Enter Yossarian: An Approach to the Procedural Catch-22 That the Private Securities Litigation Reform Act Creates

Abstract:     
The Private Securities Litigation Reform Act of 1995 (PSLRA) rejects the system of notice pleading that has governed all civil actions in federal courts since 1938 and substitutes a new set of rules to govern securities class actions. Central to those rules are heightened pleading requirements and a stay on discovery designed to preclude "fishing expeditions" by plaintiffs unable to plead sufficient facts to set forth a cause of action.

This article considers whether these provisions, in combination, create a procedural Catch-22 that will preclude plaintiffs from prosecuting many potentially meritorious claims. The article does not dwell on the interpretive issues posed by the PSLRA's pleading requirements, many of which are currently pending before appellate courts. Rather, it assumes that courts will interpret the Act to require a plaintiff both to set forth facts sufficient to demonstrate that defendants knew or recklessly disregarded the likelihood that a material statement was false or misleading at the time that statement was made and to indicate the source of those facts where allegations are made on information and belief.

The article asserts that in many cases the statement(s) that precipitate a claim of securities fraud also will provide plaintiff with information sufficient to satisfy thsi pleading standard -- e.g., a corporation's announcement that it is restating earnings for some previous period. However, there is a group of cases in which plaintiffs will not be able to satisfy the Act's pleading requirements without obtaining access to defendant's records or personnel.

The article examines one such situation in detail -- a "quasi-hypothetical" involving claims that were made against Green Tree Financial Corp. after it announced an adjustment in its reserves but before Green Tree announced that it was restating its earnings for the period at issue. The authors conclude that while it would have been possible for a plaintiff, based on publicly available information, to set forth claim that supported a strong suspicion Green Tree had misrepresented its earnings in prior years, without access to Green Tree's books and personnel, a plaintiff would not have been able to set forth a claim that would satisfy the PSLRA's pleading requirements.

The authors conclude that a court facing a situation such as that presented by their "quasi-hypothetical" should, if certain specified conditions are satisfied, conclude that a plaintiff has been "unduly prejudiced" by the discovery stay and, consistent with the language of the stay provision of the PSLRA, allow that plaintiff to engage in appropriately limited "particularized discovery." They also detail the extent of the discovery that would have been appropriate in the Green Tree situation.

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