The Political Economy of Securities
Class Action Reform
A. C. Pritchard*
Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc.1 is the latest in a series of recent Supreme Court decisions restricting securities class actions. The Court's holding in Stoneridge—rejecting scheme liability that would have roped in third party defendants— is of a piece with the Court's recent skepticism toward securities class actions. The Court's recent decisions reflect a retrenchment from a two-decade-old decision by the Court, Basic, Inc. v. Levinson,2 which was the high-water mark for the implied cause of action the courts have found in the Securities Exchange Act § 10(b) and its implementing Rule 10b-5.3Basic opened the doors wide to securities fraud class actions under Rule 10b-5 by creating a presumption of reliance for lawsuits involving securities traded in the secondary public markets—the fraud on the market theory (FOTM). The result of the Basic decision was an upsurge in securities class actions.
That upsurge was met by a predictable backlash from the targets of those suits: public companies and their officers and directors, accountants, and investment bankers. Those potential defendants complained that companies were unfairly targeted by securities class actions based on no more than a drop in the stock price, with the plaintiffs' bar looking to extort settlements based on frivolous suits.
*Professor, University of Michigan Law School. Thanks to Alicia Davis Evans, Nico
Howson, and Bob Thompson for helpful comments and suggestions.
1 552 U.S.———, 128 S.Ct. 761 (2008).
2 485 U.S. 224 (1988).
3 15 U.S.C. § 78j and 17 C.F.R. § 240.10b-5.