[House Document 104-150]
[From the U.S. Government Publishing Office]
104th Congress, 1st Session - - - - - - - - - - - - House
Document 104-150
VETO OF H.R. 1058
__________
MESSAGE
from
THE PRESIDENT OF THE UNITED STATES
transmitting
HIS VETO OF H.R. 1058, A BILL TO REFORM FEDERAL SECURITIES LITIGATION,
AND FOR OTHER PURPOSES
December 20, 1995.--Message and accompanying bill ordered to be printed
To the House of Representatives:
I am returning herewith without my approval H.R. 1058, the
``Private Securities Litigation Reform Act of 1995.'' This
legislation is designed to reform portions of the Federal
securities laws to end frivolous lawsuits and to ensure that
investors receive the best possible information by reducing the
litigation risk to companies that make forward-looking
statements.
I support those goals. Indeed, I made clear my willingness
to support the bill passed by the Senate with appropriate
``safe harbor'' language, even though it did not include
certain provisions that I favor--such as enhanced provisions
with respect to joint and several liability, aider and abettor
liability, and statute of limitations.
I am not, however, willing to sign legislation that will
have the effect of closing the courthouse door on investors who
have legitimate claims. Those who are the victims of fraud
should have recourse in our courts. Unfortunately, changes made
in this bill during conference could well prevent that.
This country is blessed by strong and vibrant markets and I
believe that they function best when corporations can raise
capital by providing investors with their best good-faith
assessment of future prospects, without fear of costly,
unwarranted litigation. But I also know that our markets are as
strong and effective as they are because they operate--and are
seen to operate--with integrity. I believe that this bill, as
modified in conference, could erode this crucial basis of our
markets' strength.
Specifically, I object to the following elements of this
bill. First, I believe that the pleading requirements of the
Conference Report with regard to a defendant's state of mind
impose an unacceptable procedural hurdle to meritorious claims
being heard in Federal courts. I am prepared to support the
high pleading standard of the U.S. Court of Appeals for the
Second Circuit--the highest pleading standard of any Federal
circuit court. But the conferees make crystal clear in the
Statement of Managers their intent to raise the standard even
beyond that level. I am not prepared to accept that.
The conferees deleted an amendment offered by Senator
Specter and adopted by the Senate that specifically
incorporated Second Circuit case law with respect to pleading a
claim of fraud. Then they specifically indicated that they were
not adopting Second Circuit case law but instead intended to
``strengthen'' the existing pleading requirements of the Second
Circuit. All this shows that the conferees meant to erect a
higher barrier to bringing suit than any now existing--one so
high that even the most aggrieved investors with the most
painful losses may get tossed out of court before they have a
chance to prove their case.
Second, while I support the language of the Conference
Report providing a ``safe harbor'' for companies that include
meaningful cautionary statements in their projections of
earnings, the Statement of Managers--which will be used by
courts as a guide to the intent of the Congress with regard to
the meaning of the bill--attempts to weaken the cautionary
language that the bill itself requires. Once again, the end
result may be that investors find their legitimate claims
unfairly dismissed.
Third, the Conference Report's Rule 11 provision lacks
balance, treating plaintiffs more harshly than defendants in a
manner that comes too close to the ``loser pays'' standard I
oppose.
I want to sign a good bill and I am prepared to do exactly
that if the Congress will make the following changes to this
legislation: first, adopt the Second Circuit pleading standards
and reinsert the Specter amendment into the bill. I will
support a bill that submits all plaintiffs to the tough
pleading standards of the Second Circuit, but I am not prepared
to go beyond that. Second, remove the language in the Statement
of Managers that waters down the nature of the cautionary
language that must be included to make the safe harbor safe.
Third, restore the Rule 11 language to that of the Senate bill.
While it is true that innocent companies are hurt by
frivolous lawsuits and that valuable information may be
withheld from investors when companies fear the risk of such
suits, it is also true that there are innocent investors who
are defrauded and who are able to recover their losses only
because they can go to court. It is appropriate to change the
law to ensure that companies can make reasonable statements and
future projections without getting sued every time earnings
turn out to be lower than expected or stock prices drop. But it
is not appropriate to erect procedural barriers that will keep
wrongly injured persons from having their day in court.
I ask the Congress to send me a bill promptly that will put
an end to litigation abuses while still protecting the
legitimate rights of ordinary investors. I will sign such a
bill as soon as it reaches my desk.
William J. Clinton.
The White House, December 19, 1995.
H.R. 1058
One Hundred Fourth Congress of the United States of America, at the
First Session, Begun and Held at the City of Washington on Wednesday,
the Fourth Day of January, One Thousand Nine Hundred and Ninety-five
An Act
To reform Federal securities litigation, and for other purposes.
Be it enacted by the Senate and House of Representatives of
the United States of America in Congress assembled,
SECTION 1. SHORT TITLE; TABLE OF CONTENTS.
(a) Short Title.--This Act may be cited as the ``Private
Securities Litigation Reform Act of 1995''.
(b) Table of Contents.--The table of contents for this Act
is as follows:
Sec. 1. Short title; table of contents.
TITLE I--REDUCTION OF ABUSIVE LITIGATION
Sec. 101. Private securities litigation reform.
Sec. 102. Safe harbor for forward-looking statements.
Sec. 103. Elimination of certain abusive practices.
Sec. 104. Authority of Commission to prosecute aiding and abetting.
Sec. 105. Loss causation.
Sec. 106. Study and report on protections for senior citizens and
qualified retirement plans.
Sec. 107. Amendment to Racketeer Influenced and Corrupt Organizations
Act.
Sec. 108. Applicability.
TITLE II--REDUCTION OF COERCIVE SETTLEMENTS
Sec. 201. Proportionate liability.
Sec. 202. Applicability.
Sec. 203. Rule of construction.
TITLE III--AUDITOR DISCLOSURE OF CORPORATE FRAUD
Sec. 301. Fraud detection and disclosure.
TITLE I--REDUCTION OF ABUSIVE LITIGATION
SEC. 101. PRIVATE SECURITIES LITIGATION REFORM.
(a) Securities Act of 1933.--Title I of the Securities Act
of 1933 (15 U.S.C. 77a et seq.) is amended by adding at the end
the following new section:
``SEC. 27. PRIVATE SECURITIES LITIGATION.
``(a) Private Class Actions.--
``(1) In general.--The provisions of this
subsection shall apply to each private action arising
under this title that is brought as a plaintiff class
action pursuant to the Federal Rules of Civil
Procedure.
``(2) Certification filed with complaint.--
``(A) In general.--Each plaintiff seeking
to serve as a representative party on behalf of
a class shall provide a sworn certification,
which shall be personally signed by such
plaintiff and filed with the complaint, that--
``(i) states that the plaintiff has
reviewed the complaint and authorized
its filing;
``(ii) states that the plaintiff
did not purchase the security that is
the subject of the complaint at the
direction of plaintiff's counsel or in
order to participate in any private
action arising under this title;
``(iii) states that the plaintiff
is willing to serve as a representative
party on behalf of a class, including
providing testimony at deposition and
trial, if necessary;
``(iv) sets forth all of the
transactions of the plaintiff in the
security that is the subject of the
complaint during the class period
specified in the complaint;
``(v) identifies any other action
under this title, filed during the 3-
year period preceding the date on which
the certification is signed by the
plaintiff, in which the plaintiff has
sought to serve, or served, as a
representative party on behalf of a
class; and
``(vi) states that the plaintiff
will not accept any payment for serving
as a representative party on behalf of
a class beyond the plaintiff's pro rata
share of any recovery, except as
ordered or approved by the court in
accordance with paragraph (4).
``(B) Nonwaiver of attorney-client
privilege.--The certification filed pursuant to
subparagraph (A) shall not be construed to be a
waiver of the attorney-client privilege.
``(3) Appointment of lead plaintiff.--
``(A) Early notice to class members.--
``(i) In general.--Not later than
20 days after the date on which the
complaint is filed, the plaintiff or
plaintiffs shall cause to be published,
in a widely circulated national
business-oriented publication or wire
service, a notice advising members of
the purported plaintiff class--
``(I) of the pendency of
the action, the claims asserted
therein, and the purported
class period; and
``(II) that, not later than
60 days after the date on which
the notice is published, any
member of the purported class
may move the court to serve as
lead plaintiff of the purported
class.
``(ii) Multiple actions.--If more
than one action on behalf of a class
asserting substantially the same claim
or claims arising under this title is
filed, only the plaintiff or plaintiffs
in the first filed action shall be
required to cause notice to be
published in accordance with clause
(i).
