in state court. In 1996, there was a significant
increase in state court class action filings as a result of
the Reform Act. State court class actions continue to be filed
in 1997, although the number of issuers sued solely in state
court has decreased approximately 30% from 1996 levels.
At the present time, state case law remains undeveloped and
inconsistent. Further, very few cases have been subject to
appellate review. The most significant pending state appellate
case of which we are aware is Diamond Multimedia Systems
v. Superior Court of Santa Clara County, 97 Daily Journal
D.A.R. 4021 (Mar. 21, 1997). In that case, the California
Supreme Court granted defendants' writ of mandate to review
a number of questions, including whether a cause of action
under section 25400 of the California Corporations Code is
only available to California residents. Section 25400(d),
upon which plaintiffs rely in most securities class actions
filed in California provides that: "It is unlawful for any
person, directly or indirectly, in this state" to
make false or misleading statements or make omissions for
the purpose of inducing the purchase or sale of any security
Plaintiffs argue that they should be permitted to certify
a national class, including plaintiffs who are not residents
of California and who have no other nexus to the jurisdiction.
Defendants' counsel argue, among other matters, that California
law on its face requires that the transaction take place in
California, and that no national class can therefore be certified.
No hearing date has yet been set in the case.
The California Supreme Court decision in Diamond Multimedia
may have significant implications for the future of state
court class action litigation because a high percentage of
federal and state class action filings are found in California.
Thus, although it is still too early to determine whether
state courts will ultimately prove to be hospitable environments
for the litigation of class action securities fraud claims
on a national scale, we expect that the Diamond Multimedia
decision will have a major impact on this issue.
9. Will the duty to audit for fraud created in Title III
give rise to material new liability for issuers or auditors?
Title III of the Reform Act created a new duty on the part
of auditors to adopt certain procedures in connection with
their audits and to inform the Securities and Exchange Commission
of illegal acts under specified circumstances. We are aware
of only one company, the Cronos Group, where the company's
auditors have prepared a report pursuant to the provisions
of Section 10A(b)(2) of the Securities Exchange Act of 1934
for filing with the SEC. There, the company's auditor, Arthur
Andersen, resigned and stated in a letter to the company's
Board of Directors that it was obligated submit a report to
the company because the circumstances prohibited them from
being able to perform an audit in accordance with generally
accepted auditing standards.59
Concern exists that Title III may support an expansive interpretation
that in the future generates substantial additional exposure
for auditors and issuers alike.60 It is, however, too soon to tell whether Title
III will create such new exposure.
10. Will institutional investors develop strategies for
effective monitoring of class action fraud claims, whether
through the lead plaintiff provision or otherwise?
As noted above, major institutional investors have employed
the lead plaintiff device in a relatively small number of
cases, and it is unclear whether more institutions will seek
that position. It appears that many institutions are evaluating
the outcomes of these early cases before determining whether
to become involved as lead plaintiffs. But even if these early
cases are successful, there are a number of structural barriers
that may prevent significant institutional investor participation
as lead plaintiffs. Many institutions may be unwilling to
undergo the heightened scrutiny of their investment and trading
practices that is likely to accompany an attempt to become
lead plaintiff. Simply put, institutions may find that seeking
the lead plaintiff position is not cost-effective or they
may simply be reluctant, as they have traditionally been,
to undertake the increased responsibility and scrutiny that
comes with the role.
For these reasons, institutions that seek to become active
may be more comfortable with initiatives that have both lower
costs and lower visibility.61 These methods, which include objecting to settlements,
writing letters to counsel, and opposing fee requests, have
already been used successfully in a number of cases62 and may provide a more palatable strategy that
is useful in a wider variety of cases.
