§ 78u-4. — Private securities litigation.
[Laws in effect as of January 24, 2002]
[Document not affected by Public Laws enacted between
January 24, 2002 and December 19, 2002]
[CITE: 15USC78u-4]
TITLE 15--COMMERCE AND TRADE
CHAPTER 2B--SECURITIES EXCHANGES
Sec. 78u-4. Private securities litigation
(a) Private class actions
(1) In general
The provisions of this subsection shall apply in each private
action arising under this chapter that is brought as a plaintiff
class action pursuant to the Federal Rules of Civil Procedure.
(2) Certification filed with complaint
(A) In general
Each plaintiff seeking to serve as a representative party on
behalf of a class shall provide a sworn certification, which
shall be personally signed by such plaintiff and filed with the
complaint, that--
(i) states that the plaintiff has reviewed the complaint
and authorized its filing;
(ii) states that the plaintiff did not purchase the
security that is the subject of the complaint at the
direction of plaintiff's counsel or in order to participate
in any private action arising under this chapter;
(iii) states that the plaintiff is willing to serve as a
representative party on behalf of a class, including
providing testimony at deposition and trial, if necessary;
(iv) sets forth all of the transactions of the plaintiff
in the security that is the subject of the complaint during
the class period specified in the complaint;
(v) identifies any other action under this chapter,
filed during the 3-year period preceding the date on which
the certification is signed by the plaintiff, in which the
plaintiff has sought to serve as a representative party on
behalf of a class; and
(vi) states that the plaintiff will not accept any
payment for serving as a representative party on behalf of a
class beyond the plaintiff's pro rata share of any recovery,
except as ordered or approved by the court in accordance
with paragraph (4).
(B) Nonwaiver of attorney-client privilege
The certification filed pursuant to subparagraph (A) shall
not be construed to be a waiver of the attorney-client
privilege.
(3) Appointment of lead plaintiff
(A) Early notice to class members
(i) In general
Not later than 20 days after the date on which the
complaint is filed, the plaintiff or plaintiffs shall cause
to be published, in a widely circulated national business-
oriented publication or wire service, a notice advising
members of the purported plaintiff class--
(I) of the pendency of the action, the claims
asserted therein, and the purported class period; and
(II) that, not later than 60 days after the date on
which the notice is published, any member of the
purported class may move the court to serve as lead
plaintiff of the purported class.
(ii) Multiple actions
If more than one action on behalf of a class asserting
substantially the same claim or claims arising under this
chapter is filed, only the plaintiff or plaintiffs in the
first filed action shall be required to cause notice to be
published in accordance with clause (i).
(iii) Additional notices may be required under
Federal rules
Notice required under clause (i) shall be in addition to
any notice required pursuant to the Federal Rules of Civil
Procedure.
(B) Appointment of lead plaintiff
(i) In general
Not later than 90 days after the date on which a notice
is published under subparagraph (A)(i), the court shall
consider any motion made by a purported class member in
response to the notice, including any motion by a class
member who is not individually named as a plaintiff in the
complaint or complaints, and shall appoint as lead plaintiff
the member or members of the purported plaintiff class that
the court determines to be most capable of adequately
representing the interests of class members (hereafter in
this paragraph referred to as the ``most adequate
plaintiff'') in accordance with this subparagraph.
(ii) Consolidated actions
If more than one action on behalf of a class asserting
substantially the same claim or claims arising under this
chapter has been filed, and any party has sought to
consolidate those actions for pretrial purposes or for
trial, the court shall not make the determination required
by clause (i) until after the decision on the motion to
consolidate is rendered. As soon as practicable after such
decision is rendered, the court shall appoint the most
adequate plaintiff as lead plaintiff for the consolidated
actions in accordance with this paragraph.
(iii) Rebuttable presumption
(I) In general
Subject to subclause (II), for purposes of clause
(i), the court shall adopt a presumption that the most
adequate plaintiff in any private action arising under
this chapter is the person or group of persons that--
(aa) has either filed the complaint or made a
motion in response to a notice under subparagraph
(A)(i);
(bb) in the determination of the court, has the
largest financial interest in the relief sought by
the class; and
(cc) otherwise satisfies the requirements of
Rule 23 of the Federal Rules of Civil Procedure.
