    [Senate Hearing 111-369]
    [From the U.S. Government Publishing Office]

                                                            S. Hrg. 111-369

     EVALUATING S. 1551: THE LIABILITY FOR AIDING AND ABETTING SECURITIES
                             VIOLATIONS ACT OF 2009

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

                                    HEARING

                                   before the

                        SUBCOMMITTEE ON CRIME AND DRUGS

                                     of the

                           COMMITTEE ON THE JUDICIARY
                              UNITED STATES SENATE

                         ONE HUNDRED ELEVENTH CONGRESS

                                 FIRST SESSION

                                   ----------

                               SEPTEMBER 17, 2009

                                   ----------

                              Serial No. J-111-46

                                   ----------

             Printed for the use of the Committee on the Judiciary

     EVALUATING S. 1551: THE LIABILITY FOR AIDING AND ABETTING SECURITIES
                             VIOLATIONS ACT OF 2009

                                                            S. Hrg. 111-369

     EVALUATING S. 1551: THE LIABILITY FOR AIDING AND ABETTING SECURITIES
                             VIOLATIONS ACT OF 2009

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

                                    HEARING

                                   before the

                        SUBCOMMITTEE ON CRIME AND DRUGS

                                     of the

                           COMMITTEE ON THE JUDICIARY
                              UNITED STATES SENATE

                         ONE HUNDRED ELEVENTH CONGRESS

                                 FIRST SESSION

                                   __________

                               SEPTEMBER 17, 2009

                                   __________

                              Serial No. J-111-46

                                   __________

             Printed for the use of the Committee on the Judiciary

                      U.S. GOVERNMENT PRINTING OFFICE
    55-898                    WASHINGTON : 2010
    -----------------------------------------------------------------------
    For Sale by the Superintendent of Documents, U.S. Government Printing Office
    Internet: bookstore.gpo.gov  Phone: toll free (866) 512-1800; (202) 512�091800
    Fax: (202) 512�092104 Mail: Stop IDCC, Washington, DC 20402�090001

                      PATRICK J. LEAHY, Vermont, Chairman
    HERB KOHL, Wisconsin                 JEFF SESSIONS, Alabama
    DIANNE FEINSTEIN, California         ORRIN G. HATCH, Utah
    RUSSELL D. FEINGOLD, Wisconsin       CHARLES E. GRASSLEY, Iowa
    CHARLES E. SCHUMER, New York         JON KYL, Arizona
    RICHARD J. DURBIN, Illinois          LINDSEY GRAHAM, South Carolina
    BENJAMIN L. CARDIN, Maryland         JOHN CORNYN, Texas
    SHELDON WHITEHOUSE, Rhode Island     TOM COBURN, Oklahoma
    AMY KLOBUCHAR, Minnesota
    EDWARD E. KAUFMAN, Delaware
    ARLEN SPECTER, Pennsylvania
    AL FRANKEN, Minnesota
                Bruce A. Cohen, Chief Counsel and Staff Director
                      Matt Miner, Republican Chief Counsel
                                     ------

                        Subcommittee on Crime and Drugs

                     ARLEN SPECTER, Pennsylvania, Chairman
    HERB KOHL, Wisconsin                 LINDSEY GRAHAM, South Carolina
    DIANNE FEINSTEIN, California         ORRIN G. HATCH, Utah
    RUSSELL D. FEINGOLD, Wisconsin       CHARLES E. GRASSLEY, Iowa
    CHARLES E. SCHUMER, New York         JEFF SESSIONS, Alabama
    RICHARD J. DURBIN, Illinois          TOM COBURN, Oklahoma
    BENJAMIN L. CARDIN, Maryland
    AMY KLOBUCHAR, Minnesota
    EDWARD E. KAUFMAN, Delaware
                   Hanibal Kemerer, Democratic Chief Counsel
                      Walt Kuhn, Republican Chief Counsel

                                C O N T E N T S

                                  ----------

                        STATEMENTS OF COMMITTEE MEMBERS

                                                                       Page

    Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont,
      prepared statement.............................................   164
    Specter, Hon. Arlen, a U.S. Senator from the State of
      Pennsylvania...................................................     1

                                   WITNESSES

    Coffee, John C., Jr., Adolf A. Berle Professor of Law, Columbia
      University School of Law, New York, New York...................     2
    Giuffra, Robert J., Jr., Partner, Sullivan & Cromwell LLP, New
      York, New York.................................................     4
    Pritchard, Adam C., Frances and George Skestos Professor of Law,
      Director, Empirical Legal Studies Center, University of
      Michigan Law School, Ann Arbor, Michigan.......................     6
    Solov, Tanya, Director, Illinois Securities Department, Office of
      the Illinois Secretary of State, on behalf of the North
      American Securities Administrators Association, Washington,
      D.C............................................................     8
    Szymanski, Patrick J., General Counsel, Change to Win,
      Washington, D.C................................................     9

                             QUESTIONS AND ANSWERS

    Questions submitted by Senator Specter to John C. Coffee, Jr.,
      (Note: Responses to questions were not received as of the time
      of printing, April 22, 2010)...................................    18
    Responses of Robert J. Giuffra to questions submitted by Senator
      Specter........................................................    22
    Responses of Adam C. Pritchard to questions submitted by Senator
      Specter........................................................    25

