Academic journal article Law and Contemporary Problems

The Nontrial Adversarial Model

Academic journal article Law and Contemporary Problems

The Nontrial Adversarial Model

Article excerpt

JOEL SELIGMAN [*]

I INTRODUCTION

During the past two decades, a nontrial adversarial model has evolved for deciding private securities law claims. Underlying this evolution are three different types of dynamics:

(1) a dramatic growth in the size of securities class actions, epitomized by the Washington Public Power Supply System litigation of the 1980s [1] and the Court's approval of the fraud-on-the-market presumption, rather than a requirement of individual proof of fraud, in Basic, Inc. v Levinson; [2]

(2) a significant growth in the cost and litigation leverage of discovery; [3] and

(3) a fundamental shift in the political orientation of Congress in securities litigation, illustrated by the gravitation from unanimous support for greater insider trading penalties during the 1980s [4] to the hostility toward plaintiffs' attorneys after the 1994 congressional election. [5]

While this nontrial adversarial model is not unique to the field, it is more pronounced in private securities class actions than in most other areas. Virtually every private securities class action in recent years has been resolved through a pretrial motion or a settlement. [6] A trial on the merits is a rare exception. [7] The central issue raised as a result of this shift is whether the nontrial adversarial model makes sense in the area of securities litigation. Professor Elliott Weiss supports this shift in his article "Pleading Securities Fraud." [8] However, the answer to this question should await a more comprehensive study of the Private Securities Litigation Reform Act of 1995 ("PSLRA").

II

DEVELOPMENT OF THE NONTRIAL ADVERSARIAL MODEL

The origins of this shift to the nontrial adversarial model can be traced back to the Supreme Court's discussion of strike suits in its 1975 decision Blue Chip Stamps v. Manor Drug Stores. [9] There, the Supreme Court expressed its concern regarding the potential for a large number of plaintiffs in securities class actions to abuse their leverage under the Federal Rules of Civil Procedure's discovery rules to force settlements in frivolous lawsuits. [10] As a result, after Blue Chip Stamps, the "successful assertion of a [Rule 9(b)] defense based on the failure of a plaintiff to have pleaded fraud with sufficient particularity increased in federal securities" cases. [11]

Underlying this increase in the number of dismissals based on Rule 9(b) motions were profound changes in judicial interpretation of the Rule's application in private securities cases. During this period, federal courts found the Rule to require them to dismiss securities claims that were mere conclusory allegations to the effect that a defendant's conduct was fraudulent or in violation of Rule 10b-5, [12] or that the defendant's reports represented a "false, misleading, and inflated picture of assets, earnings, and business." [13] An example of this interpretation of the Rule is found in the following statement by the First Circuit Court of Appeals in Wayne Investment Inc. v. Gulf Oil Corp.: "It is well settled that Rule 9 'requires specification of the time, place, and content of an alleged false representation, but not the circumstances or evidence from which fraudulent intent could be inferred.'" [14] This opinion epitomized the movement toward stricter pleading requirements for fraud for plaintiffs under Rule 9(b) after Blue Chip Stamps.

Despite this growing trend, "[o]n a motion to dismiss, [courts still] read the complaint generously and drew all inferences in favor of the pleader." [15] Courts still gave deference to the plaintiffs' complaint for two central reasons. First, Rule 9(b) did not require "the pleading of detailed evidentiary matter." [16] This meant that courts could not get a clear idea of the strength of a case prior to the discovery phase of litigation. As a result, judges needed to be more cautious in dismissing claims to protect valid lawsuits. …

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