Because few securities fraud cases go to trial, courts rarely have had to address the proportionate liability scheme created by the PSLRA. In a nutshell, the PLSRA provides for proportionate liability unless the trier of fact finds that the defendant “knowingly” violated the applicable securities laws. If a defendant is only found to have engaged in a reckless violation, the trier of a fact must make “findings with respect to each covered person and each of the other persons claimed by any of the parties to have caused or contributed to the loss incurred by plaintiff” to determine the proportionate liability of the defendant in question.
In a recent decision in the Enron securities class action – In re Enron Corp. Sec., Derivative & “ERISA” Litigation, 2006 WL 1851383 (S.D. Tex. July 5, 2006) – the court found that the failure of Congress to explain or limit the clause “each of the other persons claimed by any of the parties to have caused or contributed to the loss” has the potential to wreak havoc on a trial. The “other persons” could include “non-parties to the suit, defendants that have settled, defendants that have been dismissed, and indeed even the plaintiffs.” Based on the vagueness of the statute, “defendants most likely will attempt to designate any person or entity that might conceivably have any responsibility for the plaintiffs’ loss.” Moreover, the statute does not specify what “caused” or “contributed to” means and does not establish who has the burden of proof as to the responsibility of these “other persons.”
To address these issues, the court established some significant threshold requirements for implementing the proportionate liability scheme:
(1) Any party designating a non-party as potentially responsible for the plaintiffs’ loss shall “bear the burden of proof demonstrating that the non-party violated the federal securities statutes.”
(2) If the trier of fact determines that a defendant did not violate the securities laws, there cannot be any allocation of fault to that person.
(3) All parties who wish to claim that a non-party, settling party, or dismissed party is responsible for any or all of the plaintiffs’ losses must file, prior to trial, “the name of such person or entity and provide a statement of the factual basis for claiming that fault should be allocated” to that person or entity. Moreover, the designating person must “demonstrate in that factual statement that the non-party could have been sued by plaintiffs, i.e., that the claims against it could have met requirements of the PSLRA, but was bypassed or dismissed.”