Because it is not clear that there will be any means for defrauded investors to recover fraud losses under federal law after passage of the Private Securities Litigation Reform Act of 1995 ("PSLRA"), we oppose any further reduction in investor protections, particularly suggestions that state antifraud remedies should be preempted. Should the courts ultimately interpret the PSLRA in a way that makes recoveries under federal law impossible, state remedies will be the onl means for defrauded investors to redress their injuries.
In the 19 months since passage of the PSLRA, the new Act has barely been tested, with no trials, no appellate decisions on substantive provisions, no summary judgments, and few decisions on any of its provisions. It will take more time to assess the PSLRA's impact as the courts struggle to interpret its provisions.
SEC Chairman Arthur Levitt has counseled against additional legislation in his April 1997 letter to the President accompanying the SEC's review of the PSLRA: "[I]t is too early to assess with confidence many important effects of the [Private Securities Litigation] Reform Act and therefore, on this basis, it is premature to propose legislative changes. The one-year time frame has not allowed for sufficient practical experience with the Reform Act's key provisions, or for many court decisions (particularly appellate court decisions) interpreting those provisions."
In addition, a number of federal district courts have already issued rulings so restrictive that they threaten almost all private enforcement. In one case, Silicon Graphics, the court imposed an impossible pleading standard and initially held that reckless wrongdoers are no longer liable to their victims under the PSLRA. The SEC took the extraordinary step of entering the case to file a brief in the district court to protest the result.
A recent study found that state court cases thus far in 1997 are in fact being filed at a rate below that in 1994 and 1995, before the PSLRA even was enacted. And, the numbers are minuscule -- only about 55 cases a year nationwide. These findings undermine arguments of the high-tech, securities and accounting industries advocating federal preemption of state securities laws based on claims that a massive number of shareholder class action suits have been filed in state courts to circumvent the PSLRA.
Healthy markets depend upon deterrence and enforcement. The higher levels of market
activity and the pronounced increase in frauds and investor complaints of fraud exist against a
backdrop of deregulation, diminished enforcement resources and new barriers to investor recoveries.
Within the past two years, the Dow has soared to dizzying heights. The upsurge in both market
activity and the incidence of fraud counsels caution against enacting another major piece of
legislation that would sweep aside private state fraud enforcement.
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