``(iii) Additional notices may be
required under federal rules.--Notice
required under clause (i) shall be in
addition to any notice required
pursuant to the Federal Rules of Civil
Procedure.
``(B) Appointment of lead plaintiff.--
``(i) In general.--Not later than
90 days after the date on which a
notice is published under subparagraph
(A)(i), the court shall consider any
motion made by a purported class member
in response to the notice, including
any motion by a class member who is not
individually named as a plaintiff in
the complaint or complaints, and shall
appoint as lead plaintiff the member or
members of the purported plaintiff
class that the court determines to be
most capable of adequately representing
the interests of class members
(hereafter in this paragraph referred
to as the `most adequate plaintiff') in
accordance with this subparagraph.
``(ii) Consolidated actions.--If
more than one action on behalf of a
class asserting substantially the same
claim or claims arising under this
title has been filed, and any party has
sought to consolidate those actions for
pretrial purposes or for trial, the
court shall not make the determination
required by clause (i) until after the
decision on the motion to consolidate
is rendered. As soon as practicable
after such decision is rendered, the
court shall appoint the most adequate
plaintiff as lead plaintiff for the
consolidated actions in accordance with
this subparagraph.
``(iii) Rebuttable presumption.--
``(I) In general.--Subject
to subclause (II), for purposes
of clause (i), the court shall
adopt a presumption that the
most adequate plaintiff in any
private action arising under
this title is the person or
group of persons that--
``(aa) has either
filed the complaint or
made a motion in
response to a notice
under subparagraph
(A)(i);
``(bb) in the
determination of the
court, has the largest
financial interest in
the relief sought by
the class; and
``(cc) otherwise
satisfies the
requirements of Rule 23
of the Federal Rules of
Civil Procedure.
``(II) Rebuttal evidence.--
The presumption described in
subclause (I) may be rebutted
only upon proof by a member of
the purported plaintiff class
that the presumptively most
adequate plaintiff--
``(aa) will not
fairly and adequately
protect the interests
of the class; or
``(bb) is subject
to unique defenses that
render such plaintiff
incapable of adequately
representing the class.
``(iv) Discovery.--For purposes of
this subparagraph, discovery relating
to whether a member or members of the
purported plaintiff class is the most
adequate plaintiff may be conducted by
a plaintiff only if the plaintiff first
demonstrates a reasonable basis for a
finding that the presumptively most
adequate plaintiff is incapable of
adequately representing the class.
``(v) Selection of lead counsel.--
The most adequate plaintiff shall,
subject to the approval of the court,
select and retain counsel to represent
the class.
``(vi) Restrictions on professional
plaintiffs.--Except as the court may
otherwise permit, consistent with the
purposes of this section, a person may
be a lead plaintiff, or an officer,
director, or fiduciary of a lead
plaintiff, in no more than 5 securities
class actions brought as plaintiff
class actions pursuant to the Federal
Rules of Civil Procedure during any 3-
year period.
``(4) Recovery by plaintiffs.--The share of any
final judgment or of any settlement that is awarded to
a representative party serving on behalf of a class
shall be equal, on a per share basis, to the portion of
the final judgment or settlement awarded to all other
members of the class. Nothing in this paragraph shall
be construed to limit the award of reasonable costs and
expenses (including lost wages) directly relating to
the representation of the class to any representative
party serving on behalf of the class.
``(5) Restrictions on settlements under seal.--The
terms and provisions of any settlement agreement of a
class action shall not be filed under seal, except that
on motion of any party to the settlement, the court may
order filing under seal for those portions of a
settlement agreement as to which good cause is shown
for such filing under seal. For purposes of this
paragraph, good cause shall exist only if publication
of a term or provision of a settlement agreement would
cause direct and substantial harm to any party.
``(6) Restrictions on payment of attorneys' fees
and expenses.--Total attorneys' fees and expenses
awarded by the court to counsel for the plaintiff class
shall not exceed a reasonable percentage of the amount
of any damages and prejudgment interest actually paid
to the class.
``(7) Disclosure of settlement terms to class
members.--Any proposed or final settlement agreement
that is published or otherwise disseminated to the
class shall include each of the following statements,
along with a cover page summarizing the information
contained in such statements:
``(A) Statement of plaintiff recovery.--The
amount of the settlement proposed to be
distributed to the parties to the action,
determined in the aggregate and on an average
per share basis.
``(B) Statement of potential outcome of
case.--
``(i) Agreement on amount of
damages.--If the settling parties agree
on the average amount of damages per
share that would be recoverable if the
plaintiff prevailed on each claim
alleged under this title, a statement
concerning the average amount of such
potential damages per share.
``(ii) Disagreement on amount of
damages.--If the parties do not agree
on the average amount of damages per
share that would be recoverable if the
plaintiff prevailed on each claim
alleged under this title, a statement
from each settling party concerning the
issue or issues on which the parties
disagree.
``(iii) Inadmissibility for certain
purposes.--A statement made in
accordance with clause (i) or (ii)
concerning the amount of damages shall
not be admissible in any Federal or
State judicial action or administrative
proceeding, other than an action or
proceeding arising out of such
statement.
``(C) Statement of attorneys' fees or costs
sought.--If any of the settling parties or
their counsel intend to apply to the court for
an award of attorneys' fees or costs from any
fund established as part of the settlement, a
statement indicating which parties or counsel
intend to make such an application, the amount
of fees and costs that will be sought
(including the amount of such fees and costs
determined on an average per share basis), and
a brief explanation supporting the fees and
costs sought.
``(D) Identification of lawyers'
representatives.--The name, telephone number,
and address of one or more representatives of
counsel for the plaintiff class who will be
reasonably available to answer questions from
class members concerning any matter contained
in any notice of settlement published or
otherwise disseminated to the class.
``(E) Reasons for settlement.--A brief
statement explaining the reasons why the
parties are proposing the settlement.
``(F) Other information.--Such other
information as may be required by the court.
``(8) Attorney conflict of interest.--If a
plaintiff class is represented by an attorney who
directly owns or otherwise has a beneficial interest in
the securities that are the subject of the litigation,
the court shall make a determination of whether such
ownership or other interest constitutes a conflict of
interest sufficient to disqualify the attorney from
representing the plaintiff class.
``(b) Stay of Discovery; Preservation of Evidence.--
``(1) In general.--In any private action arising
under this title, all discovery and other proceedings
shall be stayed during the pendency of any motion to
dismiss, unless the court finds, upon the motion of any
party, that particularized discovery is necessary to
preserve evidence or to prevent undue prejudice to that
party.
``(2) Preservation of evidence.--During the
pendency of any stay of discovery pursuant to this
subsection, unless otherwise ordered by the court, any
party to the action with actual notice of the
allegations contained in the complaint shall treat all
documents, data compilations (including electronically
recorded or stored data), and tangible objects that are
in the custody or control of such person and that are
relevant to the allegations, as if they were the
subject of a continuing request for production of
documents from an opposing party under the Federal
Rules of Civil Procedure.
``(3) Sanction for willful violation.--A party
aggrieved by the willful failure of an opposing party
to comply with paragraph (2) may apply to the court for
an order awarding appropriate sanctions.
``(c) Sanctions for Abusive Litigation.--
``(1) Mandatory review by court.--In any private
action arising under this title, upon final
adjudication of the action, the court shall include in
the record specific findings regarding compliance by
each party and each attorney representing any party
with each requirement of Rule 11(b) of the Federal
Rules of Civil Procedure as to any complaint,
responsive pleading, or dispositive motion.
``(2) Mandatory sanctions.--If the court makes a
finding under paragraph (1) that a party or attorney
violated any requirement of Rule 11(b) of the Federal
Rules of Civil Procedure as to any complaint,
responsive pleading, or dispositive motion, the court
shall impose sanctions on such party or attorney in
accordance with Rule 11 of the Federal Rules of Civil
Procedure. Prior to making a finding that any party or
attorney has violated Rule 11 of the Federal Rules of
Civil Procedure, the court shall give such party or
attorney notice and an opportunity to respond.
``(3) Presumption in favor of attorneys' fees and
costs.--
``(A) In general.--Subject to subparagraphs
(B) and (C), for purposes of paragraph (2), the
court shall adopt a presumption that the
appropriate sanction--
``(i) for failure of any responsive
pleading or dispositive motion to
comply with any requirement of Rule
11(b) of the Federal Rules of Civil
Procedure is an award to the opposing
party of the reasonable attorneys' fees
and other expenses incurred as a direct
result of the violation; and
``(ii) for substantial failure of
any complaint to comply with any
requirement of Rule 11(b) of the
Federal Rules of Civil Procedure is an
award to the opposing party of the
reasonable attorneys' fees and other
expenses incurred in the action.
