In Re Silicon Graphics Securities Litigation: Shareholder Wealth Effects of the Interpretation of the Private Securities Litigation Reform Act?S Pleading Standard

Abstract

This Essay examines the stock market's reaction to the Ninth Circuit's decision in re Silicon Graphics Securities Litigation. That decision adopted the most stringent interpretation of the Private Securities Litigation Reform Act's "strong inference" standard for pleading scienter in securities fraud cases. Studying the abnormal stock returns of a sample of high technology companies, the authors find a statistically significant positive return for shareholders of these companies to the Silicon Graphics decision. They also find that these positive stock price effects were strongest for those firms most likely to be sued in securities fraud class actions, but the results were less positive for those firms most likely to be sued for committing fraud. The authors conclude that the Silicon Graphics decision enhanced shareholder wealth on average. They argue that when the Supreme Court is called upon to interpret the Reform Act's pleading standard that it should adopt the Silicon Graphics standard.

JEL Classification: M40, M41, M49, K22, G12