The New Securities Fraud Pleading Requirement: Speed Bump or Road Block?
Elliott J. Weiss
University of Arizona College of Law
38 Arizona Law Review 1 (1996).
Section 21D(b)(2) of the Private Securities Litigation Reform Act of 1995 requires a plaintiff filing a complaint in an action for damages brought under Rule 10b-5 to "state with particularity facts giving rise to a strong inference that the defendant acted with [scienter]." President Clinton, when he vetoed the Act, claimed that this provision would erect a barrier "so high that even the most aggrieved investors with the most painful losses may get tossed out of court before they have a chance to prove their case." This paper investigates whether the President's concerns were valid -- whether this new pleading requirement constitutes a "road block" that will preclude prosecution of many meritorious claims of open market securities fraud -- or whether it represents only a "speed bump" that may slow down potential plaintiffs but should not impede substantially those whose claims have merit. The paper also considers how section 21D(b)(2) differs from the standards courts in the Second Circuit and elsewhere have used in recent years to determine whether a complaint alleging open market securities fraud satisfies Fed.R.Civ.P.9(b). Finally, the paper suggests strategies that courts should employ when interpreting new section 21D(b)(2) so as to develop a more uniform and coherent body of law than they have developed when interpreting Rule 9(b). This paper is copyright Arizona Board of Regents, 1996.
JEL Classification: G18, K22
Date posted: June 13, 1998
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