``(B) Rebuttal evidence.--The presumption
described in subparagraph (A) may be rebutted
only upon proof by the party or attorney
against whom sanctions are to be imposed that--
``(i) the award of attorneys' fees
and other expenses will impose an
unreasonable burden on that party or
attorney and would be unjust, and the
failure to make such an award would not
impose a greater burden on the party in
whose favor sanctions are to be
imposed; or
``(ii) the violation of Rule 11(b)
of the Federal Rules of Civil Procedure
was de minimis.
``(C) Sanctions.--If the party or attorney
against whom sanctions are to be imposed meets
its burden under subparagraph (B), the court
shall award the sanctions that the court deems
appropriate pursuant to Rule 11 of the Federal
Rules of Civil Procedure.
``(d) Defendant's Right to Written Interrogatories.--In any
private action arising under this title in which the plaintiff
may recover money damages only on proof that a defendant acted
with a particular state of mind, the court shall, when
requested by a defendant, submit to the jury a written
interrogatory on the issue of each such defendant's state of
mind at the time the alleged violation occurred.''.
(b) Securities Exchange Act of 1934.--Title I of the
Securities Exchange Act of 1934 (78a et seq.) is amended by
inserting after section 21C the following new section:
``SEC. 21D. PRIVATE SECURITIES LITIGATION.
``(a) Private Class Actions.--
``(1) In general.--The provisions of this
subsection shall apply in each private action arising
under this title that is brought as a plaintiff class
action pursuant to the Federal Rules of Civil
Procedure.
``(2) Certification filed with complaint.--
``(A) In general.--Each plaintiff seeking
to serve as a representative party on behalf of
a class shall provide a sworn certification,
which shall be personally signed by such
plaintiff and filed with the complaint, that--
``(i) states that the plaintiff has
reviewed the complaint and authorized
its filing;
``(ii) states that the plaintiff
did not purchase the security that is
the subject of the complaint at the
direction of plaintiff's counsel or in
order to participate in any private
action arising under this title;
``(iii) states that the plaintiff
is willing to serve as a representative
party on behalf of a class, including
providing testimony at deposition and
trial, if necessary;
``(iv) sets forth all of the
transactions of the plaintiff in the
security that is the subject of the
complaint during the class period
specified in the complaint;
``(v) identifies any other action
under this title, filed during the 3-
year period preceding the date on which
the certification is signed by the
plaintiff, in which the plaintiff has
sought to serve as a representative
party on behalf of a class; and
``(vi) states that the plaintiff
will not accept any payment for serving
as a representative party on behalf of
a class beyond the plaintiff's pro rata
share of any recovery, except as
ordered or approved by the court in
accordance with paragraph (4).
``(B) Nonwaiver of attorney-client
privilege.--The certification filed pursuant to
subparagraph (A) shall not be construed to be a
waiver of the attorney-client privilege.
``(3) Appointment of lead plaintiff.--
``(A) Early notice to class members.--
``(i) In general.--Not later than
20 days after the date on which the
complaint is filed, the plaintiff or
plaintiffs shall cause to be published,
in a widely circulated national
business-oriented publication or wire
service, a notice advising members of
the purported plaintiff class--
``(I) of the pendency of
the action, the claims asserted
therein, and the purported
class period; and
``(II) that, not later than
60 days after the date on which
the notice is published, any
member of the purported class
may move the court to serve as
lead plaintiff of the purported
class.
``(ii) Multiple actions.--If more
than one action on behalf of a class
asserting substantially the same claim
or claims arising under this title is
filed, only the plaintiff or plaintiffs
in the first filed action shall be
required to cause notice to be
published in accordance with clause
(i).
``(iii) Additional notices may be
required under federal rules.--Notice
required under clause (i) shall be in
addition to any notice required
pursuant to the Federal Rules of Civil
Procedure.
``(B) Appointment of lead plaintiff.--
``(i) In general.--Not later than
90 days after the date on which a
notice is published under subparagraph
(A)(i), the court shall consider any
motion made by a purported class member
in response to the notice, including
any motion by a class member who is not
individually named as a plaintiff in
the complaint or complaints, and shall
appoint as lead plaintiff the member or
members of the purported plaintiff
class that the court determines to be
most capable of adequately representing
the interests of class members
(hereafter in this paragraph referred
to as the `most adequate plaintiff') in
accordance with this subparagraph.
``(ii) Consolidated actions.--If
more than one action on behalf of a
class asserting substantially the same
claim or claims arising under this
title has been filed, and any party has
sought to consolidate those actions for
pretrial purposes or for trial, the
court shall not make the determination
required by clause (i) until after the
decision on the motion to consolidate
is rendered. As soon as practicable
after such decision is rendered, the
court shall appoint the most adequate
plaintiff as lead plaintiff for the
consolidated actions in accordance with
this paragraph.
``(iii) Rebuttable presumption.--
``(I) In general.--Subject
to subclause (II), for purposes
of clause (i), the court shall
adopt a presumption that the
most adequate plaintiff in any
private action arising under
this title is the person or
group of persons that--
``(aa) has either
filed the complaint or
made a motion in
response to a notice
under subparagraph
(A)(i);
``(bb) in the
determination of the
court, has the largest
financial interest in
the relief sought by
the class; and
``(cc) otherwise
satisfies the
requirements of Rule 23
of the Federal Rules of
Civil Procedure.
``(II) Rebuttal evidence.--
The presumption described in
subclause (I) may be rebutted
only upon proof by a member of
the purported plaintiff class
that the presumptively most
adequate plaintiff--
``(aa) will not
fairly and adequately
protect the interests
of the class; or
``(bb) is subject
to unique defenses that
render such plaintiff
incapable of adequately
representing the class.
``(iv) Discovery.--For purposes of
this subparagraph, discovery relating
to whether a member or members of the
purported plaintiff class is the most
adequate plaintiff may be conducted by
a plaintiff only if the plaintiff first
demonstrates a reasonable basis for a
finding that the presumptively most
adequate plaintiff is incapable of
adequately representing the class.
``(v) Selection of lead counsel.--
The most adequate plaintiff shall,
subject to the approval of the court,
select and retain counsel to represent
the class.
``(vi) Restrictions on professional
plaintiffs.--Except as the court may
otherwise permit, consistent with the
purposes of this section, a person may
be a lead plaintiff, or an officer,
director, or fiduciary of a lead
plaintiff, in no more than 5 securities
class actions brought as plaintiff
class actions pursuant to the Federal
Rules of Civil Procedure during any 3-
year period.
``(4) Recovery by plaintiffs.--The share of any
final judgment or of any settlement that is awarded to
a representative party serving on behalf of a class
shall be equal, on a per share basis, to the portion of
the final judgment or settlement awarded to all other
members of the class. Nothing in this paragraph shall
be construed to limit the award of reasonable costs and
expenses (including lost wages) directly relating to
the representation of the class to any representative
party serving on behalf of a class.
``(5) Restrictions on settlements under seal.--The
terms and provisions of any settlement agreement of a
class action shall not be filed under seal, except that
on motion of any party to the settlement, the court may
order filing under seal for those portions of a
settlement agreement as to which good cause is shown
for such filing under seal. For purposes of this
paragraph, good cause shall exist only if publication
of a term or provision of a settlement agreement would
cause direct and substantial harm to any party.
``(6) Restrictions on payment of attorneys' fees
and expenses.--Total attorneys' fees and expenses
awarded by the court to counsel for the plaintiff class
shall not exceed a reasonable percentage of the amount
of any damages and prejudgment interest actually paid
to the class.
``(7) Disclosure of settlement terms to class
members.--Any proposed or final settlement agreement
that is published or otherwise disseminated to the
class shall include each of the following statements,
along with a cover page summarizing the information
contained in such statements:
``(A) Statement of plaintiff recovery.--The
amount of the settlement proposed to be
distributed to the parties to the action,
determined in the aggregate and on an average
per share basis.
``(B) Statement of potential outcome of
case.--
``(i) Agreement on amount of
damages.--If the settling parties agree
on the average amount of dam-
ages per share that would be
recoverable if the plaintiff prevailed
on each claim alleged under this title,
a statement concerning the average
amount of such potential damages per
share.
``(ii) Disagreement on amount of
damages.--If the parties do not agree
on the average amount of damages per
share that would be recoverable if the
plaintiff prevailed on each claim
alleged under this title, a statement
from each settling party concerning the
issue or issues on which the parties
disagree.
