DEFINITION of Private Securities Litigation Reform Act – PSLRA

The Private Securities Litigation Reform Act – PSLRA - is a piece of legislation passed by Congress in 1995 to stem the filing of frivolous or unwarranted securities lawsuits. The PSLRA increased the amount of evidence that plaintiffs are required to present before filing a securities fraud case with the federal courts. It also changed the way securities class action lawsuits are handled by giving judges the authority to determine plaintiffs and to take other actions to reduce legal system abuses.The purpose of the Private Securities Litigation Reform Act was to prevent unwarranted, flimsy, or fraudulent lawsuits from being filed, which can be expensive and tie up the efficiency of the legal system. It also reduced litigation risk for certain companies who faced these types of lawsuits on a regular basis.

BREAKING DOWN Private Securities Litigation Reform Act – PSLRA

A shareholder may file a securities fraud claim in federal court to recover damages believed to be sustained as a result of the actions of a firm or individuals related to the sale, trading, or price manipulation of securities.. Before the the Private Securities Litigation Reform Act, plaintiffs could file a lawsuit simply due to such events as when the price a stock changed significantly in the hopes that the discovery process would reveal some potential fraud. After the PSLRA was enacted in 1995, plaintiffs were required to bring forth particular fraudulent statements made by the defendant, to allege that the fraudulent statements were reckless or intentional and to prove that they suffered a financial loss as a result of the alleged fraud.

The PSLRA became law on December 22, 1995, when the United States Senate overrode President Clinton’s initial veto of the bill. The purposes of the law was based on the claim that there was a need to increase investor awareness regarding securities litigation, as well as to make such litigation more efficient and, importantly, to deter what was perceived to be an abundance of meritless class action lawsuits made possible under the Securities Act of 1933 and the Securities Exchange Act of 1934. Since adoption of the PSLRA, legal scholars have disagreed on its impact, with some arguing that the PSLRA helped to completely restructure the scope of securities class actions. On the other hand, others suggest that it has had little meaningful impact on the ultimate outcome of these kinds of cases, the amount of money awarded via settlements, or even the number of cases being filed. Regardless, the PSLRA has imposed strict guidelines that must be followed by plaintiffs, including more rigorous pleading requirements, mandating stays of discovery, and giving to courts specific criteria for the selection of lead plaintiffs of class actions.