[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]






                    INVESTOR PROTECTION: A REVIEW OF
               PLAINTIFFS' ATTORNEY ABUSES IN SECURITIES
                  LITIGATION AND LEGISLATIVE REMEDIES

=======================================================================

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                    CAPITAL MARKETS, INSURANCE, AND
                    GOVERNMENT SPONSORED ENTERPRISES

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                               __________

                             JUNE 28, 2006

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 109-102














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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa                 BARNEY FRANK, Massachusetts
RICHARD H. BAKER, Louisiana          PAUL E. KANJORSKI, Pennsylvania
DEBORAH PRYCE, Ohio                  MAXINE WATERS, California
SPENCER BACHUS, Alabama              CAROLYN B. MALONEY, New York
MICHAEL N. CASTLE, Delaware          LUIS V. GUTIERREZ, Illinois
EDWARD R. ROYCE, California          NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma             MELVIN L. WATT, North Carolina
ROBERT W. NEY, Ohio                  GARY L. ACKERMAN, New York
SUE W. KELLY, New York, Vice Chair   DARLENE HOOLEY, Oregon
RON PAUL, Texas                      JULIA CARSON, Indiana
PAUL E. GILLMOR, Ohio                BRAD SHERMAN, California
JIM RYUN, Kansas                     GREGORY W. MEEKS, New York
STEVEN C. LaTOURETTE, Ohio           BARBARA LEE, California
DONALD A. MANZULLO, Illinois         DENNIS MOORE, Kansas
WALTER B. JONES, Jr., North          MICHAEL E. CAPUANO, Massachusetts
    Carolina                         HAROLD E. FORD, Jr., Tennessee
JUDY BIGGERT, Illinois               RUBEN HINOJOSA, Texas
CHRISTOPHER SHAYS, Connecticut       JOSEPH CROWLEY, New York
VITO FOSSELLA, New York              WM. LACY CLAY, Missouri
GARY G. MILLER, California           STEVE ISRAEL, New York
PATRICK J. TIBERI, Ohio              CAROLYN McCARTHY, New York
MARK R. KENNEDY, Minnesota           JOE BACA, California
TOM FEENEY, Florida                  JIM MATHESON, Utah
JEB HENSARLING, Texas                STEPHEN F. LYNCH, Massachusetts
SCOTT GARRETT, New Jersey            BRAD MILLER, North Carolina
GINNY BROWN-WAITE, Florida           DAVID SCOTT, Georgia
J. GRESHAM BARRETT, South Carolina   ARTUR DAVIS, Alabama
KATHERINE HARRIS, Florida            AL GREEN, Texas
RICK RENZI, Arizona                  EMANUEL CLEAVER, Missouri
JIM GERLACH, Pennsylvania            MELISSA L. BEAN, Illinois
STEVAN PEARCE, New Mexico            DEBBIE WASSERMAN SCHULTZ, Florida
RANDY NEUGEBAUER, Texas              GWEN MOORE, Wisconsin,
TOM PRICE, Georgia                    
MICHAEL G. FITZPATRICK,              BERNARD SANDERS, Vermont
    Pennsylvania
GEOFF DAVIS, Kentucky
PATRICK T. McHENRY, North Carolina
JOHN CAMPBELL, California

                 Robert U. Foster, III, Staff Director
 Subcommittee on Capital Markets, Insurance, and Government Sponsored 
                              Enterprises

                 RICHARD H. BAKER, Louisiana, Chairman

JIM RYUN, Kansas, Vice Chair         PAUL E. KANJORSKI, Pennsylvania
CHRISTOPHER SHAYS, Connecticut       GARY L. ACKERMAN, New York
PAUL E. GILLMOR, Ohio                DARLENE HOOLEY, Oregon
SPENCER BACHUS, Alabama              BRAD SHERMAN, California
MICHAEL N. CASTLE, Delaware          GREGORY W. MEEKS, New York
PETER T. KING, New York              DENNIS MOORE, Kansas
FRANK D. LUCAS, Oklahoma             MICHAEL E. CAPUANO, Massachusetts
DONALD A. MANZULLO, Illinois         HAROLD E. FORD, Jr., Tennessee
EDWARD R. ROYCE, California          RUBEN HINOJOSA, Texas
SUE W. KELLY, New York               JOSEPH CROWLEY, New York
ROBERT W. NEY, Ohio                  STEVE ISRAEL, New York
VITO FOSSELLA, New York,             WM. LACY CLAY, Missouri
JUDY BIGGERT, Illinois               CAROLYN McCARTHY, New York
GARY G. MILLER, California           JOE BACA, California
MARK R. KENNEDY, Minnesota           JIM MATHESON, Utah
PATRICK J. TIBERI, Ohio              STEPHEN F. LYNCH, Massachusetts
J. GRESHAM BARRETT, South Carolina   BRAD MILLER, North Carolina
GINNY BROWN-WAITE, Florida           DAVID SCOTT, Georgia
TOM FEENEY, Florida                  NYDIA M. VELAZQUEZ, New York
JIM GERLACH, Pennsylvania            MELVIN L. WATT, North Carolina
KATHERINE HARRIS, Florida            ARTUR DAVIS, Alabama
JEB HENSARLING, Texas                MELISSA L. BEAN, Illinois
RICK RENZI, Arizona                  DEBBIE WASSERMAN SCHULTZ, Florida
GEOFF DAVIS, Kentucky                BARNEY FRANK, Massachusetts
MICHAEL G. FITZPATRICK, 
    Pennsylvania
JOHN CAMPBELL, California
MICHAEL G. OXLEY, Ohio


















                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    June 28, 2006................................................     1
Appendix:
    June 28, 2006................................................    59

                               WITNESSES
                        Wednesday, June 28, 2006

Cox, James D., Brainard Currie Professor of Law, Duke University.    26
Frank, Theodore H., Resident Fellow, American Enterprise 
  Institute, and Director, AEI Liability Project.................    24
Galvin, Hon. William F., Secretary of the Commonwealth, 
  Commonwealth of Massachusetts..................................    21
Walker, Hon. Vaughn R., Chief Judge, U.S. District Court, 
  Northern District of California................................    19

                                APPENDIX

Prepared statements:
    Clay, Hon. Wm. Lacy..........................................    60
    Cox, James D.................................................    62
    Frank, Theodore H............................................    75
    Galvin, Hon. William F.......................................    87
    Walker, Hon. Vaughn R........................................    90

              Additional Material Submitted for the Record

Baker, Hon. Richard H.:
    Letter from Zuckerman Spaeder LLP............................   109
Frank, Hon. Barney:
    Letter to Hon. Richard H. Baker..............................   112
    Response letter from Hon. Richard H. Baker...................   113
    Follow-up letter to Hon. Richard H. Baker....................   114
    Statement of Damon A. Silvers................................   115
    Letter from the Consumer Federation of America...............   116



















 
                     INVESTOR PROTECTION: A REVIEW
                   OF PLAINTIFFS' ATTORNEY ABUSES IN
                       SECURITIES LITIGATION AND
                          LEGISLATIVE REMEDIES

