The U.S. Chamber of Commerce has submitted a petition for rulemaking on COVID-19-related litigation. The petition argues that there has been an "explosion" of securities class action filings in recent years, often of dubious merit, and there is a strong likelihood that events related to the COVID-19 pandemic will be the basis of additional securities litigation, at least some of it spurious. The chamber maintains that the SEC has, and should exercise, its authority under the PSLRA to act against unjustified COVID-related claims.
Growth in event-driven claims. According to the petition, there has been an explosion in securities litigation in the past three years. Congress enacted the PSLRA 25 years ago in response to a high level of frivolous suits, and filing activity now exceeds the levels that led to the enactment of the PSLRA. A significant driver of this increase has been the growth of event-driven claims, the petition says, that is, lawsuits filed shortly following the decline in a company's stock after a negative event such as an oil spill or a plane crash.
The petition notes that the PSLRA was enacted in large part due to abusive, lawyer-driven suits "often based on nothing more than a company's announcement of bad news, not evidence of fraud." This pattern has returned with rapidly-filed claims designed to force defendants into settlements. Generally, the lawyers contend that the company's statements misrepresented the risk of the negative event, or that the company was obligated to disclose the risk of the event but failed to do so. The legitimacy of these suits is highly suspect, the chamber says.
COVID suits. The chamber says that a number of COVID-19 securities cases have already been filed, and more are expected in the coming months as the pandemic has wrought havoc on the stock markets. One observer has said that there are already 20 such suits, covering defendants in a variety of industries. These cases are likely just the tip of the iceberg, the petition asserts, and more suits will follow as the pandemic grinds on.
Commission action. The petition maintains that the SEC has the authority under the PSLRA to protect against unjustified COVID-19-related claims and that that authority should be exercised. According to the chamber, the PSLRA's introduction of safe harbors for forward-looking statements was meant to deter the filing of meritless claims, but there are a number of holes in these provisions and they may no longer be having their intended effect.
The PSLRA's legislative history confirms that the statutory safe harbors were meant to be a "starting point" and that the Commission can and should consider adopting regulatory reforms, the petition says. To that end, the chamber suggests three actions that the Commission should consider taking:
- The Commission should use its authority under the PSLRA to bar liability for statements about a company's plans or prospects for getting back to business, resuming sales or profitability, or other statements about the impacts of COVID-19, whether forward-looking or not, so as long as suitable warnings are attached.
- Alternatively, the Commission should consider limiting liability for all such statements to circumstances in which the plaintiff can prove that the speaker had actual (subjective) knowledge of its falsity.
- Finally, the Commission should require inclusion in financial statements of a statement reminding users that a number of the elements of financial statements are determined on the basis of projections of future business or market conditions and stating that due to the tremendous uncertainties flowing from the pandemic, there is a greater possibility of variation than in the past. The Commission should then bar liability for claims based on statements that satisfy these warnings or, alternatively, treat them as the equivalent of opinions.