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38 Ariz. L. Rev. 711 (1996)
Type I Error, Type II Error, and the Private Securities Litigation Reform Act

handle is hein.journals/arz38 and id is 731 raw text is: TYPE I ERROR, TYPE II ERROR, AND THE PRIVATE SECURITIES LITIGATION REFORM ACT Lynn A. Stout* My comments follow the academic tradition of favorably and briefly mentioning the principal paper, and then going on to discuss what seems to be something else entirely. The subject of Professor Weiss' paper is proposed Section 21D(b)(2) of the Private Securities Litigation Reform Act.' This section wrestles with an inescapable difficulty that goes along with the concept of fraud: a necessary element of any fraud claim, whether brought under the federal securities laws or at common law, is the defendant's state of mind. Lord Justice Bowen once observed that a man's state of mind is just as much a fact as his state of digestion.2 I have always wanted to offer the rejoinder: both are extremely difficult for the outside observer to detect. One of the problems with proving state of mind as an element of any cause of action is that, unless the defendant is required to submit to a polygraph, there will always be a good deal of uncertainty about what the defendant thought, or did not think, at the relevant point in time. This uncertainty inevitably gives rise to the problem law and economics scholars refer to as legal error. If I may inflict some theory on you, scholars generally divide error into two categories. The first category of legal error is called Type I error, or the false positive. In securities litigation, an example of a Type I false positive would be a judicial finding that a defendant had fraudulently misrepresented something, when in fact no fraud occurred. The second type of error is called Type II error, or the false negative. A Type II false negative occurs when a court trying to decide whether the defendant has committed fraud mistakenly finds there has been no fraud, even though fraud actually occurred. Professor Weiss' paper neatly documents how Congress in drafting Section 21D(b)(2) was concerned with both Type I error (allowing meritless suits to proceed) and Type II error (keeping legitimate fraud claims out of court). But Congress was particularly concerned about a form of Type I error: the so-called strike suit. Section 21D(b)(2) tries to discourage strike suits by raising the pleading standards plaintiffs must meet. In particular, plaintiffs are * Professor of Law, Georgetown University Law Center; Guest Scholar, The Brookings Institution. 1. Elliott J. Weiss, The New Securities Fraud Pleading Requirement: Speed Bump or Road Block?, 38 ARIZ. L. REV. 675 (1996). 2. Edgington v. Fitzmaurise, 29 Ch. D. 459,483 (1885).

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