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PSLRA at age 10 -- where next?



Kenneth M. Lehn, a former chief economist of the SEC, weighs in (WSJ sub) on the effects the Private Securities Litigation Reform Act (PSLRA) has had in the ten years since its passage, finding that it has been mildly helpful but not the hoped-for cure to shareholder-suit ills. His recommendations:

First, defendants are not currently allowed to appeal motions to dismiss federal class-action securities suits. Congress should pass legislation allowing them to do so.

� Second, damages should be calculated in terms of the per-share inflation of a company's stock price due to alleged fraud, not in terms of aggregate damages. Estimates of aggregate damages require estimates of the number of shares that were purchased during the class period at an allegedly inflated price and subsequently held or sold at a price after the alleged fraud is discovered. But there is no scientifically valid way of estimating the number of these shares. Instead of using untested models that often result in highly inflated aggregate damages, damages should be thought of in terms of per-share inflation, with investors required to come forward to prove their claims.

� Third, the current system of compensation in private securities litigation should take into account what investors receive from the relatively new Fair Funds, which are an outgrowth of Sarbanes-Oxley. Under Sarbox, the Securities and Exchange Commission is allowed to pool disgorgement and civil monetary penalties that defendants pay in settlements to it. The SEC then attempts to distribute the monies in the Fair Funds to investors who were harmed by the defendants' actions. If the total distributions made to harmed investors under the Fair Fund exceed the total damage investors incurred because of the alleged fraud, then investors should not be allowed to collect damages in private securities litigation.

 

 


Rafael Mangual
Project Manager,
Legal Policy
rmangual@manhattan-institute.org

Katherine Lazarski
Manhattan Institute
klazarski@manhattan-institute.org

 

Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.