"ain't No Glory in Pain": How the 1994 Republican Revolution and the Private Securities Litigation Reform Act Contributed to the Collapse of the United States Capital Markets

• Publication year: 2021
• Citation: Vol. 83

83 Nebraska L. Rev. 979. "Ain't No Glory in Pain": How the 1994 Republican Revolution and the Private Securities Litigation Reform Act Contributed to the Collapse of the United States Capital Markets

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Andr, Douglas Pond Cummings*

"Ain't No Glory in Pain":(fn1) How the 1994 Republican Revolution and the Private Securities Litigation Reform Act Contributed to the Collapse of the United States Capital Markets

TABLE OF CONTENTS

I. Introduction ..................................................... 980
A. Deregulation and Reform Hysteria .............................. 984

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B. Market Collapse ............................................... 989
II. The Private Securities Litigation Reform Act .................... 1004
A. How the PSLRA Amended Securities Fraud
Pleading Requirements ........................................ 1007
1. The "Super Heightened" Pleading Standard .................. 1009
2. Super Heightened Pleading Standard
Unnecessary ............................................... 1015
B. How the PSLRA Amended the Federal Securities
Laws ......................................................... 1018
C. Securities Litigation Uniform Standards Act of
1998 ......................................................... 1028
D. The Effect of the PSLRA on the Securities
Industry ..................................................... 1028
E. Examination of Legislative History in Opposition to
the PSLRA .................................................... 1033
III. Other 1990s Deregulation ....................................... 1040
A. The 1996 Telecommunications Act ............................. 1040
B. The Commodities Futures Modernization Act of
2000 ........................................................ 1041
IV. Is Deregulation Responsible for the Stock Market
Collapse of 2002? ............................................... 1044
A. Enron ........................................................ 1044
B. El Paso ...................................................... 1049
C. WorldCom ..................................................... 1051
D. Adelphia ..................................................... 1054
E. Global Crossing .............................................. 1056
F. Qwest ........................................................ 1058
V. Did the Sarbanes-Oxley Act Recapture Any Lost
Protections? ..................................................... 1059
VI. Proposals for Re-regulation ..................................... 1064
A. Re-regulation Must Occur To Protect Investors and
Ensure the Integrity of the Capital Markets .................. 1065
B. To Those that Reject Federal Regulation as a
Solution ..................................................... 1069
C. Specific Regulations Must Be Adopted ......................... 1070
VII. Conclusion ..................................................... 1071

I. INTRODUCTION

In late 1994 and early 1995, the "Republican [R]evolution"(fn2) swept through Washington, D.C. and Capitol Hill following the historic 1994

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mid-term election.(fn3) This election sweep shifted control of the Congress from the Democrats to the Republicans for the first time in forty years.(fn4) The still-faintly-echoing mantra that reverberated in the halls of the Capitol as those newly elected congresspersons took their revolutionary seats was that of "deregulation."(fn5) As a cornerstone of its 1995 agenda for change, the "Revolution Congress"(fn6) made deregulation, particularly deregulation of corporate America, one of its primary objectives.(fn7) Indeed the Revolution Congress's leadership felt that the nearly sixty years of "big government" reign, namely federal regula

tion, as initiated by President Franklin Delano Roosevelt,(fn8) and buttressed by the United States Supreme Court since 1937,(fn9) had finally

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run its course and the time for complete regulatory rollback and reversal had arrived.(fn10) Many of the Revolution Congress's leaders believed that extensive federal regulation--of all industries--was an evil that necessarily had to be eradicated.(fn11)

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A. Deregulation and Reform Hysteria

Congress began its 104th session with an extremely aggressive agenda of "reform," and deregulation styled the "Contract with America."(fn12) The Revolution Congress first set its deregulatory sights on the securities markets;(fn13) second, on the telecommunications indus

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try;(fn14) third, on hard-won environmental protections; and fourth, on the energy industry,(fn15) establishing each as a primary target at which it would aim its early deregulatory firepower.(fn16) The 104th Congress was gaveled into session with delight(fn17) by Speaker Gingrich, as the Revolution Congress was certain it had received a mid-term election mandate to end Washington's "business as usual"--and then set about to "transform" and deregulate the federal government.(fn18)

