[Congressional Record Volume 140, Number 51 (Tuesday, May 3, 1994)]
[Extensions of Remarks]
[Page E]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]


[Congressional Record: May 3, 1994]
From the Congressional Record Online via GPO Access [wais.access.gpo.gov]

 
                      SECURITIES FRAUD LITIGATION

                                 ______


                        HON. BARBARA B. KENNELLY

                             of connecticut

                    in the house of representatives

                          Tuesday, May 3, 1994

  Mrs. KENNELLY. Mr. Speaker, I would like to take a moment to 
highlight an alarming trend in securities fraud litigation. U.S. 
companies are increasingly becoming victims of lawsuits that are 
triggered by a fluctuation in stock prices intended to coerce companies 
into settling baseless claims rather than face enormous trial costs. 
Companies which report a drop in stock price or reduced earnings are 
identified by law firms that file class-action suits. These law firms 
then make the claim that the company made misleading projections of 
higher earnings and sue on behalf of shareholders. Such action is 
harmful to industry and shareholders in the long run. In addition, 
these suits will deter voluntary disclosure, an integral part of 
securities law. This type of fraud litigation is a growing problem and 
one that must be corrected without weakening a defrauded investors 
right to redress. Legislation has been introduced in both the House and 
the other body and I urge my colleagues to support H.R. 417 introduced 
by Congressman Tauzin.
  Mr. Speaker, I would like to submit for the Record and editorial that 
appeared in the Hartford Courant, Monday, April 11, 1994, regarding the 
need for securities litigation reform. I believe Members will find this 
piece a cogent argument for reforming our securities laws.

                  Frivolous Lawsuits Hurt Shareholders

       Suppose a small or medium-sized high-tech firm reports poor 
     earnings and its stock price drops by, say, 15 percent. The 
     bells begin ringing in a small number of law firms that 
     specialize in class-action lawsuits. They scan computers for 
     such unusual events in the market.
       The attorneys, ostensibly suing on behalf of shareowners, 
     do not have to specify charges--they may merely claim that 
     the company had made misleading projections of higher 
     earnings. The company is supposed to prove that it didn't do 
     anything illegal to cause earnings to tumble.
       Most companies settle out of court even if they didn't do 
     anything wrong. That's cheaper than a trial. In one study, 
     settlements averaged $8.6 million for each company sued 
     between July 1991 and June 1993.
       These frivolous lawsuits discredit the legal profession, 
     distract companies from their main tasks, discourage or 
     retard the development of new, cutting-edge businesses and 
     ultimately harm the interests of all shareholders.
       For example, CMX Systems Inc. of Wallingford, a young and 
     highly sophisticated precision-tool operation, has enjoyed 
     considerable growth since it went into business. It would 
     like to expand by raising more capital through a public 
     offering of shares. But it is reluctant to do so. A single 
     down period, or a sharp drop in the stock price for a day or 
     two, could result in a frivolous lawsuit.
       Something has gone awry. ``This run-to-the-courthouse 
     phenomenon needs to be examined,'' says Arthur Levitt, 
     chairman of the Securities and Exchange Commission. The SEC 
     is considering intervention on behalf of companies faced with 
     cases deemed to be frivolous.
       On Capitol Hill, a subcommittee on securities, chaired by 
     Sen. Christopher J. Dodd of Connecticut, held two hearings on 
     the issue last year. Mr. Dodd decided to become principal 
     sponsor of a bill that would discourage frivolous lawsuits.
       The bill has caused particular alarm among plaintiffs in 
     the bankrupt Colonial Realty case. They fear that their 
     lawsuits would be jeopardized.
       But the bill would not affect shareowner lawsuits against 
     Colonial or its accounting firm. It would not be retroactive 
     and would not prevent defrauded investors from suing 
     companies or their outside accountants.
       Indeed, the bill would not prevent any share owner from 
     going to court. It would require clearer evidence of 
     wrongdoing than is now expected before rushing to court. It 
     would promote alternative dispute-resolution procedures and 
     would give share owners greater say over the course of a 
     lawsuit. At present, the lawyers in some classaction suits 
     are in almost total control. There would also be a mechanism 
     for neutral evaluation of new cases to screen out frivolous 
     suits.
       These are reasonable provisions aimed primarily at a small 
     number of law firms that specialize in frivolous lawsuits on 
     behalf of so-called professional plaintiffs who often have 
     nominal holdings in a company.

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