Opinion ID: 77972
Heading Depth: 2
Heading Rank: 1

Heading: The PSLRA and Proportionate Liability

Text: In 1995, motivated in large part by a perceived need to deter strike suits by opportunistic private plaintiffs that filed securities fraud claims of dubious merit in order to exact large settlement recoveries, Congress passed the PSLRA. Novak v. Kasaks, 216 F.3d 300, 306 (2d Cir.2000). The PSLRA was a reaction to the significant evidence of abuse in private securities lawsuits, including the routine filing of lawsuits against issuers of securities and others whenever there is a significant change in an issuer's stock price, without regard to any underlying culpability of the issuer. H.R. Conf. Rep. No. 104-369, at 31 (1995), reprinted in 1995 U.S.C.C.A.N. 730, 730. Congress also hoped to put an end to the abuse of the discovery process to impose costs so burdensome that it is often economical for the victimized party to settle. Id. Before the PSLRA, the general rule in most securities law actions was that defendants found to have violated the Act were jointly and severally liable for all the plaintiff's damages. See Musick, Peeler & Garrett, 508 U.S. at 292, 113 S.Ct. 2085 (noting that violators share joint liability for that wrong under a remedial scheme established by the federal courts.); G.A. Thompson & Co., Inc., 636 F.2d at 963; TBG, Inc. v. Bendis, 36 F.3d 916, 927 (10th Cir.1994). In addition to strike suits, the legislative history of the PSLRA suggests Congress was concerned about the many cases in which the application of traditional joint and several liability unfairly resulted in defendants having to pay for damages caused by other defendants. See H.R.Rep. No. 104-369, at 37 (1995) (Conf.Rep.), reprinted in 1995 U.S.C.C.A.N. 730, 736 (Under current law, a single defendant who has been found to be 1% liable may be forced to pay 100% of the damages in the case.); S.Rep. No. 104-98, at 20 (1995), reprinted in 1995 U.S.C.C.A.N. 679, 699 (Under joint and several liability, each defendant is liable for all of the damages awarded to the plaintiff. Thus, a defendant found responsible for only 1% of the harm could be required to pay 100% of the damages.). To combat these perceived injustices, Congress enacted section 21(D)(f) of the PSLRA, which replaced the existing joint and several liability regime with a proportionate liability scheme that restricts joint and several liability to persons who knowingly violate the Act. Section 21(D)(f) provides in relevant part: (f) Proportionate liability (1) Applicability Nothing in this subsection shall be construed to create, affect, or in any manner modify, the standard of liability associated with any action arising under the securities laws. (2) Liability for damages (A) Joint and several liability Any covered person against whom a final judgment is entered in a private action shall be liable for damages jointly and severally only if the trier of fact specifically determines that such covered person knowingly committed a violation of the securities laws. (B) Proportionate liability (i) In general Except as provided in subparagraph (A), a covered person against whom a final judgment is entered in a private action shall be liable solely for the portion of the judgment that corresponds to the percentage of responsibility of that covered person, as determined [by the fact finder]. 15 U.S.C. § 78u-4(f)(2) (West 2007). Importantly, Congress clarified that section 21(D)(f) affects only the allocation of damages between liable defendants and must not be construed to create, affect, or in any manner modify, the standard of liability associated with any action arising under the Act. 15 U.S.C. § 78u-4(f)(1). Under Section 21(D)(f)'s proportionate liability scheme, there is a three step process to be followed by the fact finder determining a liable defendant's share of responsibility under the Act. [2] The first step is for the fact finder to determine whether the covered person [or] other persons claimed by any of the parties to have caused or contributed to the loss incurred by the plaintiff violated the securities laws. [3] Second, the fact finder determines the percentage of responsibility of each person measured as a percentage of the total fault of all persons who caused or contributed to the loss incurred by the plaintiff. Lastly, the fact finder determines whether such person knowingly committed a violation of the securities laws. A person knowingly commits a violation of the securities laws and thus is responsible for damages jointly and severally if it (1) makes an untrue statement of a material fact, with actual knowledge that the representation is false or (2) omits to state a fact necessary in order to make the statement made not misleading, with actual knowledge that ... one of the material representations of the covered person is false or (3) engages in ... conduct with actual knowledge of the facts and circumstances that make the conduct of that covered person a violation of the securities laws. 15 U.S.C. § 78u-4(10) (West 2007).