Opinion ID: 765192
Heading Depth: 3
Heading Rank: 2

Heading: The Legislative History of the PSLRA

Text: 24 When examining the legislative history, we first look to the conference report because, apart from the statute itself, it is the most reliable evidence of congressional intent. See id. at 835. In this case, the conference report suggests both that Congress generally intended to raise the pleading standards to eliminate abusive securities litigation and that it specifically intended to raise the pleading standard above that in the Second Circuit. See, e.g., H.R. CONF. REP. 104-369, at 31, 41. 25 It is clear from this conference report that Congress sought to reduce the volume of abusive federal securities litigation by erecting procedural barriers to prevent plaintiffs from asserting baseless securities fraud claims. In a joint statement, managers from the House and Senate declared that Congress has been prompted by significant evidence of abuse in private securities lawsuits to enact reforms to protect investors and maintain confidence in ourcapital markets. H.R. CONF. REP. 104-369, at 31. The managers observed that plaintiffs routinely were filing lawsuits against issuers of securities and others whenever there [was] a significant change in an issuer's stock price, without regard to any underlying culpability of the issuer, and with only faint hope that the discovery process might lead eventually to some plausible cause of action[.] Id. They recognized that plaintiffs, by targeting deep pocket defendants, could misuse the discovery process to impose costs so burdensome that it [was] often economical for the victimized party to settle[.] Id. In general, the conference report makes it clear that Congress designed the PSLRA to deter non-meritorious lawsuits by creating procedural barriers such as heightened pleading standards. Id. at 41. 26 It is also clear from the legislative history that Congress sought more specifically to raise the pleading standard above that in the Second Circuit. First, Congress declined to enact an amendment that would have adopted the Second Circuit rule. It is true that during the floor debate of its version of the PSLRA, the Senate tentatively adopted the Specter Amendment which codified the Second Circuit's two-pronged motive and opportunity and recklessness test. See 141 CONG. REC. S9,170 (daily ed. June 27, 1995). However, the joint conference committee -- consisting of House and Senate managers charged with reconciling differences between the House and Senate bills -- declined to incorporate the Specter Amendment in the final version of the PSLRA. See H.R. CONF. REP. 104-369, at 41. In doing so, they implicitly rejected the Second Circuit's two- pronged test. See Gulf Oil Corp. v. Copp Paving Co., 419 U.S. 186, 200, 95 S. Ct. 392, 401, 42 L. Ed. 2d 378 (1974) (holding that where the conference committee has expressly declined to adopt proposed statutory language, its action strongly militates against a judgment that Congress intended [the] result that it expressly declined to enact). 27 Second, the joint committee expressly rejected the Second Circuit's two-prong test in favor of a more stringent standard. The joint committee stated: 28 The Conference Committee language is based in part on the pleading standard of the Second Circuit. . . . Regarded as the most stringent pleading standard, the Second Circuit requirement is that the plaintiff state facts with particularity, and that these facts, in turn, must give rise to a strong inference of the defendant's fraudulent intent. Because the Conference Committee intends to strengthen existing pleading requirements, it does not intend to codify the Second Circuit's case law interpreting this pleading standard 23 . 29 H.R. CONF. REP. 104-369, at 41 n.23 (emphasis added). See also S. REP. 104-98, at 15 (The Committee does not intend to codify the Second Circuit's caselaw interpreting [the strong inference] pleading standard, although courts may find this body of law instructive.). Thus, although Congress derived the PSLRA strong inference language from the Second Circuit, it rejected the less stringent Second Circuit case law interpreting that strong inference language. To repeat, the conference committee purposely chose not to include in its pleading standard language derived from Second Circuit case law relating to motive, opportunity or recklessness. 30 Thus, Congress did not codify the Second Circuit case law. The joint committee sought to strengthen existing pleading requirements. See H.R. CONF. REP. 104-369, at 41. The Second Circuit case law setting forth its two-prong test existed at the time the PSLRA was passed. Clearly, Congress sought to raise the standard above all existing requirements. Congress could have adopted outright the Second Circuit standard. It did not do so. It follows that Congress sought to raise the standard above that in the Second Circuit. 31 We recognize that the PSLRA's strong inference language is taken directly from the Second Circuit. That is not determinative, however. The legislative history leads us to conclude that Congress adopted the Second Circuit's strong inference language only because it was facially more stringent than the reasonable inference standard in other circuits, see, e.g., Provenz, 102 F.3d at 1490. It does not indicate that Congress intended to adopt the Second Circuit's underlying two- prong test. After all, Congress expressly rejected the Second Circuit case law interpreting the strong inference standard. 8 32 To repeat, Congress intended for the PSLRA to raise the pleading standard even beyond the most stringent existing standard. 33 Congress further provided very strong evidence of its intent to go beyond the Second Circuit standard when it overrode President Clinton's veto of the PSLRA. In his veto message to Congress, President Clinton expressed concern that Congress had elevated the pleading standard above that required in the Second Circuit. President Clinton stated: 34 I believe that the pleading requirements of the Conference Report with regard to a defendant's state of mind impose an unacceptable procedural hurdle to meritorious claims being heard in Federal courts. I am prepared to support the high pleading standards of the U.S. Court of Appeals for the Second Circuit--the highest pleading standard of any Federal circuit court. But the conferees make crystal clear in the Statement of the Managers their intent to raise the standard even beyond that level. I am not prepared to accept that. 35 141 CONG. REC. H15,214 (daily ed. Dec. 10, 1995). Notwithstanding the President's concerns, Congress overrode his veto, and the PSLRA became law. In doing so, Congress provided powerful evidence of its intent to elevate the pleading standard to a level beyond that in the Second Circuit. 36 In sum, the legislative history supports our conclusion that the PSLRA pleading standard is higher than the standard of the Second Circuit. We find that because the joint committee expressly rejected the motive and opportunity and recklessness tests when raising the standard, Congress must have intended a standard that lies beyond the Second Circuit standard. Had Congress merely sought to adopt the Second Circuit standard, it easily could have done so. It did not do so. Instead, Congress adopted a standard more stringent than the Second Circuit standard. It follows that plaintiffs proceeding under the PSLRA can no longer aver intent in general terms of mere motive and opportunity or recklessness, but rather, must state specific facts indicating no less than a degree of recklessness that strongly suggests actual intent. Thus, we agree with the district court that the PSLRA requires plaintiffs to plead, at a minimum, particular facts giving rise to a strong inference of deliberate or conscious recklessness. We believe that this deliberate recklessness standard best reconciles Congress' adoption of the Second Circuit's so-called strong inference standard with its express refusal to codify that circuit's two-prong motive and opportunity and recklessness test. 37 Having determined that the PSLRA requires plaintiffs to plead particular facts giving rise to a strong inference of deliberate recklessness, we must determine whether the plaintiffs in this case have satisfied that requirement.