Pleading Reform or Unconstitutional Encroachment? An Analysis of the Seventh Amendment Implications of the Private Securities Litigation Reform Act

Abstract:     
The Private Securities Litigation Reform Act of 1995 (PSLRA) is a hurdle for securities fraud litigation intended to weed out at the motion to dismiss phase cases that lack merit. But the PSLRA’s protections are not without cost, which is borne by defrauded investors with meritorious claims who nevertheless cannot meet this increased obstacle to pursuing a claim. This Article addresses whether some courts are applying the PSLRA in a way that violates the Seventh Amendment by impeding a plaintiff’s ability to present his case to a jury. The PSLRA’s language is problematically vague, which has led to circuit splits on several important points, most significantly the extent to which the PSLRA requires securities fraud plaintiffs to aver detailed facts supporting the rule 10b-5 cause of action element of scienter. The more stringent of these varying interpretations, reflected in decisions in the Ninth and Tenth Circuits, raises Seventh Amendment concerns. The Sixth and Seventh Circuits have acknowledged these concerns without passing on the constitutionality of the dubiously stringent interpretation. This Article endeavors to answer the question posed by these courts, analyzing the intersection of the PSLRA with Seventh Amendment jurisprudence. This Article concludes that the more stringent interpretations of the heightened pleading requirement for scienter violate the Seventh Amendment by usurping the jury’s prerogative to resolve disputed questions of material fact and, in particular, the inferences to be drawn from those facts.

Number of Pages in PDF File: 33

Keywords: PSLRA, 10b-5 civil claims, Seventh Amendment

JEL Classification: K22, K20, K30

Accepted Paper Series