Journal Article

THE COLLECTION PROBLEM: HOW THE CIRCUIT SPLIT ON PLEADING STANDARDS IN SECURITIES FRAUD CLAIMS UNDERMINES FEDERAL REGULATORY GOALS

Immer, Lucas

2025

Overview

INTRODUCTION The Great Depression is generally recognized as the greatest economic calamity in United States history.1 One of the Great Depression's many causes was reckless financial speculation driven in part by financial fraud.2 In response to the crisis, Congress passed the 1934 Securities Exchange Act (\"the Exchange Act\"), which courts have long held creates a private right of action for plaintiffs who experience an economic loss due to reliance on a material misstatement surrounding the purchase or sale of a security.3 A prima facie claim for securities fraud under the Exchange Act requires a showing of scienter, defined as \"a mental state embracing intent to deceive, manipulate, or defraud. \"4 Securities fraud claims under the Exchange Act provide an important remedy for investors who suffer losses due to fraudulent misstatements related to securities, and they serve a central regulatory function of ensuring accurate disclosure of information in financial markets.5 However, they have also provided fertile ground for frivolous lawsuits that lack merit and are intended solely to coerce defendants into settling to avoid costly discovery.6 In response to a proliferation of frivolous claims,7 Congress enacted the Private Securities Litigation Reform Act (\"PSLRA\") in 1995.8 Among other changes, the PSLRA elevated the pleading standards for the scienter element of securities fraud claims, requiring plaintiffs to plead facts giving rise to a \"strong inference\" of scienter to survive a motion to dismiss.9 The need to plead specific facts around this state-of-mind requirement presents an interpretive puzzle when dealing with corporate defendants because corporations lack their own discrete minds and \"think\" only through their employees, officers, and agents. In the 1990s, Congress became increasingly concerned with a proliferation of frivolous securities fraud claims designed to harass defendants into settling simply to avoid costly and protracted litigation.27 - Lawmakers heard testimony suggesting that, between compiling documents and preparing and deposing key witnesses, many of whom may be high-level executives with important responsibilities, \"discovery costs account for roughly 80% of total litigation costs in securities fraud cases.28 Plaintiffs' attorneys would initiate so-called \"strike suits\" and then use familiar and well-worn \"fishing expedition\" discovery tactics to win coercive settlements even where no fraud had truly occurred.29 In 1995, in an effort to limit this trend, Congress enacted the PSLRA over a presidential veto, elevating the pleading standards for plaintiffs bringing securities fraud claims.30 The PSLRA requires plaintiffs in securities fraud actions to \"state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind. \"32 In creating this heightened degree of factual particularity, Congress cited three central aims: \"(1) to encourage the voluntary disclosure of information by corporate issuers; (2) to empower investors so that they-not their lawyers-exercise primary control over private securities litigation; and (3)to encourage plaintiffs' lawyers to pursue valid claims and defendants to fight abusive claims.

• Publisher: St. John's Law Review Association
• Subject: Disclosure / Employees / Federal court decisions / Federal legislation / Litigation / SEC 34 / Securities fraud / Securities markets