                              ----------                              


                        Wednesday, June 28, 2006

             U.S. House of Representatives,
        Subcommittee on Capital Markets, Insurance,
              and Government Sponsored Enterprises,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 10:07 a.m., in 
room 2128, Rayburn House Office Building, Hon. Richard H. Baker 
[chairman of the subcommittee] presiding.
    Present: Representatives Baker, Ryun, Shays, Gillmor, 
Castle, Lucas, Manzullo, Kelly, Ney, Biggert, Miller of 
California, Kennedy, Tiberi, Barrett, Brown-Waite, Feeney, 
Gerlach, Hensarling, Renzi, Davis of Kentucky, Fitzpatrick, 
Campbell, Pearce, McHenry, Ackerman, Sherman, Meeks, Moore of 
Kansas, Capuano, Ford, Crowley, Israel, Clay, McCarthy, Baca, 
Matheson, Miller of North Carolina, Scott, Velazquez, Davis of 
Alabama, Wasserman-Schultz, and Maloney.
    Ex officio present: Representative Frank.
    Chairman Baker. I'd like to call this meeting of the 
Subcommittee on Capital Markets to order this morning.
    Let me first acknowledge that Mr. Kanjorski, the ranking 
member of the subcommittee, is unable to participate in today's 
hearing.
    Unfortunately, due to unexpected flooding in Pennsylvania, 
he has returned home to an almost certain mandatory evacuation 
order, so our thoughts are with him this morning, as I know he 
did intend to participate.
    Mr. Frank, of course, as the ranking member of the Full 
Committee, will participate in today's hearing for that and 
other reasons, as well.
    Today the subcommittee meets to discuss actions and 
securities class action litigation, particularly the elements 
of H.R. 5491, the Securities Litigation Attorney Accountability 
and Transparency Act.
    While I believe the securities litigation area is in need 
of a more comprehensive reform, this bill represents a modest 
first step in that direction.
    A recent indictment of the country's leading securities 
firm, Milberg Weiss, and revelations accompanying this 
indictment raise significant questions. Are plaintiffs' 
interests in class action suits really being treated in the 
most appropriate manner?
    The actions alleged in the indictment are egregious. Over a 
20-year period, Weiss and two of the named partners allegedly 
kicked back millions of dollars to individuals in exchange for 
serving as the named plaintiffs in more than 150 class action 
and shareholder derivative suits.
    The scheme allegedly manufactured suits for the firm and 
solidified its dominance in the arena of securities cases.
    If these allegations are proven to be true, the firm and 
the attorneys engaged have breached their fiduciary duty to the 
investors whom they are charged to represent.
    The dominance of the Weiss firm is unparalleled. There is a 
Anjan V. Thakor study of 755 securities class action 
settlements over a 10-year period. The firm handled 43 percent 
of the settlements, netting $1.7 billion in fees and expenses.
    The second nearest competitor came in at a meager 7.8 
percent, just under $200 million.
    Although dominant 10 years ago, Milberg Weiss allegedly 
continued to abuse its dominance by engaging in this scheme of 
kickbacks up until, reportedly, 2005, until after the U.S. 
Attorney began its investigation.
    With these allegations before us, and H.R. 5491, it is 
appropriate the committee review the industry practice and 
behavior to determine if investor protection requires us to act 
in a more direct manner.
    These actions, I feel, are justified, warranted, and to 
ensure reasonable investor protection, there may be a need, in 
fact, to do more, but the provisions of the bill, I think, at a 
minimum, are essential.
    Finally, there are those who question even the propriety of 
the hearing. Mr. Weiss, in his response to me, at our voluntary 
invitation for him to appear, questioned the committee's 
legitimacy and right to conduct this examination.
    This overlooks the fact that executives of Arthur Andersen, 
WorldCom, Enron, Global Crossing, mutual fund operators, Fannie 
Mae, and Freddie Mac, all of whom were facing some level of 
legal jeopardy, be it civil or criminal, did not dissuade this 
committee from engaging in inquiry and having representatives 
of those entities appear before this committee.
    It is essential, I believe, to determine whether this 
conduct was an aberrant act or merely an instance of a single 
individual, or more disturbingly, a pattern and practice within 
an entire industry.
    This is really what's known as oversight. It's never fun, 
but it's a job that this committee has to conduct in the 
interests of all engaged in our financial securities markets.
    Although allegations of political motivations have been 
made with regard to this hearing, I would take the committee 
back to the appearance of Frank Raines in October of 2004, and 
in that case, subsequent events, I believe, have proven the 
importance of this committee's work and of staying the course.
    And I wish to be very clear. Mr. Weiss is not under 
indictment. He actually continues his practice as of this 
moment, representing numerous plaintiffs in class action suits.
    He was voluntarily invited today to discuss the actions 
that the firm was taking to ensure that the alleged abuses 
would no longer continue. Instead, he has chosen simply to 
question the motivations of the committee as well as my 
personal motivation.
    His letter, of course, will be made public. I do consider 
the response an unprofessional one to this committee's inquiry.
    However, despite the absence of Mr. Weiss, whom I believe 
refuses to appear because further discussion and disclosure 
about the conduct would perhaps further degrade the firm's 
reputation, we do have a very distinguished panel, a panel that 
I know will not shy away from legitimate discussion on how to 
best provide investor protection.
    Whether the panelists agree with my perspective or not, I 
know they will state their opinions in an articulate manner.
    I believe investor protection is best served by seizing 
ill-gotten gains and returning them to the people from whom 
they were taken.
    Others believe, perhaps rightfully so, that upon successful 
pursuit of wrongdoers, seizing assets for the satisfaction of 
the plaintiff' attorney or the State government in which the 
suit is filed is balanced justice. I find that interesting.
    I do know this. If you are robbed and your money is taken, 
you really just want your money back. The victim does not care 
if the loss came as a result of fraudulent market operatives, a 
clever trial lawyer, or a deft regulator. If any of them took 
your money, you still feel robbed.
    I choose to defend the investors from all of them--to get 
the money and simply give it back.
    Mr. Frank?
    Mr. Frank of Massachusetts. Mr. Chairman, I am very 
disappointed in the calling of this hearing.
    No one questions the usefulness of a hearing on protecting 
investors. Indeed, I am disappointed that this committee has 
had so few of them and that the focus in this case is so 
narrow.
    But to have a hearing which you originally titled, ``A 
review of a pending indictment,'' is a terrible abuse of the 
important principle of the separation of powers.
    You said, Mr. Chairman, that previously people have been 
indicted who faced some degree of legal jeopardy, civil or 
criminal.
    To equate the possibility of a civil lawsuit, including one 
not yet filed, with a pending indictment, is as fundamental a 
misunderstanding of the requirements of the American legal 
system as I have heard propounded officially.
    I thought Mr. Weiss's letter to you was quite justified. I 
would ask to put into the record now the letters between 
yourself and myself and Mr. Kanjorski--
    Chairman Baker. Without objection.
    Mr. Frank of Massachusetts.--in which we made the point 
that a hearing called, ``to review the pending indictment,'' 
your original title, is a terrible mistake, and then, in 
response to our complaint, you said, ``Well, I'll change the 
title.'' But you haven't changed the focus. You have people who 
are going to talk about the indictment.
    You say, ``Well, Mr. Weiss wasn't indicted.'' True. The 
firm of which he is a named partner has been indicted. It is to 
discuss the indictment of the firm, and that is simply entirely 
inappropriate.
    You say, Mr. Chairman, you want to look at the pattern and 
practice here. Fine. You don't need to look at the indictment 
in this particular case to do that.
    And yes, I do question, frankly, the motives of this 
hearing.
    I want to protect investors. You know, we have recently 
read a lot about the backdating of stock options. Where's the 
hearing on that? Where's the hearing that the SEC is now 
looking into?
    You say, Mr. Chairman, ``Well, this is called oversight.'' 
I can understand why you would have to explain to people the 
meaning of the phrase ``oversight,'' since we as a committee, 
indeed as a Congress, have in recent years done so little of 
it. But oversight includes looking at whether or not there is 
or isn't enforcement.
    I would like for us to have a broad hearing on investor 
protection. The issues that you mention are legitimately part 
of that. But a review of a pending indictment? Have we become 
some kind of a court, some kind of a judicial body?
    Is this a longing for the days of the Schiavo bill when we 
decided that we would intervene and reverse the courts in 
Florida? Because that's what we are talking about, a review of 
a pending indictment. That is as far from a legitimate 
legislative purpose as I can see. Mr. Weiss's letter was 
entirely appropriate.
    Now, as to the substance here, yes, I want to look into 
this, but I want to look into a lot of other issues, as well.
    Let me say at this point, and I spoke to Mr. Kanjorski, who 
is busy now with a potential flood in his district, we recently 
had a decision by the circuit court striking down the SEC's 
effort to require registration of hedge funds, a very serious 
issue.
    I think the hedge fund issue and the role of hedge funds in 
this economy and the impact that they can have is a very 
serious one. This committee has ignored the issue.
    Mr. Capuano and I had written and asked for a hearing on 
that issue. We can't have that. Instead, we have to have a 
hearing on a pending indictment, because we apparently don't 
have time to have a hearing on the subject of hedge funds.
    Mr. Kanjorski and I are preparing legislation now that will 
at the very least restore to the SEC the power that it thought 
it had before that circuit court decision regarding hedge 
funds, and I would hope that we would find time for a hearing 
about the issue of hedge funds.
    We have the Securities and Exchange Commission deprived of 
authority that it wanted to exercise with regard at least to 
registration. That's a very serious issue and has a significant 
impact not just on investors but on the whole systemic issues 
before us.
    So there are a number of areas that we want to look at.
    I think what's happened is, and we see this with 
legislation filed to repeal parts of Sarbanes-Oxley, with this 
notion that the only thing apparently going into this hearing, 
the only problem that investors face is that some lawsuits 
brought in the name of investors are too zealously brought and 
not properly structured.
    Are there no other problems that investors face? Are there 
no other abuses? As I say, the backdating of stock options, the 
refusal of boards of directors to pay attention to advisory 
votes, the problem of executive compensation, the problem of 
boards of directors receiving substantial negative votes and 
the members of the shells having no ability to deal with that?
    I think what we--maybe, you know we get into titles, and 
you changed the name of this. You were originally calling it 
``a review of a pending indictment.'' I think you should have 
called it, ``The empire strikes back,'' because that's what we 
have here.
    We have obviously on the part of many of my colleagues the 
feeling that this business of interfering with the people who 
run corporate America has gone too far. This is just beyond 
where we should be. And so we're going to repeal part of 
Sarbanes-Oxley--not you, Mr. Chairman, but others have 
advocated that. We're going to push back here.
    Now, looking at every individual advice, I do believe that 
there is room--not room, but need for a revision of how 
Sarbanes-Oxley affects smaller corporations. The chairman and I 
both said that to Mr. Cox when he was here last. Let's have an 
ongoing, balanced look at how best to protect investors.
    But a hearing that ignores the backdating of stock options, 
a committee that has not looked into hedge funds and always 
refused to do that, where you have sentiment on your side in 
particular, some on ours for repealing part of Sarbanes-Oxley, 
to make that the thrust of our approach, to act as if the real 
problem here is that the poor corporate leadership is being 
unduly picked on and harassed, and who ignore all these other 
issues, and then to top it off, frankly, by I think 
grandstanding entirely inappropriately in violation of the 
appropriate role of Congress in a system of separation of 
powers, by having a ``review of a pending indictment'' for 
which I can certainly find no precedent, which is a good thing 
about the judgment of our predecessors, is to make a mockery of 
the role of this committee, and I am very disappointed.
    Chairman Baker. I thank the gentleman for his statement.
    Mr. Ryun?
    [No response]
    Chairman Baker. Mrs. Biggert?
    [No response]
    Chairman Baker. Mr. Castle, statement?
    [No response]
    Chairman Baker. Mr. Hensarling?
    Mr. Hensarling. Thank you, Mr. Chairman.
    And one, I want to thank you for holding this hearing. I 
listened very closely to the ranking member, whom I have the 
utmost respect for, but as I read some of the written 
testimony, we appear maybe to be at different hearings here.
    I think there are some very serious issues to be discussed 
here today about the attorney-driven securities class action 
suit, its impact upon our economy, and its impact upon 
investors.
    Much of what he said may have been accurate, it may have 
been inaccurate, but much of it, I believe, is frankly 
irrelevant.
    As I look at our panel, I don't see anybody from Milberg 
Weiss represented here today. We're not here to prosecute. 
We're here to legislate.
    Beyond a reasonable doubt may be a burden to convict, but 
it certainly is not a burden to legislate and frankly, I think 
this committee has an obligation, when we see serious 
headlines, to look into the underlying matters.
    It's not just simply the case of Milberg Weiss. I think it 
was just this last week that the Chicago Tribune broke a story 
of some serious accusations of general counsels pinching funds 
that had been lead plaintiffs' in class action lawsuits--
receiving massive legal fees for apparently no work.
    Again, I don't know all the facts underlying these, but 
these are serious accusations that I believe this committee has 
an obligation to look into.
    I think this is a perfect follow-up to our earlier hearing 
that dealt with the impact of our place in the global 
securities market.
    And we know that we're losing ground and we know that is a 
worrisome trend for our jobs, for our economy, and we know from 
our testimony that frankly, being an overly litigious society 
is at least one of the primary factors that are causing many 
companies to decide to list on other exchanges besides our own.
    And so I think, frankly, there's a number of practices we 
have to look at here today, and I look forward to hearing the 
testimony. I think much good could be done.
    And I'm particularly interested in this unique aspect of 
using the power of free enterprise and competition in selecting 
lead counsel for these cases and exploring its impact on 
investors, and I believe, frankly, a little transparency, a 
little accountability, a little free enterprise may go a very 
long way to protecting our investors, our jobs, and our 
economy.
    And I want to thank the chairman for calling this hearing, 
and I yield back.
    Chairman Baker. I thank the gentleman.
    Mr. Ackerman.
    Mr. Ackerman. I thank the Chair.
    Unlike Mr. Frank, whose remarks are always very measured, I 
would like to say that I am absolutely furious that we're 
having this hearing today.
    At the outset, let me say that I know Mr. Weiss. I'm a 
friend of Mr. Weiss, and in the interests of full disclosure, I 
don't believe he's ever contributed to my campaign.
    Nine years ago, approximately five members of his 500-
member organization did contribute to my campaign, none of them 
over $500. I want to say that at the outset.
    Mr. Chairman, there's a war going on in this country 
between investors and consumers on the one hand, and corporate 
America, that seeks protection from any kind of meaningful 
lawsuit, and that war is getting rather vicious.
    The Administration and their corporate friends are using 
any means possible to try to degrade the plaintiffs' bar and to 
discredit and defame any of the players therein, and will use 
any means at their disposal, and I am sorry to see that today, 
this committee becomes a tool in that war.
    You started out by saying, Mr. Chairman, that the, 
``allegations before us.''
    This is not a court. There should be no allegations before 
us. We're not here to judge allegations in an ongoing judicial 
proceeding. How dare we involve ourselves in that?
    It was just said by my colleague across the aisle that 
we're here to legislate. We are here to legislate. That is our 
job. We are not the judiciary. We're not the Justice 
Department. We're not the Administration.
    Mention was just made that what we should do for people who 
lost money in investments is to give their money back. If 
anybody even cared to read the indictment, to read the charges, 
there is no charge that any investor lost more than one penny, 
not even one penny.
    This is a fight over who gets to represent classes, not the 
loss of money to investors. That is not charged in this 
allegation.
    Let me also say that I am appalled, absolutely appalled at 
the fact that the committee has invited a sitting Federal 
judge, who has no business before this committee, to talk about 
a matter that's before the courts.
    I took time last night to call some Federal judges. They 
were absolutely aghast that a sitting Federal judge, under the 
canons of judicial ethics, would testify on a matter of 
changing the law on issues that affect people in his courtroom.
    I read his testimony. It makes reference to Milberg Weiss. 
And maybe if we get to that point, I'll ask him if it's not 
true that even Milberg Weiss has a current case before his 
bench. This is an absolute conflict.
    I think that the judge should recuse himself of all such 
cases if he's going to take an activist role and today become 
the poster boy for judicial activism to change the law under 
which he rules.
    Mr. Chairman, this is a hit. This is an axe job against a 
particular firm that has not been found or proven guilty, that 
has not even begun the case of defending itself. This committee 
participates in an ongoing smear before the trial even begins.
    I say shame on us. We should not be involved in that. We 
have legitimate issues to address. We have legitimate concerns. 
There is legislation purportedly before us that we're 
discussing today, but that's a ruse for what's really going on 
here.
    Mr. Chairman, you said in your invitation a moment ago, you 
invited Mr. Weiss and that he declined, probably because his 
appearance here would tend to degrade his firm.
    I think that's an important statement that you have made, 
knowing full well that the person to whom we refer is also a 
live target of this criminal investigation.
    And to say, ``Oh, too bad, the guy doesn't want to come 
here and defend himself''--this isn't a courtroom. But in 
making that statement, Mr. Chairman, which I absolutely agree 
with, that it would tend to degrade his firm--I would like to 
make a motion.
    May I, Mr. Chairman?
    Chairman Baker. The gentleman was recognized for an opening 
statement. At the appropriate time, the gentleman certainly 
will be recognized for a motion.
    Mr. Ackerman. In that case, I will wait for that 
appropriate time.
    Chairman Baker. I thank the gentleman. His time has 
expired.
    Mr. Feeney.
    Mr. Feeney. Mr. Chairman, unlike some others in this 
committee, I haven't made up my mind one way on whether there 
are serious abuses, and I just look forward to hearing the 
testimony.
    I will tell you, I'm both an attorney and a shareholder, 
and I'm interested in appropriate suits on my behalf as an 
investor, but what I'm not interested in as an investor are 
suits that are diminishing the value of my shares because of 
unnecessary defense or overzealous prosecution.
    So I think there's a balance in basically the private way 
we protect investors against deliberate or negligent fraud by 
management. I hope we strike that balance right.
    But I don't think enormous windfall profits to trial 
attorneys are the type of economic growth that I'm most 
interested in encouraging.
    So I'm here, anxious to hear the testimony.
    Chairman Baker. I thank the gentleman.
    Mr. Moore.
    Mr. Moore of Kansas. No statement, Mr. Chairman, except I 
am interested in hearing the testimony of the witnesses here 
today.
    Thank you. I yield back.
    Chairman Baker. I thank the gentleman.
    Mr. Pearce.
    Mr. Pearce. Thank you, Mr. Chairman.
    I find it amazing that we're told that we're not here to 
judge the allegations.
    As I review much of the hearings through the last month, 
I've listened as people have alleged that the financial 
services field is wrongly discriminating, charging too much 
interest to minorities, and those are allegations which are 
still in the process. We've listened to them. I think we will 
probably take action on those that are suitable, as we should.
    So I appreciate having the hearing today, because maybe we 
have a war between investors and corporate America, but we also 
have a love affair between investors and corporate America, 
because more Americans own stock now than ever before.
    And Mr. Feeney addressed the need of our investors to 
maximize the wealth, maximize their value without it having to 
be deteriorated by class action suits or judgments which are 
simply going into the pockets of our trial lawyers.
    So I personally am happy that you're having the hearing and 
I look forward to the testimony.
    Thank you, Mr. Chairman.
    Chairman Baker. I thank the gentleman.
    Mr. Crowley.
    Mr. Crowley. I thank the chairman for yielding.
    The question I have is, why are we here?
    I went to bed last night and before I went to sleep, I 
don't think we changed the Constitution prior to my going to 
sleep last night.
    And this morning, I am here. We're going to be judges this 
morning, we're going to--as the case is before our Federal 
courts, that will judge the performance or the actions of one 
particular company or law firm in this case, Milberg Weiss, 
wouldn't prudence be that we wait until our courts have acted 
before we look at this particular case and its effect on our 
markets?
    I would imagine that many shareholders would prefer that, 
and pointing up one of my colleagues' mentioning of 
shareholders and his owning some shares here, I'd prefer to 
wait and see what the courts have to say about this before we 
here make a judgment about any one particular case.
    I would also like to associate myself with my colleague 
