Congressional Record, Volume 141 Issue 43 (Wednesday, March 8, 1995)

[Congressional Record Volume 141, Number 43 (Wednesday, March 8, 1995)]
[House]
[Pages H2818-H2864]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

SECURITIES LITIGATION REFORM ACT

The SPEAKER pro tempore. Pursuant to House Resolution 105 and rule
XXIII, the Chair declares the House in the Committee of the Whole House
on the State of the Union for the further consideration of the bill,
H.R. 1058.

{time} 1135

in the committee of the whole

Accordingly the House resolved itself into the Committee of the Whole
House on the State of the Union for the further consideration of the
bill (H.R. 1058) to reform Federal securities litigation, and for other
purposes, with Mr. Combest in the chair.
The Clerk read the title of the bill.
The CHAIRMAN. When the Committee of the Whole rose on Tuesday, March
7, 1995, the amendment offered by the gentleman from Texas [Mr. Fields]
had been disposed of and the bill was open for amendment at any point.
Six hours and thirty-five minutes remain for consideration of
amendments under the 5-minute rule.
Are there further amendments to the bill?

amendment offered by ms. eshoo

Ms. ESHOO. Mr. Chairman, I offer an amendment.
The Clerk read as follows:

Amendment offered by Ms. Eshoo: Page 18, beginning on line
2, strike ``For example, a defendant who genuinely forgot to
disclose, or to whom disclosure did not come to mind, is not
reckless.''.

Ms. ESHOO. Mr. Chairman, I offer this amendment to improve the
standard by which H.R. 1058 determines if a person has acted recklessly
in misleading buyers or sellers of securities.
Protecting against reckless conduct is critical in securities law
because in the world of finance there is ample opportunity to mislead
investors with recklessly fraudulent statements.
My amendment is an effort to improve H.R. 1058 in this critical area.
H.R. 1058 has many solid and much needed legal reforms. And as several
of my colleagues mentioned yesterday, we should have had legislation on
this issue before this House long before today. It is needed, and it is
overdue.
However, Mr. Chairman, the bill before us is seriously deficient when
it comes to recklessness--not so much by what is missing, but by what
has been added. My amendment protects the recklessness standard by
striking the sentence which allows the defendant to escape liability by
saying, ``Your honor, I forgot to disclose that important fact to the
customer.'' In other words, I forgot to tell the truth.
Outside of this sentence, Mr. Chairman, the bill's definition of
recklessness is perfectly adequate. It follows the so-called Sundstrand
decision which has been supported by 75 percent of the Federal courts.
Yet, H.R. 1058 has taken Sundstrand and modified it to include a
provision which exempts from liability defendants who forgot to act
responsibly.
Mr. Chairman, I believe there is a reason that no U.S. appellate
courts have adopted the definition for recklessness as it is stated in
H.R. 1058.
Our Nation's judges, most of them conservative appointees, understand
the difficulty plaintiffs, with legitimate cases, have in proving
``knowing'' fraud. Our courts have resoundingly said recklessness is
not the same as knowing fraud, and ``I forgot'' is not an excuse.
For two centuries this country has prided itself on the fact that we
are governed by the rule of law rather than by the whim of individuals.
Now the majority proposes to overturn this principle with one sentence
providing every guilty defendant the opportunity to escape retribution.
Mr. Chairman, I am not a lawyer. But I have a lay person's respect
for our Nation's statutes. They should be written with care and with
the goal of providing justice for every citizen.
Now with that in mind, Mr. Chairman, when we write the statute which
prohibits reckless and fraudulent conduct in securities law, do we want
to include the following sentence: ``For example, a defendant who
genuinely forgot to disclose, or to whom disclosure did not come to
mind, is not reckless.''
Mr. Chairman, do we want our laws to say such a thing? Do we want to
give the defense of faulty memory to a reckless person? I don't think
so.
The high technology companies in my district need relief from
meritless lawsuits now. We need to pass legislation that will end these
suits yet protect investors' rights.
My amendment would be one step in the long process of writing a bill
which Congress passes and that the President can sign. I urge my
colleagues on both sides of the aisle to support this reasonable
amendment and improve this legislation.
Mr. BLILEY. Mr. Chairman, I rise in opposition to the amendment.
Mr. Chairman, the second sentence of the recklessness definition
comes directly from the Sundstrand decision. It is part of the holding
of the case. Take it out and we change the law. In footnote 20 of the
Sundstrand decision, the court wrote, ``[t]hus, if a trial judge found,
for example, that a defendant genuinely forgot to disclose information
or that it never came to his mind, etc., this prong of the * * * test
would defeat a finding of recklessness * * * '' 553 F.2d 1033, 1045F n.
20 (7th Cir. 1976). Thus, the second sentence comes directly from the
original decision at the point where the judges were explaining the
standard. Opponents of the legislation seem to want to choose
selectively from Sundstrand or to pretend that the explanatory second
sentence does not exist. But it does.
Opponents of the language argue that the second sentence is merely a
footnote. If we ignore footnotes, we should ignore the recklessness
issue--because the Supreme Court created the issue in the now-famous
footnote 12 in the Hochfelder decision. Other famous footnotes in
judicial history include footnote 4 in the Carolene Products case,
which has generated dozens of law review articles and thousands of
pages of commentary.
The Sundstrand court was using the footnote to explain that the
standard for recklessness is something more than inexcusable
negligence. In the Hochfelder decision, the Supreme Court expressly
recognized that negligence is not enough for liability under IOb-5.
Thus, a mistake, even a bad mistake, is not enough to establish
liability. The wrongdoing must be conscious for liability to attach. In
applying the Supreme Court's standard, the Sundstrand court explained
that for a party to be liable for recklessness, the omission must
derive from something more egregious than even ``white heart/empty
head, good faith.'' The footnote explains that ``this is a subjective
test with the requirement of something more than ``inexcusable
negligence'' imposed because of Hochfelder.'' Thus, by including the
second sentence in the legislation, Congress is clarifying its intent
not to lower the standard under IOb-5 cases to mere negligence or gross
negligence. As the Court explained, forgetting facts is not actionable.
Not a single Federal district or appellate court relying on the
Sundstrand standard has raised any objections to footnote 20, or have
found it inconsistent with the recklessness standard articulated in the
case. Federal district courts have referred to footnote 20 when
articulating the Sundstrand test. The courts appear to accept footnote
20 as part of the holding in the case. For example; Seifer v. Topsy's
International, Inc. 487 F. Supp. 653, 665 (D. Kan. Mar. 19, 1980):

[T]he core requirement of Hochfelder and Ultramereal is
that the plaintiff establish that the defendant lacked a
genuine belief that the information disclosed was accurate
and complete in all material respect.--Accord, Sundstrand,
553 F.2d at 1045 n. 20.

None of the circuit courts that have adopted the Sundstrand standard
have rejected footnote 20 or its substance.
Opponents claim that the second sentence would reverse the rule of
``ignorance of the law is no excuse.'' This argument is nonsense. The
Sundstrand standard speaks of ignorance of the facts, not ignorance of
the law. Ignorance of the law is, indeed, no excuse. But, as the
footnote says, ignorance of the facts is negligence, or even
inexcusable negligence, and actors are not liable for negligence under
IOb-5 actions. The law is not intended to penalize individuals who
forget particular facts. The second sentence says nothing about
ignorance of the law and does
[[Page H2819]] not provide an affirmative defense for one who forgot
to obey the law--as the minority argues. It speaks only to ignorance of
facts.
I urge a ``no'' vote on the amendment.
Mr. DeFAZIO. Mr. Chairman, I move to strike the last word.
Mr. Chairman, as I heard the former Member speaking, I could hear a
distant sound and I think it was champagne corks popping on Wall
Street. This is extraordinary. I am not an attorney, so I will not cite
chapter and verse of precedents. I will go straight to the heart of the
matter.

{time} 1145

If a person who has worked hard their whole life to put together a
little bit of savings for retirement, or maybe they want to annuitize
their pension, they have to depend upon someone for advice. And they go
and they depend upon the advice of a stockbroker or a prospectus
written by some $500-an-hour lawyer on Wall Street. And there is a
little omission in that prospectus. It forgets to tell you that you are
not investing in Treasury bills, you are investing in derivatives. You
lose your money, your life savings, your annuitized pension. It is
gone. You are broke.
Do my colleagues know what? You now have a little problem. Two
things. One is if you want to sue, this has loser pay in it. So if you
are the individual who lost your life savings, you have to find the
wherewithal to come with the money to pay for the costs.
Second, it has a new and novel defense from a lay person's
perspective. I do not know of any other law in America where you can
say, ``I forgot. I forgot.''
What this means is the next time that someone tries to go to court to
recover against the next Charles Keating--there will not be another
Charles Keating--that would be great if there were no more frauds that
cost the American people millions of dollars like the savings and loan
scandals. No, that is not what it means. What it means is you will not
have recourse to sue them because they forgot or they just overlooked
the disclosure that the bank was on the brink of insolvency when you
put your money in there, or when you invested it in that bank.
At a time of turmoil in international markets, just after the bank's
scandal, not very long after the Orange County scandal, how is it that
we can come credibly before the American people and say Wall Street
needs protection from those little stockholders, Wall Street needs
protection from people who are putting their life savings in their
hands. Why? Well, because Wall Street might forget to tell them
something crucial.
This is absolutely outrageous beyond the pale. It is a step through a
looking glass into some bizarre new world.
Mr. BLILEY. Mr. Chairman, will the gentleman yield?
Mr. DeFAZIO. I yield to the gentleman from Virginia.
Mr. BLILEY. Mr. Chairman, the gentleman makes a strong argument, but
he is wrong on one of the facts, and that is if the firm knew of some
information that was derogatory and withheld it, they would not be
excused under this language. They could not use the ``I forgot''
defense, because they knew the language to begin with.
Mr. DeFAZIO. If I can reclaim my time, I think what this leads to is
full employment for psychologists, because we are going to have an
awful lot of amnesia on Wall Street. It was not that they knew or
recklessly disregarded or consciously omitted, but it is just they
forgot at the moment that they were drafting it, or when the print of
the prospectus came back from the printer, the proof, and it left out
the section on risky derivatives, well, they forgot. They forgot that
that should have been there.
Mr. BLILEY. Mr. Chairman, will the gentleman yield again?
Mr. DeFAZIO. I yield again to the gentleman from Virginia.
Mr. BLILEY. The word in there is genuinely forgot, and as a proof in
fraud, you have to prove all fraud in court. But they would not be able
to stand a chance of maintaining a defense under this language if they
knew in advance and deliberately just withheld it, because they could
not use that defense because they did not genuinely forget.
Mr. DeFAZIO. If I can reclaim my time, I understand this is not the
reckless disregard section, so we already have reckless disregard, and
this is a further definition of reckless disregard. That is, a defense
for reckless disregard is ``I forgot.'' Is that not correct? It is a
definition of reckless disregard.
Mr. BLILEY. It is a definition of reckless, yes. The gentleman is
correct.
Mr. DeFAZIO. Reclaiming my time, if someone recklessly disregards and
they lose your pension or your annuity, I think at that point they
should be liable. I do not think they should have the defense of they
forgot. I do not think the average American is going to think depending
on experts, that is an incredible position to be taken by the U.S.
Congress.
Mr. FIELDS of Texas. Mr. Chairman, I move to strike the requisite
number of words.
Mr. Chairman, as we are having this debate I think it is important
for all of us as Members not to forget certain points.
Point No. 1 mentioned by Chairman Bliley just a moment ago is if you
take this sentence out of the statute as the statute is currently
drafted, you change the law. This sentence that is the subject matter
of the debate comes directly from Sundstrand.
Some people say that this is not important because this sentence
comes from a footnote. But it is important to point out, as the
chairman did just a moment ago, that in footnote 12 of Hockfelder that
footnote created the issue of recklessness and whether recklessness
might meet the standard of intent that was required.
This sentence in Sundstrand was used to describe what was meant by
the court in interpreting recklessness. This sentence has been
litigated and relitigated. This sentence has stood the test of judicial
review. In fact, this sentence as part of Sundstrand has been adopted
by 9 of the 12 Federal circuit courts.
I think it is really important for this debate to put this in
perspective. Where does this particular amendment affect the
legislation, and it is important for Members to know that this occurs
in subsection 4 in defining recklessness. But it occurs in section
10(a) where we are talking about the requirements for securities fraud
actions, and particularly under section (a) of Scienter, and we say
under this section, it says to establish Scienter and we list elements,
the defendant indirectly made a fraudulent statement, the fact that the
defendant possessed the intention to deceive, manipulate or defraud and
the defendant made such fraudulent statement knowingly or recklessly,
and that is why the definition of reckless is so important in its
definition and how it is put down in this particular statute.
So it is important to go to the definition of recklessness in the
statute as it is drafted to understand the purpose of that particular
sentence.
I will read in section 4, recklessness. ``For the purposes of
paragraph 1,'' the paragraph I will refer to in just a moment, ``a
defendant makes a fraudulent statement recklessly if the defendant in
making such statement is guilty of highly unreasonable conduct that
involves not simply merely simple or even gross negligence, but an
extreme departure from standards of ordinary care; and (b) presents a
danger of misleading buyers or sellers that was either known to the
defendant or so obvious that the defendant must have been consciously
aware of it.''
Then the sentence that is the subject of this follows. It says: ``For
example, a defendant who genuinely forgot to disclose or to whom
disclosure did not come to mind is not reckless.'' The court was
indicating what was meant in the definition of reckless in that
Sundstrand decision, so it is important that this sentence remain, and
it is important that people recognize that this has already been
adopted, it has been litigated time and again, but adopted by 9 of the
12 Federal circuit courts.
Mr. MANTON. Mr. Chairman, I move to strike the requisite number of
words and I rise in favor of the Eshoo amendment.
At the outset, I want to commend my colleague, Ms. Eshoo, for
offering this important amendment which would dramatically improve the
bill's recklessness standard.
As a representative who hails from New York City, the financial
capital of
[[Page H2820]] the world and the headquarters of most of our Nation's
securities accounting firms, I share my colleagues interest in passing
securities litigation reform and easing capital formation for our
local, regional, and national economies.
However, as the representative of New York's Seventh Congressional
District, I am also committed to protecting the people of Queens and
the Bronx, who help keep New York City running by supplying the city's
businesses with skilled labor. My district is also home to a large
number of retired middle class workers.
I want to state that I support a level playing field in securities
litigation.
I think clear rules will serve to define prohibited activities and
eventually lead to better protection of all parties. We must resist the
temptation to try to address the uncertainties of the securities market
by presuming bad faith by either party in securities litigation cases.
In that regard, I rise in support of Ms. Eshoo's amendment which
would correct the bill's untenable standard for defining recklessness
which would protect fraudulent conduct.
When first introduced, this securities litigation reform legislation
contained no provisions designed to hold businesses accountable for
reckless conduct, instead, defrauded investors would have had to prove
that defendants actually intended to defraud them. After much criticism
from members of the Commerce Committee, liability for recklessness was
restored, but was defined as willful blindness, a definition which has
been adopted by no circuit courts of appeal.
It is difficult to understand why willfulness that is, intent, should
be required as a prerequisite to a finding of recklessness.
In fact, the only thing that seemed to recommend that obscure
definition was that it was so narrow that it was unlikely anyone could
be found reckless under its definition, and in fact, no one had never
been found reckless through its use.
For the benefit of my colleagues who are not on the Commerce
Committee I would like to point out that, contrary to what they may
hear today, there is little disagreement about what recklessness means
in Federal courts. The majority of circuits, including the second
circuit in New York, which most people acknowledge has special
expertise in securities matters, has adopted the seventh circuit's
determination in Sundstrand versus Sun Chemical, that:

Reckless conduct may be defined as a highly unreasonably
omission involving not merely simple or even inexcusable
negligence, but an extreme departure from the standards of
ordinary care, and which presents a danger of misleading
buyers or sellers that is either known to the defendant or is
so obvious that the actor must have been aware of it.

While H.R. 1058 now contains language similar to Sundstrand, I ask my
colleagues to consider why the ``For Example'' sentence, which the
Eshoo amendment would strike, was added to this accepted standard. I do
not think that I am being unreasonably suspicious by suggesting that
these changes were designed to undermine the Sundstrand standard. If my
colleagues are not trying to weaken the accepted standard, why don't
they simply accept this amendment?
The issue before us is not a complex legal question.
If the Congress passes something which represents the accepted
definition of recklessness plus ``something,'' then we are not
codifying the current court standard. Courts will determine that we
must mean something besides the accepted definition of recklessness,
and set about to determine what else the addition of the footnote will
require before a showing of recklessness can be made.
As Anthony Lewis pointed out in the New York Times on Monday, this
extra sentence will likely open new loopholes for securities fraud.
I can think of no reason to allow businesses to escape liability for
their own fraud if they conveniently forget that they perpetrated fraud
on investors.
I cannot fathom the common sense in this definition of recklessness.
My colleague, Ms. Eshoo, and I have worked together through the
committee process to improve the securities litigation portion of the
Contract With America.
In an unfortunately all too partisan setting, Ms. Eshoo has attempted
to forge reasonable legislation which balances the rights of businesses
and investors. She has drafted a commonsense amendment. I urge my
colleagues to support it.
amendment offered by mr. cox of california as a substitute for the
amendment offered by ms. eshoo

Mr. COX of California. Mr. Chairman, I offer an amendment as a
substitute for the amendment.
The Clerk read as follows:

Amendment offered by Mr. Cox as a substitute for the
amendment offered by Ms. Eshoo: Page 18, beginning on line 2,
strike ``For example'' and all that follows through line 5
and insert the following: ``Deliberately refraining from
taking steps to discover whether one's statements are false
or misleading constitutes recklessness, but if the failure to
investigate was not deliberate, such conduct shall not be
considered to be reckless.''

{time} 1200

Mr. COX of California. Mr. Chairman, I would like to address myself
to the comments that have been made thus far by my colleagues
concerning one sentence in our definition in the statute of the court-
created cause of action for reckless violation of the securities laws.
The 1934 act and the 1933 act do not contain any private cause of
action. This has been created by the courts.
Likewise, they do not contain any cause of action for recklessness.
That, too, has been created by the courts in very recent years.
Our legislation takes the rather dramatic step of codifying this
judge-made law of recklessness in the lower courts, judge-made law that
the Supreme Court has never agreed to; only in a footnote in a Supreme
Court decision did they say they were not prepared to decide whether
recklessness could be a cause of action at all.
So for the first time our legislation would be codifying
recklessness, and to do this, we borrowed, at the suggestion of
Democrats on the Committee on Commerce, language from the seventh
circuit Sundstrand case. The Sundstrand decision itself crafted a
recklessness standard borrowed from another court in the western
district of Oklahoma, and that court had its opinion quote verbatim in
the Sundstrand case.
Then the judge in the Sundstrand case came up with his own
interpretation of what that meant, which he put in a footnote. We have
both the western district of Oklahoma case that was recited in
Sundstrand and the judge's own words in this proposed legislation. It
is the judge's own words in Sundstrand that contain the definition of
the distinction between recklessness and negligence, so that someone
who honestly makes a mistake is definitionally negligent but not
reckless. Therein lies the distinction. And it is that language that is
giving rise to all of this debate.
So my colleague from California has proposed merely to strike that
sentence which would leave us with something of a vacuum in our
legislative definition of recklessness, but her reason for wanting to
strike it is, I think, a fair one, and that is that examples are not
normally contained in statutes.
Now, one of the reasons that I think we need to put as much as
possible into the statute is that judges increasingly are not looking
to legislative history to determine what Congress meant. I actually
support that mode of judicial interpretation of statute.
I think there is a way to solve the problem. I am going to agree with
my colleague from California that we can strike this last sentence and
still achieve the objective, and I have proposed that we substitute
instead language from a court case in the southern district of New York
that simply harmonizes the Hochfelder standard that we have already
written into subparagraph (b) of this statute with the idea of
recklessness. The sentence we would substitute says simply this:

Deliberately refraining from taking steps to discover
whether one's statements are false or misleading constitutes
recklessness, but if the failure to investigate was not
deliberate, such conduct shall not be considered to be
recklessness.

I think we can all agree this is exactly what this statute means.
This is what the judge-made case law already on the books means. Even
if we do not enact this statute, it clarifies precisely
[[Page H2821]] what is our congressional intent. It offers guidance to
the courts, and most importantly of all, guidance to the American
people who would like to know in advance the standard to which they
should conform their conduct.
So I congratulate my colleagues for focusing our attention on this
issue. I think that this is a fair resolution.
Mr. BRYANT of Texas. Mr. Chairman, will the gentleman yield?
Mr. COX of California. I yield to the gentleman from Texas.
Mr. BRYANT of Texas. I appreciate the gentleman's congratulations. We
tried very hard to focus you on this issue in committee. Let us just go
over, briefly, what happened here.
In the subcommittee you told us the Sundstrand decision said one
thing. We argued vigorously with that. In full committee you told us it
said another thing which is what is in the bill today. Now you are
presenting us with a handwritten amendment in which you say that you
have tried to find some way to further codify what you were after.
I think it raises a serious question about exactly what you guys are
doing. I mean, have you thought this thing through or not? Why is this
just a handwritten amendment? Was this just patched together in the
last hour? We are writing laws that affect pension plans, affect
people's stock investments, affect the stability of the market. This is
a serious matter. You come up here at the very last minute with a
handwritten amendment which, by the way, I find to be very difficult,
much of which is almost impossible to distinguish from what is in the
bill already.
When did you write this amendment, I ask the gentleman from
California [Mr. Cox]?
Mr. COX of California. Reclaiming my time, the gentlewoman from
California, at the close of business last night, was recognized as the
opening amendment today, and it is, therefore, timely that we are
discussing her amendment to this bill today, and it is because of the
initiative to change the legislation that we are now engaged in
describing how to do that. It is, of course, important for all of us to
participate in this debate.
Mr. BRYANT of Texas. If the gentleman will yield further, the
Republican leadership told us yesterday there would be no additional
amendments. We just saw this in the last 5 minutes.
Mr. TAUZIN. Mr. Chairman, I move to strike the requisite number of
words.
Mr. Chairman, I rise in support of the substitute amendment.
We are talking literally about the last sentence of the definition
contained in the Sundstrand decision of recklessness. I want to point
out for the members of the committee that the last sentence that is
being debated here by the Eshoo amendment is contained in the
Sundstrand decision. It is contained in the Sundstrand decision in
further elaboration of what recklessness is not; Sundstrand adopts the
language from the Oklahoma case which was the first case that was
decided after the Supreme Court case of Hochfelder. It adopted that
language and defined what recklessness is. That is in the bill exactly,
indeed, as the court described it in the Sundstrand decision.
But Sundstrand and the court in Sundstrand went a step further. It
said not only is this what recklessness is, this is what it is not.
And why was that important? It was important because in the original
Supreme Court decision the Court made it very clear to its circuit
courts who are going to be interpreting the law even more precisely
than the Supreme Court did, it made it very clear, and here is a quote
from Hochfelder, that ``When a statute,'' like 10(b)(5) ``when a
statute speaks so specifically in terms of manipulation and deception
and of implementing devices and contrivances, the commonly understood
terminology of intentional wrongdoing, and when its history reflects no
more expansive intent, we are quite unwilling to extend the scope of
this statute to negligent conduct.''

In effect, what Hochfelder was saying was that this statute,
10(b)(5), that we are codifying and amending today, was clearly in its
origination and in its history an intentional-fraud statute, not a
negligence statute. Now, I know that there are many who would like to
turn it into a negligence statute. That is not what it is. It is an
intentional-fraud statute.
The courts have interpreted that statute to say that when somebody's
conduct is not quite clearly intentional but so reckless as to get real
close to intentional misconduct, that that, too, can be used as a cause
of action under the statute.
Hochfelder was saying you still need to find some elements that lead
you to that conclusion that recklessness is so severe that it is the
equivalent of intentional wrongdoing, and so Sundstrand came along, the
Oklahoma case came along interpreting that Supreme Court decision even
further and defined recklessness in those terms.
Let me quote from what is in the bill and what is in Sundstrand:
``Reckless conduct may be defined as a highly unreasonable omission
involving not merely simple or even inexcusable negligence.'' Hear this
again, ``Not even inexcusable negligence, but an extreme departure from
the standards of ordinary care and which presents a danger of
misleading buyers or sellers that is either known by the defendant or
is so obvious that the actor must have been aware of it.''
Sunstrand is, in effect, saying that you have got to get awfully
close to intentional negligence.
What the gentleman is now offering in place of further clarifying
language of what is not negligence that is contained in Sundstrand,
verbatim, is a statement that is taken from other court decisions,
again interpreting the Supreme Court decision saying ``deliberately
refraining from taking steps to discover whether your statement is true
or false is, indeed, recklessness.'' In effect, referring again, as the
Supreme Court said you must refer to, some kind of deliberateness, some
kind of intentional misconduct, something so close to the intent to
defraud that it meets both the history, the intent, and the original
language of section 10(b)(5). Let me say it again: There are many
people who would like this section of the law to be a negligence
section. It is not. This is a fraud section of law, and you can try to
turn it into a negligence standard if you like by amendment. That is
not what this law is all about. That is not what this section of
litigation is all about.
There are many lawyers who try to turn it into a negligence standard.
The court in Sundstrand and the Supreme Court said that is not the law.
This is a recklessness, almost right up there close to intent to
defraud, and if you want to make sure that that is true, the
gentleman's substitute amendment is not only right but eliminates,
indeed, an example that is in Sundstrand, because I frankly think that
is not good text in the law and substitutes instead a finding of the
court.
The CHAIRMAN. The time of the gentleman from Louisiana [Mr. Tauzin]
has expired.
(By unanimous consent, Mr. Tauzin was allowed to proceed for 1
additional minute.)
Mr. BRYANT of Texas. Mr. chairman, will the gentleman yield?
Mr. TAUZIN. I yield to the gentleman from Texas.
Mr. BRYANT of Texas. A few moments ago you all were quoting to us
from a 1976 decision in Sundstrand saying this is the common law; we
are just going to codify it.
Last night we were told there would be no more amendments to the
bill. In the last 5 or 10 minutes, we have been handed a very illegible
handwritten amendment which you are now lauding as a great new standard
for this industry.
I would like to ask the gentleman, if I can----
Mr. TAUZIN. Reclaiming my time, I will be happy to respond; whatever
time I have, I have got your question. The question is should the
example that is quoted in Sundstrand of what is not negligence be
contained in this bill. You have objected to that. The gentlewoman has
asked we take it out. We are saying OK, if you really want to do that,
let me answer the question----
Mr. BRYANT of Texas. Do you take it out?
Mr. TAUZIN. Let me answer your question.
Mr. BRYANT of Texas. I did not ask a question. I have got a question
for you.
Mr. TAUZIN. If the gentleman has suggested it should come out as he
and the gentlewoman have, we are saying OK, if you are going to take
that out,
[[Page H2822]] you need to clarify as the Supreme Court asked us to do
that you are still talking about a deliberate refraining from taking
steps to discover the truth or falsity of the statement.
The CHAIRMAN. The time of the gentleman from Louisiana [Mr. Tauzin]
has again expired.
(At the request of Mr. Bryant of Texas and by unanimous consent, Mr.
Tauzin was allowed to proceed for 1 additional minute.)
Mr. BRYANT of Texas. If the gentleman will yield further, when did
you first see this handwritten amendment that we have been handed here
in the last few minutes?
Mr. TAUZIN. We have been discussing that and other language taken
from the Supreme Court decisions for some days now in an effort to try
to make this bill more palatable to my friend from California who was
going to offer this amendment.
Mr. BRYANT of Texas. We know as of last night there was no plan to
offer any additional amendment. Now we see a handwritten amendment in
the last few minutes.
Mr. TAUZIN. Reclaiming my time, this is not an additional amendment.
This is a substitute for your own amendment. The idea is before I and
other Members who support this bill are willing to accept your
amendment which deletes language from the Sundstrand decision, we think
you ought to have language that clarifies what the Supreme Court said.
That is what this amendment does.
Mr. FIELDS of Texas. Mr. Chairman, will the gentleman yield?
Mr. TAUZIN. I yield to the gentleman from Texas.
Mr. FIELDS of Texas. Mr. Chairman, I would just point out last night
this amendment did not exist, that this has been a dynamic process. We
have taken the concerns expressed by people on the other side of the
aisle. We have attempted to address those concerns to make the
legislative language a little tighter, and we worked as late as this
morning trying to come up with the particular language.
Mr. DINGELL. Mr. Chairman, I move to strike the requisite number of
words.
Mr. Chairman, I rise to oppose the substitute.
I rise first to commend the gentlewoman from California for her
amendment. It should be adopted.
Second of all, this curious piece of paper that has been passed
around should be rejected. The gentleman from California has presented
us with an amendment that was never before seen. This is not
inconsistent with the practices that we have observed.
But I want to take my colleagues through what is going on here. What
is at stake here is the rights of investors, not a bunch of slippery
lawyers, but investors, investors who were hurt in things like Orange
County, things like the Milken, Boesky defalcations and a large number
of other items of rascality, also in questions like we saw in
connection with the savings and loan debacles where lawyers and
accountants gave bad opinions, where they audited improperly, where
they failed to keep track of property, where they did not find that
property which was carried on the books did not exist, or where they
failed to find that it was overvalued. Those matters have been found to
be reckless, reckless by the courts, and actionable.
Now we find that there is an attempt to get away from the problem of
these people by defining recklessness to essentially be deliberate
misbehavior. At question is not the issue of negligence or even of
fraud. It is simply of reckless misbehavior.
The amendment which is offered by the gentleman from California would
say that if the failure to investigate was not deliberate, such conduct
shall not be considered to be reckless. We are talking here about
lawyers giving opinions as to suitability. We are talking here about
accountants who are failing to ascertain that the property which is
carried on the books and which is filed in the reports which are
submitted to the shareholders and the SEC, in fact, does not exist or
does not have the value which is assigned to it.
Is that fraud? Quite probably. Is it reckless? Absolutely. These
people have a fiduciary duty, a fiduciary duty, a duty of the highest
responsibility to the shareholders, and they have a responsibility
which they must carry out to the Federal Government and to the State
regulators to file their reports truthfully and to use due care and
proper care to find out that the value is there, that the property
exists, that it is not overvalued in some kind of a fraudulent
evaluation.

