Securities litigation reform

Nessim Mezrahi

In numerous prior posts on this site (for example, here), I have written about the problems caused by the U.S. Supreme Court’s March 2018 decision in Cyan, Inc. v. Beaver County Employees Retirement Fund. In the following guest post, Nessim Mezrahi, cofounder and CEO of SAR, a securities class action data analytics and software company, issues a call for reform to address the “confusion” that Cyan has caused. A version of this article previously appeared on Law 360. I would like to thank Nessim for allowing me to publish his article on this site. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to publish a guest post. Here is Nessim’s article.
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Regular readers of this blog know that the statistics surrounding U.S. securities litigation in recent years are nothing short of alarming, including, for example, both record numbers of lawsuits and record percentages of listed companies sued. Severity trends are concerning as well. All of these trends are exacerbated by the impact of the U.S. Supreme Court’s 2018 Cyan decision, which opens companies conducting securities offerings to multiple, conflicting lawsuits in state and federal court. Given these trends, it is hardly surprising that there have been renewed calls from business groups for securities class action litigation reform. Now, Chubb, a leading global insurer, has added its voice to the calls for reform. In an interesting June 11, 2019 paper entitled “From Nuisance to Menace: The Rising Tide of Securities Class Action Litigation” (here), the company details the extent of the current securities litigation mess and sets forth a number of proposals for securities litigation reform. 
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When Congress enacted the PSLRA in 1995, one of the goals was to try to deter frivolous litigation. As time has passed, it has also become clear that many of the PSLRA’s procedural reforms also created a structure of incentives for plaintiffs’ lawyers. For example, the PSLRA’s most adequate plaintiff requirement created an incentive for plaintiffs’ lawyers to seek to represent institutional investors. However, according to a recent academic study, with the passage of time, some of the incentives have had a distorted impact, as the incentives motivate plaintiffs’ lawyers to try to get hold of a mega-case “lottery ticket” that will produce a jackpot outcome – for the lawyers. These distortions in turn are creating many of the ills we are now seeing the securities class action litigation arena, justifying, according to the academic authors, another round of securities litigation reform.
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Because the lawsuits are so expensive to litigate and to resolve, securities class action litigation has long been the subject of both scrutiny and criticism. However, while the history of concern about securities litigation is long, the case can be made that there has rarely been a time when securities litigation in the U.S. deserves a critical look more than it does now. As has been well-documented on this site and elsewhere, securities class action lawsuit filing activity has been a record levels for the past two years. Signs are so far this year that these heightened levels of activity, which can only be described as alarming, are continuing. Given these circumstances, it is hardly surprising that business groups and others are now raising calls for another round of securities class action litigation reform.
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Last fall, the U.S. Chamber Institute for Legal Reform issued a paper detailing the ways in which the U.S. securities class action litigation system is “spinning out of control,” and calling for a renewed wave of securities litigation reform. In a new paper, entitled “Containing the Contagion: Proposals to Reform the Broken Securities Class Action System,” the Institute renews the call for reform and sets out a series of specific proposals intended address the “abuses” the paper identifies. The current securities class action litigation system, according to the paper, is “plainly broken, harming investors and our capital markets.” The Institute’s February 25, 2019 paper can be found here.
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