from New York, Mr. Ackerman, in regards to a member of the 
judiciary here before the committee who may very well have to 
hear testimony on this particular case or similar cases like 
it. I have concerns about that, as well, and would associate 
myself with the remarks of the gentleman from New York.
    With that, I'll yield back the balance of my time.
    Chairman Baker. I thank the gentleman.
    Mr. McHenry.
    Mr. McHenry. Thank you, Mr. Chairman. Thank you for holding 
this hearing.
    I must disagree with my colleagues on the other side of the 
aisle. I think this is a very helpful hearing.
    They keep bringing up the firm Milberg Weiss, and I look at 
the committee hearing, and the title of it, Mr. Chairman, if 
I've the correct committee hearing notice, is, ``Investor 
protection: a review of plaintiffs' attorneys' abuses in 
security litigation and legislative remedies.''
    I certainly think this hearing is mostly likely about 
legislative remedies, but if they're bringing up Milberg Weiss, 
I assume that really pertains to a review of plaintiffs' 
attorneys' abuses in security litigation.
    Well, it's kind of perplexing they would bring up Milberg 
Weiss if that weren't the case, that perhaps that was a firm 
that was abusive and securities litigation.
    So Mr. Chairman, you know, I think it's perplexing that the 
other side keeps talking about this.
    A colleague said that this side of the aisle is a tool for 
our corporate friends. Well, Mr. Chairman, I would simply 
retort that perhaps it's the other side that's the tool for the 
trial bar.
    I yield back the balance of my time.
    Chairman Baker. I thank the gentleman.
    Mrs. McCarthy.
    Mr. Frank of Massachusetts. Will the gentlelady yield to me 
for 30 seconds?
    Mrs. McCarthy. I will yield to the gentleman from 
Massachusetts.
    Mr. Frank of Massachusetts. I would just point out to the 
previous speaker that the original title of the hearing was, 
``A review of the indictment.''
    So the notion that we are the ones who brought it up is, of 
course, about as far removed from reality as we get even in 
this hearing room from time to time.
    The original purpose--the original title of the hearing 
was, ``A review of the indictment.'' The chairman, when Mr. 
Kanjorski and I objected, wrote back and said, ``Okay, I'll 
change the title, but I won't change the focus.''
    In fact, the memorandum sent out by the committee in its 
first substantive sentence says, ``The law firm of Milberg 
Weiss and two of its partners were indicted.''
    So the focus on the indictment is the chairman's focus, not 
ours.
    I thank the gentlelady.
    Mrs. McCarthy. Taking my time back, again, I'm looking 
forward to the hearing, but I have to say that, you know, we 
have seen this Congress, certainly in the last 10 years that 
I've been in Congress, try to do everything they can to take 
away the ability of our trial lawyers to help people that 
rightfully should be able to sue.
    If we look at a number of corporations in the last several 
years that have abused their powers--and Enron certainly is 
right there on the top of them--that it is our job to protect 
certainly our constituents and certainly those that need to be 
protected.
    You know, I consider myself a pro-business person, but when 
I look at these CEO's, they're putting the stockholder over 
their employees 9 times out of 10, don't particularly care what 
their employees do, and that's why we're dealing with pensions, 
possibly losing health care, and we're wondering why the 
middle-income families in this country are feeling the pain.
    So I will listen to the testimony, and I am surprised that 
we have a sitting judge, and I don't know the law that much, 
but I am surprised that we have a sitting judge who possibly 
will be talking about a case that's not even put to trial yet.
    With that, I yield back the balance of my time.
    Chairman Baker. I thank the gentlelady.
    Mr. Campbell?
    Mr. Campbell. Thank you, Mr. Chairman.
    I have not been a Member of this Congress or this committee 
for very long, but if I'm not mistaken, this committee and this 
Congress, after the Enron, WorldCom, and so forth debacles, 
acted to have hearings and in fact took action on those items 
with Sarbanes-Oxley law and others long before many, if not all 
of the convictions in those cases occurred.
    In fact, it was only earlier this year that the primary 
convictions on Enron actually occurred, and I don't think that 
anyone on this committee believes that this committee or this 
Congress should not have acted with Sarbanes-Oxley or whatever 
remedy we felt was appropriate until now, some 3 years after 
the shareholders in the Enron and WorldCom cases had lost their 
money.
    What we are dealing with here is similar to those cases, is 
an allegation of wrongdoing upon which shareholders have been 
harmed, and I don't really see any distinction between hearings 
dealing with the allegations on Enron and WorldCom or the 
allegations here.
    So I thank you for the hearing, and I look forward to the 
testimony.
    Chairman Baker. I thank the gentleman for his statement.
    Mr. Clay.
    Mr. Clay. Thank you, Mr. Chairman.
    Mr. Frank of Massachusetts. Will the gentleman yield to me 
for 10 seconds?
    Mr. Clay. I yield to the gentleman.
    Mr. Frank of Massachusetts. The difference is this. No one 
who was under indictment was summoned. Those were hearings not 
about indictments.
    And you are talking now about a hearing where it said 
originally, ``a review of the indictment,'' and it was only 
changed for cosmetic purposes, and the invited witness was the 
named partner in the firm that is under indictment.
    And if the gentleman does not think there is a difference 
between someone who is under indictment in our system and 
someone who isn't, that's the core of our question.
    We are saying that at the point that an indictment comes 
and you are focused on a particular individual or a particular 
company, firm, whatever, with criminal liability, that ought to 
make a difference.
    I thank the gentleman.
    Mr. Clay. I thank the gentleman.
    It is alarming to see the discovery of additional alleged 
ways to defraud investors in their retirements--their 
children's college funds, trusts for their families, and other 
current or future plans for their investments.
    There is currently a case in court, no decision has been 
rendered, in which a law firm is accused of giving $11.3 
million in kickbacks to paid plaintiffs. The indictment alleges 
that the firm received well over $200 million in attorney fees 
from class action lawsuits over the past 20 years. There is a 
20-count indictment in this case.
    My concern centers on the alleged amounts of money involved 
and the fear of this not being an isolated case.
    These alleged schemes potentially are costing billions of 
dollars to investors. It is the investors who ultimately pay 
the judgments. We must stop this bleeding of our investment 
resources.
    However, in our haste to do something about this problem, 
we must not put in remedies that further complicate the 
problem.
    H.R. 5491, the Securities Litigation Accountability and 
Transparency Act, has been introduced as a remedy for this 
issue.
    I, as well as many others, have concerns that the loser 
pays provision of the bill could add a threat to plaintiff 
attorneys that would result in discouraging meritorious 
lawsuits as well as the intended frivolous lawsuits.
    Many are concerned that if a judge determined that their 
case was not substantially justified, the plaintiffs could be 
forced to pay the defendants' legal fees. This could eliminate 
those law firms that work on a contingency basis and only the 
large firms would be able to take the risk of these cases.
    I also have concerns about Section 4 of H.R. 5491. This 
provision removes the right of plaintiffs to choose their lead 
attorneys.
    The Consumer Federation of America writes that, ``Allowing 
judges to impose a competitive bidding process suggests that 
costs are the only relevant factor to consider when selecting 
counsel and that judges are better able than investors to 
determine what is in their best interest. Under the worst-case 
scenario, investors could be forced to accept representation by 
a lower-cost firm that lacks the expertise and experience of 
other available counsel and could lose their case as a 
result.''
    I look forward to hearing the witnesses' testimony and the 
discussion of these and other salient issues on this subject.
    I also commend Chairman Baker for bringing forth 
legislation and I hope that we can work on compatible 
legislation to address this need.
    I yield back the balance of my time.
    Chairman Baker. I thank the gentleman for his statement.
    Mr. Gillmor.
    Mr. Gillmor. Thank you, Mr. Chairman.
    I'll only say I think it's very timely, what you're doing, 
and I think it's very important that we examine some of the 
abuses in this area.
    And I yield back.
    Chairman Baker. I thank the gentleman for his delightfully 
constructive statement.
    Mr. Miller.
    Mr. Miller of North Carolina. Thank you, Mr. Chairman. I 
will make an opening statement, even though I did not intend to 
when I arrived, and I wonder, after all of the opening 
statements, what is really left for the witnesses to say this 
morning.
    The law recognizes that there are people we should be able 
to trust; we should be able to count on them to act on our 
behalf, and to deal with us fairly, honestly, and openly. Those 
are fiduciary relationships.
    A lawyer has that relationship with their client. A client 
should be able to count on their lawyer to act on their behalf, 
and to deal with them fairly, openly, and honestly.
    The law also recognizes that corporate officers are 
supposed to have that relationship with shareholders, and that 
shareholders can count on corporate officers to act on their 
behalf, to act fairly, openly, and honestly.
    If lawyers are betraying the trust of their clients, I'm 
outraged. I join in the outrage of those on that other side.
    But I also hope that they will join in the outrage that I 
feel if corporate officers are betraying the trust of 
shareholders to abuse their position, to take advantage, and to 
betray the trust of the people who should be able to trust 
them.
    Chairman Baker. I thank the gentleman.
    Pursuant to the notice of the vote on the Floor, it would 
be my intention, with everyone's concurrence, to recognize Ms. 
Velazquez, if she chooses to make any opening statement.
    I don't believe there's an additional member on our side 
that wishes to make an opening statement.
    I would ask the gentlelady to make her statement and then 
we would recess for the votes, much to the delight of our 
panel, I'm sure.
    Mr. Frank of Massachusetts. There is only one vote, 
apparently. There is a motion to adjourn.
    Chairman Baker. A long day.
    Mr. Frank of Massachusetts. So buckle your seatbelts, it's 
going to be a bumpy ride today.
    Chairman Baker. Yes. I'm looking forward to that 
excitement.
    There being no objection, Ms. Velazquez?
    Ms. Velazquez. Thank you, Mr. Chairman.
    I ask unanimous consent to submit my statement into the 
record.
    Chairman Baker. Absolutely, without objection.
    In that light, since we have a 15-minute vote, we will just 
come right back. We have one, and rather than rush any person 
to conclude their statement, we will stand in recess pending 
the single vote.
    Thank you.
    [Recess]
    Chairman Baker. I'd like to reconvene the meeting of the 
Subcommittee on Capital Markets.
    At the time of the committee's recess, I do not believe 
there was an additional member requesting recognition for 
opening statements.
    That being the case, I would now begin to move to our panel 
of witnesses.
    Mr. Ackerman. Mr. Chairman?
    Chairman Baker. Mr. Ackerman?
    Mr. Ackerman. Would this be the appropriate time?
    Chairman Baker. The gentleman is being recognized for what 
purpose?
    Mr. Ackerman. To make a motion.
    Chairman Baker. The gentleman is recognized.
    Mr. Ackerman. Let me just get myself organized here for a 
second.
    Mr. Chairman, pursuant to the rules of the committee, the 
Rules of the House, and section 2(K)5 of Rule 11, I move that 
the committee go into executive session, and I ask to be heard 
on the motion.
    Chairman Baker. The motion is in order. The gentleman's 
motion, however, is not debatable, and the committee would 
proceed--
    Mr. Ackerman. Mr. Chairman, I'm reading the rules, and it 
does not say that the motion is not debatable, and in the 
absence of an assertion, every motion is debatable.
    Chairman Baker. I'm advised by the committee 
parliamentarian that a discussion as to why the committee would 
go into a non-public consideration of a legislative matter is 
not a debatable measure, by precedent of the House.
    Mr. Frank of Massachusetts. Parliamentary inquiry, Mr. 
Chairman?
    Chairman Baker. The gentleman is recognized.
    Mr. Ackerman. Reserving the right to appeal the decision.
    Chairman Baker. Understood.
    Mr. Frank of Massachusetts. Mr. Chairman, you're ruling 
that the motion is not debatable when it comes to the 
parliamentarian, who is entirely legitimate in his ruling, so I 
will not contest that, but I did want to get clarification, 
because does that apply to the provision that says whenever it 
is asserted by a member of the committee that the evidence or 
testimony may tend to degrade, defame, or incriminate any 
person, that ruling says that even if you say the purpose is 
that the testimony would tend to defame or degrade or 
incriminate, that is still nondebatable?
    Chairman Baker. I am advised that is correct.
    Does the gentleman insist on his motion?
    Mr. Ackerman. Mr. Chairman, reserving the right to insist, 
Mr. Chairman, am I correct in saying that it was your statement 
that, ``Mr. Weiss chooses not to appear before the committee 
because that would apparently degrade''--your words again--
``his firm''?
    Does not that fit into Paragraph 5, ``Whenever it is 
asserted by a member''--that would be me, in this case--
``whenever it is asserted by a member of the committee''--and 
that would be you in this, case, too--``that the evidence or 
testimony at the hearing may tend to degrade, defame, or 
incriminate any person,'' etc.?
    You've said it, I've said it, and I've read the hit man-
like testimony of some of our witnesses, and they say it, and 
do it.
    And does this not say ``may'' and then we go into executive 
session?
    Because if it's important for us as legislators to hear the 
testimony of the witnesses, I don't think it is necessary to 
degrade this committee itself by dragging us into the act of 
degrading people who are accused, and who have not had the 
opportunity to defend themselves in court.
    Chairman Baker. If I understand the gentleman's inquiry 
properly, it is as to whether or not we should go into 
executive session. The gentleman's privilege motion is in 
order.
    The matter, however, to which I object, is the debate of 
the motion to go into executive session, pursuant to the 
parliamentarian's advising me that a debate of the motion to go 
into executive session thereby makes public the very issues 
which the gentleman would seek to make non-public by entering 
into executive session.
    Therefore, the matter before the committee, as I understand 
it at the moment, is your motion to go into executive session, 
which I then ruled is in order, however, it is not debatable.
    Therefore, the committee should immediately proceed--
    Mr. Ackerman. I would appeal the decision of the Chair.
    Chairman Baker. And the gentleman now moves to appeal the 
ruling of the Chair, which is also in order, which would--Mr. 
Ryun?
    Mr. Ryun. Mr. Chairman, I move to lay the appeal on the 
table.
    Chairman Baker. Which is also in order. Mr. Ryun is within 
his right to move to table your motion to appeal the ruling of 
the Chair.
    There being no further motion--
    Mr. Ackerman. I would request a roll call vote.
    Chairman Baker. There being no further motion in order at 
this time, the question is the matter before the committee, to 
which the gentleman from New York requests a roll call vote.
    The clerk will call the roll on the motion to table the 
motion to appeal the ruling of the Chair.
    The clerk is coming around to call the roll here. Just one 
moment.
    Mr. Ackerman. Mr. Chairman?
    Chairman Baker. Mr. Ackerman.
    Mr. Ackerman. I would ask unanimous consent, using my sense 
of math over my sense of justice, to withdraw the motion to 
appeal from the decision of the Chair and proceed directly to 
the vote.
    Chairman Baker. I appreciate the gentleman's offer, and I 
would first have to turn to Mr. Ryun and ask him to withdraw 
his motion to table the motion.
    Mr. Ryun. Mr. Chairman, I withdraw the motion.
    Chairman Baker. Mr. Ryun withdraws his motion.
    Mr. Ackerman is recognized. He withdraws his motion.
    We are now back to proceeding to our first witness?
    Oh, I understand. Now you want to vote on the motion to go 
into executive session.
    That motion is not debatable. That motion is before the 
committee, and we will now vote on the motion to go into 
executive session.
    The clerk will call the roll, please.
    The Clerk. Mr. Ryun.
    Mr. Ryun. No.
    The Clerk. Mr. Ryun votes no.
    Mr. Shays.
    [No response]
    The Clerk. Mr. Gillmor.
    Mr. Gillmor. No.
    The Clerk. Mr. Gillmor votes no.
    Mr. Bachus.
    [No response]
    The Clerk. Mr. Castle.
    [No response]
    The Clerk. Mr. Lucas.
    Mr. Lucas. No.
    The Clerk. Mr. Lucas votes no.
    Mr. Manzullo.
    Mr. Manzullo. No.
    The Clerk. Mr. Manzullo votes no.
    Mr. Royce.
    [No response]
    The Clerk. Mrs. Kelly.
    Mrs. Kelly. No.
    The Clerk. Mrs. Kelly votes no.
    Mr. Ney.
    Mr. Ney. No.
    The Clerk. Mr. Ney votes no.
    Mr. Fossella.
    [No response]
    The Clerk. Mrs. Biggert.
    Ms. Biggert. No.
    The Clerk. Mrs. Biggert votes no.
    Mr. Miller of California.
    [No response]
    The Clerk. Mr. Kennedy.
    Mr. Kennedy. No.
    The Clerk. Mr. Kennedy votes no.
    Mr. Tiberi.
    Mr. Tiberi. No.
    The Clerk. Mr. Tiberi votes no.
    Mr. Barrett.
    Mr. Barrett. No.
    The Clerk. Mr. Barrett votes no.
    Ms. Brown-Waite.
    [No response]
    The Clerk. Mr. Feeney.
    [No response]
    The Clerk. Mr. Gerlach.
    Mr. Gerlach. No.
    The Clerk. Mr. Gerlach votes no.
    Ms. Harris.
    [No response]
    The Clerk. Mr. Hensarling.
    Mr. Hensarling. No.
    The Clerk. Mr. Hensarling votes no.
    Mr. Renzi.
    [No response]
    The Clerk. Mr. Davis of Kentucky.
    Mr. Davis of Kentucky. No.
    The Clerk. Mr. Davis votes no.
    Mr. Fitzpatrick.
    [No response]
    The Clerk. Mr. Campbell.
    Mr. Campbell. No.
    The Clerk. Mr. Campbell votes no.
    Mr. Kanjorski.
    [No response]
    The Clerk. Mr. Ackerman.
    Mr. Ackerman. Aye.
    The Clerk. Mr. Ackerman votes aye.
    Ms. Hooley.
    [No response]
    The Clerk. Mr. Sherman.
    [No response]
    The Clerk. Mr. Meeks.
    Mr. Meeks. Aye.
    The Clerk. Mr. Meeks votes aye.
    Mr. Moore of Kansas.
    Mr. Moore of Kansas. Aye.
    The Clerk. Mr. Moore votes aye.
    Mr. Capuano.
    Mr. Capuano. Aye.
    The Clerk. Mr. Capuano votes aye.
    Mr. Ford.
    [No response]
    The Clerk. Mr. Hinojosa.
    [No response]
    Mr. Crowley.
    Mr. Crowley. Aye.
    The Clerk. Mr. Crowley votes aye.
    Mr. Israel.
    [No response]
    The Clerk. Mr. Clay.
    Mr. Clay. Aye.
    The Clerk. Mr. Clay votes aye.
    Mrs. McCarthy.
    Mrs. McCarthy. Aye.
    The Clerk. Mrs. McCarthy votes aye.
    Mr. Baca.
    Mr. Baca. Aye.
    The Clerk. Mr. Baca votes aye.
    Mr. Matheson.
    Mr. Matheson. Aye.
    The Clerk. Mr. Matheson votes aye.
    Mr. Lynch.
    [No response]
    The Clerk. Mr. Miller of North Carolina.
    Mr. Miller of North Carolina. Aye.
    The Clerk. Mr. Miller votes aye.
    Mr. Scott.
    Mr. Scott. Aye.
    The Clerk. Mr. Scott votes aye.
    Ms. Velazquez.
    Ms. Velazquez. Aye.
    The Clerk. Ms. Velazquez votes aye.
    Mr. Watt.
    [No response]
    The Clerk. Mr. Davis of Alabama.
    Mr. Davis of Alabama. Aye.
    The Clerk. Mr. Davis votes aye.
    Ms. Bean.
    [No response]
    The Clerk. Ms. Wasserman-Schultz.
    Ms. Wasserman-Schultz. Aye.
    The Clerk. Ms. Wasserman-Schultz votes aye.
    Chairman Baker. Mr. Sherman, how is he recorded?
    The Clerk. Mr. Sherman is not recorded.
    Mr. Sherman. Please record me as an aye.
    The Clerk. Mr. Sherman votes aye.
    Mr. Baker, I hadn't actually finished the roll yet.
    Chairman Baker. I'm sorry. Will members withhold, please?
    Mr. Frank.
    Mr. Frank of Massachusetts. Mr. Chairman, I have to explain 
that since I am on the committee ex officio, along with the 
chairman, in the absence of the chairman, I will not vote.
    I think it's only appropriate if the chairman is here for 
me to vote, since we are both here ex officio.
    I would have voted aye if I had voted.
    Chairman Baker. I respect and appreciate the ranking 
member's sense of fairness.
    The Clerk. Mr. Baker.
    Chairman Baker. I vote no.
    The Clerk. Mr. Baker votes no.
    Chairman Baker. Mr. Miller?
    Mr. Miller of California. No.
    The Clerk. Mr. Miller votes no.
    Chairman Baker. Mr. Israel?
    Mr. Israel. Aye.
    The Clerk. Mr. Israel votes aye.
    Chairman Baker. Mr. Shays?
    Mr. Shays. No.
    The Clerk. Mr. Shays votes no.
    Chairman Baker. Mr. Castle?
    Mr. Castle. No.
    The Clerk. Mr. Castle votes no.
    Chairman Baker. Mr. Renzi?
    Mr. Renzi. No.
    The Clerk. Mr. Renzi votes no.
    Chairman Baker. Mr. Fitzpatrick?
    Mr. Fitzpatrick. No.
    The Clerk. Mr. Fitzpatrick votes no.
    Chairman Baker. The clerk will report.
    The Clerk. Mr. Chairman, the ayes are 16 and the nays are 
20.
    Chairman Baker. The gentleman's motion has failed.
    We will now proceed to hearing the testimony of our panel 
of witnesses.
    Mr. Frank of Massachusetts. I think it's safe to say 
goodbye to most of the members who just dropped in to vote.
    [Laughter]
    Chairman Baker. I think the gentleman is correct. This is 
the first time, in a long time, that the Capital Markets 
Subcommittee has been full.
    Mr. Barrett. Yes, but Mr. Chairman, some of us did vote, 
while the other abstained from voting.
    Mr. Frank of Massachusetts. Which means I get all the more 
credit for showing up.
    Chairman Baker. But some are doing a great service by 
showing up, voting, and then leaving.
    Let us now proceed to our first witness.
    Mr. Ackerman. Mr. Chairman?
    Chairman Baker. The gentleman from New York.
    Mr. Ackerman. I request that the witnesses be sworn.
    Chairman Baker. The gentleman has asked that the witnesses 
be sworn.
    I have no objection to the witnesses being sworn, and if 
there is no further objection from anyone on the panel, or 
discussion, at this time, I would ask all witnesses please to 
rise.
    If you would please respond appropriately, do you swear to 
tell the whole truth and nothing but the truth, so help you, 
God?
    [Witnesses sworn]
    Chairman Baker. For the record, all witnesses answered 
affirmatively to the inquiry.
    I thank the gentleman.
    We will now proceed to hear our first witness on the panel, 
the Honorable Vaughn R., Walker, Chief Judge, U.S. District 
Court, Northern District of California.
    Let me, for all witnesses, make the normal advisory. We 
request the witnesses to constrain your remarks to 5 minutes. 
Your full written testimony will be made part of the official 
record, and we do appreciate your patience and participation 
here today.
    Judge, please proceed at your own leisure.

