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Although the Commission staunchly defends the right of defrauded investors to seek meaningful relief, we are sensitive to the burdens imposed on corporations by abusive litigation, which increases the cost of capital formation. As an agency whose primary mission is investor protection, we respect the concerns raised by both sides of this debate.
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I. THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
S. 1260 is best interpreted in light of Congress' most recent litigation reform effort, the 1995 Reform Act. The Reform Act primarily affected federal class actions which, while often providing the only practical method available to compensate defrauded small investors, are commonly thought to be the type of securities suits most prone to abuse. Class actions often involve expensive and time-consuming discovery, de facto control by plaintiffs' lawyers, and the potential for substantial damage awards. In passing the Act, Congress attempted to curb the potential abuses of class actions by adopting the following principal provisions applicable to federal securities litigation:
- (i) a "safe harbor" for forward-looking statements;
- (ii) a stay of discovery while a motion to dismiss is being decided;
- (iii) heightened pleading standards requiring specific recital of facts giving rise to a "strong inference" of fraud;
- (iv) a "lead plaintiff" provision designed to wrest control of class action litigation from lawyers and to empower institutional shareholders in this context; and
- (v) a system of proportionate, as opposed to joint and several, liability for defendants who are not found to have knowingly committed fraud.
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II. EFFECTIVENESS OF REFORM ACT
In the aftermath of the Reform Act, state court class actions have increased in number and become a more important feature of the securities fraud litigation landscape. Several reasons for this increase have been advanced. Some observers believe that the increase is attributable to efforts to circumvent the Reform Act's provisions, particularly the heightened pleading requirements and discovery stay, which do not apply in state court. Others point to the advantages available in state court such as causes of action for aiding-and-abetting, non-unanimous jury verdicts, and punitive damages.
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