{time} 1215

That is what is at stake. This is an attempt to reduce the amendment
offered by the gentlewoman from California [Ms. Eshoo] as an attempt to
reduce the responsibility and to define recklessness now as some kind
of deliberate misbehavior. That is not it.
What is at stake here is the question of whether or not the
individual has carried out his proper fiduciary relationship, whether
he has been reckless, and recklessness comes to the brink of, but does
not include, deliberate wrongdoing.
This is an attempt to get a little more protection for wrongdoers and
to strip a little more of the protection from the ordinary citizen who
has invested his or her life savings in a stock or a security which can
be converted to worthlessness by the kind of wrongdoing that this
amendment offered by the gentleman from California [Mr. Cox] would
sanctify. That is what is at stake here.
Now, the original amendment offered by the gentlewoman simply struck
out dicta, struck out a footnote. The committee was largely agreed that
what we should do was to address this within the framework of the
Sundstrand decision. The gentleman from California now finds that
inadequate. He essentially would seek now to repudiate the language
which he pushed in the committee. That is perhaps right, and I think
that he should be commended for retreating from it, but not for
retreating to something which raises the burden on the litigants to a
still higher level, to address the problem of wrongdoing by people who
are failing to carry out their fiduciary responsibility to investors
and investing public of this country.
Mr. WHITE. Mr. Chairman, I move to strike the requisite number of
words. I would say simply I yield to the gentleman from California for
his comments on this issue.
Mr. COX of California. I thank the gentleman for yielding.
Mr. Chairman, I listened carefully to the comments of the gentleman
from Michigan [Mr. Dingell], and I must say it proves the law of the
inverse correlation between desperate level and factual content on many
occasions.
What the gentleman from Michigan may have forgotten is that the bill
we are discussing today simply embodies the policy choices that, for
decades and decades, have been made by Democrat Congresses and
confirmed by our Supreme Court.
The pattern of the Federal securities laws is clear. When Congress
wanted to impose absolute liability or impose liability for mere
negligence, it did so explicitly. What the gentleman may have forgotten
is that the securities laws already impose strict and absolute
liability on the directors of a company for fraudulent misstatements
and omissions. It is not just recklessness, not just negligence, but
strict liability and absolute liability for the directors of company
under section 11. It is the same thing for the officers of the company.
By and large, what the Congress has chosen to do in securities laws
is deal differently with formal documents filed with the SEC and deal
differently with the enforcement powers of the SEC, on the one hand,
and, on the other hand, informal documents and conversations ranging
from press releases to telephone conversations and so on, where we want
to make sure we facilitate the free movement of informal communications
between issuers of securities and participants in the security markets.
So we find that the legislative judgment made by the New Deal
Congresses of the 1930's was that it was appropriate to apply a very
high standard of liability and not to require liability and not to
require fraudulent intent where prepared offering documents, formal
prepared offering documents and SEC filings are involved.
On the other hand, as is the case with private litigation that we are
dealing with in this bill, Congress did not want to chill candid, free,
and informal communications.
[[Page H2823]] The language which the gentleman is discussing would
affect private securities actions way outside the bounds of the formal
offering documents that are provided prospectuses and so on, where we
have strict liability. The ``I forget'' defense does not work for any
people who are the issuers of securities.
I think we need to focus on the fact that what we are doing here is
not writing language for the first time in this bill, we are taking
language from court decisions and putting it into statutes, and we are
doing it, I think, in a very foresighted way. So that for the very
first time, what the gentleman would like to see, I think, a
codification of recklessness, would exist in our securities laws, and
that codification will reflect the best reconciliation of our Supreme
Court decisions in Hochfelder, which said every violation of section
10-B has to be intentional and which our lower courts have said
sometimes that would include recklessness.
Mr. TAUZIN. Mr. Chairman, will the gentleman yield?
Mr. WHITE. I yield to gentleman from Louisiana.
Mr. TAUZIN. I thank the gentleman for yielding to me.
Mr. Chairman, the gentleman from Michigan has asserted that the
addition of the word ``deliberately,'' which is contained in the
gentleman's substitute, is something new to the law. Let me beg to
differ, and let me quote from the Supreme Court.
The court said on page 212 of the decision, ``We note that such a
reading cannot be harmonized,'' a reading of nonintentional fraud,
``with the history of this ruling. A history making clear that when the
Commission adopted the rule, it was intended to apply only to
activities that involved Scienter.''
Scienter is defined by the court on page 194. It means ``a mental
state embracing intent,'' that is deliberateness, ``intent to deceive,
manipulate, or defraud.''
I will quote from Sundstrand as well. This is the Sundstrand
language, the definition of recklessness is ``the kind of recklessness
that is equivalent to willful fraud.'' Willful, deliberate fraud.
Further, ``Indeed the franking definition,'' which is what they used,
``of recklessness should be viewed as the functional equivalent of
intent.''
Deliberateness is what the Supreme Court in Sundstrand talked about,
is absolutely part of our law, and it should be part of it. And I thank
the gentleman for yielding.
Mr. ALLARD. Mr. Chairman, will the gentleman yield?
Mr. WHITE. I yield to the gentleman from Colorado.
(Mr. ALLARD asked and was given permission to revise and extend his
remarks.)
Mr. ALLARD. I thank the gentleman for yielding.
Mr. Chairman, I rise in support of H.R. 1058 and the Cox amendment.
Mr. Chairman, abuses of securities litigation are particularly
excessive. This act restricts the filing of frivolous suits by imposing
stricter conditions.
The act requires class action suits to have plaintiff steering
committees to ensure that the interests of the lawyers to do dominate
those of the plaintiffs. It equalizes individual plaintiff awards in a
class action suit and restricts named plaintiffs from filing more than
five suits in a 3-year period. The act also allows the court to order
the ``lower pays'' rule in unjustified cases.
The plaintiff has a greater burden of proof under this act, which
allows the defendant to avoid liability if there is no intentional
deceit. Also, the plaintiff must prove that loss was incurred because
of reliance on a fraudulent statement. Finally, the act protects
publishers of market predictions if the forecasts are well-reasoned but
do not hold true.
Without these reforms, plaintiff lawyers can file securities cases
with few restraints. They routinely pounce on companies following a
chance drop in stock. They have good reason to take, and in fact
promote these suits. The plaintiff's counsels generally spend little
time determining the facts of the case, yet receive a considerable
amount of money for their involvement. Such practices are fostered by
so-called professional plaintiffs who are sometimes recruited by
lawyers with the promise of easy money. H.R. 1058 removes the
incentives to file unfounded claims.
Mr. Speaker, it is time we restore the notion that a capitalist
economy, there are risks. The process is simple. Stocks rise, you win,
stocks drop, you lose. Each person making an investment knows that it
is a risk, still certain investors have been encouraged by counsel to
fault companies for their inability to predict earnings. We can no
longer afford to operate this way. Risk is an important element in the
market.
In Colorado alone it is estimated that frivolous securities
litigation unjustly costs tens of millions of dollars every year. The
assailed companies feel like they are dealing with a terrorist.
Following a simple shift in stock price or a particular corporate
decision, they find that their company is suddenly held hostage and
they are compelled to negotiate a ransom payment.
The cost of these suits is even more outrageous when you consider
that the filing parties never see the bulk of the payment, it is the
plaintiff attorneys who reap most of the benefits. When the law
provides such incentives for greed, the law should be revised.
H.R. 1058, the Securities Litigation Reform Act, will effectively
limit unreasonable law suits. I strongly support this legislation.
Mr. BRYANT of Texas. Mr. Chairman, I move to strike the requisite
number of words.
Mr. Chairman, the question for Members of the House is what should
the standard, what would the standard be, if the Eshoo amendment were
adopted? It is that simple.
Leaving aside all else you have heard today; if the Eshoo amendment
was adopted, what would be the standard? Here is the standard. It is in
the bill as brought out by the majority. The standard would be:
``Reckless conduct may be defined as highly unreasonable (conduct)
involving not merely simple,'' not merely simple, ``or even inexcusable
negligence, but an extreme departure from the standards of ordinary
care and which presents a danger of misleading buyers or sellers that
is either known to the defendant or is so obvious that the action must
have been aware of it.'' That is the standard. That is an extremely
high standard.
Simple negligence is not enough, gross negligence is not enough; it
has got be even worse than that before you can hold one of these
security dealers liable in a civil action.
What we are arguing about is, should anything more come at the end of
this paragraph? What the gentleman from California [Mr. Cox] wanted to
put at the end of this paragraph is a sentence that would have said,
``Even if they do as bad as all of that, if they just plain forgot, it
is all right, and they are not in trouble.''
Now, having been, I assume, embarrassed by the absurdity of that
proposal, he comes now with a last-minute rewrite, a handwritten
amendment which we have just seen in the last few minutes, which says,
``Add at the end of this extremely high standard a sentence that,
``Deliberately refraining from taking steps to discover whether one's
flagrant or false or misleading conduct would constitute recklessness.
But if the failure to investigate was not deliberate, such conduct
shall not be considered to be reckless.''
Mr. Chairman, this language does not need an add-on. But, second, it
sure does not need an add-on. But, second, it sure does not need an
add-on that says, I forgot. In effect, Mr. Cox's last-minute rewrite,
which we did not see until 10 or 15 minutes ago, is just another way of
saying, I forgot.
What does it say: ``If the failure to investigate was not deliberate,
such conduct shall not be considered to be reckless.'' What does that
mean if failure to investigate is not deliberate?
The point is the law should hold somebody who is in the business of
issuing securities to at least this standard so that those who invest
will know that they are not being the victim of false statements or
grossly reckless statements that could cause them to lose their money.
If they lost their money, under the Cox language, they could say,
``Well, our failure to investigate the facts which we put into the
issuing documents was not deliberate.'' How can a failure to
investigate be not deliberate? Who has the burden to decide whether or
not an investigation ought to be done? Surely the burden ought to be
upon those who are in a position, with an office full of experts and
unlimited resources to do the investigation of whether or not the facts
set forth in the offering document are true or not. The burden should
not be left upon the pensioner, or upon the widow, upon the hopeful
investor who has no
[[Page H2824]] way whatsoever to know what facts should or should not
be investigated.
Members of the House, we have never ever allowed ignorance to be an
excuse in a civil action or in a criminal action. If an American
citizen forgets to buy their license plate after the old one has
expired, they do not get to plead, ``I forgot.'' They do not get to
say, ``Well, my failure to investigate whether or not my license plate
has expired was not deliberate.'' You do not get off with that. If your
lawyer fails to record your deed, he does not get off by saying, ``I
forgot,'' or, ``My failure to investigate my file to see whether or not
I had a deadline to record the deed,'' somehow or other was accidental.
That does not let him off the hook.
Who should be held responsible? Surely it is not the average person,
relying upon the representations of experts, who invests his money.
This level of responsibility is higher than we place on probably any
other potential defendant in a civil action. You cannot hold him
responsible for simple negligence or even gross negligence. In fact,
you cannot hold him responsible unless they exhibit an extreme
departure from the standards of ordinary care or present a danger of
misleading buyers and sellers known to the defendant are so obvious
that he should have known it.
Ms. ESHOO wants to leave a period at the end of that sentence. These
guys want to say, ``However, if in spite of all that, the guy says, `I
forgot,' he gets off the hook.''
Now, embarrassed by the words ``I forgot,'' they come up with a last-
minute rewrite which means, in effect, the same thing as I forgot.
I strongly urge you to vote down the Cox amendment, to say ``no'' to
this reckless kind of legislative procedure where amendments are thrown
together at the last minute on critical legislation like this, to say
``no'' to the Cox amendment, say ``yes'' to the Eshoo amendment, and
let us leave some kind of protection in this law for the average
American investor so that those who take advantage of them by
misleading them in offering documents will not be able to profit from
their recklessness.
Mr. WATT of North Carolina. Mr. Chairman, I move to strike the
requisite number of words.
Mr. Chairman, I would like to thank you for recognizing me because I
really had intended to stay out of this discussion, but I got more and
more outraged as I heard the debate taking place on the floor about
what was going on. I want to respond to my colleague from Louisiana,
Mr. Tauzin, who said we were trying to go back to a negligence
standard.
I want to admit to my colleagues that if it were me, I would be happy
with a negligence standard. I did not come to the floor to play games
with you. Lawyers are subject to negligence standard, doctors are
subject to a negligence standard, ordinary people who drive automobiles
and run into folks are subject to a negligence standard. If they make a
mistake and they injure somebody, they are held liable.
But I will not recognize to you that under the law as it is written
Congress has already imposed a higher level of standard for folks in
the stock brokerage business and those who engage in securities
business. They have said, ``You can be held liable only if you do
something fraudulently, knowingly, recklessly.'' That is a higher
standard or actually, from the common, ordinary people's vernacular, it
is a lower standard.
Mr. COX of California. Mr. Chairman, will the gentleman yield?
Mr. WATT of North Carolina. No, I will not yield. I want to make sure
that you can confuse the issue if you want, but right now is my time to
try to relate this to some semblance of sanity rather than missed--come
and go that you all are engaged in.

{time} 1230

What my colleagues want to do is take the already high standard, the
one that is a step up, that applies to every other member of society,
and create what I would call an impossibility standard, because if we
adopted this language, you would never ever be able to win any cases in
the securities area because any time recklessness is alleged or
somebody is engaged in fraudulent conduct, the securities person would
come back and say, ``Oh, well, that might be true, but I forgot to tell
you,'' and all of a sudden they would be off the hook.
Well, my colleagues, I thought the purpose of this bill was to get
rid of frivolous lawsuits and to cut down on the amount of securities
litigation which we have built in a wonderful procedure for trying to
stop those kinds of lawsuits, but, Mr. Chairman, when we start to raise
the standard to an even higher level of care, an impossibility
standard, then I start to wonder is the purpose really to get rid of
frivolous lawsuits or is it to protect the buddies up on Wall Street
from what goes on in the real world, from the standard that everybody
else in our society, these people, all of whom are seated in the
gallery, are subject to, this common, everyday standard, and all of a
sudden securities people, whom we have already given a higher level of
protection to, now they want to give an impossible level of protection
to.
So, Mr. Chairman, I want to make sure that everybody understands in
common, everyday language what is being proposed here: If I do
something, if I am reckless, if I do it knowingly, and I come into
court and say, Oh, no, I forgot, all of a sudden I am shielded from
liability under this amendment.
Mr. COX of California. Mr. Chairman, will the gentleman yield?
Mr. WATT of North Carolina. I yield to the gentleman from California.
Mr. COX of California. I would just point out, to correct the record,
that underwriters, brokers and dealers who act as underwriters are
absolutely and strictly liable, and I say to the gentleman, ``You don't
need to prove negligence and recklessness; they are strictly----
The CHAIRMAN. The time of the gentleman from North Carolina [Mr.
Watt] has expired.

announcement by the chairman

The CHAIRMAN. The Chair would remind Members not to make reference to
individuals in the gallery.
Mr. MARKEY. Mr. Chairman, I move to strike the requisite number of
words.
Mr. Chairman, I rise in opposition to the amendment offered by the
gentleman from California [Mr. Cox] to the amendment offered by the
gentlewoman from California [Ms. Eshoo].
Mr. Chairman, let us make it quite clear that today there is a
standard which is used by the Federal courts, and that standard is
largely an agreed upon standard, and it is the standard which is in the
well of the House which has been sitting there as a printed statement
of what has been accepted by 80 percent of the Federal courts of the
United States.
Now remember the standard is one which Federal judges across the
country, most of them Reagan and Bush Federal district court judges,
have used as their standard, and it has served our country quite well.
Now, if over the course of the last 10 to 15 years 75 to 80 percent
of the Federal district court judges, almost all of them Reagan and
Bush appointees, have drafted a standard, have adopted a standard,
which they use, why would we on the floor of the United States Congress
adopt a standard which is a handwritten standard just presented to us
that will
override 15 years of precedents of the Reagan and Bush era judges that
have reached the consensus as to what the standard should be? Should we
not give some deference to these Federal district court judges? Should
we not allow them in their courts, knowing all of the facts and law,
the history of this country, to come to some consensus?

Now I have the greatest respect for the legal knowledge of the
gentleman from California, but it is not so substantial a level of
respect that I think that a handwritten amendment on the floor, with no
notice to any Members and in contradiction to the promise that there
would be no additional majority party amendments to the legislation
here today, should serve as a substitute for 15 years of settled law.
The intent of this amendment, I think at the end of the day, is nothing
more, nor less, then to dress up, dress up the I-forgot defense. It
puts it in fancier words. It uses a legalese that, I think, is probably
more professional than actually putting the words ``I forget'' into the
law, but the effect of it is the same, to ensure that the standard for
ordinary Americans to be able to bring
[[Page H2825]] actions against executives of companies who have misled
those individuals in the investment of their money have a more
difficult time in court.
That is what this is all about, by the way, or else we would not be
out here on the floor of the House of Representatives. We would not be
here if they were really happy with what the Sundstrand decision says,
which is again, and this is what we believe the public should have as
their protection, that there be reckless conduct which may be defined
as highly unreasonable conduct involving not merely simple or even
inexcusable negligence, but an extreme departure from the standards of
ordinary care and which presents a danger of misleading buyers or
sellers that are either known to the defendant or so obvious that the
actor must have been aware of it.
This standard is one which the Federal district court judges have,
George Bush and Ronald Reagan judges, codified for all intents and
purposes as the national standard. We cannot use, we should not be
allowed to use, a handwritten amendment on the floor of the House of
Representatives to be attached to this profoundly important piece of
American jurisprudence, and I just hope that anyone who is listening to
this debate understands quite clearly that any additions to this are
meant to reduce the ability of ordinary Americans to recover in the
courts of the United States when executives of S&L's, when executives
of a private company, have deliberately misled--
The CHAIRMAN. The time of the gentleman from Massachusetts [Mr.
Markey] has expired.
Mr. FIELDS of Texas. Mr. Chairman, I move to strike the requisite
number of words.
Mr. Chairman, first of all I want to compliment the gentleman from
California [Mr. Cox]. In Sundstrand the court defined ``recklessness''
building on the court decision in Hochfelder, and that is what we have
currently in the statute. We have language that has already been
litigated, and relitigated, and been adopted by 9 of the 12 Federal
circuit courts.
Now I am complimenting the gentleman because, if I understand what
the gentleman from California is doing with his handwritten amendment,
which at one time that is the only type of amendments we had on the
floor, handwritten amendments, but what the gentleman is doing is,
first, I understand, he is trying to be cooperative. There were some
concerns expressed on the other side of the aisle, and the gentleman is
stepping up to the plate to meet some of those concerns, and we take
the amendment offered by the gentlewoman from California [Ms. Eshoo] as
being a sincere attempt to make the language better. Well, I hope that
the other side of the aisle can look at this in the same vein, that the
gentleman from California is trying to make this a better piece of
legislation, and in doing so he is being consistent with what is in the
statute now, and I would ask the gentleman: ``Is that the gentleman's
intent, first, to be cooperative; and, second, to be consistent with
the thrust of the language that is currently in the statute as
drafted?''
Mr. COX of California. Mr. Chairman, will the gentleman yield?
Mr. FIELDS of Texas. I yield to the gentleman from California.
Mr. COX of California. Mr. Chairman, I thank the gentleman from Texas
for his kind words. That is, of course, precisely the purpose here.
I say to the gentleman, naturally, when we put the Sundstrand
language into the case, or, excuse me, into the statute, to begin with
in committee, it was an accommodation in itself in response to concerns
expressed on the other side of the aisle. What we now seek to do is to
remove part of the Sundstrand decision even though there was request to
put it in to begin with and instead to clarify, as best we can, how we
are harmonizing the Supreme Court decision in Hochfelder, which all
lower courts recognize is the law of the land. It states rather clearly
that there must be an intent to deceive, manipulate and defraud. We
have put that into the statute with the common law of recklessness that
has developed in concert with that, and we are simply saying that good
faith is not reckless.
There are many different ways to say this. We want to say it as
clearly and as often as we can so we can avoid litigation on this
subject, and while there has been much reference to a handwritten
amendment, the fact is the handwriting was a mere transcription of
language that appears in the Second Circuit of New York District Court
case from which we are quoting. It is the courts' language; it is the
courts that have crafted this common law remedy.
I would also just like to point out for the record that one would
think from this debate that recklessness is the only standard by which
we judge securities laws violations, but in fact it is the standard by
which Congress, acting in the wake of the Depression, the New Deal
Congress, sought to judge actions on the periphery of securities
transactions, at the center of securities transactions, involving
issuers, underwriters, accountants and experts. We have strict
liability.
I say to my colleagues, so the notion that you can't sue someone who
was reckless or someone who was merely negligent is wrong. You can sue
and win on the basis of strict liability against the company, the
issuer, the directors, the officers, the accountants who issue the
registration statement and act as its underwriters and its experts.
There is strict liability.
Mr. TAUZIN. Mr. Chairman, will the gentleman yield?
Mr. FIELDS of Texas. I yield to the gentleman from Louisiana.
Mr. TAUZIN. Mr. Chairman, I thank the gentleman from Texas [Mr.
Fields] for yielding, and I, too, want to compliment the gentleman from
California [Mr. Cox]. What he did was to listen very carefully to the
concerns expressed by the gentlewoman and try to address them and
answer them and bridge the gap. What he has done is not made up
language. The language is from the latest expression of the courts, the
U.S. District Court for the Southern District of New York, interpreting
the Supreme Court decision in Hochfelder, and what the court said in
that case, and I quote:

When the defendant deliberately failed to acquire the
information that would have indicated to her that statements
were false or misleading, that constituted recklessness.

That is the exact language the gentleman has presented to us today in
this amendment. In quotes, ``The defendant deliberately refrained from
taking steps to discover whether their statements were false or
misleading constitutes recklessness,'' which is an exact statement of
what the court said, not what the gentleman from California said.
Mr. FIELDS of Texas. Reclaiming my time for just a moment to see if
the gentleman agrees, this has been an evolutionary process. There have
been changes from the time this bill was originally introduced up until
today. I mean we have changed on the loser pay provisions, we have
changed on this particular section. There have been other things that
we have done in trying to craft a good piece of legislation working
with all parties.
The CHAIRMAN. The time of the gentleman from Texas [Mr. Fields] has
expired.
(On request of Mr. Bryant of Texas and by unanimous consent, Mr.
Fields of Texas was allowed to proceed for 1 additional minute.)
Mr. BRYANT of Texas. Mr. Chairman, will the gentleman yield?
Mr. FIELDS of Texas. I yield to the gentleman from Texas.
Mr. BRYANT of Texas. Mr. Chairman, I would just like to appeal to the
common sense of the gentleman from Texas. This amendment, which they
all have handwritten at the last minute, says that deliberately from
taking steps--for refraining from taking steps to discover whether or
not one's own statements are false is reckless, but if the failure to
investigate whether one's own statements were false was not deliberate,
then that conduct is not considered to be reckless.
How in the world could a failure to investigate whether or not one's
own statements were false, that it was not deliberate, possibly justify
as a way of exonerating one from responsibility? I ask, who has
responsibility to make sure that your statement is not false in the
first place?

{time} 1245

Mr. FIELDS of Texas. Mr. Chairman, reclaiming my time, first of all,
I think this is an honest-to-goodness, legitimate attempt to clarify,
and I also
[[Page H2826]] think it is an honest-to-goodness attempt to work with
the other side of the aisle. Again I want to compliment the gentleman
from California for doing that, and I want to go one step further. I
think it makes the standard even stronger.
Mr. BRYANT of Texas. Mr. Chairman, will the gentleman yield further?
The CHAIRMAN. The time of the gentleman from Texas [Mr. Fields] has
expired.
The question is on the amendment offered by the gentleman from
California [Mr. Cox] as a substitute for the amendment offered by the
gentlewoman from California [Ms. Eshoo].
The question was taken; and the Chairman announced that the noes
appeared to have it.

recorded vote

Mr. FIELDS of Texas. Mr. Chairman, I demand a recorded vote.
A recorded vote was ordered.
The vote was taken by electronic device, and there were--ayes 252,
noes 173, answered ``present'' 1, not voting 8, as follows:

[Roll No. 210]

AYES--252

Allard
Archer
Armey
Bachus
Baker (CA)
Baker (LA)
Ballenger
Barr
Barrett (NE)
Bartlett
Barton
Bass
Bateman
Bereuter
Bilbray
Bilirakis
Bliley
Blute
Boehlert
Boehner
Bonilla
Bono
Brewster
Browder
Brownback
Bryant (TN)
Bunn
Bunning
Burr
Burton
Buyer
Callahan
Calvert
Camp
Canady
Castle
Chabot
Chambliss
Chenoweth
Christensen
Chrysler
Clinger
Coble
Coburn
Collins (GA)
Combest
Condit
Cooley
Cox
Cramer
Crane
Crapo
Cremeans
Cubin
Cunningham
Davis
Deal
DeLay
Diaz-Balart
Dickey
Dooley
Doolittle
Dornan
Dreier
Dunn
Ehlers
Ehrlich
Emerson
English
Ensign
Everett
Ewing
Fawell
Fields (TX)
Flanagan
Foley
Forbes
Fowler
Franks (CT)
Franks (NJ)
Frelinghuysen
Frisa
Frost
Funderburk
Gallegly
Ganske
Gekas
Geren
Gilchrest
Gillmor
Gilman
Goodlatte
Goodling
Goss
Graham
Greenwood
Gunderson
Gutknecht
Hall (TX)
Hancock
Hansen
Harman
Hastert
Hastings (WA)
Hayworth
Hefley
Heineman
Herger
Hilleary
Hobson
Hoekstra
Hoke
Holden
Horn
Hostettler
Houghton
Hunter
Hutchinson
Hyde
Inglis
Jacobs
Johnson (CT)
Johnson, Sam
Jones
Kasich
Kelly
Kennedy (RI)
Kim
King
Kingston
Klug
Knollenberg
Kolbe
LaHood
Largent
Latham
LaTourette
Laughlin
Lazio
Leach
Lewis (CA)
Lewis (KY)
Lightfoot
Linder
Livingston
LoBiondo
Longley
Lucas
Manzullo
Martini
McCollum
McCrery
McHugh
McInnis
McIntosh
McKeon
McNulty
Menendez
Metcalf
Meyers
Mica
Miller (FL)
Minge
Molinari
Montgomery
Moorhead
Moran
Morella
Myers
Myrick
Nethercutt
Neumann
Ney
Norwood
Nussle
Oxley
Packard
Parker
Paxon
Peterson (MN)
Petri
Pombo
Porter
Portman
Pryce
Quillen
Quinn
Radanovich
Ramstad
Regula
Riggs
Roberts
Roemer
Rogers
Rohrabacher
Ros-Lehtinen
Roth
Roukema
Royce
Salmon
Sanford
Saxton
Scarborough
Schaefer
Schiff
Seastrand
Sensenbrenner
Shadegg
Shaw
Shays
Shuster
Sisisky
Skeen
Skelton
Smith (MI)
Smith (NJ)
Smith (TX)
Smith (WA)
Solomon
Souder
Spence
Stearns
Stenholm
Stockman
Stump
Talent
Tate
Tauzin
Taylor (NC)
Thomas
Thornberry
Tiahrt
Torkildsen
Upton
Vucanovich
Waldholtz
Walker
Walsh
Wamp
Watts (OK)
Weldon (FL)
Weldon (PA)
Weller
White
Whitfield
Wicker
Wilson
Wolf
Young (AK)
Young (FL)
Zeliff
Zimmer

NOES--173

Ackerman
Andrews
Baesler
Baldacci
Barcia
Barrett (WI)
Becerra
Beilenson
Bentsen
Berman
Bevill
Bishop
Bonior
Borski
Boucher
Brown (CA)
Brown (FL)
Brown (OH)
Bryant (TX)
Cardin
Chapman
Clay
Clayton
Clement
Clyburn
Coleman
Collins (IL)
Collins (MI)
Conyers
Costello
Coyne
Danner
de la Garza
DeFazio
DeLauro
Dellums
Deutsch
Dicks
Dingell
Dixon
Doggett
Doyle
Duncan
Durbin
Edwards
Engel
Eshoo
Evans
Farr
Fattah
Fazio
Fields (LA)
Filner
Flake
Foglietta
Ford
Fox
Frank (MA)
Furse
Gejdenson
Gephardt
Gonzalez
Gordon
Green
Gutierrez
Hall (OH)
Hamilton
Hastings (FL)
Hayes
Hefner
Hilliard
Hinchey
Hoyer
Istook
Jackson-Lee
Jefferson
Johnson (SD)
Johnston
Kanjorski
Kaptur
Kennedy (MA)
Kennelly
Kildee
Kleczka
Klink
LaFalce
Lantos
Levin
Lewis (GA)
Lincoln
Lipinski
Lofgren
Luther
Maloney
Manton
Markey
Martinez
Mascara
Matsui
McCarthy
McDermott
McHale
Meehan
Mfume
Miller (CA)
Mineta
Mink
Moakley
Mollohan
Murtha
Nadler
Neal
Oberstar
Obey
Olver
Ortiz
Orton
Owens
Pallone
Pastor
Payne (NJ)
Payne (VA)
Pelosi
Peterson (FL)
Pickett
Pomeroy
Poshard
Rahall
Reed
Reynolds
Richardson
Rivers
Rose
Roybal-Allard
Rush
Sabo
Sanders
Sawyer
Schroeder
Schumer
Scott
Serrano
Skaggs
Slaughter
Spratt
Stark
Stokes
Studds
Stupak
Tanner
Taylor (MS)
Tejeda
Thompson
Thornton
Thurman
Torres
Torricelli
Towns
Traficant
Tucker
Velazquez
Vento
Visclosky
Volkmer
Ward
Watt (NC)
Waxman
Williams
Wise
Woolsey
Wyden
Wynn
Yates

ANSWERED ``PRESENT''--1

Lowey

NOT VOTING--8

Abercrombie
Gibbons
Johnson, E.B.
McDade
McKinney
Meek
Rangel
Waters

{time} 1304

Mr. HALL of Texas and Mr. WELLER changed their vote from ``no'' to
``aye.''
So the amendment offered as a substitute to the amendment was agreed
to.
The result of the vote was announced as above recorded.
The CHAIRMAN. The question is on the amendment offered by the
gentlewoman from California [Ms. Eshoo], as amended.
The question was taken; and on a division (demanded by Mr. Fields of
Texas) there were--ayes 120, noes 73.
So the amendment, as amended, was agreed to.

amendment offered by mr. markey

Mr. MARKEY. Mr. Chairman, I offer an amendment.
The Clerk read as follows:

Amendment offered by Mr. Markey:
Page 28, after line 2, insert the following new section
(and redesignate the succeeding sections and conform the
table of contents accordingly):

SEC. 6. INAPPLICABILITY TO DERIVATIVES.