III. Uniform Standards as a Solution to the State Litigation
It worth emphasizing at the outset that a leading plaintiffs'
class action attorney describes the Grundfest-Perino Study
as "undoubtedly correct in concluding that there has been
an increase in the number of securities fraud class action
cases filed in state court."63 The fact
of an increase in state court securities fraud litigation
activity since passage of the Reform Act thus does not appear
to be in material dispute. This increase in state securities
fraud class action litigation has given rise to calls for
a uniform federal standard that would govern securities fraud
litigation affecting national markets.64
Two bills currently pending in the House of Representatives,
H.R. 1653 (introduced by Representative Campbell)65
and H.R. 1689 (introduced by Representatives Eshoo and White),
would both achieve that result, although through slightly
different means. H.R. 1653 would prohibit any state private
civil action alleging either a misrepresentation or omission,
or that the defendant used or employed a manipulative or deceptive
device or contrivance, in connection with the purchase or
sale of a "covered security." The definition of a "covered
security" is identical to that contained in the National Securities
Markets Improvements Act of 1996, and relates essentially
to securities that trade on national markets. H.R. 1689 would
preempt similar claims, but only with respect to class actions.
H.R. 1689 would also preempt class actions against companies
that have issued covered securities, even if the security
at issue was not itself a covered security. Finally, H.R.
1689 would permit the removal of any class action involving
a covered security to federal court.66
Neither bill is intended to limit the scope of any state's
authority to bring lawsuits alleging violations of state law,
and neither bill is intended to intrude upon the dominant
corporate law causes of action that are traditionally the
province of the states. Our reading of these bills suggests
that neither should give rise to these unintended effects,
It would, however, be a relatively straightforward matter
to add to either bill a savings provision making it crystal
clear that uniform federal class action securities fraud standards
do not limit the authority of state agencies to prosecute
violations of state securities laws. Such a provision would
be wholly consistent with the structure of the Reform Act
itself, which is intended to regulate only private litigation
and has no effect on the SEC's enforcement authority. It would
also be a straightforward matter to add language assuring
that uniform securities fraud litigation standards do not
intrude on traditional corporate law causes of action.
The objective of each of these bills is, instead, to eliminate
the strategic use of state securities fraud litigation as
a means to evade key provisions of federal law. Strategic
evasion can have a variety of objectives. Plaintiffs could,
without limitation, pursue state litigation in order to:
(1) take discovery that would be prohibited by a federal
(2) avoid defenses available pursuant to the federal forward-looking
(3) plead cases where the facts alleged would be insufficient
to avoid dismissal in a federal court;69
(4) avoid the need for the designation of a lead plaintiff;
(5) avoid heightened scrutiny of settlement terms.71
In defense of the increase in state court litigation, a leading
plaintiffs' counsel claims that there are "many good reasons
why victims of securities fraud might prefer to attempt to
litigate their claims in state court," other than simple evasion
of Reform Act provisions.72 Counsel observes
that "many state courts permit plaintiffs to recover on a
9-to-3 jury vote, as opposed to unanimous verdicts required
in the federal system; [that] many state laws permit a recovery
upon a showing of negligence, as opposed to recklessness or
intentional misconduct, and some states permit recovery without
any showing of reliance."73
Counsel also asserts that some states provide substantial
procedural advantages for plaintiffs.74
These alternative explanations for the increase in state
level litigation are implausible for at least two simple reasons.
First, even if true, each of these factors supporting state
court litigation existed prior to the effective date of the
Reform Act. If state court litigation is currently attractive
for the stated non-evasive reasons, then state court litigation
would have been equally attractive years ago and should have
occurred with greater frequency prior to the Act's passage.
But it did not. The inescapable conclusion is that the alleged
pre-existing benefits of state litigation cannot be the cause
of the post-Reform Act increase in state litigation. Second,
plaintiffs' own litigation conduct demonstrates an obvious
effort to avoid the mandatory discovery stay through state
court litigation.75 Plaintiffs'
actual conduct is therefore inconsistent with the proffered
rationalizations for increased state court activity. Accordingly,
the most reasonable explanation for the undisputed increase
in state court litigation is plaintiffs' desire to evade certain
Reform Act provisions.
Because state court litigation is employed as a means to
evade key provisions of the Reform Act, it should come as
no surprise that the debate over uniform federal securities
fraud litigation standards often divides combatants along
the same lines observed in the debate over the Reform Act.
Pro-plaintiff forces who bemoan passage of the Act oppose
uniform standards while pro-defense forces who support the
Act's reforms call for uniformity as a necessary adjunct to
reform. Viewed from this perspective, the uniformity debate
is merely a reprise of the debate over the Reform Act itself.
Our analysis regarding the merits of federal uniformity differs
from the approaches urged by both plaintiff and defense camps.
