Letter to the Senate on PSLRA and the Uniform Standards Act

February 27, 2002

To Members of the United States Senate:

On behalf of the U.S. Chamber of Commerce, the world's largest business federation, representing more than three million businesses and organizations of every size, sector, and region, I am writing to express our strong opposition to any attempt (including amendments to the energy bill as well as any other piece of pending legislation) designed to weaken or repeal the Private Securities Litigation Reform Act (the PSLRA) or the Securities Litigation Uniform Standards Act (the Uniform Standards Act).

Congress is right to take a serious look at the Enron debacle but that effort should not bolster ill-considered attempts to undermine the PSLRA or Uniform Standards Act – balanced and effective statutes that have brought much-needed rationality to the securities litigation process. We therefore strongly believe that recent efforts to use Enron as an excuse to repeal elements of the PSLRA as well as the Uniform Standards Act must be rejected.

It is useful to recall why the PSLRA was enacted in the first place: it addressed the serious problem of frivolous and abusive securities strike lawsuits. This problem was extensively documented in congressional hearings and academic studies over the years leading to enactment of the statute. Those hearings and studies demonstrated that a small coterie of plaintiffs' lawyers brought suit whenever a company's stock price fell for any reason, alleging that securities fraud was responsible. To serve as their ostensible clients, the lawyers recruited professional plaintiffs who bought a few shares of many companies' stock for the sole purpose of bringing a class action suit the day after the share price declined. The lawyers would file literally the same boilerplate complaint in case after case – sometimes even forgetting to change the names of the companies listed as the defendant. The point of this exercise was to extract hefty attorneys' fees from companies that couldn't afford years of litigation over nuisance suits.

The result was that many cases settled with token payments for shareholders and enormous fees for lawyers. This system was bad for everyone. It did nothing for real victims of securities fraud. It affirmatively injured the shareholders of companies that were forced to pay judicial blackmail. And because companies were fearful of being sued whenever they missed their earnings projections, executives stopped making forward-looking statements about company plans and expectations – thus removing valuable information from the market.

The PSLRA's response to this abuse – enacted by a substantial, bipartisan majority of both Houses – was balanced and modest. First, to address repeat, lawyer-driven litigation, the Act bars suits by professional plaintiffs and gives judges the authority to select the lead plaintiff who will best represent the interests of all class members. Second, to address frivolous strike suits, the Act heightens the standard for filing a complaint that alleges securities fraud: instead of making wholly unsubstantiated allegations with the hope of extorting a quick settlement, the complaint now has to state some facts supporting the conclusion that the defendant acted with fraudulent intent. Third, to get more information to investors, the PSLRA creates a safe harbor for forward-looking statements that are not made with knowledge of falsity. Fourth, the Act provides that each defendant in a multi-party suit usually should be required to pay only that portion of the judgment for which the jury finds it responsible, rather than the entire judgment – although the defendant remains liable for the entire judgment in cases where it had actual knowledge that its statements were false. Finally, the subsequent enactment of the Uniform Standards Act moved the bulk of securities-related class actions into federal court.

The PSLRA also took significant steps to strengthen investor protections. It gives the Securities and Exchange Commission authority to take action against persons who aid and abet securities fraud. At the same time, the PSLRA provides that auditors who uncover illegal acts must notify the SEC if the company does not take corrective action.

The principal argument now advanced by those who challenge the PSLRA and the Uniform Standards act is the same claim that was made when the legislation was enacted, namely that the heightened pleading standard would close the courthouse doors to victims of securities fraud. But that fear has proved to be completely unjustified. In the year immediately after enactment of the PSLRA in 1995, the number of federal securities class actions did dip, almost certainly because plaintiffs' lawyers had rushed to file suits that were in the pipeline before the Act took effect. But in each of the next four years the number of shareholder suits filed bounced back to – or above – pre-PSLRA levels. And last year, plaintiffs filed more than twice as many securities fraud class actions than had been brought in any prior year. That the plaintiffs' securities bar is filing claims at far more than pre-Act rates demonstrates that, post-PSLRA, the securities fraud class action is alive and well.

Most important, it also is clear that, far from leading to dismissal of meritorious claims, the statutes are working as its drafters intended to improve recoveries for investors who really have been injured. The race to the courthouse, in which lawyers try to seize control of a case by being the first to file suit, appears to have slowed. The complaints filed by plaintiffs now have more factual detail, meaning that the lawyers are doing a little homework before bringing suit rather than hoping to hit pay dirt in discovery fishing expeditions. The dismissal rate for insubstantial claims has increased somewhat, while the number of suits settled for nuisance value has declined. And as several studies have confirmed, the average settlement value of post-PSLRA claims is up substantially. The PSLRA thus is helping to prevent the coercive settlement of frivolous cases while correlating the size of settlements with the merits of the underlying claim.

Against this background, opponents of the PSLRA and the Uniform Standards Act cannot credibly claim that they somehow were responsible for the events leading to the collapse of Enron. If Enron's executives and auditors in fact engaged in the misconduct now alleged by plaintiffs' lawyers, nothing in the PSLRA or the Uniform Standards Act will shield them from liability. Indeed, if the allegations of the plaintiffs' lawyers are believed, Enron is a uniquely bad example for opponents of the PSLRA because liability in that case is virtually assured. That is why the plaintiffs' lawyers fought ferociously among themselves to be named lead counsel in the Enron shareholder litigation: they had no doubt that a huge payment to the plaintiffs, and an unprecedented payday for the lawyers, is assured.

Overall, the Chamber believes that the value and effectiveness of both the PSLRA and the Uniform Standards Act is clear and unquestionable. It is harder to bring abusive strike suits now than it was in 1995. At the same time, those cases that have merit are producing significantly better returns for shareholders. The system may not be quite the feeding trough for lawyers that it had been prior to the PSLRA, but it is a lot better for the investors who should be the real beneficiaries of the securities litigation process.

We therefore strongly urge that any attempt to repeal or weaken the PSLRA or the Uniform Standards Act be rejected. The Chamber may use votes on or related to this matter in our annual "How they Voted" scorecard.

Sincerely,

R. Bruce Josten
Executive Vice President, Government Affairs
U.S. Chamber of Commerce