Hurdles of Different Heights for Securities Fraud Litigants of Different Types

Fraud claims filed by investors in the wake of the financial crisis of 2008 reveal a significant and unrecognized problem in securities law: the law treats claims of investors who purchase securities through private placements more favorably than it treats claims of investors who purchase shares on public exchanges or in public offerings. The disparity is a symptom of financial markets outpacing their legal and regulatory framework, and this Article proposes a remedy. The different hurdles confronting investors who invest in different transactions but who make similar allegations and rely on the same law are, the Article contends, an unfair and apparently unintended result of the Private Securities Litigation Reform Act of 1995 ( PSLRA ) which sought to curb frivolous shareholder class actions. The PSLRA raised the standard plaintiffs must meet in alleging that a defendant had wrongful intent, or scienter, but it did not raise the standard applicable to claims that a plaintiff reasonably relied on an allegedly fraudulent misrepresentation or omission. Because establishing scienter is difficult for investors with access only to regulatory disclosures by publicly traded companies, while establishing reasonable reliance is more likely to be difficult for putatively sophisticated investors in private placements, investors in publicly accessible transactions face a higher hurdle than private placement investors when alleging fraud. This Article describes and critiques this effect of the PSLRA, and calls on Congress to revise standards so that investors victimized by fraud have the same chance of recovery through litigation whether or not they purchased securities in a private placement