STATEMENT OF THE HONORABLE VAUGHN R. WALKER, CHIEF JUDGE, U.S. 
        DISTRICT COURT, NORTHERN DISTRICT OF CALIFORNIA

    Judge Walker. Thank you, Mr. Chairman, and members of the 
committee.
    It's a pleasure to be here to speak today to House 
Resolution 5491, and that is what I'm going to be talking 
about.
    In light of the comments that have been made, let me just 
say, in particular with reference to some of the comments made 
by Congressman Ackerman, that I think it's always appropriate 
for the Congress to examine and to investigate how the laws 
that it enacts work in actual practice. That's always 
appropriate for the Congress to do.
    Congress enacted much securities regulation legislation 
over the years, much of it having to do with how cases 
involving those laws are litigated, and I think it's quite 
appropriate for the House and for the Congress to examine that 
and from time to time, when appropriate, to hear from judges 
who are called upon to apply those laws to determine whether or 
not they are working in the way that Congress intended them to 
work.
    Let me say that I come to this particular subject matter, 
the subject matter of securities litigation, from a little 
different perspective than others.
    Most lawyers in these cases appear on one side or the 
other, always for the plaintiff or always for the defendant.
    Well, I've practiced on both sides, and now as a judge, 
I've practiced on all three sides of these cases, and it is 
from that perspective that I offer the comments on H.R. 5491.
    Class actions are, at bottom, a privatization of a public 
function, public law enforcement.
    It is as if a public law enforcement function has been 
delegated to private parties to bring these actions, to 
maintain these actions, to pursue them on behalf of parties who 
are injured, and it operates in the same way that public law 
enforcement does.
    The general public does not ask for law enforcement 
officials to initiate the machinery of justice, and in the same 
way, absent class members do not ask for these class actions to 
be initiated.
    The only direct attorney-client relationships that exist 
are those that exist between the named plaintiffs, or the lead 
plaintiffs, and counsel in the cases.
    There are, with respect to these cases, relatively few of 
the kinds of controls that are analogous in other contexts of 
public contracting, controls that ensure transparency, 
competition, and the other measures that we all believe are 
appropriate when a public function is delegated to private 
parties.
    Congress, in 1995, perceived that there were abuses in this 
area, and as you well know, enacted the Private Securities 
Litigation Reform Act of that year, imposing essentially two 
requirements: one, a lead plaintiff requirement; and two, a 
heightened pleading requirement.
    I would suggest to the committee that things have not quite 
worked out the way that I think Congress intended.
    Relatively few lead plaintiffs have come forward in the 
form of institutional investors, as was envisioned by Congress 
when it enacted the lead counsel provisions of the 1995 Act.
    Studies have shown that only about a fifth, perhaps a third 
of institutional investors have come forward to serve as lead 
plaintiffs, to monitor the litigation, to control and watch 
counsel, and to make important decisions about when to settle 
and how to settle and how to litigate the case.
    It is still true that most of these cases are lawyer 
driven, lawyer brought, and lawyer controlled.
    And secondly, the heightened pleading standards of the 
legislation, I think, have also not quite turned out the way 
that Congress intended in 1995.
    What those heightened pleading standards have essentially 
done is to front-end load much of the work of these cases to 
require a great deal of litigation at the very beginning and to 
increase, actually, the cost of the litigation, and to increase 
the cost to securities issuers by putting--by essentially 
incentivizing them to put a lot of cautionary language into 
their offering documents, cautionary language and other 
measures that essentially have very little informational value 
to investors.
    H.R. 5491 makes several steps that I think are very 
helpful.
    The disclosure provisions to require that counsel and lead 
plaintiff disclose the relationships that they have among one 
another is a very helpful measure--a requirement to disclose 
some of the interrelationships that have been troubling in this 
area.
    Secondly, the provision that provides for competition as a 
means by which a judge can impose some controls over the costs 
to investors of these cases to try to bring down attorney fees 
to a more reasonable level.
    In cases where there have been active large institutional 
investors as lead plaintiffs and in cases in which there has 
been competitive bidding in the selection of lead counsel, the 
costs to investors of the fees and expenses in those cases have 
been substantially less than in the traditional form of 
organization of those cases, and the recoveries in those cases 
have been just as significant in the cases that have proven to 
be meritorious.
    Two other points which I would make very briefly.
    That is, first, I think the committee should look at an 
additional provision that would put some limitation on the 
ability of counsel to aggregate a group of unrelated plaintiffs 
and thereby qualify for the most adequate plaintiff or lead 
plaintiff provisions of the act.
    That has permitted counsel to put together groups that are 
large, that are unwieldy, and that do not exercise any 
effective control over the litigation.
    So I would suggest that the committee may wish to look at 
that possibility.
    And finally, at the fee shifting provision of H.R. 5491, 
let me just say that would be a far more effective and measured 
way of getting at the problem which Congress attempted to get 
at with the heightened pleading requirement. It would 
essentially impose upon those persons who bring actions that 
are not substantially justified the costs of the action and, 
therefore, provide an incentive not to bring cases that cannot 
substantially be justified.
    So I would think that perhaps with, I'm sure, the changes 
that will be wrought through the legislative process, the 
fundamental ideas that are put forth in H.R. 5491 are worthy of 
very serious consideration, and Mr. Chairman, I am pleased and 
honored to have the opportunity to come and address the 
committee on this subject.
    [The prepared statement of Judge Walker can be found on 
page 90 of the appendix.]
    Chairman Baker. I thank the gentleman for his participation 
and his statement.
    Our next witness is certainly not new to the committee, the 
Honorable William F. Galvin, secretary of the commonwealth, 
Commonwealth of Massachusetts.
    Welcome, sir.