                           SUBMISSIONS FOR THE RECORD

    AFL-CIO, Richard L. Trumka, Secretary-Treasurer, Washington,
      D.C., letter...................................................    26
    Business Roundtable, brief.......................................    28
    Chamber of Commerce, R. Bruce Josten, Executive Vice President,
      Government Affairs, Washington, D.C., letter and brief.........    61
    Coffee, John C., Jr., Adolf A. Berle Professor of Law, Columbia
      University School of Law, New York, New York, statement........   102
    Dodd, Hon. Christopher J., a U.S. Senator from the State of
      Connecticut:
        Letter to Solicitor General Paul Clement.....................   114
        Letter to Christopher Cox....................................   116
        Letter to President George W. Bush...........................   118
    Giuffra, Robert J., Jr., Partner, Sullivan & Cromwell LLP, New
      York, New York, statement......................................   120
    Government Affairs Subcommittee, Enron's Collapse................   136
    Lacorte, Dagan A., Village Trustee, Village of Suffern, Suffern,
      New York, letter...............................................   163
    Levitt-Amicus Brief Stoneridge 2007,.............................   165
    Logan, Brendel, on behalf of Hudson Valley Environmental Action
      Fund, Albany, New York, letter.................................   182
    Miller, Arthur R., National Law Journal, September 24, 2007 case.   184
    NYSE Euronext, John K. Halvey, Group Executive Vice President &
      General Counsel, New York, New York, letter and brief..........   186
    New York Times, July 28, 2009, article...........................   215
    Pritchard, Adam C., Frances and George Skestos Professor of Law,
      Director, Empirical Legal Studies Center, University of
      Michigan Law School, Ann Arbor, Michigan, statement and article   216
    SEC v. Bank of America, U.S. District Court Southern District of
      New York, Memorandum order.....................................   262
    Securities Industry and Financial Markets Association (SIFMA),
      Scott DeFife, Senior Managing Director, Government Affairs,
      Washington, D.C., letter and brief.............................   274
    Solov, Tanya, Director, Illinois Securities Department, Office of
      the Illinois Secretary of State, on behalf of the North
      American Securities Administrators Association, Washington,
      D.C., statement................................................   320
    Soskin, Philp, Chair, Multi-Services Committees, Budget & Finance
      Committee, Government Operations Committee, Treasurer, Rockland
      County Solid Waste Management Authority, letter................   324
    Specter, Hon. Arlen, a U.S. Senator from the State of
      Pennsylvania, letter...........................................   326
    Szymanski, Patrick J., General Counsel, Change to Win,
      Washington, D.C., statement....................................   328
    Wall Street Journal, New York, New York:
        July 17, 2009, article.......................................   351
        August 10, 2009, article.....................................   352
    Westlaw, Thomson Reuters:
        Central Bank amicus brief....................................   353
        In re Refco..................................................   375

     EVALUATING S. 1551: THE LIABILITY FOR AIDING AND ABETTING SECURITIES
                             VIOLATIONS ACT OF 2009

                                  ----------

                          THURSDAY, SEPTEMBER 17, 2009

                                   U.S. Senate,
                       Subcommittee on Crime and Drugs,
                                    Committee on the Judiciary,
                                                        Washington, DC.
        The Subcommittee met, pursuant to notice, at 5 p.m., in
    room SD-226, Dirksen Senate Office Building, Hon. Arlen
    Specter, Chairman of the Subcommittee, presiding.
        Present: Senator Specter.

     OPENING STATEMENT OF HON. ARLEN SPECTER, A U.S. SENATOR FROM
                       THE STATE OF PENNSYLVANIA

        Chairman Specter. Good afternoon, ladies and gentlemen. The
    hearing will proceed.
        I regret the delay in beginning this hearing, but I know
    you are fully aware of the circumstances which delayed it,
    circumstances which made the delay unavoidable. The Senate has
    its own tempo, and we have just finished a series of votes. And
    this is a very important hearing, and I would like to see
    legislation result from the hearing and think it important to
    establish a record which can be reviewed by other Committee
    members who are not here and by other Senators to establish a
    basis for legislative action.
        When I noted the decision in Stoneridge, I was more than
    surprised; I was shocked. From my own experience as a district
    attorney, knowing aiders and abetters are co-conspirators and
    are liable, hard to understand. And in the context where the
    circuits until 1994 were unanimous, with the arguable exception
    of the Seventh Circuit, imposing such liability, two Supreme
    Court decisions, really makes me wonder what the court is up
    to. And there have been commentaries about this Court being
    partial to big business. Hard to understand how aiders and
    abetters are not liable. And in light of some of the recent
    developments, consideration perhaps should be given to some
    modification of our standards on the confirmation process.
        The tradition has been that nominees are never asked how
    they are going to decide cases. And when Chief Justice Roberts
    testified that it was a matter for Congress to decide the
    factual basis for decisions under the Supreme Court standard of
    proportionate--proportionate and what? Very hard to remember
    proportionate and congruent because it makes little sense. Then
    the voting rights came up, and he appeared to disregard a very
    extensive congressional record. And now we are looking at a
    decision on corporate contributions which, if reversed, is
    going to set the electoral process on its head in this country
    if corporations can make contributions in political campaigns.
        We would not countenance someone who would overturn Brown
    v. Board of Education, and maybe we have to look beyond. This
    issue raises in a sense that question.
        Well, there is a lot that I have on my mind in this and
    related subjects, but that has been about as brief as I can be.
    I intend to make an extended floor statement on the subject
    next week, if I can get to it. But we are going to proceed now
    with the bare bones, with no introductions, which is something
    I would like to take time to elaborate upon, but in view of the
    hour, I am just going to turn to our first witness, Professor
    John C. Coffee, Adolf A. Berle Professor of Law at Columbia,
    the author of a textbook way back when I went to law school.
        Professor Coffee, the floor is yours.

     STATEMENT OF JOHN C. COFFEE, JR., ADOLF A. BERLE PROFESSOR OF
       LAW, COLUMBIA UNIVERSITY SCHOOL OF LAW, NEW YORK, NEW YORK