This Act and the amendments made by this Act shall not
apply to any action based on an allegation of fraud in
connection with the purchase or sale of a derivative
instrument. For purposes of this section, the term
``derivative instrument'' means any financial contract or
other instrument that derives its value from the value or
performance of any security, currency exchange rate, or
interest rate (or group or index thereof), but does not
include--
(1) any security that is traded on a national securities
exchange or on an automated interdealer quotation system
sponsored by a securities association registered under
section 15A of this title;
(2) any forward contract which has a maturity at the time
of issuance not exceeding 270 days;
(3) any contract of sale of a commodity for future
delivery, or any option on such a contract, traded or
executed on a designated contract market and subject to
regulation under the Commodity Exchange Act; or
(4) any deposit held by a financial institution.

Mr. MARKEY (during the reading). Mr. Chairman, I ask unanimous
consent that the amendment be considered as read and printed in the
Record.
The CHAIRMAN. Is there objection to the request of the gentleman from
Massachusetts?
There was no objection.
Mr. MARKEY. Mr. Chairman, the amendment which is now pending before
the House is one that deals with one of the most complex areas of the
financial world. The issue is derivatives. The issue here today is
whether or not these new financial products, derivatives, which are
causing more and more trouble out in our financial marketplace, are
going to be given the proper respect, which they should in this
legislation, with respect to protection of investors.
Derivatives are financial products whose value is dependent upon or
derived from the value of some underlying financial asset, such as a
stock or a bond, a foreign currency, a commodity or an index
representing the values of that asset.
[[Page H2827]] Some derivatives have been around for many years, such
as exchange traded futures and options used by investors and dealers
seeking to hedge positions taken in the stock and bond markets, or to
speculate on future market movements.
Within the last few years, however, exchange traded futures and
options have been supplemented by a vast and dizzying array of over-
the-counter derivatives. These include structured securities, forwards,
swaps, options, swaptions, caps, floors, and callers that may be linked
to the performance of the Japanese stock market, the dollar, deutsche
mark, the S&P 500, or virtually any other asset out in our marketplace.
Today the outstanding value of the principal underlying the over-the-
counter derivatives is estimated to be $12 trillion. Remember, we are
going to have a big debate here this year on how to spend $1.5
trillion, which will divide this Congress quite bitterly. We are
talking here now about instruments that are valued at $12 trillion in
their principal form.
Now, the dynamic growth of the over-the-counter derivatives market is
the direct result of developments in telecommunications and computer
technologies and breakthroughs in new concepts and modern portfolio
management strategies.
Using these new tools of technology and portfolio management
strategies, a new generation of Wall Street geniuses have begun to
market these products out across out country. By breaking down the
price movement into individual deltas and gammas, betas, and vegas
dancing across the computer screen, the quants, that is the
mathematical geniuses who call themselves quants because they deal in
quantitative mathematics, they deal as physicists, who have moved over
from the nuclear physicist world into the world of creating these new
products, have created the new world of cyberfinance, which is
reshaping both the United States and the global financial marketplace.

{time} 1315

These geniuses, these young men and women that work with computers
and highly sophisticated mathematical and other principles, have
developed these captions and flortions, the accreting and amortizing
swaps, the digital options, the butterfly spreads, the condors, the
straddles, the cylinders, the roller coaster swaps.
All of these products have now been sent out into the American
marketplace, in many instances with the promise that they are quite
safe for a municipality to purchase. There might be a home town that
has been told they can purchase some of these products. There may be
people inside of the district who have been told they are quite safe to
purchase.
The problem is, Mr. Chairman, is that in the hands of ``The Boy Who
Lost $1 Billion; Nicholas Leeson, the 28-Year-Old Trader Who Bankrupted
England's Oldest Financial Firm,'' that is Newsweek's cover this week;
Fortune magazine, ``Cracking the Derivatives Case: the Untold Story of
Lies, Arrogance, and Ignorance That Cost Major Players Billions.'' This
is Fortune magazine we are talking about.
The CHAIRMAN. The time of the gentleman from Massachusetts [Mr.
Markey] has expired.
(By unanimous consent, Mr. Markey was allowed to proceed for 3
additional minutes.)
Mr. MARKEY. Mr. Chairman, this is Time magazine: ``Ego and greed, the
insider story of the 28-year-old trader who blew $1 billion, broke a
bank, and stunned the world.''
This is Fortune magazine from 2 weeks ago: ``The risk that won't go
away; financial derivatives are tightening their grip on the world
economy, and nobody knows how to control them.''
Mr. Chairman, we are talking here about ensuring that these very
sophisticated geniuses not be able to inoculate themselves against suit
while they are dealing in these very risky financial products that are
so complex that, in more instances, the CEO's of the companies
themselves do not understand them. Proctor & Gamble, Gibson, companies
across this country are alleging that they were misled into these
products.
The objective of the Markey amendment out here is to ensure that
investors are protected when they are misled into products of this
nature, which by their very personality cannot possibly be understood
by ordinary, unsophisticated investors. By that, I mean the town
treasurers, the country treasurers, the ordinary individual that thinks
that they are sophisticated, but they are not so sophisticated that
they can understand an algorithm that stretches out for half a mile and
was constructed only inside of the mind of this 26- or 28-year-old
summa cum laude in mathematics from Cal Tech or from MIT who
constructed it. No one else in the firm understands it.
The lesson that we are learning is that the heads of these firms turn
a blind eye, because the profits are so great from these products that,
in fact, the CEO's of the companies do not even want to know how it
happens until the crash, which brings down the oldest bank in England,
which brings down a company, a county, a municipality, an individual.
Mr. Chairman, this amendment is intended to ensure that protections
are given to individuals against these kinds of products being sold to
them. Mr. Chairman, I urge every Member that is very concerned about
Fortune magazine's identification of this as one of the most serious
problems in our economy to vote ``yes'' on the Markey amendment, to
give real protection to the ordinary investor in this country.
Mr. FIELDS of Texas. Mr. Chairman, I rise in opposition to the
amendment.
Mr. Chairman, the purpose of this legislation is to stop frivolous
lawsuits. That is the purpose, to stop lawyers from rolling the dice. I
want to point out that the example of Mr. Leeson does not fit under
this particular legislation because he acted with intent, knowingly.
The proposed amendment would exclude from the coverage of the
Securities Litigation Reform Act many derivative instruments. The
benefits of the act should not be denied to any type of transaction
that is a security. Vexatious and expensive litigation is a general
problem, not just in one area and not another.
The proposed amendment is based upon a fundamental misunderstanding
of derivatives. Few derivative transactions are securities. Of those
that are securities, fewer still are traded off the exchange. This act
that has been drafted is designed to provide protection against
frivolous securities litigation.
It would be counterproductive to introduce exclusions based upon
classes of transactions, particularly for transactions that frequently
provide substantial hedging benefits to end-users throughout the United
States.
Derivative transactions are now essential risk management tools.
Exposing these transactions that are securities to the risk of
frivolous litigation would raise the cost of essential risk management
activities.
To adopt this amendment, and I cannot say it any more succinctly than
this, to adopt this amendment is to adopt two standards of fraud for
securities, one for derivative securities traded in the over-the-
counter market, and then a separate standard for all other securities.
That is not fair. This amendment is flawed, and I urge Members to vote
against it.
(Mr. DINGELL asked and was given permission to revise and extend his
remarks.)
Mr. DINGELL. Mr. Chairman, I rise in support of the amendment. Mr.
Chairman, this amendment would remedy a problem that is being largely
ignored throughout this society, and is largely being ignored in
connection with this legislation.
This is a problem of huge investments by pension funds, investment
funds, mutual funds, and State and local governments across the country
in the high-risk derivative securities. These investments are often
made without purchasers being informed by their brokers of the true
nature or the great risk of these investments or, in some cases,
without the brokers even informing the purchaser that they are making
these investments at all.
The amendment would exempt derivative securities from the bill. Those
are the securities which caused the collapse of the investment pool run
by Orange County. Americans are only beginning to understand the risks
associated with these things, which are little
[[Page H2828]] better than financial time bombs. Only because of
investments in derivatives which caused one of the wealthiest
communities in the country, Orange County, CA, to go belly up in a
matter of months and now be in bankruptcy, has the public begun to
focus on the huge risks associated with these kinds of investments.
In Orange County the derivative losses have forced cutbacks in vital
Government services such as health care, education, and even road
maintenance. In some cases, county employees have been laid off
completely, or else have had their hours of pay reduced.
Mr. Chairman, Orange County is not alone, as the ``60 Minutes''
expose on Sunday night dramatically highlighted. A particularly
chilling moment in that piece toward the end was when ``60 Minutes''
asked their expert whether there may be other Orange counties out
there, and he responded with this warning: ``It is not a question of
whether there are others out there. There are, and many other
municipalities are out there sitting on huge derivative timebombs,
without any of them even knowing that they confront this great peril on
behalf of themselves and their constituents.''
As we debate this bill in only 7 hours, literally hundreds of local
municipal governments scattered all over the country are just beginning
to discover the extent of their exposure to high-risk derivative
securities. Many of them are seeking to avoid this disaster and to
climb out of the pit after suffering colossal losses on their
investments.
From Auburn, Maine, to the State of Florida, from Charles County, MD,
to Odessa College, TX, to Aspen, CO, and to Orange County, State and
local governments are suffering staggering losses due to incredibly
complex, incomprehensible high-risk securities whose risk cannot only
not be calculated, but not even understood.
There is a chart here which explains and shows the communities and
public institutions across the United States which have just so far
reported losses from investments in speculative derivatives. Look at
the list: Orange County, $1.7 billion in losses; Louisiana State
pension fund, $50 million; Georgia Municipal Electric Authority, $49
million; City College of Chicago, $46 million; Minnetonka fund in
Minnesota, over $90 million; New Hampshire State pension fund, $25
million; the Virginia State retirement system, $66 million, and West
Virginia investment pool, up to $279 million.
How would the Members from all these States and all the others who
might be afflicted with this situation explain to their constituents
that they have voted to prevent their county governments and their
governments from acting to recover from wrongdoers for their failure to
properly advise, or their failure to properly reveal facts associated
with the speculative and risky character of the investment?
We just got over paying $150 billion to bail out the savings and
loans institutions from a financial disaster, largely caused by
legislation that was rushed through this body because big business came
in here pleading for relief.
If Members will recall, they came in saying that they had to have the
ability to engage in all kinds of businesses so that they would then be
able to go out and make money and get themselves out of a hole which
they had rapidly been digging.
The same situation is here. Mr. Chairman, in a nutshell, this is deja
vu all over again. I urge my colleagues to support the Markey
amendment. Vote to protect the American people against derivatives.
Vote to allow them to engage in proper self-help, to retrieve ill-
gotten gains from wrongdoers who carelessly and recklessly disregard
their responsibility to investors, to taxpayers, and to this country.
Mr. COX of California. Mr. Chairman, I move to strike the last word.
Mr. Chairman, I rise in opposition to the amendment. The effect of
this amendment is to carve out a $1.5 trillion hunting preserve for
strike suit lawyers. It would exempt from the protections for
plaintiffs who are class members, plaintiffs who are involved in
actions related to derivatives.
Presumably in order to protect the citizens of Orange County, CA, the
gentleman from Michigan would make sure that our legislation would not
be available to provide for people in Orange County a plaintiffs'
steering committee, so that the plaintiff class has a means to protect
themselves against abusive practices. There would be no court-appointed
guardian for members of the class if they happen to be suing in
relation to Orange County. There would be no ban on professional
plaintiffs. There would be no ban on bonus payments to preferred
plaintiffs, so some members of the class could be discriminated
against. All the protections in our bill would be unavailable.
There is also an incredible non sequitur in the argument that I just
heard, and that is that Barings and Orange County and Proctor &
Gamble's problems with derivatives and Gibson Greetings' problems with
derivatives, all of these things would never have happened if only we
had the present strike suit system in place.
Of course, we do have the present strike system in place, and these
things happened. What we are seeking to do is prevent fraudulent abuse
using the securities laws.
Our existing security laws are targeted at abusive practices, devices
to deceive, manipulate, and defraud. For the first time what the
gentleman from Massachusetts would be doing is shifting us away from
focusing on bad practices and saying that ``We are only going to focus
on these bad practices if they involve certain kinds of securities, and
we will discriminate from one kind of security to another.'' It would
be an incredible hodge-podge, unmanageable for our Nation's capital
markets.
It is not as if we have to deal with this issue at the 11th hour with
a floor amendment. We have actually had hearings on this subject. The
Senate Committee on Banking had extensive hearings on derivatives and
on their role in Orange County.
Alan Greenspan, the Chairman of the Federal Reserve System,
testified. Arthur Levitt, Chairman of the Securities and Exchange
Commission, testified. Here is what he said, Arthur Levitt: ``It would
be a grave error to demonize derivatives and blame them for the loss in
Orange County. Derivatives are not inherently bad or good. They are a
bit like electricity, dangerous if mishandled, but bearing the
potential to do tremendous good.''

{time} 1330

Alan Greenspan: ``It would be a serious mistake to respond to these
developments by singling out derivative instruments for special
regulatory treatment.'' The Chairman of the Federal Reserve said it
would be a serious mistake to pass the Markey amendment because the
amendment singles out derivatives for special treatment and special
legal status in 10b-5 actions. It would create a separate legal status
for the treatment of derivatives.
Furthermore, there is no reason Congress should permit abusive
litigation to continue if a derivative is involved. What we are after
here with this legislation is the prevention of abusive practices. Why
would we want those abusive practices to go on if derivatives were
involved? It makes no sense at all. Congress would defeat its purpose
if it allowed abusive lawsuits to continue in one special area of
securities transactions. Congress should end abusive securities
litigation, regardless of the particular type of transaction that was
involved.
I urge the defeat of this ill-considered amendment.
Mr. FIELDS of Texas. Mr. Chairman, will the gentleman yield?
Mr. COX of California. I yield to the gentleman from Texas.
Mr. FIELDS of Texas. Mr. Chairman, just very quickly, I ask the
gentleman if he concurs with me. Two examples that have been
prominently used in this particular debate on this amendment, Barings
and Orange County. If we apply the requirements of Scienter under this
particular statute that we are discussing, the defendant directly or
indirectly made a fraudulent statement, the defendant possessed the
intention to deceive, manipulate, or defraud, the defendant made such
fraudulent statement knowingly or recklessly.
As we know the facts of these two particular cases, in these two
particular cases, they would not be afforded any of the benefits under
the statute
[[Page H2829]] that we are debating which is aimed at stopping
frivolous lawsuits. Is that the gentleman's understanding?
Mr. COX of California. Mr. Chairman, that is exactly right. What we
will be doing by passing this amendment would be opening the door for
frivolous lawsuits in a particular type of case. Ironically, there
would even be new issues to litigate. Now we could litigate the
question of whether a derivative product was involved or not, whether
it was peripheral to the transaction, whether it was central to the
transaction, whether it was really derivative or not. All of this is
rather abstruse and in any case irrelevant to what we are trying to do
right here.
Mr. KLINK. Mr. Chairman, I move to strike the requisite number of
words.
Mr. Chairman, I am not an attorney and I will not stand in the well
and say that I understand everything about derivatives, either, even
having served the last 2 years on the Committee on Banking, Finance and
Urban Affairs. But what I do know is that the more you know about them,
the more you have to be a little bit leery about how they are handled.
They are extremely complicated and they are dangerous financial
products. Even some very sophisticated investors do not understand
derivatives completely. Their value is derived from the value of other
assets, other instruments, other indices, and they are frequently
traded over the counter in very highly leveraged transactions. At this
time really no one can make a reasonable prediction of the potential
losses that institutional holders, including many public entities, face
from the derivatives. The one chart that the gentleman from Michigan
[Mr. Dingell] was pointing to showed how many municipalities, how many
counties across this Nation, and those are just the ones we know about,
may risk some sort of danger and some taxpayers' dollars. I will be
offering an amendment very soon to try to deal with that.
But this scantily regulated market is thought to be rife with fraud
and abuse. I will point right now to Fortune magazine, we have blown
this up, and it says, ``Cracking the Derivatives Case, the Untold Story
of Lies, Arrogance and Ignorance that Cost Major Players Billions.''
We are talking about billions of dollars and we do not know the
stories about the lies, we do not know how much arrogance and how much
ignorance there is.
The point is that now is not the time to relax the already lax
controls that exist on the misconducts in the derivatives market.
During the past year, private companies like Procter & Gamble, Gibson
Greetings, and public entities like Orange County, CA, have made
headlines. Financial institutions like Barings Bank PLC have
experienced sudden and dramatic losses based on derivatives trading.
According to Sunday's ``60 Minutes,'' the question is not whether there
are going to be more losses but the question really is when will those
losses be known and how much will they be? How many more billions of
dollars will be lost in the derivatives market?
For that reason I would say just as all of the headlines that the
gentleman from Massachusetts [Mr. Markey] had pointed to earlier, this
is just not the time to relax those already lax controls.
Orange County has filed a multi-billion-dollar Federal securities
suit already against Merrill Lynch and others. The suit will not be
affected because after that news, Orange County was grandfathered in
and some other municipalities, other local governments have not been.
The gentleman from California [Mr. Cox] determined that he wants to
make this bill prospective only. Other institutions may soon find
themselves in the same predicament.
Mr. MARKEY. Mr. Chairman, will the gentleman yield?
Mr. KLINK. I yield to the gentleman from Massachusetts.
Mr. MARKEY. We have here Fortune magazine. This is not some populist
perspective on this issue. Here is the headline in their magazine,
``The Risk That Won't Go Away.''
``Like alligators in a swamp, derivatives lurk in the global economy.
Even the CEO's of the companies that use them don't understand them.''
We have to give the public protection. We have to ensure that they
are going to be able to bring class-action suits if there is a
systematic pattern of trying to defraud investors in this area.
Derivatives are just not as well understood as they should be even by
the people who are selling them, even by the people who are making
profits from them. We have to have the protection of the Markey
amendment for all investors in this country.
Mr. KLINK. Reclaiming my time and asking the gentleman a question,
would you say, sir, by everything that we know that certainly we have
had much more experience in the normal securities market. We have not
had that experience in understanding how to deal with derivatives and
the cases of these billions of dollars. My understanding also is this
is sometimes constructed much like just going into one of the gambling
casinos in Las Vegas and laying your money down and spinning the wheel.
Mr. MARKEY. If the gentleman would yield further, I think it is a
pretty big step for Fortune to take to say that CEO's of the companies
do not even understand them, and we are talking about the companies
that are selling them as well as buying them. I think that we should
give the protection to the ordinary investor on a financial product
that is that complex.
Mr. KLINK. I thank the gentleman from Massachusetts, and I support
his amendment.
Mr. FIELDS of Texas. Mr. Chairman, will the gentleman yield?
Mr. KLINK. I yield to the gentleman from Texas, the chairman of the
subcommittee.
Mr. FIELDS of Texas. I appreciate the gentleman yielding. As always I
appreciate the work of the gentleman.
Let me just ask, the gentleman mentioned Procter & Gamble. As I
understand, Procter & Gamble is an over-the-counter derivative which is
not a security derivative and consequently would not be covered by this
amendment. Is that the gentleman's understanding?
Mr. KLINK. It may or may not be true. Again not being an attorney, I
do not know the intricacies of my knowledge.
Mr. FIELDS of Texas. Also the gentleman has mentioned Barings.
Mr. MARKEY. Mr. Chairman, will the gentleman yield?
Mr. KLINK. Barings is offshore. Reclaiming my time for a moment, I
yield to the gentleman from Massachusetts.
Mr. MARKEY. I thank the gentleman for yielding.
The answer is that it is an over-the-counter interest rate swap which
again the CEO's of these companies are contending were not accurately
described to them. There are many derivatives that are
infinitely more complex, in fact exotic in their nature.

The CHAIRMAN. The time of the gentleman from Pennsylvania [Mr. Klink]
has expired.
(At the request of Mr. Fields of Texas and by unanimous consent, Mr.
Klink was allowed to proceed for 3 additional minutes.)
Mr. KLINK. I continue to yield to the gentleman from Texas.
Mr. FIELDS of Texas. I am certainly not trying to put the gentleman
on the spot. Going back to Barings, Barings is, as I understand, a
situation involving exchange-traded derivatives which again would not
be the subject matter of this particular amendment and not the subject
matter of this legislation.
Mr. KLINK. Reclaiming my time from the gentleman, I appreciate what
the gentleman is trying to do. My problem with this is the process.
The gentleman raises some good questions, but again with the last
substitute amendment from the gentleman from California [Mr. Cox], the
way we are approaching this legislation, I do not think that we have
had the opportunity given the fact that we are on this 100-day calendar
to address these things, and certainly not to the satisfaction of this
Member.
I just think that when we are talking about something as volatile,
something that is as dangerous and as complicated as derivatives that I
think that the gentleman's amendment from Massachusetts certainly makes
a great deal of sense, to say let us just take a step back in this one
instance and have the adequate time to hold hearings so that we are not
placing this extremely
[[Page H2830]] volatile portion where billions of dollars are being
lost on the same train that is taking that 100-day ride.
Let us take time. I may find after we have those hearings that I
agree with the gentleman from Texas.
Mr. FIELDS of Texas. Because I am willing to make a commitment to the
gentleman that we will have hearings on the subject of derivatives. It
is my understanding that the report comes out this week from the
Securities and Exchange Commission. I think that is subject matter that
must be addressed by our subcommittee and we will be having hearings on
that particular subject.
Mr. KLINK. I appreciate the chairman's promise of that. I still
support the amendment of the gentleman from Massachusetts. I urge its
passage.
Mr. BAKER of Louisiana. Mr. Chairman, I move to strike the requisite
number of words.
Mr. Chairman, if this amendment were to be properly characterized in
financial terms, it may well be a derivative in itself because it is
not apparently well-understood and second is attempting to solve a very
complicated problem in a very simplistic manner. Further, if this were
to be classified as a forward-looking statement, the disclosure
required for the sale of initial public offering, it might well be
actionable under the public fraud statute.
Let me explain why. This amendment is purporting to solve the
derivatives problem that exists in our marketplace internationally. It
was inferred that if this were in effect, the Barings failure might not
well have occurred. It was inferred that if this amendment had been
operational, Orange County might well have been somehow prevented.
The simple fact is this amendment creates a new cause of action for
only a very small number of derivatives transactions. There are huge
numbers of derivatives transactions on a daily basis. The ones that are
the target of this amendment deal specifically with a very small number
of investors and
frankly are not held for investment purposes in most cases but are
actually transactions between two knowledgeable business interests who
are trying to minimize their business future risk. For instance, one
gentleman may have a variable interest rate, one may have a fixed
interest rate and for reasons we do not understand, they want to enter
into the transaction which limits both their risk.

The irony in this debate is derivatives have been lost, they have
been mischaracterized. Derivatives in essence are instruments intended
to minimize risk-taking. And because of the sensationalism surrounding
a few very significant and unfortunate losses that have occurred in the
international market, this amendment is being proposed to appear to be
responsive to those problems. It is not in fact. If it had been adopted
by this Congress and had been the law of the land, it would make no
difference in any of the failures we are now discussing or debating and
in fact will likely not preclude any forward failures as a result of
its adoption.
The chairman of the committee has proposed hearings on the matter and
in our own Committee on Banking and Financial Services, there will be
hearings on the matter and we should be taking a responsible look into
the regulation of derivatives, but let me quickly add, none of the
current regulators, whether it is the SEC, the Federal Reserve, the
FDIC, the Comptroller of the Currency, all of whom have testified
before the Committee on Banking and Financial Services at any time in
the near term have indicated any need for any regulatory authority
beyond which that they already have.
I suggest to the Members this amendment is not well thought out, it
is ill-timed, and should be rejected.
Mr. COX of California. Mr. Chairman, will the gentleman yield?
Mr. BAKER of Louisiana. I yield to the gentleman from California.
Mr. COX of California. The gentleman is exactly correct in noting
first that this amendment as drafted excludes most of the big
derivatives problems that we have all been made publicly aware of. It
also includes many things that are not derivatives at all. The
definition as drafted includes, and I quote, a contract that derives
its value from the value of any security. That includes a lot of things
that most people would not consider to be derivatives at all.
For example, many people in firms across America, many in California,
have their compensation package comprised of something called phantom
stock. Phantom stock is not real shares of stock but it is just a
contract that tracks the value of the underlying stock. The way this is
written, because those are not exchange-traded securities, any lawsuit
arising out of that employee compensation would be exempt from the
coverage of what we are passing right now, the Securities Litigation
Reform Act. Surely the gentleman does not mean to include those types
of things as derivatives.
Mr. BAKER of Louisiana. If I could reclaim my time, the gentleman's
point is well made, and that is that in many cases these are
negotiations entered into between two well-intended and understanding
business partners for their mutual benefit. If we are actually looking
to protect the unsophisticated investor from acquiring an interest in a
product which they do not understand, this amendment does not
accomplish that goal. If we are worried about pension fund investments
or the working person who is trying to enhance his financial condition,
adopting this amendment will not in fact help. It may in fact hurt. I
thank the gentleman for his comment.
The CHAIRMAN. The question is on the amendment offered by the
gentleman from Massachusetts [Mr. Markey].
The question was taken; and the Chairman announced that the noes
appeared to have it.

recorded vote

Mr. MARKEY. Mr. Chairman, I demand a recorded vote.
A recorded vote was ordered.
The vote was taken by electronic device, and there were--ayes 162,
noes 261, answered ``present'' 1, not voting 10, as follows:

[Roll No. 211]

AYES--162

Abercrombie
Ackerman
Andrews
Baesler
Baldacci
Barrett (WI)
Bateman
Becerra
Beilenson
Berman
Bishop
Bonior
Borski
Boucher
Brown (CA)
Brown (FL)
Brown (OH)
Bryant (TX)
Cardin
Clay
Clayton
Clement
Clyburn
Coleman
Collins (IL)
Collins (MI)
Conyers
Costello
Coyne
DeFazio
DeLauro
Dellums
Dicks
Dingell
Dixon
Doggett
Doyle
Duncan
Durbin
Edwards
Engel
Eshoo
Evans
Farr
Fazio
Fields (LA)
Filner
Flake
Foglietta
Ford
Fox
Frost
Furse
Gejdenson
Gephardt
Gordon
Green
Gutierrez
Hall (OH)
Hamilton
Hastings (FL)
Hefner
Hilliard
Hinchey
Holden
Horn
Hoyer
Jackson-Lee
Jacobs
Johnson (SD)
Johnson, E. B.
Johnston
Kaptur
Kennedy (MA)
Kennelly
Kildee
Kleczka
Klink
Lantos
Levin
Lewis (GA)
Lipinski
Lofgren
Luther
Maloney
Manton
Markey
Martinez
Mascara
Matsui
McCarthy
McDermott
McHale
McNulty
Meehan
Menendez
Metcalf
Mfume
Miller (CA)
Mineta
Minge
Mink
Moakley
Mollohan
Morella
Murtha
Nadler
Neal
Oberstar
Obey
Olver
Owens
Pallone
Pastor
Payne (NJ)
Pelosi
Peterson (FL)
Pomeroy
Poshard
Rahall
Reed
Reynolds
Rivers
Roemer
Roukema
Roybal-Allard
Rush
Sabo
Sanders
Sawyer
Schroeder
Schumer
Scott
Serrano
Slaughter
Smith (WA)
Spratt
Stark
Stokes
Studds
Stupak
Tanner
Taylor (MS)
Thompson
Thornton
Torres
Torricelli
Towns
Traficant
Tucker
Velazquez
Visclosky
Volkmer
Ward
Watt (NC)
Waxman
Williams
Wise
Woolsey
Wyden
Wynn
Yates

NOES--261

Allard
Archer
Armey
Bachus
Baker (CA)
Baker (LA)
Ballenger
Barcia
Barr
Barrett (NE)
Bartlett
Barton
Bass
Bentsen
Bereuter
Bevill
Bilbray
Bilirakis
Bliley
Blute
Boehlert
Boehner
Bonilla
Bono
Brewster
Browder
Brownback
Bryant (TN)
Bunn
Bunning
Burr
Burton
Buyer
Callahan
Calvert
Camp
Canady
Castle
Chabot
Chambliss
Chapman
Chenoweth
Christensen
Chrysler
Clinger
Coble
Coburn
Collins (GA)
Combest
Condit
Cooley
Cox
Cramer
Crane
Crapo
Cremeans
Cubin
Cunningham
Danner
de la Garza
Deal
DeLay
Deutsch
Diaz-Balart
Dickey
Dooley
Doolittle
Dornan
Dreier
Dunn
Ehlers
Ehrlich
Emerson
English
Ensign
[[Page H2831]] Everett
Ewing
Fawell
Fields (TX)
Flanagan
Foley
Forbes
Fowler
Frank (MA)
Franks (CT)
Franks (NJ)
Frelinghuysen
Frisa
Funderburk
Gallegly
Ganske
Gekas
Geren
Gilchrest
Gillmor
Gilman
Gonzalez
Goodlatte
Goodling
Goss
Graham
Greenwood
Gunderson
Gutknecht
Hall (TX)
Hancock
Hansen
Harman
Hastert
Hastings (WA)
Hayes
Hayworth
Hefley
Heineman
Herger
Hilleary
Hobson
Hoekstra
Hoke
Hostettler
Houghton
Hunter
Hutchinson
Hyde
Inglis
Istook
Johnson (CT)
Johnson, Sam
Jones
Kanjorski
Kasich
Kelly
Kennedy (RI)
Kim
King
Kingston
Klug
Knollenberg
Kolbe
LaFalce
LaHood
Largent
Latham
Laughlin
Lazio
Leach
Lewis (CA)
Lewis (KY)
Lightfoot
Lincoln
Linder
Livingston
LoBiondo
Longley
Lucas
Manzullo
Martini
McCollum
McCrery
McHugh
McInnis
McIntosh
McKeon
Meyers
Mica
Miller (FL)
Molinari
Montgomery
Moorhead
Moran
Myers
Myrick
Nethercutt
Neumann
Ney
Norwood
Nussle
Ortiz
Orton
Oxley
Packard
Parker
Paxon
Payne (VA)
Peterson (MN)
Petri
Pickett
Pombo
Porter
Portman
Pryce
Quillen
Quinn
Radanovich
Ramstad
Regula
Richardson
Riggs
Roberts
Rogers
Rohrabacher
Ros-Lehtinen
Rose
Roth
Royce
Salmon
Sanford
Saxton
Scarborough
Schaefer
Schiff
Seastrand
Sensenbrenner
Shadegg
Shaw
Shays
Shuster
Sisisky
Skaggs
Skeen
Skelton
Smith (MI)
Smith (NJ)
Smith (TX)
Solomon
Souder
Spence
Stearns
Stenholm
Stockman
Stump
Talent
Tate
Tauzin
Taylor (NC)
Tejeda
Thomas
Thornberry
Thurman
Tiahrt
Torkildsen
Upton
Vento
Vucanovich
Waldholtz
Walker
Walsh
Wamp
Watts (OK)
Weldon (FL)
Weldon (PA)
Weller
White
Whitfield
Wicker
Wilson
Wolf
Young (AK)
Young (FL)
Zeliff
Zimmer

ANSWERED ``PRESENT''--1

Lowey

NOT VOTING--10

Davis
Fattah
Gibbons
Jefferson
LaTourette
McDade
McKinney
Meek
Rangel
Waters

{time} 1403

The clerk announced the following pair:
On this vote:

Mr. Fattah for, with Mr. Davis against.

