Document Type


Publication Date

May 2004


securities fraud, class action, damages, Private Securities Fraud Litigation Act, PSLRA, limitation, 90 day, look-back, risk, beta-coefficient, corrective disclosure, systematic risk, market risk, capital asset pricing model, CAPM, windfall, efficient market, over-reaction


Published in The Business Lawyer, v. 59, no. 3, 2004, p. 1043-1056.


In this article, I address a serious problem with the approach to damages embodied in the Private Securities Litigation Reform Act (PSLRA) that artificially increases awards in securities fraud actions in down markets. Congress enacted PSLRA to limit frivolous lawsuits under the federal securities laws. Among the many changes wrought by PSLRA was the imposition of a limit on damages in private securities fraud actions under the Exchange Act. Specifically, PSLRA limits damages in a case of bad news fraud to the difference between the purchase price and the average market price during the ninety-day period following corrective disclosure. As it turns out, this formula unduly encourages securities litigation in down markets by increasing the limitation on damage awards to the extent that the subject stock falls further after corrective disclosure either because of a general decline in the market or because of independent news about the company. Moreover, the PSLRA formula disproportionately enhances potential awards against growth companies whose stock prices tend to move by more than the market as a whole. In short, the PSLRA formula has increased the incentives for plaintiffs to sue particularly in down markets. Fortunately, because the Exchange Act also expressly limits awards to actual damages, the courts can avoid the ill effects of the PSLRA formula by adjusting the prices on which awards are calculated to filter out market events as well as independent company-specific news both before and after corrective disclosure.