Suja Thomas Challenges Constitutionality of PSLRA's Heightened Pleading Requirement
Prof. Suja Thomas has recently posted her latest article, The PSLRA's Seventh Amendment Problem, on SSRN. The article may be downloaded at http://ssrn.com/abstract=968893. Here is the Abstract:
This Article is the first to examine the proper role of the jury in private securities fraud litigation. In the Private Securities Litigation Reform Act, Congress required that a securities fraud complaint plead "a strong inference" of scienter. The courts have disagreed on the standard that satisfies this requirement, and likewise, the involved parties disagree. Defendant corporations argue for a stringent standard that would result in the dismissal of many claims, while plaintiff investors support a flexible standard that would allow more claims to go forward. Indeed, the Supreme Court's resolution of this issue may have an impact beyond securities litigation. If a stringent standard is adopted, special pleading may be permitted in other types of cases, including employment discrimination cases. Thus these cases may be dismissed before any discovery has been conducted. In the present context, securities law experts have not addressed the constitutional issue posed by the special pleading requirement; whether this requirement violates the Seventh Amendment right to a jury trial. The Supreme Court has held that a modern procedure must satisfy the substance of the English common law jury trial in 1791 to be constitutional under the Seventh Amendment. Accordingly, the special pleading rules developed in 21st century securities litigation must be viewed through an 18th century common law lens. This Article argues that the scienter standards developed by the courts in securities cases do not comport with substance of the common law jury trial and thus are constitutionally problematic. Contrary to the common law, the courts improperly engage in one or more steps of assessing the reasonableness of facts and corresponding inferences pled by the plaintiffs. This Article also acknowledges the possible constitutional infirmity posed by the PSLRA's "strong inference" standard itself and the heightened pleading requirements and proposes an alternative standard to dismiss a securities fraud claim that comports with the Seventh Amendment.