Significantly, we take no position on the ultimate wisdom
of the reforms introduced by the Act, and we respect the concerns
voiced by many of the Act's critics. We believe that the uniformity
debate can and should be resolved according to a set of neutral
principles that apply whether or not one supports the provisions
of the Reform Act, and that the debate over uniformity should
not be an occasion to reopen the debate over the merits of
the 1995 reforms.
The application of these neutral principles leads us to conclude
(1) National markets should, for reasons wholly unrelated
to the debate over the merits of the Reform Act, be governed
by uniform national standards;
(2) Under the doctrine of implied conflict preemption,
many provisions of the federal securities laws - including
large portions of the Reform Act - can and should be interpreted
as preempting conflicting provisions of state law; and
(3) In order to promote certainty and efficiency in federal
and state courts, and in our national securities market,
Congress should enact legislation that makes it clear that
federal antifraud standards prevail in national markets.
A. National Markets Should be Governed by National Standards.
Our nation is blessed with vast and liquid capital markets
that pay no heed to state boundaries. Whether buyers or sellers
are located in New York, California, Texas, Connecticut, or
Montana matters not a whit to the disclosure rules, price
discovery mechanisms, or trading practices that govern transactions
in national markets.
If individual states are permitted to assert individual jurisdiction
over transactions in national markets, the predictable result
is chaos and mayhem. To present just one illustration of the
untoward consequences of unconstrained state level litigation,
imagine the predicament confronting a large issuer such as
IBM in the event of an allegation of fraud in connection with
the purchase and sale of its securities.
If state law causes of action are permitted to proceed, IBM
could be exposed to litigation in each of the fifty states
under fifty different procedural and substantive standards.
Many of these regimes would reflect dramatically opposed and
irreconcilably different policy judgments regarding the costs
and benefits of disclosure and litigation. No reasonable public
policy purpose would be served by such a proliferation of
Even if litigation could be confined to one forum, enormously
complicated choice of law questions will arise regarding the
application of different states' laws to different members
of the class. A court may have to apply as many as fifty different
substantive legal standards to members of the class. The resulting
confusion and complexity will essentially replicate many of
the management problems that pervade mass tort and other kinds
of class actions based on state law.76 Again, it
is difficult to recognize any socially beneficial purpose
that would be served.
With different liability standards, enormous time and energy
will also be devoted to resolving arcane legal questions,
such as determining the particular state where the fraud allegedly
took place or whether the particular state court may properly
assert personal jurisdiction over the defendant. Moreover,
if federal and state actions proceed simultaneously, both
the courts and the parties face a significant increase in
the time and costs associated with resolving the litigation.77
Issues raised by forward-looking statements provide an excellent
example of the substantive problems that this balkanization
of the federal securities laws will inevitably create. Congress
created the Reform Act's safe harbor to alleviate the chilling
effect that lawsuits have "on the robustness and candor of
disclosure," particularly with respect to the release of valuable
forward-looking statements regarding an issuer's prospects.78
But if one or more states do not have similar safe harbors,
then issuers face potential lawsuits and liability for actions
that do not violate federal standards. Under these circumstances,
issuers will naturally be reluctant to provide the forward-looking
information Congress sought to elicit and the federal standard
will fail of its intended purpose because of the existence
of inconsistent state law.
Issuers participating in national markets - and the investors
who purchase securities in national markets - have an interest
in avoiding such litigation nightmares. Issuers and investors
alike reasonably require that each transaction in the securities
market be subject to a single, coherent, set of regulatory
principles with which honest market participants can efficiently
comply. It serves no rational purpose to expose honest participants
in a uniform national market to conflicting and inconsistent
procedural or substantive standards. In the field of securities
regulation, these uniform standards are most readily articulated
at the federal level.79
B. The Reform Act May Already Preempt Many Conflicting Provisions
of State Law.
New York's highest court recently explained that three doctrines
can support a finding of federal preemption over a state securities
regime. First, the doctrine of "express preemption" requires
specific language articulating a Congressional intent to preempt.
Second, "implied field preemption" may be found when "the
Federal legislation is so comprehensive in its scope that
it is inferable that Congress wished fully to occupy the field
of its subject matter...." Guice v. Charles Schwab &
Co., Inc., 89 N.Y.2d 31, 674 N.E.2d 282, 285 (N.Y.