Messrs. DEUTSCH, LaFALCE, and TEJEDA changed their vote from ``aye''
to ``no.''
Mr. PAYNE of New Jersey and Mr. BERMAN changed their vote from ``no''
to ``aye.''
So the amendment was rejected.
The result of the vote was announced as above recorded.
Amendment offered by Mr. Dingell

Mr. DINGELL. Mr. Speaker, I offer an amendment.
The Clerk read as follows:

Amendment offered by Mr. Dingell: Page 28, line 12, insert
before the period the following: ``, except that this Act and
the amendments made by this Act shall not apply to any action
commenced by any State or local government, or any agency or
instrumentality of any State or local government, before the
date which is 3 years after such date of enactment.''.

The CHAIRMAN. The gentleman from Michigan [Mr. Dingell] is recognized
for 5 minutes.
(Mr. DINGELL asked and was given permission to revise and extend his
remarks.)
Mr. DINGELL. Mr. Chairman, the purposes of the amendment are very
simple, to permit counties and local units of government, States, to
continue to sue under existing law for 3 years. If we are concerned
about frivolous litigation, that is not a matter of concern here.
Mr. Chairman, the purpose of the amendment is very simple, to permit
cities, States, local units of government to continue suing under
existing practices for a period of 3 years. This will not afford any
professional litigant, any sly lawyer to run around forming class-
action suits. It simply allows communities to have the same protection
that Orange County would have to sue where wrongdoing is done them
using the new derivatives.
I would urge my colleagues to support this legislation.
Mr. Chairman, I yield to my friend and colleague, the gentleman from
Pennsylvania [Mr. Klink], a cosponsor of the amendment.
Mr. KLINK. Mr. Chairman, I thank the gentleman, the ranking member of
the Committee on Commerce, for yielding to me.
I am very proud and pleased to cosponsor this amendment with him.
Indeed, the gentleman is correct, this is a simple amendment. It allows
State and local governments who have been defrauded in the securities
market to bring suit for recovery of their losses under current rules
for 3 years after the enactment of this bill.
The derivatives disaster that we have seen, we have talked about all
morning long, in Orange County, CA, has shown us the risks that
currently face State and local governments that have invested public
moneys in the securities market.
Again, Orange County, CA, lost $1.7 billion, almost $2 billion. If
you take a look at this chart, these are other municipalities, other
counties across this country. Many will be in the States of the Members
who are in this Chamber.
And what we are simply saying is that residents there now face
cutbacks in public services. Orange County's biggest employer now faces
layoffs; small investors might lose their nest eggs; retirees in
Orange County might lose their pensions. We do not want this to happen
in other counties either. We want them to have the same course of
action as the people in Orange County will have after they have been
grandfathered by this bill that we are taking up today.

Other communities and States across the country face these problems.
We have seen losses. You will see the list. It is in places like
Minnesota, Colorado, Maine, Maryland, Illinois, Wyoming, Florida, South
Carolina, Georgia, Ohio, Louisiana, California, New Hampshire, Texas,
Virginia, and Wisconsin.
Mr. Chairman, the losses will run into the multibillions of dollars.
These are taxpayers' dollars. We want to protect the taxpayers of your
counties, of your cities, of your townships in the same way that we
have grandfathered the people from Orange County, CA.
Now, regardless, ladies and gentlemen, of whether you support the
provisions of H.R. 1058, you have to agree that they are going to make
it more difficult to pursue securities litigation. The bill provides
for heightened pleading requirements, a modified losers-pay rule, a
more stringent definition of recklessness, and hundreds of other, or
many other legal hurdles.
However, I believe that if and when these provisions take effect,
State and local governments should have extra time to bring legal
action under the current law in order to recover public money that has
been lost.
Three years is the current statute of limitations in securities
fraud. This amendment that I cosponsor along with the gentleman from
Michigan [Mr. Dingell] will provide that extra amount of time after
this bill takes effect for those State and local governments that are
now facing losses, or may discover losses in the next year or two, to
determine whether they have been defrauded and then to decide the best
way to recover those losses.
State and local governments have successfully countered in fraud
cases in the past. The city of San Jose, CA, recovered $12.7 million in
a case 10 years ago when it sued two investment companies after they
lost $60 million. The State of West Virginia successfully sued several
brokerage firms after they lost $200 million between 1986 and 1987.
These are not frivolous lawsuits. These are government entities that
are trying to protect the taxpayers' dollars, those same taxpayers that
pay our salaries, from having losses due to securities fraud.
We have all heard stories about frivolous lawsuits, but I would beg
to differ that municipalities, government entities, are not going to
bring frivolous lawsuits. If they do, then they are going to suffer
term limits at the ballot box, because the people that live there and
pay their taxes will not allow for people to risk their dollars hiring
attorneys, hiring solicitors to file frivolous lawsuits.
This is an attempt to be able to bring back money that has been lost
on the securities market. This amendment is simple. It would allow
State and local governments who may have been defrauded to bring suit
for recovery of their losses under the existing rules
[[Page H2832]] but only for 3 years from enactment of H.R. 1058.
Orange County and others can get their suits filed before this bill
takes place, will have an easier time to recover their losses; your
State and your community deserve the same chance.
I urge people to support this amendment.
Mr. DINGELL. One last point, this amendment does not roll back the
statute of limitations.
The CHAIRMAN. The time of the gentleman from Michigan [Mr. Dingell]
has expired.
(At the request of Mr. Fields of Texas and by unanimous consent, Mr.
Dingell was allowed to proceed for 3 additional minutes.)
Mr. FIELDS of Texas. Mr. Chairman, will the gentleman yield?
Mr. DINGELL. I am happy to yield to my good friend from Texas, for
whom I have greatest regard.
Mr. FIELDS of Texas. Mr. Chairman, I appreciate that.
First of all, I appreciate the gentleman clarifying this does not
toll the statute of limitations. That is just what I heard the
gentleman say.
Mr. DINGELL. I was aware of the apprehensions of my good friend from
Texas. I wanted to ease them as best I could.
Mr. FIELDS of Texas. I appreciate that. If the gentleman will
continue to yield, could the gentleman give us the specific examples
that he is trying to address?
Mr. DINGELL. Matters of the sort that you see on the poster in the
well. You are looking there at, I would say, probably 40 or 50 cities,
States, and local units of government as well as possibly a number of
State governments where they would be compelled to sue now on matters
which might involve derivatives under the new law as opposed to the old
law. The amendment permits them to sue under the old law for a period
of 3 years. That is because the derivatives situation is growing and
expanding, and every day we find some new situation which requires,
quite frankly, great concern.
For example, the Barings Bank which just collapsed, Orange County,
other places as listed on the chart that my good friend has just shown
to the House.
Mr. MARKEY. Mr. Chairman, will the gentleman yield?
Mr. DINGELL. I yield to the gentleman from Massachusetts.
Mr. MARKEY. If I may ask the gentleman a question, Have there been
any allegations that any municipality in the United States has filed a
frivolous lawsuit? Is there any allegation that has ever been made that
they should be prevented under this legislation from being exempted and
using the older standard?
Mr. DINGELL. If the gentleman would permit, the gentleman has come up
with a very good point. The thrust of the legislation before this body
at this minute relates to lawyers who assemble class-action suits for
their personal profit. This relates, this amendment protects intact for
a period of 3 years cities, States, counties, and local units of
government, so that they may go in and sue. They have been no
allegations whatsoever, none, that cities, States, or counties have
engaged in any kind of frivolous litigation on matters of this kind.
Mr. FIELDS of Texas. Mr. Chairman, will the gentleman yield?
Mr. DINGELL. I yield to the gentleman from Texas.
Mr. FIELDS of Texas. Again, just as a point of clarification, and I
appreciate the gentleman yielding, are these the only examples that the
gentleman is speaking to in his amendment?
Mr. DINGELL. Well, these are the only ones of which I am aware at
this particular minute, but I would observe that every day, if you read
the Wall Street Journal, you will find that there are new and
additional derivatives problems which are afflicting everybody,
including highly sophisticated people like General Electric, Barings
Bank or, indeed, Orange County, which ran a several-billion-dollar
investment trust.
Mr. TAUZIN. Mr. Chairman, will the gentleman yield?
Mr. DINGELL. I yield to the gentleman from Louisiana.
Mr. TAUZIN. Does the gentleman's amendment exempt countries and
municipalities from the other provisions of this bill?
The CHAIRMAN. The time of the gentleman from Michigan [Mr. Dingell]
has again expired.
(At the request of Mr. Tauzin and by unanimous consent, Mr. Dingell
was allowed to proceed for 2 additional minutes.)
Mr. TAUZIN. I understand the gentleman to explain the amendment that
it allows the municipalities to sue under the old liability regimes.
{time} 1415

The question is, does it also exempt the municipalities and pension
funds from the other provisions, such as not paying bounties, conflict-
of-interest provisions, and other protections of this bill?
Mr. DINGELL. Those matters, I would observe to the gentleman, are not
relevant to the kind of litigation that we are discussing here.
Mr. TAUZIN. If the gentleman will yield further, the question is,
does this amendment also exempt these suits from the conflict-of-
interest provisions, the payment of bounties, other problems we have
had with lawsuits where lawyers are, in fact, sometimes engaged in a
conflict-of-interest provision?
Mr. DINGELL. If the gentleman would permit, cities, States, counties,
local units of government are covered under existing law in all
matters; all matters, all fashion, all purposes for a period of 3
years. They are given no additional right over those which they have
now, and none are taken away from them. They may proceed to litigate in
the fashion they may now do for a period of 3 years.
Mr. TAUZIN. If the gentleman would yield further, the answer is that
this amendment does, in fact, exempt cities and these funds from the
other protections of this bill, conflict-of-interest, payment of
bounties?
Mr. DINGELL. Let me advise my good friend that the protections of
this bill have never been extended to investors. The protections of
this bill are extended to a bunch of high-priced lobbyists, to a group
of people in the accounting profession, large numbers of whom are now
in the gallery up above watching this proceeding, and to a group of
slippery people in the investment industry who have been taking
advantage of investors by marketing questionable derivatives, by
engaging in an assortment of difficult, improper series of behaviors.
Mr. TAUZIN. If the gentleman would yield further, then a lawyer who
wants to pursue a case for one of these listed up here in front of us
could still engage in a conflict-of-interest position that is
prohibited by this bill, could still engage in payment of bounties
prohibited by this bill?
The CHAIRMAN. The time of the gentleman from Michigan [Mr. Dingell]
has expired.
(By unanimous consent, Mr. Dingell was allowed to proceed for 2
additional minutes.)
Mr. DINGELL. What the gentleman [Mr. Tauzin] is referring to are
class action matters. Those are matters which really do not relate to
the business that we are discussing. Here we are talking about
communities, cities, States, local units of government, governmental
agencies which need to go in and sue. These are not class actions in
the sense that we have been talking about in the basic legislation
which we address, the actions to which we are addressing ourselves with
this amendment are not class actions. No professional plaintiffs, no
bodies, no illegal behavior of the kind that would be condemned by this
legislation.
It would be illegal for a county treasurer to accept a bounty, and
indeed if he were to do so, he would first of all be committing a
crime, but second of all if he were to do so, he would be responsible
for paying those moneys over to the county or to the governmental
agency of which he was a part because that money would belong to the
county as opposed to belonging to him.
Mr. TAUZIN. If the gentleman would yield further, I just want to be
absolutely clear that the amendment that the gentleman has offered goes
further than exempting these kind of lawsuits from the liability
standards, it exempts it from the entirety of this bill, is that
correct?
Mr. DINGELL. That is correct, but, remember, the language of this
bill is not something which is applicable to the kind of lawsuit about
which we are
[[Page H2833]] addressing under this particular amendment. The
language of this bill relates to bounty hunting, to a large number of
other practices which are engaged in by people who participate in class
action suits, according to the charges which have been made here, and
not governmental institutions which are going out and suing to recover
moneys improperly taken from their taxpayers.
Mr. MARKEY. Mr. Chairman, will the gentleman yield?
Mr. DINGELL. I yield to the gentleman from Massachusetts.
Mr. MARKEY. I thank the gentleman for yielding to me.
Mr. Chairman, is it not true that the U.S. Conference of Mayors and
the Government Finance Officers Association of the United States both
favor this?
The CHAIRMAN. The time of the gentleman from Michigan [Mr. Dingell]
has again expired.
(On request of Mr. Markey and by unanimous consent, Mr. Dingell was
allowed to proceed for 1 additional minute.)
Mr. DINGELL. I yield to the gentleman.
Mr. MARKEY. I thank the gentleman for yielding.
Mr. Chairman, the mayors of the United States, those whom we are
talking about putting block grants together and trusting them with
hundreds of billions of dollars of American taxpayers' money, now we
are going to put real restrictions upon them, putting them into a
suspect class of frivolous plaintiffs who have been abusing the court
system of this country. Whereas the mayors and Government Finance
Officers Association has a sterling record for bringing suits only
where they are justified.
Mr. DINGELL. There is no evidence of abuse by the mayors and
Government Finance Officers of the cities, States and counties. It is
also a fact their behavior has been exemplary.
It is also a fact that they are engaged in litigation to protect
their taxpayers against wrongdoing done not only to the cities, States,
and counties, but also to the taxpayers thereof.

U.S. Conference of Mayors,

Washington, DC, March 6, 1995.
Hon. Newt Gingrich,
Speaker, House of Representatives,
Washington, DC
Dear Mr. Speaker: On behalf of the United States Conference
of Mayors, I would like to raise some serious concerns
regarding H.R. 1058--formally title II of H.R. 10, the Common
Sense Legal Reforms Act.
Local governments participate in the securities markets
both as investors of pension funds and temporary cash
balances as well as issuers of municipal debt. Therefore, we
have an interest both in preserving well-established and
vital investor rights and protecting ourselves from
unwarranted and expensive litigation.
While we recognize the goal of H.R. 1058 to curtail
``frivolous'' private securities actions under the federal
securities law, we believe that the intended reforms may
severely limit justified litigation, lesson deterrence to
securities fraud, and waken existing legal standards.
In addition, as has been pointed out by the Government
Finance Officers Association (GFOA), this legislation fails
to address key issues such as an extension of the statute of
limitations to provide a fair and reasonable period for
filing a securities fraud case and the creation of investor
rights to purse private actions against person who violate
appropriately clear standards in aiding and abetting
securities fraud.
We ask that these concerns be addressed as this legislation
is considered on the House floor. Thank you for your
continued attention to our nation's cities.
Sincerely yours,

Victor Ashe,

Mayor of Knoxville,
President.
____

Government Finance

Officers Association,

Washington, DC, March 3, 1995.
Re H.R. 1058 (Title II of H.R. 10 concerning securities
litigation reform).

Hon. Frank Tejeda,
U.S. House of Representatives, Cannon House Office Building,
Washington, DC.
Dear Congressman Tejeda: The House of Representatives will
take up H.R. 1058 (formerly Title II of H.R. 10, the Common
Sense Legal Reforms Act) next week. I am writing on behalf of
the Government Finance Officers Association (GFOA) to
register opposition to the package of securities litigation
reform changes scheduled for a vote on Tuesday. The GFOA is a
professional association of state and local government
officials, both elected and appointed, whose duties include
the investment of temporary cash balances and pension funds
and the issuance of municipal debt.
Our members are both investors in securities and issuers of
securities. Therefore, it is especially important to GFOA
that any reform legislation strike an appropriate balance to
ensure the rights of investors and at the same time correct
flaws in the litigation process that result in frivolous
litigation. We oppose H.R. 1058 because it is harmful to
investors and the markets. We believe the reforms that are
intended to deter frivolous lawsuits do not simply address
abuses, but chill litigation, even when justified. We support
limited and targeted litigation reforms that preserve
investors' rights, preserve accountability and instill market
discipline.
Additionally, we do not support this bill because it fails
to address important issues identified by our members. These
are an extension of the statute of limitations to provide a
fair and reasonable period for filling a securities fraud
case and the creation of investor rights to pursue private
actions against persons who violate appropriately clear
standards in aiding and abetting securities fraud. Also, we
continue to be concerned about the method used to allocate
financial liability faced by defendants in securities fraud
litigation.
Federal securities litigation reform is an important issue
for state and local government officials. However, we urge
you to vote ``no'' on final passage of H.R. 1058.
Sincerely,

Catherine L. Spain,

Director,
Federal Liaison Center.

Mr. COX of California. Mr. Chairman, I move to strike the requisite
number of words, and I rise in strong opposition to this amendment.
Mr. Chairman, this amendment proceeds on the mistaken premise that
what is good for trial lawyers is always good for everybody else. It
proceeds on the mistaken assumption that the trial lawyers' interests
are always the same as their clients. But what we heard in hearings on
this very bill is that that, unfortunately, is not always the case.
The Dodd-Domenici bill which preceded this in the Senate last year,
drafted in principal part by the current chairman of the Democratic
National Committee contained no such carve-out as is being offered
today.
The Tauzin bill that was offered in the Congress last year contained
no such carveout. This legislation contains no such carveout, for a
very good reason. Every client deserves the protections of this
legislation. The mere fact that there happens to be a government that
is the client does not mean that that client should not still have
protections against abusive practices by lawyers.
Let us take, for example, the provisions in this legislation that
prevent abusive conflicts of interest. The judge is given the
opportunity to disqualify a lawyer from representing the client if it
turns out that the lawyer owns the securities that are the subject of
the action. That is a conflict of interest, and judges should, except
for exceptional cases which this bill provides for, have the
opportunity to disqualify the lawyer for conflict of interest.
Why in the world would we want to say, just because taxpayers are
involved, they should not have protections against conflict of interest
that are provided on page 11 of this bill? There is a full recovery
rule in this bill that is a substantial protection to plaintiffs with
winning cases. Right now we have a winner/loser system under which,
when you get all finished, the winner has to pay the costs anyway even
though they proved somebody else is responsible and committed the
injury.
We have heard that in some cases that might deter people without much
money from bringing cases, and we have already provided for that by
letting the contingent fee arrangement take care of that. But
obviously, if the government is bringing the case, that is not a
question. Instead the problem is going to be at the other end of the
case when the government prosecutes a very good cause of action and the
taxpayers then end up holding the bag for the damages committed by
someone else and that the court has already proven and accepted were
established by someone else.
The gentleman from Michigan said that governments cannot be involved
in class actions. Nonsense. Of course they can.
This is a new rule that he has just invented on the floor of this
Congress. But there is nothing in the Federal Rules of Civil Procedures
that would prevent a subdivision of a local government from being a
member of a class. And why should they not be entitled to the same
protection for class members as this bill provides? Right now we
[[Page H2834]] know that one of the abuses that occurs in that kind of
litigation is that the lawyer settle the cases on terms favorable to
themselves, giving only cents on the dollar to investors.
But this bill provides protections for members of that class so that
they find out up front how much is going to the lawyers per share and
how much is going to plaintiffs in the action. All of these protections
are designed for investors' benefit. As a practical matter, what the
gentleman would do with his amendment is strip all of these investor
protections simply on the ground it happened to be a government or a
subdivision of a government, not prosecuting under the Federal
securities law, not SEC acting as a plaintiff on its own behalf. This
makes absolutely no sense whatever. There is no precedent for it in 60
years of Federal securities law, and we should not start at the 11th
hour having not taken it up in any committee or subcommittee or any
time heretofore, and do it right now.
I strongly oppose the amendment.
Mr. BRYANT of Texas. Mr. Chairman, I move to strike the requisite
number of words.
Mr. Chairman, ladies and gentlemen, I do not think there is anything
that more highlights the real purpose of this legislation more than the
refusal of the gentleman from California [Mr. Cox] and the gentleman
from Texas [Mr. Fields] and others to go along with this amendment.
All this amendment says is that the very harsh new standards for
winning one of these cases are not going to apply in the future, will
not be made to apply for the next 3 years to cities and to public
institutions.
This bill was brought to us because the other side told us, without
any evidence, by the way, but told us there were a bunch of greedy
lawyers out there and a bunch of greedy professional plaintiffs and all
of them got together and would file these strike suits, making life
miserable for people in business who need to raise capital.
Well, assuming that that is correct, they never did tell us that the
cities and towns of the country and the counties of this country and
the universities and public institutions of this country were involved
in that kind of behavior. In fact, everybody knows they are not.
I wonder if the city council of a city is going to vote to engage in
an irresponsible lawsuit to try to make a little money. I hardly think
so. I wonder if the University of Minnesota, which was on this chart
before it was taken away, was going to vote that the board of regents
involved themselves in an irresponsible lawsuit. I don't think so.
This amendment by Mr. Klink is a very fine idea. It just says we are
not going to apply these standards to public institutions because we
have seen an enormous number of them who have gotten into trouble
lately and they ought to be able to file lawsuits based upon the
current law.
A very remarkable thing with regard to Orange County, Mr. Cox's area,
should be commented upon. H.R. 1058, when drafted and circulated last
fall, contained a provision which would have applied the new, harsh
standards in the bill today retroactively to pending cases. Well, then
Orange County got in big trouble, lost a whole bunch of money, and lo
and behold, without comment, the retroactive provisions of the bill are
now out.
So, Mr. Cox's community, which is the biggest example in the country
of the point that is being made here today, is allowed to file and
prosecute its lawsuit under the low standard, but my town and city or
your town or city will in the future have to prosecute its case under
the harsh standards. What a curious development. Where did that
provision go?
The point is this: Even if there is justification for this
legislation, and I think there is not, no case has been made that we
have had irresponsible lawsuits filed by cities and communities and
universities.
For goodness sakes, if these people who sometimes I think are more
easily than they ought to be duped and fooled and get into trouble,
they ought to be able to file their lawsuits under the existing
standards.
Mr. COX of California. Mr. Chairman, will the gentleman yield?
Mr. BRYANT of Texas. I yield to the gentleman from California.
Mr. COX of California. I thank the gentleman for yielding to me.
Mr. Chairman, I would just like to correct the record. The bill, as
originally introduced, had the same effective date that the bill on the
floor has. This has never been changed.
Mr. BRYANT of Texas. I want to reclaim my time. The gentleman has
changed my words. This is a debating technique which is very clever,
but it does not work.
What I said was the draft of the gentleman's bill which was
circulated last fall after you guys won the election and had your
Contract With America, had a retroactivity provision in it. Lo and
behold, Orange County realizes it cannot live with the retroactivity
provision, and the retroactivity provision, which would have affected
your community negatively, was taken out. So all the rest of us will
have to prosecute our cases for our towns and cities under the high
standard, but your county gets to keep going under the low standard.
My point is that the bill no longer applies retroactively, and
therefore the gentleman's community of Orange County is protected, but
all the rest of our communities are not.
Vote for the amendment. At least give the taxpayers a break.
Mr. MOORHEAD. Mr. Chairman, I move to strike the requisite number of
words, and I rise in opposition to the amendment, and I yield to the
gentleman from California [Mr. Cox].
Mr. COX of California. I thank the gentleman from California for
yielding to me. I will be brief.
Mr. Chairman, I have already made my complete presentation on why I
think this amendment would gut the bill. It would strip all the
protections concerning conflict of interest, protection of litigants
from abuses by the attorneys not in the interests of the clients and so
on, just on the thin tissue that there happens to be a government
entity involved.
But I did want to address the comments of the gentleman just
preceding concerning the applicability of this legislation to
litigation arising out of the Orange County problems.
{time} 1430

Any litigation arising out of the Orange County problems that anyone
chooses to file under Federal securities laws will be covered by this
bill as soon as it is passed by the Congress. Thus far the actions have
been filed, not under the Federal laws, but under State laws, so it
really would not matter what is the effective date for this purpose,
and I have taken it to be an affront to this Member to suggest that,
when we introduced the bill on January 4 and made sure that the bill
was drafted with a provision that makes it clear that there will be
only one rule applying in the middle of any lawsuit, that that was
somehow directed to Orange County.
In my view this is good legislation which I want applicable to my
constituents. I would like to have all of my constituents have the
protections against conflict of interest, against abusive practices by
lawyers that foment litigation against strike suits apply to them. This
will help the taxpayers of Orange County, and I would not be surprised,
mark my words, that somebody does not bring a lawsuit against the
county of Orange, against the taxpayers of Orange County, and it is
they who will be the ultimate deep pockets unless we have these strike
suit protections. The new incoming treasurer of Orange County, the guy
who has come in at the request of all the people, picking up the
pieces, is the guy who knows what is going on here, has written a
letter, wrote to our committee, and he said he strongly supports this
legislation without the carve out that the gentleman's amendment would
provide because it will protect the taxpayers of Orange County from
precisely the kind of abuses that we are legislating against here
today.
Mr. MARKEY. Mr. Chairman, I move to strike the requisite number of
words.
Mr. Chairman, I rise in support of the amendment offered by the
gentleman from Michigan [Mr. Dingell] and I rise just to make again the
very simple point that the gentleman from Michigan is seeking to ensure
that the cities and towns of the United States, who may have already
been placed in jeopardy by financial transactions that
[[Page H2835]] have yet to fully manifest themselves in terms of the
financial losses which their citizens, their taxpayers, are going to
suffer, be allowed to be exempt from this legislation for 3 years so
that a lot of this financial activity can be made more manifestly
obvious.
The reason for it is quite simple. One, there has been no allegation
that any mayor, that any city counselors, that any city solicitor, in
the United States has ever filed a frivolous lawsuit, and the
ostensible justification for this legislation is that we are going
after the lawyers and the professional plaintiffs who are making a
mockery of the court system of this country.
If that is our justification for passing legislation, let us not
allow the cities and towns, the taxpayers of this country, to be swept
into this. If we do not have the capacity to exempt municipalities from
this legislation, even though there are no allegations against them,
then clearly the intent is to inoculate those whose municipalities
might sue rather than protect municipalities themselves.
So let us know what this amendment is all about. I say to my
colleagues, The Dingell amendment is to give your mayor, your city
counselors, the ability to sue.
Mr. DINGELL. Mr. Chairman, will the gentleman yield?
Mr. MARKEY. I yield once again to the gentleman from Michigan, the
author of this amendment, so he can elaborate upon that point.
Mr. DINGELL. Mr. Chairman, there is absolutely no evidence of
wrongdoing on the part of any municipal, State or local government
official in connection with litigation of this kind, absolutely none.
There are absolutely no protections given to cities, States, and local
units of government by the bill, but what is given, and it is a
prodigious benefit, is to a group of slippery rascals from the
derivatives business. They will receive an inoculation against
litigation against them for wrongdoing in connection with derivatives
and in connection with investments which the cities have made and the
counties and the local units of government have made to increase their
earnings on the monies which they have as tax receipts during the time
that they are waiting to expend those monies.
Mr. BRYANT of Texas. Mr. Chairman, will the gentleman yield?
Mr. MARKEY. I yield to the gentleman from Texas.
Mr. BRYANT of Texas. Mr. Chairman, I thank the gentleman from
Massachusetts [Mr. Markey], and to supplement the remarks he just made
I would just like to address the gentleman from California [Mr. Cox]
one more time here. He stood up here a moment ago and said what a
curiosity that the original draft that was circulated in the fall said
that this bill is going to be retroactive, so these high standards
would apply retroactively to everybody, and, lo and behold, Orange
County got in trouble, got its lawsuit filed, and the retroactively
provision went out. The gentleman from California [Mr. Cox] said, ``Oh,
it wouldn't make any difference because that case is filed in State
court.''
I say to the gentleman, Well, I just went there and checked, Mr. Cox.
The fact is that Orange County filed a $3 billion lawsuit under rule
X(b)5 in Federal Bankruptcy Court, so your community gets the lower
standard, but our communities get the higher standard.
I urge my colleagues to vote for the Dingell amendment.
Mr. COX of California. Mr. Chairman, will the gentleman yield?
Mr. MARKEY. I yield to the gentleman from California.
Mr. COX of California. Mr. Chairman, I oppose retroactive
legislation. It does not work. We had the same question come up on
title I of this bill. I opposed it there.
I say to my colleagues, The fact is, if you have two different rules
operating inside of the same lawsuit, it doesn't work.
Mr. BRYANT of Texas. Mr. Chairman, will the gentleman yield to me
again?
Mr. MARKEY. I yield to the gentleman from Texas.
Mr. BRYANT of Texas. Why did the gentleman just tell us his case was
filed in State court when it was filed in Federal court? I mean the
grounds of the gentleman's defense continue to shift from moment to
moment around here.
I say to the gentleman, The fact is whatever you propose, whatever
you support, the fact of the matter is it was going to be retroactive
until your community got in trouble, and now all of our communities
have to face a higher standard, but not Orange County. Your community
gets to go in the lower standard. That's not a good idea.
Vote for the Dingell amendment.
Mr. COX of California. Mr. Chairman, will the gentleman yield?
Mr. MARKEY. I yield to the gentleman from California.
Mr. COX of California. The original lawsuits were filed under State
laws and in State courts. The gentleman brings a new matter to my
attention, but I assure him that lawsuit was surely filed after January
4, after the date of introduction of this bill, which gets directly to
the gentleman's point.
The gentleman just speaks of motive, and I gave the gentleman my
answer to his question, which is that I wanted to be sure, when we
introduced that bill on January 4, that it was not retroactive.
Indeed, Mr. Chairman, I was in a radio debate with a Member of the
other body from California in which she alleged that this was
retroactive----
The CHAIRMAN. The time of the gentleman from Massachusetts [Mr.
Markey] has expired.
(By unaniomus consent, Mr. Markey was allowed to proceed for 1
additional minute.)
Mr. COX of California. Mr. Chairman, will the gentleman continue to
yield?
Mr. MARKEY. I yield to the gentleman from California.
Mr. COX of California. She stated that the bill was retroactive, and
I stated that it was not, and I then went back and checked, and indeed
that provision of the bill, the effective date, which is a biolerplate
provision that comes at the end that this Member had never been
involved in drafting, was improperly constructed, and it would have
required that inside a lawsuit two different rules apply. That makes no
sense whatever.
Mr. MARKEY. Reclaiming my time, Mr. Chairman, just to conclude by
making this point:
Once again there are no allegations against any mayor or city council
in the United States. Why are we going to charge them with being
frivolous in any lawsuits which they are going to bring if there has
never been an allegation in the history that has come before this body
as testimony that would lend that kind of limitation upon their ability
to sue if they have been defrauded?
The gentleman from Michigan [Mr. Dingell] does not even ask that they
be given the rights for eternity, but only for the next 3 years so that
the existing body of financial sales, of representations which have
been made in the marketplace to municipalities, continue to be
litigated under the old law.
The CHAIRMAN. The time of the gentleman from Massachusetts [Mr.
Markey] has expired.
Mr. FIELDS of Texas. Mr. Chairman, I move to strike the requisite
number of words.
Mr. Chairman, let me, first of all, address what I almost hear as a
basic assumption that the underlying piece of legislation is bad. This
is not a bad piece of legislation. This legislation is aimed at the
filing of frivolous lawsuits, and I will be glad to stipulate to my
good friend from Michigan and my good friend from Massachusetts that
our county and local governments do not file frivolous lawsuits.
Now, having said that, the underlying piece of legislation would not
apply to them in the filing of lawsuits that have merit, which we are
willing to stipulate that is what they do. But why deny for 3 years the
protections that we think are in this piece of legislation when
frivolous lawsuits are filed?
Now, having stipulated that frivolous lawsuits are not filed by
governmental entities, let me create a scenario because, as the
gentleman from Michigan pointed out just a moment ago, we have had some
local governmental entities who have lost money. There is a fact
question in each of those situations whether the money was lost on bad
judgment, by someone who represents that governmental entity, or
[[Page H2836]] whether money was lost because of some fraudulent and
intentional advice. If it was fraudulent and intentional advice, then
this statute would not affect that type of cause of action. If it was
bad judgment on the part of the agent for the governmental entity, we
could envision under some circumstances where a lawsuit could be
brought that would be frivolous.
The point is this statute is designed to stop the filing of the
frivolous lawsuits, should not be construed in any way as stopping the
legitimate lawsuits that can be brought when there is fraud or some
other type of intent, and with that I would have to reluctantly oppose
the amendment offered by the gentleman from Michigan [Mr. Dingell]. I
think he brings it with every good intention.
Mr. DINGELL. Mr. Chairman, will the gentleman yield?
Mr. FIELDS of Texas. I yield to the gentleman from Michigan.
Mr. DINGELL. Mr. Chairman, I will express the highest regard to my
good friend, the gentleman from Texas [Mr. Fields].
First of all, a litigant must prove and plead what is going on in the
mind of the other side before he can properly get into court. He has
literally got to define the thought process and the intentions of the
other party. Cities, States, counties, local units of government, would
not be compelled to bear that burden. That is hardly something that I
think they ought to be compelled to do because they are litigating on
behalf of their taxpayers. There are a large number of other burdens
that they must pay before they can get into court and a large number of
other burdens they must carry, and I do not see why it is that they
should have to carry these burdens to litigate on behalf of their
people.
There is no allegation, none, that there has ever been any
wrongdoing, that there is any ambulance chasing or any shyster lawyer
practices engaged in in connection with these matters, and I would just
urge my colleagues to support this, and I appreciate the concerns of my
friend from Texas, but I would just say that the burdens that he is
imposing on the cities, and States and local units of government by
this amendment do not need to be accepted because there is no abuse on
their part.
Mr. FIELDS of Texas. Reclaiming my time, Mr. Chairman, again I have
the highest admiration for my friend, I return the compliment and I
sincerely mean that.
There is a difference of opinion perhaps on the need for the
specificity of pleading whether it is a governmental entity or it is a
private class seeking some redress, but I will restate to the gentleman
that it is my strong belief that this is a fair statute and there
should not be two different types of treatments, one for governmental
entities and those for all others. I think this is fair to all who
might be subject to some action that would be fraudulent, particularly
with intent.
Mr. COX of California. Mr. Chairman, will the gentleman yield?
Mr. FIELDS of Texas. I yield to the gentleman from California.
Mr. COX of California. I will just underscore what the gentleman from
Texas has just said.
The assertion is made that government entities generally do not bring
frivolous lawsuits. So what? That is really not what we are talking
about here. What we are talking about is abusive practices in the
context of litigation, and in many of the cases and in many of the
parts of this legislation those abusive practices are maintained by
lawyers acting otherwise than in the interests of their clients, so
this bill protects the client, and who is the client for purposes of
this amendment? The government entity and the taxpayer.
Why would we want to strip the taxpayer of the protection against
abusive practices that this legislation affords?
On the question of pleading, the gentleman from Michigan, although I
am sure with every good intention, misstates rather dramatically what
the legislation says. What the legislation says is that the complaint
shall specify each statement or omission alleged to have been
misleading. That is not an onerous requirement for anyone inasmuch as
rule X(b)5, section 10(b), in the 1934 act predicates liability on some
misstatement or omission, and we already have a requirement in here
that either you prove reliance or fraud on the market. So there has to
be a fraudulent statement out there somewhere, and asking somebody to
identify what those fraudulent statements are before they bring
litigation is, I think, entirely reasonable.
Second, the complaint shall also make----
The CHAIRMAN. The time of the gentleman from Texas [Mr. Fields] has
expired.
{time} 1445