(II) Rebuttal evidence
The presumption described in subclause (I) may be
rebutted only upon proof by a member of the purported
plaintiff class that the presumptively most adequate
plaintiff--
(aa) will not fairly and adequately protect the
interests of the class; or
(bb) is subject to unique defenses that render
such plaintiff incapable of adequately representing
the class.
(iv) Discovery
For purposes of this subparagraph, discovery relating to
whether a member or members of the purported plaintiff class
is the most adequate plaintiff may be conducted by a
plaintiff only if the plaintiff first demonstrates a
reasonable basis for a finding that the presumptively most
adequate plaintiff is incapable of adequately representing
the class.
(v) Selection of lead counsel
The most adequate plaintiff shall, subject to the
approval of the court, select and retain counsel to
represent the class.
(vi) Restrictions on professional plaintiffs
Except as the court may otherwise permit, consistent
with the purposes of this section, a person may be a lead
plaintiff, or an officer, director, or fiduciary of a lead
plaintiff, in no more than 5 securities class actions
brought as plaintiff class actions pursuant to the Federal
Rules of Civil Procedure during any 3-year period.
(4) Recovery by plaintiffs
The share of any final judgment or of any settlement that is
awarded to a representative party serving on behalf of a class shall
be equal, on a per share basis, to the portion of the final judgment
or settlement awarded to all other members of the class. Nothing in
this paragraph shall be construed to limit the award of reasonable
costs and expenses (including lost wages) directly relating to the
representation of the class to any representative party serving on
behalf of a class.
(5) Restrictions on settlements under seal
The terms and provisions of any settlement agreement of a class
action shall not be filed under seal, except that on motion of any
party to the settlement, the court may order filing under seal for
those portions of a settlement agreement as to which good cause is
shown for such filing under seal. For purposes of this paragraph,
good cause shall exist only if publication of a term or provision of
a settlement agreement would cause direct and substantial harm to
any party.
(6) Restrictions on payment of attorneys' fees and expenses
Total attorneys' fees and expenses awarded by the court to
counsel for the plaintiff class shall not exceed a reasonable
percentage of the amount of any damages and prejudgment interest
actually paid to the class.
(7) Disclosure of settlement terms to class members
Any proposed or final settlement agreement that is published or
otherwise disseminated to the class shall include each of the
following statements, along with a cover page summarizing the
information contained in such statements:
(A) Statement of plaintiff recovery
The amount of the settlement proposed to be distributed to
the parties to the action, determined in the aggregate and on an
average per share basis.
(B) Statement of potential outcome of case
(i) Agreement on amount of damages
If the settling parties agree on the average amount of
damages per share that would be recoverable if the plaintiff
prevailed on each claim alleged under this chapter, a
statement concerning the average amount of such potential
damages per share.
(ii) Disagreement on amount of damages
If the parties do not agree on the average amount of
damages per share that would be recoverable if the plaintiff
prevailed on each claim alleged under this chapter, a
statement from each settling party concerning the issue or
issues on which the parties disagree.
(iii) Inadmissibility for certain purposes
A statement made in accordance with clause (i) or (ii)
concerning the amount of damages shall not be admissible in
any Federal or State judicial action or administrative
proceeding, other than an action or proceeding arising out
of such statement.
(C) Statement of attorneys' fees or costs sought
If any of the settling parties or their counsel intend to
apply to the court for an award of attorneys' fees or costs from
any fund established as part of the settlement, a statement
indicating which parties or counsel intend to make such an
application, the amount of fees and costs that will be sought
(including the amount of such fees and costs determined on an
average per share basis), and a brief explanation supporting the
fees and costs sought. Such information shall be clearly
summarized on the cover page of any notice to a party of any
proposed or final settlement agreement.
(D) Identification of lawyers' representatives
The name, telephone number, and address of one or more
representatives of counsel for the plaintiff class who will be
reasonably available to answer questions from class members
concerning any matter contained in any notice of settlement
published or otherwise disseminated to the class.
(E) Reasons for settlement
A brief statement explaining the reasons why the parties are
proposing the settlement.
(F) Other information
Such other information as may be required by the court.