1996), cert. denied, 117 S.Ct. 1250 (1997). [A copy
of the Guice decision is annexed hereto as Exhibit
A.] Third, "implied conflict preemption may be found when
it is impossible for one to act in compliance with both the
Federal and State laws, or when 'the state law * * * stan[ds]
as an obstacle to the accomplishment and execution of the
full purposes and objectives of Congress'."80
In Guice, the court held that SEC regulations
governing payments for order flow preempted state law because
"[p]ermitting the courts of each state to impose civil liability
on national securities brokerage firms ... would inevitably
defeat the congressional purpose of enabling the SEC to develop
and police [a] 'coherent regulatory structure' for a national
market system."81 The application
of state law antifraud principles in private litigation would,
according to the court, lead to a "chaotic regulatory structure"
in which brokerage firms would have to tailor communications
with clients to meet fifty different state standards as well
as a federal standard.82 The court observed further that when state law
"through the imposition of common law tort liability or otherwise,
adversely affects the ability of a Federal administrative
agency to regulate comprehensively and with uniformity ...
then the state law may be pre-empted even though 'collision
between state and federal regulation may not be an inevitable
The Court found implied conflict preemption notwithstanding
the "savings clause" of Section 28(a) of the Exchange Act.84
Indeed, the Court explained that "[s]ubstantially similar
savings clauses have been interpreted as only negating implied
field preemption, but not conflict preemption...."85
The logic of the Guice decision has substantial
implications for the debate over uniformity and the Reform
Act. For example, it is clearly impossible to achieve the
objectives Congress intended under the mandatory stay if plaintiffs
can evade the stay simply by filing individual or class action
complaints in state courts. Similarly, it is impossible for
the Reform Act to stimulate greater forward-looking disclosure
if issuers continue to be subject to state court liability
that is more expansive and pays no heed to the Reform Act's
forward-looking safe harbor. Much the same can be said for
state court litigation that avoids the need to designate a
lead plaintiff, has no proportionate liability standard analogous
to the Reform Act's, allows complaints to proceed on the basis
of weaker allegations that fail to meet the Act's "strong
inference" pleading requirement, and does not impose heightened
scrutiny of settlement agreements. State litigation thus "stan[ds]
as an obstacle to the accomplishment and execution of the
full purposes and objectives of Congress,"86 and should
be preempted by many of the Reform Act's provisions.
Accordingly, by the logic established in Guice
and based on existing precedent regarding implied conflict
preemption, there is a strong foundation upon which federal
and state courts can and should conclude that several Reform
Act provisions preempt conflicting or incompatible state law
C. Congress Should Enact Uniform Federal Antifraud Standards.
Notwithstanding the powerful arguments that can be made in
support of implied conflict preemption under existing law,
it is clear that litigation over this issue can impose substantial
costs on plaintiffs and defendants alike.87
It is also clear that there exists a possibility that at least
one of the fifty states will conclude that the Reform Act
does not preempt state standards in some material respect.88 Indeed, plaintiffs
need to identify only one state willing to act as a safe harbor
for an expansive application of state law in order to wreak
significant procedural and substantive confusion, impose substantial
cost, and potentially gut large portions of the Reform Act.
Fortunately, Congress can put an end to this burdensome and
potentially dangerous litigation by enacting legislation that
makes it crystal clear that national markets are subject to
uniform national standards. The debate over the most appropriate
antifraud standards in national markets could then be addressed
to Congress, the deliberative body that is best suited to
balance competing national interests in this complex area
A. Grundfest is the William A. Franke Professor of Law and
Business and a Crocker Faculty Scholar at Stanford Law School.
A. Perino is a Lecturer and Co-Director of the Roberts Program
in Law and Business at Stanford Law School. The authors would
like to acknowledge the substantial assistance of Joan Lambert,
Associate Director of Stanford Law School's Digital Law Project,
in the preparation of this testimony.
L. No. 104-67, 109 Stat. 737 (1995) (codified in scattered
sections of 15 U.S.C.).
J. Leffler, A Web of Resources for Securities Law,
N.Y.L.J., June 16, 1997, at S5.
Cal. Local Rule 23-3 (available at http://securities.stanford.edu).