        Mr. Coffee. Thank you very much, and I am honored to be
    here, and I will try to be quite concise.
        You focused on an anomaly, Chairman Specter, and it is an
    anomaly. For over a century, there has been criminal liability
    for anyone who aids and abets a Federal violation of law. For
    about a half-century, the Restatement of Torts, written by the
    American Law Institute, has stated the rule that private
    liability exists and a victim can sue not only the primary
    violator but a secondary violator who provides substantial
    assistance.
        Many Federal statutes, including the Commodities Exchange
    Act, which is something that closely parallels the Securities
    Exchange Act, does provide for private actions against aiders
    and abetters. But we have the Federal securities laws which,
    since 1994, do not permit the victim to sue the aider and
    abetter even if there is conscious, knowing assistance given to
    the primary violation.
        Now, it is time to reevaluate that. There are many--and I
    fully acknowledge that in 1995, Congress, in passing the
    Private Securities Litigation Reform Act, accepted the Supreme
    Court's decision in Central Bank, but we have seen a lot of
    water go over the dam since then. We have seen serious
    developments and maybe some deterioration in the discipline and
    our capital markets. Just thinking back over the last decade,
    we have had the IPO bubble in 2000, Enron and WorldCom in 2001
    and 2002; we have had the securities analyst scandals; we have
    had the market timing abuses. And now we have this huge credit
    crisis that dwarfs everything else.
        All of this suggests that the critical gatekeepers in our
    financial markets, the financial intermediaries, on whom
    investors rely to do things that they cannot do for themselves,
    such as the accountants, such as the credit rating agencies,
    may be under-deterred, and if they are under-deterred, we
    cannot expect to get back to equilibrium without some
    discipline on actors whose role is absolutely essential in the
    financial markets.
        Now, from a policy perspective, I would suggest this entire
    debate comes down to one critical issue: Do we think that
    public enforcement standing alone can do the job of deterring,
    disciplining, and obtaining compensation for victims from these
    secondary participants? I am going to suggest to you that there
    are at least three reasons why public enforcement, although
    very important, is not sufficient to do that job by itself.
        Public enforcement in the context of securities violations
    means enforcement by the Securities and Exchange Commission. I
    am an admirer of that body, for all of its recent problems, but
    it has got at least three fundamental problems that I think we
    have to recognize.
        The SEC is authorized to sue aiders and abetters for
    knowing violations, but it can only seek relatively modest
    civil penalties plus disgorgement of ill-gotten gains. It
    cannot sue for restitution on behalf of all the victims, and
    that is the huge difference between disgorgement and
    restitution.
        Next, the SEC always has been, is now, and always will be
    cost constrained and logistically underfunded, and they will be
    the first to say that. The SEC is also not administratively
    capable of handling the equivalent of a large class action in
    terms of settling claims, dealing with all the class members,
    and disbursing the proceeds. It would be an administrative
    nightmare for them if they were to try to deal with the issue
    of handling restitution.
        Finally, the last point I would say about the Securities
    and Exchange Commission is a sensitive one, and I do not want
    to overstate it. Recent scandals--Mr. Madoff, the current Bank
    of America issue--suggest that the SEC does not proceed quite
    as zealously and vigorously against prominent figures and
    established firms as they do against the outcasts and the out-
    and-out crooks. But if we are going to have discipline in the
    capital markets, there has to be someone who will take serious
    disciplinary action, seek serious penalties against the major
    gatekeepers. And I think private enforcement can do that better
    than can public enforcement.
        We have already seen that private enforcement. Look at the
    Enron class action or the WorldCom class action. They both
    settled for $7.5 billion and $6.5 billion, respectively. Those
    are numbers that dwarf anything the SEC has ever received in
    the way of penalties or in the way of class action recoveries.
    The point here is really that the private enforcement bar can
    chase the money, can get significant claims, and it is not
    interested in simply getting headlines. For better or worse,
    they do go where the money is, and that is what is needed if we
    are going to get compensation for victims.
        Let me make two last points in just a second or two. One is
    that you are going to hear an awful lot about how authorizing
    liability against aiders and abetters will open the floodgates
    for frivolous and extortionate litigation. That might have been
    true, arguably, once. But since the Private Securities
    Litigation Reform Act of 1995, secondary participants are not
    only protected, they are virtually insulated because of the
    pleading rules under that act, because you cannot get discovery
    unless you can plead with particularity facts giving rise to a
    strong inference of fraud.
        There is no realistic prospect of frivolous, extortionate
    litigation brought against secondary participants. They can
    have that action dismissed without discovery unless at the
    outset you can show a very strong case that gives rise to a
    strong inference of fraud.
        And last, in just a sentence, in my proposal I suggest to
    you that you couple restoring private liability with a ceiling
    on damages. That is because the real goal here should be to
    create a penalty that deters but does not destroy. We do not
    want to see the loss of one more accounting firm like Arthur
    Andersen or one credit rating agency, because they are both in
    very concentrated markets. So I would suggest to you that the
    Solomonic compromise here--and I try to give you a possible
    model--is to restore aiding and abetting liability with a
    realistic ceiling on damages for secondary participants in
    securities violations.
        Thank you very much.
        [The prepared statement of Mr. Coffee appears as a
    submission for the record.]
        Chairman Specter. Thank you, Professor Coffee.
        We turn now to Robert Giuffra--how do you pronounce that?
        Mr. Giuffra. Giuffra. We met before, Senator. Giuffra.
        Chairman Specter. Thank you. Partner of the prestigious law
    firm Sullivan & Cromwell.

       STATEMENT OF ROBERT J. GIUFFRA, JR., PARTNER, SULLIVAN &
                    CROMWELL LLP, NEW YORK, NEW YORK

        Mr. Giuffra. Mr. Chairman, in 1995, the PSLRA was passed
    with broad bipartisan support, including of Senators Dodd,
    Kennedy, and Reed, and then-Representative Schumer. As chief
    counsel to the Senate Banking Committee when Senator D'Amato
    chaired it, I worked closely with Republicans, Democrats, and
    then-SEC Chairman Arthur Levitt to develop a balanced law.
        Congress should not revisit the bipartisan judgment made in
    1995 in the PSLRA. That judgment was that the SEC and the
    Justice Department are best suited to prosecute aiders and
    abetters of securities fraud.
        S. 1551 would greatly expand the existing securities class
    action system, but this system benefits lawyers, often does not
    help investors, and often is not fair.
        Now, in the real world, where I practice law, motions to
    dismiss and summary judgment do not weed out baseless claims.
    In fact, less than 40 percent of all securities class action
    cases are ever dismissed on a motion. Less than 40 percent.
    More than 60 percent are settled, and, you know, one or two a
    year are ever tried. Less than 30 percent are ever dismissed on
    a motion to dismiss. In other words, by bringing a securities
    class action lawsuit, a lawyer has a better than 60 percent
    chance of getting fees through a settlement. Great odds.
        Now, juries can be unpredictable. There is on deep-pocket
    third party that wants to risk losing a multi-billion-dollar
    jury verdict. And even where a case has no merit, companies
    have to spend tens of millions of dollars defending those
    cases, reviewing millions of e-mails.
        Now, to eliminate settlements because a judge did not
    dismiss a baseless securities case, what Congress should do, as
    Senator Schumer has suggested, is permit parties as a right to
    appeal lower-court decisions denying motions to dismiss. If S.
    1551 is enacted, the plaintiffs' bar will routinely name
    defendants all deep pockets who did business with a company.
    Plaintiffs' lawyers do not need documentary evidence to survive
    a motion to dismiss. They just need to cut a deal with one
    criminal insider who will point the finger at a banker or a
    lawyer. And today, when bankers, accountants, and lawyers
    receive hundreds of e-mails a day, it is very easy for a lawyer
    to blow one e-mail out of proportion.
        Now, S. 1551 would hurt the competitiveness of U.S. capital
    markets. In Europe and Asia, there are no securities class
    actions. Non-U.S. companies do not think that our system is
    fair, and they are leaving our markets.
        I live and work in New York City. Enactment of this
    proposal would be good for the city of London, but it would not
    be good for New York, Philadelphia, or other U.S. financial
    centers.
        Now, since 1995, the SEC, the Justice Department, and State
    Attorney Generals have investigated the banks, the accountants,
    and the lawyers who provided services to Enron, WorldCom, Tyco,
    Refco, and the other companies that suffered major frauds and,
    when appropriate, they have taken action. Federal prosecutors
    convicted the law firm partner involved in the Refco matter and
    several Enron bankers, and the SEC obtained $50 million from
    the cable box providers involved in the Stoneridge case.
        Now, SEC lawyers and DOJ lawyers serve the public interest.
    They have no incentive to bring strike suits. The SEC and the
    DOJ are far better than private lawyers to exercise the
    discretion and judgment that is needed to decide when a
    banker's conduct crossed the line.
        By contrast, plaintiffs' lawyers have every incentive to
    sue deep-pocket third parties. The SEC can recover and the DOJ
    can recover damages from wrongdoers. Since 2002, the SEC has
    recovered more than a billion dollars and the DOJ billions
    more. And the SEC and the DOJ do not have to pay as much as a
    third of any recovery to lawyers, and there is no risk that SEC
    or DOJ lawyers will pay kickbacks to plaintiffs or make
    political contributions to pension fund administrators to get
    control of cases. And the threat of 20 years in prison is a far
    greater deterrent to securities fraud than civil litigation.
        Finally, ``fraud'' is a very loose term. When a murder
    occurs, we can all agree that a crime has been committed. Not
    so with securities fraud. Prior to Central Bank, courts
    required plaintiffs to prove that secondary actors actually
    knew that the fraud they allegedly were assisting as going on.
    In this proposal, Senator, by adopting an open-ended definition
    of ``recklessness,'' this would force many companies to settle
    baseless cases. The proposal of just pure recklessness without
    any definition would be far more lenient than the existing
    standard that judges across the United States have adopted.
        So, to sum up, Congress should continue to rely on the SEC
    and the Department of Justice to prosecute aiders and abetters.
    The benefits of private enforcement are few, and the costs to
    our economy was potentially very great.
        Thank you.
        [The prepared statement of Mr. Giuffra appears as a
    submission for the record.]
        Chairman Specter. Thank you very much.
        I have to take a 2-minute break.
        [Recess 5:19 p.m. to 5:22 p.m.]
        Chairman Specter. Our next witness is Professor Adam
    Pritchard, Frances and George Skestos Professor of Law at the
    University of Michigan.
        Professor Pritchard.

