Do Differences in Pleading Standards Cause Forum Shopping in Securities Class Actions?: Doctrinal and Empirical Analyses

Federal appellate courts have promulgated divergent legal standards for pleading fraud in securities fraud class actions after the Private Securities Litigation Reform Act (PSLRA). Recently, the Supreme Court of the United States issued a decision in Tellabs, Inc. v. Makor Issues & Rights, Ltd. that could have resolved these differences, but did not do so. This Paper provides two significant contributions. We first show that Tellabs avoids deciding the hard issues that confront courts and litigants daily in the wake of the PSLRA’s heightened pleading standard. As a consequence, the opinion keeps very much alive the circuits’ disparate interpretations of the PSLRA’s fraud pleading standard. To be sure, Tellabs might ultimately be applied by lower courts to narrow the range of permissible approaches to satisfying the strong inference standard, but leaves a good deal of room within which wide variations in approach will continue. Our second contribution is empirical in that we seek to answer the question: do plaintiffs’ attorneys take advantage of the differences among the circuits’ interpretation of the pleading standard to select more favorable venues to file their cases, as some scholars have claimed? We find that 85 percent of the securities fraud class actions in our sample are filed in the home circuit of the defendant corporation. While we find that the differences in the circuits’ pleading standards do not have a statistically significant impact on the plaintiffs’ choice of venue, we find that plaintiffs are more likely to file low-value cases in jurisdictions other than the one in which the defendant’s headquarters is located.