``(iii) Inadmissibility for certain
purposes.--A statement made in
accordance with clause (i) or (ii)
concerning the amount of damages shall
not be admissible in any Federal or
State judicial action or administrative
proceeding, other than an action or
proceeding arising out of such
statement.
``(C) Statement of attorneys' fees or costs
sought.--If any of the settling parties or
their counsel intend to apply to the court for
an award of attorneys' fees or costs from any
fund established as part of the settlement, a
statement indicating which parties or counsel
intend to make such an application, the amount
of fees and costs that will be sought
(including the amount of such fees and costs
determined on an average per share basis), and
a brief explanation supporting the fees and
costs sought. Such information shall be clearly
summarized on the cover page of any notice to a
party of any proposed or final settlement
agreement.
``(D) Identification of lawyers'
representatives.--The name, telephone number,
and address of one or more representatives of
counsel for the plaintiff class who will be
reasonably available to answer questions from
class members concerning any matter contained
in any notice of settlement published or
otherwise disseminated to the class.
``(E) Reasons for settlement.--A brief
statement explaining the reasons why the
parties are proposing the settlement.
``(F) Other information.--Such other
information as may be required by the court.
``(8) Security for payment of costs in class
actions.--In any private action arising under this
title that is certified as a class action pursuant to
the Federal Rules of Civil Procedure, the court may
require an undertaking from the attorneys for the
plaintiff class, the plaintiff class, or both, or from
the attorneys for the defendant, the defendant, or
both, in such proportions and at such times as the
court determines are just and equitable, for the
payment of fees and expenses that may be awarded under
this subsection.
``(9) Attorney conflict of interest.--If a
plaintiff class is represented by an attorney who
directly owns or otherwise has a beneficial interest in
the securities that are the subject of the litigation,
the court shall make a determination of whether such
ownership or other interest constitutes a conflict of
interest sufficient to disqualify the attorney from
representing the plaintiff class.
``(b) Requirements for Securities Fraud Actions.--
``(1) Misleading statements and omissions.--In any
private action arising under this title in which the
plaintiff alleges that the defendant--
``(A) made an untrue statement of a
material fact; or
``(B) omitted to state a material fact
necessary in order to make the statements made,
in the light of the circumstances in which they
were made, not misleading;
the complaint shall specify each statement alleged to
have been misleading, the reason or reasons why the
statement is misleading, and, if an allegation
regarding the statement or omission is made on
information and belief, the complaint shall state with
particularity all facts on which that belief is formed.
``(2) Required state of mind.--In any private
action arising under this title in which the plaintiff
may recover money damages only on proof that the
defendant acted with a particular state of mind, the
complaint shall, with respect to each act or omission
alleged to violate this title, state with particularity
facts giving rise to a strong inference that the
defendant acted with the required state of mind.
``(3) Motion to dismiss; stay of discovery.--
``(A) Dismissal for failure to meet
pleading requirements.--In any private action
arising under this title, the court shall, on
the motion of any defendant, dismiss the
complaint if the requirements of paragraphs (1)
and (2) are not met.
``(B) Stay of discovery.--In any private
action arising under this title, all discovery
and other proceedings shall be stayed during
the pendency of any motion to dismiss, unless
the court finds upon the motion of any party
that particularized discovery is necessary to
preserve evidence or to prevent undue prejudice
to that party.
``(C) Preservation of evidence.--
``(i) In general.--During the
pendency of any stay of discovery
pursuant to this paragraph, unless
otherwise ordered by the court, any
party to the action with actual notice
of the allegations contained in the
complaint shall treat all documents,
data compilations (including
electronically recorded or stored
data), and tangible objects that are in
the custody or control of such person
and that are relevant to the
allegations, as if they were the
subject of a continuing request for
production of documents from an
opposing party under the Federal Rules
of Civil Procedure.
``(ii) Sanction for willful
violation.--A party aggrieved by the
willful failure of an opposing party to
comply with clause (i) may apply to the
court for an order awarding appropriate
sanctions.
``(4) Loss causation.--In any private action
arising under this title, the plaintiff shall have the
burden of proving that the act or omission of the
defendant alleged to violate this title caused the loss
for which the plaintiff seeks to recover damages.
``(c) Sanctions for Abusive Litigation.--
``(1) Mandatory review by court.--In any private
action arising under this title, upon final
adjudication of the action,
the court shall include in the record specific findings
regarding compliance by each party and each attorney
representing any party with each requirement of Rule
11(b) of the Federal Rules of Civil Procedure as to any
complaint, responsive pleading, or dispositive motion.
``(2) Mandatory sanctions.--If the court makes a
finding under paragraph (1) that a party or attorney
violated any requirement of Rule 11(b) of the Federal
Rules of Civil Procedure as to any complaint,
responsive pleading, or dispositive motion, the court
shall impose sanctions on such party or attorney in
accordance with Rule 11 of the Federal Rules of Civil
Procedure. Prior to making a finding that any party or
attorney has violated Rule 11 of the Federal Rules of
Civil Procedure, the court shall give such party or
attorney notice and an opportunity to respond.
``(3) Presumption in favor of attorneys' fees and
costs.--
``(A) In general.--Subject to subparagraphs
(B) and (C), for purposes of paragraph (2), the
court shall adopt a presumption that the
appropriate sanction--
``(i) for failure of any responsive
pleading or dispositive motion to
comply with any requirement of Rule
11(b) of the Federal Rules of Civil
Procedure is an award to the opposing
party of the reasonable attorneys' fees
and other expenses incurred as a direct
result of the violation; and
``(ii) for substantial failure of
any complaint to comply with any
requirement of Rule 11(b) of the
Federal Rules of Civil Procedure is an
award to the opposing party of the
reasonable attorneys' fees and other
expenses incurred in the action.
``(B) Rebuttal evidence.--The presumption
described in subparagraph (A) may be rebutted
only upon proof by the party or attorney
against whom sanctions are to be imposed that--
``(i) the award of attorneys' fees
and other expenses will impose an
unreasonable burden on that party or
attorney and would be unjust, and the
failure to make such an award would not
impose a greater burden on the party in
whose favor sanctions are to be
imposed; or
``(ii) the violation of Rule 11(b)
of the Federal Rules of Civil Procedure
was de minimis.
``(C) Sanctions.--If the party or attorney
against whom sanctions are to be imposed meets
its burden under subparagraph (B), the court
shall award the sanctions that the court deems
appropriate pursuant to Rule 11 of the Federal
Rules of Civil Procedure.
``(d) Defendant's Right to Written Interrogatories.--In any
private action arising under this title in which the plaintiff
may recover money damages, the court shall, when requested by a
defendant, submit to the jury a written interrogatory on the
issue of each such defendant's state of mind at the time the
alleged violation occurred.
``(e) Limitation on Damages.--
``(1) In general.--Except as provided in paragraph
(2), in any private action arising under this title in
which the
plaintiff seeks to establish damages by reference to
the market price of a security, the award of damages to
the plaintiff shall not exceed the difference between
the purchase or sale price paid or received, as
appropriate, by the plaintiff for the subject security
and the mean trading price of that security during the
90-day period beginning on the date on which the
information correcting the misstatement or omission
that is the basis for the action is disseminated to the
market.
``(2) Exception.--In any private action arising
under this title in which the plaintiff seeks to
establish damages by reference to the market price of a
security, if the plaintiff sells or repurchases the
subject security prior to the expiration of the 90-day
period described in paragraph (1), the plaintiff's
damages shall not exceed the difference between the
purchase or sale price paid or received, as
appropriate, by the plaintiff for the security and the
mean trading price of the security during the period
beginning immediately after dissemination of
information correcting the misstatement or omission and
ending on the date on which the plaintiff sells or
repurchases the security.
``(3) Definition.--For purposes of this subsection,
the `mean trading price' of a security shall be an
average of the daily trading price of that security,
determined as of the close of the market each day
during the 90-day period referred to in paragraph
(1).''.
SEC. 102. SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS.
(a) Amendment to the Securities Act of 1933.--Title I of
the Securities Act of 1933 (15 U.S.C. 77a et seq.) is amended
by inserting after section 27 (as added by this Act) the
following new section:
``SEC. 27A. APPLICATION OF SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS.
