Securities Law: An Overview
Private Securities Litigation Reform Act and Sarbanes-Oxley Act
Both the Private Securities Litigation Reform Act of 1995 (PSLRA) and the Sarbanes-Oxley Act of 2002 (SOX) contain provisions that significantly affect businesses. The PSLRA established new rules for securities class actions and brought about several important changes affecting cases brought under the securities laws. SOX established new regulations related to how companies report financial information to ensure that investors receive clear and honest financial information. An experienced securities attorney at Jacko Law Group, PC in San Diego, California can provide your business with more guidance regarding the PSLRA and SOX.
Private Litigation Reform Act of 1995
The PSLRA was designed to prevent the "routine filing of lawsuits against issuers of securities and others whenever there is a significant change in an issuer's stock price, without regard to any underlying culpability of the issuer, and with only faint hope that the discovery process might lead eventually to some plausible cause of action…." H.R. Conf. Rep. No. 104-369 (1995), reprinted in 1995 U.S.C.C.A.N. 679, 730. Here are some of the key provisions of the PSLRA that affect private actions against companies for securities violations:
- Heightened Pleading Standards: Plaintiffs must specify each statement alleged to have been misleading and the reasons why it is misleading. If an allegation regarding the statement is made on information and belief, the complaint must state with particularity the facts on which that belief is based. 15 U.S.C. § 78u-4(b)(1). If a plaintiff fails to comply with these requirements, the complaint will be dismissed.
- Mandatory Stay of Discovery and Document Preservation: The discovery stay provision is designed to protect defendants from the high cost and burden of discovery in a case that might be dismissed and to prevent plaintiffs from filing a case without doing sufficient research and then relying on discovery to gather factual information to avoid dismissal. H.R. Conf. Rep. No. 104-369 (1995), reprinted in 1995 U.S.C.C.A.N. 731-2.
- Safe Harbor: Issuers can make oral and written forward-looking statements so long as they include "cautionary statements" that identify factors that could cause actual results to substantially differ from the results described in or are immaterial to the statements. 15 U.S.C. § 78u-5(c)(1)(A)(i)-(ii). Forward-looking statements include projections of revenue, plans and objectives of management and statements about future economic performance. 15 U.S.C. § 78u-5(i)(1).
- Damages: The PSLRA has a "bounce back" period for damages, which calculates damages by taking the value of the security on the date the plaintiff bought or sold it and the mean market value of the security during the 90-day period after any information correcting an allegedly false statement or omission was disclosed.
Sarbanes-Oxley Act of 2002
Sarbanes-Oxley Act of 2002 (SOX) was enacted in response to a number of corporate and accounting scandals, such as Enron and WorldCom, which cost investors billions of dollars. SOX applies to all public companies in the US, but it does not apply to privately held companies. SOX's regulations cover all aspects of financial reporting. SOX is divided into 11 titles and a set of definitions, but generally, SOX provisions can be divided into the following areas: public disclosure of financial information and regulation of insider conflicts; corporate governance matters; regulation of auditors; rules for attorneys; responsibilities of ancillary gatekeepers such as rating agencies; miscellaneous provisions; and remedies and penalties. SOX also created the Public Company Accounting Oversight Board (PCAOB) to regulate auditors of public companies.
Most of SOX's provisions apply only to "issuers" as that term is defined in SOX, although a few provisions apply to any person regardless of status. The provisions that apply to any person include section 1107 dealing with criminal employee whistleblower protection; sections 802 and 1102 covering record keeping; and sections 807 and 902 regarding new criminal offenses.
SOX's provisions affect nearly all aspects of a company's business. For example, CEOs and CFOs are required to certify annual reports. SOX also requires public companies to maintain "disclosure controls and procedures" that are designed to completely and accurately disclose financial and non-financial information in reports filed with the SEC in a timely manner. Companies must also maintain and evaluate "internal control over financial reporting," which means that they must establish a process that can provide reasonable assurance of the reliability of financial reporting and financial statements used for external purposes.
SOX includes a statute of limitations that applies to private securities fraud actions in the form of an amendment to the general statute of limitations of four years. The amendment provides that a separate statute of limitations of the earlier of two years after discovery of the facts constituting the violation or five years after the violation applies to claims of fraud, deceit, manipulation or contrivance.
Conclusion
The above information highlights some of the key provisions of the PSLRA and SOX. There are many other provisions that may affect your business. A securities lawyer at Jacko Law Group, PC in San Diego, California can guide you through the complex requirements of the PSLRA and SOX.
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