STATEMENT OF MANAGERS -- THE "PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995," H.R. CONF. REP. NO. 369, 104th Cong.,
1st Sess. 33-34 (1995), reprinted in 1995 U.S.C.C.A.N.
730, 732-33 [hereinafter STATEMENT OF MANAGERS].
A. GRUNDFEST AND MICHAEL A. PERINO, SECURITIES LITIGATION
REFORM: THE FIRST YEAR'S EXPERIENCE (John M. Olin Program
in Law and Economics, Stanford Law School, Working Paper No.
140, Feb. 1997) [hereinafter GRUNDFEST AND PERINO]; see
also U.S. SECURITIES AND EXCHANGE COMM. OFFICE OF GENERAL
COUNSEL, REPORT TO THE PRESIDENT AND THE CONGRESS ON THE FIRST
YEAR OF PRACTICE UNDER THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995 (Apr. 1997) [hereinafter the SEC REPORT]; DENISE
M. MARTIN, ET AL., RECENT TRENDS IV: WHAT EXPLAINS FILINGS
AND SETTLEMENTS IN SHAREHOLDER CLASS ACTIONS? (National Economic
Research Associates, Nov. 1996) [hereinafter NERA STUDY].
A. Perino, A Census of Securities Class Action Litigation After
the Private Securities Litigation Reform Act of 1995,
Written Testimony Before the Subcommittee on Securities of
the Committee on Banking, Housing, and Urban Affairs, United
States Senate (July 24, 1997).
at Table 1.
AND PERINO, supra note 5, at 9.
supra note 6, at 10.
AND PERINO, supra note 5, at 6; NERA STUDY, supra note 5, at Table 1.
supra note 6, at Table 1.
e.g., GRUNDFEST AND PERINO, supra note 5,
at 8; William S. Lerach, Private Securities Litigation
Reform Act 1995 [sic] 1 & 1/2 Years Later, Submitted
for American Bar Association Annual Convention, August 1997
at 11 (copy undated) (on file with authors).
AND PERINO, supra note 5, at ii; Bill Kisliuk, Rough Ride for
Securities Defenders, Recorder, July 16, 1997, at 1.
supra note 6, at Table 2.
at Table 3.
AND PERINO, supra note 5, at 17.
at 18; LAURA E. SIMMONS, CORNERSTONE RESEARCH, THE IMPORTANCE
OF MERIT-BASED FACTORS IN 10b-5 LITIGATION Table 2 (Nov. 14,
1996) (on file with authors).
have, however, rejected plaintiffs' inference that trading
by insiders will, in many circumstances, create the requisite
strong inference of scienter. See, e.g., In re
Silicon Graphics Securities Litig., Fed. Sec. L. Rep.
¶ 99,468 (CCH), 1997 WL 285057 (May 23, 1997, N.D. Cal.).
AND PERINO, supra note 5, at 19.
GRUNDFEST AND PERINO, supra note 5,
generally 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., 1st Sess. (1993).
AND PERINO, supra note 5, at 16.
L. JONES AND SETH E. WEINGRAM, WHY 10b-5 LITIGATION RISK IS
HIGHER FOR TECHNOLOGY AND FINANCIAL SERVICES FIRMS 1 (John
M. Olin Program in Law and Economics, Stanford Law School
Working Paper No. 112, July 1996).
AND PERINO, supra note 5, at 12.
id. at 17-22.
exceptions to this trend are Sears Roebuck and Westinghouse,
both of which were sued in securities class action lawsuits
in 1997. See Full Text of Securities Fraud Complaints
in Securities Class Action Clearinghouse, available
on the Internet at http://securities.stanford.edu.
REPORT, supra note 5, at 1.
e.g., Wolf Haldenstein Adler Freeman & Herz LLP
Announce Notice of Pendency of Class Action on Behalf of Purchasers
of Common Stock of Bre-X Minerals, Ltd., PR Newswire,
Mar. 31, 1997; Notice of Pendency of Class Action Against
Mercury Finance Company and Others, PR Newswire, Jan.
REPORT, supra note 5, at 23; NERA STUDY, supra note 5, at 6.