(8) Security for payment of costs in class actions
In any private action arising under this chapter that is
certified as a class action pursuant to the Federal Rules of Civil
Procedure, the court may require an undertaking from the attorneys
for the plaintiff class, the plaintiff class, or both, or from the
attorneys for the defendant, the defendant, or both, in such
proportions and at such times as the court determines are just and
equitable, for the payment of fees and expenses that may be awarded
under this subsection.
(9) Attorney conflict of interest
If a plaintiff class is represented by an attorney who directly
owns or otherwise has a beneficial interest in the securities that
are the subject of the litigation, the court shall make a
determination of whether such ownership or other interest
constitutes a conflict of interest sufficient to disqualify the
attorney from representing the plaintiff class.
(b) Requirements for securities fraud actions
(1) Misleading statements and omissions
In any private action arising under this chapter in which the
plaintiff alleges that the defendant--
(A) made an untrue statement of a material fact; or
(B) omitted to state a material fact necessary in order to
make the statements made, in the light of the circumstances in
which they were made, not misleading;
the complaint shall specify each statement alleged to have been
misleading, the reason or reasons why the statement is misleading,
and, if an allegation regarding the statement or omission is made on
information and belief, the complaint shall state with particularity
all facts on which that belief is formed.
(2) Required state of mind
In any private action arising under this chapter in which the
plaintiff may recover money damages only on proof that the defendant
acted with a particular state of mind, the complaint shall, with
respect to each act or omission alleged to violate this chapter,
state with particularity facts giving rise to a strong inference
that the defendant acted with the required state of mind.
(3) Motion to dismiss; stay of discovery
(A) Dismissal for failure to meet pleading requirements
In any private action arising under this chapter, the court
shall, on the motion of any defendant, dismiss the complaint if
the requirements of paragraphs (1) and (2) are not met.
(B) Stay of discovery
In any private action arising under this chapter, all
discovery and other proceedings shall be stayed during the
pendency of any motion to dismiss, unless the court finds upon
the motion of any party that particularized discovery is
necessary to preserve evidence or to prevent undue prejudice to
that party.
(C) Preservation of evidence
(i) In general
During the pendency of any stay of discovery pursuant to
this paragraph, unless otherwise ordered by the court, any
party to the action with actual notice of the allegations
contained in the complaint shall treat all documents, data
compilations (including electronically recorded or stored
data), and tangible objects that are in the custody or
control of such person and that are relevant to the
allegations, as if they were the subject of a continuing
request for production of documents from an opposing party
under the Federal Rules of Civil Procedure.
(ii) Sanction for willful violation
A party aggrieved by the willful failure of an opposing
party to comply with clause (i) may apply to the court for
an order awarding appropriate sanctions.
(D) Circumvention of stay of discovery
Upon a proper showing, a court may stay discovery
proceedings in any private action in a State court, as necessary
in aid of its jurisdiction, or to protect or effectuate its
judgments, in an action subject to a stay of discovery pursuant
to this paragraph.
(4) Loss causation
In any private action arising under this chapter, the plaintiff
shall have the burden of proving that the act or omission of the
defendant alleged to violate this chapter caused the loss for which
the plaintiff seeks to recover damages.
(c) Sanctions for abusive litigation
(1) Mandatory review by court
In any private action arising under this chapter, upon final
adjudication of the action, the court shall include in the record
specific findings regarding compliance by each party and each
attorney representing any party with each requirement of Rule 11(b)
of the Federal Rules of Civil Procedure as to any complaint,
responsive pleading, or dispositive motion.
(2) Mandatory sanctions
If the court makes a finding under paragraph (1) that a party or
attorney violated any requirement of Rule 11(b) of the Federal Rules
of Civil Procedure as to any complaint, responsive pleading, or
dispositive motion, the court shall impose sanctions on such party
or attorney in accordance with Rule 11 of the Federal Rules of Civil
Procedure. Prior to making a finding that any party or attorney has
violated Rule 11 of the Federal Rules of Civil Procedure, the court
shall give such party or attorney notice and an opportunity to
respond.
