University of Michigan Law School Scholarship Repository
Abstract
It is often said that California sets the pace for changes in America\u27s tastes. Trends established in California often find their way into the heartland, having a profound effect on our nation\u27s cultural scene. Nouvelle cuisine, the dialect of the Valley Girl and rollerblading all have their genesis on the West Coast. The most recent trend to emerge from California, instead of catching on in the rest of the country, has been stopped dead in its tracks by a legislative rebuke from Washington, D.C. California\u27s latest, albeit short-lived, contribution to the nation was a migration of securities fraud class actions from federal to state court. This migration had its origin in Washington, D.C., not Los Angeles. Less than three years ago, Congress passed the Private Securities Litigation Reform Act of 1995 (Reform Act, Act, or PSLRA. The corporate lobby and professionals who serve corporations persuaded Congress that companies and their managers were being harassed by class action lawyers more concerned with a case\u27s settlement value (and potential attorneys\u27 fees) than its merits. In response to that perceived abuse, Congress enacted the Reform Act, a series of primarily procedural measures making it more difficult to bring securities fraud class actions. Three years after its passage, the Act has greatly altered the course of securities litigation; however, its effect on capital formation and investor protection remains uncertain. One result of the Reform Act became clear soon after its passage although it seems not to have been anticipated by Congress. The Act\u27s sweeping reform, directed largely at securities fraud class actions brought in federal court, leaves state securities fraud actions untouched. Class action lawyers sought to avoid the restrictions imposed by the Reform Act by resorting to state law actions brought in state court. The majority of the state class actions filed since passage of the Reform Act have been filed in California. The first part of this Article assesses the evidence showing a migration to California state court. The authors conclude that claims regarding the magnitude of migration to state court were overblown, but that parallel state and federal cases were a serious problem for corporate issuers forced to defend such dual-track litigation and that state liability concerns threatened to undermine the Reform Act\u27s safe harbor for forward-looking statements
