In 1995, significant changes were make to the Private Securities Litigation Reform Act, dealing with cases filed under federal securities laws. These changes related to class representation, discovery, liability, pleadings and awards fees and expenses.
The stated purpose of the Act is to limit trivial securities lawsuits. Before the Act was passed, plaintiffs could move forward by offering only minimal fraud evidence while they went fishing for more proof during pretrial discovery. Weak or trivial lawsuits were costly, even if the charges were groundless. However, because of the expense, many defendants just settled rather than fight. Since the passage of the Act, plaintiffs now need proof of fraud before a suit is initiated.
The rules governing securities class action lawsuits allow, among other things, a judge to decide the most fitting plaintiff in a class action suit. There must also be full disclosure to investors relating to proposed settlements, bonus payments to favored plaintiffs are barred and the judge may closely examine any attorney conflicts of interest.
Major securities fraud claims are typically brought under Section 10(b) of the Exchange Act. The Supreme Court has ruled there must be six elements alleged and proven to prevail in a suit filed under this section. These elements are that a defendant committed a material omission or misrepresentation; that they made that omission on purpose or recklessly; that the omission was made in relation to the purchase/sale of a security; that the plaintiff relied on the omission and that because they relied on it, they suffered an economic loss and that the plaintiff is able to prove causation.