September 27, 2007

Law And Order: The Case Behind Securities Class Action Reform

Featuring:  Adam C. Pritchard - Professor of Law University of Michigan

Securities class action lawsuits allow investors to hold public companies responsible for a number of issues like fraud or other spurious practices. The number of such suits spiked after the Supreme Court gave them the green light in Basic v. Levinson in 1987. This essentially eliminated the reliance requirement, making class actions much easier to bring to trial. Congress attempted to weed out the more frivolous of the lawsuits when it passed the Private Securities Litigation Reform Act of 1995.

Despite that legislation, the number of securities class actions has stayed relatively constant, ranging from 150 to 200 per year with judges still having to dismiss about 25% of the suits. Experts agree the amount of frivolous suits substantially increases the cost of doing business in America. Consequently, a number of studies have identified the possibility of securities fraud class actions as one factor limiting the competitiveness of U.S. capital markets. Foreign companies cite the fear of securities class actions as one of the top reasons for not listing their shares on the New York Stock Exchange or NASDAQ.