By Doug Greene, Jessie M. Gabriel, Douglas Shively, and Genevieve York-Erwin; Doug Greene leads BakerHostetler’s firmwide Securities and Governance Litigation Team. Jessie M. Gabriel and Douglas Shively are Partners, and Genevieve York-Erwin is an Associate, with the Firm.*

The pleading stage is critically important in securities fraud class actions. A plaintiff’s survival of a motion to dismiss opens the door to burdensome discovery at a company’s highest levels, and even meritless claims that advance beyond the pleading stage raise the specter of protracted, expensive litigation and the non-zero risk of substantial liability. Not surprisingly, most cases that are not dismissed ultimately settle. While this dynamic is not unique to securities litigation, it is markedly amplified in this context.

Congress enacted the Private Securities Litigation Reform Act of 1995 “[a]s a check against abusive litigation.”1 To prevent meritless securities class actions, the Reform Act, which amends the Securities Act of 1933 (‘33 Act) and the Securities Exchange Act of 1934 (‘34 Act), imposes heightened requirements for pleading that a challenged statement was false or misleading, and that it was made with intent to defraud (scienter). Congress specified that the district court “shall dismiss the complaint” on a motion to dismiss if it does not meet the Reform Act’s heightened pleading standard.