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Early Revolution Congress's deregulatory and reform efforts laserfocused on the federal securities laws that, after intense lobbying, infighting, hand wringing, and doom-saying,(fn19) led to the passage of the Private Securities Litigation Reform Act of 1995 ("PSLRA").(fn20) In an effort to relieve the securities markets of burdensome federal government oversight, a bipartisan Congress easily passed the PSLRA and handily overrode a President Bill Clinton veto.(fn21) The PSLRA dramatically changed the landscape of federal securities law regulation by amending the Securities Act of 1933 ("1933 Securities Act")(fn22) and the Securities Exchange Act of 1934 ("1934 Securities Exchange Act")(fn23) to essentially, as many argue, "shield corporations and accountants from shareholder lawsuits."(fn24) But the PSLRA did far more (or worse) than shield corporations and corporate insiders from shareholder lawsuits, as detailed infra .(fn25)

Following the immense reform "victory" of the PSLRA, the Revolution Congress immediately turned its attention to the telecommunications industry as its next deregulation target.(fn26) This deregulatory

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attention evolved into the Telecommunications Act of 1996 ("Telecommunications Act").(fn27) Passed with wide support and signed into law by a clearly supportive President Clinton, the Telecommunications Act dramatically altered the landscape of federal telecom regulation by overhauling the Telecommunications Act of 1934,(fn28) amending federal law essentially to rewrite longstanding federal laws affecting cable television, telecommunications, and the Internet. "The Telecommunications Act of 1996 is the first major overhaul of telecommunications law in almost 62 years. The goal of this new law is to let anyone enter any communications business--to let any communications business compete in any market against any other."(fn29) The Telecommunications Act deregulated five major industry categories: radio and television broadcasting, cable television, telephone services, internet and on-line computer service, and telecom equipment manufacturing.(fn30) But, the

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Telecommunications Act did far more (or worse) than attempt to stimulate competition in the telecommunications market.(fn31)

After the massive deregulatory and reform "victories" of the PSLRA and the Telecommunications Act, the Revolution Congress took aim at the electricity, energy, and derivatives trading industries in its effort to continue to roll back federal regulation.(fn32) Motivated by recent successes in the securities and telecom industries, Congress continued its aggressive efforts to privatize and remove federal oversight from other highly regulated fields.(fn33) Such aggressive efforts eventually led to the Commodity Futures Modernization Act of 2000 ("CFMA").(fn34) The CFMA dramatically distorted the energy derivatives trading landscape by refusing the opportunity to regulate energy derivatives trading leading to unregulated energy derivatives trading in wildly fraudulent and dishonest ways.(fn35) The CFMA did far more (or worse) than fail to regulate the energy derivatives trading market, bowing to intense lobbying from the likes of Enron and El Paso.(fn36)

The success of the Revolution Congress in discarding or eliminating significant segments of federal regulation from crucial industries was accompanied simultaneously by a wild bull market that saw the U.S. market indicators soar to record heights never before attained.(fn37)

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The late 1990s and early part of 2000 saw unabashed speculation that the U.S. capital markets could potentially continue the meteoric climb that had become almost expected by U.S. investors.(fn38) Notwithstanding such exuberance, the U.S. capital markets collapsed in 2002.(fn39) Not since Black Tuesday and the stock market crash of 1929 had the U.S. capital markets faltered so astonishingly.(fn40)

B. Market Collapse

The Great Depression, one of the bleakest economic periods in U.S. history, was precipitated by Black Tuesday(fn41) and the U.S. stock mar

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ket crash of 1929.(fn42) During that stock market collapse, the Dow Jones Industrial Average dropped 340 points and lost eighty-nine percent of its value.(fn43) Thousands of U.S. investors lost millions of dollars(fn44) as subsequent congressional panels uncovered the fraudulent activity of corporations, underwriters, and executives as the primary cause of the false valuation of collapsing companies, into which investors had poured (and lost) their life savings.(fn45)

The stock market collapse of 2001-02 has become, some argue, an equally spectacular failure as Black Tuesday and the market crash of 1929.(fn46) One commentator urged the adoption of the moniker "Crash of 2002."(fn47) "Ten trading days, 1,360 points off the Dow. Let's start calling the `sell off' what it is. Let's call it a panic. Let's call it a crash. Indeed, after rallying following Sept. 11, the markets...