The PSLRA's Seventh Amendment Problem

Abstract:     
This Article is the first to examine the proper role of the jury in private securities fraud litigation. In the Private Securities Litigation Reform Act, Congress required that a securities fraud complaint plead "a strong inference" of scienter. The courts have disagreed on the standard that satisfies this requirement, and likewise, the involved parties disagree. Defendant corporations argue for a stringent standard that would result in the dismissal of many claims, while plaintiff investors support a flexible standard that would allow more claims to go forward. Indeed, the Supreme Court's resolution of this issue may have an impact beyond securities litigation. If a stringent standard is adopted, special pleading may be permitted in a whole variety of other cases, including employment discrimination cases, resulting in many dismissals before any discovery has even been conducted. In the present context, securities law experts have not addressed the constitutional issue posed by the special pleading requirement; whether this requirement violates the Seventh Amendment right to a jury trial. The Supreme Court has held that a modern procedure must satisfy the substance of the English common law jury trial in 1791 to be constitutional under the Seventh Amendment. Accordingly, the special pleading rules developed in 21st century securities litigation must be viewed through an 18th century common law lens. This Article argues that the scienter standards developed by the courts in securities cases do not comport with substance of the common law jury trial and thus are constitutionally problematic. Contrary to the common law, the courts improperly engage in one or more steps of assessing the reasonableness of facts and corresponding inferences pled by the plaintiffs. This Article proposes a constitutionally permissible alternative standard to dismiss a securities fraud claim. The Article acknowledges the possible constitutional infirmity posed by the PSLRA's "strong inference" standard itself and its heightened pleading requirements and argues that because Congress sought to solve problems with the class action nature of securities fraud actions, the focus should have been class actions specifically, instead of the cause of action generally.

Number of Pages in PDF File: 26

Keywords: Private Securities Litigation Reform Act, PSLRA, heightened, fraud, civil procedure, 9(b), 12(b)(6), motion to dismiss, Seventh Amendment, jury, securities, English common law, common law, scienter, corporations

JEL Classification: K40, K41, K49, K10, K19, K30, K13, K22

working papers series