(By unanimous consent, Mr. Fields of Texas was allowed to proceed for
2 additional minutes.)
Mr. FIELDS of Texas. Mr. Chairman, I yield to the gentleman from
California.
Mr. COX of California. Mr. Chairman, I thank the gentleman for
yielding further.
Finally, the section says an allegation may be made on information
and belief. So there are several parts of this pleading section that
the gentleman from Michigan has conveniently left out of his
description.
First of all, we are talking today about allegations, so we do not
need to know that they are true. You simply allege it and you get on
with your lawsuit, you go through discovery, you take depositions, you
subpoena records, and so on, and see if you can back up those
allegations. But you make the allegations in your complaint; you do not
put the proof in your complaint.
Second, you can do it on information and belief, so you just state in
your pleading that the plaintiff is informed and believes and thereupon
alleges that--and that is very, very easy to do. The complaint shall
make allegations which, if true, would be sufficient to establish
Scienter.
So for purposes of judging the pleading, all the court does is assume
all of the allegations are true even before you have actually proved
them, and if added together, assuming their truthfulness, they would
state a cause of action and you get by judgment on the pleadings, and
away you go and you are off with your lawsuit. That is the way it ought
to work.
Many, many years ago a young lawyer wrote a Law Review article in
which he said that the noticed pleadings which, up until that point,
had been the rule of Federal pleadings, should be departed from and we
should have this rule where you specifically plead, because it would
help end abuses in this area. The young lawyer who wrote this, it turns
out, is a lawyer named William Shannon Lerach, who is now one of the
big securities class action lawyers in America--he lives out in San
Diego, out my way in California--and he came as a witness and I asked
him about this Law Review article and he said, ``I still agree with
that today.''
So I think the gentleman from Michigan should get in league with Mr.
Lerach and get on board with our pleading requirements. They are good
ones, and we need them.
The CHAIRMAN. The time of the gentleman from Texas [Mr. Fields] has
again expired.
(On request of Mr. Dingell, and by unanimous consent, Mr. Fields of
Texas was allowed to proceed for 3 additional minutes.)
Mr. DINGELL. Mr. Chairman, will the gentleman yield?
Mr. FIELDS of Texas. I yield to the gentleman from Michigan.
Mr. DINGELL. Mr. Chairman, the new rights that would be afforded
cities, States, and local units of government would be the following:
No. 1, loser pays. Before a city, State, or local unit of government
can go into court in connection with derivatives fraud or other fraud
upon their consumers involving securities, they would have to absorb
the risk of paying the entire cost, lawyers and everything else, if
they lost.
In addition to this, there would be, as I mentioned, the heightened
pleading requirements. There would be no more joint and several
liability. So slippery people would escape. There would be no fraud-on-
the-market protections for inactively traded securities.
Now, here is what the United States Conference of Mayors says with
regard to protections that the bill would afford them. Reduced to its
simplest form, it is ``thanks but no thanks.'' I
[[Page H2837]] will, by unanimous consent, at the appropriate time
include this with my remarks.

While we recognize the goal of H.R. 1058 to curtail
frivolous private securities actions under Federal securities
laws, we believe that the intended reforms may severely limit
justified litigation, lessen deterrence to security frauds,
and weaken existing legal standards insofar as the
communities are concerned.

Mr. Chairman, I thank my friend for yielding.
Mr. FIELDS of Texas. Mr. Chairman, reclaiming my time, let me address
a few of the points the gentleman has just made.
First of all, with regard to the loser-pay provision in our bill,
there is a substantial justification clause, and the court has the
discretion in the requirement for the posting of a bond.
On the second point, we do have a legitimate disagreement on the
specificity of pleadings. I think it is important to have pleadings
that are specific.
The third point the gentleman made is with regard to joint and
several liability. Joint and several liability is in this statute where
there is knowing fraud. Again we have talked about this, and we have
been willing to stipulate that the cases we are aware of at this
particular moment are cases that are legitimate that the county
governments and local governments have against others.
The final point the gentleman made was regarding the fraud on the
market. Nothing is changed with this particular statute based on what
the law is at this particular moment. We are codifying Levinson.
Mr. DINGELL. Mr. Chairman, will the gentleman yield?
Mr. FIELDS of Texas. I am glad to yield to the gentleman from
Michigan.
Mr. DINGELL. Mr. Chairman, it would require in addition to that also
that State or local units of government, cities or counties, before
they could litigate, could be required to post a bond; is that not so?
Mr. FIELDS of Texas. That is possible, but also, reclaiming my time,
the judge has the discretion to say, ``Your bond is $1,'' or your bond
is something else
that is reasonable. The judge has the discretion to come in and ask
for something other than the posting of what could be the entire cost
of that particular lawsuit.

Mr. DINGELL. Mr. Chairman, will the gentleman yield?
Mr. FIELDS of Texas. Reclaiming my time, Mr. Chairman, let me finish
and then I will be glad to yield to the gentleman.
We did that on purpose to give the judge the discretion to look at
cases like this and use good common sense.
Mr. DINGELL. But under the current law, however, there is no
requirement that a city, county, State, or local unit of government
post a bond.
Mr. Chairman, I thank my friend for yielding.
Mr. TAUZIN. Mr. Chairman, I move to strike the requisite number of
words.
Mr. Chairman, there are two classes of stockholders whose interests
can be affected by a 10B(5) statute. There is a class of investors who
believes they have been defrauded, and they ought to be able to file a
lawsuit. Under this bill they can file that suit. Any city, county, or
individual in this country who believes they have been defrauded in
their investments can file a suit, and if there is a fraudulent claim,
they will have the full protections of joint and several liability that
exists in current law.
Under this bill the big change is that if you file a suit for
something other than intentional fraud in this judge-made area of the
law, you are going to have to specify who is guilty of the recklessness
or who is guilty of the misconduct, and in the court proceedings they
are going to find out what percent they contributed, and they will be
liable for that percentage. It is called proportionate liability.
So stockholders or investors, whether they be cities, counties,
pension funds, or individuals who believe they have been caused to have
a loss in their investments through someone's recklessness, can still
file a lawsuit under this bill. They simply have to point to the guilty
party, and the proportion of liability is assessed against that guilty
party. That is the big change in this bill.
But there is another class of stockholders who under current law are
horribly affected under 10B(5) lawsuits. They are the stockholders who
still own stock in the company that is being sued, who are still a part
of the corporation that just got sued by one of these lawyers, and who
find out that the value of their stock has been depressed because their
company is suddenly involved in a big extended lawsuit that may be
without merit. In fact, most of these cases are settled regardless of
merit. In fact, one of the persons who went bankrupt as a result of
some of these suits was quoted as saying, ``It wasn't the litigation we
would lose that was the problem; it was the cost of winning that caused
the greatest part of our financial distress.''
As companies around America are being sued under 10B(5) judge-made
law, with deep pockets, or anybody who gets shotgun suits filed against
them, finds out that their company is depressed and their stock is
hurt, who do we find out is hurt then? It is the pension investor, the
private investor, who still owns stock in that company and who finds
out that the company is spending most of its money on lawyers and
courtrooms instead of on creating products and creating jobs.
Now, should it matter whether a lawsuit is brought by a government or
by an individual when that is the result? This amendment will exempt
all government suits under this 10B(5) filing, whether it was a
derivative investment or not. The suit may be against a small company
struggling to create jobs and indeed to return profits to its
investors, as is often the case. Are we going to say that governments
get better protections, that they can sue in deep pockets liability
under this act, when citizens will be under this new standard? Are we
going to say under our system of justice that governments have a better
standing in court than citizens? If the reforms in this bill are not
good for this country, and I firmly believe they are, I would not have
engaged in this effort for 4 solid years to reform this section of law.
If the Chairman of the SEC is correct when he said, ``There are two
classes of stockholders whose rights must be balanced here,'' should we
give government better protection under the law than we extend to
citizens? Should we not have the same rules applying to government
investors as we have applying to individual investors?
If there is one thing Americans hate the most around here, it is when
we apply different standards to government that we do to citizens. We
just went through that in the first week of this Congress when we
decided that the Congress should be accountable to the same laws we
impose on businesses across America. Are we now going to say that when
we are reforming this body of law, we are going to have a separate set
of laws for government and a separate set of laws for citizens? I do
not think we should do that.
Let me concede, as my friend, the gentleman from Texas did, that I do
not believe that governments bring frivolous lawsuits, but they do
bring lawsuits against companies just like individuals do, and they
ought to have the same rules apply to them as will apply to citizens in
this case, and if Members believe as I do that we are reforming this
law for the right reasons, they should vote against this amendment. If
they do not, then they should vote for the amendment and vote against
the bill.
Mr. KLINK. Mr. Chairman, I move to strike the requisite number of
words.
Mr. Chairman, I will not take the full 5 minutes, but there are a
couple of points that I think need to be made on this amendment. Again
let me say that I am proud to cosponsor this amendment with the
gentleman from Michigan [Mr. Dingell].
As for the previous speaker, the gentleman from California [Mr. Cox],
I agree with much of his intent, but as to his point about having two
classes, the fact that there is one set of laws for governments and one
for citizens, the fact if that government is citizens. The government
has no money. The only money that the government has is that which the
citizens send to us.
Now, I would put it this way: When a normal citizen makes an
investment, that citizen has the responsibility for that decision, and
whether or not they are going to be able to sue, whether
[[Page H2838]] that suit is frivolous, we ought to address that in
some form. But normal taxpayers do not very often have much of a say in
how moneys are invested on their behalf by their local governments.
Mr. TAUZIN. Mr. Chairman, will the gentleman yield on that point?
Mr. KLINK. Yes, I yield to the gentleman from Louisiana.
Mr. TAUZIN. Mr. Chairman, citizens invest in money market funds that
make investments, just as they invest in pension funds that are run by
governments and by private entities that make investments. There is no
difference.
My question to the gentleman is this: Why should we say to a citizen
that chose a private investment fund to make his investments, ``You're
going to have a set of laws that relate to you, but if you invest in a
government pension fund, you get a different set of laws that apply to
you''? That is what is wrong.
Mr. KLINK. Mr. Chairman, I think, to answer the gentleman's question,
there appears to be, with this whole derivative thing, the fact that
things are changing from moment to moment and from hour to hour. Every
time we pick up a newspaper something new has happened, and we are
learning something new about it all the time. If I may respond to one
of the comments that I think the gentleman from California [Mr. Cox]
made, he mentioned the fact that this carve-out did not exist and the
Dodd-Domenici language did not exist in his bill, but I think things
have changed dramatically.
Mr. TAUZIN. Mr. Chairman, will the gentleman yield?
Mr. KLINK. I would like to finish my thought, and then I would be
glad to yield to the gentleman.
The fact of the matter is that things are changing all the time in
this regard. So what we are saying is, let us not create two separate
bodies of law. But the amendment delays the effect of this bill on
State and local governments for 3 years, and that is the same period of
time that currently is the statute of limitations for securities fraud.

{time} 1500

I think it is unfair to require State and local governments to risk
taxpayers' money in a loser-pay system. That is one of the problems.
Let me just finish with this, and that is I have a letter here from
the mayor of Philadelphia, Edward Rendell. The first paragraph of the
letter says, ``The city of Philadelphia,'' and this is like other
municipalities, some are much larger and some are smaller, ``The city
of Philadelphia is responsible for proper administration of over $2
billion in public pension funds for its workers and its retires. Like
other private and public institutional investors, the city is
completely dependent on a strong Federal system of securities laws and
remedies to ensure probity in the financial marketplace and to deter
would be wrongdoers.''
This next sentence is what really bothers me. He says, ``We are
deeply concerned by the incidence of fraud in securities markets, and
most particularly by the fact that many questionable investment schemes
seem to target municipalities and government entities.''
They find themselves being targeted because they are not up-to-date,
and they are talked into these investments, and just like Mr. Cox's
Orange County, CA, all of a sudden something bad happens.
I will tell you that I think large and small municipalities across
the State, not wanting to bring frivolous lawsuits, not wanting to
spend taxpayers' money in pursuing frivolous cases, they are shocked by
what happened in Orange County, CA, they are shocked when they look at
what happened in San Jose and in States across this Nation.
We simply say let us delay it for the statute of limitations. Let us
not have different sets of rules for other municipalities than we have
for Orange County.
Mr. TAUZIN. Mr. Chairman, will the gentleman yield?
Mr. KLINK. I yield to the gentleman from Louisiana.
Mr. TAUZIN. Mr. Chairman, I thank the gentleman for yielding. I asked
him to yield to make this point. Any municipality or pension fund that
thinks they have been defrauded under any kind of investment, be it a
derivative or something else, has that right to file that suit today.
These lawsuits are cranked out normally up to 2 hours after the stock
prices fall. If somebody has a case on that list that we were shown
this morning, they can bring that suit today under the old law. They
can bring it next week under the old law. Until this law goes into
effect, they can file this suite.
Mr. MILLER of California. Mr. Chairman, will the gentleman yield?
Mr. KLINK. I yield to the gentleman from California.
Mr. MILLER of California. Mr. Chairman, yes, they can file a lawsuit
today, but what we are finding out about derivatives is as this
instrument spins around the world and its consequences, this is like
peeling an onion. The fact is this law may become law before people
realize the extent to which they have been damaged. A lot of these
investments are very indirect investments. They join pools. State laws
require it. We are talking about the money of school boards.
The CHAIRMAN. The time of the gentleman form Pennsylvania [Mr. Klink]
has expired.
(By unanimous consent, Mr. Klink was allowed to proceed for 2
additional minutes.)
Mr. KLINK. I yield to the gentleman from California [Mr. Miller].
Mr. MILLER of California. Mr. Chairman, in the California example,
people who really had very little say over the investment of their
money, school districts, water districts, sewer districts, citizen
boards, without this kind of experience, and they were indirectly part
of this arrangement and now they want to unravel that and assert their
rights, we ought to let time for that to happen.
This is like the early days of the S&L scandal. There are a lot of
people that do not know today that they are going to be affected by
this because something else that goes wrong in the market triggers the
vulnerability into this investment pool fund or instrument that looks
safe today or looks safe 3 months from now, but may not turn out to be
safe a year from now.
Mr. TAUZIN. If the gentleman will yield further, I would say to my
friend from California [Mr. Miller] that we just had that debate. We
agreed not to exempt derivative lawsuits from this bill. That is
another debate. But my point is this amendment covers more than
investments in derivatives, does it not?
Mr. KLINK. Yes, it does.
Mr. TAUZIN. It exempts the city in all of its suits. So if the city,
county, or pension board wants to bring a suit against a small company,
under this amendment they would be exempted from this bill, would they
not be?
Mr. KLINK. Mr. Chairman, reclaiming my time, I think this is an
instance where we just have to agree to disagree. I understand that.
My point is this: If it is fair for Orange County, CA, to go under
the old rule, then I think we need to take the statute of limitations,
and I do not think that is being unreasonable, and say for not the
period of enactment, but for the period of the statute of limitations,
while this is being shaken out.
Mr. TAUZIN. If the gentleman will yield further so I may make one
final point, just to clarify it, the gentleman is saying this statute
of limitations will apply to new claims that might arise during the 3
years. The gentleman is not saying you are extending the statute of
limitations for claims that already exist, are you?
Mr. KLINK. No.
Mr. TAUZIN. No, you are actually extending this law for 3 years
applied to new claims. So it is not an extension of the statute of
limitations, is it?
Mr. KLINK. Mr. Chairman, reclaiming my time, the gentleman is
correct. I am saying extend it for the period of time of the statute of
limitations. The gentleman is correct. I think this will give us time
to see how this is shaking out. Again, there is a lack of confidence
across this country because of what happened in the gentleman's area in
Orange County, CA.
Mr. COX of California. Mr. Chairman, I ask unanimous consent to
proceed for 3 additional minutes.
The CHAIRMAN. Without objection, the gentleman from California [Mr.
[[Page H2839]] Cox] is recognized for 3 additional minutes.
There was no objection.
Mr. COX of California. Mr. Chairman, we actually have had testimony
on this very subject, on the application of this bill as presently
drafted to Orange County, and the testimony came in a letter addressed
both to the testimony came in a letter addressed both to the chairman
and to the ranking member of the Subcommittee on Telecommunications and
Finance. It comes from John M.W. Moorlach, who will soon be nominated
and sworn in as the new Treasurer of Orange County to pick up the
pieces where Bob Citron left off.
Here is what his testimony said:

The taxpayers of Orange County will suffer severe financial
repercussions resulting from its longtime former treasurer's
investment strategy. Now lawyers may victimize our taxpayers
a second time by extorting multimillion dollar settlements
under rigged rules that stack the deck against the county.
This will further compound our already tragic financial
losses. As a certified public accountant, I'm well aware that
members of my profession for years have been victimized by
strike suits brought by a handful of unscrupulous lawyers.
These unethical few neither know nor care whether their so-
called clients have actually been victimized. They simply
bring cases for their extortion value and settle them without
trial on the merits. As a result, accountants and companies
innocent of any wrongdoing end up paying out millions of
dollars to get rid of nuisance suits, while entire classes of
victims of real fraud may only get pennies on the dollar for
their claims. The biggest share by far goes to the lawyers.

Now, here is where we get to the point of this amendment.

This game has already started in Orange County. Whatever
the rights and wrongs of these cases, the only certainty is
that under the current system, only the lawyers will get
rich. Justice will not be done, not for the plaintiffs who
will receive a percentage on the dollar as their lawyers
benefit from handsome fees, and not for Orange County's
taxpayers, who may have to take another multimillion dollar
hit that will be as unnecessary and destructive as Citron's
investment strategy itself.

Mr. Moorlach's point is that the County of Orange, already suffering,
and you have seen the layoffs, 11,000 people, already suffering from
the consequences of the Citron strategy, may now itself be the target
of strike suits. And, yes, some of these suits may be brought by
unscrupulous lawyers who are lucky enough to land as a client any one
of the municipalities or subdivisions that invested in this pool.
Lawyers have great sway over their clients. We want to make sure that
the clients always have rights against the lawyers, that they have the
right to control the litigation, and that litigation device is not
abused. If it were to be abused, then Orange County, read ``the
taxpayers,'' would end up paying the damages.
John Moorlach concludes,

The Contract With America bill will stop this legalized
embezzlement farce. It will strengthen the rights of real
victims of fraud, while preventing frivolous cases from
victimizing responsible people. It will be good for the
country and for Orange County. I wish you well as you
consider this important legislation.''

So the point is that when municipalities are suing municipalities, it
is just as likely that lawyers can get out of control as when lawyers
are representing someone else. We want to make sure that Orange
County's taxpayers are protected to the extent that Orange County might
be a victim of lawsuits that are brought for their settlement value,
because it is the taxpayers, not Bob Citron, that will end up paying
those damages. And we want to be sure that the municipalities who are
plaintiffs have all of the protections against conflict of interest,
protections for lawyers to drive the litigation so that the lawyer does
not do it, protections against lawyer-driven litigation that are part
of this bill. Stripping all of those protections out of this bill just
because it is the taxpayers who are the clients and the taxpayers who
would otherwise get those protections makes no sense at all.

So I hope at least in the context of my home county, having heard
from the people who are handling that, that we would understand just
how destructive this amendment might be.
Mr. BRYANT of Texas. Mr. Chairman, will the gentleman yield?
Mr. COX of California. I yield to the gentleman from Texas.
Mr. BRYANT of Texas. Mr. Chairman, that is the point I made a moment
ago. Your home county has already been taken care of. They have already
filed their Federal case under the lower standard. Now you are raising
the standard for the rest of our communities.
Mr. COX of California. Reclaiming my time, the gentleman is aware
that the statutes of limitation that apply to what went on in Orange
County are sufficiently long so that people can file lawsuits after
this legislation. It is my sincere and fond hope that this legislation
will apply to as much of the litigation that might arise out of Orange
County as is possible, for precisely the reasons that John Moorlach,
the soon-to-be Treasurer of Orange County, just pointed out.
Mr. BRYANT of Texas. If the gentleman will yield further, the
gentleman just verified what I just said in a long round and about way
of saying it.
The second question I have for the gentleman is, inasmuch as all this
amendment does is say we are not going to apply the standards of this
bill to the cities and counties and public institutions for the next 3
years, can you name a city or county or public institution that has
been accused of filing a frivolous securities case?
The question has already been answered, and the answer is ``no.''
The CHAIRMAN. The question is on the amendment offered by the
gentleman from Michigan [Mr. Dingell].
The question was taken; and the Chairman announced that the noes
appeared to have it.

RECORDED VOTE

Mr. DINGELL. Mr. Chairman, I demand a recorded vote.
A recorded vote was ordered.
The vote was taken by electronic device, and there were--ayes 179,
noes 248, answered ``present'' 1, not voting 6, as follows:

[Roll No. 212]

AYES--179

Abercrombie
Ackerman
Andrews
Bachus
Baesler
Baldacci
Barcia
Barrett (WI)
Becerra
Beilenson
Bentsen
Berman
Bevill
Bishop
Bonior
Borski
Boucher
Browder
Brown (CA)
Brown (FL)
Brown (OH)
Bryant (TX)
Cardin
Chapman
Clay
Clayton
Clyburn
Coleman
Collins (IL)
Collins (MI)
Conyers
Costello
Coyne
Cramer
de la Garza
DeFazio
DeLauro
Dellums
Dicks
Dingell
Dixon
Doggett
Doyle
Duncan
Durbin
Edwards
Engel
Eshoo
Evans
Farr
Fattah
Fazio
Fields (LA)
Filner
Flake
Foglietta
Ford
Fox
Frank (MA)
Frost
Furse
Gejdenson
Gephardt
Gonzalez
Gordon
Green
Gutierrez
Hall (OH)
Hall (TX)
Hamilton
Hastings (FL)
Hefner
Hilliard
Hinchey
Holden
Hoyer
Jackson-Lee
Jefferson
Johnson (SD)
Johnson, E.B.
Johnston
Kanjorski
Kaptur
Kennedy (MA)
Kennelly
Kildee
Kleczka
Klink
LaFalce
Lantos
Laughlin
Levin
Lewis (GA)
Lincoln
Lipinski
Lofgren
Luther
Maloney
Manton
Markey
Martinez
Mascara
Matsui
McCarthy
McDermott
McHale
McNulty
Meehan
Menendez
Mfume
Miller (CA)
Mineta
Mink
Moakley
Mollohan
Murtha
Nadler
Neal
Oberstar
Obey
Olver
Ortiz
Orton
Owens
Pallone
Pastor
Payne (NJ)
Pelosi
Peterson (FL)
Pickett
Pomeroy
Poshard
Rahall
Reed
Reynolds
Richardson
Rivers
Roemer
Roybal-Allard
Rush
Sabo
Sanders
Sawyer
Schroeder
Schumer
Scott
Serrano
Skaggs
Slaughter
Spratt
Stark
Stokes
Studds
Stupak
Tanner
Taylor (MS)
Tejeda
Thompson
Thornton
Thurman
Torres
Torricelli
Towns
Traficant
Tucker
Velazquez
Vento
Visclosky
Volkmer
Ward
Waters
Watt (NC)
Waxman
Williams
Wise
Woolsey
Wyden
Wynn
Yates

NOES--248

Allard
Archer
Armey
Baker (CA)
Baker (LA)
Ballenger
Barr
Barrett (NE)
Bartlett
Barton
Bass
Bateman
Bereuter
Bilbray
Bilirakis
Bliley
Blute
Boehlert
Boehner
Bonilla
Bono
Brewster
Brownback
Bryant (TN)
Bunn
Bunning
Burr
Burton
Buyer
Callahan
Calvert
Camp
Canady
Castle
Chabot
Chambliss
Chenoweth
Christensen
Chrysler
Clement
Clinger
Coble
Coburn
Collins (GA)
Combest
Condit
Cooley
Cox
Crane
Crapo
Cremeans
Cubin
Cunningham
Danner
Davis
Deal
DeLay
[[Page H2840]] Deutsch
Diaz-Balart
Dickey
Dooley
Doolittle
Dornan
Dreier
Dunn
Ehlers
Ehrlich
Emerson
English
Ensign
Everett
Ewing
Fawell
Fields (TX)
Flanagan
Foley
Forbes
Fowler
Franks (CT)
Franks (NJ)
Frelinghuysen
Frisa
Funderburk
Gallegly
Ganske
Gekas
Geren
Gilchrest
Gillmor
Gilman
Goodlatte
Goodling
Goss
Graham
Greenwood
Gunderson
Gutknecht
Hancock
Hansen
Harman
Hastert
Hastings (WA)
Hayes
Hayworth
Hefley
Heineman
Herger
Hilleary
Hobson
Hoekstra
Hoke
Horn
Hostettler
Houghton
Hunter
Hutchinson
Hyde
Inglis
Istook
Jacobs
Johnson (CT)
Johnson, Sam
Jones
Kasich
Kelly
Kennedy (RI)
Kim
King
Kingston
Klug
Knollenberg
Kolbe
LaHood
Largent
Latham
LaTourette
Lazio
Leach
Lewis (CA)
Lewis (KY)
Lightfoot
Linder
Livingston
LoBiondo
Longley
Lucas
Manzullo
Martini
McCollum
McCrery
McHugh
McInnis
McIntosh
McKeon
Metcalf
Meyers
Mica
Miller (FL)
Minge
Molinari
Montgomery
Moorhead
Moran
Morella
Myers
Myrick
Nethercutt
Neumann
Ney
Norwood
Nussle
Oxley
Packard
Parker
Paxon
Payne (VA)
Peterson (MN)
Petri
Pombo
Porter
Portman
Pryce
Quillen
Quinn
Radanovich
Ramstad
Regula
Riggs
Roberts
Rogers
Rohrabacher
Ros-Lehtinen
Rose
Roth
Roukema
Royce
Salmon
Sanford
Saxton
Scarborough
Schaefer
Schiff
Seastrand
Sensenbrenner
Shadegg
Shaw
Shays
Shuster
Skeen
Skelton
Smith (MI)
Smith (NJ)
Smith (TX)
Smith (WA)
Solomon
Souder
Spence
Stearns
Stenholm
Stockman
Stump
Talent
Tate
Tauzin
Taylor (NC)
Thomas
Thornberry
Tiahrt
Torkildsen
Upton
Vucanovich
Waldholtz
Walker
Walsh
Wamp
Watts (OK)
Weldon (FL)
Weldon (PA)
Weller
White
Whitfield
Wicker
Wilson
Wolf
Young (AK)
Young (FL)
Zeliff
Zimmer

ANSWERED ``PRESENT''--1

Lowey

NOT VOTING--6

Gibbons
McDade
McKinney
Meek
Rangel
Sisisky

{time} 1527

Mr. BACHUS changed his vote from ``no'' to ``aye.''
So the amendment was rejected.
The result of the vote was announced as above recorded.
{time} 1530

amendment offered by mr. tauzin

Mr. TAUZIN. Mr. Chairman, I offer an amendment, the Mineta-Tauzin
amendment.
The CHAIRMAN. The Clerk will designate the amendment.
The text of the amendment is as follows:

Amendment offered by Mr. Tauzin: Page 26, beginning on line
1, strike section 37 through page 28, line 2, and insert the
following:

``SEC. 37. APPLICATION OF SAFE HARBOR FOR FORWARD-LOOKING
STATEMENTS.