      STATEMENT OF ADAM C. PRITCHARD, FRANCES AND GEORGE SKESTOS
      PROFESSOR OF LAW, DIRECTOR, EMPIRICAL LEGAL STUDIES CENTER,
         UNIVERSITY OF MICHIGAN LAW SCHOOL, ANN ARBOR, MICHIGAN

        Mr. Pritchard. I want to thank you, Chairman Specter, for
    inviting me to testify today.
        There are two possible justifications for imposing
    liability for securities fraud: compensation and deterrence.
    Neither one of those rationales supports the extension of
    liability to accountants, bankers, and lawyers that is proposed
    in this bill.
        To put it bluntly, the compensation rationale for
    securities class actions is nonsense. Class actions provide
    about 3 to 10 cents on the dollar of the losses that investors
    have sustained, and that is a good thing. If we were to
    actually provide compensation for the full losses that
    investors suffered in securities class actions, it would be an
    economic disaster. Shareholders are paying the compensation
    that is paid out in securities class actions because the
    settlement dollars come from the corporation itself or the
    directors and officers' insurance that is paid for by the
    corporation.
        So we have an insurance scheme--an insurance scheme that
    protects against fraud, but it is an insurance scheme in which
    we have to pay 50 cents on every premium dollar for
    administrative costs. Plaintiffs' lawyers get paid, the defense
    lawyers get paid, and the shareholders get their own money
    back, with a big haircut for the lawyers.
        If you tried to sell this sort of insurance policy to a
    shareholder, you would not be able to find anyone who would buy
    it. If you tried to get an insurance commissioner to approve
    it, you would not find any insurance commissioner in the United
    States who would let you sell it.
        Aiding and abetting liability would not change that
    calculus. Shareholders are effectively paying the fees that go
    to accountants, lawyers, and investment banks, and any
    liability costs that we impose on those professionals are going
    to be passed back to the shareholders in the form of higher
    fees. There is no free lunch in adding new deep pockets. We
    just will be able to employ more lawyers. As an educator of
    future lawyers, I want to say that is a good thing, but it is
    not enough to justify the bill. The only effective protection
    against secondary market fraud is diversification.
        The second rationale for imposing securities fraud
    liability is deterrence. Given what we know about securities
    fraud class actions based on the studies that have been done
    over the last 10 years since the Private Securities Litigation
    Reform Act was adopted, it is implausible that securities class
    actions have any important deterrent impact at the margin above
    and beyond reputational effects in the market and Government
    enforcement efforts.
        If you want to know what the predictors are of securities
    fraud class actions--how can you predict who is going to be
    sued--the relevant criteria are market capitalization, share
    turnover, stock price drop, Government investigations, and
    restatements of accounting statements. The class action bar
    does not uncover fraud. It follows these very public
    indicators. The stock price drop occurs. The class action bar
    responds.
        Secondary defendants are sued when the corporation is
    bankrupt. The corporation is the easy settlement target.
    Ordinarily, the plaintiffs' lawyers are happy to go after them.
    That would not change if aiding and abetting liability were to
    be introduced. If we protect shareholders against the effects
    of bankruptcy by giving them a deep pocket to sue in the case
    when the corporation has gone bankrupt, it is going to further
    undermine the deterrent effect of securities class actions.
        The problem with securities class actions is that the
    individuals who commit fraud--the officers who lie--do not pay
    in these class actions. If we take away the incentive to go
    after those officers in bankruptcy, which is the only time that
    the officers and directors pay, the plaintiffs' lawyers will
    pursue the investment bankers and the accountants because they
    can pay a lot more than the individual officers can.
        If we want to reform securities fraud class actions, we
    need to begin with the fundamental economic problem. We need to
    fix the damages measure. There are two ways to do this.
    Congress could reform the damages measure directly, or we could
    allow shareholders to adopt the appropriate damages measure
    through the company's articles of incorporation.
        The appropriate measure is disgorgement. If you have
    committed fraud, give back the benefits of the fraud, perhaps
    with a multiplier to reflect the probability that not all fraud
    would be detected. Maybe we would need to have attorney fee
    shifting. If the corporation has not benefited from the fraud,
    which is the overwhelming case, then there would be no damages.
    If the officer has benefited in the form of bonuses or stock
    options, the officer would have to pay. Apply the same rule to
    the secondary defendants.
        In conclusion, the capital markets and the U.S. Treasury
    would be the victims if liability bankrupts an accounting firm
    or a TARP recipient. Without reforming the damages measure, it
    would be reckless to adopt aiding and abetting liability.
        [The prepared statement of Mr. Pritchard appears as a
    submission for the record.]
        Chairman Specter. Thank you very much, Professor Pritchard.
        Our next witness is Ms. Tanya Solov, Director of the
    Securities Department of the Office of the Illinois Secretary
    of State. Welcome and we look forward to your testimony.