``(a) Applicability.--This section shall apply only to a
forward-looking statement made by--
``(1) an issuer that, at the time that the
statement is made, is subject to the reporting
requirements of section 13(a) or section 15(d) of the
Securities Exchange Act of 1934;
``(2) a person acting on behalf of such issuer;
``(3) an outside reviewer retained by such issuer
making a statement on behalf of such issuer; or
``(4) an underwriter, with respect to information
provided by such issuer or information derived from
information provided by the issuer.
``(b) Exclusions.--Except to the extent otherwise
specifically provided by rule, regulation, or order of the
Commission, this section shall not apply to a forward-looking
statement--
``(1) that is made with respect to the business or
operations of the issuer, if the issuer--
``(A) during the 3-year period preceding
the date on which the statement was first
made--
``(i) was convicted of any felony
or misdemeanor described in clauses (i)
through (iv) of section 15(b)(4)(B) of
the Securities Exchange Act of 1934; or
``(ii) has been made the subject of
a judicial or administrative decree or
order arising out of a governmental
action that--
``(I) prohibits future
violations of the antifraud
provisions of the securities
laws;
``(II) requires that the
issuer cease and desist from
violating the antifraud
provisions of the securities
laws; or
``(III) determines that the
issuer violated the antifraud
provisions of the securities
laws;
``(B) makes the forward-looking statement
in connection with an offering of securities by
a blank check company;
``(C) issues penny stock;
``(D) makes the forward-looking statement
in connection with a rollup transaction; or
``(E) makes the forward-looking statement
in connection with a going private transaction;
or
``(2) that is--
``(A) included in a financial statement
prepared in accordance with generally accepted
accounting principles;
``(B) contained in a registration statement
of, or otherwise issued by, an investment
company;
``(C) made in connection with a tender
offer;
``(D) made in connection with an initial
public offering;
``(E) made in connection with an offering
by, or relating to the operations of, a
partnership, limited liability company, or a
direct participation investment program; or
``(F) made in a disclosure of beneficial
ownership in a report required to be filed with
the Commission pursuant to section 13(d) of the
Securities Exchange Act of 1934.
``(c) Safe Harbor.--
``(1) In general.--Except as provided in subsection
(b), in any private action arising under this title
that is based on an untrue statement of a material fact
or omission of a material fact necessary to make the
statement not misleading, a person referred to in
subsection (a) shall not be liable with respect to any
forward-looking statement, whether written or oral, if
and to the extent that--
``(A) the forward-looking statement is--
``(i) identified as a forward-
looking statement, and is accompanied
by meaningful cautionary statements
identifying important factors that
could cause actual results to differ
materially from those in the forward-
looking statement; or
``(ii) immaterial; or
``(B) the plaintiff fails to prove that the
forward-looking statement--
``(i) if made by a natural person,
was made with actual knowledge by that
person that the statement was false or
misleading; or
``(ii) if made by a business
entity; was--
``(I) made by or with the
approval of an executive
officer of that entity, and
``(II) made or approved by
such officer with actual
knowledge by that officer that
the statement was false or
misleading.
``(2) Oral forward-looking statements.--In the case
of an oral forward-looking statement made by an issuer
that is subject to the reporting requirements of
section 13(a) or section 15(d) of the Securities
Exchange Act of 1934, or by a person acting on behalf
of such issuer, the requirement set forth in paragraph
(1)(A) shall be deemed to be satisfied--
``(A) if the oral forward-looking statement
is accompanied by a cautionary statement--
``(i) that the particular oral
statement is a forward-looking
statement; and
``(ii) that the actual results
could differ materially from those
projected in the forward-looking
statement; and
``(B) if--
``(i) the oral forward-looking
statement is accompanied by an oral
statement that additional information
concerning factors that could cause
actual results to differ materially
from those in the forward-looking
statement is contained in a readily
available written document, or portion
thereof;
``(ii) the accompanying oral
statement referred to in clause (i)
identifies the document, or portion
thereof, that contains the additional
information about those factors
relating to the forward-looking
statement; and
``(iii) the information contained
in that written document is a
cautionary statement that satisfies the
standard established in paragraph
(1)(A).
``(3) Availability.--Any document filed with the
Commission or generally disseminated shall be deemed to
be readily available for purposes of paragraph (2).
``(4) Effect on other safe harbors.--The exemption
provided for in paragraph (1) shall be in addition to
any exemption that the Commission may establish by rule
or regulation under subsection (g).
``(d) Duty To Update.--Nothing in this section shall impose
upon any person a duty to update a forward-looking statement.
``(e) Dispositive Motion.--On any motion to dismiss based
upon subsection (c)(1), the court shall consider any statement
cited in the complaint and cautionary statement accompanying
the forward-looking statement, which are not subject to
material dispute, cited by the defendant.
``(f) Stay Pending Decision on Motion.--In any private
action arising under this title, the court shall stay discovery
(other than discovery that is specifically directed to the
applicability of the exemption provided for in this section)
during the pendency of any motion by a defendant for summary
judgment that is based on the grounds that--
``(1) the statement or omission upon which the
complaint is based is a forward-looking statement
within the meaning of this section; and
``(2) the exemption provided for in this section
precludes a claim for relief.
``(g) Exemption Authority.--In addition to the exemptions
provided for in this section, the Commission may, by rule or
regulation, provide exemptions from or under any provision of
this title, including with respect to liability that is based
on a statement or that is based on projections or other
forward-looking information,
if and to the extent that any such exemption is consistent with
the public interest and the protection of investors, as
determined by the Commission.
``(h) Effect on Other Authority of Commission.--Nothing in
this section limits, either expressly or by implication, the
authority of the Commission to exercise similar authority or to
adopt similar rules and regulations with respect to forward-
looking statements under any other statute under which the
Commission exercises rulemaking authority.
``(i) Definitions.--For purposes of this section, the
following definitions shall apply:
``(1) Forward-looking statement.--The term
`forward-looking statement' means--
``(A) a statement containing a projection
of revenues, income (including income loss),
earnings (including earnings loss) per share,
capital expenditures, dividends, capital
structure, or other financial items;
``(B) a statement of the plans and
objectives of management for future operations,
including plans or objectives relating to the
products or services of the issuer;
``(C) a statement of future economic
performance, including any such statement
contained in a discussion and analysis of
financial condition by the management or in the
results of operations included pursuant to the
rules and regulations of the Commission;
``(D) any statement of the assumptions
underlying or relating to any statement
described in subparagraph (A), (B), or (C);
``(E) any report issued by an outside
reviewer retained by an issuer, to the extent
that the report assesses a forward-looking
statement made by the issuer; or
``(F) a statement containing a projection
or estimate of such other items as may be
specified by rule or regulation of the
Commission.
``(2) Investment company.--The term `investment
company' has the same meaning as in section 3(a) of the
Investment Company Act of 1940.
``(3) Penny stock.--The term `penny stock' has the
same meaning as in section 3(a)(51) of the Securities
Exchange Act of 1934, and the rules and regulations, or
orders issued pursuant to that section.
``(4) Going private transaction.--The term `going
private transaction' has the meaning given that term
under the rules or regulations of the Commission issued
pursuant to section 13(e) of the Securities Exchange
Act of 1934.
``(5) Securities laws.--The term `securities laws'
has the same meaning as in section 3 of the Securities
Exchange Act of 1934.
``(6) Person acting on behalf of an issuer.--The
term `person acting on behalf of an issuer' means an
officer, director, or employee of the issuer.
``(7) Other terms.--The terms `blank check
company', `rollup transaction', `partnership', `limited
liability company', `executive officer of an entity'
and `direct participation investment program', have the
meanings given those terms by rule or regulation of the
Commission.''.
(b) Amendment to the Securities Exchange Act of 1934.--The
Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.) is
amended by inserting after section 21D (as added by this Act)
the following new section:
``SEC. 21E. APPLICATION OF SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS.
``(a) Applicability.--This section shall apply only to a
forward-looking statement made by--
``(1) an issuer that, at the time that the
statement is made, is subject to the reporting
requirements of section 13(a) or section 15(d);
``(2) a person acting on behalf of such issuer;
``(3) an outside reviewer retained by such issuer
making a statement on behalf of such issuer; or
``(4) an underwriter, with respect to information
provided by such issuer or information derived from
information provided by such issuer.
