[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



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                  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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