The Search for the Holy Grail - Pleading a Claim Under the PSLRA

by Charles W. Schwartz, a partner in V&E's Houston office, and chair of the firm's Securities Litigation Group.

The Private Securities Litigation Reform Act of 1995 ("PSLRA") has had numerous consequences, many of them unintended. Perhaps the most ironic is that the law firms thought to be the "target" of the Act have, in fact, been its biggest beneficiaries. Before the PSLRA, lead counsel was often selected by timing, geography, and log rolling. Now, with lead counsel being selected by the investor with the presume largest loss, the plaintiffs' firms with the most wherewithal have established a virtual hegemony in lead plaintiff and lead counsel positions. Of the more than 1,600 securities fraud cases filed since the PSLRA was enacted in 1995, a small group of plaintiffs' firms controls more than 30% of that market.

This near monopoly status gives the leading plaintiffs' firms an inventory of cases that allows them to act almost like the Solicitor General in terms of which cases to pursue and which cases to abandon in an effort to shape PSLRA jurisprudence in their favor. Some firms, after suffering dismissals on the basis of well-reasoned opinions, do not appeal those judgments for fear of having the courts of appeal adopt controlling legal precedent against them.

Contrary to the claims of some, the PSLRA has not prevented meritorious securities cases from being pursued and ultimately won. Indeed, if anything, the amount of recoveries has increased since the passage of the Act. The heightened pleading standard under the PSLRA has, however, stopped many marginal cases, particularly those based on nothing more than the vicissitude of a stock market drop. For example, the rule in the Fifth Circuit is that "in order to survive a motion to dismiss, a plaintiff alleging a fraud claim must now plead specific facts giving rise to a 'strong inference' of scienter." Nathenson v. Zonagen Inc., 267 F.3d 400, 407 (5th Cir. 2001); see also Branca v. Paymentech, Inc., No. Civ. A. 3:97-CV-2507-L, 2000 WL 145083, at *3 (N.D. Tex. Feb. 8, 2000). As a result, about 30% of the cases subject to the PSLRA are dismissed with prejudice.

Notwithstanding their other successes, the plaintiffs' bar finds it intolerable that at any given moment 30% of their inventory is worthless. Accordingly, the plaintiffs' bar has zealously sought the holy grail: a formula to meet the heightened pleading requirements of the PSLRA. Some of these attempts have been inventive, indeed inspired. But most have failed. This article surveys a few of these.

1. The Prolix Complaint

Plaintiffs have decided one way to "adequately" plead fraud with particularity is simply to write a lengthy complaint. As a result, it is not unusual to see complaints in excess of 100 pages, with some exceeding 500 pages. Plaintiffs hope the sheer magnitude of the complaint will deter a trial judge from dismissing the case. Using this technique, plaintiffs re-plead the same facts over and over, sometimes repeating the pleadings...