STATEMENT OF THE HONORABLE WILLIAM F. GALVIN, SECRETARY OF THE 
          COMMONWEALTH, COMMONWEALTH OF MASSACHUSETTS

    Mr. Galvin. Thank you, Mr. Chairman.
    Mr. Chairman, Ranking Member Frank, thank you again for 
your invitation.
    As secretary of the Commonwealth of Massachusetts, I am the 
chief securities regulator in Massachusetts, and among other 
provisions, my office administers and enforces the 
Massachusetts Uniform Securities Act.
    The work of my Securities Division includes the review of 
securities offerings, the listing of securities professionals, 
and significant enforcement work.
    Enforcement cases brought by my office have addressed some 
of the most substantial and timely problems in the financial 
marketplace: false and misleading analyst reports from national 
brokerages; market timing of mutual funds; abusive practices in 
the sales of annuity products; and fraudulent conduct by 
investment advisors.
    I must stress that the great majority of financial firms 
conduct an honest business and most issuers of stock are not 
defrauding investors.
    However, my office has repeatedly seen that small investors 
are at a serious disadvantage when they deal with the dishonest 
sellers of securities and dishonest companies.
    It is imperative that investors at all levels have 
effective remedies in cases when they are defrauded. Class 
action litigation has been an effective remedy, especially for 
small investors.
    My office also incorporates Massachusetts corporations and 
charters business entities in Massachusetts.
    I'm very sympathetic to the needs of legitimate 
businesspeople and their companies, but business corporations 
ultimately belong to their shareholders. Corporate executives 
and directors owe fiduciary obligations of care and loyalty to 
the corporation and its shareholders.
    I speak today for the interest of investors.
    If investors are to defend themselves from misconduct and 
fraud by officers and directors, we must preserve their 
remedies under the securities laws. Ultimately, giving 
investors strong and effective remedies will help prevent 
misconduct by company management.
    The way I see it, the right to civil litigation is an 
essential part of the free market. It's a free market force 
that guarantees that there will be financial consequences for 
fraud and wrongdoing, and it operates as a deterrent in the 
marketplace to continuing misconduct.
    My office has committed significant resources to 
enforcement. We are a strong cop on the beat, although the 
resources of any regulatory agency will always be limited.
    Regulators cannot police the financial marketplaces alone. 
Since the 1930's, investors' private right to sue has also 
operated to police and deter investment fraud. Both of these 
tools are essential to maintain the integrity of our financial 
markets.
    We are concerned that the provisions of the Securities 
Litigation, Attorney Accountability, and Transparency Act will 
stifle the ability of plaintiffs to obtain recourse when the 
securities laws are violated.
    While my office has returned more than $20 million directly 
to investors, I'm still concerned that many times so-called 
Fair Funds or pool compensation funds do not effectively reach 
defrauded investors. Civil actions offer a more precise remedy.
    Let me speak about some of the specific provisions that I'm 
concerned about.
    The loser pays provision. This provision may be seriously 
detrimental to the interests of retail investors because their 
attorneys will be required to take on greater financial risk in 
a class action.
    This provision would reverse the long-standing ``American 
rule'' that each party in an action should be responsible for 
its costs unless the action involves abuse of the legal 
process, potentially imposing on a defendant costs--on a 
plaintiff--that will chill investors and their attorneys from 
pressing legitimate claims.
    Litigation always involves many uncertainties. If there is 
a risk that the costs of defense counsel may fall on 
plaintiffs' counsel, lawyers and parties who cannot afford that 
risk are that exposure will back away from even meritorious 
investor suits.
    I note that Federal Rule 11 already requires that court 
filings not be made for any improper purpose, and that legal 
arguments be warranted, and that a party violating these 
requirements will be subject to court sanctions, including 
paying defendants' costs and legal fees.
    The loser pays provision of this legislation will add very 
little value to the current court rules.
    With regard to conflict of interest disclosure, I have no 
comment on this section, except to ask whether legislation that 
targets the practice of a particular law firm is the proper way 
to approach these issues.
    I note the law firm in question is currently the subject of 
a Federal indictment for the practices that this section would 
address, and it seems to me that the courts should be the ones 
to make those decisions as to the guilt of that firm before we 
pursue general remedial action.
    The court's role in selecting counsel for plaintiffs' class 
is a particularly troubling part of the bill. It's not clear 
why this section is necessary, and appears not to be advisable.
    The Private Securities Litigation Reform Act of 1995 
created a presumption that the investor with the largest 
financial stake in a case should serve as lead plaintiff and it 
should choose and negotiate with class counsel.
    This law has led to more institutional investors acting as 
lead plaintiffs in class actions, so these cases are often led 
by sophisticated plaintiffs with meaningful resources.
    If the proper party is acting as lead plaintiff, the 
selection of counsel should rest with them.
    Section 4 of this bill goes beyond requiring that the court 
should simply approve or disapprove counsel for the plaintiffs, 
and instead embroils the court in the selection of plaintiffs' 
counsel.
    The legislation will allow the court to employ alternative 
means in the selection and retention of counsel for the 
plaintiff, including a competitive bidding process.
    Clearly, a bidding process is not the best way to select 
counsel when significant issues are at stake in complex and 
technical litigation.
    This provision also raises disturbing constitutional 
issues, including the right to be represented by counsel, 
freedom of association, and freedom of contract. In the end, it 
is simply common sense that if the proper lead plaintiff is in 
place, that plaintiff is in the best position to select its 
counsel.
    I urge that this legislation not be adopted.
    Even after the passage of the Sarbanes-Oxley Act, we 
continue to see disturbing examples of fraud in the financial 
markets, from the failure and bankruptcy of the Refco commodity 
firm just a few months after its IPO went to market, to the 
unfolding stories relating to the backdating of executive stock 
options, there are still fresh examples of fraud and misconduct 
in the financial marketplace.
    But there is often a common thread running through these 
scandals, and that is the application of two sets of rules, one 
set for connected insiders, which will allow them to exact 
unjust profits from the marketplace, and the other set of rules 
for the average American investor that has them pay the price 
for the fraud of the connected insiders.
    Private suits play an important part in keeping companies 
honest.
    As successive Congresses have encouraged and often required 
American families to assume the risks of the marketplace for 
their pensions and other aspects of their financial future, I 
urge you to protect and not diminish this important tool to 
fight abuse and fraud against investors.
    Thank you.
    [The prepared statement of Mr. Galvin can be found on page 
87 of the appendix.]
    Chairman Baker. I thank the gentleman.
    In light of the pending motion to rise on the Floor, and 
not to put the next witness under any constraint with 
testimony, I suggest the committee now recess, record votes, 
and return as quickly as possible.
    [Recess]
    Chairman Baker. If I may, I'd like to reconvene our 
hearing.
    At the time of the committee's recess, we had just 
concluded, or Mr. Galvin had concluded his remarks, and we were 
to move to our next witness.
    I welcome to the committee today Mr. Theodore H. Frank, 
resident fellow and director, AEI Liability Project of the 
American Enterprise Institute.
    Welcome, sir.

   STATEMENT OF THEODORE H. FRANK, RESIDENT FELLOW, AMERICAN 
    ENTERPRISE INSTITUTE AND DIRECTOR, AEI LIABILITY PROJECT

    Mr. Frank. Thank you, Mr. Chairman, and members of this 
subcommittee, for your kind invitation to testify today.
    I serve as a resident fellow at the American Enterprise 
Institute, but I'm not testifying here on their behalf, and the 
views that I'm sharing here today are my own.
    There are areas of securities class action reform that are 
unavoidably divisive, but this bill should not be one of them. 
The small steps taken by this bill are non-controversial means 
to reduce corruption in the securities litigation process, 
benefitting shareholders and plaintiffs' law firms that play by 
the rules.
    Securities class actions affect almost every element of 
American business. Between 1997 and 2005, there were 225 
securities class actions brought against members of the Fortune 
500.
    From 1996 to 2005, securities class action settlement 
totalled $37 billion. Not all of that settlement money reflects 
wrongdoing.
    As Justice Stevens noted about securities class actions in 
a unanimous Supreme Court decision in March, even weak cases 
brought under the securities laws may have substantial 
settlement value, because the very pendency of the lawsuit may 
frustrate or delay normal business activity.
    There is a war, with investors on one side and lawyers on 
the other. It's worth noting that the majority of institutional 
investors, who suffer the greatest losses from stock fraud, 
don't want anything to do with the vast majority of securities 
litigation, because they recognize that they are made worse off 
by it.
    Settlements in such lawsuits provide money to the 
plaintiffs' left-hand pocket by taking it from their right-hand 
pocket with a substantial commission to the plaintiffs' 
attorneys involved for facilitating the transaction.
    In the WorldCom litigation, Forbes Magazine calculated that 
the lead plaintiff, Public Pension Fund, lost at least $2 
million net from its settlements, because it also held stock in 
the defendant banks, while the plaintiffs' attorneys, who 
donated generously to the elected official who approved the fee 
agreement, collected more than $300 million.
    This is ironic, given that the lawsuits against the 
bystander banks accused the defendants of having conflicts of 
interest.
    The recent indictment shines a small light on a small 
portion of a great problem of corruption in the plaintiffs' 
bar. The very fact of someone pleading guilty to accepting 
kickbacks exhibits that the PSLRA's attempt to impose market 
discipline on securities litigation has failed.
    If securities class action attorneys were facing market 
competition, there would be no windfall worth fighting for with 
millions of dollars in alleged under-the-table payments, much 
less the risk of prosecution.
    I would argue that sweeping reform is needed. This bill is 
not that sweeping reform, but it represents some incremental 
reforms that improve the system for honest players on both 
sides of the table, and therefore, should be uncontroversial.
    Most notably, courts differ over whether the PSLRA, the 
Private Securities Litigation Reform Act, permits competitive 
bidding. As a result, courts are reluctant to implement 
auctions, and the benefits auctions provide to investors and to 
honest plaintiff law firms are rarely realized.
    This bill fixes the statutory ambiguity by making 
competitive bidding to chose lead counsel explicitly 
permissible.
    Auctions should lead to lower-priced representation. When a 
court appoints a law firm within setting the fees, the 
attorneys' incentive is to maximize their take, but if a law 
firm is selected by auction, attorneys compete to provide the 
lowest reasonable bid.
    Empirical research supports these theoretical contentions. 
Both Judge Milton Shadur, a Carter appointee who has 
experimented with competitive bidding in his court, and 
Professor Michael Parin, in a 2006 working paper, find that 
auctions substantially reduced attorneys' fees and increased 
returns to the class.
    Parin's study predicted that fees could be cut by more than 
half. This money, which amounts to hundreds of millions of 
dollars a year, could be going directly into investors' pockets 
instead of those of attorneys.
    It further suggests that class action attorneys are gouging 
at a price twice what a fair market competition would produce, 
the equivalent of one's local service station charging $6 a 
gallon for gasoline on a normal spring day in 2006 without 
extenuating circumstances.
    In the case of an overcharging service station, one can 
choose to buy gas elsewhere. Unnamed class members have little 
recourse to limit fees obtained by plaintiffs' firms who did 
not agree to a market-based price at the front end.
    The language of the bill is permissive, not mandatory. 
Thus, courts will have the freedom to attempt alternative 
approaches, for example structuring auctions for when there 
isn't a trustworthy institutional investor as a lead plaintiff. 
This judicial discretion will provide helpful data on how best 
to help investors when Congress next revisits the securities 
laws.
    I'd love to talk about any of these issues in the more 
detailed testimony, written testimony, with any of the members 
who would like.
    [The prepared statement of Mr. Frank can be found on page 
75 of the appendix.]
    Chairman Baker. I thank the gentleman for his testimony.
    Our next witness is Professor James D. Cox, Duke University 
School of Law, Duke University.
    Welcome, sir.