(3) Presumption in favor of attorneys' fees and costs
(A) In general
Subject to subparagraphs (B) and (C), for purposes of
paragraph (2), the court shall adopt a presumption that the
appropriate sanction--
(i) for failure of any responsive pleading or
dispositive motion to comply with any requirement of Rule
11(b) of the Federal Rules of Civil Procedure is an award to
the opposing party of the reasonable attorneys' fees and
other expenses incurred as a direct result of the violation;
and
(ii) for substantial failure of any complaint to comply
with any requirement of Rule 11(b) of the Federal Rules of
Civil Procedure is an award to the opposing party of the
reasonable attorneys' fees and other expenses incurred in
the action.
(B) Rebuttal evidence
The presumption described in subparagraph (A) may be
rebutted only upon proof by the party or attorney against whom
sanctions are to be imposed that--
(i) the award of attorneys' fees and other expenses will
impose an unreasonable burden on that party or attorney and
would be unjust, and the failure to make such an award would
not impose a greater burden on the party in whose favor
sanctions are to be imposed; or
(ii) the violation of Rule 11(b) of the Federal Rules of
Civil Procedure was de minimis.
(C) Sanctions
If the party or attorney against whom sanctions are to be
imposed meets its burden under subparagraph (B), the court shall
award the sanctions that the court deems appropriate pursuant to
Rule 11 of the Federal Rules of Civil Procedure.
(d) Defendant's right to written interrogatories
In any private action arising under this chapter in which the
plaintiff may recover money damages, the court shall, when requested by
a defendant, submit to the jury a written interrogatory on the issue of
each such defendant's state of mind at the time the alleged violation
occurred.
(e) Limitation on damages
(1) In general
Except as provided in paragraph (2), in any private action
arising under this chapter in which the plaintiff seeks to establish
damages by reference to the market price of a security, the award of
damages to the plaintiff shall not exceed the difference between the
purchase or sale price paid or received, as appropriate, by the
plaintiff for the subject security and the mean trading price of
that security during the 90-day period beginning on the date on
which the information correcting the misstatement or omission that
is the basis for the action is disseminated to the market.
(2) Exception
In any private action arising under this chapter in which the
plaintiff seeks to establish damages by reference to the market
price of a security, if the plaintiff sells or repurchases the
subject security prior to the expiration of the 90-day period
described in paragraph (1), the plaintiff's damages shall not exceed
the difference between the purchase or sale price paid or received,
as appropriate, by the plaintiff for the security and the mean
trading price of the security during the period beginning
immediately after dissemination of information correcting the
misstatement or omission and ending on the date on which the
plaintiff sells or repurchases the security.
(3) ``Mean trading price'' defined
For purposes of this subsection, the ``mean trading price'' of a
security shall be an average of the daily trading price of that
security, determined as of the close of the market each day during
the 90-day period referred to in paragraph (1).
(f) Proportionate liability
(1) Applicability
Nothing in this subsection shall be construed to create, affect,
or in any manner modify, the standard for liability associated with
any action arising under the securities laws.
(2) Liability for damages
(A) Joint and several liability
Any covered person against whom a final judgment is entered
in a private action shall be liable for damages jointly and
severally only if the trier of fact specifically determines that
such covered person knowingly committed a violation of the
securities laws.
(B) Proportionate liability
(i) In general
Except as provided in subparagraph (A), a covered person
against whom a final judgment is entered in a private action
shall be liable solely for the portion of the judgment that
corresponds to the percentage of responsibility of that
covered person, as determined under paragraph (3).
(ii) Recovery by and costs of covered person
In any case in which a contractual relationship permits,
a covered person that prevails in any private action may
recover the attorney's fees and costs of that covered person
in connection with the action.
(3) Determination of responsibility
(A) In general
In any private action, the court shall instruct the jury to
answer special interrogatories, or if there is no jury, shall
make findings, with respect to each covered person and each of
the other persons claimed by any of the parties to have caused
or contributed to the loss incurred by the plaintiff, including
persons who have entered into settlements with the plaintiff or
plaintiffs, concerning--
(i) whether such person violated the securities laws;
(ii) the percentage of responsibility of such person,
measured as a percentage of the total fault of all persons
who caused or contributed to the loss incurred by the
plaintiff; and
(iii) whether such person knowingly committed a
violation of the securities laws.
