Do the Merits Matter Less After the PSLRA
A Presentation By Steven Choi of Boalt School of Law Berkeley
Live From Law and Economics at Stanford Law School
I'm here from 4:00 to 5:30 for my last class before Spring Break. This talk will be on the Private Securities Litigation Reform Acto of 1975 which Professor Choi is giving a preliminary presentation of his draft. I'll be trying my best to keep up with the comments.
Klausner is giving the intro. Corporate Academics became econ focused only after the late 70s, before that was the prehistoric era. Then there was the soft-guess phase (Easterbrook). Recently, Corporate Academics has begun to have a strong emperical section. Better than the old econ guys who got the institutions wrong.
main talk - this paper is about securities class action - in theory this exists to prevent fraud. What's the problem? in mid 1990s, there was a sense that many fraud class actions were brought for nuissance/frivolous reasons by plaintiff's attorneys in order to extract a settlement.
In 1995 Congress responded over veto with the PSLRA reform act (henceforth reform act). If we wanted to get rid of all frivolous suit, we can either (a) eliminate cause of action (b) set bond. Problem with these methods is that they are indiscriminate. PSLRA was designed to be more targeted (lead plaintiff provisions, stay on discovery until after motion to dismiss, pleading with particularity, attorney costs reviewed by court)
two questions - is the pslra any better than a flat tax on litigation, OR getting rid of the cause of action
1) did it result in drop of frivolous litigation
2) topic of paper - are we also losing meritorius lawsuits under the PSLRA (smaller value claims) and something about losing easy cases, whatever that means.
First question was did the PSLRA try to change the location of the dividing line between frivolous litigation and litigation with merit? If so, not bad that we are losing some cases that would otherwise be meritorius. Choi retorts that he is only arguing that he wants the reading public to realize that there is a tradeoff.
Some terms - Nuisance Suit (proxied by settlement of $2 million or less); Hard Evidence = Suits where had accounting restatement (or inquiry where restatement is expected or SEC investigation/enforcement related to the alleged fraud)
Three basic hypotheses
1) (Size Effect) The minimum potential damage award for a securities class action before a plaintiffs' attorney choose to file a securities fraud class action increased post -PSLRA Does the size effect ratchet up, so that we are eliminating everything for these smaller companies?
2) (Soft Evidence): Plaintiffs' attorneys are less likely to file non-nuisance claims that involve only soft evidence of fraud in the post-PSLRA period
3) (outcomes): Soft evidence claims that received a non-nuisance outcome int eh Pre-PSLra period are molikely to receive a low level settlement or a dismissal.....
Questions on data set - why did he choose the years he chose? Convience. Didn't want to go too far out.
Grundfest - Another thing need to look at is how hot the IPO market is.
Its a myth that all companies with giant price drop get sued. Question - how many get sued? 5%? 7%?
the guy to my left asked if it really mattered taht a company made a restatement. grundfest said yes and gave 4 significant variables. he just happened to know off hand. if a restatement, then (i) probability of suit increases, (ii) probability of surviving motion to dismiss increases, (iii) probability that your auditor will be named as a codefendant increases and (iv) probability that you will settle for a higher amount increases
Ok, the discussion has gone hard core stats - I could follow, but break is so close........
Results and Outcomes - sorry he went to fast. Read the paper that is linked above if you are curious.