D. Damages in Securities Class Actions

• Library: South Carolina Damages (SCBar) (2009 Ed.)

D. Damages in Securities Class Actions

1. Impact of the Public Securities Litigation Reform Act of 1995

Adopted in an effort to curb perceived litigation abuses arising in securities class actions, the Public Securities Litigation Reform Act of 19 9 5 ⁸⁰ dramatically impacted nearly all aspects of securities litigation against public companies. Among those aspects is damages calculation.

In some cases, a securities plaintiff may be victimized by what the cases call a "fraud on the market." The "fraud-on-the-market" damages theory was accepted by the Supreme Court in Basic, Inc. v. Levinson.⁸¹ There, the Court reasoned that when a company whose securities trade in an open and developed market allegedly makes a misrepresentation about its securities, the market price of its securities will reflect that misrepresentation. Under the fraud on the market theory, the measure of damages is "actual" or "out-of-pocket" damages due to the fraud (in contradistinction to other causes), limited by the "bounce back" provisions of the Private Securities Litigation Reform Act ("PSLRA") discussed below.

The Reform Act attempts to cope with the uncertainty of damage calculations by adopting the "90 Day Look-Back Period." This rule in essence codifies the out-of-pocket method of damage calculation. It aims to limit damages to losses actually caused by the fraud as opposed to losses caused by market conditions. The statute applies to plaintiffs injured through purchases of publicly traded securities. New section 21D(e) of the Exchange Act⁸² places a cap on damages arising in some fraud cases where bad news is released, causing the stock's price to dive. In an attempt to account for a "bounce-back" in a security's price after full or corrective disclosure is made, Congress provided that, if following the corrective disclosure of unfavorable information, the security recovers all or a portion of the initial price decrease, then damages will be capped by the difference between the plaintiff's purchase or sale price and the mean trading price of the security over the ninety-day period beginning on the date of the corrective disclosure.⁸³ When the plaintiff sells or repurchases the security before expiration of the ninety-day period, the plaintiff may recover no more than the difference between the purchase or sale price and the appropriate mean trading price.⁸⁴ The ninety-day look-back provision is an important limitation on the amount of damages available in fraud-on-the-market cases.

Another aspect of the PSLRA affecting damage claims is the concept of proportionate (rather than joint and several) liability. This provision is available to defendants who did not intentionally deceive. Whereas defendants are jointly and severally liable for knowing violations with right of contribution, defendants guilty only of reckless misconduct are liable based on comparative fault. For the latter, the standard of liability is one of "proportionate liability."⁸⁵ The statute provides that "a person against whom a final judgment is entered in a private action shall be liable solely for the portion...