When Congress cleared legislation a dozen years ago to tighten standards and procedures for private securities fraud lawsuits, President Bill Clinton vetoed it, saying that it would “have the effect of closing the courthouse doors on investors who have legitimate claims.” But Congress overrode him and enacted the law just three days later, thanks to votes from almost all Republicans and dozens of business-minded Democrats. Three years later, Congress blocked an end run around the law by essentially preventing lawyers from filing securities class action suits in state courts to avoid the new requirements for federal suits.

With a decade of experience, however, the statute appears to have surprised opponents by helping to improve the quality of securities fraud suits in federal courts.

The number of securities class actions declined to 110 last year — from an annual average of 250 cases in the years before the law was enacted. But because of one central provision, these lawsuits are now being brought by institutional investors — such as state universities, public pension plans and union-affiliated banks — that are in a better position than individual shareholders to take legitimate claims from complaint to successful settlements or verdict.

Partly as a result, the average settlement size increased to $28.5 million in 2005 from $26.4 million the previous year, according to data compiled by Stanford Law School and Cornerstone Research. Total settlements in 2005 were a record $3.5 billion even before counting mega-settlements in two of the biggest securities frauds in U.S. history: $6.1 billion in the WorldCom case and $7.1 billion so far in the Enron case, with a trial against remaining defendants — including ex-CEO Jeffrey Skilling — scheduled to begin next month.

“The law has not completely closed the door to legitimate claims,” says Patrick Szymanski, general counsel for Change to Win, the recently formed federation of seven big unions unaffiliated with the AFL-CIO. “There are fewer class actions today,” the University of California argues in a Supreme Court brief, but they are “better led and better pled.” Seven securities law professors joined the brief.

Stock markets serve a vital function by allowing companies to sell stock to raise capital, but to work properly, the investors need accurate information about the companies’ financial conditions. Federal laws enforced by the Securities and Exchange Commission impose disclosure requirements on publicly traded companies, but the SEC can do only so much to police the system.

So from the start, individual investors have been permitted to sue to recover damages when fraudulent disclosures cause them to pay too much for a stock or to sell at a loss. Favorable Supreme Court decisions starting in the 1960s encouraged securities class actions that came to be dominated by a handful of entrepreneurial-minded law firms.

Over time, business lobbies charged that some law firms sought out investors to bring dubious claims of fraud based on little more than an unexplained drop in stock prices and then used the lawsuits to extort quick settlements that went mainly to lawyers, not shareholders. The 1995 law dealt with this so-called strike suit problem by authorizing federal courts to appoint a lead plaintiff for securities class actions instead of allowing the first plaintiff who filed to control the case. The change has shut out individual shareholders from securities litigation, Szymanski says, but institutional investors “have stepped in to fill the gap.”

As one example, the University of California was designated lead plaintiff in the class action against Enron Corp. The university’s 485-page complaint filed in 2002 laid out the complex tale of financial shenanigans by Enron executives aided by accountants, brokerages, banks and law firms that allegedly ended up costing shareholders $25 billion.

The law also requires plaintiffs to include in their initial complaints sufficient allegations to create “a strong inference” that the defendant intended to deceive, manipulate or defraud investors. That provision gives federal judges some greater leeway to dismiss cases at an early stage.

The Supreme Court will hear a case later this month, Telllabs Inc. v. Makor Issues and Rights, on how to interpret that provision. Business groups say judges should consider a defendant’s responses in deciding whether a plaintiff has made an adequate case. The American Association for Justice (formerly the Association of Trial Lawyers of America) says that approach intrudes on the right to a jury trial protected in federal courts by the Seventh Amendment.

The Supreme Court has been skeptical of plaintiffs’ rights in recent years — a trend reinforced by the court’s newest members, Chief Justice John G. Roberts Jr. and Samuel A. Alito Jr. Whatever the outcome in this case, however, the broader picture suggests that in one controversial area Congress may have succeeded in changing the federal litigation system without completely choking off access to the courts for the victims of corporate wrongdoing.

Kenneth Jost is the Supreme Court editor for CQ Press.