``(a) Safe Harbor In General.--In any private action
arising under this title based on a fraudulent statement (as
defined in section 10A), a person shall not be liable with
respect to any forward-looking statement if and to the extent
that the statement--
``(1) contains a projection, estimate, or description of
future events; and
``(2) refers clearly (or is understood by the recipient to
refer) to--
``(A) such projections, estimates, or descriptions as
forward-looking statements; and
``(B) the risk that such projections, estimates, or
descriptions may not be realized.

The safe harbor for forward-looking statements established
under this subsection shall be in addition to any safe
harbor the Commission may establish by rule or regulation.
``(b) Definition of Forward-Looking Statement.--For the
purpose of this section, the term `forward-looking statement'
shall include (but not be limited to) projections, estimates,
and descriptions of future events, whether made orally or in
writing, voluntarily or otherwise.
``(c) No Duty To Make Continuing Projections.--In any
private action arising under this title, no person shall be
deemed to have any obligation to update a forward-looking
statement made by such person unless such person has
expressly and substantially contemporaneously undertaken to
update such statement.
``(d) Automatic Procedure for Staying Discovery; Expedited
Procedure for Consideration of Motion on Applicability of
Safe Harbor.--
``(1) Stay pending decision on motion.--Upon motion by a
defendant to dismiss on the ground that the statement or
omission upon which the complaint is based is a forward-
looking statement within the meaning of this section and that
the safe harbor provisions of this section preclude a claim
for relief, the court shall stay discovery until such motion
is decided.
``(2) Protective orders.--If the court denies a motion to
dismiss to which paragraph (1) is applicable, or if no such
motion is made and a party makes a motion for a protective
order, at any time beginning after the filing of the
complaint and ending 10 days after the filing of such party's
answer to the complaint, asserting that the safe harbor
provisions of this section apply to the action, a protective
order shall issue forthwith to stay all discovery as to any
party to whom the safe harbor provisions of this section may
apply, except that which is directed to the specific issue of
the applicability of the safe harbor. A hearing on the
applicability of the safe harbor shall be conducted within 45
days of the issuance of the protective order. At the
conclusion of the hearing, the court shall either dismiss the
portion of the action based upon the use of the forward-
looking information or determine that the safe harbor is
unavailable in the circumstances.
``(e) Regulatory Authority.--The Commission shall exercise
its authority to describe conduct with respect to the making
of forward-looking statements that will be deemed not to
provide a basis for liability in private actions under this
title. Such rules and regulations shall--
``(1) include clear and objective guidance that the
Commission finds sufficient for the protection of investors;
``(2) prescribe such guidance with sufficient particularity
that compliance shall be readily ascertainable by issuers
prior to issuance of securities; and
``(3) provide that forward-looking statements that are in
compliance with such guidance and that concern the future
economic performance of an issuer of securities registered
under section 12 of this title will be deemed not to be in
violation of this title. Nothing in this section shall be
deemed to limit, either expressly or by implication, the
authority of the Commission to exercise similar authority or
to adopt similar rules and regulations with respect to
forward-looking statements under other statutes under which
the Commission exercises rule-making authority.''.

Mr. TAUZIN (during the reading). Mr. Chairman, I ask unanimous
consent that the amendment be considered as read and printed in the
Record.
The CHAIRMAN. Is there objection to the request of the gentleman from
Louisiana?
There was no objection.
Mr. TAUZIN. Mr. Chairman, I yield to the gentleman from California
[Mr. Mineta].
(Mr. MINETA asked and was given permission to revise and extend his
remarks.)
Mr. MINETA. Mr. Chairman, the amendment that the gentleman from
Louisiana [Mr. Tauzin] and I are offering addresses the issue of the
safe harbor for forward-looking statements--statements made by
companies and others about the future prospects of earnings, products,
technologies or the like.
Mr. Chairman, if a company fails to meet analysts' earnings
projections--or other projections--because of changes in the business
cycle or a change in the timing of an order or contract, the company
often finds itself faced with a lawsuit. In fact, more than one out of
every two companies in Silicon Valley have been subject to a class
action securities lawsuit. Many of these lawsuits are based upon
forward-looking information.
Once a company experiences a drop in stock price or if earnings fail
to meet expectations, plaintiffs' lawyers use the discovery process as
a fishing expedition to find any statements or records within a company
that could support an allegation of fraud. Quite often, they base their
charges of fraud on what they allege are false and misleading past
statements of future expectations. Technology companies are prime
targets for this type of senseless litigation because of the nature of
the technology industry. By definition, forward-looking statements in
the high tech industry involve a future product, innovation, or
technology. Failing to meet one expectation or another is often
inevitable.
Why is a safe harbor for forward looking information important?
Because the threat of costly and disruptive litigation has a chilling
effect on the willingness of companies to make disclosures in the
marketplace. And over the long term, less information results in a less
efficient marketplace. According to a recent study, technology
companies are sued far more frequently than any other industry, and pay
the highest settlements of any industry--averaging over $9 million per
[[Page H2841]] case. A National Venture Capital Association study of
over 200 publicly traded entrepreneurial companies found that 71
percent reported being more reluctant to discuss company performance
with analysts or the public. To all of these companies, the SEC safe
harbor rules have proven to be legally nonexistent.
Let me offer you two Silicon Valley examples:
John Adler, CEO, Adaptec, a Silicon Valley high technology company.
Mr. Adler says Adaptec has adopted a ``no communications'' policy,
which ``means they say nothing beyond what they must disclose by law.''
Scott McNealy, CEO, Sun Micro-systems, spoke of his company's policy
of offering only ``limited guidance'' to Wall Street analysts.
Concluding that the legal risks of providing earnings and revenue
projections to Wall Street analysts are too high, the company no longer
releases this information and refuses to comment directly on analysts'
projections.
Mr. Chairman, technology companies are popular targets for class
action lawsuits because of several industry-wide factors which provide
grist for the securities litigation mill: First, they have many new
cutting edge products, which sometimes do not succeed in the
marketplace; second, their earnings and stock price are volatile; and
third, they have a custom and practice of paying officers and employees
in part with stock or stock options.
These factors are seized upon by plaintiffs' lawyers over and over
again to create a false picture of fraud by technology companies, where
none in fact exists. For example, if a company announces that earnings
during the quarter were negatively affected by various external market
factors, plaintiffs' lawyers proceed to sue the company, accusing it of
fraud for having failed to predict the adverse effects of price
competition, and so forth. These cases involve nothing more than fraud
by hindsight, the basic theory of which is that the company should have
known, or must have known, that the future would not be as predicted.
The safe harbor rules have proven ineffective to stop this type of
abusive litigation.
Faced with a barrage of suits alleging fraud by hindsight, it is no
wonder that technology companies have become reluctant to provide
forward-looking information to the market.
Another phenomenon which is almost universally experienced by
technology companies, and is predominantly a function of customer
behavior, is the extremely uneven pattern of bookings during a
particular quarter. Many technology companies will experience a
significant percentage of bookings in the last few weeks of a quarter--
the so-called hockeystick--as a result of customers waiting until the
end of the quarter to negotiate the best deal. The hockeystick pattern
makes the task of predicting revenues and earnings extremely difficult,
particularly for technology companies selling higher-priced products
and equipment, where the loss of just a few orders will make or break
the quarter.
A number of recent class actions have been brought against companies
which missed the quarter, but did not know that would occur until just
a few weeks--or in some cases, days--before the end of the quarter.
Nevertheless, under the fraud by hindsight theory, these companies have
been sued for not having predicted the future, and for giving
supposedly baseless statements of optimism at the beginning of the
quarter. The safe harbor rules have utterly failed to protect these
companies from abusive shareholder litigation.
Mr. Chairman, the litigation risks associated with making forward-
looking disclosures also have been compounded in recent years by two
key developments in the caselaw: First, the so-called duty to update,
and second, the judicial refinement of the bespeaks caution doctrine.
Very frequently, companies provide soft forward-looking information
to the market, such as ``demand should continue to be strong for our
products.'' The duty to update would authorize a claim, even when the
original statement was true when made, if the company does not timely
inform the market when demand no longer is strong. Under this rule, the
requirement to track all forward-looking statements given to the
market, including soft information, and continually update it, can
quickly overwhelm the abilities of even the most dedicated of
companies. Further, companies cannot reasonably rely on risk factor
disclosures, since plaintiffs may argue that a company disseminated
literally dozens of cautionary statements to cover all the specific
risks and contingencies it sees in its futures business. In short,
companies continue to proceed at considerable peril in making forward-
looking disclosures.
Mr. Chairman, my amendment is intended to promote maximum disclosure
by corporate executives by providing a safe harbor for forward-looking
statements if, and only if, certain requirements are met. Only
statements involving projections, estimates or descriptions of future
events are covered. In order to be protected the statements must be
referred to clearly as forward-looking statements or be understood as
forward-looking statements. Second, the risk that such projections,
estimates or descriptions may not be realized must also be clearly
stated.
This approach has broad support in the business community.
The CHAIRMAN. The time of the gentleman from Louisiana [Mr. Tauzin]
has expired.
(At the request of Mr. Mineta and by unanimous consent, the gentleman
from Louisiana, Mr. Tauzin, was allowed to proceed for 2 additional
minutes.)
Mr. MINETA. Mr. Chairman, will the gentleman yield?
Mr. TAUZIN. I continue to yield to my colleague, the gentleman from
California.
Mr. MINETA. Mr. Chairman, it is supported by the American Business
Conference, the American Electronics Association, the Association of
Publicly Traded Companies, the Business Roundtable, the National
Association of Manufacturers, the National Venture Capital Association,
and the American Institute of Certified Public Accountants.
More importantly, Mr. Chairman, this approach has broad support among
recipients of forward-looking information--the investment community.
The California Public Employee Retirement System [CALPERS] stated ``We
recommend that the existing safe harbor rule be amended to provide a
safe harbor from private actions to any issuer who adequately couches
its projections in cautionary language.''
This amendment is also consistent with the recent testimony of the
executive director of the Council of Institutional Investors,
representing hundreds of local, State, and labor pension funds.
Finally, this amendment would not prevent the Securities and Exchange
Commission from bringing an enforcement action against any person on
the basis of a forward-looking statement. It would only curb ``fraud-
by-hindsight'' alleged in private, speculative strike suits. So, Mr.
Chairman, this amendment will finally provide some clear guidance to
companies in the area of forward-looking statements; it will maximize
disclosure and improve the efficiency of the market, and most
importantly it will provide investors with the ammunition they need to
make sound decisions based on maximum information.
Mr. FIELDS of Texas. Mr. Chairman, I move to strike the requisite
number of words.
Mr. Chairman, first and foremost, I want to congratulate my good
friend, the gentleman from Louisiana [Mr. Tauzin] and my good friend,
the gentleman from California [Mr. Mineta] for offering this good
amendment. It is an amendment that I plan to support. I encourage all
of my colleagues to do so. In fact, on this side of the aisle, we have
examined the amendment, and we would be more than happy to accept it.
I represent a community in my district that has a very high
biotechnology presence, in Woodlands, TX. I am told constantly by these
companies that they have to be very careful in what they say and how
they disclose information. It is very difficult for them to
communicate, particularly when they are trying to raise capital.
I think what the gentleman from California [Mr. Mineta] does in his
statement is goes in a direction that provides that safe harbor, gives
protection, and certainly puts investors on notice as to what is a
forward-looking statement.
Let me also say that I believe this is a pro-investor, pro-disclosure
amendment. I support it, because it is clear that if we do not provide
an effective safe harbor for forward-looking information companies who
disclose only boilerplate information specifically required by the
Securities and Exchange Commission, in that instance, the investors
does not win.
We have seen the study cited by my colleague. The threat of
litigation has a chilling effect on disclosure of forward-looking
information. In the end,
[[Page H2842]] investors are deprived of valuable information.
Mr. Chairman, we should face it, investors want company officials to
talk about their future prospects. Investors want to hear the opinions
of company officials, analysts, and others. The SEC has said this kind
of information is important to investors, but company officials cannot
know with certainty what the future actually holds.
That is so true for my companies in the Woodlands. When they in good
faith respond to questions from analysts, or when they talk or write
about trends and future uncertainties, they risk being sued by some
plaintiff's lawyer at some point in the future.
The Securities and Exchange Commission itself has recognized that it
needs to provide a safe harbor for this kind of information or
companies will never in fact disclose that information. However, the
rules the SEC wrote years ago just do not work.
The area of the gentleman from California [Mr. Mineta] is an example:
19 of the 30 largest companies in Silicon Valley have been sued since
1988; the aggregate settlement cost was $500 million. A National
Economic Research Association study found that high-tech companies were
involved in almost one-third of the settlements analyzed, making the
industry a disproportionate target of securities suits.
A National Venture Capital Association survey found that 62 percent
of responding entrepreneurial companies that went public since 1986 had
been sued by 1993, so there has got to be change, Mr. Chairman. We
think that the safe harbor provisions of this bill are strengthened by
this Mineta amendment. It offers the companies and others the certainty
that they need.
The amendment also gives investors that information they need. It
ensures that investors will understand that statements about
projectsions, estimates, and future events are just that, projections,
clearly identified as such. It requires that clear warnings are given
that these projections may not be realized.
If these requirements are met, and only if these requirements are
met, the safe harbor will be available. This is the Speakes caution
doctrine, which courts have recognized. This is hardly a radical or new
idea. We have had far too many lawsuits based on fraud by hindsight
after people of good faith have made forward-looking statements, or for
reasons beyond their control, fell short.
This amendment would curb those abusive private actions, but it does
not affect the SEC's enforcement powers in any way. If the SEC has
found any company has attempted to take advantage of the safe harbor by
committing fraud, it could bring an injunctive action against the
company, impose civil fines, impose sanctions on its officers or
directors, refer the matter to criminal authorities, and get a court to
order disgorgement of any illegal profits.
The range of enforcement powers of the SEC are simply not effective,
so any suggestions that fraud would go unremedied are unfounded. This
would also make it clear that the SEC has the authority to write
additional safe harbor rules.
This is especially important because this amendment applies only to
actions brought under the Exchange Act.
I want to conclude by complimenting my good friend, the gentleman
from California, who has been a leader in this particular area, and
also I want to compliment my good friend, the gentleman from Louisiana
[Mr. Tauzin].
{time} 1545

Mr. FARR. Mr. Chairman, I move to strike the requisite number of
words.
Mr. Chairman, I rise in support of the Mineta amendment. It will take
only a minute of my time, but I want to clarify for my colleagues what
the amendment will do and what the amendment will not do. This
amendment will result in greater disclosure of information to
investors. It will encourage corporate officials to give investors
useful information about their future plans. It will prevent the
``fraud-by-hindsight'' lawsuits that are crippling our high-technology
industries.
The bill will not give corporate officials a license to lie, because
the authority of the SEC, the State regulators, the Justice Department
and other law enforcement agencies will not be affected. It will not
permit brokers or others to make promises about the company's
prospects, because it clearly does not cover statements that are
promises or assurances and it will not change the law of insider
trading. If corporate insiders try to hype their company's stock and
bail out before the investors know the real facts, they can be sued by
the investors as well as by the SEC.
This amendment simply says that when company officials talk about the
future, the statements must be taken in context, and when they give
clear warnings that their projections or estimates may not come true,
they cannot be sued by private actions.
Mr. TAUZIN. Mr. Chairman, will the gentleman yield?
Mr. FARR. Mr. Chairman, I yield to the gentleman from Louisiana.
Mr. TAUZIN. I thank the gentleman for yielding. I asked him to yield
for only one purpose and that is indeed to congratulate the gentleman
from California for the excellent amendment.
This amendment has the unique advantage of being supported by both
the high-technology community, which is the subject of many of these
lawsuits, and by many investor groups. For example, CALPERS, the
California public employees investment group, is in support of this
approach. The executive director of the Council of Institutional
Investors, a group of large corporate and labor union pension funds,
has endorsed this approach. It is the right approach, it brings us
closer to the bill the gentleman from California [Mr. Minetta] himself
has cosponsored and filed in this session and in former sessions of the
Congress. I want to congratulate him again for this fine work and urge
adoption of the amendment.
Mr. COX of California. Mr. Chairman, I move to strike the requisite
number of words, and I rise in support of the amendment.
I too want to join in congratulating my colleague, the gentleman from
California [Mr. Mineta], for offering a very constructive proposal on
safe harbor. It is in fact part of the legislation that we had intended
to change in the committee but because of our deadline to bring the
bill to the floor, we determined that it would be best accomplished on
the floor of the House. But I do not want anyone to think that because
this amendment is being made on the floor that it has not been
carefully discussed and thoughtfully considered.
It has had the complete benefit of analysis by every member on our
Committee on Commerce, and I think the gentleman from California, who
is not on the committee, is to be congratulated for broadening that
discussion and that debate and the support for this amendment to be on
the committee.
This amendment does a number of things that is really long overdue in
the area of forward-looking information. It codifies the ``bespeaks
caution'' doctrine in effect, something that we have found very
workable in the common law, and now we are making it very clear as a
matter of congressional policy, very clear as a matter of statute, that
we intend to do that in the securities laws themselves, in the positive
law.
A very important part of this amendment is that it will permit people
who project honestly and diligently the future as best they can with
the limited tools that all of us have to prognosticate, permit them to
avoid a lawsuit on the basis of those statements.
CALPERS testimony was just referred to by my colleague the gentleman
from Louisiana. I want to read just briefly from that testimony. This
is of course a huge investor of pension funds. Their view is from the
investor standpoint.
They say, ``By definition projections are inherently uncertain.''
``The more such statements are based on assumptions susceptible to
change, the less useful they are in assessing prospective performance.
Investors recognize this and appropriately discount the importance of
such information when making investment decisions. We see no reason why
investors should then be allowed to rely upon such statements in an
action for fraud after the speculative nature has been fully
disclosed.''
That is precisely the basis for this amendment. What my colleague
the
[[Page H2843]] gentleman from California does in his amendment is put
into law a clear, understandable and readily accessible procedure to
automatically stay discovery and to avoid all the rest of the lawsuit
while the court takes a look at whether the safe harbor applies and we
do not get ourselves mixed up in long months and years of discovery on
the general lawsuit itself until first we dispose of this question of
the safe harbor. It makes it truly a safe harbor.
This is very much the approach that I think we ought to take. For
some time, we have asked the SEC to help us with rules in this area.
But as we worked on this legislation, we discovered that the SEC itself
did not want the responsibility of writing the court procedures for
early dismissal of an action, the court procedures to stay discovery,
because that would put an independent agency of the Federal Government
in the business of writing rules to govern the article 3 courts. It is
appropriately the role of Congress to do that in the statute.
I think what we have got here, in sum, is a safe harbor provision
that will work, it is clear and easy to understand for all of the
people, not just the issuers of securities but people who talk about
securities, for their business, the analysts, the people on the
telephone and so on, people will not be afraid to talk about the future
anymore for fear of a lawsuit; and we have satisfied the concerns of
investors who desperately want this information.
Right now, we have something of a black market in forward-looking
information. Nobody wants officially to state for the record, least of
all CEO's speaking to the press, what might happen in the future of
their company because they know they might be sued if they are wrong,
if they guess wrong about the future. But investors all want this
information. They are interested mildly in the track record of a
company, what has happened in the past, but what they really want to
know is what is going to happen if I buy this security, if I buy this
stock or this bond today, tomorrow and the next day, what will happen
in the future, is this a good investment or not?
It is that future information that matters the most, that is what the
market demands, and the market gets it after a fashion right now, they
get it in whispered conversations, under the table, it is a black
market, it is not the best information, it is not the highest quality
information, and we would like it to be. That will be the effect of
this amendment. It has been adequately demonstrated, I think, to
everyone's satisfaction that this will help investors in that fashion,
it will help issuers, it will stop frivolous and abusive lawsuits,
which is precisely the centerpiece of this bill.
I heartily endorse it. I congratulate my colleague the gentleman from
California for bringing it, and I am happy to support it.
Ms. HARMAN. Mr. Chairman, I move to strike the requisite number of
words, and I rise in support of the amendment.
(Ms. HARMAN asked and was given permission to revise and extend her
remarks.)
Ms. HARMAN. Mr. Chairman, I am pleased to join in the bipartisan
effort to clarify and improve upon the safe-harbor language contained
in the securities litigation reform bill.
Investors, the SEC, and securities analysts all agree that forward-
looking information, that is, information about a company's future
prospects, is critically important to investors. Such information is
particularly important to investors of high-technology, high-growth
companies, whose very existence pushes the boundaries of technology
that are essential to our economy's future growth.
By their very nature, the statements of these companies involve a
future product, innovation, or technology whose performance is subject
to the vagaries of the economy.
By their very definition, projections of performance are inherently
uncertain and it is often inevitable that the company will fail to meet
one or more analysts' expectations.
When these companies fail to meet analysts' expectations, they often
face abusive lawsuits, which sap resources that could otherwise be used
for research, product promotion, and market development.
As a consequence, corporate executives have been increasingly
reluctant to make forward-looking statements. They are unwilling to put
scarce assets at risk if a product is delayed or an earnings estimate
is not met.
A study by the National Venture Capital Association of more than 200
publicly traded entrepreneurial companies found that 71 percent
reported being more reluctant to discuss company performance with
analysts or the public.
While the immediate loser of such practices are the companies
dependent on raising capital in the markets, the ultimate loser is the
investor, for whom these statements are invaluable sources of
information.
Thus, it is not surprising that the safe-harbor language offered by
my friend from Silicon Valley is supported by the investment community,
the recipients of forward-looking information.
One of the largest institutional investors, the California Public
Employee Retirement System said that ``a revision to the safe harbor is
warranted in order to better balance the dual objectives of maintaining
efficient capital markets and promoting investor protection.'' The
safe-harbor amendment achieves this balance.
I urge its adoption.
I yield to the gentleman from Louisiana [Mr. Tauzin].
Mr. TAUZIN. Mr. Chairman, I thank the gentlewoman for yielding.
I want to congratulate her on her statement. It is exactly correct.
The adoption of this amendment not only furthers the cause of this
legislation, which is to encourage good disclosure, but certainly to
make it clear that forward-looking statements, particularly when they
are carefully framed the way this amendment requires them to be so that
investors are warned in advance that these projections may not be
realized, is the way in which to protect against both these kinds of
lawsuits, and at the same time encourage information to come forward
above the table, not under the table.
I congratulate the gentlewoman on her statement.
Ms. HARMAN. I appreciate that.
I would make one additional point, that is, the bottom line from this
amendment is more information, not less, to investors, and everyone
wins from that practice.
Mr. TAUZIN. The gentlewoman is correct.
Mr. MARKEY. Mr. Chairman, I move to strike the requisite number of
words, and I rise in opposition to the amendment.
Mr. Chairman, the subject matter on the floor at this time is an
extremely sensitive one, because it deals with the public materials
made available to investors in this country, and upon that information,
investors make their decisions as to whether or not they should put
their money into any particular company in this country.
If you are CALPERS, that is, this huge institutional investor, you do
not have to worry. You are able to hire dozens of extremely
sophisticated analysts to give you all the information you want. So it
would make sense for CALPERS to sign up on something like this. I think
they are wrong. I think they should be embarrassed, because they know
that the ordinary investor does not have the same kind of access to
information. Perhaps they are looking for more people to sign into
CALPERS as their agent to do this kind of analysis. But for the
ordinary investor, they are dependent upon the prospectuses, upon the
annual reports, upon the registration reports, upon the quarterly
reports of publicly held companies.
Now, a forward-looking statement under historical definition is one
which the company makes projections about what they think is going to
happen. Inside the contours of that statement, they have to be
respectful of the truth as opposed to absolute outright conjecture.
For example, you cannot say today in your forward-looking statement,
``And over the next year, we expect to find the cure for AIDS. And we
expect to see our stock increase in value 1,000 percent.''
``And, by the way, the cure for cancer could come in one year, but
that might be a two-year project and then we expect to see yet a
doubling again of our stock.''
[[Page H2844]] That kind of forward-looking statement historically
has not been allowed, unless you know that is going to happen, because
people might think that you are asserting that you are going to find a
cure for AIDS, or for cancer, or some other breakthrough in some other
area of American entrepreneurial endeavor.
You can, however, make a forward-looking statement about what you
think looks reasonable for the future, reasonable.
What we have in this amendment is for all intents and purposes not a
safe harbor. A safe harbor is something we can all support and
historically we do, and the Securities and Exchange Commission right
now is in the process, as the experts in this field, of drafting new
safe harbor legislation, new regulation for this country.
{time} 1600

But if this particular amendment passes, we are going to have to
change the old statement to be amended to ``lies, damn lies, and
forward-looking statements'' because you will be able to say whatever
you want and you will be protected.
And here is the language in the amendment that makes that possible,
it is pretty simple:

A person shall not be liable with respect to any forward-
looking statement if the risk that such projections,
estimates, or descriptions may not be realized is made part
of the statement.

So you just have to say after 30 pages of describing the cure for
AIDS and the cure for cancer, psoriasis, and baldness and then put in
one sentence that says, ``the risk that such projections, estimates, or
descriptions may not be realized,'' that is it, that could be a
footnote, but it will be in there after 30 pages.
Now if you are CALPERS you will find it. You are hiring summa cum
laudes from Stanford or Harvard Business School to read these things
for you. You are investing billions of dollars. But what about the tens
of thousands of individuals who are just going to be relying upon a
prospectus? They are going to be reading this statement without any
real knowledge that in fact this one little sentence is the disclosure,
the inoculation against suit after you put your life savings in this
company thinking they are guaranteeing.
So I do not have any problem with forward-looking statements. As a
matter of fact, I could even construct this amendment.
The CHAIRMAN. The time of the gentleman from Massachusetts [Mr.
Markey] has expired.
(By unanimous consent, Mr. Markey was allowed to proceed for 1
additional minute.)
Mr. MARKEY. I can even imagine a situation where we draft something
that allows for even those kinds of statements to be made. But of
course we would have to put some kind of skull and crossbones around it
and inside of the statement so we differentiated it from the facts
ma'am, nothing but the facts in terms of what the actual condition of
the company is.
So this is, in my opinion, a very dangerous amendment. We can change
the forward-looking statement regulations of this country. I do not
have any problem with doing that and I think a lot of CEO's in this
country need some relief, and I think we can work with them to do it.
But the way this is drafted right now, the single worst, most
unscrupulous business executives in this country will be free to make
any kind of misstatements they want and by just making this very simple
disclaimer that the estimates may not be realized, they are off the
hook. And they will hire the fanciest law firms in America to draft a
30-page statement with this one line in it and it is caveat emptor out
in the marketplace, running completely contrary to our long history of
disclosure and protection for investors.
So this is not a safe harbor, this is a safe ocean of fraud, and the
SEC will have to wage a two-ocean struggle with limited resources to
keep track of all of the fraud and misrepresentation that will be
possible. I sincerely hope that the Members would reject this
amendment. I think it can be drafted in a way which does in fact
comport with the needs to reform the forward statement conditions under
which we are now operating, but this is not that amendment.
Mr. MINETA. Mr. Chairman, will the gentleman yield?
Mr. MARKEY. I am glad to yield to the gentleman from California.
The CHAIRMAN. The time of the gentleman from Massachusetts [Mr.
Markey] has again expired.
(At the request of Mr. Mineta and by unanimous consent, Mr. Markey
was allowed to proceed for 2 additional minutes.)
Mr. MINETA. Mr. Chairman, under the example the gentleman gives, it
seems to me that the SEC would still be able to bring an action against
the individual, or there are State regulations or there is common law
fraud that would still subject the maker of those kinds of statements
to action.
Mr. MARKEY. If I may reclaim my time, it is not the SEC we are
talking about in this particular legislation, it is the investor, him
or herself who will be limited in their ability to sue to get money
back for themselves.
Mr. MINETA. In my opinion, if my friend would further yield, it seems
to me that again in those instances, the gentleman used the example of
CALPERS as a number of us did, it seems to me that whether they are
sophisticated individuals who are investors, or the grandmother who
wants to buy stock for grandchildren, that they would still be subject
to the provisions of this bill and that they are going to be subject to
suit.
On the other hand, let me also mention where the gentleman said the
SEC is drawing rules on this right now, as I understand it they are
just looking at the issue. They have done nothing to get into
rulemaking or even holding a hearing on this issue.
Mr. MARKEY. If I can reclaim my time, the SEC comment letter to the
committee on it said:

Because the Commission is in the midst of a rulemaking
proceeding, it would be inappropriate to take a position on
the substantive safe-harbor provisions. The most appropriate
solution to the issue, from the Commission's perspective,
would be a provision directing the Commission to complete its
rulemaking proceeding and report back to Congress.