        STATEMENT OF TANYA SOLOV, DIRECTOR, ILLINOIS SECURITIES
       DEPARTMENT, OFFICE OF THE ILLINOIS SECRETARY OF STATE, ON
        BEHALF OF THE NORTH AMERICAN SECURITIES ADMINISTRATORS
                     ASSOCIATION, WASHINGTON, D.C.

        Ms. Solov. Thank you, Chairman Specter. I am honored to
    convey the support of the North American Securities
    Administrators Association for S. 1551, the Liability for
    Aiding and Abetting Securities Violations Act.
        NASAA is the member association of State and provincial
    securities regulators and maintains a corporate office in
    Washington, D.C. State securities regulators, license broker-
    dealers, and investment advisers, register local securities
    offerings and conduct compliance examinations. Especially
    important is their enforcement role: protecting the Nation's
    investors by bringing thousands of actions every year against
    the firms and individuals who have committed securities fraud.
    In certain cases, regulators seek restitution or rescission on
    behalf of investors. However, given the large number of
    investors in the market today, private civil cases are a
    necessary and important complement to State and Federal
    actions. S. 1551 would restore the ability of defrauded
    investors to seek damages from all of the entities that
    substantially participated in the fraud.
        My colleagues and I have witnessed firsthand the
    devastation of financial fraud on victims and their families.
    Investor education materials teach investors to conduct
    research on companies prior to investing, but no amount of
    research will allow investors to make appropriate decisions if
    the financial and other public information provided by
    companies is false or misleading. The integrity of the U.S.
    markets depends on accurate information, and our laws must send
    the message to corporate management, as well as their lawyers,
    accountants, investment bankers, and other so-called secondary
    actors, that they will be held accountable for aiding and
    abetting in deception and fraud.
        In passing the Securities Exchange Act, Congress implicitly
    authorized a private right of action, and for decades
    thereafter courts allowed private suits. As Professor Coffee
    stated, the right to bring a private suit for aiding and
    abetting has been severely restricted by the Supreme Court and
    other courts. The decisions in these cases favor big business
    over innocent investors. Corporations and secondary actors
    often seek short-term profits, big bonuses, and large fees, and
    many times these goals can be achieved by cooking the books or
    engaging in sham transactions. Sham transactions are
    fraudulent, and even the majority in Stoneridge acknowledged
    that they are not baseless. If secondary actors are permitted
    to avoid liability, there will be no deterrent to prevent them
    from engaging in fraudulent schemes.
        State and Federal regulators filed numerous cases against
    corporations and secondary actors in the past decade. However,
    many more cases of fraud were not pursued by regulators due to
    resource limitations. The majority in Stoneridge contends that
    aiding and abetting actions can be brought by the SEC on behalf
    of shareholders. While it is true that Federal regulators can
    pursue such cases, Chairman Mary Schapiro stated that the
    agency's enforcement and examination resources have been
    severely constrained in recent years. The SEC's immediate
    agenda includes proxy access, compensation disclosure, hedge
    funds, and others that need regulatory attention. Significant
    SEC resources will be expended working on these priorities as
    well as large Ponzi scheme cases and fraudulent activity having
    national impact. Cases involving a limited number of
    shareholders are less likely to be addressed.
        Critics of private securities actions claim that such cases
    provide little benefit to victims, they punish innocent
    shareholders, and unjustly reward plaintiffs' lawyers. In
    reality, over the years private actions resulted in greater
    recoveries for shareholders than the compensation from
    regulatory actions. The fact that victims were not able to
    recover full damages is the result of a number of factors
    including the shareholders' desire to settle for less rather
    than to spend more time in litigation. The contention that
    paying defrauded investors harms innocent, current shareholders
    is not really applicable in cases involving secondary actors
    such as accountants. The vast majority of shareholders want
    accountability and the right to seek redress for wrongdoing. If
    management is concerned about current shareholders, it might
    strip away the bonuses, high salaries, and stock options
    awarded to those who participated in the fraud and place those
    assets in the victim restitution fund. With regard to
    plaintiffs' lawyers' fees, it is important to remember that
    class action settlements, including attorneys' fees, are
    reviewed and approved by judges. The recent Bank of America
    case is an example of a case where the judge refused to approve
    a negotiated settlement.
        Allowing investors to file aiding and abetting cases will
    not open the floodgates of litigation and stifle business
    development. Private suits were allowed prior to the Central
    Bank and Stoneridge decisions, and businesses grew and
    flourished during those years. Congress enacted Section 10(b)
    of the Securities Exchange Act with the understanding that
    Federal courts respected the principle that every wrong would
    have a remedy. S. 1551 recognizes the right of defrauded
    shareholders to bring private actions against aiders and
    abetters and to seek remedies from wrongdoers.
        In the interest of investor protection and market
    integrity, NASAA supports S. 1551. Thank you.
        [The prepared statement of Ms. Solov appears as a
    submission for the record.]
        Chairman Specter. Thank you very much, Ms. Solov.
        Our final witness is the general counsel of Change to Win,
    Patrick--Szymanski?
        Mr. Szymanski. Szymanski, Your Honor--Senator Specter. I
    think I am back in the court of appeals someplace.
        Chairman Specter. Mr. Szymanski, I am not a ``Your Honor.''
        [Laughter.]
        Chairman Specter. Thank you for joining us.

     STATEMENT OF PATRICK J. SZYMANSKI, GENERAL COUNSEL, CHANGE TO
                         WIN, WASHINGTON, D.C.

