Federal Securities Litigation Update

This paper reports on a review of recent federal securities court decisions that relate to accountant's liability issues. The review covers litigation arising under the Securities Act of 1933 as well as the Securities and Exchange Act of 1934 with heavy emphasis on the Private Securities Litigation Reform Act (PSLRA) of 1995, which amended both the 1933 and 1934 Acts. Regarding the 1933 Act, emphasis is given to the question of whether aftermarket purchasers can sue under Section 11. The issue was apparently settled when the Eighth Circuit Court of Appeals ruled that aftermarket purchasers can sue if they can “directly trace” their securities to the deficient registration statement. Regarding the 1934 Act, the paper analyzes recent court interpretations of the PSLRA and their potential impact on accountants. The paper stresses two important trends resulting from the PSLRA: (1) that plaintiff allegations of the defendant's motive and opportunity alone are usually not enough to allow a suit to survive the pleading stage, and (2) that plaintiffs must avoid generalized charges and cite particular facts that support a strong inference of the defendant's scienter.