Securities Litigation

Following the increase in value of many securities in the 1980s and 1990s, plaintiffs’ lawyers used downturns in stock prices as opportunities to file shareholder class action lawsuits. By the early 1990s, securities litigation abuse was widespread. Some securities lawyers would file “strike suits,” in which plaintiffs recruited by lawyers would buy a few shares of a company's stock for the sole purpose of bringing a securities class action lawsuit within days after the share price declined, despite little or no evidence of any corporate wrongdoing.

The plaintiff lawyers’ lawsuits often have opened the door for abuse of the discovery process, and many companies have settled securities lawsuits rather than face plaintiff lawyer expeditions into their corporate files, much less risk multi-million-dollar jury awards.

The rise in frivolous securities litigation affects American businesses, investors, workers, retirees and consumers. In 2006 alone securities class action lawsuit settlements totaled over $20.7 billion. Even meritorious actions were compromised on terms that benefited lawyers but left defrauded investors without adequate compensation for their losses.

Securities Litigation Reform

Congress addressed concerns over abusive securities class action lawsuits in the 1990s by passing the Private Securities Litigation Reform Act (PSLRA) in 1995 and the Securities Litigation Uniform Standards Act (SLUSA) in 1998.

These reforms established important procedural and substantive restrictions on securities lawsuits, including the creation of a heightened pleading standard that generally makes it more difficult for plaintiffs to file allegations of securities fraud without having solid information beforehand on which to base such a claim. The role of these reforms in attempting to limit fraudulent securities litigation has been important, yet the plaintiffs’ bar and its allies continue to seek to roll back these laws.

Abuse Continues

Despite these reforms in the 1990s, securities class action litigation abuse continues. Settlements of securities lawsuits between 1995 and 2005 exceeded $25 billion.

Starting in 2000, federal prosecutors from across the country began investigating allegations that a major securities litigation firm, Milberg Weiss Bershad Hynes & Lerach, paid millions of dollars in illegal kickbacks to clients who served as lead plaintiffs in stock fraud suits. In 2006, federal prosecutors indicted the firm and two of its name partners for a scheme that earned the firm more than $200 million in attorneys’ fees. Read the U.S. Department of Justice press release announcing The Milberg Weiss Indictments.

Outrage over the fraudulent practices exposed in the Milberg Weiss indictment drew renewed cries for reform of securities litigation practices and tighter reins on attorney ethics. On the heels of these indictments, U.S. Representative Richard Baker (R-LA) introduced the Securities Litigation Attorney Accountability and Transparency Act (SLAATA), a bill that sets standards for certifying plaintiffs in securities class action lawsuits and awarding attorneys’ fees.

Legislative reforms have proven helpful in deterring some abuses in securities litigation practices, yet issues related to the types of plaintiffs being brought into class action securities lawsuits, and outrageous plaintiff attorneys’ fees, continue to plague the system.