``(b) Exclusions.--Except to the extent otherwise
specifically provided by rule, regulation, or order of the
Commission, this section shall not apply to a forward-looking
statement--
``(1) that is made with respect to the business or
operations of the issuer, if the issuer--
``(A) during the 3-year period preceding
the date on which the statement was first
made--
``(i) was convicted of any felony
or misdemeanor described in clauses (i)
through (iv) of section 15(b)(4)(B); or
``(ii) has been made the subject of
a judicial or administrative decree or
order arising out of a governmental
action that--
``(I) prohibits future
violations of the antifraud
provisions of the securities
laws;
``(II) requires that the
issuer cease and desist from
violating the antifraud
provisions of the securities
laws; or
``(III) determines that the
issuer violated the antifraud
provisions of the securities
laws;
``(B) makes the forward-looking statement
in connection with an offering of securities by
a blank check company;
``(C) issues penny stock;
``(D) makes the forward-looking statement
in connection with a rollup transaction; or
``(E) makes the forward-looking statement
in connection with a going private transaction;
or
``(2) that is--
``(A) included in a financial statement
prepared in accordance with generally accepted
accounting principles;
``(B) contained in a registration statement
of, or otherwise issued by, an investment
company;
``(C) made in connection with a tender
offer;
``(D) made in connection with an initial
public offering;
``(E) made in connection with an offering
by, or relating to the operations of, a
partnership, limited liability company, or a
direct participation investment program; or
``(F) made in a disclosure of beneficial
ownership in a report required to be filed with
the Commission pursuant to section 13(d).
``(c) Safe Harbor.--
``(1) In general.--Except as provided in subsection
(b), in any private action arising under this title
that is based on an untrue statement of a material fact
or omission of a material fact necessary to make the
statement not misleading, a person referred to in
subsection (a) shall not be liable with respect to any
forward-looking statement, whether written or oral, if
and to the extent that--
``(A) the forward-looking statement is--
``(i) identified as a forward-
looking statement, and is accompanied
by meaningful cautionary statements
identifying important factors that
could cause actual results to differ
materially from those in the forward-
looking statement; or
``(ii) immaterial; or
``(B) the plaintiff fails to prove that the
forward-looking statement--
``(i) if made by a natural person,
was made with actual knowledge by that
person that the statement was false or
misleading; or
``(ii) if made by a business
entity; was--
``(I) made by or with the
approval of an executive
officer of that entity; and
``(II) made or approved by
such officer with actual
knowledge by that officer that
the statement was false or
misleading.
``(2) Oral forward-looking statements.--In the case
of an oral forward-looking statement made by an issuer
that is subject to the reporting requirements of
section 13(a) or section 15(d), or by a person acting
on behalf of such issuer, the requirement set forth in
paragraph (1)(A) shall be deemed to be satisfied--
``(A) if the oral forward-looking statement
is accompanied by a cautionary statement--
``(i) that the particular oral
statement is a forward-looking
statement; and
``(ii) that the actual results
might differ materially from those
projected in the forward-looking
statement; and
``(B) if--
``(i) the oral forward-looking
statement is accompanied by an oral
statement that additional information
concerning factors that could cause
actual results to materially differ
from those in the forward-looking
statement is contained in a readily
available written document, or portion
thereof;
``(ii) the accompanying oral
statement referred to in clause (i)
identifies the document, or portion
thereof, that contains the additional
information about those factors
relating to the forward-looking
statement; and
``(iii) the information contained
in that written document is a
cautionary statement that satisfies the
standard established in paragraph
(1)(A).
``(3) Availability.--Any document filed with the
Commission or generally disseminated shall be deemed to
be readily available for purposes of paragraph (2).
``(4) Effect on other safe harbors.--The exemption
provided for in paragraph (1) shall be in addition to
any exemption that the Commission may establish by rule
or regulation under subsection (g).
``(d) Duty To Update.--Nothing in this section shall impose
upon any person a duty to update a forward-looking statement.
``(e) Dispositive Motion.--On any motion to dismiss based
upon subsection (c)(1), the court shall consider any statement
cited in the complaint and any cautionary statement
accompanying the forward-looking statement, which are not
subject to material dispute, cited by the defendant.
``(f) Stay Pending Decision on Motion.--In any private
action arising under this title, the court shall stay discovery
(other than discovery that is specifically directed to the
applicability of the exemption provided for in this section)
during the pendency of any motion by a defendant for summary
judgment that is based on the grounds that--
``(1) the statement or omission upon which the
complaint is based is a forward-looking statement
within the meaning of this section; and
``(2) the exemption provided for in this section
precludes a claim for relief.
``(g) Exemption Authority.--In addition to the exemptions
provided for in this section, the Commission may, by rule or
regulation, provide exemptions from or under any provision of
this title, including with respect to liability that is based
on a statement or that is based on projections or other
forward-looking information, if and to the extent that any such
exemption is consistent with the public interest and the
protection of investors, as determined by the Commission.
``(h) Effect on Other Authority of Commission.--Nothing in
this section limits, either expressly or by implication, the
authority of the Commission to exercise similar authority or to
adopt similar rules and regulations with respect to forward-
looking statements under any other statute under which the
Commission exercises rulemaking authority.
``(i) Definitions.--For purposes of this section, the
following definitions shall apply:
``(1) Forward-looking statement.--The term
`forward-looking statement' means--
``(A) a statement containing a projection
of revenues, income (including income loss),
earnings (including earnings loss) per share,
capital expenditures, dividends, capital
structure, or other financial items;
``(B) a statement of the plans and
objectives of management for future operations,
including plans or objectives relating to the
products or services of the issuer;
``(C) a statement of future economic
performance, including any such statement
contained in a discussion and analysis of
financial condition by the management or in the
results of operations included pursuant to the
rules and regulations of the Commission;
``(D) any statement of the assumptions
underlying or relating to any statement
described in subparagraph (A), (B), or (C);
``(E) any report issued by an outside
reviewer retained by an issuer, to the extent
that the report assesses a forward-looking
statement made by the issuer; or
``(F) a statement containing a projection
or estimate of such other items as may be
specified by rule or regulation of the
Commission.
``(2) Investment company.--The term `investment
company' has the same meaning as in section 3(a) of the
Investment Company Act of 1940.
``(3) Going private transaction.--The term `going
private transaction' has the meaning given that term
under the rules or regulations of the Commission issued
pursuant to section 13(e).
``(4) Person acting on behalf of an issuer.--The
term `person acting on behalf of an issuer' means any
officer, director, or employee of such issuer.
``(5) Other terms.--The terms `blank check
company', `rollup transaction', `partnership', `limited
liability company', `executive officer of an entity'
and `direct participation investment program', have the
meanings given those terms by rule or regulation of the
Commission.''.
SEC. 103. ELIMINATION OF CERTAIN ABUSIVE PRACTICES.
(a) Prohibition of Referral Fees.--Section 15(c) of the
Securities Exchange Act of 1934 (15 U.S.C. 78o(c)) is amended
by adding at the end the following new paragraph:
``(8) Prohibition of referral fees.--No broker or
dealer, or person associated with a broker or dealer,
may solicit or accept, directly or indirectly,
remuneration for assisting an attorney in obtaining the
representation of any person in any private action
arising under this title or under the Securities Act of
1933.''.
(b) Prohibition of Attorneys' Fees Paid From Commission
Disgorgement Funds.--
(1) Securities act of 1933.--Section 20 of the
Securities Act of 1933 (15 U.S.C. 77t) is amended by
adding at the end the following new subsection:
``(f) Prohibition of Attorneys' Fees Paid From Commission
Disgorgement Funds.--Except as otherwise ordered by the court
upon motion by the Commission, or, in the case of an
administrative action, as otherwise ordered by the Commission,
funds disgorged as the result of an action brought by the
Commission in Federal court, or as a result of any Commission
administrative action, shall not be distributed as payment for
attorneys' fees or expenses incurred by private parties seeking
distribution of the disgorged funds.''.
(2) Securities exchange act of 1934.--Section 21(d)
of the Securities Exchange Act of 1934 (15 U.S.C.
78u(d)) is amended by adding at the end the following
new paragraph:
``(4) Prohibition of attorneys' fees paid from
commission disgorgement funds.--Except as otherwise
ordered by the court upon motion by the Commission, or,
in the case of an administrative action, as otherwise
ordered by the Commission, funds disgorged as the
result of an action brought
by the Commission in Federal court, or as a result of
any Commission administrative action, shall not be
distributed as payment for attorneys' fees or expenses
incurred by private parties seeking distribution of the
disgorged funds.''.
SEC. 104. AUTHORITY OF COMMISSION TO PROSECUTE AIDING AND ABETTING.