So they are in the midst of doing the rulemaking on this issue right
now and they have been, and again, the point is that we are stripping
individuals from their ability to sue, not the SEC to bring an
enforcement action. We want some ordinary person who has put $50,000 or
$100,000 of their own money into a company, maybe even $1,000 of their
own money into a company under completely, or almost fraudulent, not
almost, but actually a fraudulent set of misrepresentations made by the
company.
Mr. WHITE. Mr. Chairman, I move to strike the requisite number of
words, and I rise to speak in favor of the amendment.
Mr. Chairman, I am new to Congress and new to the Commerce Committee.
I would like to say in the very short period of time I have been on the
Commerce Committee I have developed a great deal of respect and even
admiration for the gentleman from Massachusetts. I think he does a very
good job of explaining his points to us. But I have to say he is
absolutely dead wrong on this issue because this is a case where it is
the ordinary investor not the large investor that will benefit from
this amendment.
The securities laws as they exist now are an example of laws that are
distorted by our legal system to work against the purposes for which
they were actually intended. These laws were designed to promote
disclosure, and yet the threat of liability is so great, the
uncertainty is so great, that companies are restrained and prevented
from disclosing information that they would like to disclose.
It is not the large investor who suffers. The large investor will
figure out that information. They do have staffs, they can get that
information on their own, but the small investor, precisely the person
who needs to have this information and who would benefit from a little
bit greater information flow, does not get this information.
Mr. Chairman, I spent the last 15 years or so representing small
companies in the Seattle area, and in that area we have hundreds and
hundreds of small technology companies, biotechnology companies, just
the sort of companies that would love to disclose lots of information
to the public. They
[[Page H2845]] do not do so because of the threat of liability that
exists under the current law.
It is absolutely essential for the ordinary investor to get this
information, and this amendment is long overdue to allow that
information to be disclosed.
So I would urge every single one of my colleagues to vote for it.
Mr. FIELDS of Texas. Mr. Chairman, will the gentleman yield?
Mr. WHITE. I yield to the gentleman from Texas.
Mr. FIELDS of Texas. I appreciate the gentleman yielding because it
is important to focus this debate again on companies that have actually
been affected, and the fact that the safe-harbor language that is
currently in place does not work.
Netrix, a typical small company located in Virginia went public in
September 1992, and in 5 months the company's stock doubled in value.
In February the company announced that the first quarter earnings for
1993 would be disappointing. The stock fell and the company was
immediately hit with a lawsuit. In the weeks following the filing,
Netrix had to produce 50,000 documents and 200,000 electronic messages
to plaintiffs' attorney. The company estimated that to defend the suit
would cost $250,000 and possibly millions more if it lost in an
extended court battle. They settled the suit for $975,000. The lawyers
got 33 percent plus expenses, shareholders were left with what amounted
to about $400 per person.
Silicon Graphics, a California computer company, has been hit by four
class action lawsuits in the past 3 years. In 1991 the company was hit
with a lawsuit. The CEO, Ed McCracken, decided to fight the suit. After
1 year of legal dispute, the judge dismissed the suit. Two other law
firms sued the company again. After another year of dispute, they
settled for an undisclosed amount, perhaps close to $1 million. By that
time the company had spent more than $1 million in legal fees.
Legent, a Virginia software firm, was sued within hours of
acknowledging in July 1993 that its quarterly earnings would be lower
than expected. Over the next 8 to 10 weeks the company had to provide
290,000 pages of documents to respond to plaintiffs' subpoenas. The CEO
of the company spent nearly 90 percent of his time preparing the
company's defense. Legent wanted to settle but was outraged by the
amount. A Federal judge finally dismissed the charges, but by that time
the company had spent $2 million in legal fees.
Mr. Chairman, this is abusive, particularly when you realize that the
vast majority of the suits are against these high-technology
developing, emerging companies.
We need the amendment offered by my good friend from Louisiana [Mr.
Tauzin] and the amendment offered by the gentleman from California [Mr.
Mineta]. This is necessary for this legislation.
Mr. COX of California. Mr. Chairman, will the gentleman yield?
Mr. WHITE. I yield to the gentleman from California.
Mr. COX of California. Mr. Chairman, I thank the gentleman for
yielding. I want to concur with the gentleman's earlier assessment that
the safe harbor protects investors of all sizes. There is certainly no
reason to think that the same investor who in one of the litigations
that is covered in other parts of this legislation, who would be
relying upon the fraud-on-the-market doctrine, would not rely for the
same effect on what CALPERS or other large investors are doing when
they assess information.
The market price, according to the fraud-on-the-market doctrine
reflects knowable information enacted in a liquid market, and if we
have big institutional investors that are pouring over all these
prospectuses, reading all of the press releases and so on, if they are
the big market makers and traders, of course, that gets translated to
the price under what we call efficient markets theory as quickly as can
be.
The CHAIRMAN. The time of the gentleman from Washington [Mr. White]
has expired.
(At the request of Mr. Cox of California and by unanimous consent,
Mr. White was allowed to proceed for 2 additional minutes.)
Mr. COX of California. Mr. Chairman, would the gentleman yield?
Mr. WHITE. I am happy to continue to yield to the gentleman from
California.
Mr. COX of California. Once that market price then reflects the
assessment that CALPERS or some other institutional investor has made
of forward-looking information, an individual who does not read the
prospectus is put in the position of benefiting from that expertise.
That is how the fraud-on-the-market doctrine works. That is why we were
asked to put it into the legislation.
So it really does not do to say that the individual investor is left
only with the prospectus, because as the gentleman knows, most
individual investors, would that it were otherwise, do not read those
prospectuses. It would be a much better market if everybody did, but
just as shoppers go into grocery stores, and so many hasty shoppers
like I used to be before I had kids, I would hurry myself down the down
the supermarket aisle and just grab things, and go down the checkout
and I would depend on all of the other shoppers actually looking at the
prices in the supermarket and that is what kept the supermarket honest.
It was not Chris Cox when I was moving down the aisle that quickly.
But it is the same way with individual investors who would buy so
many shares of stocks. They are not for such a trivial investment going
to read the prospectus and read everything available to the investors,
but somebody is, and it is in fact the case that the market is capable
of discounting forward-looking information.
What is most important about this amendment is that the quality of
forward-looking information that we have not got under the current
rules is defective and it is injuring investors. Bad information is
being traded on because it is the only information in many cases. When
companies know things that could be of use to investors they are
sitting on it because it may affect the future and they are afraid to
say yes or no, here is what is going to happen. And we have material
event disclosure already. We have to talk about things as they occur,
but what about having a best estimate of the future? That is what
investors want to know and that is what this amendment will get out to
the marketplace.
Mr. DINGELL. Mr. Chairman, I move to strike the requisite number of
words and I rise in opposition to the amendment.
Mr. Chairman, I am going to try and make this simple enough so that
all of my colleagues can understand, and so that a Philadelphia lawyer
is not needed to interpret what is about here.

{time} 1615

This does not deal, the amendment, with the authorities of the SEC.
It deals, however, with the authorities of the ordinary citizen to go
to court, to sue over matters in which he has been deceived,
hoodwinked, or in which he has been taken advantage of my someone who
has made a forward-looking projection or statement, provided that meets
certain tests. Those tests are really very simple. They say that the
disclosures are forward-looking statements and, second, it refers to
the risk that the projections made may not be realized.
Once those two tests are met, no rascality, no deceit, no duplicity,
no outrage, no falsehood, no misleading statement is of a character
which would ban a citizen to go to court to seek redress for the fact
that he has been deceived and that he has lost money because of that
condition. That is all it says.
This is an immunity bath for wrongdoing so long as the disclosures
say that they are forward-looking statements; and, second, that it
refers to the risk that the projections may not be realized. If those
conditions are met, this is an immunity bath, and any kind of
rascality, any kind of deceit is fully justified.
This is an amendment which would have been loved by Mr. Ponzi, who
was the builder of enormous fiscal undertakings which were bottomed on
fraud, holding companies, and other kinds of misbehavior. This is the
kind of proposal that would have been loved by Mr. Insull, who built
himself an enormous empire of electrical utilities through devices
which would have been sanctified under this by simply the use of the
two devices which are set forth in the language of the amendment.
[[Page H2846]] It will only be a little while if this is adopted
into law that Members of Congress are going to have people saying,
``Why is it that you permitted this kind of behavior to go forward?''
And we are going to have to address our constituents as to why it is we
have taken from the American investing public the protections which
they now have with regard to truth, fairness, honesty, and integrity in
the marketplace and in reporting and disclosures. It has all been done
on the thesis there are a bunch of slippery lawyers out there forming a
large number of citizen suits which I happen to think is occasionally a
very good idea, but it is important that they keep in mind
one thing: the end result of this is going to be that citizens are
going to be less able to protect themselves from wrongdoing, and the
protection that we have built up over prospectuses and other things is
going to be shrunk significantly by the unfortunate language of this
amendment.
Mr. HASTERT. Mr. Chairman, I rise in support of the amendment by the
gentleman from California.
This amendment, to provide a true safe harbor, strikes a balance
between the need to encourage companies to provide information to the
marketplace and the need to protect investors.
The amendment requires companies to include a cautionary statement in
their prospectus for investors. This statement, describing activities
expected to be undertaken by the company, would make it clear to
investors that the statement is forward-looking and inherently subject
to risk because the statement may not come to pass.
If investors are properly warned, then the company will not be
subject to suit for the statements made. This provides a true safe
harbor for companies that want to reveal as much information as
possible.
The amendment will also make clear that the SEC has the power and
flexibility to provide other safe harbors.
The safe harbor provisions offered up to this point do not provide
clear definitions, so they still leave companies vulnerable to lengthy
and expensive litigation. It's not really a safe harbor if the jagged
rocks and sandbars of continued litigation threaten to run U.S.
companies aground.
Therefore, I urge my colleagues to adopt this amendment.
The CHAIRMAN. The question is on the amendment offered by the
gentleman from Louisiana [Mr. Tauzin].
The amendment was agreed to.
amendment offered by mr. wyden

Mr. WYDEN. Mr. Chairman, I offer an amendment.
The CHAIRMAN. The Clerk will designate the amendment.
The text of the amendment is as follows:

Amendment offered by Mr. Wyden: Page 28, after line 2,
insert the following new section (and redesignate the
succeeding sections and conform the table of contents
accordingly).

SEC. 6. FINANCIAL FRAUD DETECTION AND DISCLOSURE.

(a) Amendments to the Securities Exchange Act of 1934.--The
Securities Exchange Act of 1934 is amended by inserting after
section 13 (15 U.S.C. 78m) the following new section:

``SEC. 13A. FRAUD DETECTION AND DISCLOSURE.

``(a) Audit Requirements.--Each audit required pursuant to
this title of an issuer's financial statements by an
independent public accountant shall include, in accordance
with generally accepted auditing standards, as may be
modified or supplemented from time to time by the Commission,
the following:
``(1) procedures designed to provide reasonable assurance
of detecting illegal acts that would have a direct and
material effect on the determination of financial statement
amounts;
``(2) procedures designed to identify related party
transactions which are material to the financial statements
or otherwise require disclosure therein; and
``(3) an evaluation of whether there is substantial doubt
about the issuer's ability to continue as a going concern
over the ensuing fiscal year.
``(b) Required Response to Audit Discoveries.--
``(1) Investigation and report to management.--If, in the
course of conducting any audit pursuant to this title to
which subsection (a) applies, the independent public
accountant detects or otherwise becomes aware of information
indicating that an illegal act (whether or not perceived to
have a material effect on the issuer's financial statements)
has or may have occurred, the accountant shall, in accordance
with generally accepted auditing standards, as may be
modified or supplemented from time to time by the
Commission--
``(A)(i) determine whether it is likely that an illegal act
has occurred, and (ii) if so, determine and consider the
possible effect of the illegal act on the financial
statements of the issuer, including any contingent monetary
effects, such as fines, penalties, and damages; and
``(B) as soon as practicable inform the appropriate level
of the issuer's management and assure that the issuer's audit
committee, or the issuer's board of directors in the absence
of such a committee, is adequately informed with respect to
illegal acts that have been detected or otherwise come to the
attention of such accountant in the course of the audit,
unless the illegal act is clearly inconsequential.
``(2) Response to failure to take remedial action.--If,
having first assured itself that the audit committee of the
board of directors of the issuer or the board (in the absence
of an audit committee) is adequately informed with respect to
illegal acts that have been detected or otherwise come to the
accountant's attention in the course of such accountant's
audit, the independent public accountant concludes that--
``(A) any such illegal act has a material effect on the
financial statements of the issuer,
``(B) senior management has not taken, and the board of
directors has not caused senior management to take, timely
and appropriate remedial actions with respect to such illegal
act, and
``(C) the failure to take remedial action is reasonably
expected to warrant departure from a standard auditor's
report, when made, or warrant resignation from the audit
engagement,

the independent public accountant shall, as soon as
practicable, directly report its conclusions to the board of
directors.
``(3) Notice to commission; response to failure to
notify.--An issuer whose board of directors has received a
report pursuant to paragraph (2) shall inform the Commission
by notice within one business day of receipt of such report
and shall furnish the independent public accountant making
such report with a copy of the notice furnished the
Commission. If the independent public accountant making such
report shall fail to receive a copy of such notice within the
required one-business-day period, the independent public
accountant shall--
``(A) resign from the engagement; or
``(B) furnish to the Commission a copy of its report (or
the documentation of any oral report given) within the next
business day following such failure to receive notice.
``(4) Report after resignation.--An independent public
accountant electing resignation shall, within the one
business day following a failure by an issuer to notify the
Commission under paragraph (3), furnish to the Commission a
copy of the accountant's report (or the documentation of any
oral report given).
``(c) Auditor Liability Limitation.--No independent public
accountant shall be liable in a private action for any
finding, conclusion, or statement expressed in a report made
pursuant to paragraph (3) or (4) of subsection (b), including
any rules promulgated pursuant thereto.
``(d) Civil Penalties in Cease-and-Desist Proceedings.--If
the Commission finds, after notice and opportunity for
hearing in a proceeding instituted pursuant to section 21C of
this title, that an independent public accountant has
willfully violated paragraph (3) or (4) of subsection (b) of
this section, then the Commission may, in addition to
entering an order under section 21C, impose a civil penalty
against the independent public accountant and any other
person that the Commission finds was a cause of such
violation. The determination whether to impose a civil
penalty, and the amount of any such penalty, shall be
governed by the standards set forth in section 21B of this
title.
``(e) Preservation of Existing Authority.--Except for
subsection (d), nothing in this section limits or otherwise
affects the authority of the Commission under this title.
``(f) Definitions.--As used in this section, the term
`illegal act' means any action or omission to act that
violates any law, or any rule or regulation having the force
of law.''.
``(b) Effective Dates.--As to any registrant that is
required to file selected quarterly financial data pursuant
to item 302(a) of Regulation S-K (17 CFR 229.302(a)) of the
Securities and Exchange Commission, the amendments made by
subsection (a) of this section shall apply to any annual
report for any period beginning on or after January 1, 1996.
As to any other registrant, such amendment shall apply for
any period beginning on or after January 1, 1997.

Mr. WYDEN. Mr. Chairman, this amendment stipulates that if there is a
major fraud perpetrated at a corporation and corporate management
refuses to correct the abuse, the corporation's accountant would be
required to report the fraud to government regulators. This amendment
is important to the legislation we are working on, because fraud and
abuse often result in securities litigation. By providing new tools to
root out financial fraud, Congress can help prevent securities lawsuits
from ever being filed.
Now, we all know that it is simply impossible to wave a wand and
prevent greed. The taxpayers and investors have a right to expect that
corporate management, to whom they entrust their savings, will not go
out and steal from them, and our citizens have a
[[Page H2847]] right to expect that those that they rely on to alert
them to outright egregious cases of fraud, the public accountants who
audit the corporate financial statements, will be at their post and
ready to blow the whistle on a rogue executive. The Resolution Trust
Corporation estimated that 40 percent of the savings and loan failures
were attributable to fraud, but yet time after time the public
accountants either did not know what was going on or simply did not
tell anyone. The files now bulge with examples of companies that were
shut down after receiving a clean audit.
For example, the General Accounting Office found that 28 of 30
savings and loans went bankrupt in California in 1985 and 1986 after
receiving clean audits shortly before they went under. A most notorious
example involved Mr. Keating and Lincoln Savings and Loan. The judge,
when this case went to court, issued a blistering opinion and asked,
``Where were the professionals when these clearly improper transactions
were being consummated? Why didn't any of them speak up or dissociate
themselves from the transactions?''
Had the accountants blown the whistle when they should have, Mr.
Keating could have been shut down much earlier and taxpayers and
investors could have been saved a lot of money.
This amendment will provide the investing public with a truth serum
for the corporate financial statements. The fun-house mirror that is
used by ripoff artists and those with fraudulent intentions can be
shattered. The word ``public'' in the title ``certified public
accountant'' means that the auditors work for the public and not for
management. They are not paid to compile a company's financial
statements. That is the job of the internal auditor. The public auditor
is paid to certify to investors and creditors that the statements that
are compiled by the firm are accurate.
Let me close by saying that the Securities and Exchange Commission
and the State securities regulators have long supported this amendment.
To their credit, the accounting profession is now in support of the
legislation.
I think that the staff on both sides, both the majority and the
majority, probably can recite the language of this amendment by heart.
We have worked cooperatively on this for many years.
Mr. Chairman, I yield to my friend, the gentleman from Texas [Mr.
Fields].
Mr. FIELDS of Texas. Mr. Chairman, I appreciate the gentleman
yielding, and he is absolutely correct in the work that has been done
through the years, the labor that he has put into this particular
amendment.
I support the amendment, because it provides a more efficient
mechanism for an auditor to report the discovery of acts of
questionable legality to management, the board of directors, and, if
necessary, to the Securities and Exchange Commission.
The current practice requires an auditor to resign if illegal
practices are not addressed by the company. This can create an obvious
disincentive to an auditor doing the right thing and pursuing his
discovery up the corporate chain of command until it is addressed.
This amendment is the same legislation our committee and the House
have reported out before, and I urge my colleagues to support the
gentleman's amendment.
Mr. WYDEN. I thank my friend for his very gracious statement. He is
absolutely right. We have passed this from our committee unanimously on
several occasions.
Mr. Chairman, I would conclude by asking unanimous consent that
debate on this amendment and all amendments thereto be limited to 15
minutes, equally divided, with the time I have already consumed to be
counted against our side.
The CHAIRMAN. Is there objection to the request of the gentleman from
Oregon?
There was no objection.
The CHAIRMAN. Is any Member opposed to the amendment?
If not, the Chair will allocate the remaining time by unanimous
consent.
Mr. FIELDS of Texas. Mr. Chairman, if it is possible, we would like
the time divided at this point. I do not have any requests for time,
but I never know when someone might come on the floor, and I would ask
if the gentleman would mind dividing the time equally.
Mr. WYDEN. I would be happy to do that, Mr. Chairman.
The CHAIRMAN. Without objection, the gentleman from Texas [Mr.
Fields] controls 7\1/2\ minutes.
There was no objection.
Mr. FIELDS of Texas. Mr. Chairman, I yield such time as he may
consume to the gentleman from Massachusetts [Mr. Markey].
Mr. MARKEY. Mr. Chairman, I thank the gentleman very much for
yielding. I asked him to yield only because this is going to be a
consensus, and the gentleman from Oregon has already consumed most of
his time, and I would like to have an opportunity to hear him again
before the amendment is put to the House.
The Wyden amendment is consistent with H.R. 1058's goal of curbing
the explosive growth of securities fraud lawsuits. It requires frauds
to be detected, reported, and corrected before they become lawsuits.
The Wyden amendment will restore the confidence of the investing
public in the integrity of financial disclosures made by public
companies. It requires that audits include procedures designed to
detect fraud and related-party transactions as well as to evaluate the
issuer's ability to continue as a going concern.
It deters frivolous lawsuits against accountants by precluding
private rights of action against accountants for any finding,
conclusion, or statement expressed in the fraud reports made to the SEC
by the accountant or by the accounting firm.
The amendment has already been reported unanimously twice by the full
House, three times by the full Committee on Commerce. It is based on a
solid record of 34 days of hearings conducted since 1985. It is a
voluminous set of reports which covers just about every case from ESM
to the American Savings & Loan Association case to the Home State
Savings, the Z.Z. Best, Mission Insurance, Transit Casualty, the whole
range of issues that have been raised over the last decade.
The gentleman from Oregon [Mr. Wyden] has synthesized it into a
single amendment with a set of recommendations which we believe go a
long way toward insuring that there will be early and adequate
detection of fraud by the accounting firms of this country, while
inoculating them against suit in any of the activities which they
undertake pursuant to the amendment which we are now considering.
Mr. FIELDS of Texas. Mr. Chairman, I yield such time as he may
consume to the gentleman from Louisiana [Mr. Tauzin].
Mr. TAUZIN. Mr. Chairman, I, too, want to say not only a good word in
favor of this amendment but in favor of its author. The gentleman from
Oregon [Mr. Wyden] has been a stalwart advocate for the proposition
that when accountants do detect fraud that they make it known; they
have a public responsibility, even though they are working for a
private firm. His efforts in the last Congress to pass this amendment
as a bill and move it into the Senate are well known by his colleagues
on the Committee on Commerce, and I just want to make sure that the
American public also is aware of his tremendous efforts to do that.
His efforts, combined with this bill, I think, will produce a
combination that says when the public gets information it is going to
be good information. When accountants detect fraud, it is going to get
reported. We will have a better system that leads to fewer lawsuits and
much more accurate information and hopefully many less of the problems
that have engendered the debate we have had today.
The gentleman has been an extraordinary advocate of this proposition.
I have been pleased to join with him in the past in favor of this bill.
I am pleased to say to the accountants' association, who have worked
with him and I on this bill, and in deep support of it, and are anxious
to see it become law, they, too, have recognized their public
responsibility in this area as the gentleman has pointed it out so many
times in the past.
I think we have come to closure on this issue. We begin to build a
much better system with fewer lawsuits, hopefully fewer problems for
investors, fewer problems for all of us who do not want to see problems
settled in court,
[[Page H2848]] but want to see good investments made with good
information, and I again want to congratulate the gentleman and thank
my friend from Texas for yielding.
Mr. WYDEN. Mr. Chairman, I yield myself such time as I may consume.
Let me just say that over the last 6 or 7 years under the leadership
of the gentleman from Michigan [Mr. Dingell] and the gentleman from
Massachusetts [Mr. Markey], our subcommittee has held more than 20
hearings to examine the kinds of fraud that this amendment deals with.
{time} 1630

That has been the bipartisan tradition in the Committee on Commerce.
I want to thank the gentleman from Texas [Mr. Fields] for continuing
that bipartisan tradition. I think this is going to help reduce the
kind of problems that make for securities litigation.
Mr. Chairman, I yield back the balance of my time.
Mr. FIELDS of Texas. Mr. Chairman, I want to compliment our friend,
the gentleman from Oregon [Mr. Wyden], for this amendment.
Mr. Chairman, I yield back the balance of my time.
The CHAIRMAN. The question is on the amendment offered by the
gentleman from Oregon [Mr. Wyden].
The amendment was agreed to.

amendment offered by mr. bryant of texas

Mr. BRYANT of Texas. Mr. Chairman, I offer an amendment.
The CHAIRMAN. The Clerk will designate the amendment.
The text of the amendment is as follows:

Amendment offered by Mr. Bryant of Texas: Page 18,
beginning on line 6, strike subsections (b) and (c) and
insert the following (and redesignate the succeeding
subsections accordingly):
``(b) Pleading Requirement.--In any action arising under
this title in which the plaintiff may recover money damages
only if it proves that the defendant acted with scienter, the
plaintiff must allege in its complaint facts suggesting that
the defendant acted with that state of mind.

Mr. BRYANT of Texas. Mr. Chairman, one of the most, I think,
difficult to understand portions of the bill before us today is the
portion that has heretofore not been focused upon, regarding the
requirements for pleading the case when a person might file if he has
been defrauded by someone in the business of issuing securities.
The requirements of H.R. 1058 will, in simple statement, be
impossible for real-life plaintiffs to meet because they require that
investors who bring securities fraud cases must make specific
allegations which, if true, would be sufficient to ``establish,'' which
word comes from the bill, to establish that the defendant had acted
knowingly or recklessly. That means prior to discovery when it is
virtually impossible for plaintiff to establish the facts that would be
necessary to meet this new requirement that would have to be known and
filed with the case in the beginning or you could not even proceed.
I want to quote now: Plaintiffs would be required ``to make specific
allegations, which, if true, would be sufficient to establish Scienter
as to each defendant at the time the alleged violation occurred.''
That is to establish a knowing element on the part of the actor, the
defendant, at the time the defendant committed the alleged violation.
Obviously, no defrauded investor could pursue a claim for fraud
unless that plaintiff is lucky enough to have the clearest proof of
each defendant's state of mind before filing suit.
State of mind is one part, but in spite of the specificity
requirements of the Federal rules, state of mind is one part of the
case that you cannot know, cannot prove in the beginning. Prof. Arthur
Miller of Harvard University testified that an excessive pleading such
as proposed in this bill is totally unrealistic. It is only in the
rarest cases that this type of evidence exists in the beginning.
So, not only are we raising in this bill the bar so high that it
would be almost impossible to win, not only are we making it impossible
for average person to file cases because of the loser-pays provisions,
but we are now saying that their filing must, in effect, allege,
specifically cite so much evidence that you could prove the state of
mind of the defendant from the very beginning.
Financial claims are complicated, more so than other types of cases.
In many cases it is difficult to even understand the basic transaction.
It can take years of work, reading documents and questioning witnesses
to be able to put together the case to determine the defendant's state
of mind.
Obviously, corporate defendants are not ignorant. They know not to
make statement up front that can be used in this fashion. so it leaves
the defendant or the plaintiff in a very, very difficult situation.
We had the director of the securities division of the Utah Department
of Commerce, Mark Griffin, who testified on behalf of the State
regulators, that,

This new pleading requirement would go well beyond what are
current acceptable standards of pleading fraud with
specificity. For example, plaintiffs may not know at the
pleading stage information about a defendant's state of mind,
which is usually not within a plaintiff's knowledge until
after discovery.

No Federal court currently requires a pleading standard that is
anything like the provision in this bill. Our distinguished former
colleague, Judge Abner Mikva, now counselor at the White House, said it
is very hard indeed, and almost impossible, for a plaintiff to know
such things about a defendant's
state of mind before his lawyers obtain documents and testimony in
discovery.

In addition to the stat of mind requirement, this bill has a second
flawed pleading requirement. Again, at the beginning of the case the
plaintiff would have to set forth ``with specificity all information,''
they have to give all the information in advance that forms the basis
for the allegations of the plaintiff, meaning any whistle-blower within
a securities firm involved would have to be uncovered in the pleadings
in the very, very beginning.
Third, a further deficiency in this bill is the language limiting the
plaintiff to one amended complaint. That is, you file your complaint,
and you had better comply with the specificity requirements I just
mentioned and you only get one chance to amend your complaint.
Now, let me compare this, for example: In the suite filed against
Charles Keating, talking about the civil suit filed by the defrauded
bondholders in southern California, it was necessary for them to amend
their securities complaint six times as new facts were discovered.
In the ZZZZ Best case, a notorious fraud in which the perpetrator and
10 others were convicted of crimes, there were 5 amended consolidated
complaints before the case was allowed to stand.
As currently written, the bill would have prevented these cases from
going forward, simply put.
My amendment would replace with the language my good friend from
Louisiana [Mr. Tauzin] set forth in H.R. 417, as introduced in the 103d
Congress, with 180 cosponsors. The gentleman from Louisiana's [Mr.
Tauzin] language is better than what is in the bill today. What it
simply says is there would be a heightened pleading requirement that
goes well beyond current law with respect to fraud, but it is not so
high as having to establish fraud without hard evidence.
My amendment would require that plaintiff alleged facts suggesting
that the defendant acted intentionally or recklessly. It is the same
language the gentleman from Louisiana [Mr. Tauzin] used, the same
language as cosponsored by the gentleman who is offering this bill
today.
It is a heightened pleading requirement which was acceptable last
year, and I would hope it would be acceptable this year. For goodness'
sake, after all the other barriers raised in this bill, do not make it
impossible for them to even file the case.
I urge support of the amendment.
Mr. FIELDS of Texas. Mr. Chairman, I move to strike the requisite
number of words.
Mr. Chairman, again I can appreciate the sincerity with which my
colleague from Texas comes to the well. But pleading with specificity
is something that every attorney should be prepared to do. Otherwise,
the burden is unfairly required to guess what that person did wrong,
what the defendant did wrong in a given set of circumstances.
[[Page H2849]] H.R. 1058's provision is plain common sense. It
requires a complaint to specify the statement alleged to be misleading.
You have to ask the question: Is that unreasonable? Should not a
defendant be told what he said or did not say that was misleading or
fraudulent or that there was intent? The complaint must also specify
the allegations which, if true, would be sufficient to establish
scienter. Is it unfair to say to a plaintiff who wishes to sue for
fraud that that plaintiff must plead the facts that, if they are later
proven, would establish the case for fraud? To do otherwise is to
sanction lawsuits where the plaintiff forces the defendant to guess how
the defendant felt instead of merely producing evidence to defend
himself.
Mr. Chairman, we talk about this all day, but what we are really
aiming at in this legislation is to stop the frivolous lawsuit, not to
stop the lawsuit, where there is a fraudulent statement made directly
or indirectly by the defendant. We do feel that the defendant--it has
to be shown that the defendant made such statement knowingly or
recklessly and that the defendant possessed the intention to deceive,
manipulate, or defraud. If we do not have a more specific pleading
requirement in this statute, then you are going to see continued what
has already been discussed today, and that is people watching to see
stock prices fall, coming in with a very general pleading, going into
protracted discovery where all types of information is required, tying
up the efforts and the resources of offices and directors of that
particular corporation.
We do not think it is too much to require that, under this particular
type of lawsuit, there be better and greater specificity.
Mr. BRYANT of Texas. Will the gentleman yield?
Mr. FIELDS of Texas. I yield to the gentleman from Texas.
Mr. BRYANT of Texas. I thank the gentle for yielding.
Mr. Chairman, I would just like to point out that the language which
is in my amendment is exactly the same amendment which Mr. Tauzin
introduced in the bill last year and which I suspect the gentleman from
Texas, Mr. Fields, probably cosponsored, because 180 Members did. That
was the bill to address the problem that this bill is addressing today,
reportedly. Why would not the standard be as good as when it was
introduced last year?
Mr. FIELDS of Texas. Mr. Chairman, we had the opportunity, first, to
work on that piece of legislation. Second, the dynamics in this House
and the Senate have changed. If you look at the requirements for
explicit pleadings of scienter in our particular statute, I do not see
that as being too burdensome for a plaintiff or a plaintiff's lawyer.
It basically says he probably would add to subsection A, referring to
scienter, section 10A applies to complaints,

* * * shall specify each statement or omission alleged to
have been misleading, and the reasons the statement or
omission was misleading. The complaint shall also make
specific allegations which, if true, would be sufficient to
establish Scienter as to each defendant at the time the
alleged violation occurred. It shall not be sufficient for
this purpose to plead the mere presence of facts inconsistent
with the statement or omission alleged to have been
misleading.
If an allegation is made on information and belief, the
complaint shall set forth with specificity all information on
which that belief is formed.

