Reforming The Reform Act

The Wall Street Journal has an op-ed (subscrip. req’d) today discussing the effectiveness of the PSLRA. The author is Kenneth Lehn, a professor and former chief economist for the SEC.

The op-ed argues that the PSLRA has not discouraged the bringing of securities class actions. To the contrary, the percentage of listed companies subject to suit has increased and settlement values are up. The author summarizes the results of a number of recent studies.

After this rigorous opening, however, the op-ed suggests three modest PSLRA reforms that do not really go to the identified problem. First, defendants should be allowed to appeal denials of motions to dismiss. Second, damages should not be calculated using aggregate models. Finally, investors who are fully compensated for their losses by SEC distributions pursuant to the Fair Funds program should not be allowed to collect additional damages in private litigation.

Even assuming that these proposed reforms were worthwhile, it is hard to see how they would have any significant effect on the number of filings. What is missing, one might suggest, is a proposed reform addressing the economic incentives driving plaintiffs’ attorneys to bring securities class actions.

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