Section 20 of the Securities Exchange Act of 1934 (15
U.S.C. 78t) is amended--
(1) by striking the section heading and inserting
the following:
``liability of controlling persons and persons who aid and abet
violations'';
and
(2) by adding at the end the following new
subsection:
``(f) Prosecution of Persons Who Aid and Abet Violations.--
For purposes of any action brought by the Commission under
paragraph (1) or (3) of section 21(d), any person that
knowingly provides substantial assistance to another person in
violation of a provision of this title, or of any rule or
regulation issued under this title, shall be deemed to be in
violation of such provision to the same extent as the person to
whom such assistance is provided.''.
SEC. 105. LOSS CAUSATION.
Section 12 of the Securities Act of 1933 (15 U.S.C. 77l) is
amended--
(1) by inserting ``(a) In General.--'' before ``Any
person'';
(2) by inserting ``, subject to subsection (b),''
after ``shall be liable''; and
(3) by adding at the end the following:
``(b) Loss Causation.--In an action described in subsection
(a)(2), if the person who offered or sold such security proves
that any portion or all of the amount recoverable under
subsection (a)(2) represents other than the depreciation in
value of the subject security resulting from such part of the
prospectus or oral communication, with respect to which the
liability of that person is asserted, not being true or
omitting to state a material fact required to be stated therein
or necessary to make the statement not misleading, then such
portion or amount, as the case may be, shall not be
recoverable.''.
SEC. 106. STUDY AND REPORT ON PROTECTIONS FOR SENIOR CITIZENS AND
QUALIFIED RETIREMENT PLANS.
(a) In General.--Not later than 180 days after the date of
enactment of this Act, the Securities and Exchange Commission
shall--
(1) determine whether investors that are senior
citizens or qualified retirement plans require greater
protection against securities fraud than is provided in
this Act and the amendments made by this Act;
(2) determine whether investors that are senior
citizens or qualified retirement plans have been
adversely impacted by abusive or unnecessary securities
fraud litigation, and whether the provisions in this
Act or amendments made by
this Act are sufficient to protect their investments
from such litigation; and
(3) if so, submit to the Congress a report
containing recommendations on protections from
securities fraud and abusive or unnecessary securities
fraud litigation that the Commission determines to be
appropriate to thoroughly protect such investors.
(b) Definitions.--For purposes of this section--
(1) the term ``qualified retirement plan'' has the
same meaning as in section 4974(c) of the Internal
Revenue Code of 1986; and
(2) the term ``senior citizen'' means an individual
who is 62 years of age or older as of the date of the
securities transaction at issue.
SEC. 107. AMENDMENT TO RACKETEER INFLUENCED AND CORRUPT ORGANIZATIONS
ACT.
Section 1964(c) of title 18, United States Code, is amended
by inserting before the period ``, except that no person may
rely upon any conduct that would have been actionable as fraud
in the purchase or sale of securities to establish a violation
of section 1962. The exception contained in the preceding
sentence does not apply to an action against any person that is
criminally convicted in connection with the fraud, in which
case the statute of limitations shall start to run on the date
on which the conviction becomes final''.
SEC. 108. APPLICABILITY.
The amendments made by this title shall not affect or apply
to any private action arising under title I of the Securities
Exchange Act of 1934 or title I of the Securities Act of 1933,
commenced before and pending on the date of enactment of this
Act.
TITLE II--REDUCTION OF COERCIVE SETTLEMENTS
SEC. 201. PROPORTIONATE LIABILITY.
(a) Amendment to Securities and Exchange Act of 1934.--
Section 21D of the Securities Exchange Act of 1934 (as added by
this Act) is amended by adding at the end the following new
subsection:
``(g) Proportionate Liability.--
``(1) Applicability.--Nothing in this subsection
shall be construed to create, affect, or in any manner
modify, the standard for liability associated with any
action arising under the securities laws.
``(2) Liability for damages.--
``(A) Joint and several liability.--Any
covered person against whom a final judgment is
entered in a private action shall be liable for
damages jointly and severally only if the trier
of fact specifically determines that such
covered person knowingly committed a violation
of the securities laws.
``(B) Proportionate liability.--
``(i) In general.--Except as
provided in paragraph (1), a covered
person against whom a final judgment
is entered in a private action shall be
liable solely for the portion of the
judgment that corresponds to the
percentage of responsibility of that
covered person, as determined under
paragraph (3).
``(ii) Recovery by and costs of
covered person.--In any case in which a
contractual relationship permits, a
covered person that prevails in any
private action may recover the
attorney's fees and costs of that
covered person in connection with the
action.
``(3) Determination of responsibility.--
``(A) In general.--In any private action,
the court shall instruct the jury to answer
special interrogatories, or if there is no
jury, shall make findings, with respect to each
covered person and each of the other persons
claimed by any of the parties to have caused or
contributed to the loss incurred by the
plaintiff, including persons who have entered
into settlements with the plaintiff or
plaintiffs, concerning--
``(i) whether such person violated
the securities laws;
``(ii) the percentage of
responsibility of such person, measured
as a percentage of the total fault of
all persons who caused or contributed
to the loss incurred by the plaintiff;
and
``(iii) whether such person
knowingly committed a violation of the
securities laws.
``(B) Contents of special interrogatories
or findings.--The responses to interrogatories,
or findings, as appropriate, under subparagraph
(A) shall specify the total amount of damages
that the plaintiff is entitled to recover and
the percentage of responsibility of each
covered person found to have caused or
contributed to the loss incurred by the
plaintiff or plaintiffs.
``(C) Factors for consideration.--In
determining the percentage of responsibility
under this paragraph, the trier of fact shall
consider--
``(i) the nature of the conduct of
each covered person found to have
caused or contributed to the loss
incurred by the plaintiff or
plaintiffs; and
``(ii) the nature and extent of the
causal relationship between the conduct
of each such person and the damages
incurred by the plaintiff or
plaintiffs.
``(4) Uncollectible share.--
``(A) In general.--Notwithstanding
paragraph (2)(B), upon motion made not later
than 6 months after a final judgment is entered
in any private action, the court determines
that all or part of the share of the judgment
of the covered person is not collectible
against that covered person, and is also not
collectible against a covered person described
in paragraph (2)(A), each covered person
described in paragraph (2)(B) shall be liable
for the uncollectible share as follows:
``(i) Percentage of net worth.--
Each covered person shall be jointly
and severally liable for the
uncollectible share if the plaintiff
establishes that--
``(I) the plaintiff is an
individual whose recoverable
damages under the final
judgment are
equal to more than 10 percent
of the net worth of the
plaintiff; and
``(II) the net worth of the
plaintiff is equal to less than
$200,000.
``(ii) Other plaintiffs.--With
respect to any plaintiff not described
in subclauses (I) and (II) of clause
(i), each covered person shall be
liable for the uncollectible share in
proportion to the percentage of
responsibility of that covered person,
except that the total liability of a
covered person under this clause may
not exceed 50 percent of the
proportionate share of that covered
person, as determined under paragraph
(3)(B).
``(iii) Net worth.--For purposes of
this subparagraph, net worth shall be
determined as of the date immediately
preceding the date of the purchase or
sale (as applicable) by the plaintiff
of the security that is the subject of
the action, and shall be equal to the
fair market value of assets, minus
liabilities, including the net value of
the investments of the plaintiff in
real and personal property (including
personal residences).
``(B) Overall limit.--In no case shall the
total payments required pursuant to
subparagraph (A) exceed the amount of the
uncollectible share.
``(C) Covered persons subject to
contribution.--A covered person against whom
judgment is not collectible shall be subject to
contribution and to any continuing liability to
the plaintiff on the judgment.
``(5) Right of contribution.--To the extent that a
covered person is required to make an additional
payment pursuant to paragraph (4), that covered person
may recover contribution--
``(A) from the covered person originally
liable to make the payment;
``(B) from any covered person liable
jointly and severally pursuant to paragraph
(2)(A);
``(C) from any covered person held
proportionately liable pursuant to this
paragraph who is liable to make the same
payment and has paid less than his or her
proportionate share of that payment; or
``(D) from any other person responsible for
the conduct giving rise to the payment that
would have been liable to make the same
payment.
``(6) Nondisclosure to jury.--The standard for
allocation of damages under paragraphs (2) and (3) and
the procedure for reallocation of uncollectible shares
under paragraph (4) shall not be disclosed to members
of the jury.
``(7) Settlement discharge.--
``(A) In general.--A covered person who
settles any private action at any time before
final verdict or judgment shall be discharged
from all claims for contribution brought by
other persons. Upon entry of the settlement by
the court, the court shall enter a bar order
constituting the final discharge of all
obligations to the plaintiff of the settling
covered person arising out of the action. The
order
shall bar all future claims for contribution
arising out of the action--
``(i) by any person against the
settling covered person; and
``(ii) by the settling covered
person against any person, other than a
person whose liability has been
extinguished by the settlement of the
settling covered person.