REPORT ON THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995, S. REP. NO. 98, 104th Cong., 1st Sess. 10 (1995), reprinted
in 1995 U.S.C.C.A.N. 679, 689; see also Elliott
J. Weiss & John S. Beckerman, Let the Money Do the Monitoring:
How Institutional Investors Can Reduce Agency Costs in Securities
Class Actions, 104 YALE L.J. 2053 (1995).
REPORT, supra note 5, at 51.
State of Wisconsin Investment Board's Reply in Support of
Its Motion for Appointment as Lead Plaintiff, Gluck
v. Cellstar Corp., No. 3:96-CV-1353-R (N.D. Tex.) at
9-11 (available on the Internet at http://securities.stanford.edu).
e.g., Gluck v. Cellstar Corp., No. 3:96-CV-1353-R
(N.D. Tex., Oct. 1, 1996) (appointing the State of Wisconsin
Investment Board as sole lead plaintiff over objection of
individual plaintiffs who argued that SWIB was a sophisticated
investor that was atypical of the class as a whole); Chan
v. Orthologic Corp., No. Civ 96-1514 PHX RCB (D. Ariz.,
Dec. 19, 1996) (appointing the City of Philadelphia pension
fund over similar objections).
E. WILLGING, ET AL., FEDERAL JUDICIAL CENTER, EMPIRICAL STUDY
OF CLASS ACTIONS IN FOUR FEDERAL DISTRICT COURTS 117 (1996).
E. O'Brien, A Study of Class Action Securities Fraud
Cases 1988-1996 at 16 (available on the Internet at
AND PERINO, supra note 5, at 25.
Silicon Graphics, the plaintiffs made an in
camera submission to the court which may have contained
sources or specific facts that bolstered their allegations
about the alleged negative internal reports. The court declined
to review plaintiffs' submission, but allowed plaintiffs leave
to supplement their allegations with respect to such reports.
Plaintiffs declined the invitation and the case is currently
on appeal to the Ninth Circuit.
96-20136 SW at 8-9 (N.D. Cal. May 6, 1997) (available on the
Internet at http://securities.stanford.edu).
U.S.C. § 78u-4(b)(2).
example, in Marksman Partners, L.P. v. Chantal Pharmaceutical
Corp., 927 F.Supp. 1297 (C.D. Cal. 1996), the court
held that the two tests established by the Second Circuit
should be employed. Other cases have reached similar results.
See, e.g., Zeid v. Kimberley, 930 F. Supp.
431 (N.D. Cal. 1996); STI Classic Funds v. Bollinger
Industries, Inc., No. 3-96-CV-823-R (N.D. Tex. Nov.
12, 1996); Fischler v. AmSouth Bancorporation,
1996 U.S. Dist. LEXIS 17670 (M.D. Fla. Nov. 14, 1996); Rehm
v. Eagle Finance Corp., 954 F.Supp. 1246 (N.D. Ill.
1997); 1997 U.S. Dist. LEXIS 767 (N.D. Ill. Jan. 27, 1997).
e.g., In re Silicon Graphics, Inc. Securities Litig.,
Fed Sec. L. Rep. ¶ 99, 468 at 97,133 (CCH) (May 23, 1997
N.D. Cal) (plaintiff must create a "strong inference of knowing
or intentional misconduct."); Friedberg v. Discreet
Logic, 959 F.Supp. 42, 48 (D. Mass. 1997) (holding
that the Reform Act pleading standard was intended to be stronger
than the existing Second Circuit standard); Norwood
Venture Corp. v. Converse, 959 F.Supp. 205, 208 (S.D.N.Y.
1997) (holding that Congress sought to raise the pleading
standard beyond the Second Circuit standard). We are also
informed that a class action filed against America Online
has recently been dismissed, but we have been unable to obtain
a copy of the decision.
U.S.C. § 78u-5.
In re Silicon Graphics, Inc. Securities Litig.,
U.S. Dist. LEXIS 16989, [1996-97 Tr. Binder] Fed. Sec. L.
Rep. (CCH) ¶ 99,325 (N.D. Cal. Sept. 25, 1996), defendants
argued in support of their initial motion to dismiss the complaint
that their statements fell within this safe harbor provision
because they gave safe harbor warnings on two conference calls
with analysts. Silicon Graphics submitted the declaration
of its Chief Financial Officer along with the warnings he
read on these calls. However, the court held that under Federal
Rule of Civil Procedure 12(b)(6), such extrinsic evidence
may not be considered on a motion to dismiss. Id.
at 95,962. The court stated that defendants may properly argue
the safe harbor provision on a motion for summary judgment.
