I can’t let the day pass without a nod to Floyd Norris’s very thoughtful column on the unintended—make that, intended, but still unfortunate—consequences of the 1995 Private Securities Litigation Reform Act.
That law, a Clinton-era triangulation classic, was meant to protect innocent companies from being hit with extortionate “fraud” suits by a voracious plaintiffs’ bar that galloped to the courthouse merely because a stock price had dropped. The extent and seriousness of the slapsuit problem was hotly debated at the time, and I mean hotly in the way a debate funded by unlimited money can be. It was endless, fierce and littered with expensive studies.
This was not an area for the faint of heart. The posterchild of the securities-fraud plaintiffs’ bar, Milberg Weiss, was finally indicted by the Bush administration Justice Department. Suffice it to say, the corporate side won.
But, as Norris notes, you’ve got to be careful what you wish for.
Now, investors in auction-rate securities, many of them corporations themselves, find they can’t get traction in fraud claims against brokerages that sold as safe securities that turned out to be risky indeed.
Their problem:
That law, the Private Securities Litigation Reform Act, says that a case, when filed, must be very specific about the fraud that is alleged, or it will be immediately dismissed. In many cases, a plaintiff would need access to inside information to make such a claim with enough detail. Such information could be there in company files, but the plaintiff has no way to get at it before the case is thrown out.
Indeed, it can be a Catch-22. The question, as always, is whether the baby of private fraud enforcement was thrown out with the bathwater of bogus and frivolous claims.
The instant case (love those legal terms) involves a woman who claims in Manhattan federal court that Raymond James, the brokerage, misled her about the instruments’ safety and indeed dumped them on customers before the market collapsed. The case was thrown out on the evidence problem, with the judge allowing it to be refiled if proof can be found to meet the law’s requirements. We’ll see.
But as Norris notes:
If there ever is a wide-ranging trial, we might get to see which issues of auction-rate securities were owned by Wall Street firms in the summer and fall of 2007, and how much they sold before the collapse. We might learn if the firms understood risks they did not mention to customers.
But that will not happen if judges continue to prevent such cases from proceeding even to the discovery process. Corporations that cheered the 1995 law may discover it keeps them from having a chance to recover their own losses.
It might have been nice to have mentioned that the PSLRA was and is part of a broader, decades-long movement to curtail plaintiffs’ rights (what Nader calls the closing of the courthouse door), a subject that, however you feel about it, deserves more attention.
Still, a fine column.
Dean Starkman Dean Starkman runs The Audit, CJR’s business section, and is the author of The Watchdog That Didn’t Bark: The Financial Crisis and the Disappearance of Investigative Journalism (Columbia University Press, January 2014). Follow Dean on Twitter: @deanstarkman.