The Importance of the Prefiling Phase for Securities-Fraud Litigation

The pleading burden that governs securities-fraud litigation is significantly higher than those standards that govern traditional civil cases. The heightened pleading burden applicable to securities cases has transformed the motion to dismiss into something like summary judgment. In fact, to contend with this heightened pleading burden, plaintiffs typically must spend more time in the prefiling phase gathering sufficient, reliable evidence of securities fraud. With almost two decades of litigation under the securities laws’ heightened pleading burden, empirical studies are revealing that certain kinds of evidence are more likely to defeat a motion to dismiss than others. But dismissal statistics and cases are telling in another respect as well. They reveal that some forms of corroboration (SEC proceedings, accounting restatements, bankruptcies) seem more likely to help stave off dismissal than others (insider trading, inferences from shared experience, and accounts from confidential witnesses). This issue—the effective strategies for investigating and pleading securities-fraud claims—is the subject of this year’s conference sponsored by Loyola University Chicago School of Law’s Institute for Investor Protection

Toward a Just Measure of Repose: The Statute of Limitations for Securities Fraud

Statutes of limitations, a long-standing bulwark of civil litigation, mitigate the risk that evidence of meritorious claims will become stale and relieve defendants who might be exposed to claims from unending uncertainty about whether claims will be brought. But these twin rationales are balanced against allowing plaintiffs sufficient time to discover and file meritorious claims. This balance is manifest in the judicial and congressional effort to fashion a statute of limitations for securities fraud claims. The Supreme Court in Merck & Co. v. Reynolds recently attempted to strike that balance in its interpretation of the statute of limitations for securities fraud claims under section 10(b) and Rule 10b-5. But we show that the Court has failed. Merck presents a pleading trap for victims of securities fraud that will preclude the adjudication of meritoriousclaims. Moreover, the Supreme Court’s Merck decision exemplifies a much more serious problem with the entire limitations regime for securities fraud. We demonstrate that the discovery provision in that regime should be discarded for a singular statute of repose as the discovery provision unnecessarily precludes meritorious claims without providing any more support for the twin rationales beyond what is already provided by a statute of repose alone. The repose provision by itself reduces the use of stale evidence and litigation uncertainty and it does not unnecessarily preclude meritorious claims. In this sense, our proposal bucks the trend of scholarship addressing the statute of limitations that advocates eliminating limitations periods entirely. We find that insights from behavioral economics and practical realities of market activity justify some measure of repose. Thus, we advocate abolishing the discovery provision in the statute of limitations but keeping the statute of repose

Toward a Just Measure of Repose: The Statute of Limitations for Securities Fraud

Statutes of limitations, a long-standing bulwark of civil litigation, mitigate the risk that evidence of meritorious claims will become stale and relieve defendants who might be exposed to claims from unending uncertainty about whether claims will be brought. But these twin rationales are balanced against allowing plaintiffs sufficient time to discover and file meritorious claims. This balance is manifest in the judicial and congressional effort to fashion a statute of limitations for securities fraud claims. The Supreme Court in Merck & Co. v. Reynolds recently attempted to strike that balance in its interpretation of the statute of limitations for securities fraud claims under section 10(b) and Rule 10b-5. But we show that the Court has failed. Merck presents a pleading trap for victims of securities fraud that will preclude the adjudication of meritoriousclaims. Moreover, the Supreme Court’s Merck decision exemplifies a much more serious problem with the entire limitations regime for securities fraud. We demonstrate that the discovery provision in that regime should be discarded for a singular statute of repose as the discovery provision unnecessarily precludes meritorious claims without providing any more support for the twin rationales beyond what is already provided by a statute of repose alone. The repose provision by itself reduces the use of stale evidence and litigation uncertainty and it does not unnecessarily preclude meritorious claims. In this sense, our proposal bucks the trend of scholarship addressing the statute of limitations that advocates eliminating limitations periods entirely. We find that insights from behavioral economics and practical realities of market activity justify some measure of repose. Thus, we advocate abolishing the discovery provision in the statute of limitations but keeping the statute of repose

Toward a Just Measure of Repose: The Statute of Limitations for Securities Fraud

Statutes of limitations, a long-standing bulwark of civil litigation, mitigate the risk that evidence of meritorious claims will become stale and relieve defendants who might be exposed to claims from unending uncertainty about whether claims will be brought. But these twin rationales are balanced against allowing plaintiffs sufficient time to discover and file meritorious claims. This balance is manifest in the judicial and congressional effort to fashion a statute of limitations for securities fraud claims. The Supreme Court in Merck & Co. v. Reynolds recently attempted to strike that balance in its interpretation of the statute of limitations for securities fraud claims under section 10(b) and Rule 10b-5. But we show that the Court has failed. Merck presents a pleading trap for victims of securities fraud that will preclude the adjudication of meritoriousclaims. Moreover, the Supreme Court’s Merck decision exemplifies a much more serious problem with the entire limitations regime for securities fraud. We demonstrate that the discovery provision in that regime should be discarded for a singular statute of repose as the discovery provision unnecessarily precludes meritorious claims without providing any more support for the twin rationales beyond what is already provided by a statute of repose alone. The repose provision by itself reduces the use of stale evidence and litigation uncertainty and it does not unnecessarily preclude meritorious claims. In this sense, our proposal bucks the trend of scholarship addressing the statute of limitations that advocates eliminating limitations periods entirely. We find that insights from behavioral economics and practical realities of market activity justify some measure of repose. Thus, we advocate abolishing the discovery provision in the statute of limitations but keeping the statute of repose