Living Trust, et al. v. Palmieri, et al., No. C96-1096D
(W.D. Wash. Apr. 10, 1997); Fernhoff v. NuMed Home Health
Care, Inc., No. 96-200-CIV-T-21C (M.D. Fla. 199_);
Finkel v. Putnam Convertible Opportunities & Income
Trust, Fed. Sec. L. Rep. ¶ 99,427 (CCH) (S.D.N.Y.
Feb. 11, 1997); In re Silicon Graphics, Inc. Securities
Litig., Fed Sec. L. Rep. ¶ 99,468 (CCH) (N.D.
Cal. May 23, 1997); Steckman v. Hart Brewing Co.,
Fed Sec. L. Rep. ¶ 99,420 (S.D. Cal. Dec. 24, 1996);
Zeid v. Kimberley, No. 96-20136 (N.D. Cal. May
re BAESA Securities Litigation, 96 Civ. 7435 (S.D.N.Y.
July 9, 1997); Hockey v. Medhekar, Fed. Sec.
L. Rep. ¶ 99,465, 1997 WL 203704 (N.D. Cal. Apr. 15,
1997); Myles v. Midcom Communications, Inc.,
No. 96-614D (W.D. Wash. Nov. 19, 1996) (available on the Internet
at http://securities.stanford.edu); Rehm
v . Eagle Finance Corp., 954 F.Supp. 1246 (N.D. Ill.
v. Discreet Logic, Inc., 959 F.Supp. 42 (D. Mass. 1997);
Powers v. Eichen et al., No. Civ. 96-1431-B (S.D.
Cal. Mar. 13, 1997).
Partners, L.P. v. Chantal Pharmaceutical Corp., 927
F.Supp. 1297 (C.D. Cal. 1996); STI Classic Funds v.
Bollinger Industries, Inc., No. 3-96-CV-823-R (N.D.
Tex. Nov. 12, 1996); Greebel v. FTP Software,
No. 96-10544-JLT (D. Mass. 1996); In re Wellcare Management
Group, Inc. Securities Litig., 1997 WL 222254 (N.D.N.Y.
Apr. 30, 1997).
supra note 40, at 3.
supra note 39, at 117.
ECONOMIC RESEARCH ASSOCIATES, FEDERAL SHAREHOLDER CLASS ACTION
FILINGS RISE TO PRE-REFORM ACT LEVELS AS STATE FILINGS FALL,
U.S.C. § 78u-4(g)(2)(b)(i).
25400(d) states in its entirety :
It is unlawful for any person, directly or indirectly,
in this state:
* * *
(d) If such a person is a broker dealer or other person
selling or offering for sale or purchasing or offering to
purchase the security, to make, for the purpose of inducing
the purchase or sale of such security by others, any statement
which was, at the time and in the light of the circumstances
under which it was made, false or misleading with respect
to any material fact, or which omitted to state any material
fact necessary in order to make the statements made, in
light of the circumstances under which they were made, not
misleading, and which he knew or had reasonable ground to
believe was so false or misleading.
February 3, 1997, entities affiliated with the Cronos Group
filed Form 8-K's with the SEC which reported Arthur Andersen's
resignation. These documents are available on the Internet
at the SEC's EDGAR database (http://www.sec.gov/cgi-bin/srch-edgar?cronos).
e.g., Harvey L. Pitt, More Than "Classical GAAS":
Audits and Corporate Illegality Under the Litigation Reform
Act (1996), reprinted in Hon. Jed S. Rakoff
et al., Corporate Sentencing Guidelines: Compliance
and Mitigation, App. R. (1996); Statement on
Auditing Standards No. 82 -- Consideration of Fraud in a Financial
Statement Audit, J. of Accountancy, April 1997.
Joseph A. Grundfest and Michael A. Perino, The Pentium
Papers: A Case Study of Collective Institutional Activism
in Litigation, 38 Ariz. L. Rev. 559 (1996).
e.g., In re California Micro Devices Securities
Litig., 168 F.R.D. 257 (N.D. Cal. 1996); Weiser
v. Grace, Index No. 106285/95 (N.Y. Sup. Ct., Sept.
