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The Reform Act appears to be achieving Congress' purposes in the following areas:
Most federal securities class action complaints filed in 1996 appeared to contain detailed factual allegations specific to the action.
Secondary defendants, such as accountants and lawyers, are being named much less frequently in federal securities class actions.
The "race to the courthouse" to file a complaint has slowed somewhat. Although a few cases were filed within days of the release of negative news by the issuer, most were filed after at least several weeks had passed.
The courts have strictly applied the discovery stay imposed by the Reform Act during the pendency of a motion to dismiss. Coupled with the heightened pleading standards, the stay has protected defendants from having to provide discovery until the court has determined whether the plaintiffs have adequately pled their claims.
Areas of Concern
Other provisions of the Reform Act, however, appear to have been less successful in achieving Congress' objectives. The Commission's staff has identified three principal areas of concern regarding the implementation of the Reform Act. First, the staff has received anecdotal reports that the safe harbor is not encouraging companies voluntarily to disclose more forward-looking information. Second, parallel cases have been brought in state court where the discovery stay does not apply, thus permitting plaintiffs to obtain discovery that they could not get in federal court. Third, institutional investors are failing to assume active roles as lead plaintiffs in federal class actions.
Safe Harbor for Forward-Looking Statements
The Staff Report indicated that it appears that companies are not using the safe harbor to make more forward-looking disclosure. In preparing the Staff Report, the Commission's Office of the General Counsel spoke with issuers who stated that their primary concern is the lack of judicial guidance as to the sufficiency of the required "meaningful cautionary" language. They are also waiting to see how other companies are making use of the safe harbor. Concern about potential liability under state law, where the statements may not be protected by the federal safe harbor, was another frequently cited reason for not including more forward-looking disclosure.
Discovery Stay
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