Paving the Delaware Way: Legislative and Equitable Limits On Bylaws After ATP

In ATP Tour, Inc. v. Deutscher Tennis Bund, the Delaware Supreme Court held that a private company’s fee-shifting bylaw was facially valid. And before that decision, Delaware courts similarly upheld companies’ use of forum-selection bylaws requiring that intra-corporate disputes be litigated in a single designated forum. Many interpreted these holdings as broad endoresements of bylaws that could regulate the litigation process itself and a move by the Delaware courts to curtail shareholder litigation. Indeed, the Delaware legislature itself responded to ATP, amending the state’s corporate law to explicitly prohibit Delaware companies from adopting fee-shifting bylaws for shareholder litigation. But the legislature simultaneously allowed Delaware companies to adopt forum-selection bylaws. In this Article, we show that ATP and caselaw related to forum-selection bylaws will not result in calamity for investors or provide a silver bullet for companies to end shareholder and securities litigation. Rather, when carefully and fairly read, these decisions simply reaffirm the Delaware Way, under which corporate managers are vested with broad legal authority, but that authority is tempered by principles of equity. Using ATP and fee-shifting bylaws as a point of departure, we provide a template for equitable analysis of not only fee-shifting bylaws, but also forum-selection bylaws and other bylaws relating to litigation. Furthermore, as we argue in this Article, had equitable principles been properly applied to fee-shifting bylaws, equitable principles would have likely prevented fee-shifting bylaws from extinguishing meritorious shareholder or securities litigation anyway. In fact, the only kind of fee-shifting bylaw that would likely have survived equitable scrutiny is one that already exists under Delaware’s Rule 11—one that provides that a neutral arbiter can approve of two-way shifting of reasonable fees in response to frivolous litigation. Ultimately, perhaps the most compelling case for legislation barring fee-shifting bylaws in other states that follow the Delaware Way is that doing so may spare litigants and the system the lengthy, common-law process that will likely arrive at the state of the law already in place. In ATP Tour, Inc. v. Deutscher Tennis Bund, the Delaware Supreme Court held that a private company’s fee-shifting bylaw was facially valid. And before that decision, Delaware courts similarly upheld companies’ use of forum-selection bylaws requiring that intra-corporate disputes be litigated in a single designated forum. Many interpreted these holdings as broad endoresements of bylaws that could regulate the litigation process itself and a move by the Delaware courts to curtail shareholder litigation. Indeed, the Delaware legislature itself responded to ATP, amending the state’s corporate law to explicitly prohibit Delaware companies from adopting fee-shifting bylaws for shareholder litigation. But the legislature simultaneously allowed Delaware companies to adopt forum-selection bylaws. In this Article, we show that ATP and caselaw related to forum-selection bylaws will not result in calamity for investors or provide a silver bullet for companies to end shareholder and securities litigation. Rather, when carefully and fairly read, these decisions simply reaffirm the Delaware Way, under which corporate managers are vested with broad legal authority, but that authority is tempered by principles of equity. Using ATP and fee-shifting bylaws as a point of departure, we provide a template for equitable analysis of not only fee-shifting bylaws, but also forum-selection bylaws and other bylaws relating to litigation. Furthermore, as we argue in this Article, had equitable principles been properly applied to fee-shifting bylaws, equitable principles would have likely prevented fee-shifting bylaws from extinguishing meritorious shareholder or securities litigation anyway. In fact, the only kind of fee-shifting bylaw that would likely have survived equitable scrutiny is one that already exists under Delaware’s Rule 11—one that provides that a neutral arbiter can approve of two-way shifting of reasonable fees in response to frivolous litigation. Ultimately, perhaps the most compelling case for legislation barring fee-shifting bylaws in other states that follow the Delaware Way is that doing so may spare litigants and the system the lengthy, common-law process that will likely arrive at the state of the law already in place

The Unjustified Judicial Creation of Class Certification Merits Trials in Securities

The class action device is vital to deterring securities fraud and remedying its victims, who almost never suffer losses sufficient to justify an individual suit. Nonetheless, the federal courts have begun to convert the class certification process into a premature trial on the merits, thereby precluding victims of securities fraud from pursuing otherwise valid claims of financial wrongdoing. In particular, in a series of important decisions, the federal courts have required plaintiffs to prove the essential elements of their securities fraud claims at the preliminary class certification stage. This Article demonstrates why this trend should end. The judicial creation of class certification merits trials in securities fraud cases is inconsistent with the federal securities laws and Supreme Court precedent. Moreover, judicial resolution of the merits of a securities fraud claim at the class certification threshold infringes on the Seventh Amendment right to trial by jury. Nor can class certification merits trials be excused by any legitimate policy concerns. The harm purportedly averted by these trials is illusory. The supposed threat that class certification and post-certification discovery costs will produce in terrorem settlements is unfounded and illogical. Finally, this Article concludes that the harm caused by class certification merits trials is substantial. This new procedure will over-deter the very type of private securities fraud actions that both supplement Securities and Exchange Commission enforcement actions and compensate victims for losses caused by securities fraud