Pleading Under the PSLRA: Congress’s Super-Heightened Standard.
Increasing the specificity required in pleadings for certain fraud actions beyond Rule 9(b)’s heightened requirements, Congress in 1995 passed the Private Securities Litigation Reform Act (“PSLRA”) for securities fraud litigation. Professor Miller explains:
The statute requires that the complaint specify each statement alleged to have been misleading and give the reason or reasons why each is misleading. In addition, if an allegation is made on information and belief, all facts on which that belief is formed must be stated with particularity. Finally, facts giving rise to a “strong inference” that the defendant acted with scienter must be stated with particularity. Exactly what these heightened pleading requirements demand remains an unsettled question despite having been heavily litigated, but courts have been demanding far more specificity in securities actions than in the past, leading to the dismissal of many actions because of a failure to meet the statute’s standard.
Arthur Miller, “The Pretrial Rush to Judgment: Are the ‘Litigation Explosion,’ ‘Liability Crisis,’ and Efficiency Clichés Eroding Our Day in Court and Jury Trial Commitments?” 78 N.Y.U. L. Rev. 982, 1011-13 (2003) (internal footnotes omitted).
In offering a critical take on the impact of the PSLRA, Professor André Cummings provided one assessment of the law’s impacts on plaintiffs:
The new pleading standard for a plaintiff suing a corporation for fraudulent violation of the securities laws requires the victim of the alleged fraud, without any benefit of discovery, to plead particularized facts that will show a “strong inference” that each named defendant acted with a specific intent to defraud. A plaintiff must “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” This pleading standard increases the particularity that must be pled to the level of a “strong inference” that each defendant acted with specific intent to defraud, an unusually high burden--in truth, a higher burden than any other federal pleading standard. . . .
Further hampering victims of alleged securities fraud is the PSLRA amendment that mandates, absent certain findings by the court, an automatic stay of discovery in any securities lawsuit while the (routine) motion to dismiss is pending before the court. Additionally, the amendment requires plaintiffs both to identify specific statements made by the accused management that were in fact misleading and to also explain how and in what way the fraudulent statements were misleading.
André Douglas Pond Cummings, “‘Ain’t No Glory In Pain’: How the 1994 Republican Revolution and the Private Securities Litigation Reform Act Contributed to the Collapse of the United States Capital Markets,” 83 Neb. L. Rev. 979, 1009-11 (2005).