Heightened Pleading and Discovery Stays: An Analysis of the Effect of the Pslra's Internal-Information Standard on '33 and '34 Act Claims
Posted: 1 Mar 1999
This Article presents a new model for analyzing securities-fraud claims. It then discusses the pleading and stay-of-discovery requirements enacted by Congress in the Private Securities Litigation Reform Act of 1995 (the "Reform Act"), arguing that the combined impact of these provisions is likely to be overinclusive.
The Reform Act's pleading standard is best understood in light of the common law preceding it. To survive a motion to dismiss under pre-Reform Act pleading standards, plaintiffs had to plead specific types of facts derived from internal company information. Plaintiffs met this internal-information standard through the use of the Federal Rules of Civil Procedure's liberal discovery provisions. The Reform Act, aimed at abusive securities litigation, both prohibits such discovery and heightens the pleading standard necessary to survive a motion to dismiss. By combining these reforms, the Reform Act implements a standard that is outcome-determinative and, if strictly applied, virtually impossible to meet.
Early decisions under the Reform Act illustrate the outcome-determinative impact of these provisions and reveal that despite Congress's stated intent to resolve the circuit split on the applicable pleading standard, the Reform Act's language and legislative history have left the courts in a quandary. As a result, the beginning of a new circuit split is already apparent. To resolve these problems, I propose that Congress repeal the stay-of-discovery requirements and, instead, adopt managerial-judge provision to process securities-fraud claims. Such a mechanism would better balance the competing goals of protecting markets and defendants and limiting so-called abusive litigation.
Finally, I consider whether the Reform Act's pleading standards apply to claims pursuant to the Securities Act of 1933 ("Securities Act") and conclude that, contrary to their practice before the Reform Act, courts should not apply the new scienter-based pleading standard to the negligence and strict-liability claims of the Securities Act. I support this argument with references to both the Reform Act's plain language and legislative history, and the Securities Act's purpose. The post-Reform Act decisions considering this issue have relied on pre-Reform Act case law without considering whether the Reform Act changed that law, resulting in some incorrectly applying the pleading standards to plaintiffs' claims under the Securities Act.
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