 STATEMENT OF JAMES D. COX, BRAINARD CURRIE PROFESSOR OF LAW, 
                        DUKE UNIVERSITY

    Mr. Cox. I also thank the committee for inviting me to 
share my views, both in writing and orally here.
    Congressman Feeney mentioned earlier the necessity of 
achieving some balance, and I want to share and amplify some 
data points that are in my sworn statement that filings of 
securities class actions peaked in 2003-2004; there was a 17 
percent decline in 2005 from that of 2004.
    Following the PSLRA, we found a significant increase in the 
granting of motions to dismiss and motions for summary 
judgment.
    Before the PSLRA, the rate was about 19 percent on filed 
cases; after that, it's in excess of 40 percent, a 107 percent 
change in that short period of time.
    My paper captures some of the explanations for this, some 
of which is the PSLRA, some is doctrinal shifts that have 
occurred, and a number of things. All these have had a 
chastening effect on the number of filings of class actions.
    As to the question of auctions, I want to just mention one 
thing.
    Arranged marriages should always cast--we should always 
cast a skeptical eye toward any sort of arranged marriages, and 
I think we should do that particularly when we find in the last 
3 years a growing trend, and it is a significant increase in 
the trend of financial institutions stepping forward to apply 
and then be selected as a lead plaintiff.
    Our own surveys and canvassing of funds has revealed to us 
that the relationship that they have with the law firm, and 
they do look around for a variety and are not just generally 
married to one law firm, is important to their decision to 
become a lead plaintiff.
    I commend to the committee a review of the very thoughtful 
Third Circuit Task Force Report on Selecting Lead Counsel, 
where they conclude generally that auctions are a bad idea, but 
save them for rare situations, such as Judge Walker widely saw 
was happening in the Oracle case, the very first case to 
introduce auctions, and that would still be a possibility 
today.
    Courts do not prohibit auctions. They are permitted in 
situations where the court thinks that there's not an 
appropriate counsel here, and that's certainly true under the 
guidance of the Third Circuit Task Force Report.
    So I believe that auctions remain alive and well, a 
fallback position when the court believes that there's reason 
to question whether there's suitable and appropriate counsel 
there.
    As to the fee shifting arrangement, which is the Rule 11 
modifications that we find in H.R. 5491, let me just point out 
four problems with that.
    One, there's a certain internal inconsistency. What happens 
with this draft language that you have is you're adding a new 
section to the rule.
    Earlier what happened with the PSLRA is a mandated finding 
by the presiding court about whether Rule 11 has been 
satisfied. That has not been changed in H.R. 5491.
    So the life of the provisions that you're proposing would 
be in a situation where the judge has already made a finding 
that there's no reason for Rule 11 sanctions and so, therefore, 
you're likely to find counsel for the defendants seeing that 
this just continues the litigation burdens, the expense, and 
the bother of litigation, by so moving, so you need to look at 
internal inconsistency.
    The other thing you may want to ask is, why was it in the 
PSLRA that they changed Rule 11 for securities litigation? And 
the reason was they found that defense counsel was reluctant to 
move for Rule 11 sanctions in these cases.
    So now you're introducing where you were prior to pretty 
much PSLRA, and that was found to be deficient at that point. 
I'm not quite sure how things have changed.
    The other thing I want to just share with you, the third 
point I'll say, as a reader of advance sheets--that's what I'm 
going to be doing when I'm waiting for my 3:30 plane this 
afternoon--I can just share with you that I find, in reading 
those cases, you know, a lot of close questions when the 
defendant's motion to dismiss is granted on the pleading 
issues, that I don't think this is a slam dunk for thinking 
that there's a lot of Rule 11 cases that are going to be 
arising by tinkering around with the standards here, because I 
think that these are vetted within the law firms' offices and 
these are close cases, so I don't think you're going to find 
that.
    I will say the following, that courts have imposed, in a 
handful of instances, I must say, Rule 11 sanctions pursuant to 
the PSLRA.
    Whereas before the PSLRA, there were extremely isolated 
instances over 25 years of imposing Rule 11 sanctions, in the 
10 years since the PSLRA, you now find a handful of cases where 
that's happening.
    And the final question I would have is, anytime that we 
start talking about loser pay principles, anything that 
introduces friction into access to the courts, I just want to 
point out a wonderful phrase that's part of our democracy, and 
distinguishes our country from countries around the world, and 
it's the expression, ``Access to justice.''
    That's a wonderful expression. Let's be very careful before 
we start tinkering with anything that's going to cause that to 
be qualified in any substantial way without producing equally 
substantial benefits.
    The final thing I'd say is that the third provision in H.R. 
5491 calls for greater disclosure of information about how 
counsel was selected, conflicts of interest.
    I would fully support that. I believe it should not be 
isolated to securities class action.
    My sworn statement suggests that perhaps this is something 
that should be universal across class actions.
    Many judges do inquire very closely with respect to 
conflicts of interest, how the plaintiff is selected, counsel, 
in a class action, whether it be a securities class action or a 
non-securities class action.
    This is something that should be uniform across judges, and 
to the extent that all judges don't do that, then I think there 
are grounds, as there is proposed in this legislation, for 
making it uniform across all class actions.
    Thank you for your time, and I'll be glad to work with the 
committee and the staff in supplying other information that's 
come out of our studies of securities class action settlements.
    Thank you very much.
    [The prepared statement of Mr. Cox can be found on page 62 
of the appendix.]
    Chairman Baker. I thank the gentleman for his statement.
    I will start with questions.
    First, Secretary Galvin, I noted in your written testimony 
a concern about so-called Fair Fund distributions, but in the 
resolution of the Putnam settlement, which was $110 million in 
the aggregate, of which the State of Massachusetts received 
half, the SEC received half, there was, as I understand it, a 
distribution of $5 million back to Putnam Fund's shareholders.
    How was the determination made as to who was entitled, and 
to the amount each recipient ultimately received?
    Mr. Galvin. As a matter of fact, that process is still 
ongoing.
    We're trying to determine--most of the losers in that case 
were investors who operate through pension funds or 401k's.
    We're attempting now to work through a schedule with Putnam 
to get those monies back.
    My policy has been that I want to make sure that the 
victims are made whole first. The only monies that the State 
generally gets are monies that compensate us for our 
investigation or in some way are actually a punitive penalty 
for conduct. We do not preference our taking over the 
individuals.
    In the Putnam case, we're still in the process of 
negotiating the details of getting back people's money.
    Obviously, when you're talking market timing, calculating 
the exact damage is extremely difficult. When you're talking an 
aggregated fund, such as many of the victims here were, it's 
even more complicated, but we're still committed to that goal.
    My frustration, as referred to in my remarks, is that so 
often, for instance, in the research analysis cases, I think 
you'll find that most of that money is still sitting over at 
the SEC or under court jurisdiction where they're trying to 
figure out how to get it back to those who were harmed.
    I think class actions provide a better remedy for figuring 
out exactly who is most adversely affected. I think that that's 
an important tool to have when you're trying to make people 
whole, especially in complex financial cases.
    Increasingly, the victims of these types of financial 
crimes are indirect in the sense that they are members of 
pension funds, they are affected by involvement in mutual 
funds. Calibrating their precise loss is extremely difficult 
and time consuming, but I still think it's a goal.
    I share with you the idea that the important thing is to 
put people back, get people back their money, and if it's been 
stolen from them, to get it back for them.
    Chairman Baker. Well, why not, then, if you're going 
through the difficult task of making judgments about whom is 
entitled to the funds in the first place, deducting out your 
cost of administration? Certainly that can't be $50 million out 
of the $55 million settlement.
    Why would you not, after having established the fact and 
precedent that you wish to give money back.
    I believe in your statement you also indicated in the 
aggregate, through efforts of your office, you have returned 
about $20 million to investors.
    What is the legitimate reason for keeping $50 million at 
the State level as opposed to giving it back, or some 
significant percentage, to those identified recipients?
    Mr. Galvin. Well, I don't think we have.
    First of all, the Putnam case was a joint case between 
Massachusetts and the SEC, and obviously, as you know, from 
some of my previous appearances before this committee, I do 
subscribe to the theory that the SEC has superior jurisdiction, 
and obviously, in that regard, we give them some leeway in 
determining how these cases are decided.
    We've always preferenced Massachusetts investors, 
especially, and others.
    In the case of Putnam, you also had a number of investors 
from outside of Massachusetts who were adversely affected by 
the conduct. In that case, the SEC was the better party to 
speak for them, more than I was.
    Chairman Baker. Well, that's correct. The settlement was 
$110 million. SEC received $55 million of it. All of the $55 
million, pursuant to SEC explanations, will go to Fair Funds 
distribution, and that merely--
    Mr. Galvin. That hasn't been distributed. I mean, that's my 
criticism.
    Chairman Baker. Well, of $7 billion targeted by the SEC 
subject to Fair Funds identification as being ill-gotten gains, 
$5 billion has been collected in assets and over $3.1 billion, 
I believe, to date, has actually been distributed.
    So the progress is more significant than most would 
believe. I'm just getting to the principle, rather than actual 
operative facts, and that is, should we not give the money back 
to the individuals as opposed to retention for State government 
purposes?
    Mr. Galvin. My sympathy is to give it back to the 
individuals, and I think it's been proven by the actions we've 
taken.
    I do think this whole issue is an evolving one and I think 
it speaks to the larger issue of this legislation and what 
we're here about.
    You know, it's interesting that we're talking about 1995, 
the last time the Congress acted in this area, and I would urge 
you to look at all the changes that have occurred in the 
financial marketplace since 1995, and what we've uncovered.
    You know, it's not just because of State regulators and 
Federal action, but--and perhaps also the action of this 
committee.
    I think we're a lot more aware today of the risks that 
people have, of some of the misconduct that's going on, and the 
amounts of money that are affected.
    Just the mutual fund scandal alone, the Putnam--
    Chairman Baker. If I can sort of cap, because I'm getting 
ready--my time is going to expire in just a second, you do not 
have objection to the principle of a Fair Fund, but rather 
concerns about the operative distribution of funds assigned to 
a Fair Fund, is that--
    Mr. Galvin. If a Fair Fund is truly fair, I'm for it.
    Chairman Baker. That's what I needed to hear, and I have 
more on the subject, and I wanted to get to Judge Walker with a 
series, but I'm out of time, so I'll go to Mr. Frank at this 
time. I'm sorry, Mr. Ackerman.
    Mr. Ackerman. Will we have more than one round, Mr. 
Chairman?
    Chairman Baker. I suspect so, yes.
    Mr. Ackerman. Thank you, very much.
    Chairman Baker. Mr. Ackerman was asking as to process, will 
we have more than one round of questions, and I just wanted to 
disclose to everybody that that's our intention.
    Mr. Ackerman. Thank you.
    I just want to make it clear for those people who might be 
listening, or just reading the initial transcripts, of really 
what's going on here.
    What we've heard from the witnesses sounds very reasonable. 
What they've addressed verbally is really the issue, and the 
issue is legitimate, regardless of whether you have an opinion 
or not, or agree with one side or the other; the issue is real.
    But this is a ruse. This is a beard. The real purpose here, 
after listening to the reasonable witnesses that the majority 
presented, is not the statements that they said in which there 
was not one mention, I think, listening, trying to listen 
carefully, of a specific law firm, but the real intent was at 
the beginning to put into the record the voluminous pages of 
their testimony, which does almost entirely address itself to 
ripping apart and damaging the reputation of one particular law 
firm that hasn't yet been tried, certainly hasn't been found 
guilty.
    I'm still puzzled by the appearance of Judge Walker. I 
don't know how he justifies, and I heard his written testimony, 
but I read--I heard his oral testimony, I read his written 
testimony. He's here lobbying on a bill.
    I don't know if he's registered as a lobbyist. I don't know 
that he's recused himself, or is going to, in cases that come 
before him and deal with this matter--that deal with how 
attorneys who appear before him are going to get compensated.
    I know he has very strong opinions. He's expressed them, 
and appropriately so, at peer review and other forums. But the 
particular case that he cites, and he only cites one case by 
name, is the case that was cited initially in this hearing.
    The judge states that he's been on all three sides of the 
issue--the corporate side, the plaintiff side, and now the 
bench.
    I would contend that he's on two sides of the separation of 
powers issue--sitting on the bench, and now coming here trying 
to help us write the law, and perhaps if we don't like the law, 
we'll be on all three sides of that, and maybe we can veto it.
    On the testimony, Judge, that you present, you say, 
``Mention has been made here today of the recent indictment of 
Milberg Weiss law firm and two of its partners,'' etc.
    This was given out a couple of days ago, so I guess you 
knew that mention would be made here.
    You then say, ``The factual recitals of the Milberg 
indictment tell of millions of illegal kickbacks to lead 
plaintiffs, misrepresentations to courts, breaches of fiduciary 
duties to investor class members,'' quote and unquote.
    That kind of drags their name through the mud just by the 
very mention of it in the way--you go on to say, ``The 
defendants in that case are entitled to a fair trial''--that's 
pretty generous--``and the government may not be able to prove 
the facts alleged in the indictment'', etc.
    You don't even indicate that the facts might not be true. 
Your concern is the government may not be able to prove the 
facts, which in and of itself may be able to stand the smell 
test.
    But you go on to say, ``or persuade the courts that that 
those facts, if proved, constitute the alleged crimes,'' 
``but,'' you continue to say, ``the indictment is significant 
nonetheless.''
    So even if there's no case, the indictment becomes 
significant.
    ``These allegations need not''--your words--``need not be 
proved true beyond a reasonable doubt for them to awaken 
Congress to the need to review,'' etc., etc.
    So while in your courtroom you may have a standard of 
reasonable doubt, you're suggesting to people who make the law 
that we base the law on a case that may have no merit and 
legislate on some problem that may or may not exist, and I'm 
not saying that it doesn't, but that's your suggestion to us, 
and I don't think that's fair.
    Interesting, you go on to cite another case that was in 
the--reported in the Chicago Tribune a week ago about 
allegations, and it's interesting, you don't mention the name 
of this law firm, and you don't mention the name of its 
partners, and you don't mention the injustices that they were 
allegedly charged with.
    It's interesting that you just stay on Milberg Weiss.
    Chairman Baker. If the gentleman--
    Mr. Ackerman. You're very much to the point. You're on 
message.
    Chairman Baker. If the gentleman can begin to--
    Mr. Ackerman. And that's what concerns me.
    Chairman Baker.--to wind up, I want to make sure every 
member, and we will do multiple rounds to make sure the 
gentleman gets all of his questions in.
    Mr. Ackerman. Can I have another half a minute, just to 
finish the thought?
    I thank the Chair for his indulgence.
    And in one other place, you say, ``Significantly, in at 
least two of the class actions listed in the indictment against 
Milberg Weiss,'' etc., etc., Milberg Weiss was able to inject 
itself into''--that's a pretty loaded word, ``inject itself 
into the legislation with a client, and that they would not 
have met the criteria for most adequate plaintiff.''
    That's pretty much an opinion that we're not writing here.
    And you go on to talk about the Oxford--and I'm finished 
with this, Mr. Chairman.
    ``It's worth noting that in one of these cases, Oxford 
Health involved the largest kickback''--not even alleged--
``single kickback payment''--then you have ``alleged in the 
Milberg indictment.''
    I don't know if you read the whole indictment. Is it not 
true that Mr. Vogel, whom I believe is the person who is--who 
received the kickback, isn't it true that he was never 
appointed the lead plaintiff, never even represented the class?
    I don't know how you make this analogy without that even 
being the case.
    You're trying the case here, Your Honor, with only part, 
with only the prosecution side, and without full knowledge of 
the facts.
    Chairman Baker. The gentleman's time has expired.
    Was it his intention to afford the judge an opportunity--
    Mr. Ackerman. Oh, absolutely, if the Chair would--
    Chairman Baker. If the gentleman chooses to respond.
    Judge Walker. Thank you very much, Mr. Chairman, and Mr. 
Ackerman.
    First of all, we're not talking about a case which we're 
trying here in this committee room, Mr. Ackerman. The 
defendants in that case are going to have their day in court.
    There have been guilty pleas already in connection with 
that case, and of course that puts--
    Mr. Ackerman. Your Honor, just to be fair, the guilty pleas 
were by witnesses who were found guilty in other cases and are 
looking for deals, not any of the people accused in this firm, 
is that correct?
    Judge Walker. I'm thoroughly familiar with how this works, 
of course.
    Mr. Ackerman. I just want to make sure everybody else 
understood that.
    Judge Walker. And I believe that it is not incumbent upon 
this committee to wait until the resolution of a lawsuit to 
decide that a lawsuit or a criminal prosecution may raise 
questions which the committee would want to look at.
    What I think the committee should be interested in, and I 
hope is interested in, is how these cases work in actual 
practice.
    After all, the people who are charged with the 
responsibility of representing wronged investors carry very 
serious fiduciary obligations to those investors, and as 
attorneys, they have to do more than simply be free of a 
criminal conviction. They should avoid impropriety, and indeed, 
avoid the appearance of impropriety.
    What I said in that portion of the written statement, and 
what I think is significant for the committee, is that when 
there are charges of this kind, whether proven in a courtroom 
to a standard of criminal liability, nevertheless would be 
grounds for this committee to look at the process and examine 
it and determine whether it is working in the best interests of 
investors and the best interests of the economy.
    And the provisions of the proposed legislation, I believe, 
are substantial and should be seriously considered by the 
committee as a reform of this litigation process.
    And with all due respect, sir, judges do know something 
about litigation, and I think can offer some insights to the 
Congress when it comes to how litigation works in actual 
practice, and I would hope that the committee and Congress 
would hear from judges from time to time on that subject.
    Chairman Baker. The gentleman's time has expired.
    Mr. Ackerman. If I could just follow up?
    Chairman Baker. Okay, 30 seconds, please.
    Mr. Ackerman. It's always good to hear from judges.
    Was your viewpoint on this overturned by the Ninth Circuit?
    Judge Walker. There was a case that went up on a petition 
for writ of mandate in connection with a selection of class 
counsel that I made in a case. That was reversed on the grounds 
that the process of bidding in that case did not comply with 
the lead counsel provisions of the 1995 Act. That is correct.
    Mr. Ackerman. Thank you.
    Chairman Baker. The gentleman's time has expired.
    Mr. Hensarling?
    Mr. Hensarling. Thank you, Mr. Chairman.
    Although I have a number of questions for the panel, I must 
admit, after listening to a lot of opening comments after my 
own, I feel compelled to say a few things, because I'm somewhat 
taken aback by the reaction to this hearing.
    Some have protested the mere existence of this hearing 
because they didn't like its previous title.
    I happen to know, for example, that the most famous song of 
the Beatles, ``Yesterday,'' was once termed ``Scrambled Eggs'' 
before they chose to call it ``Yesterday.'' I'm not sure that 
the popularity of the song was ever burdened by its previous 
title.
    Some have protested this hearing because they see it as 
some type of interference in ongoing litigation.
    I think I've read everybody's biography, but let me ask the 
first question.
    Are any of you four gentleman directly involved in the 
Milberg Weiss litigation?
    [Chorus of noes.]
    Mr. Hensarling. Listening to the testimony, I don't frankly 
know how any reasonable person could come to that conclusion.
    Following the logic of some of our friends on the other 
side of the aisle, and I think this point was made earlier when 
we followed what appears to be the logic of some, Sarbanes-
Oxley would not have been passed 4 years ago, it would have 
been passed perhaps several weeks ago once Jeff Skilling and 
Ken Lay were finally convicted.
    Some have said that this is a hearing to attack, I guess, 
the reputation or integrity of a firm, and I think I've just 
witnessed an attack on one particular witness.
    I think I know why he's here, or at least I know one of the 
reasons that I'm very happy he's here.
    That is, there is a legitimate issue on the usefulness of a 
competitive bidding process in class action securities 
litigation, and whether you agree with it or don't agree with 
it, I think it would be very difficult to conclude that the 
justice who initiated this and has 15 years of experience in 
it, you would have to conclude that he's an expert at the 
issue.
    So with that, I would like to ask my first question to 
Judge Walker.
    I've seen at least three studies that make a fairly 
compelling case that in the competitive bidding process, fees 
have been significantly reduced as much as a factor of 50 
percent.
    In your own court, can you explain what you've observed, 
how the auction process reduces attorneys' fees?
    Judge Walker. Let me just tell you, Congressman, how it 
began.
    It began in 1990 when lawyers were contending for the 
leadership position in a securities class action, and the 
contention was all on very subjective grounds, personality 
conflicts. It was East Coast versus West Coast, that sort of 
thing, none of which seemed to me mattered as far as the 
interests of the investors were concerned.
    And I simply suggested to the lawyers that they submit 
proposals for the representation of the class based upon the 
price of their services and the quality of those services, and 
that was met, I must say, with silence in the courtroom.
    Subsequently, what I received was a joint proposal. The 
battle having been resolved, the parties gave up their 
respective positions and submitted a joint proposal.
    Well, needless to say, I didn't think that that was in the 
interests of the investors.
    And in fact, they had prepared a transcript of the meeting 
at which this joint proposal was worked out and it sounded very 
much like some of the things that you read about in price 
fixing cases. It sounded very much like that. I used to do that 
kind of work when I was practicing law.
    But in any event, that's how it began.
    And the results were very satisfactory from the point of 
view of the class. Recovery was had, a very substantial 
recovery. It came in early in the case. And the fees were 
substantially lower than the standard 25 percent, one-third fee 
that typically had been awarded.
    The same was true in other cases in which competitive 
bidding had been used in the selection of class counsel.
    Now, I must tell you that I do not advocate competitive 
bidding in all cases and I don't have--I'm not without some 
reservations about it.
    If you have a lead plaintiff which is a responsible 
institutional investor or other investor in whom the court can 
have confidence that the investor is monitoring the lawyers, 
interested in the litigation, is following it, and is making 
decisions of the kind that a client would make, there's no need 
for any kind of competitive selection process because that lead 
plaintiff will have done that itself, or himself or herself.
    In addition, it's not altogether clear what means of 
compensation is the most advantageous to the class.
    Is it a decreasing percentage to take advantage of 
economies of scale in litigation or is it an increasing 
percentage in order to incentivize the lawyer, or is it the 
kind of system that Judge Lewis Kaplan developed in the 
Southeby's case, in which he set a certain amount of money 
below which the attorneys would get nothing and above which 
they would get a percentage of the recovery?
    So I completely agree with Professor Cox that competitive 
bidding is a useful tool in the arsenal of a judge who is 
interested in protecting the interests of the class and 
ensuring that the class gets fair, good, and reasonable 
economic representation--
    Chairman Baker. The gentleman's time has expired.
    Judge Walker.--and we should not abandon that tool.
    Chairman Baker. I thank the gentleman.
    Mr. Frank.
    Mr. Frank of Massachusetts. Mr. Chairman, first of all, I 
want to deal with rather bizarre misrepresentations of our 
arguments.
    No one has suggested that it's inappropriate to inquire 
into the subject matter. No one has suggested waiting for 
legislation until trials are completed. These are total 
fantasies.
    What we are saying is that it should be possible to go into 
the subject matter without focusing on a pending indictment, 
and that title was relevant because the title indicated what 
the intent was, to focus on the indictment.
    And we did think that it was inappropriate for a 
Congressional committee to do a review of an indictment, and 
frankly, I think there was some indication of this being the 
purpose because, Judge Walker, I have to agree with one of the 
particular points Mr. Ackerman made.
    I'll be honest with you. I think it's disingenuous in your 
testimony where you say on Page 4 in your prepared testimony 
submitted earlier, ``Mention has been made here today of the 
recent indictment of the Milberg Weiss law firm,'' as if 
somebody else had brought it up and you felt compelled to 
comment on it.
    You obviously came here as part of a plan to discuss it and 
to be critical of the firm. I'm a great believer in the First 
Amendment. In some places that would be an appropriate thing.
    For a sitting Federal judge to come to a Congressional 
committee and pretend that it somehow just came up when it was 
part of an intent to focus on it is part of what we're upset 
about.
    Now, I do have a couple of questions.
    For Mr. Frank, in your first statement, you say, ``When 
Congress passed the 1933 and 1934 Acts, there was no private 
right of action. Such a right was created by judicial fiat and 
accepted as a fait accompli by the Supreme Court.''
    Now, judicial fiat and fait accompli are not usually words 
of approbation.
    Do you take the view that we would have been better off if 
such a right had never been created? Do you oppose the very 
existence of a private right of action?
    Mr. Frank. No, I didn't say that.
    Mr. Frank of Massachusetts. No, no, I know you didn't say--
you said it was judicial fiat and a fait accompli.
    I never heard anybody talk about fiat and fait accompli 
about things they liked, so you sound here critical of the very 
existence of a private right of action.
    Do you think it was a mistake to have created a private 
right of action?
    Mr. Frank. I think it's a mistake for the judiciary--
    Frank of Massachusetts. No, no. No, that's not the 
question.
    Do you think it was a mistake to have created a private 
right of action, simple straightforward question.
    Mr. Frank. It depends on the scope of the private right of 
action.
    Mr. Frank of Massachusetts. The one that was created. I'm 
not talking about one up on Mars.
    Do you think that it was wrong in 1946 that it was created 
by a district court opinion and accepted in 1971 by the Supreme 
Court? Do you wish that hadn't happened?
    Mr. Frank. Do you mean as a matter of a judicial 
decisionmaking or do you mean as a matter of public policy?
    Mr. Frank of Massachusetts. Public policy.
    Mr. Frank. As a matter of public policy, the right that was 
created was overbroad.
    Mr. Frank of Massachusetts. So would you want any private 
right of action in these cases?
    Mr. Frank. I would like some right of private action.
    Mr. Frank of Massachusetts. You had described that in 
writing, but you basically objected to the very existence of 
the right as it existed from 1971?
    Mr. Frank. No, I objected to the judicial--
    Mr. Frank of Massachusetts. As it existed?
    Mr. Frank. No, I objected--
    Mr. Frank of Massachusetts. You said it was overbroad. That 
means as it existed then.
    Mr. Frank. Well, to some extent I object to it, and to 
some--
    Mr. Frank of Massachusetts. Yes, all right, I want to get--
now, as to auctions, you said that auctions save money.