        Mr. Szymanski. Thank you, Senator. And, again, thanks to
    you for the invitation to testify. Let me confess at the outset
    that, unlike the other people sitting up here, I have not spent
    my career involved in securities litigation. I am a union
    lawyer, and I spent a lot of time talking to workers, and I
    have got to disagree with Mr. Giuffra when he basically says we
    ought to leave things the way they are. I do not think what we
    have seen since the mid-1990's indicates in anybody's mind that
    things ought to stay where they were back then.
        Professor Coffee catalogued very briefly and succinctly
    many of the things that have happened since then that indicate
    that it is time for a reexamination. And whether it is the
    result of my talking to workers or just my own natural bias, I
    have always thought that the law ought to make sense. I have
    always thought that you ought to be able to explain things so
    that a reasonably intelligent person can understand them. And
    as far as I am concerned, any rule of law that does not make
    sense has got a problem. And Stoneridge does not make any
    sense.
        In Stoneridge, two providers of cable TV converters--
    Scientific Atlanta and Motorola--entered into sham contracts
    with a cable TV service provider, Charter Communications, to
    artificially inflate Charter's assets. There was no economic
    reason for the contracts. They had a perfectly fine
    relationship before these changes happened. The contracts were
    back-dated to fool Charter's outside audit firm, and Scientific
    Atlanta and Motorola knew that the additional fictional income
    would be used to artificially inflate Charter's assets. In
    short, the fraud on shareholders could not have been
    accomplished in that case without the willing participation and
    knowing participation of Scientific Atlanta and Motorola. But
    the Supreme Court in Stoneridge held that because Scientific
    Atlanta and Motorola had no duty to the shareholders and made
    no public statements, they are not responsible for any of the
    losses that were suffered by the Charter Communications
    shareholders.
        Now, my written testimony describes similar cases involving
    Enron, Refco, Homestore.com, Pugh v. Tribune. Interestingly,
    the judge in Refco is Judge Lynch. And in some of these cases,
    the wrongdoing participants were convicted or pled guilty to
    criminal charges, and they still completely escaped any civil
    liability or responsibility for the losses suffered by the
    innocent shareholders. Now, you just try explaining that to a
    worker, someone who goes out every day and makes money, as John
    Houseman used to say, ``the old-fashioned way.'' He and she
    ``earn it.''
        This makes no sense. It does not make sense to me, and it
    does not make sense to hard-working Americans who invest their
    own funds in 401(k)s and IRAs and in pension funds in which
    they participate. And let me make that point. We sometimes talk
    about institutional investors as though they are something
    different. They are not different than workers. They are simply
    holding the funds that those workers earned in trust for a
    purpose: to pay pensions that those workers are relying on when
    it comes time for them to retire. And when they are injured,
    the workers are injured, and that is worker money, not money
    that belongs to anybody else. And the Government, their
    Government, should be protecting them, not the wrongdoers who
    are responsible for defrauding them. People ought to be
    responsible for their actions, and the idea that these third-
    party people are immune from liability is ridiculous.
        So I am here to tell you that the organizations who
    represent workers, who brought America the weekend, holidays,
    the 40-hour work week, employer-paid health care, pensions, and
    health and safety standards and more, and who are still
    fighting to keep those standards on behalf of working people in
    this country, support Senate bill 1551, which tries to bring
    some common sense back into this area of the law.
        I look forward to your questions, Senator. Thank you.
        [The prepared statement of Mr. Szymanski appears as a
    submission for the record.]
        Chairman Specter. Thank you very much, Mr. Szymanski.
        Professor Pritchard, in looking for deterrence, what would
    you think about an active role by the Department of Justice to
    utilize 18 U.S.C. Section 2 to send people to jail because the
    Federal criminal law makes it a criminal violation to aid and
    abet somebody who commits a crime? Fraud is a crime.
        Mr. Pritchard. I think criminal enforcement is essential to
    deterring fraud, and I have no complaint about it being applied
    against third parties who have assisted, aided, facilitated the
    fraud. As long as their guilt is determined beyond a reasonable
    doubt to a jury and the standards for fraudulent intent are
    met, then I think that is an excellent deterrent to fraud.
        Chairman Specter. But proving that you think should be
    insufficient for damages for the shareholder?
        Mr. Pritchard. Insofar as the third party may have received
    benefits from participating in the fraud, I think they
    definitely should be made to pay those back.
        Chairman Specter. Well, you have testified about
    disgorgement, but you think even though their conduct is
    sufficient to send them to jail, it is not sufficient to
    compensate the party who has been injured by that conduct.
        Mr. Pritchard. I think the compensation is irrelevant. What
    is important is sending them to jail. Sending people to jail is
    a very strong message that you should not do that.
        Chairman Specter. There is some thinking on cases like
    Pinto that it is insufficient to have the tortfeasor pay
    damages. Pinto is a good illustration of the document showing
    that Ford executives knew that putting the gas tank at the rear
    to save money from putting it in a less exposed spot
    constituted malice, supports a conviction for murder in the
    second degree, and that that would be the way to really deal
    with corporate executives who knowingly put into the stream of
    commerce items which are reasonably expected to cause serious
    bodily injury or death. Do you think that would be a
    collaterally good approach?
        Mr. Pritchard. A what kind of approach? I am sorry?
        Chairman Specter. Well, a better approach than damages.
        Mr. Pritchard. Sending people to jail if they----
        Chairman Specter. I am calling it a ``collateral''
    approach.
        Mr. Pritchard [continuing].--Are knowingly trying to kill
    people? Yes.
        Chairman Specter. Well, they are not trying to kill people.
    They are recklessly indifferent to it.
        Ms. Solov, you talked about favoring big business, and in
    the Stoneridge case the Court lined up 5-3--Justice Breyer
    recused himself--which has all the contours of a traditional
    ideological battle. Do you think that in favoring big business
    this is a part of the liberal-conservative split on the Supreme
    Court in the matter of ideology as opposed to justice, to pick
    an abstract term?
        Ms. Solov. Stoneridge is just one of several, of many
    cases. Tellabs was another case, and there are many lower-court
    cases where I think the courts are coming down in favor of big
    business.
        Chairman Specter. Never mind the lower courts. There are
    many cases where, as the commentators have said, the Supreme
    Court is favoring big business. But dealing with the Supreme
    Court, do you think it is ideological?
        Ms. Solov. Well, it is hard to say. I did find it
    interesting in Stoneridge that, unlike the testimony that we've
    heard about baseless cases, the Court did not say that these
    transactions were baseless. I think in this case they were
    saying that they are somehow constrained by the Private
    Securities Litigation Reform Act from awarding damages and
    looking to Congress. I think they are inviting Congress to make
    some changes to allow for aiding and abetting liability. And
    throughout the case, they write that Congress knew to include
    the SEC as a party that can bring aiding and abetting actions,
    but Congress did not include private rights of action.
        So it is difficult----
        Chairman Specter. You think they were really inviting
    Congress to do something? To say that Congress could have done
