April 24, 2025
An Interview with Daniel S. Sommers by Kate Fitzgerald, Senior Manager, Marketing Communications
Daniel S. Sommers, a Cohen Milstein partner and former co-chair of the firm’s Securities Litigation & Investor Protection practice, is a highly regarded thought leader in securities class actions and investor rights. He is a member of the National Association of Public Pension Attorneys’ Securities Litigation Committee and former chair of the Council of Institutional Investors’ Markets Advisory Council, as well as a past chair of the District of Columbia Bar’s Investor Rights Committee of the Corporation for the Finance & Securities Law Section. His nearly 40 years of experience gives him special perspectives having litigated securities class actions—both before and after the enactment of the Private Securities Litigation Reform Act of 1995 (“PSLRA”.)
Kate Fitzgerald: Tell us a little about the PSLRA and why it was enacted?
Daniel Sommers: The PSLRA had its genesis in the mid-1990s. It was drafted to address concerns about the utility and costs of securities class actions.
For example, there was a perception that securities class actions were generated by and for the benefit of plaintiffs’ lawyers, that plaintiffs were often retail investors with relatively small investment losses who had little incentive to supervise the litigation and often were “repeat” or “professional” plaintiffs, and that many cases were filed too quickly, were poorly investigated, or simply lacked merit.
There was also the perception that these cases imposed undue costs on issuers—especially the costs of discovery, which can be significant in securities class action cases.
In general, the intent of the PSLRA’s proponents was to enact legislation that would eliminate or at least reduce what they perceived to be “meritless” cases; to establish procedures to slow down the speed with which cases can be filed; to replace so-called “lawyer driven” litigation with litigation led by larger, sophisticated institutional investors that have the capability and incentive to supervise litigation due to their a large financial interest in the case; and to reduce the agency costs of these cases—especially those related to the discovery process.
KF: Who advocated for and against passing the PSLRA?
DS: The PSLRA was advocated for by business groups, such as the U.S. Chamber of Commerce and Business Roundtable, as well public companies, especially high-tech companies, which saw themselves as frequent targets at the time. In opposition to the PSLRA were plaintiffs’ lawyers, investor rights groups, and some academics who advocated for the importance of these cases to protect the rights of investors and argued that the proposed statute would preclude meritorious cases from proceeding.
Notably, this view was shared by President Clinton, who expressed his concerns about the proposed legislation and issued a veto. But that veto was overridden by Congress.
KF: Could you outline some of the more significant PSLRA provisions?
DS: Yes, the PSLRA contains many provisions that changed the way securities class actions were litigated. For example, the statute radically changed the process by which both the lead plaintiff and its counsel are appointed by the court.
Before the PSLRA, courts often gave control of cases to the investor that filed the initial case— regardless of the size of their investment or their loss, and regardless of the quality of their complaint or the capabilities of their counsel. In other cases, courts sometimes made judgments about which investor was best or had filed the best complaint or allowed various plaintiffs privately to agree on leading cases with groups of investors.
In response, the PSLRA created a very specific structure, methodology, and timeline that district courts must follow when appointing the lead plaintiff. This process remains unique to securities class action litigation.
For instance, the PSLRA directs courts to select as lead plaintiff the investor or group of investors with the greatest financial interest in the case, provided they also satisfy the class action adequacy and commonality requirements of Rule 23. This was a significant change from prior practice, where courts had significant discretion to appoint lead plaintiffs, and this change gave institutional investors a significant preference to be appointed as the lead plaintiff.
The PSLRA also established a 60-day window for investors to file lead plaintiff motions. This provision was intended to eliminate the race to the courthouse and to encourage sophisticated investors an opportunity to investigate the claims and to decide whether to lead these cases. Again, this was another mechanism that was intended to induce institutional investors to participate in these cases.
This was a significant change from prior practice where courts had significant discretion to appoint lead plaintiffs.
KF: That is a dramatic shift in procedure. How did the PSLRA impact discovery?
DS: The changes to the discovery process were also dramatic. The PSLRA imposed a mandatory stay of all formal discovery until defendants’ motion to dismiss is denied. There are very limited exceptions to the discovery stay.
Previously, district court judges had discretion to permit discovery to proceed while a motion to dismiss was pending and investors could use information learned in discovery to support the claims alleged in the complaint. The PSLRA almost entirely eliminated this option from investors’ arsenal. Now, investors and their counsel must marshal facts to support the claims in their complaint without any of the powerful discovery tools provided for by the Federal Rules of Civil Procedure.
KF: What else changed under the PSLRA?
DS: Another important change included in the PSLRA was the adoption of a heightened pleading standard that requires plaintiffs to plead their complaint with specific facts that give rise to a “strong inference” that each defendant acted with scienter—an intentional or reckless intent to deceive investors. This standard is to my knowledge higher than the standard in any other type of federal civil litigation and has resulted in investors’ counsel undertaking in-depth investigations to assemble very strong facts to support their claims. This change, along with the discovery stay provision, has presented a significant challenge to investors.
KF: And what about forward-looking statements?
