The Private Securities Litigation Reform Act of 1994, Pub.L. 103-67, enacted several major changes in the U.S., affecting many cases brought under federal and state law. One significant change is that trial attorneys are now permitted to join as observers on trials that are being conducted outside of the jurisdiction of the courts. This, however, should not be taken to mean that all SEC claims should be pursued in federal court. There are many complex issues that require trial lawyers, who are thoroughly experienced in securities fraud and securities litigation, to be intimately knowledgeable about their client’s local venue and the legal process. In some cases, this knowledge may not be available.
There are also significant changes to the rules applicable to both parties. For example, it is now beyond doubt that plaintiffs must show a Prima facie case of injury or harm in order to recover damages. This shift is largely positive for plaintiffs as it makes the process much easier to bring such a claim. Previously, only shareholders were able to show such a case. The changes effected by the Private Securities Litigation Reform Act of 1994 also affect defendants.
First, in private securities litigation, there was an exception to the general rule that an action could be brought on behalf of a class, when all other methods of the class action had been ruled out. The new rule is that a class only requires that more than one individual class members suffer some kind of harm as a result of a negligent act or conduct. The plaintiffs must provide forward-looking information with regard to the likelihood of success of their claim. If they do not, the claim will fail.
Second, the private securities Litigation Reform Act has amended the common standard of negligence for actions brought by plaintiffs. Under the old rules, the plaintiff simply had to prove that there was negligence on the part of a defendant and that this negligence proximately caused harm or injury to the plaintiff. The new rule allows for either a direct or inferring negligence on the part of the defendant. This new stipulation may open the door for more complex claims involving a number of individuals or entities. This is good news for those who may have such a complicated relationship with one another and who might be able to put a spin on how the harm was caused.
Third, the private securities Litigation Reform Act has amended the standard of fraud used in class action cases. The fraud requirement under the old rules was only based upon a defendant’s deliberate acts of deception. The new rule bases its fraud burden solely on a party’s conduct. For example, an audit of a firm’s process in detecting fraud requires proof that the auditor has conducted an inspection that was deficient. Under the new statute, the auditor may not be held liable unless there is proof of a material misstate.
Fourth, the Act has amended the definition of a forward-looking statement. The term has been defined as any statement that is made on a regularly held publicly available web site that contains forward-looking information about the future results of operations and financial projections. Forward-looking statements are to be used as a basis for making business decisions and should be taken as of such times only. A company must provide notice to the Securities and Exchange Commission of any forward-looking statement that is filed with the SEC. To date, this requirement has not been enforced.
Fifth, the Act has amended the definition of securities class. Class refers to persons who may bring a securities class action lawsuit. Persons qualified as members of a securities class are not required to have or anticipate having to bring a securities action if they do not maintain minimum standards of care. In most states, a member of a securities class is not required to do anything other than file a complaint in a civil proceeding. However, if the state court decides that the minimum level of care was not maintained, then the plaintiff is not required to file a complaint.
Private Securities Litigation Reform Act has resulted in many new options for plaintiffs bringing lawsuits. One of the best is the new class action lawsuit. Unlike securities cases, it does not require an investment on behalf of the plaintiff and is generally faster to win. The plaintiff does not need to rely on the strength of their attorney’s predictions of actual results because this evidence will not be admissible in a civil liability case.