    it differently, do you really think it is an invitation?
        Ms. Solov. Well, I think that they----
        Chairman Specter. You think they would like to see Congress
    change their decision?
        I am coming back to my question on ideology, which you have
    not answered yet. Yes or no?
        Ms. Solov. I think that there seems to be a split with the
    Justices, yes.
        Chairman Specter. Mr. Giuffra, when you talk about the SEC
    being the better agency to deal with it, Senator Grassley and
    I, when he chaired the Finance Committee and I chaired the
    Judiciary Committee, went after the SEC on failure to deal with
    insider trading. And we had very much the same view that was
    stated by Judge Rakoff in the celebrated refusal to accept the
    settlement this week, castigating the SEC. I will not ask you
    if you thought Senator Grassley and I were wrong. Let me ask
    you if you think Judge Rakoff was wrong.
        Mr. Giuffra. Senator, I respect all of you and I know Judge
    Rakoff quite well. The SEC does a very good job. The SEC in
    these big cases--the WorldComs, the Enrons--in those cases they
    take a lot of testimony, and they would love to make a case
    against a wealthy lawyer, a wealthy banker, and, in fact, they
    do when the facts and circumstances warrant it.
        The problem is what I am concerned about is the innocent
    banker and the innocent lawyer and the innocent accountant in
    the case that is not the high-profile case, but where a
    plaintiff's lawyer names everyone who touched a company that
    has a stock drop and essentially seeks hundreds of millions of
    dollars in damages. The legal fees can be in the tens of
    millions of dollars. And what happens is that third party has
    no choice but to settle the case.
        As I mentioned in my testimony, 60-plus percent of these
    cases are settled; less than 40 percent are dismissed on either
    a motion to dismiss or on summary judgment.
        Chairman Specter. I recall your testimony. It was only a
    few minutes ago.
        Mr. Giuffra. Yes, I understand.
        Chairman Specter. My memory is good for about 40 minutes.
        Now, do you remember my question?
        Mr. Giuffra. Yes, I think the SEC--we have an excellent SEC
    enforcement person, Robert Khuzami. He is going to try to do
    things to even strengthen the SEC further. Obviously, Congress
    can give more money to the SEC. There are a lot of really
    competent lawyers at the SEC, and those lawyers do not have a
    conflict of interest. They are doing the public's work.
        Class action lawyers are obviously motivated by getting
    attorneys' fees, and so the problem becomes that they will
    bring cases that do not have merit.
        Chairman Specter. You have said that before several times,
    but I would like to come back to my question. My question was:
    Do you think Judge Rakoff was wrong?
        Mr. Giuffra. I think in that particular case, what Judge
    Rakoff was concerned about was the problem of the current
    shareholders of Bank of America paying money to settle this
    matter, and he thought that perhaps other people should pay the
    money. And that is one of the problems with class actions
    generally, because what happens with class actions is the
    shareholders pay the money.
        Chairman Specter. I will only ask it one more time.
        Mr. Giuffra. Okay.
        Chairman Specter. Was Judge Rakoff wrong?
        Mr. Giuffra. I think that he identified an issue, but I
    still think that the SEC does a very good job. And, in fact,
    the point that was made----
        Chairman Specter. Let the record show you have not answered
    my question unless you want to dispute my conclusion.
        Mr. Giuffra. I think the concern that he has focused on,
    though, is the concern about these cases, which is the pocket-
    shifting problem, which is that the shareholders essentially
    pay the damages, as opposed to the people who did something
    wrong. And I fully support criminal--if someone engages in--if
    it is a banker or a lawyer or an accountant, if they engage in
    real securities fraud, put them in jail. The SEC and the
    Department of Justice can do that. The problem is the cases
    that are far from the line, where people are innocent and maybe
    they dealt with a company that was full of fraudsters and they
    were lied to, and then what happens is the plaintiffs' lawyers
    will do a deal with the fraudsters and have the fraudsters
    blame the lawyers and blame the accountants.
        Chairman Specter. OK, that is fine. I understand your
    points made repetitively. But I would just have liked to have
    had an answer to the question.
        Mr. Szymanski, is the Court ideological? Is this another
    aspect of the ideology which permeates the Court with all these
    5-4 decisions?
        Mr. Szymanski. I cannot help but think that it is. I see
    decisions that are customarily with a bloc of voters on one
    side and a bloc of voters on the other side, and it is the same
    bloc. And you can have your viewpoint about who you agree with
    and who you disagree with, but it seems to be the same bloc
    ruling the same way every time.
        Chairman Specter. What do you think about the conventional
    wisdom of deference to the President as the appointing
    authority? There are some Senators who will apply an
    ideological test. I think most do not. Do you think Senators
    should?
        Mr. Szymanski. I think, unfortunately, we have had a series
    of judges nominated by Presidents, and I would say Republican
    Presidents, who are much more, I think, ideological than some
    of the judges appointed otherwise or nominated otherwise. I
    think, unfortunately, the initial obligation ought to be for
    the President of the United States to appoint good, fair judges
    to begin with.
        Chairman Specter. Does empathy suggest an ideology?
        Mr. Szymanski. I am sorry?
        Chairman Specter. Does empathy suggest an ideology?
        Mr. Szymanski. Empathy does not suggest ideology to me. The
    difficulty--when you talk about ideology, I think you are
    talking about ideology that overrules adherence to the law and
    the Constitution.
        We all know that there is interpretation to be done, and
    interpretation is always done with a point of view. And as good
    as people try to be honest to the law, there are going to be
    judgments that are going to be made, and those judgments are
    colored by somebody's viewpoint about how things ought to
    operate.
        You know, the Supreme Court listens to the election
    returns, one famous wag used to say. And I think that is true,
    although I think that most of the judges honestly try to do
    their best in reaching their decisions.
        Chairman Specter. Do you think the judicial appointments,
    the appointments to the Supreme Court are appropriate for
    Presidential campaigning, as a Presidential campaign issue?
        Mr. Szymanski. If the President would say that he is
    interested in appointing certain people to the Court for
    certain reasons? I honestly do not think that that ought to be
    something that is there, that they ought to be saying that they
    are going to appoint good judges who are fair judges to----
        Chairman Specter. Nominees have been doing that at least
    since Nixon, haven't they?
        Mr. Szymanski. And I think that is unfortunate, Senator. I
    really think that that is where it begins. It would be much
    easier for the Senate and these nominations would be much
    easier for the Senate to address if they began from a point
    that was more neutral than they have been.
        Chairman Specter. If they all had the sterling academic and
    professional qualifications like Chief Justice Roberts?
        Mr. Szymanski. I cannot say that when I saw Chief Justice
    Roberts' nomination that I had a sense about how I thought he
    would rule in certain cases like these, if he had the
    opportunity, if the law allowed him the ability to go one way
    or another, how he would rule.
        Chairman Specter. What do you think of his definition of
    stare decisis that the Court should be modest, should not shock
    the system, should consider the length of the decision, how
    many times it had been reaffirmed, how much reliance there was,
    whether a contrary decision would reflect on the integrity of
    the Court? Do you think those are pretty good standards?