    Should the Federal Government use auctions and other 
governments use auctions when they're hiring outside counsel? 
The Federal Government may not do it as much. It does 
sometimes. State and local governments also do it.
    Do you advocate the use of auctions when State and local 
governments hire outside counsel, as a possibility?
    Mr. Frank. It depends on the situation.
    Mr. Frank of Massachusetts. Well, yes. Then you would say 
that in some cases say there should be auctions by them?
    Mr. Frank. There should be a competitive bidding process. 
That's, I think, a different concept than an auction. An 
auction implies that the only element is price.
    Mr. Frank of Massachusetts. So would you differentiate 
between the kind of selection process you would use in class 
action cases from what a, say, a local government maybe ought 
to do when hiring outside counsel?
    Mr. Frank. Well, it depends on whether there are named 
class members; it depends on a variety of--
    Mr. Frank of Massachusetts. All right. To be honest, I--
well, let me ask the other--how about the ``loser pays'' 
principle. Let me ask this.
    Judge Walker, the loser pays, principle, are you in favor 
in this case?
    Judge Walker. I do favor it--
    Mr. Frank of Massachusetts. Good. What about in patent 
cases, do you favor the loser pays principle?
    Judge Walker. Yes, and we have a modified form of a ``loser 
pay'' in patent cases--
    Mr. Frank of Massachusetts. So you're not just for the 
loser pay principle in class action cases--
    Judge Walker. Oh--
    Mr. Frank of Massachusetts.--you're for generally applying 
it?
    Judge Walker.--absolutely not. No, I think it would be very 
constructive--
    Mr. Frank of Massachusetts. Mr. Frank--
    Judge Walker.--I would just say--
    Mr. Frank of Massachusetts. No, no, you answered the 
question.
    Judge Walker. Well--
    Mr. Frank of Massachusetts. Mr. Frank, do you think that 
the loser pay principle should be applied in, say, patent 
cases, in cases where two businesses are suing each other?
    Mr. Frank. Yes. Yes, I do.
    Mr. Frank of Massachusetts. So you're for the loser pay 
principle in general, not just--
    Mr. Frank. Yes--
    Mr. Frank of Massachusetts.--in the class action cases.
    Let me say, Mr. Chairman, at this point, I would like to 
introduce into the record a statement from the Consumer 
Federation of America, which is on the bill where it 
expresses--``express our opposition to H.R. 5491,'' and also 
from the AFL-CIO associate general counsel Damon Silvers, 
``H.R. 5491 will protect perpetrators of corporate fraud and 
increase legal fees to plaintiff lawyers at the expense of 
working''--to Mr. Galvin, just one last question--
    Chairman Baker. Just, without objection, that's admitted.
    Mr. Frank of Massachusetts. Thank you.
    Are there other issues that you think we should address, 
because I think nobody has an objection, everybody is in favor 
of addressing in these hearings and legislatively the whole 
question of how best to protect shareholders, and the argument 
here is that this legislation will lead to better protection of 
shareholders.
    Are there other factors that you think we should be 
considering if we were to deal with legislation?
    Mr. Galvin. Absolutely. I think there's a multitude of 
issues.
    For instance, in the idea of remediation, one of the things 
that I've been most concerned about is the arbitration process.
    We force investors into arbitrations that are oftentimes 
rigged against them, and that's a condition of buying stock, 
and that's something that I think the Congress ought to be 
looking at.
    That actually affects many people in this country who don't 
go--can't go to litigation, that are trying to get recovery of 
losses.
    And there's one example.
    I think the whole issue of the pricing and the timing of 
options that was mentioned in my testimony is another.
    The hedge fund issue, which I think cuts across our entire 
financial services system, indeed our entire economy, that's 
another example of something that I think demands a lot more 
attention than it's been getting.
    Mr. Frank of Massachusetts. I thank the secretary, who has 
been a great leader in consumer protection and shareholder 
protection, and I hope that we can pursue these--
    Chairman Baker. The gentleman's time has expired.
    Mr. Feeney.
    Mr. Feeney. Thank you, Mr. Chairman.
    I think the testimony from all of our panel has been quite 
interesting.
    First of all, Your Honor, I want to tell you that I'm 
hardly offended by your being here. Matter of fact, I consider 
your testimony interesting, persuasive, and very much 
appropriate.
    Congress, collectively and individually, all the time gives 
advice to the president and to our sister branch in the 
judiciary. Sometimes we do it officially. It's called a 
resolution. Sometimes we do it unofficially. It's called 
criticism of judicial decisions. I engage in it on a frequent 
basis.
    And I can't ever remember being offended by something that 
a judge said off of the bench. I'm regularly offended by 
decisions that come from the bench.
    But for example, you know, Justice Breyer's recent book, 
Act of Liberty, I find terribly, terribly interesting, and I'm 
glad that he shared it with us. I wrote a full critique of his 
book because I thought it was wrong, but I'm delighted that he 
shared his view with us.
    And I think that your testimony, especially given your 
experience, is particularly helpful, from my perspective.
    Chairman Baker. Would the gentleman yield for just one 
moment, for just a procedural matter?
    Mr. Feeney. I'll yield under any circumstances, but I hope 
it doesn't come out of my time.
    Chairman Baker. Absolutely not. The gentleman's time will 
be honored.
    I understand Secretary Galvin needs to leave the hearing. 
Certainly we want to accommodate him.
    There were questions on the second round we'd like to 
forward. We will put those in writing and--
    Mr. Galvin. I apologize for having to leave, but I have 
made other commitments that require my departure.
    Chairman Baker. We certainly understand. I just wanted to 
make clear for the record that we would follow up with our 
questions by correspondence.
    Mr. Galvin. I look forward to working with the committee.
    Chairman Baker. I thank the secretary for his appearance.
    The gentleman is recognized on the remainder of his time.
    Mr. Feeney. Thank you very much, Mr. Chairman.
    We appreciated having the gentleman from Massachusetts with 
us.
    Professor Cox, I understand that there are significant 
portions of H.R. 5491 that you don't think are necessary, but 
you do agree that there are some problems, and you refer to 
them in your testimony.
    In a recent article, you actually analyzed some of the pay 
to play allegations and suggested that perhaps a total bar of 
appointments from a law firm that's made political donations is 
appropriate.
    As a former lawyer, I'm terribly troubled by some of the 
allegations, and we don't need to have a trial here of any 
particular names. We can talk about hypotheticals and legal 
ethics and appropriateness, and I think that all of us can 
hopefully agree.
    With respect to the pay to play practices, could you 
describe those as they may be happening in the real world out 
there, and tell us what, if anything, you think Congress may 
need to do, since you point out in your article, the American 
Bar Association has sort of a, you know, ambiguous inference or 
implication that this may be wrong, but none of the 50 States 
has apparently directly barred this.
    So maybe you can address what pay to play is, what the 
problem is, and how Congress may need to address it.
    Mr. Cox. Pay to play exists on several fronts. The front we 
looked at in terms of trying to find out if there is some 
relationship between, for example, State treasurers, State 
controllers, etc., decisions of funds under their control could 
become lead plaintiffs or not.
    And there are, you know isolated stories that we were first 
able to collect in the press that suggested this was a problem.
    Second thing we looked at was to go from State to State to 
find out how many law firms, plaintiff law firms registered as 
lobbyists.
    We did find, I believe, nine States where there were at 
least one, sometimes seven plaintiffs' law firms that had 
registered as lobbyists in those States.
    We teed up then the idea that many States had wisely, in 
light of the brouhaha that accompanied the Cendant settlement 
where there were allegations of pay to play, where Pennsylvania 
law firms mysteriously were making contributions to somebody 
running for statewide office in the State of New York, and then 
was selected as lead plaintiff in the Cendant litigation--
strange connection there, I would think, but leave that as it 
is.
    Many States then introduced procedures to insulate the 
decisions about becoming the lead plaintiff totally from those 
who would be political officers, etc., head of advisory 
committees.
    And we think that's a good practice, certainly a 
prophylactic requirement, and we think that, to just wrap this 
up, because I don't want to eat into your time needlessly, 
thinking that this is fair game, I think, when you're a 
presiding judge and you have an institution, I think it's worth 
asking those questions about--that probe exactly how it came 
that you selected this law firm to represent--
    Mr. Feeney. Well, professor, if I can interrupt, Judge 
Walker may do that. But should we require it of other judges 
who may not be as thorough as Judge Walker is?
    Mr. Cox. Yes. I found nothing objectionable in that portion 
of H.R. 5491 on that point.
    Mr. Feeney. Can I give you a hypothetical that is a little 
bit historical? I don't think it's in play today.
    Supposing that it turned out that a particular industry, 
like the tobacco industry, was sued by a group of 10 or 12 law 
firms who ended up in a settlement, having never needed to take 
the case to trial, that resulted in hundreds of millions of 
dollars per law firm, and supposing it turned out that those 
law firms had one significant thing in common, that they had 
made contributions to attorneys general in various States and 
their respective party treasuries; would that be an ethically 
troubling problem for you as a professor of law?
    Mr. Cox. The answer to that is that it would certainly be a 
troubling problem, just sort of given my makeup, okay?
    Whether I'm going to entangle that with ethics or not is 
another question.
    Going forward, I would think we'd want to learn from that 
experience and try to squeeze that out. I mean, now if we start 
doing it with lawyers doing that, I mean, I think we go right 
down the list and there's lots of other entanglements.
    I just speak as somebody who, you know, grew up in Kansas 
and lives in Durham, North Carolina. We see things a lot 
differently than maybe what goes on around here.
    But I find all those entanglements troubling.
    Chairman Baker. The gentleman's time has expired.
    Mr. Miller.
    Mr. Miller of North Carolina. Thank you, Mr. Chairman.
    I did not practice in this area. I did not bring class 
actions when I practiced law.
    But all the concerns that I have heard today, and about 
this subject generally, ring a bell with me, because when I 
went to law school, my understanding was that class actions 
were fundamentally different. The courts were adjudicating the 
rights of people who weren't there, who weren't sitting in the 
courtroom, who had never met their lawyers, and who had no 
control of the litigation.
    And for those reasons, the rules of court put a pretty 
strict burden on the judge to make sure that people were not 
abused, that people whose rights were being adjudicated were 
being treated fairly by the named plaintiffs who were different 
from the class members and from their lawyers.
    And looking at Rule 23, it seems to me that every concern 
that anyone has expressed today is already reflected in the 
rule.
    In appointing a counsel, first of all, the counsel for a 
class has to be approved by the court. At the end of the 
litigation, their attorneys' fees and their reimbursement of 
cost has to be approved by the court, with everyone put on 
notice, all the members of the class put on notice, and allowed 
to come forward and have their say, and the opposing party put 
on notice.
    And then the court has to enter findings of fact and 
conclusions of law, and is required to act in the best 
interests of the class members.
    And the criteria for selecting counsel for a class seemed 
to me to hit all the right considerations.
    The court has to consider the work the counsel has done in 
identifying or investigating potential claims in that action, 
the experience in handling class actions, other complex 
litigation and claims specifically of the type asserted in that 
action, a knowledge of the law, the resources the counsel could 
bring to representing the class.
    The court may also consider more than one applicant to be 
counsel for a class, and required to consider all those 
considerations, and also to require any applicant to propose 
terms for attorney fees and nontaxable costs. That's at the 
front end.
    And at the back end, they also have to approve the award of 
attorneys' fees.
    Judge Walker, it appears, based on just reading Rule 23, 
that if litigants or class members are having their rights 
seriously abused by their lawyers, if their lawyers retain 
them, then the judge responsible for the litigation, the judge 
assigned the litigation has seriously failed the duties given 
to the judge under Rule 23.
    I'm sorry. Is there some consideration in Rule 23 that you 
think should not apply in selection of counsel?
    Judge Walker. To the contrary, Mr. Miller. I think Rule 23 
should apply to selection of counsel in securities class 
actions.
    The problem is that we have the overlay of the lead counsel 
provisions of the 1995 Act, which make difficult the kind of 
comparative or competitive selection process that Rule 23 now 
envisions.
    I would say further that the comparative or competitive 
processes that Rule 23 now contains were not there in 1990 when 
the first bidding case came down. That basically is an 
outgrowth of the decisions made by judges, including myself, 
and the learning that the courts obtained through that process.
    But let me just comment further on a very troubling aspect 
of Rule 23 and all class actions, not just securities class 
actions, and that's the situation that the judge faces at the 
end of the litigation.
    At the end of the litigation, typically, the parties have 
settled. There's a fund of money. The defendants have agreed to 
pay in the money and they've agreed not to contest the 
plaintiffs' and plaintiffs' counsels' application for fees.
    And there is nobody there who really represents the class, 
other than the lead plaintiff, and if the lead plaintiff is not 
a vigorous advocate for the class, the judge really doesn't 
have an adversarial presentation, and that's what we need in 
court. That's the raw material with which we work, an 
adversary--an advocate on one side and an advocate on the other 
side, and through that clash, we try to reach a just result.
    And, in the absence of a vigorous lead plaintiff, you 
simply don't have the raw material to make these 
determinations.
    Mr. Miller of North Carolina. But Judge Walker, that seems 
to be contemplated in any Rule 23 case.
    In any class action, the court has to pause and consider 
that the plaintiffs before the court and their counsel are not 
like most plaintiffs and most counsel, most parties and their 
counsel, that there are people who are not there whose rights 
are being adjudicated.
    Any settlement, the court has to approve. The court has to 
look at it skeptically, and not just accept the arguments of 
those in the courtroom. The court needs to understand that a 
class action is different.
    This is understood by the rules for the entire time that 
Rule 23 has been in effect, the entire time that we've 
recognized class actions. Courts have to understand, judges 
have to understand this case is not like other cases.
    Judge Walker. And my point is--
    Mr. Miller of North Carolina. And that seems to be 
reflected already by the rules.
    Judge Walker.--is that that adversarial process is absent 
once the parties have resolved the case and gone away.
    Mr. Miller of North Carolina. Right.
    Judge Walker. And the judge only has one side of the case.
    Mr. Miller of North Carolina. And the rule says to judges, 
``You do not have the adversarial process you usually have. You 
cannot just listen to the people who are in the courtroom. You 
have to pause and consider the position of those who aren't 
here before you approve the settlement.''
    Judge Walker. That is true.
    Mr. Miller of North Carolina.--before you approve the 
settlement,'; before you approve attorneys' fees, before you 
approve lead counsel or counsel for a class.''
    Professor Cox--
    Judge Walker. That is true, but let me just add one 
comment.
    A judge just can't pull these facts out of thin air. A 
judge depends upon the parties to present the facts and to 
present them in an adversarial fashion, and when the 
adversarial process no longer exists, then the raw material for 
the kind of decision making you're talking about is simply 
absent.
    Chairman Baker. And can the gentleman begin to wrap up? 
You're over your time.
    Mr. Miller of North Carolina. I was going to ask Professor 
Cox if he thinks that Rule 23 does not reflect the 
considerations that apply in class actions, in how the court is 
supposed to supervise the conduct of lawyers for a class in a 
class action.
    Mr. Cox. I would concur with Congressman Miller, to be 
brief.
    And I would just say another thing, that as we've discussed 
this in the hallways at my law school and other law schools, 
one question we've always had is why judges don't more 
frequently resort to some other mechanisms to try and squeeze 
these fees down or evaluate a settlement.
    You know, you've seen some instances outside the securities 
arena of using special masters to come in and take a look at 
it, to introduce some sort of close scrutiny, and there are 
some mechanisms out there.
    But I agree, I think we overtax our courts. We need to 
expand the number of judgeships, etc. But at the same time, I 
think there's more that the judges can be doing here, and I 
would encourage that, with all due respect.
    Chairman Baker. The gentleman's time has expired.
    Mr. Campbell.
    Mr. Campbell. Thank you, Mr. Chairman.
    Judge Walker, in your oral testimony, I believe that--I'm 
going to paraphrase here, and ask you if it's correct--in class 
action securities litigation where there is not a sophisticated 
institutional lead plaintiff, that the lead--the attorneys in 
that case are basically acting, when they're representing 
hundreds of thousands of shareholders, in a public trust. Is 
that a fair clarification or fair--
    Judge Walker. I think that's a fair understanding yes.
    Mr. Campbell. Of what you said.
    Do either of the other members of the panel disagree with 
that?
    [No response]
    Mr. Campbell. No? Okay.
    And we have seen violations of that public trust in the 
past, or abuses of that public trust by plaintiffs' law firms, 
have we not?
    Judge Walker. That's certainly what appears to have 
motivated the 1995 Private Securities Litigation Reform Act, 
that Congress determined that there were problems that needed 
to be addressed.
    Mr. Campbell. Right. And I take it neither of you disagree 
with that?
    Mr. Cox. I don't know whether I agree with it or not. I 
mean, I generally supported some of the reforms, but not all 
the reforms of the PSLRA.
    Mr. Campbell. My point was simply that abuses of this trust 
that we just defined have occurred.
    Mr. Frank. Yes.
    Mr. Cox. The answer to that has to be yes, but on what 
scale, of course.
    Mr. Campbell. Right. Okay.
    Then the next question is, what do we do about it?
    And if these--which is what this hearing, I believe is 
about--if these attorneys are operating in a fashion of public 
trust, and therefore we have an obligation to ensure that that 
public trust is protected, does the existing laws, do the 
existing laws in this area adequately protect the public trust, 
or is there more that we should do?
    Now, I believe that Judge Walker implied that you believe 
there's more that we should do in that regard?
    Judge Walker. Well, that's right, and I agree entirely with 
Professor Cox as well, that there's more that judges can and 
should do.
    I think there's more that--
    Mr. Campbell. How do we sitting up here entice, or 
whatever, judges to do more that they should do, then?
    Judge Walker. Well, I don't know that you can entice them, 
Congressman, but certainly the provisions here in the Act, 
particularly the disclosure provisions, and I would suggest a 
provision governing aggregation and also a provision which 
allows a judge to either directly or indirectly engage in a 
competitive selection of class counsel when there is not an 
active lead plaintiff sophisticated and able to take charge of 
the litigation would be a very constructive step in the right 
direction.
    Mr. Campbell. Mr. Frank, you, I believe, stated in your 
testimony that you think that H.R. 5491 is a step or something, 
but not where you believe the law should go in this area; is 
that correct?
    Mr. Frank. That's correct.
    Mr. Campbell. Where do you believe it should go?
    Mr. Frank. Well, I think the loser pays provision of H.R. 
5491 is going to end up being toothless.
    I think the substantially justified standard isn't 
sufficiently different enough from the Rule 11 standard that 
judges exercising their discretion will do so to fee shift in a 
meaningful number of cases.
    I further think that there's an underlying fundamental 
problem with the securities class action where the lawsuits 
that are being brought are not to the public good in general.
    Mr. Campbell. How do we--
    Mr. Frank. Well, I think we need to limit the securities 
laws to cases where there's real insider trading, to where 
corporate executives are, for example, using misleading 
financial projections to get better bonuses for themselves and 
then view that as sort of a derivative action for the 
shareholder against the wrongdoing executive rather than these 
sort of lawsuits that make up the vast majority of securities 
lawsuits, where it's sort of one pocket feeding the other 
pocket and the only real winners are the lawyers.
    Mr. Campbell. So you're suggesting that the abuses we're 
talking about are better limited by actually changing the 
securities law so that those actions aren't raised at all?
    Mr. Frank. I think it's a fundamental problem in the 
current system, certainly.
    Mr. Campbell. Okay. Professor Cox?
    Mr. Cox. Well, I think one thing we want to do is think 
about providing a whole set of the right incentives, and part 
of the incentives is to try and have individuals go and pursue 
the assets of those who are responsible for the wrong.
    So the statement about money going from one pocket to the 
other pocket is a little overblown, I think you would have to 
admit to that.
    But it is an issue of circularity, where, you know, money 
goes out of a corporation if the corporation makes a payment, 
and the lead plaintiff continues to own that corporation, and 
you say, ``Well, that's okay, some of that's paid by the 
insurance company,'' and of course the lead plaintiff owns the 
insurance company, too.
    So, you know, there's this problem of circularity out 
there, and I think everybody identifies that, and if you're 
going to deal with the circularity problem, then you have to 
really figure out where the money is, and the money is going to 
be with the people who are responsible--the CEO's, the 
investment bankers, and others who have aided in the fraud.
    And to be able to do that, if you're willing to do it, 
means you have to rethink the role of aiding and abetting 
responsibility or at least the definitions of what is a primary 
participant, so that those avenues can be pursued if you're 
going to cap or limit the recoveries against the corporation to 
overcome the circularity problem.
    That's where I would start with things--redirect the money.
    Mr. Campbell. Isn't the purpose of looking for--having a 
lead plaintiff that is sophisticated, institutional, etc., is 
that, you're right, I don't see how we can here sit here and 
create any legislation which can judge on this circularity in 
every single instance, but--
    Mr. Cox. Oh, yes, you can. You can do a number of things.
    One, you could rethink about how you design the 
proportionate liability standards that were introduced by the 
PSLRA so that perhaps that shields certain individuals from 
liability, and then you could also reverse Central Bank of 
Denver, which prohibited aiding and abetting under the anti-
fraud provision.
    Yes, Congressman, there are some things you could do.
    Mr. Campbell. I would like either Mr. Frank or Judge 
Walker's comment on that, and then I'll yield back, Mr. 
Chairman.
    Judge Walker. Well, I'd simply add this to our discussion 
of lead plaintiffs, Congressman.
    If you were the trustee of a substantial investor that had 
been wronged in one of these frauds, you would face a troubling 
decision that you'd have to make.
    Do you come in as a lead plaintiff and try to represent a 
class of people that you've never seen before and have no 
obligation to, or would you attempt to opt out of the class and 
pursue your own individual action?
    And more and more institutional investors are doing the 
latter.
    So we don't have a sufficient incentive, it seems to me, in 
the present scheme of things to provide a reason for the kinds 
of institutional investors or investors that we want to see 
come in and monitor these cases, and Congress might very well 
give some consideration to how it would change things to give 
sufficient incentives to the kinds of monitors that we think 
are appropriate to watch over these cases.
    Chairman Baker. The gentleman's time has expired.
    Mr. McHenry.
    Mr. McHenry. Thank you, Mr. Chairman.
    I certainly appreciate you holding this hearing. I think 
the panelists have been very good in their testimony. I enjoyed 
hearing you. I'm sorry that Secretary Galvin had to leave; I 
had a few questions for him.
    But if I could start with you, Mr. Frank, in your 
testimony, you provide evidence that 70 percent of securities 
settlements in 2004 were, ``actually nuisance settlements of 
under $10 million, an amount that to settle is cheaper than 
litigating,''.
    And you term these settlements, ``effectively legalized 
extortion.'' Those are strong words.
    Can you elaborate on that?
    Mr. Frank. Certainly.
    We have three stages of litigation.
    One, the cases that are dismissed right up front because 
they don't even meet the PSLRA's pleading standards. Two, the 
cases that are litigated and then thrown out on summary 
judgment. And three, the cases that are settled.
    And if you look at the distribution of settlement amounts, 
you find that a stunning number of these are just very small 
amounts.
    Surely not all of the settlements under $10 million are 
fraudulent, but for a lot of corporations, you're facing a 
litigation that's very expensive to try, very expensive to get 
to the summary judgment stage or past the summary judgment 
stage to try. It takes up executive time. It takes up corporate 
time. And it take attorneys' fees.
    And in many cases, it's just cheaper to settle, pay what is 
effectively an extortionate amount because the plaintiffs' 
lawyers are saying, ``You give us money or we'll put your 
corporation through all of this and even if you win, because 
there's no loser pays, you don't get any of your money back,'' 
and it's a rational decision for the corporation to just pay 
off the plaintiffs' attorney.
    Mr. McHenry. What is your remedy?
    Mr. Frank. Well, one remedy for this would be a real 
definitive loser pays provision that takes it out of the hands 
of the judge and just says, you lose a case that you bring to 
trial, you're compensating the defendant for what they've 
done,'' and that's the way it's done in every western democracy 
except the United States.
    Mr. McHenry. Well, Secretary Galvin actually says that, in 
effect, that our enhancement of Rule 11 is not effective.
    Can you speak to that--what we offer in our legislation?
    Mr. Frank. Certainly.
    There are various differing standards one could use for fee 
shifting.
    Right now, we have a Rule 11 standard that is used in 
perhaps maybe 1 percent of all the cases, if that many, and 
probably less than that.
    The current legislation wishes to change that from the Rule 
11 standard to a standard of substantially justified, which is 
the same standard in Federal Rule 37, the same standard in the 
Equal Access to Justice Act, though it's actually a little bit 
stricter than that because it requires the winning party to 
prove that it wasn't substantially justified, which is the 
opposite of the role it takes in the Equal Access to Justice 
Act.
    But at the end of the day, it ends up with judicial 
discretion, and if you talk to securities lawyers, they'll tell 
you that judges don't like fee shifting if its' discretionary. 
They just want the case out of their courts, and if there's no 
fee shifting, then they don't have to have further proceedings 
on how much the fees are.
    Mr. McHenry. Professor Cox, you actually have a similar 
statement in your testimony that says, ``not likely to be 
effective for several reasons.'' And you mention some of these 
in your testimony.
    Could you elaborate?
    Mr. Cox. Yes.
    First of all, I think Ted is right. I think that judges 
tend to be reluctant to impose that.
    But more likely, under the old rule, individuals tended to 
not move, or the defendants tend not to move to it, again for a 
variety of reasons.
    They had sometimes the burden of proof, wanting to put the 
litigation behind them, frequently repeat players with the 
parties on the other side.
    You know, so there's a variety of issues there.
    As to judges' unwillingness to impose Rule 11, I defer to 
the one judge in the room to talk about that.
    But I would just say that the standards that apply in Rule 
11 or that were introduced by the PSLRA, or that would be 
introduced by this litigation, are sufficiently tolerant to 
create a lot of ambiguity into the process, which is unlikely, 
therefore, to lead to the results that you and others would 
like to achieve.
    Mr. McHenry. Professor Cox, do you support a loser pay 
provision?
    Mr. Cox. Not at all.
    Mr. McHenry. Not at all?
    Mr. Cox. No.
    Mr. McHenry. And why would that be?
    Mr. Cox. Well, I think I mentioned the phrase earlier. I 
think it really does fly in the face of an important part of 
American society, which is access to justice, and the loser pay 
rule really operates to the disadvantage of those who are 
outside the corridors of power or wealth.
