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Restoring the Rights of Defrauded Investors

The Private Securities Litigation Reform Act of 1995 ("PSLRA") and the Securities Litigation Uniform Standards Act of 1998 ("SLUSA") facilitated the recent corporate crime wave by diminishing the threat of civil lawsuits against corporate financial wrongdoers and their "aiders and abetters." The PSLRA made it more difficult for defrauded investors to sue by imposing a freeze on plaintiffs' ability to discover evidence until much later in the legal process, and replacing "joint and several" liability with "proportionate" liability.

The SLUSA forced almost all small investors to take their case to federal court, where they must sue under the draconian terms of the PSLRA instead of the often more investor-friendly laws of their own states.

Together, these laws have severely reduced the rights of shareholders and other victims seeking to use the civil court system to recover their losses from corporate wrongdoers and their co-conspirators. According to Columbia U. Prof. John C. Coffee, reversing these laws may be the single most important reform that Congress could enact in response to the recent corporate crime wave.

In addition to these two laws, the Supreme Court created an additional impediment to civil lawsuits against aiders and abettors in Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A. (1994), a decision which prohibited private plaintiffs from suing defendants on the grounds that they aided or abetted a securities law violation. Previously, most courts had permitted such suits. Since the Central Bank decision, defendants have frequently used it to get courts to dismiss shareholder litigation.

As Boston U. School of Law Prof. Susan Koniak has suggested, "No other legal reform enacted will do any good as long as there are no consequences to lawyers who bless anything a manager wants to do."

For More Information:
Financial Oversight of Enron: The SEC and Private-Sector Watchdogs Excellent report by Senate Committee on Governmental Affairs (10/7/02)
"The Chickens Have Come Home to Roost" by William S. Lerach (nation's leading securities class action trial lawyer)
Enron Watchdog (U.S. PIRG)
Consumers Union statement on updating the PSLRA
"Enron Democrats" by William Greider
Securities Class Action Clearinghouse Maintained by Stanford U. Law School and Cornerstone Research

Related Legislation:

Investor Protection Act of 2002
Shareholder and Employee Rights Restoration Act of 2003
Accountability for Auditors Act of 2002 (H.R. 3617). Introduced by Rep. Markey (D-MA), this bill would withdraw certain benefits of the Private Securities Litigation Reform Act from auditors that perform non-audit functions.

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