Closing the Loophole in the Private Securities Litigation Reform Act of 1995

April
1998
Julia C. Kou

This Note argues that state courts should adopt the Reform Act's most adequate plaintiff requirement for both securities fraud class actions and derivative suits. Part I reviews the agency costs of strike suits generally with the aid of a paradigmatic case. Part II examines in detail how the Reform Act attempted to reduce these agency costs through various procedural requirements and, in particular, through the most adequate plaintiff requirement. Although the most adequate plaintiff requirement facilitates institutional investor involvement as lead plaintiffs, and such involvement will likely minimize the agency costs associated with bringing a shareholder class action, the fact that this requirement is limited to federal courts has created a new problem, namely, forum shopping. The plaintiffs' bar may circumvent the Act simply by opting to bring more strike suits in state rather than federal courts. Part III therefore argues that individual states should incorporate similar changes into their procedural laws both to close this loophole and to reduce agency costs.

This article appears in the April 1998 Issue: Volume 73, Number 1