Financial Reform Leaves Vile Law Intact

Are you ready to hear another reason why the financial reform bill is not the game-changer it's cracked up to be? Ready or not, here it comes: Congress decided that one of the most noxious anti-investor, anti-consumer laws since Hammurabi's Code deserved to be kept intact.

I refer to the Private Securities Litigation Reform Act of 1995. While it was "reforming the financial system," Congress failed to reform out of existence this most vile of laws.

In this space a couple of weeks ago I referred to this horrendous law as the Private Securities Litigation Castration Act, but I forgot to identify who gets castrated: You. The reason is that the PSLRA sets a "high as an elephant's eye" standard for litigants trying to sue corporations and corporate officers, banks, hedge funds -anyone -- who may have ripped them off.

One result is that the expected torrent of litigation over the financial crisis, beginning with the subprime crisis of 2007, failed to materialize and those that commenced were chopped down in a wave of dismissals. I'll be coming to that in a moment. But first let's wallow a bit in this latest congressional nonfeasance.

Before PSLRA, people suing bad actors in corporate America could sue on bare-bones facts, and use civil discovery to tear loose information that they could use to prove wrongdoing (or -- and this is where it got gamey -- a class-action settlement enriching the lawyers while the investors or customers got bupkis). Thanks to PSLRA, investors must "state with particularity facts giving rise to a strong inference" that fraud was intentional. No laundry list of misdeeds, no discovery. If they win, investors still get bupkis, but they win far less than they used to, and corporate crime goes unpunished.

Congress didn't chop down the Christmas tree for overpaid lawyers. It planted one for Wall Street and corporations. That's become evident in the way judges throughout the country are falling over themselves to dismiss suits against the alleged perps of the financial crisis, in the dwindling number of cases in which plaintiffs have the gumption to try to leap over the PSLRA barrier. As reported recently by D&O Diary, one of my favorite legal blogs, lawsuits claiming violation of the securities laws have actually declined in the first half of this year. Financial crisis? What financial crisis?