The Judicial Access Barriers to Remedies for Securities Fraud
Michael J. Kaufman
Loyola University Chicago School of Law
John M. Wunderlich
Institute for Investor Protection
April 8, 2011
Law and Contemporary Problems, Forthcoming
Congress has created a mechanism through which victims of securities fraud may pursue remedies for their losses against the perpetrators. That mechanism includes the substantive prohibitions of the federal securities laws, as well as the procedural pathways established by the Private Securities Litigation Reform Act of 1995 and the Federal Rules of Civil Procedure and Evidence. In this Article, we delineate those access barriers and question both their constitutionality and wisdom.
We begin by describing how some federal courts have rewritten the PSLRA and the Federal Rules of Civil Procedure and Evidence to erect merits barriers at three key pre-trial litigation stages that force plaintiffs to prove their case without the benefit of discovery to a judge before reaching a jury. In particular, some federal courts have redesigned the pleading standard under the PSLRA and the federal rules so as to steeply discount allegations of scienter based on circumstantial evidence. Other courts have doctored Rule 23 to require plaintiffs to prove the elements of reliance and loss causation by a preponderance of the evidence to pursue a class action. And some other courts have adjusted Rule 56 and the expert-witness regime to require plaintiffs to establish the weight and credibility of their expert witnesses to avoid summary judgment. At each of these pre-trial stages, the federal courts have effectively required plaintiffs to meet a burden of proof which is actually greater than or equal to the burden of proof which should be encountered only later at trial.
The next part explains that these access barriers pose both constitutional and practical concerns. First by rewriting rules of procedure, rather than deferring to traditional rulemaking bodies like Congress and the Advisory Committee on Civil Rules of the Judicial Conference, the judiciary has usurped the rulemaking function of the legislature. Second, the pre-trial barriers erected require plaintiffs to meet, or at times even exceed, their burden of proof at trial and leave district courts with considerable fact-finding power, encroaching on the province of the jury.
The constitutional implications of these merits-based access barriers alone should be sufficient to prevent federal courts from continuing to redesign the private securities litigation process. If it is not, this next part offers another reason cautions against mainstream acceptance of these judicial access barriers: they are unwise. The judicial access barriers rest on three premises that are incomplete, unsupported, or not true, including the incomplete and unsupported contention that defendants settle claims in terrorem, the myth that Congress is incapable of fashioning rules responsive to litigation concerns and that the jury is incapable of merited fact-finding, and the flawed assumption that merits-based screening precludes only “frivolous” litigation. We discover no legitimate support for any of these assumptions.
Number of Pages in PDF File: 56
Date posted: April 30, 2011 ; Last revised: July 9, 2011