``(B) Reduction.--If a covered person
enters into a settlement with the plaintiff
prior to final verdict or judgment, the verdict
or judgment shall be reduced by the greater
of--
``(i) an amount that corresponds to
the percentage of responsibility of
that covered person; or
``(ii) the amount paid to the
plaintiff by that covered person.
``(8) Contribution.--A covered person who becomes
jointly and severally liable for damages in any private
action may recover contribution from any other person
who, if joined in the original action, would have been
liable for the same damages. A claim for contribution
shall be determined based on the percentage of
responsibility of the claimant and of each person
against whom a claim for contribution is made.
``(9) Statute of limitations for contribution.--In
any private action determining liability, an action for
contribution shall be brought not later than 6 months
after the entry of a final, nonappealable judgment in
the action, except that an action for contribution
brought by a covered person who was required to make an
additional payment pursuant to paragraph (4) may be
brought not later than 6 months after the date on which
such payment was made.
``(10) Definitions.--For purposes of this
subsection--
``(A) a covered person `knowingly commits a
violation of the securities laws'--
``(i) with respect to an action
that is based on an untrue statement of
material fact or omission of a material
fact necessary to make the statement
not misleading, if--
``(I) that covered person
makes an untrue statement of a
material fact, with actual
knowledge that the
representation is false, or
omits to state a fact necessary
in order to make the statement
made not misleading, with
actual knowledge that, as a
result of the omission, one of
the material representations of
the covered person is false;
and
``(II) persons are likely
to reasonably rely on that
misrepresentation or omission;
and
``(ii) with respect to an action
that is based on any conduct that is
not described in clause (i), if that
covered person engages in that conduct
with actual knowledge of the facts and
circumstances that make the conduct of
that covered person a violation of the
securities laws;
``(B) reckless conduct by a covered person
shall not be construed to constitute a knowing
commission of a violation of the securities
laws by that covered person;
``(C) the term `covered person' means--
``(i) a defendant in any private
action arising under this title; or
``(ii) a defendant in any private
action arising under section 11 of the
Securities Act of 1933, who is an
outside director of the issuer of the
securities that are the subject of the
action; and
``(D) the term `outside director' shall
have the meaning given such term by rule or
regulation of the Commission.''.
(b) Amendments to the Securities Act of 1933.--Section
11(f) of the Securities Act of 1933 (12 U.S.C. 77k(f)) is
amended--
(1) by striking ``All'' and inserting ``(1) Except
as provided in paragraph (2), all''; and
(2) by adding at the end the following new
paragraph:
``(2)(A) The liability of an outside director under
subsection (e) shall be determined in accordance with section
38 of the Securities Exchange Act of 1934.
``(B) For purposes of this paragraph, the term `outside
director' shall have the meaning given such term by rule or
regulation of the Commission .''.
SEC. 202. APPLICABILITY.
The amendments made by this title shall not affect or apply
to any private action arising under the securities laws
commenced before and pending on the date of enactment of this
Act.
SEC. 203. RULE OF CONSTRUCTION.
Nothing in this Act or the amendments made by this Act
shall be deemed to create or ratify any implied private right
of action, or to prevent the Commission, by rule or regulation,
from restricting or otherwise regulating private actions under
the Securities Exchange Act of 1934.
TITLE III--AUDITOR DISCLOSURE OF CORPORATE FRAUD
SEC. 301. FRAUD DETECTION AND DISCLOSURE.
(a) In General.--The Securities Exchange Act of 1934 (15
U.S.C. 78a et seq.) is amended by inserting immediately after
section 10 the following new section:
``SEC. 10A. AUDIT REQUIREMENTS.
``(a) In General.--Each audit required pursuant to this
title of the financial statements of an issuer by an
independent public accountant shall include, in accordance with
generally accepted auditing standards, as may be modified or
supplemented from time to time by the Commission--
``(1) procedures designed to provide reasonable
assurance of detecting illegal acts that would have a
direct and material effect on the determination of
financial statement amounts;
``(2) procedures designed to identify related party
transactions that are material to the financial
statements or otherwise require disclosure therein; and
``(3) an evaluation of whether there is substantial
doubt about the ability of the issuer to continue as a
going concern during the ensuing fiscal year.
``(b) Required Response To Audit Discoveries.--
``(1) Investigation and report to management.--If,
in the course of conducting an audit pursuant to this
title to which subsection (a) applies, the independent
public accountant detects or otherwise becomes aware of
information indicating that an illegal act (whether or
not perceived to have a material effect on the
financial statements of the issuer) has or may have
occurred, the accountant shall, in accordance with
generally accepted auditing standards, as may be
modified or supplemented from time to time by the
Commission--
``(A)(i) determine whether it is likely
that an illegal act has occurred; and
``(ii) if so, determine and consider the
possible effect of the illegal act on the
financial statements of the issuer, including
any contingent monetary effects, such as fines,
penalties, and damages; and
``(B) as soon as practicable, inform the
appropriate level of the management of the
issuer and assure that the audit committee of
the issuer, or the board of directors of the
issuer in the absence of such a committee, is
adequately informed with respect to illegal
acts that have been detected or have otherwise
come to the attention of such accountant in the
course of the audit, unless the illegal act is
clearly inconsequential.
``(2) Response to failure to take remedial
action.--If, after determining that the audit committee
of the board of directors of the issuer, or the board
of directors of the issuer in the absence of an audit
committee, is adequately informed with respect to
illegal acts that have been detected or have otherwise
come to the attention of the accountant in the course
of the audit of such accountant, the independent public
accountant concludes that--
``(A) the illegal act has a material effect
on the financial statements of the issuer;
``(B) the senior management has not taken,
and the board of directors has not caused
senior management to take, timely and
appropriate remedial actions with respect to
the illegal act; and
``(C) the failure to take remedial action
is reasonably expected to warrant departure
from a standard report of the auditor, when
made, or warrant resignation from the audit
engagement;
the independent public accountant shall, as soon as
practicable, directly report its conclusions to the
board of directors.
``(3) Notice to commission; response to failure to
notify.--An issuer whose board of directors receives a
report under paragraph (2) shall inform the Commission
by notice not later than 1 business day after the
receipt of such report and shall furnish the
independent public accountant making such report with a
copy of the notice furnished to the Commission. If the
independent public accountant fails to receive a copy
of the notice before the expiration of the required 1-
business-day period, the independent public accountant
shall--
``(A) resign from the engagement; or
``(B) furnish to the Commission a copy of
its report (or the documentation of any oral
report given) not later than 1 business day
following such failure to receive notice.
``(4) Report after resignation.--If an independent
public accountant resigns from an engagement under
paragraph (3)(A), the accountant shall, not later than
1 business day following the failure by the issuer to
notify the Commission under paragraph (3), furnish to
the Commission a copy of the accountant's report (or
the documentation of any oral report given).
``(c) Auditor Liability Limitation.--No independent public
accountant shall be liable in a private action for any finding,
conclusion, or statement expressed in a report made pursuant to
paragraph (3) or (4) of subsection (b), including any rule
promulgated pursuant thereto.
``(d) Civil Penalties in Cease-and-Desist Proceedings.--If
the Commission finds, after notice and opportunity for hearing
in a proceeding instituted pursuant to section 21C, that an
independent public accountant has willfully violated paragraph
(3) or (4) of subsection (b), the Commission may, in addition
to entering an order under section 21C, impose a civil penalty
against the independent public accountant and any other person
that the Commission finds was a cause of such violation. The
determination to impose a civil penalty and the amount of the
penalty shall be governed by the standards set forth in section
21B.
``(e) Preservation of Existing Authority.--Except as
provided in subsection (d), nothing in this section shall be
held to limit or otherwise affect the authority of the
Commission under this title.
``(f) Definition.--As used in this section, the term
`illegal act' means an act or omission that violates any law,
or any rule or regulation having the force of law.''.
(b) Effective Dates.--The amendment made by subsection (a)
shall apply to each annual report--
(1) for any period beginning on or after January 1,
1996, with respect to any registrant that is required
to file selected quarterly financial data pursuant to
the rules or regulations of the Securities and Exchange
Commission; and
(2) for any period beginning on or after January 1,
1997, with respect to any other registrant.
Newt Gingrich,
Speaker of the House of Representatives.
Strom Thurmond,
President of the Senate pro tempore.
[Endorsement on back of bill:)
I certify that this Act originated in the House of
Representatives.
Robin H. Carle, Clerk.