Academic journal article Journal of Corporation Law

The Plaintiffs'decision to Sue Auditors in Securities Litigation: Private Enforcement or Opportunism?

Academic journal article Journal of Corporation Law

The Plaintiffs'decision to Sue Auditors in Securities Litigation: Private Enforcement or Opportunism?

Article excerpt


The first half of this decade saw a crescendo of criticism of U.S. securities laws: articles appeared in the business and legal press alleging that these laws were being abused.l Much of the criticism focused on the plaintiffs' attorney:

Abusive and unwarranted litigation is a problem not just for the accounting profession, but for business and the economy generally. A small group of attorneys is reaping millions of dollars by bringing federal securities fraud claims (under SEC Rule lOb-5). .... These attorneys use the threat of enormous legal costs, a lengthy and disruptive discovery process, protracted litigation, and damage to reputation to force large settlements.2

No constituent group has been more vocal in its protest than the "Big 6"3 public accounting firms, which are frequently targets of securities class action lawsuits. These suits are a great concern to auditing firms because they are the source of nearly one-third of all lawsuits against auditors and account for more than one-half of the firms' settlement payments.4 These suits nearly always result in settlements, which many believe are unrelated to their legal merit,5 leading to the charges of "opportunism" described above. Furthermore, recent congressional and judicial actions have been premised upon evidence of abusive securities litigation6-evidence that is largely anecdotal. Even Senator Christopher J. Dodd, sponsor of one proposal, disparaged the lack of evidence on the need for significant legislative changes:

[A]fter a long hearing that lasted well into the afternoon, we found no agreement on whether there is in fact a problem, the extent of the problem, or the solution to the problem. In my experience with this subcommittee, I've never encountered an issue where there is such disagreement over the basic facts. We often argue about policy, we argue about ideology, we often argue about politics, but it is rare that we spend so much time arguing about basic facts.7

In 1991, the Big 6 accounting firms and the American Institute of Certified Public Accountants ("AICPA") began to organize efforts to reform the securities laws.8 Their massive lobbying efforts quickly began to produce results. Citing arguments similar to those found in the Big 6 firms' 1992 position paper,9 the California Supreme Court severely restricted accountants' common law liability in that state.lI Two years later, in what was termed "the most important federal securities law decision in several years,"11 the U.S. Supreme Court swept away the widely accepted doctrine of aiding and abetting liability in an apparent attempt to provide relief for the litigation-weary accounting profession.l2 Moreover, in December 1995, after receiving lengthy testimony from accounting firms and their allies, Congress passed the Private Securities Litigation Reform Act of 1995 (the "Reform Act")13, which has been labeled the most sweeping change in United States securities laws since the New Deal.14

The squabble over securities reform, however, was far from over. In 1996, the AICPA was once again engaged in defending auditors' liability in securities lawsuitsthis time on the state level. California's Proposition 211, an initiative sponsored by the plaintiffs' bar, attempted to circumvent the Reform Act.lS Since the Reform Act only applied to federal courts, Proposition 211 would have allowed securities lawsuits that were precluded from being filed in federal courts to be heard in California state courts.l6 As a result, there would have been an increase in securities lawsuits filed in the state courts. Proposition 211, however, was voted down in the 1996 election. 17

Most recently, Congress adopted a measure that would preempt much of the present state law in favor of federal securities regulation. The Securities Litigation Uniform Standards Act was introduced in 199718 after several studies suggested that the frequency of securities class actions had not diminished, but rather had shifted from federal courts to state courts, thereby evading the provisions of the Reform Act. …

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