3, 1996); The Pentium Papers, supra note
supra note 12, at 11.
Seek More Legislation to Preserve Securities Litigation Reform,
BNA SEC. L. DAILY (Feb. 7, 1997).
Authors of this testimony provided technical assistance to
Congressman Campbell's office in drafting this legislation.
these differences are highly technical, they could potentially
have important real-world consequences. For example, because
H.R. 1653 preempts all private actions it would prevent a
plaintiff from filing an individual action in state court
in order to obtain discovery that might be stayed in a parallel
federal action. H.R. 1689 applies to far more securities than
H.R. 1653, and would permit issuers with covered securities
to obtain preemption of class actions involving bond sales
or intrastate securities offerings. H.R. 1653 would not, in
and of itself, allow a defendant to remove a securities action
that was improperly filed in state court, but the bill can
easily be amended to achieve the same result, if necessary
U.S.C. §§ 77z-1(b), 78u-4(b)(3)(B).
U.S.C. § 78u-5.
U.S.C. § 78u-4(b).
U.S.C. § 78u-4(a)(3).
U.S.C. § 78u-4(a)(7).
supra note 12, at 11.
e.g., Marinaro v. Superior Court of Santa Clara
County, 1996 Cal. LEXIS 6105 (Oct. 30, 1996) (noting
that lower court had denied stay of state action in favor
of four federal parallel federal actions); Shores v.
Cinergi Pictures Entertainment, Inc., No. BC149861
(Cal. Super. Ct., Los Angeles County, Sept. 19, 1996) (staying
discovery on 1933 Act claim but permitting discovery to proceed
on a common law negligent misrepresentation claim); Lee
v. IMP, Inc., No. CV760793 (Cal. Super., Ct., Santa
Clara County, Dec. 23, 1996) (denying motion to stay discovery);
In re Oak Technology Securities Litig., No. CV758510
(Cal. Super. Ct., Santa Clara County, Oct. 22, 1996) (denying
motion to stay action).
Amchem Prods. Inc. v. Windsor, No. 96-220, ___
U.S. ___, 1997 WL 345149 (June 25, 1997).
Bill Kisliuk, Are Two Securities Cases Better Than One?,
Recorder, July 14, 1997, at 1, 2 (noting a defense counsel
estimate that the cost of pretrial proceedings has increased
by about one-third as a result of dual filings).
OF MANAGERS, supra note 4, at 43, 1995 U.S.C.C.A.N. at 742.
theory, each issuer could also be subject to a uniform standard
if: (1) the individual states were authorized to adopt
their own securities antifraud regimes which could preempt
federal law; and (2) issuers were permitted to elect into
any one state's antifraud regime or into the federal regime.
Such a system would come close to replicating our federal
approach to corporation law and would generate a predictable
debate over a potential "race to the bottom" resulting from
issuers gravitating to the jurisdiction with the most relaxed
standards as opposed to a potential "race to the top" as a
result of beneficial competition among state securities regulatory
regimes. While such a system is possible in theory, no pending
legislation suggests that uniformity be attained by allowing
state law to preempt federal standards. Accordingly, we view
this alternative approach as a matter of academic interest
only. See, e.g., Michael A. Perino, Fraud and
Federalism: Preempting Private State Securities Fraud Causes
of Action (forthcoming).
674 N.E.2d at 285 (quoting Barnett Bank of Marion
County v. Nelson, 116 S. Ct. 1103, 1008 (1996)).
(quoting Schneidewind v. ANR Pipeline Co.,
485 U.S. 293, 310 (1988)).
at 291-92; see 15 U.S.C. § 78bb.
at 291-92 (emphasis in original).
at 285 (quoting Barnett Bank, 116 S.Ct.
Diamond Multimedia Systems v. Superior Court of Santa
Clara County, 97 Daily Journal D.A.R. 4021 (Mar. 21,
1997); See also supra note 77.
note 75, supra, for citations to decisions
that do not apply the federal stay to state securities fraud
class actions see also Kisliuk, supra note 13, at 1.
23 Jul 1997