(B) Contents of special interrogatories or findings
The responses to interrogatories, or findings, as
appropriate, under subparagraph (A) shall specify the total
amount of damages that the plaintiff is entitled to recover and
the percentage of responsibility of each covered person found to
have caused or contributed to the loss incurred by the plaintiff
or plaintiffs.
(C) Factors for consideration
In determining the percentage of responsibility under this
paragraph, the trier of fact shall consider--
(i) the nature of the conduct of each covered person
found to have caused or contributed to the loss incurred by
the plaintiff or plaintiffs; and
(ii) the nature and extent of the causal relationship
between the conduct of each such person and the damages
incurred by the plaintiff or plaintiffs.
(4) Uncollectible share
(A) In general
Notwithstanding paragraph (2)(B), upon \1\ motion made not
later than 6 months after a final judgment is entered in any
private action, the court determines that all or part of the
share of the judgment of the covered person is not collectible
against that covered person, and is also not collectible against
a covered person described in paragraph (2)(A), each covered
person described in paragraph (2)(B) shall be liable for the
uncollectible share as follows:
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\1\ So in original. Probably should be preceded by ``if,''.
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(i) Percentage of net worth
Each covered person shall be jointly and severally
liable for the uncollectible share if the plaintiff
establishes that--
(I) the plaintiff is an individual whose recoverable
damages under the final judgment are equal to more than
10 percent of the net worth of the plaintiff; and
(II) the net worth of the plaintiff is equal to less
than $200,000.
(ii) Other plaintiffs
With respect to any plaintiff not described in
subclauses (I) and (II) of clause (i), each covered person
shall be liable for the uncollectible share in proportion to
the percentage of responsibility of that covered person,
except that the total liability of a covered person under
this clause may not exceed 50 percent of the proportionate
share of that covered person, as determined under paragraph
(3)(B).
(iii) Net worth
For purposes of this subparagraph, net worth shall be
determined as of the date immediately preceding the date of
the purchase or sale (as applicable) by the plaintiff of the
security that is the subject of the action, and shall be
equal to the fair market value of assets, minus liabilities,
including the net value of the investments of the plaintiff
in real and personal property (including personal
residences).
(B) Overall limit
In no case shall the total payments required pursuant to
subparagraph (A) exceed the amount of the uncollectible share.
(C) Covered persons subject to contribution
A covered person against whom judgment is not collectible
shall be subject to contribution and to any continuing liability
to the plaintiff on the judgment.
(5) Right of contribution
To the extent that a covered person is required to make an
additional payment pursuant to paragraph (4), that covered person
may recover contribution--
(A) from the covered person originally liable to make the
payment;
(B) from any covered person liable jointly and severally
pursuant to paragraph (2)(A);
(C) from any covered person held proportionately liable
pursuant to this paragraph who is liable to make the same
payment and has paid less than his or her proportionate share of
that payment; or
(D) from any other person responsible for the conduct giving
rise to the payment that would have been liable to make the same
payment.
(6) Nondisclosure to jury
The standard for allocation of damages under paragraphs (2) and
(3) and the procedure for reallocation of uncollectible shares under
paragraph (4) shall not be disclosed to members of the jury.
(7) Settlement discharge
(A) In general
A covered person who settles any private action at any time
before final verdict or judgment shall be discharged from all
claims for contribution brought by other persons. Upon entry of
the settlement by the court, the court shall enter a bar order
constituting the final discharge of all obligations to the
plaintiff of the settling covered person arising out of the
action. The order shall bar all future claims for contribution
arising out of the action--
(i) by any person against the settling covered person;
and
(ii) by the settling covered person against any person,
other than a person whose liability has been extinguished by
the settlement of the settling covered person.
(B) Reduction
If a covered person enters into a settlement with the
plaintiff prior to final verdict or judgment, the verdict or
judgment shall be reduced by the greater of--
(i) an amount that corresponds to the percentage of
responsibility of that covered person; or
(ii) the amount paid to the plaintiff by that covered
person.
(8) Contribution
A covered person who becomes jointly and severally liable for
damages in any private action may recover contribution from any
other person who, if joined in the original action, would have been
liable for the same damages. A claim for contribution shall be
determined based on the percentage of responsibility of the claimant
and of each person against whom a claim for contribution is made.
