Tort Reform Revolution (1996)

federal victory and the battle in the states. On December 22, 1995, thanks to an intensive four-year effort by business, investor and professional groups and bipartisan support in Congress, the Private Securities Litigation Reform Act became law. reform act is an important first step but only a first step in making the liability system less vulnerable to abuse. next step must be state tort reform. profession is already battling attempts to use state securities laws as vehicles for similar abuse, and it can expect legislative and legal challenges to the federal act. This article discusses what the reform act does, and what still must be done, to achieve equity in civil liability. companion article, The Reform Act: What CPAs Should Know, on page 55 provides a more detailed analysis of the provisions of greatest significance to the accounting profession, including proportionate liability, the safe harbor for forward-looking information and detection and disclosure of fraud. WHAT'S IN THE LAW? reform act's objectives are to discourage abusive claims of investors' losses due to fraudulent misstatements or omissions by issuers of securities (Securities and Exchange Commission rule 10b-5 suits), provide more protection against securities fraud and increase the flow of forward-looking financial information. Following is a brief summary of how the act's principal provisions will achieve its objectives. * An end to vague pleas and fishing expeditions. It no longer will be possible to file suits based on vague claims of fraud and then subject defendants to expensive and disruptive discovery proceedings involving cartons of documents and exhaustive depositions in order to fish for facts to support the allegations and leverage settlements. reform act adopts the pleading standard of the Second Circuit Court, which requires all claims to cite specific examples of a strong inference of the defendants' fraudulent intent. Defendants may move for dismissal or summary judgment based on the adequacy of the plea, and discovery proceedings cannot begin until the court makes a decision. This requirement will provide prompt relief for blameless defendants and encourage plaintiffs' attorneys to focus their efforts on obtaining fair recoveries for investors with legitimate claims. * Sanctions for frivolous claims. Sanctions for frivolous claims already exist under rule 11 (b) of the Federal Rules of Civil Procedure, but they are seldom imposed. By requiring courts to evaluate lawyers' conduct under rule 11 (b), the reform act increases the likelihood that abuses will be identified and punished. act mandates sanctions amounting to the injured party's attorney fees and costs if any party has failed to meet the rule's requirements. It has been alleged that fear of sanctions will deter small investors from filing claims. Sanctions are intended to penalize significant abuses, not mere mistakes; and they can be reduced or eliminated if the court determines that they would be unjust or unduly burdensome or that the violation was minimal. * Plantiff's control of class actions. In the past, the plaintiff ostensibly filing a securities fraud class action on behalf of injured investors was likely to be a so-called professional plaintiffhired by the attorney initiating the suit to act as lead plaintiff in name only. Members of the plaintiff class had little or no control over the resolution of the case, usually a quick settlement totally unrelated to any question of wrongdoing by the defendant. attorney received about one-third of the settlement, leaving the plaintiffs with a recovery of 10% or less of their estimated loss. professional plaintiff generally received a larger share of the settlement as a fee for services rendered. Under the reform act, plaintiffs in securities fraud class actions will have greater assurance that their interests are being served. …