NCPA - Daily Policy Digest - Despite 1995 Reforms, Shareholder Suits Mount

NATIONAL CENTER FOR POLICY ANALYSIS
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Despite 1995 Reforms, Shareholder Suits Mount

When Congress passed the Private Securities Litigation Reform Act in 1995, it thought it was preventing frivolous class-action lawsuits. But the number of securities class-action suits appears about to set a record this year. According to one expert, "The courthouse doors remain wide open, and the data demonstrate that."

The number of suits filed this year has reached 179 -- a rate which would establish a record 269 filings for 2002, according to Stanford Law School's Securities Class Action Clearinghouse.

The rate has picked up over the summer and cash settlements are growing.

As of June the median settlement amount reached $6 million -- compared to $5.5 million for all of 2001 and $4 million before the act.

The average settlement is $32.7 million, up from $25 million.

The Association of Trial Lawyers of America had warned, erroneously, that shareholders would lose out if the act were passed.

The act provided "safe harbors" for company financial statements, created a three-year statute of limitations, narrowed liability and required plaintiffs to show direct evidence of fraud.

The act did have the effect of increasing the proportion of cases dismissed -- from 12 percent to 24 percent, supporters note, meaning fewer frivolous cases are getting through the screen.

Source: Sean Higgins, "Shareholder Suits Near a High Despite '95 Reform Legislation," Investor's Business Daily, September 10, 2002.

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