The Private Securities Litigation Reform Act (PSLRA) as reflected by its title is primarily concerned with securities litigation initiated by private parties. A caricature sketched many years ago by a British artist, R.O. Bright, sums up the underlying thrust of the Act. A cow labeled LITIGATION is being pulled by the head by the plaintiff and by the tail by the defendant, with a guffawing judge looking down on the scene. The lawyer, sitting with his corpulent posterior overlapping the stool, is milking the cow. There was nary a defender in either the House or the Senate of the entrepreneurial class action lawyer at whom the Act is directed, although there was considerable disagreement as to the anecdotal and statistical evidence relating to securities fraud class actions. There was no disagreement, however, that frivolous securities fraud class actions, whatever their number, exist in too large numbers and that there was a need to reform class action procedures. Those provisions of the PSLRA specifically tailored to end the race to the courthouse and empower the members of the class to act as real plaintiffs had the support of virtually all members of Congress. See § 2.04.

   The Act, however, goes well beyond dealing with the trappings of the class action and impacts private securities litigation in a dramatic fashion, although in the near term it may give rise to more litigation than it limits as the courts attempt to implement and interpret its several provisions that pervasively and sometimes ambiguously affect virtually all private securities litigation under the Securities Acts. The PSLRA adds a Section 27 to the Securities Act and a Section 21D to the Exchange Act that are substantially identical except in one area. Both include identical provisions relating to the selection of the lead plaintiff and lead counsel (see § 2.04]) and various other aspects of a class action (see § 2.05[2]), including extensive provisions governing class action settlement procedures (see § 4.09). Both include identical provisions applicable to any private action (class or otherwise) under the respective Acts limiting discovery pending resolution of a motion to dismiss. See § 4.01. Both include identical provisions relating to imposition of sanctions for frivolous actions, motions, and responsive pleadings. See § 4.04. The one area in which these sections differ significantly is that the Exchange Act includes requirements relating to pleading scienter with particularity and other enhanced pleading provisions that are not included in the Securities Act. See § 3.02. The Exchange Act also includes a provision allowing the court in actions arising under that Act to require an undertaking from the parties and/or their counsel of security for fees and expenses that may be awarded. See § 4.06.

   Separately, the Act limits joint and several liability under the Exchange Act to knowing violations of that Act (see § 4.11), and provides for a modified proportionate liability for non-knowing violations of the Exchange Act (see § 4.12). This dichotomy of joint and several vs. proportionate liability was extended by the Conference Committee to the liability of outside directors in actions brought under Section 11 of the Securities Act, notwithstanding no such provision was included in either version adopted by the House or the Senate. See § 4.11. A right to contribution for defendants jointly and severally liable in actions arising under the Exchange Act against others also liable is confirmed and is based on percentage of responsibility. See § 4.12. Settling defendants in an action arising under the Exchange Act are barred from obtaining contribution from non-settling defendants, and the amount of any judgment is to be reduced by the greater of the amount paid by settling defendants or the settling defendants’ percentage of responsibility. See § 4.13.

   A centerpiece of the Act is the safe harbor provision for forward-looking statements. Separate but identical provisions are applicable to private actions under the Securities Act and under the Exchange Act. These provisions are discussed at § 5.xx. The safe harbor is of considerable significance to securities practitioners involved in the disclosure process. The provisions, of course, also are critical in connection with litigation involving forward-looking representations as they are framed as a limitation on liability in private actions under the Securities Acts. The Commission’s safe harbor for forward-looking statements is discussed at § 5.xx and the bespeaks caution doctrine, which in some respects is the precursor of the PSLRA safe harbor, is discussed at § 5.xx.

   The PSLRA restricts, and for all practical purposes excludes, securities fraud as a predicate act in private actions asserted under the RICO treble damage provisions , expands the Commission’s authority to initiate a civil action to enjoin and/or impose a civil penalty on one who aids or abets a violation of Rule 10b(5), and includes limited provisions relating to damages and causation (see § 4.10). The PSLRA also imposes new responsibilities on accountants to detect and report illegal acts as part of their auditing and certification procedures in preparing financial statements for inclusion in Exchange Act filings. See Exchange Act § 10A.

   The provisions of the PSLRA are effective as to private actions arising under the Securities Acts commenced after the date of enactment (December 22, 1995); hence, are in effect as to any action filed now. Private actions under the Securities Acts commenced before or on the enactment date are not subject to the provisions of the Act.