        Mr. Szymanski. I think those are very good standards.
        Chairman Specter. How do you think those standards would
    apply if objectively applied to letting corporations engage in
    campaign--make campaign contributions?
        Mr. Szymanski. I would think that the Supreme Court ought
    to leave the law the way it is instead of all of a sudden
    finding that the First Amendment permits corporations to do
    these----
        Chairman Specter. Leave the law the way it is, but how
    would you think those standards for stare decisis would apply
    to that issue?
        Mr. Szymanski. That is the way I think that those standards
    would apply. I mean, that is the way the law has been.
        I will tell you personally my gripe with the whole thing
    about corporations are decisions that were done in the mid-
    1800's that found that corporations were people with the rights
    of people. I think, frankly, although there is a lot of stare
    decisis since the mid-1800's, finding that corporations are
    people and should be treated as though they have the rights of
    people, I do not think they should, frankly. Corporations are
    legal fictions, and I do not think they should have the rights
    of people. And that is where I think we went wrong.
        But if you are talking about overturning stare decisis, I
    am talking about overturning now 150 years of it rather than
    just 35 or 40 years of it.
        And, by the way, Senator, let me say I think that Judge
    Rakoff was right, and I do not think he was worried about who
    was going to pay the money. I think what he was concerned about
    was that the amount of the settlement did not come anywhere
    near the size of the $3.5 billion of the violation that was
    involved.
        Chairman Specter. Let me thank you for answering the Rakoff
    question.
        Professor Coffee, do you think the securities laws are
    fairly well balanced at the present time, if we move ahead and
    enact S. 1551, would be pretty well balanced?
        Mr. Coffee. I think 1551 does fill the void. I do think--
    and you have heard this debate between myself and Mr. Giuffra--
    that public enforcement cannot do it all by itself. We need
    private enforcement to supplement public enforcement, and 1551
    is directing private enforcement at secondary participants and
    what I will call the ``gatekeepers of our capital markets.''
        Chairman Specter. What do you think of the recent----
        Mr. Coffee. What do I think what?
        Chairman Specter. What do you think of the recent Supreme
    Court decision, opinion by Justice Kennedy changing the
    pleading rules?
        Mr. Coffee. Which rules--I am just not hearing fully.
        Chairman Specter. The recent Supreme Court decision,
    opinion by Justice Kennedy requiring a lot more specificity on
    pleading in----
        Mr. Coffee. Well, that is going to weed out some
    meritorious cases. It is going to weed out some frivolous
    cases. I think on balance it is probably going to go in the
    direction of making it much harder to get access to the Court.
        Chairman Specter. What happened to notice pleading,
    Professor Charles E. Clark and Dioguardi v. Durning and all
    that sort of thing?
        Mr. Coffee. I remember both Professor and Judge Clark from
    a long time ago, and he had a very liberalized pleading rule. I
    do think that there has been some evidence that we needed to
    cut back on frivolous litigation. I think there were some
    provisions in the PSLRA that were justified and were desirable.
    But precisely because we have those protections, I now think
    1551 is particularly justified because you are not turning
    loose a huge litigation engine on innocent secondary
    participants. They have great protection--great protection
    under the PSLRA.
        And let me point out we are talking about a world in which
    there was obvious under-deterrence in some fields. To my
    knowledge, no credit rating agency has ever been held liable
    for damages for securities fraud. And I think they have made
    some very serious errors.
        I think your 1551 would greatly increase the possibility of
    holding accountable some of the critical gatekeepers who today
    are not deterred.
        Chairman Specter. Do you think the 1995 legislation
    established an appropriate balance in the necessity of
    pleading?
        Mr. Coffee. I think it went a little too far. I think there
    were abuses that needed to be curbed. I think it went a little
    too far. If it was up to me and I ruled the world, I would
    correct the balance 10 or 15 degrees back in the direction of
    making it slightly more pro-plaintiff. But I would not try to
    simply reverse or throw out the PSLRA. I think it has a number
    of provisions that should be retained.
        Chairman Specter. My recollection is I offered an amendment
    which would have struck a little different balance, which
    passed the Senate 57-42. Do you remember----
        Mr. Giuffra. I actually do remember that. I remember being
    on the floor, Senator, when you made----
        Chairman Specter. I tried to talk Senator D'Amato into
    holding it in conference. He probably was listening more
    closely to you than to me.
        [Laughter.]
        Chairman Specter. What did you think of that amendment?
    Probably not much because it went down in conference and you
    were counsel.
        Mr. Giuffra. Respectfully, Senator, I think the problem is
    that what was going on in those cases was that the plaintiffs'
    lawyers would see a company's stock price drop; they would go
    into their support system, literally, change the names on the
    form complaints, and file them the next day. They did no
    investigation, no consideration of actually whether fraud had
    occurred.
        Chairman Specter. Why not put some teeth into Rule 11 on
    penalties for frivolous lawsuits, to deal with frivolous
    lawsuits?
        Mr. Giuffra. We tried to do that in the PSLRA, and there
    was a lot of discussion about it. And, in fact, the House bill
    had much tougher provisions to sanction lawyers. The Senate
    bill reduced those provisions, and there is a provision in the
    PSLRA that says that at the end of every case the judge should
    consider whether Rule 11 sanctions should be imposed.
        Typically, since most of these cases settle or are
    dismissed, the defense lawyers do not want to really fight with
    the plaintiffs' lawyers, and the cases where they are
    dismissed, everybody just wants it to go away. And I, in fact,
    was involved in a case recently where the judge basically said
    it was a baseless complaint. We said let us try to see if the
    judge will look and see whether Rule 11 sanctions should be
    filed. And in that particular case, the plaintiff's lawyer and
    I had a conversation, and the plaintiff's lawyer had filed a
    motion to dismiss, and I decided it was better for my client,
    rather than to litigate about sanctions, to just have the case
    be dropped.
        So sanctions are--you know, courts are not in the United
    States very pro-sanctions. It is much more of a U.K. concept.
        Chairman Specter. Yes, but you are a fellow who likes
    deterrence. Wouldn't that have been a deterrent to some
    lawyers?
        Mr. Giuffra. Absolutely, but at least in the United States
    we do not have a loser-pay rule, and that is one of the issues.
    You can----
        Chairman Specter. Well, it is not loser pay if you can
    prove sanctions under Rule 11.
        Mr. Giuffra. Absolutely. But there are so few cases where
    lawyers are actually ever sanctioned, notwithstanding the----
        Chairman Specter. It seems to me like you have one, as you
    describe it, where it could have been done.
        Mr. Giuffra. And I decided it was better for my client not
    to pursue the sanctions because they would appeal, it would be
    more money being spent on the case, and so it was better just
    to have it end.
        Chairman Specter. We are now at the 1-hour mark, and thank
    you very much for staying. This is a very, very distinguished
    panel. You are even more erudite than you are patient, which is
    going some, on a 2 o'clock hearing which was rescheduled for 3,
    then for 4, and started at 5. So thank you all very much for
    coming.
        [Whereupon, at 6:02 p.m., the Subcommittee was adjourned.]
        [Questions and answers and submission for the record
    follow.]

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