DS: In general, the PSLRA immunized issuers from liability for forward looking types of statements, such as projections and forecasts about business plans or economic performance, if they were accompanied by “meaningful cautionary” language or if the information was “immaterial” to investors; or where the plaintiff fails to prove that the speaker made the statement with “actual knowledge” of its falsity.
KF: Any other material changes?
DS: Yes, there are several other important provisions. For instance, the PSLRA clarified that investors had the burden to prove that false statements made by defendants caused investor losses. It also created a 90-day lookback cap on recoverable damages to prevent a perceived windfall for investors in situations where a corrective disclosure causes a drop in the stock price, but the stock price rebounds in the 90 days following the class period.
The PSLRA also changed prior practice by limiting the instances when joint and several liability would be available to plaintiffs only to situations in which there is a finding that the defendant knowingly violated federal securities laws.
The PSLRA further required that courts make findings at the conclusion of a case as to whether any party or their counsel filed documents that contained baseless arguments and whether, as a result, sanctions are appropriate.
Finally, the statute set requirements for settlement notices, including disclosures about potential recoveries had the case gone to trial and attorneys’ fees.
KF: What has been the overall impact of the PSLRA on the role of institutional investors?
DS: As you can see, the PSLRA has dramatically changed the landscape of securities class action litigation—especially from the investor perspective. As to the success or failure of the statute, the results have been mixed, with some provisions being problematic for investors and others benefiting them.
Perhaps the greatest positive from the investor perspective has been caused by the lead plaintiff provision.
The PSLRA’s lead plaintiff process has unquestionably resulted in sophisticated investors, including institutional investors, becoming more engaged in securities class actions. These investors include public pension funds (including public safety funds), Taft-Hartley funds, and large, non-U.S. funds.
While most initial cases are still filed by retail investors, the PSLRA clearly achieved one of its goals, as it has led to a surge in institutional investor participation. One study indicates that between 1995 and 2002 institutional leadership in these cases increased from virtually zero to about 27% of all cases. And between 2010 and 2012 institutional investors were appointed lead plaintiff in 40% of all cases. Our own internal analysis of 2024 filings confirms this data.
KF: What have been the implications of this increased participation by institutional investors?
DS: There have been significant beneficial consequences of this trend. The data shows that the increased participation of institutional investors is associated with lower dismissal rates and larger recoveries for investors. In fact, institutional investors have served as lead plaintiffs in virtually all the largest securities class action recoveries post-PSLRA. By this measurement, the PSLRA did achieve one of its most important objectives – encouraging large, meritorious cases to proceed.
In addition, there is evidence that more sophisticated investors are better able to negotiate attorney fee caps, lowering attorney fees and increasing per share investor recoveries.
By these measurements, the PSLRA has achieved its objective to control costs and fees and increase net investor recoveries—all of which benefits investors
KF: What about the race to the courthouse issue?
DS: Eliminating the so-called “race to courthouse” has not been achieved. I think this is largely because the drafters of the PSLRA did not fully understand the dynamics of securities class actions. So, we still have a system where initial cases are filed shortly after the disclosure of an adverse event— typically by a small retail investor. However, the initial filing does trigger the 60-day lead plaintiff filing window for other investors, including institutional investors, to step forward, which as I mentioned is a benefit to all investors.
KF: What about the case quality issue?
DS: Anecdotally, I have observed over the last 30 years that the quality of work from plaintiff lawyers has generally improved. In particular, we see this reflected in the factual specificity in operative complaints, especially those filed by institutional investors. This is another important argument for institutional investors to serve as lead plaintiffs
KF: What about the impact of the automatic discovery stay?
DS: In terms of the automatic discovery stay provision, it met its stated objective: for plaintiffs, unfortunately, it has effectively thwarted their ability to obtain any formal discovery until resolution of the motion to dismiss.
Interestingly, however, it has encouraged plaintiffs’ counsel to sharpen their pre-filing investigation skills. So, we are seeing more robust pre-filing investigations, such as obtaining information from witnesses—including former employees of the issuer—and other important information that is used to bolster the complaint’s allegations. Unfortunately, the automatic discovery stay along with the statutory lead plaintiff process has increased the duration of these cases. For instance, the lead plaintiff process followed by the filing and litigation over an amended complaint can often take 6 months to a year before any formal discovery can proceed.
KF: Has there been a material drop in the number of filed cases?
DS: Simply put, no. There is no evidence that fewer cases have been filed post-PSLRA. On average around 225 securities class actions are filed per year, though obviously those numbers are higher in some years and lower in others.
KF: Are there any recent PSLRA changes or trends you anticipate?
DS: I see nothing on the horizon. After 30 years, the PSLRA is well established and deeply engrained in securities law jurisprudence. Indeed, most lawyers and judges have never experienced securities class action litigation without the PSLRA.
While both sides would still like to see material changes to the statute, there does not appear to be any public momentum for legislative change—although in our current political environment it is hard to predict what issues might take hold in Congress and elsewhere. 22 | cohenmilstein.com cohenmilstein.com | 23 So, it appears that the PSLRA, in its current form, is here to stay.
With that said, I anticipate that institutional investors will continue take on leadership positions— especially in cases involving serious allegations of misconduct and significant investor losses. From the investor protection point of view, this is certainly the most important and positive long-term consequence of the PSLRA.