Mickey Kaus vilifies John Kerry for his support of the Private Securities Litigation Reform Act:
If none of Kerry's opponents makes a good negative ad against him based on the information in this Jonathan Cohn article, then the Iowans will have won! ... On the stump this week, Kerry portentously attacked special interests and complained that retirement accounts have been "decimated" by the "scandals of Enron and Worldcom," but Cohn makes it clear that an overbroad law that Kerry supported limiting the ability of investors to sue over fraudulent accounting practices contributed to the Enron and Worldcom scandals. The law was backed by a variety of monied special interests and was passed over President Clinton's veto. ... You think there is enough hypocrisy there to work with?Kaus doesn't even identify the law in question, relying entirely on Cohn's critique. In turn, Cohn relies solely on the opinions of two - just 2 - law professors. Neither Cohn nor Kaus bothered to check the facts. There are several empirical studies of PSLRA readily available at SSRN.com. That research almost uniformly suggests that the PSLRA has not had adverse effects on securities law enforcement, let alone contributing to Enron or WorldCom.
Do the Merits Matter More? Class Actions under the Private Securities Litigation Reform Act by Johnson, Nelson, and Pritchard concludes: "the PSLRA has furthered Congress's goal of discouraging frivolous securities fraud lawsuits." Should Congress Repeal Securities Class Action Reform? by Adam Pritchard found:
The Private Securities Litigation Reform Act of 1995 was designed to curtail class action law-suits by the plaintiffs bar. In particular, the high-technology industry, accountants, and investment bankers thought that they had been unjustly victimized by class action lawsuits based on little more than declines in a company's stock price. Prior to 1995, the plaintiffs' bar had free rein to use the discovery process to troll for evidence to support its claims. Moreover, the high costs of litigation were a powerful weapon with which to coerce companies to settle claims. The plaintiffs' bar and its allies in Congress have called for a repeal or modification of the PSLRA. This paper evaluates the operation of class action lawsuits before and after the act. The hard evidence does not support repealing the PSLRA. In fact, securities class actions are being filed at a record pace. And although a higher percentage of these lawsuits is being dismissed now than before the act, the ones that survive lead to larger settlements. The PSLRA raised the standard required before plaintiffs' attorneys could drag a defendant company through the expense of discovery. The lawsuits that meet this higher standard are likely to be less frivolous and are consequently worth more in settlement negotiations. The combination of higher settlements and a smaller percentage of such cases getting to trial suggests that the class action lawsuits under the PSLRA are doing a more cost-effective job of deterring corporate fraud. This conclusion is bolstered by the fact that post-PSLRA complaints have more particularized allegations that are more highly correlated with factors related to fraud. In short, the PSLRA is working well, although not as well as intended, and there do not appear to be grounds to either repeal or significantly amend it. A better course for reform would be to change the damages remedy in securities fraud class actions to focus on deterrence.Did the Private Securities Litigation Reform Act Work? by Michael Perino found:
PSLRA did not work as intended. This article demonstrates that as many or more class actions are filed after the Act as before. High technology issuers remain at significantly greater risk than issuers in other industries. There is statistically significant evidence, however, that suggests that the Act improved overall case quality at least in the circuit that most strictly interprets one of the Act's key provisions, a heightened pleading standard. The data in the article also demonstrate that Congress did not achieve its goal of increasing the filing delay in class actions. Actions are filed as quickly now as they were before passage of the Act. Nonetheless, that too may provide indirect evidence that plaintiff's attorneys are selecting more apparent cases of fraud that require less pre-filing investigation.In sum, Cohn's claim that "many experts think the law played a critical role in the scandals--partly by insulating auditors and other would-be watchdogs from the threat of lawsuits" is disproven by the empirical evidence. (By the way, since when do two professors count as "many"?) The evidence is clear that the PSLRA has not done much to deter meritorious securities suits, while it has had some success in cutting back on strike suits. Kaus and Cohn owe John Kerry an apology.
Update: Now Kaus says that:
Prof. Bainbridge disagrees, citing some studies that say the lawsuit-limiting bill Kerry supported has resulted in fewer settlements but bigger settlements. But that hardly answers the question, which is whether those who did the fudging at Enron et al. thought they would be held accountable for the particular transgressions they were committing. Big judgments in clear-cut cases of fraud (even if perfectly foreseen) might not deter easily-concealed gray-area fudging.He still doesn't get it. The PSLRA did NOT significantly reduce the amount of securities litigation. It did force plaintiffs' lawyers to be more careful about screening which suits they bought. The net effect should have been to increase the deterrent effect of securities fraud litigation. Anyway, he still hasn't come up with an iota of real evidence linking Enron to the PSLRA. And, he still doesn't have permalinks on his blog. Case closed.