    Mr. McHenry. I would sort of point to power and wealth with 
the $9.7 billion award and settlements just last year, and the 
25 to 30 percent the trial lawyers netted off of that, so 
you're talking about a $3 billion industry, and you're talking 
about them acting as if they're not in power.
    I mean, I think they're fully in power, and raking the 
shareholders over the coals.
    Mr. Cox. You know, I thought the plaintiffs in these cases 
were the investors, and many of them are widows, widowers, and 
orphans, individuals--
    Mr. McHenry. Yes, but you're talking about $3 billion that 
trial lawyers net off of this type of action, $3 billion, and 
if I may--
    Chairman Baker. The gentleman needs to begin to wind up.
    Mr. McHenry. So I would point out that the idea that these 
people are out of power and indigent is almost laughable on its 
face when you have--
    Mr. Cox. I don't think it's laughable at all. I think that 
you need to provide rewards for the high cost of conducting 
this litigation--the search costs, the uncertainty of the 
process, and the 40 percent of the cases that get dismissed.
    If you ran a business like that, you'd want a pretty good 
profit margin on the products that you did sell, Congressman.
    Mr. McHenry. And I would just say that's one heck of an 
award, $3 billion.
    If I may finish with you, Judge Walker, you know, if you 
could speak in terms of a lower plaintiffs' attorney having to 
pay, and Rule 11, if you could just touch on that, based on 
your experience.
    Judge Walker. It seems to me a more objective standard than 
Rule 11 would be useful for the subcommittee to consider, for a 
number of reasons.
    First of all, Rule 11 applies in all sorts of cases, not 
simply securities cases, and there might be certain standards 
in a securities case that you might want to impose that would 
not necessarily be applicable in cases generally.
    Secondly, Rule 11 is subject to judicial interpretation, 
which changes and evolves over time.
    As Professor Cox pointed out, Rule 11 issues generally 
arise at the tail end of litigation, and nobody wants to deal 
with that at the end of litigation, because by this time, the 
case is pretty much over.
    Rule 11 sanctions are difficult. They're essentially 
impractical to impose. And that's the reason that there are so 
few instances of them being imposed.
    Finally, they relate to the signing of pleadings, 
primarily, rather than the conduct of litigation, and I think 
it would be useful for the committee to consider a sanction or 
a fee shift that would bring into the equation not just what 
was written in the pleadings, but how the litigation was 
conducted.
    Chairman Baker. The gentleman's time has expired.
    Mr. Davis.
    Mr. Davis of Alabama. Thank you, Mr. Chairman.
    Gentlemen, let me pick up where Mr. McHenry left off, on 
the loser pay issue.
    Judge, as a former lawyer and a former assistant U.S. 
attorney, I'm reluctant to question a Federal judge too 
strongly, but I'm not sure--
    Judge Walker. It happens all the time.
    Mr. Davis of Alabama.--I'm not sure that I followed your 
last argument.
    You mentioned some of the defects in relying on Rule 11 as 
a remedy for frivolous claims, and you mention the fact that, 
well, the litigation is over, it's hard for the court to go 
back in and address these issues.
    Presumably, losers pay, obviously, happens after the 
litigation is over, too, so why wouldn't those same arguments 
cut just as strongly against loser pay?
    Judge Walker. Well, if it were required that there be an 
award at the end of a case in which a defendant had prevailed, 
judges would have no choice but to get into the issue.
    But under the Rule 11 standard that now exists, it's not 
mandatory, it's not required, and it's an unpleasant piece of 
business.
    And judges are no different from anybody else. We don't 
like to do what's unpleasant.
    Mr. Davis of Alabama. Judge, let me ask you one practical 
concern.
    You've been on the bench a while, and I was a law clerk for 
a district judge in Alabama, and we are both well aware that it 
takes all phases of litigation a very long time to move.
    One concern that I have is that losers pay would weave 
potentially another 9 to 10 months worth of litigation, because 
under--and I think we all understand at this point in the 
hearing, we're not talking about a hard scenario that every 
plaintiff who loses pays.
    You would have, the district judge would have the capacity 
to do an analysis of whether there was a substantial basis for 
the claim. There would be some extra layer of scrutiny.
    That layer of scrutiny would presumably require hearings, 
possibly evidentiary hearings, possibly just arguments on 
motions. They would have to be scheduled.
    There would no doubt be motions for additional hearings. 
There might be a motion for reconsideration of your first 
ruling. There might be an appeal of your ruling at the same 
time the appeal of the underlying case was going on.
    It seems to me that we would weave a lot of complexity into 
the end of cases.
    And I suppose it raises another question.
    Since the appeal of the underlying ruling would be going on 
at the same time, what happens in terms of attorneys' fees 
issues and those kinds of questions if a judge were to somehow 
rule that, ``I think a plaintiff should pay,'' and somehow the 
judge was reversed on the underlying ruling on the merits; what 
would happen then?
    Anybody? Mr. Frank, have you thought about that kind of a 
standard? What would be the remedy for a plaintiff who ended up 
winning on appeal and after a judge found that claim was not 
entitled to paying?
    Mr. Frank. Well, it's the same remedy that a defendant has 
after losing, which is you move for a stay of the ruling 
pending appeal and the appeal either succeeds or it doesn't 
succeed, and if the appeal succeeds, you've never paid a penny, 
and you get your bonds back, and if the appeal doesn't succeed, 
then the defendant gets to execute--
    Mr. Davis of Alabama. Well, that sounds good, but for the 
fact of attorneys' fees.
    Judge?
    Judge Walker. The award is not payable until the judgment 
is final, and the final--
    Mr. Davis of Alabama. What about attorneys' fees that 
accumulate in the interim--
    Judge Walker.--appeal has been exhausted.
    But distinguish, Congressman, if you would, determining the 
amount of fees from whether fees should be awarded. It's the 
latter that is complicated.
    Determining the amount of fees is generally pretty 
uncomplicated.
    Mr. Davis of Alabama. Yes, I think you're right.
    Judge Walker. It's generally just hours and a reasonable 
fee rate and--
    Mr. Davis of Alabama. The point I was making, though, 
gentlemen, is obviously there's a period of time in which a 
litigant--these cases don't happen on contingency, typically. 
There's a period of time in which a litigant is having to bear 
the legal cost of not just adjudicating the appeal or pursuing 
the appeal, but also the legal cost of challenging the finding 
of pay by the plaintiff.
    And my only concern--I don't want to spend my whole 5 
minutes on this--my only concern is that if you have multiple 
tracks that are being pursued, an appeal plus the question of 
who pays, that it simply builds a lot of complexity and a lot 
of burden for the plaintiff.
    Judge Walker. Well, but would you use that logic then to 
say that a plaintiff who is successful should not recover fees?
    And we have lots of provisions, and quite properly--
    Mr. Davis of Alabama. What I would say, Your Honor, is that 
if we contemplate--
    Judge Walker.--that the plaintiff is entitled to fees, and 
so we have to go through that determination.
    Mr. Davis of Alabama. But the question is, if we're going 
to make a change in the rules as we know them, who has the 
burden of persuasion?
    And I would argue that if there are reasons of complexity, 
reasons of redundancy, that might argue against a change, 
perhaps we should err on the side of caution.
    Let me raise another line of questions.
    Let me go back to Professor Cox's point. He and Mr. McHenry 
had an exchange over the question of is the little guy, is the 
little plaintiff, excluded from bringing these kinds of claims.
    I'm more on Professor Cox's side of the argument than 
either the judge or Mr. Frank, but if I just wrap up, Your 
Honor, let me tell you why I think there's a lot to Professor 
Cox's argument.
    By definition, for a plaintiff investor to even bring this 
kind of case, that person has to wade through a lot of 
transactional costs, and has to wade through a lot of gaps of 
information. It is not an evenly situated playing field.
    It's difficult under the best of circumstances, I think 
you'd agree, Professor Cox, that it's hard under the best of 
circumstances to get plaintiffs to fully exercise and pursue 
their rights.
    Now, you add the disincentive of a penalty at the end, of 
having to pay the cost of the litigation, you add that 
possibility, and I can't imagine that you don't raise a 
significant impediment to these kinds of cases being brought, 
and I think that's something we ought to be concerned about.
    Mr. Frank, you were trying to speak to that?
    Mr. Frank. Yes, you raise an impediment to cases that 
aren't substantially justified. I'm not sure why--
    Mr. Davis of Alabama. This is the problem, though, Mr. 
Frank. Some of the cases will be and some won't be. They all 
won't be found to be in the not substantially justified 
category.
    The disincentive accrues for everybody who might be a 
plaintiff in one of these cases, doesn't it, Professor Cox?
    Mr. Cox. There's going to be heavy discounting on the 
benefits of me bringing this suit if there is a loser pay rule, 
and that's the point that Congressman McHenry was missing.
    You start squeezing out the fees and you introduce the 
uncertainty of the loser pay rule, and those widows, those 
orphans, retirees' funds, etc., are going to not think twice, 
they're going to think seven, eight, nine times about--
    Mr. Davis of Alabama. Well, let me just end on this point.
    What I think you're missing, frankly, Mr. Frank, sure, 
people who bring frivolous lawsuits shouldn't be able to 
collect anything and probably ought to bear the costs of 
litigation.
    What I'm concerned about is the class of people who lose, 
but who still have a merit to their lawsuit, who lost because 
their judge wasn't as wise as Vaughn Walker, or who lost 
because their lawyer didn't file a discovery motion in time, or 
who lost because a witness went south in a deposition, you name 
it.
    Chairman Baker. Or lost because his time has expired.
    [Laughter]
    Mr. Davis of Alabama. People bring a lot of good cases that 
are not successful, and those of us who practice law understand 
that.
    Chairman Baker. I thank the gentleman.
    Mr. Pearce.
    Mr. Pearce. The University of Southern California would 
like the same option, to go back and play the last 4 minutes of 
that national championship game. Everyone would always like the 
ability to replay.
    Mr. Walker, Judge Walker, you had mentioned in your 
testimony the need to awaken Congress to the need to review the 
operations.
    We've heard a lot of comments and I'm sorry I haven't been 
able to be here for the questions, but does that seem like a 
valid reason to have a hearing, to awaken Congress to the need 
that lies out there in the circumstance?
    And I have a lot more questions, so please, a shorter 
answer rather than a longer one.
    Judge Walker. Well, I don't think a judge is here to tell 
Congress when it should have a hearing or not have a hearing. 
That seems to me to be entirely up to Congress to decide.
    Mr. Pearce. I understand, but I'm asking if you think 
there's a compelling need for Congress to sit and listen to 
this.
    You heard the early opening statements--that we are making 
a mistake that was foolish, that we're impeding the process of 
the judiciary.
    Judge Walker. I don't feel that this hearing or the 
consideration of legislation to change the way securities class 
actions are handled impedes what judges do in the least.
    Mr. Pearce. Thank you, sir--
    Judge Walker. It seems to me to be a fair and appropriate 
matter for Congress to consider at any time that it perceives 
that there's a problem.
    Mr. Pearce. Okay.
    The question I have for all of you is that there are 
complaints that attorneys' fees are just not widely known in 
these class action settlements and opinions have been given 
that greater publication of those fees would be productive.
    Again, short answers, because I have several questions in 5 
minutes.
    So Mr. Walker, Mr. Frank, and Mr. Cox, if you all would--
    Judge Walker. It would be very helpful to have that. It 
would be very helpful to judges who are called upon to set fees 
in cases.
    Mr. Pearce. Mr. Frank.
    Mr. Frank. I concur.
    Mr. Pearce. Mr. Cox?
    Mr. Cox. I fully concur, too.
    Mr. Pearce. Okay.
    How would we go about that? What--would we post those on 
the Internet a Web site that puts all fees of all actions of 
this nature in one site?
    Judge Walker. I don't want to mention a university that's a 
rival of the University of Southern California, but Stanford 
University Law School has a Web site that compiles a great deal 
of information concerning securities litigation, and that would 
be one appropriate vehicle.
    Mr. Pearce. Okay. Mr. Frank, any comment?
    Mr. Frank. I think that's right. I think we just need to 
make the--if we require the disclosure of the information, then 
existing private sources can disseminate it.
    Mr. Pearce. Mr. Cox?
    Mr. Cox. Our work has shown, as repeated in the filed 
statement, that a significant problem in securities class 
actions is that individuals, particularly institutions, with 
provable claims do not submit those claims.
    One of the problems is that there is no centrally located 
mandatory place for notice of settlements to occur. There's no 
uniformity in the form that has to be satisfied.
    A great contribution could be made in putting money into 
people's pocket by not just going with the Stanford site, which 
is quite good, but making it a site that something has to 
happen mandatorily.
    That doesn't require legislation, it requires probably a 
swift kick in the backside to the SEC to get this moving, 
because that's where they could have the force to do that.
    Mr. Pearce. Any suggestion, Mr. Cox, as to what that might 
be that would be that swift kick?
    Mr. Cox. Perhaps somebody on the football team.
    Mr. Pearce. Mr. Cox, you had talked about--Mr. Galvin 
actually had talked about it before I was called away--the risk 
of the chilling effect on people from having to bear the 
possible risk, and you had then I think an answer to Mr. Davis, 
had supported something similar to that.
    How can we avoid the chill on the other side, the chill 
that causes companies never to get into things where there 
might even be litigation?
    That chill probably affects the price of stock just as much 
as any wrongdoing.
    Mr. Cox. I remain the eternal optimist here, and hope 
springs eternal and I do think that part of the dip we're 
seeing in the filings of securities claims, as documented in my 
statement, is a result of the great strengthening that's 
occurred since 2002 in the financial reporting process.
    I think that that, following good procedures, running a 
good ship, is the best way to avoid a cold chill down your 
spine if you're a CFO or a CEO.
    Mr. Pearce. Mr. Walker, do you have a comment on that?
    Judge Walker. No, I would concur with Professor Cox.
    One needs to bear in mind, however, that all of these rules 
and regulations and disclosure requirements do come at a cost, 
and I think it's fair in our system that those costs be borne 
by public issuers of securities, but we do have to recognize 
that there is a cost that these entail.
    Mr. Pearce. Mr. Cox, would you have any--oops, I see my 
time has expired. Thank you, Mr. Chairman.
    Chairman Baker. If you want to ask your final one and wrap 
up, that's fine.
    Mr. Pearce. The whole problem, Mr. Cox, of the improper 
relationships that appear to be highlighted in this case that's 
before the courts right now, how can we root that out?
    I mean, you get somebody that does not do anything and gets 
the $750,000 fee, and I mean, this is, according to the paper, 
that's always going to be an attraction.
    So how do you root that kind of behavior out?
    Mr. Cox. Well, I always think that the first line of 
defense in protecting the class members, and I think that's 
what we're really talking about, and also the whole system, are 
the presiding judges, and I defer to Judge Walker to say what 
guidance we can have.
    But I think the publicity surrounding the Milberg Weiss 
indictment and also the recent revelations in the Chicago 
Tribune all are wakeup calls to judges that they need to 
inquire deeply into possible conflicting relationships.
    And as I said before, I do support that part of H.R. 5491.
    Mr. Pearce. Mr. Walker do you, and Mr. Frank, I'll give you 
one last chance, then my time is expired.
    Judge Walker. I quite agree with Professor Cox's last 
statement. I think it is a wakeup call, both to Congress and to 
the judges.
    Mr. Pearce. Mr. Frank?
    Mr. Frank. I agree.
    Mr. Pearce. You guys are really compatible out there.
    All right, thanks.
    Thanks, Mr. Chairman.
    Chairman Baker. You should have been here earlier.
    [Laughter]
    Chairman Baker. I thank the gentleman for yielding back.
    By prior agreement, I had indicated that we would have a 
second round of questions, and so keeping my commitment to Mr. 
Ackerman, I'll recognize him, but it's my intention, and this 
is a bit unusual, if we have additional members arrive, I will 
not recognize them for questions.
    There is a 2 o'clock hearing in this committee room, and 
there is time needed to prepare for that, so Mr. Ackerman and 
Mr. Davis will be the last of the day.
    Please proceed, sir.
    Mr. Ackerman. Thank you, I appreciate that, Mr. Chairman.
    I just want to clarify a couple of points for the record.
    The first one is that in the Milberg Weiss indictment, 
which is referenced so extensively in the written testimony of 
witnesses, that there is no charge or allegation that even one 
dollar was lost to investors by the things that they were 
charged with, that it basically charged--it was mostly a fight 
between who gets to represent the class, etc.
    Secondly, there is no charge that the firm that is cited so 
extensively in the testimony is not a vigorous firm in the 
prosecution for their clients.
    Third, because people mentioned it as if it were a crime or 
a charge that the firm received or earned $1.6 billion in fees 
and reimbursements, that first, there is no fee that can be 
paid that's not approved by the judge or the court, and second, 
I find it curious that nothing was made, no point was made that 
the firm, if that number is correct, received $1.6 billion, 
that they also recovered $45 billion for the people in the 
classes that they represented.
    Fourth, I don't know of any CEO of any of the large, giant 
corporations that have been found guilty of corporate 
corruption in which the CEO of that company did not earn more 
money than the attorneys for the lead plaintiffs.
    That having been said, I want to turn to Mr. Frank's 
testimony, if I may.
    I find it highly unusual, because Mr. Frank's testimony 
reads like the opening statement in a prosecution, by the 
prosecutors.
    The very first statement, Mr. Chairman, says, ``Hello.''
    The second sentence says who he is, and that he's not 
necessarily representing the people who pay for his livelihood.
    And he waits all the way to the third sentence before 
bringing up Milberg Weiss, and from that third sentence on, 
there's hardly a page that goes by that he doesn't mention 
Milberg Weiss, ripping them apart in the most vicious ways, 
expressing opinions that he could not do in a court of law, the 
purpose of which is only speculative, but certainly that's what 
his testimony is all about, and that was the purpose of his 
being here and the focus of so many who are involved in this, 
I'll call it a movement.
    Pages aren't numbered, but under number two, ``Abuses by 
the plaintiffs' bar in securities legislation, the problem of 
kickbacks,'' he says, quote:
    ``To illustrate the problem of illegal kickbacks, I 
summarize the Milberg Weiss indictment from the government's 
complaint.''
    And then he goes on and on, and on and on and on and on, 
about the Milberg Weiss case, testifying, in effect, as to what 
the charges are in the case and what his opinions are.
    I'll cite just a couple of examples.
    ``According to the indictment, Milberg Weiss paid kickbacks 
to at least three groups of named plaintiffs,'' etc., etc., 
etc.
    ``Milberg Weiss obtained more than $216 million in 
attorneys' fees.''
    ``The government alleges that the kickbacks were sometimes 
given in cash,'' laundered through this and that, going into 
specifics that are unproven, and really have no business before 
this committee or Congress.
    Those are points to make in a court of law, not in a 
subcommittee holding a hearing on legislation, talking about 
who allegedly put what money in what drawer and who gave it to 
who.
    That's no concern of ours, and the only purpose that I can 
think of is to smear this company that has been indicted and 
not yet tried.
    Then on the next page:
    ``Some have suggested,'' you say, ``Some have suggested 
that the monies were just what they were recorded as, referral 
fees, but this is implausible.''
    And you go and analyze for us why the firm is guilty and 
why the defense that apparently they're going to put up, 
according to you, should be knocked down.
    That you're trying that case before me, whose only 
experience at this, having not gone to law school, is that of a 
schoolteacher, who did teach about the separation of powers to 
small children, and being presumed innocent until proven 
guilty, is very offensive.
    The only purpose of doing this--you say, ``Why would 
Milberg Weiss passively pay millions of dollars,'' as if they 
did. I don't know. Maybe you do. ``Why would they do that,'' 
you say, unless this or that?
    Chairman Baker. Can the gentleman begin to wrap up, please?
    Mr. Ackerman. The only purpose is to defame, degrade, and 
incriminate.
    You mention the Chicago Tribune case.
    ``The Chicago Tribune revealed that Milberg Weiss''--the 
former predecessor company, law firm--as if those are facts, 
because a newspaper charged it--they revealed. It wasn't that 
they charged. They revealed. You reveal something that's true. 
That's a charge. There's a difference, and you know that, and 
you make that look like a fact.
    And then in number three, and I'm wrapping up, Mr. 
Chairman, you say, ``The Milberg Weiss indictment shines a 
small light on a small portion of a great problem of corruption 
in the plaintiffs' bar. The very fact of kickbacks''--da da da 
da da da da--the fact. You've now rendered a decision in your 
own case.
    You may not be representing the people who pay your 
livelihood, but it seems to me that you've weighed in here in a 
very, very unfair way the views to which you're entitled, but 
testifying in this court, as if it were a court in absentia of 
a real court, instead of presenting the evidence that you 
apparently know, I don't know how, because you said you have no 
involvement in that case--I do understand, I think, that as an 
attorney, you appeared in cases on the other side of Milberg 
Weiss--
    Chairman Baker. If you can, sir, wrap up.
    Mr. Ackerman. And I'd like your response to that, Mr. 
Frank.
    Mr. Frank. Well, I challenge your premises on many 
different levels.
    First of all, Mr. Vogel did, I believe it was Mr. Vogel who 
did plead guilty and did plead that the United States 
Government could prove that he took several million dollars in 
kickbacks from Milberg Weiss.
    With respect to the Chicago Tribune, Coughlin and Milberg 
Weiss acknowledged that they made these payments and argue that 
they were appropriate, and the Chicago Tribune simply quotes 
judges who say, ``I didn't know about these payments, and it 
would have made a difference in my opinion if somebody had told 
me about them. I don't feel that they were disclosed to me.''
    Mr. Ackerman. Excuse me. Just on that statement, isn't 
their assertion that they paid finders fees to another law 
firm?
    Mr. Frank. No, sir, not in the Chicago Tribune.
    With respect to kickbacks and whether or not plaintiffs are 
hurt by this, I would note that this is not something that's 
controversial. Other plaintiffs' law firms criticize this. They 
say that this goes to the very center of what it is to be a 
class counsel.
    And the point of a lead plaintiff is to act as a watchdog, 
and it's already a problem--
    Mr. Ackerman. I'm sorry, their competition complained about 
them?
    Mr. Frank. I'm sorry?
    Mr. Ackerman. You're saying--
    Mr. Frank. Other law firms complained about them, yes. 
Other law firms--
    Mr. Ackerman. The other law firms being the law firms that 
they were able to best at becoming the lead law firm, other law 
firms--
    Mr. Frank.--other law firms.
    Mr. Ackerman.--that didn't get the fees?
    Chairman Baker. If I may, sir, I really need to call on Mr. 
Davis.
    Mr. Ackerman. And I will yield to him.
    Mr. Davis of Alabama. Thank you, Mr. Chairman. Thank you 
Mr. Chairman.
    Let me--I have a couple of questions to close with, but Mr. 
Frank, you did something that's kind of remarkable a minute 
ago, and I can't help but comment on it.
    You were asked about your prejudgment of various facts in 
the case by my friend from New York, and your response was 
that, well, someone has entered a guilty plea and made certain 
assertions.
    Mr. Frank, if you've practiced in anybody's court for any 
period of time, to take one guilty plea in a case and to make a 
dispositive judgment about the case based on that is 
remarkable.
    But let me move on to my other two questions.
    General proposition. We hear these arguments a lot, that, 
``Well, we're concerned about the costs of litigation on 
defendants, we don't like frivolous claims,'' and the arguments 
tend to spill over. We'll hear them in the securities context. 
And then we're told, ``Well, we're just talking about 
securities cases.''
    And then we'll hear them in the medical malpractice 
context. And then we'll hear them in the civil rights context. 
And then we'll hear them in the products liability context.
    Just so I'm clear, Mr. Frank, is your enthusiasm for losers 
pay limited to securities litigation or is it pretty much 
anytime a plaintiff walks in court?
    Mr. Frank. I believe it's appropriate in several other 
areas.
    Mr. Davis of Alabama. When is it not appropriate? Give me a 
class of civil litigation where it's not appropriate.
    Mr. Frank. I think civil rights litigation is a very good 
place for where it's not appropriate. I think there is a 
problem there, where you do have widows and orphans and 
indigent people who are bringing litigation.
    Mr. Davis of Alabama. Products liability?
    Mr. Frank. Products liability, I think that can be judged 
by the attorneys firms. These are very well-financed law firms 
that have received billions of dollars from tobacco litigation 
and other sources.
    And in England, where there is losers pay, there is not a 
problem of bringing products liability suits, because well, the 
law firms that bring them--
    Mr. Davis of Alabama. This is the only concern, well, not 
the only, but it's one major concern I have with your argument.
    The argument keeps turning into, whenever plaintiffs make a 
lot of money off these cases, we think the loser ought to pay.
    Now, that's a nice subjective standard, but I can't imagine 
it's guidance for Congress.
    What happens if plaintiffs have a bad year? Then we switch 
over and we take them out of losers pay?
    I mean, it seems like that seems to be your constant 
refrain, that if the plaintiffs' attorneys are making a lot of 
money, they somehow need to be bearing the burden of losers 
pay, whereas if, in civil rights cases, they're not making that 
much money, that somehow exempts them from it. I think we need 
a harder principle than that.
    The final point that I will make today, we have--and I 
don't have all the details and legal theories in front of me, 
but by my recollection, we've made it harder to bring 
securities claims in the last 10 years, we've made it harder to 
bring State claims in Federal court, we've made it harder to 
prove securities claims by requiring a higher degree of 
knowledge of wrongdoing. There are a number of substantive 
things that have been done with the law to make it harder to 
bring these cases.
    And I think, frankly, we ought to be content with that. If 
by narrowing the scope of claims and narrowing the class of 
people who can bring them, and making Rule 23 harder as a 
general proposition, if that hasn't had a sufficient deterrent 
effect, if that hasn't had the effect of casting out a lot of 
frivolous or unsubstantial claims, then maybe we need to heed 
that lesson.
    As a practical matter, it's the last point I will make, 
Congress has done a lot, and the Supreme Court and the 
appellate courts have done a lot to narrow the scope of these 
kinds of legislation and claims. That itself is a disincentive, 
is it not, Professor Cox?
    Mr. Cox. That's correct.
    Mr. Davis of Alabama. That itself is something which ought 
to put a crimp in these cases, and I don't think that Congress 
needs to weigh in and have this heavy hand sitting out there.
    Because you're right. It's not just securities cases you 
want to do, Mr. Frank. You and a lot of people on your side 
want to do as many plaintiffs' cases as you can, and I think 
it's the wrong direction.
    I yield back the balance of my time.
    Chairman Baker. I thank the gentleman for yielding back.
    Let me express appreciation to all of you for your time and 
contribution. It is my intent to move forward with H.R. 5491 
subject to suggested modifications that you have brought to the 
committee's attention.
    This hearing was a bit different from our customary 
practice in that witnesses were sworn before testimony.
    It is my intention to leave the hearing record open for an 
additional 45 days. A number of members who could not be here 
have interest in forwarding questions of interest for them.
    The responses to those inquiries would be subject to the 
same rules of sworn testimony.
    Just to state for the record purposes, I do have my own 
interrogatories that I would like to forward for a number of 
reasons.
    But having said that, I am appreciative for members' 
attendance and for the very productive discussion I believe we 
engaged in today.
    Thank you, and our meeting stands adjourned.
    [Whereupon, at 1:33 p.m., the subcommittee was adjourned.]



                            A P P E N D I X



                             June 28, 2006



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