The Private Securities Litigation Reform Act of 1994, Pub.L.104-67, adapted many substantive changes in the United States regarding private securities litigation. One of the most significant pieces of the act is the requirement that broker-dealers must inform clients of the nature and expected outcome of the transactions in a written statement. The statements must also include a risk-based disclosure statement. The purpose of this disclosure statement is to give the client a reasonable picture of the potential downside or reward of such an investment. In most instances, broker-dealers are fiduciaries and must therefore deliver this information.
However, this Act does not apply to plaintiffs’ private securities litigation. That is, the new Act does not require broker-dealers to disclose the risks associated with their investments; it only requires them to make reasonably good faith representations. There are however, some exceptions to this rule. For instance, if the firm has actual notice that there is a question of material misstatements or omissions among its portfolio investments, it must inform the client promptly and provide reasonable accommodations for those hardships. And, if it is required by law or the statute to maintain a record of such investments, then it must also do so.
However, plaintiffs’ private securities litigation fall outside of these statutes’ requirements to disclose materials. Plaintiffs are required to prove “a concrete probability that a plaintiff will receive a settlement award when they resolve the claim.” The new Act falls within this strict requirement. Thus, plaintiffs have a much greater chance of obtaining a judgment against a defendant who failed to make reasonable disclosures, especially in securities class actions.
The securities class action lawsuit reform Act also extends the statute of limitations on securities fraud claims to include all class action plaintiffs. Previously, the statute of limitations on securities fraud cases had been 10 years from the date of the breach. With the passage of the Act, the limit has been increased to a lifetime. However, an action may be brought sooner than the limitation period begins if the investor, to wit, the defrauded entity, is no longer within the age of majority.
Finally, the Act includes provisions to implement the provisions of the Sarbanes Oxley andizenkan amendments. These amendments, passed by Congress in 2002, increase the penalties for securities fraud. Specifically, the Act authorizes the U.S. attorney to “forfeiture, for cause, any property used or intended to be used to commit such fraud, and to destroy or carry away any records, papers, securities or other things used or related to such fraud.” As previously noted, the penalties are based on the amount of money involved and the defrauding of investors. Additionally, the United States Attorney General can also order civil penalties against the liable party. The Act also requires each broker and publisher to inform their clients about the new provisions.
The PPLRRA also requires each broker and publisher to inform any individual that receives or purchases of investment securities or a product that has become a fraud. Additionally, as required by the Act, all brokerage and sales organizations must inform their customers and shareholders of “any false or unsubstantiated statements or rumors which have a reasonable likelihood to deceive the buyer or a consignor.” In addition, the Act also requires each broker and publisher to inform any person underwriting a security that a transaction does not pass the “first-of-a-kind” test. As defined, the first-of-a-kind test is a test that is used to determine whether or not the sales process would result in a profit for the issuer. The publishers and brokers are required to explain this provision and the effect it has on the trading environment.
While the federal courts may be reluctant to enjoin enforcement of the Act, the PPLRRA can still have meaningful deterrence effects. For example, in the event that a brokerage publishes inaccurate information, the brokerage’s insured client will be the recipient of the inaccurate information. However, if the brokerage is unable to correct the inaccurate information, the client may be able to file a lawsuit against the brokerage. This can provide additional incentive for brokers and publishers to make accurate information readily available to their customers and shareholders. Because of the Act’s emphasis on mandatory customer notifications, courts may be more likely to prevent unwarranted securities lawsuits.
The final part of the Act requires each broker and publisher to submit annual reports to the Secretary of the Department of Securities and Exchange Commission regarding their compliance with the Private Securities Litigation Reform Act. In the 2010 report, the majority of brokerage firms provided an annual disclosure of how many unwarranted securities lawsuits they had settled, along with an identification of the court that had issued the complaint against them. This information can help the Secretary performs his role of ensuring compliance with the securities laws. Although the private securities litigation reform act has many worthwhile aspects, some aspects of the Act are problematic. One problem is that Congress may not continue to revisit the Act for years, if ever. For this reason, the future of the Act will remain uncertain for both brokers and publishers.