(9) Statute of limitations for contribution
In any private action determining liability, an action for
contribution shall be brought not later than 6 months after the
entry of a final, nonappealable judgment in the action, except that
an action for contribution brought by a covered person who was
required to make an additional payment pursuant to paragraph (4) may
be brought not later than 6 months after the date on which such
payment was made.
(10) Definitions
For purposes of this subsection--
(A) a covered person ``knowingly commits a violation of the
securities laws''--
(i) with respect to an action that is based on an untrue
statement of material fact or omission of a material fact
necessary to make the statement not misleading, if--
(I) that covered person makes an untrue statement of
a material fact, with actual knowledge that the
representation is false, or omits to state a fact
necessary in order to make the statement made not
misleading, with actual knowledge that, as a result of
the omission, one of the material representations of the
covered person is false; and
(II) persons are likely to reasonably rely on that
misrepresentation or omission; and
(ii) with respect to an action that is based on any
conduct that is not described in clause (i), if that covered
person engages in that conduct with actual knowledge of the
facts and circumstances that make the conduct of that
covered person a violation of the securities laws;
(B) reckless conduct by a covered person shall not be
construed to constitute a knowing commission of a violation of
the securities laws by that covered person;
(C) the term ``covered person'' means--
(i) a defendant in any private action arising under this
chapter; or
(ii) a defendant in any private action arising under
section 77k of this title, who is an outside director of the
issuer of the securities that are the subject of the action;
and
(D) the term ``outside director'' shall have the meaning
given such term by rule or regulation of the Commission.
(June 6, 1934, ch. 404, title I, Sec. 21D, as added and amended Pub. L.
104-67, title I, Sec. 101(b), title II, Sec. 201(a), Dec. 22, 1995, 109
Stat. 743, 758; Pub. L. 105-353, title I, Sec. 101(b)(2), title III,
Sec. 301(b)(13), Nov. 3, 1998, 112 Stat. 3233, 3236.)
References in Text
This chapter, referred to in text, was in the original ``this
title''. See References in Text note set out under section 78a of this
title.
The Federal Rules of Civil Procedure, referred to in subsecs.
(a)(1), (3)(A)(iii), (B)(iii)(I)(cc), (vi), (8), (b)(3)(C)(i), and (c),
are set out in the Appendix to Title 28, Judiciary and Judicial
Procedure.
Amendments
1998--Subsec. (b)(3)(D). Pub. L. 105-353, Sec. 101(b)(2), added
subpar. (D).
Subsecs. (f), (g). Pub. L. 105-353, Sec. 301(b)(13)(B), redesignated
subsec. (g) as (f).
Subsec. (g)(2)(B)(i). Pub. L. 105-353, Sec. 301(b)(13)(A),
substituted ``subparagraph (A)'' for ``paragraph (1)''.
1995--Subsec. (g). Pub. L. 104-67, Sec. 201(a), added subsec. (g).
Effective Date of 1998 Amendment
Amendment by section 101(b)(2) of Pub. L. 105-353 not to affect or
apply to any action commenced before and pending on Nov. 3, 1998, see
section 101(c) of Pub. L. 105-353, set out as a note under section 77p
of this title.
Effective Date of 1995 Amendment
Amendment by Pub. L. 104-67 not to affect or apply to any private
action arising under securities laws commenced before and pending on
Dec. 22, 1995, see section 202 of Pub. L. 104-67, set out as a note
under section 77k of this title.
Effective Date
This section not to affect or apply to any private action arising
under this chapter or title I of the Securities Act of 1933 (15 U.S.C.
77a et seq.), commenced before and pending on Dec. 22, 1995, see section
108 of Pub. L. 104-67, set out as an Effective Date of 1995 Amendment
note under section 77l of this title.
Construction
Nothing in section to be deemed to create or ratify any implied
right of action, or to prevent Commission, by rule or regulation, from
restricting or otherwise regulating private actions under this chapter,
see section 203 of Pub. L. 104-67, set out as a note under section 78j-1
of this title.
Section Referred to in Other Sections
This section is referred to in section 77k of this title.