We do not believe that is a terrible burden for someone to carry as
they walk into the courtroom door. That is the reason we have added the
section.
Mr. BRYANT of Texas. Mr. Chairman, the principal point of my
amendment is to point out what all lawyers agree to; that is, you can
allege with specificity as required under the rules the violations of
the law and the wrongdoing, but you cannot allege the facts which prove
the state of mind of the wrongdoer.
The gentleman's bill requires someone to allege that in the very
beginning, which cannot be done. Legal scholars agree it cannot be
done. I am simply saying if you do that, that means no one can file a
case. So why not make it higher than that presently, but make it a
reasonable standard which can be met so that people can file these
cases?
The gentleman's bill also says you only get one amended complaint. In
the Keating case, they had to amend the complaint six times, as I said
a moment ago, in order to get it together because they kept on
discovering more and more detail.
The CHAIRMAN. The time of the gentleman from Texas [Mr. Fields] has
expired.
Mr. BRYANT of Texas. Mr. Chairman, I ask unanimous consent that there
be a limit on debate of 20 minutes on the remainder of the
consideration of this amendment, equally divided and controlled by both
sides, and that request would go to any amendments to the amendment as
well.
The CHAIRMAN. Is there objection to the request of the gentleman from
Texas [Mr. Bryant]?
There was no objection.
The CHAIRMAN. The time is to be controlled equally by the gentleman
from Texas [Mr. Bryant] and the gentleman from Texas [Mr. Fields].
Mr. BRYANT of Texas. Mr. Chairman, I yield such time as he may
consume to the gentleman from Michigan [Mr. Dingell].
(Mr. DINGELL asked and was given permission to revise and extend his
remarks.)
Mr. DINGELL. Mr. Chairman, I commend the gentleman for his amendment.
The hard fact is that this legislation, as now drawn, makes it
impossible to win without having both an attorney, a psychiatrist, and
probably a psychic, because you must plead to prove the state of mind
of the defendant in this litigation. And the way the language on this
section is drafted, it also requires, for example, that you submit a
witness list because you must literally, in your pleadings, include the
names of confidential informants, employees, competitors, Government
employees, members of the media, and others who have provided
information leading to the filing of the case. And even where they have
requested anonymity, ofttimes out of fear of retaliation you must
submit those names.
This is not something which has been approved by the bar or by
scholars. Bar groups, academics, and regulators have all opposed
heightened pleading requirements. Arthur Miller, the Bruce Bromley
Professor of Law at Harvard Law School, testified in 1994:

The proposal seems to suggest that at the outset of the
case, plaintiffs have the burden of proof of each individual
defendant's state of mind. But this is totally unrealistic.
It is not only in the rarest of cases that this type of
evidence exists, under the best of circumstances requiring
plaintiffs to plead defendant's state of mind generally calls
for the drawing of subtle inferences from facts available
prior to the institution, a task that is highly treacherous.
It would be impossible in the vast majority of cases in which
these facts are simply unavailable prior to the lawsuit.

Mark Griffin, director of the securities division of the State of
Utah Department of Commerce, had this to say:

This new pleading requirement would go well beyond what are
currently acceptable standards of pleading in fraud with
specificity. For example, plaintiffs may not know at the
pleading stage information about a defendant's state of mind,
which is usually not within a plaintiff's knowledge until
after discovery. Therefore, such information could not be
included in a complaint. It should be pointed out that this
provision would appear to directly overrule, to directly
overrule, rule 9B of the Federal Rules of Civil Procedures.

Beyond this, it must be observed there is something else here which
has to be addressed, and that is a matter of very legitimate concern to
those of us in this body. It is a fact that under this proposal, only
one amendment of the pleadings would be permitted. Now, how do we
compare that with existing law? Let us take the Lincoln Savings & Loan,
the Keating fraud.

{time} 1645

Plaintiffs were required to amend their complaint not once, but six
times, before it met all requirements for defendants. The case
ultimately led to recovery of $240 million for thousands of elderly
victims who had been victimized. With that requirement, Mr. Chairman,
there would have been no recovery in the Keating Lincoln Savings & Loan
case. In the WPPSS scandal, where thousands of victims of fraud
ultimately recovered over $750 million, Mr. Chairman, plaintiffs were
required to amend their complaint several times before it met the
requirements of all the defendants.
[[Page H2850]] This proposal changes it. It keeps a requirement, a
reasonable requirement for scienter, but it requires a reasonable
number of occasions in which the pleadings may be reformed and may be
amended. It is clearly fair. It is clearly proper. It protects the
concerns of legitimate complaints, and it does not trammel or unfairly
amend the provisions for existing Federal rules of civil procedure.
I urge the adoption of the amendment. The gentleman is wise in having
offered it, and he deserves accommodation of the House. The amendment
should be adopted.
Mr. FIELDS of Texas. Mr. Chairman, I yield such time as he may
consume to the gentleman from California [Mr. Cox].
Mr. COX of California. Mr. Chairman, I was just, during the debate,
refreshing my recollection about Dodd-Domenici. It is now S. 240
introduced January 18, 1995, for Mr. Domenici, Mr. Dodd, who I need not
remind people is now the chairman of the Democratic National Committee,
Mr. Hatch, Ms. Mikulski, Mr. Bennett, Ms. Moseley-Braun, Mr. Lott, Mrs.
Murray, Mr. Mack, Mr. Johnston, Mr. Faircloth, Mr. Conrad, Mr. Burns,
Mr. Chafee, on and on. It is a completely bipartisan group.
The provisions of Dodd-Domenici on specific pleading are a heck of a
lot tougher than what we have in our bill because over in the other
body they have recognized the problems that are created when someone
launches a lawsuit which can take years and years and consume a whole
lot of money on both sides with just vague conclusory allegations.
We have heard some horror stories, or not really horror stories
because they never happened, but we have heard horror future fiction
about what would have happened in old cases that were successful if the
new rule had been put in place. We are told, for example, in one case
they had to amend their pleading six times. Well, right now the current
rules are sufficiently lax that nobody bothers a great deal when they
file the complaint. In the very abusive cases we know they just roll
them right off the word processor. The worst that can happen to them
after all, since one can amend one's complaint nearly an infinite
number of times, is that some judge will make them go back and amend
it.
It is very difficult these days to get knocked out on the pleadings
because one can simple amend. It is only when, even after amendment,
people cannot state a cause of action. They end up losing on the
pleadings, but it is not a logical form of argument to say that a case
that was filed under the old rules where one could freely amend their
complaint would have not make it if they could not have amended it so
often. They simply would have taken more care in investigating the
facts and bringing those cases to begin with, and what we heard about
those cases is that the facts were on their side, that eventually they
got it right even in their complaint.
The other thing we need to point out here is we are not asking anyone
do anything other than allege. We are asking people to make an
allegation. That is they can charge something. They do not have to
prove it until later. But they have to know what it is they are
charging. The definition of a fishing expedition lawsuit is one in
which somebody does not know what they are after at first. They want to
start the lawsuit to get the civil discovery tools to figure out their
cause of action as they go along. They sort of make it up as they go
along.
That is exactly the abusive kind of litigation we are trying to stop.
This is the centerpiece of the bill that will permit us to stop it.
The language that is in Dodd-Domenici is:

The complaint shall allege specific facts demonstrating the
state of mind of each defendant.

Now we had a lot of complaint about that language on our side because
people said, ``Well, you would have to be a mind reader in order to
demonstrate the state of mind of each defendant.'' So now our bill no
longer says that. It says that the complaint shall specify each
statement or omission alleged to have been misleading. Those are
objective facts and the reasons that the statement or omission was
misleading. That is factual as well, and of course one only has to
allege it.
The complaint shall also make specific allegations which, if true,
would be sufficient to establish scienter. So one only has to allege
things which, if true, if they were proved later, would add up to a
case that meets all the requirements of the existing law.
Then we go on to say it shall not be sufficient for this purpose to
plead the mere presence of facts inconsistent with a statement or
omission. If an allegation is made on information and belief, the
complaint shall set forth with specificity all information on which
that belief is formed. These are all things that are within the
capacity of anyone initiating a lawsuit to comply with.
So, we are left with the fact that the Bryant amendment is probably
directed at the language that people have complained about in Dodd-
Domenici, which I point out again is sponsored by some of our most
liberal Democrats in the U.S. Senate. This is a bipartisan agreement
that fishing expedition lawsuits are a bad thing and we should stop
them.
I also should point out that we have heard that the bill that we are
amending here would overrule 9(b), but in fact Federal Rules of Civil
Procedure 9(b), rule 9(b), requires that one pleads fraud with
particularity. Since these are fraud cases, Mr. Chairman, that is
exactly what we are requiring here, and we do flesh out in greater
detail precisely what we mean so we can avoid litigation on this
subject.
Ironically the amendment is completely inconsistent with Federal
Rules of Civil Procedure 9(b) because, while it requires that one
pleads fraud or particularity, the Bryant amendment would let a costly
lawsuit go ahead if the complaint only, quote, suggests that fraud may
have occurred. This is a hunting license for aggressive lawyers and
frivolous lawsuits.
Finally the Bryant amendment is inconsistent with court decision
after court decision which have said that, when the plaintiffs cannot
state what statements are false, they cannot proceed.
So, Mr. Chairman, we are on solid ground here, and I hope that we
will reject the Bryant amendment.
Mr. BRYANT of Texas. Mr. Chairman, I yield myself such time as I may
consume.
Mr. Chairman, I think, and perhaps in this debate more than most, it
is just a question of who to believe. Mr. Cox's characterization of
this amendment is in my view completely incorrect, and I think that a
careful study of it would cause most Members to agree.
When it comes to alleging fraud, Mr. Chairman, one must plead with
specificity in order that the defendant might know what he is being
charged with. The difference though is not with regard to alleging
fraud. It is in the bill that is before us today, ``You must, as well,
allege what's called scienter,'' which means there was a knowing
element on the part of the defendant, and one must allege the specific
facts which prove the knowing element.
That is why the gentleman from Michigan [Mr. Dingell] said a moment
ago, ``For the first time you're going to have to have a psychiatrist
in your office if you're going to figure out a way to file one of these
cases, and frankly even that wouldn't work. Basically they're raising
the bar so high that nobody could file the case.''
I have taken in my amendment the same standard which these fellows
over here all supported last year and which the gentleman from
Louisiana [Mr. Tauzin] introduced last year in his bill. It raises the
standard from where it is today, but it does not go bananas, go to the
extremes, that make it impossible for anybody to file a case, and the
second thing the amendment will do is it would eliminate the portion of
their bill which for the first time says, ``You can only file one
amended complaint.''
I ask, ``Why would you want to stop a plaintiff from being able to
file amended complaints?''
As the point was made by me and the gentleman from Michigan [Mr.
Dingell] together a moment ago in the Keating case, they had to file
five or six amended complaints in order to finally get the case right
because they kept on discovering things.
Let me show my colleagues one of the things they discovered right
here. This is a blow-up of a document that
[[Page H2851]] was given out to their bond sellers that was used to
tell them what they ought to emphasize in order to sell those bonds. It
says at the top up there, ``Capitalize on this,'' and then it goes over
a series of sales points.
Look at the last one. Look at the last sales point on the second page
of this memo. It says, ``No. 13, and always remember the weak, the meek
and the ignorant are always good targets.'' Now that is what they found
in their discovery efforts in the Keating case.
Under the bill brought forth today by the gentleman from California
[Mr. Cox], this would not have been allowed to have been pled in the
Keating case because, after the first amendment, one cannot amend
anymore, so they could not have amended their complaint based upon the
finding of this document. These documents are not waiting around for
plaintiffs to find them. In the beginning they have got to find them
through discovery.
What my amendment would say is that we are going to require, continue
to require, specificity in pleading in allegations made with regard to
fraud. But we do not go so far as to say, ``You've got to plead the
specific facts that prove scienter (that is knowledge) because nobody
can get those facts. You can't file them,'' and under the bill before
us today, if it has not been filed that way, they are going to be out
court. So a person whose pension has gone down the drain, whose
personal investments have gone down the drain, a person who has been
defrauded, who has very few resources, even if he had a case, is not
going to be able to get a lawyer to take the case because under the
standard being brought to us today they could not win the case.
For goodness sakes. Let us at least go with the standard that these
fellows said was the one we should go with last year rather than go
with the standard of the new revolution in the House, which is go to
enormous extremes.
Mr. MARKEY. Mr. Chairman, will the gentleman yield?
Mr. BRYANT of Texas. I yield to the gentleman from Massachusetts.
Mr. MARKEY. As my colleague knows, the problem with this provision in
the legislation is that it requires each person who has been defrauded,
knows they have been defrauded, every bone in their body tells them
that this financial advisor, this banker, this person that sold them
this stock that has gone sour, defrauded them. But if they are going to
sue, they have to be like Carnac. They have to be able to know exactly
what was in the mind of the person who defrauded them, exactly on that
night, December 18, 1993, when that person sold them or concocted the
concept of defrauding the individual with the life savings losing
investment which the person made as a result.
I say to my colleagues, you couldn't sue Charlie Keating. You
couldn't sue anybody because, as the other person, absent the psychic
Carnac-like powers, you're left to the marketplace to have a strong
sense that you, in fact, have been defrauded, know that all of the
circumstantial evidence points in that direction, but not be able to
plead with the specificity that satisfies this Mount Everest of burdens
which has been constructed.
And we have everyone from Anthony Lewis in the New York Times who has
said it is very hard, indeed impossible for a plaintiff to know such
things about a defendant's state of mind. We have Judge Abner Mikva who
was an experienced Federal judge and is now counsel to the President
who has spoken out against this smoking gun pleading requirement in the
bill. This just creates insurmountable obstacles to an ordinary person
being able to bring an action.
And remember the pleadings standard in the Bryant bill is identical
to the Tauzin bill of last year. All we have done is taken the language
that the gentleman from Louisiana [Mr. Tauzin] had in his bill and
brought it out here on the floor for those of my colleagues who
supported the Tauzin bill last year.
The CHAIRMAN. The time of the gentleman from Texas [Mr. Bryant] has
expired.
The Chair recognizes the gentleman from Texas [Mr. Fields] for 4
minutes.
Mr. FIELDS of Texas. Mr. Chairman, I yield myself such time as I may
consume.
{time} 1700

Mr. FIELDS of Texas. Mr. Chairman, since we spent most of today
talking about intent, let us talk about what our intent is in this
pleadings section. Let us also talk about what the effect is of our
pleadings section.
Does the legislation as it is currently drafted, and particularly the
pleadings section as it is currently drafted, bar a plaintiff or
plaintiff class harmed by an untrue statement or material omission
which was knowingly made and relied upon? Absolutely not.
In fact, we believe that the specificity of the pleading of facts
required in this legislation should promote faster recovery at lower
plaintiff cost; that the plaintiff should actually see a higher return
when those type lawsuits are brought.
But it is important again to point to the facts, to constantly point
to the facts that small and medium-sized companies alone have paid out
nearly $500 million during the last 2 years, and we all recognize that
settling a case is oftentimes cheaper and quicker than defending in
court, and the problem is getting worse.
In the last 5 years the number of strike suits have tripled. The
intent here is to stop the frivolous lawsuit, to stop the fishing
expedition. If people do not think that happens, then I would be glad
to refer them to a letter from a Mr. Dick Egan of Hopkinton, MA, dated
January 16, 1995, this year.
In the body of the letter Mr. Egan talks about the two class action
lawsuits filed against him. But let me just read down in the body of
the letter where he says, ``Our second Strike Suit came in 1991 when we
pre-announced that we would not meet analysts expectations.'' The
expectation of analysts. ``We just weren't going to have a loss. In
fact, we were (and still are) quite profitable. We just weren't going
to meet the numbers someone else said we would.
``The stock tanked,'' to use his words, ``and we were sued by a law
firm that makes a business by initiating strike suits against high-tech
companies. They sued us within 48 hours on behalf of two Planitiffs
which together owned only 300 or 400 shares* * *
``Of course the lessons we learned from the 1988 suit were not
forgotten and now being a larger company and knowing we did not do
anything wrong to mislead sharehoders, I decided to fight this one out.
``I am pleased to report that the Judge's verdict was rendered in our
favor and contained the comments that `this case was dead on arrival'
and he would not `allow a continuance of this fishing expedition.'
Certainly it did not help the Strike Suit Lawyers case when we pointed
out their motion contained throughout the name of a prior plaintiff.''
``Of course,'' Mr. Egan goes on, ``we still had to pay our legal
costs which were over $100,000 and while I never estimated the cost and
time lost through the discovery process, I'm sure it was it was twice
as much.''
I will present this letter to anyone as an example of the type of
fishing expedition, frivolous lawsuit this legislation is intended to
stop.
Mr. TAUZIN. Mr. Chairman, will the gentleman yield?
Mr. FIELDS of Texas. I yield to the gentleman from Louisiana.
Mr. TAUZIN. I would just point out the language in the bill is much
improved over the language last year that the gentleman from Texas [Mr.
Bryant] and I offered. If the language we had in the bill was so good
last year, I want to know why we did not get a markup on the bill. This
language is much better, much more specific. It is the kind of language
that would prevent fishing expeditions. We ought to reject this
amendment and pass this good bill.
The CHAIRMAN. All time having expired, the question is on the
amendment offered by the gentleman from Texas [Mr. Bryant].
The question was taken; and the Chairman announced that the noes
appeared to have it.

recorded vote

Mr. BRYANT of Texas. Mr. Chairman, I demand a recorded vote.
A recorded vote was ordered.
The vote was taken by electronic device, and there were--ayes 168,
noes 255, answered ``present'' 1, not voting 10, as follows:
[[Page H2852]] [Roll No 213]

AYES--168

Abercrombie
Ackerman
Andrews
Baesler
Baldacci
Barcia
Barrett (WI)
Becerra
Beilenson
Bentsen
Berman
Bishop
Bonior
Borski
Boucher
Browder
Brown (CA)
Brown (FL)
Brown (OH)
Bryant (TX)
Cardin
Chambliss
Chapman
Clayton
Clement
Clyburn
Coleman
Collins (IL)
Collins (MI)
Conyers
Cooley
Costello
Coyne
Cramer
de la Garza
DeFazio
DeLauro
Dellums
Dicks
Dingell
Dixon
Doggett
Doyle
Duncan
Durbin
Engel
Evans
Fattah
Fazio
Fields (LA)
Filner
Flake
Foglietta
Ford
Fox
Frost
Furse
Gejdenson
Gephardt
Gonzalez
Gordon
Green
Gutierrez
Hall (OH)
Hamilton
Hastings (FL)
Hefner
Hilliard
Hinchey
Holden
Hoyer
Jackson-Lee
Jacobs
Jefferson
Johnson (SD)
Johnson, E. B.
Johnston
Kanjorski
Kaptur
Kennedy (MA)
Kennedy (RI)
Kennelly
Kildee
Klink
LaFalce
Lantos
Levin
Lewis (GA)
Lincoln
Lipinski
Lofgren
Luther
Maloney
Manton
Markey
Martinez
Mascara
Matsui
McCarthy
McCollum
McDermott
McHale
Meehan
Menendez
Mfume
Miller (CA)
Minge
Mink
Moakley
Mollohan
Murtha
Nadler
Oberstar
Obey
Olver
Owens
Pallone
Pastor
Payne (NJ)
Pelosi
Peterson (FL)
Pomeroy
Poshard
Rahall
Reed
Reynolds
Richardson
Rivers
Roybal-Allard
Rush
Sabo
Sanders
Sawyer
Schroeder
Schumer
Scott
Serrano
Skaggs
Slaughter
Spratt
Stark
Stokes
Studds
Stupak
Tanner
Taylor (MS)
Thompson
Thornton
Thurman
Torres
Torricelli
Towns
Traficant
Tucker
Velazquez
Vento
Visclosky
Volkmer
Ward
Waters
Watt (NC)
Waxman
Williams
Wise
Woolsey
Wyden
Wynn
Yates

NOES--255

Allard
Archer
Armey
Bachus
Baker (CA)
Baker (LA)
Ballenger
Barr
Barrett (NE)
Barton
Bass
Bateman
Bereuter
Bevill
Bilirakis
Bliley
Blute
Boehlert
Boehner
Bonilla
Bono
Brewster
Brownback
Bryant (TN)
Bunn
Bunning
Burr
Burton
Buyer
Callahan
Calvert
Camp
Canady
Castle
Chabot
Chenoweth
Christensen
Chrysler
Clinger
Coble
Coburn
Collins (GA)
Combest
Condit
Cox
Crane
Crapo
Cremeans
Cubin
Cunningham
Danner
Davis
Deal
DeLay
Deutsch
Diaz-Balart
Dickey
Dooley
Doolittle
Dornan
Dreier
Dunn
Edwards
Ehlers
Ehrlich
Emerson
English
Ensign
Eshoo
Everett
Ewing
Farr
Fawell
Fields (TX)
Flanagan
Foley
Forbes
Fowler
Frank (MA)
Franks (CT)
Franks (NJ)
Frelinghuysen
Frisa
Funderburk
Gallegly
Ganske
Gekas
Geren
Gilchrest
Gillmor
Gilman
Goodlatte
Goodling
Goss
Graham
Greenwood
Gunderson
Gutknecht
Hall (TX)
Hancock
Hansen
Harman
Hastert
Hastings (WA)
Hayworth
Hefley
Heineman
Herger
Hilleary
Hobson
Hoekstra
Hoke
Horn
Hostettler
Houghton
Hunter
Hutchinson
Hyde
Inglis
Istook
Johnson (CT)
Johnson, Sam
Jones
Kasich
Kelly
Kim
King
Kingston
Kleczka
Klug
Knollenberg
Kolbe
LaHood
Largent
Latham
LaTourette
Laughlin
Lazio
Leach
Lewis (CA)
Lewis (KY)
Lightfoot
Linder
Livingston
LoBiondo
Longley
Lucas
Manzullo
Martini
McCrery
McHugh
McInnis
McIntosh
McKeon
McNulty
Metcalf
Meyers
Mica
Miller (FL)
Mineta
Molinari
Montgomery
Moorhead
Moran
Morella
Myers
Myrick
Nethercutt
Neumann
Ney
Norwood
Nussle
Ortiz
Orton
Oxley
Packard
Parker
Paxon
Payne (VA)
Peterson (MN)
Petri
Pickett
Pombo
Porter
Portman
Pryce
Quillen
Quinn
Radanovich
Ramstad
Regula
Riggs
Roberts
Roemer
Rogers
Rohrabacher
Ros-Lehtinen
Rose
Roth
Roukema
Royce
Salmon
Sanford
Saxton
Scarborough
Schaefer
Schiff
Seastrand
Sensenbrenner
Shadegg
Shaw
Shays
Shuster
Sisisky
Skeen
Skelton
Smith (MI)
Smith (NJ)
Smith (TX)
Smith (WA)
Solomon
Souder
Spence
Stearns
Stenholm
Stockman
Stump
Talent
Tate
Tauzin
Taylor (NC)
Tejeda
Thomas
Thornberry
Tiahrt
Torkildsen
Upton
Vucanovich
Waldholtz
Walker
Walsh
Wamp
Watts (OK)
Weldon (FL)
Weldon (PA)
Weller
White
Whitfield
Wicker
Wilson
Wolf
Young (AK)
Young (FL)
Zeliff
Zimmer

ANSWERED ``PRESENT''--1

Lowey

NOT VOTING--10

Bartlett
Bilbray
Clay
Gibbons
Hayes
McDade
McKinney
Meek
Neal
Rangel

{time} 1721

Mr. McCOLLUM changed his vote from ``no'' to ``aye.''
So the amendment was rejected.
The result of the vote was announced as above recorded.
Amendment Offered by Mr. Manton

Mr. MANTON. Mr. Chairman, I offer an amendment.
The CHAIRMAN. The Clerk will designate the amendment.
The text of the amendment is as follows:

Amendment offered by Mr. Manton: Page 7, beginning on line
19, strike subsection (c) through page 11, line 8, and insert
the following:
``(c) Awards of Fees and Expenses.--
``(1) Authority to award fees and expenses.--If the court
in any private action arising under this title enters a final
judgment against a party litigant on the basis of a default,
a motion to dismiss, motion for summary judgment, or a trial
on the merits, the court shall, upon motion by the prevailing
party, determine whether--
``(A) The complaint or motion is being presented for any
improper purpose, such as to harass or to cause unnecessary
delay or needless increase in the cost of litigation;
``(B) the claims, defenses, and other legal contentions in
the complaint or motion, taken as a whole, are unwarranted by
existing law or by a nonfrivolous argument for the extension,
modification, or reversal of existing law or the
establishment of new law;
``(C) the allegations and other factual contentions in the
complaint or motion, taken as a whole, lack any evidentiary
support or would be likely to lack any evidentiary support
after a reasonable opportunity for further investigation or
discovery; or
``(D) the denials of factual contentions are unwarranted on
the evidence or are not reasonably based on a lack of
information or belief.
``(2) Award to prevailing party.--If the court determines
that the losing party has violated any subparagraph of
paragraph (1), the court shall award the prevailing party
reasonable fees and other expenses incurred by that party.
The determination of whether the losing party violated any
such subparagraph shall be made on the basis of the record in
the civil action for which fees and other expenses are
sought.
``(3) Application for fees.--A party seeking an award of
fees and other expenses shall, within 30 days of a final,
nonappealable judgment in the action, submit to the court an
application for fees and other expenses that verifies that
the party is entitled to such an award under paragraph (1)
and the amount sought, including an itemized statement from
any attorney or expert witness representing or appearing on
behalf of the party stating the actual time expended and the
rate at which fees and other expenses are computed.
``(4) Sanctions against attorney.--The court--
``(A) shall award the fees and expenses against the
attorney for the losing party unless the court determines
that the losing party was principally responsible for the
actions described in subparagraph (A), (B), (C), or (D) of
paragraph (1); and
``(B) may, in its discretion, reduce the amount to be
awarded pursuant to this section, or deny an award, to the
extent that the prevailing party during the course of the
proceedings engaged in conduct that unduly and unreasonably
protracted the final resolution of the matter in controversy.
``(5) Rule of construction.--Nothing in this subsection
shall be construed to limit or impair the discretion of the
court to award costs pursuant to other provisions of law.
``(6) Definitions.--For purposes of this subsection, the
term `fees and other expenses' includes the reasonable
expenses of expert witnesses, the reasonable cost of any
study, analysis, report, test, or project which is found by
the court to be necessary for the preparation of the party's
case, and reasonable attorney fees and expenses. The amount
of fees awarded under this section shall be based upon
prevailing market rates for the king and quality of services
furnished.

Mr. MANTON. Mr. Chairman, virtually all of the evidence assembled by
the Commerce Committee during its consideration of the securities
litigation reform issue indicated that Congress can and should take
reasonable steps to reduce or eliminate frivolous securities lawsuits
while at the same time protecting--rather than diminishing or even
wiping out--the legitimate rights of defrauded individual investors to
seek redress in our courts.
My amendment, based on rule XI of the Federal Rules of Civil
Procedure, strikes that balance. This amendment provides that Federal
courts must shift the cost of attorney's fees to the losing party if
the court finds that the loser's arguments were frivolous or presented
[[Page H2853]] in bad faith. Furthermore, this amendment would also
require the court to impose sanctions on attorneys who bring these
cases.
This is a tough standard but, and this is critical, it's also a fair
standard.
The amendment responds directly to the concerns about frivolousness
and abuse that underlie the legislation we have been considering.
The purpose of the legislation before us today is to deter those who
exploit the otherwise effective laws Congress has enacted to protect
the investor.
We have been told that securities lawsuits with virtually no merit,
but which are expensive to defend, force companies into settlements.
According to many companies, these cases are sometimes brought in bad
faith by lawyers whose sole interest is in securing a lucrative award
or fees.
My amendment corrects this problem because it sends a clear message
to Federal judges about their role in overseeing securities fraud
cases.
It informs these judges that the Congress is dissatisfied with the
discretionary approach to fee shifting adopted by the Supreme Court and
the Administrative Office of the Courts, and wants fees and expenses
imposed whenever a case is found to be frivolous or brought in bad
faith.
My amendment also sends a message to overzealous plaintiffs' lawyers,
because it will require the Court to impose the defendants' legal fees
on them or the individual investor if the case is frivolous or brought
in bad faith.
The approach of my amendment is superior to the fee shifting language
contained in H.R. 1058 because my amendment does not mandate that
judges require class action plaintiffs to post a bond before they can
bring their case to court.
While I strongly support the concept of securities litigation reform,
I cannot support a proposal to require ordinary people to pay for the
right to have their day in court.
I understand my colleagues view that requiring undertakings from
class action plaintiffs will curtail the number of suits which
unscrupulous lawyers may bring. Fortunately, section 11(E) of the
Securities Act of 1933 already grants judges the discretionary power to
require class plaintiffs to post a bond.
This discretionary power allows judges to distinguish between the so-
called professional plaintiffs and those plaintiffs who are
professional, hard working Americans.
While I share my colleagues' interest in eliminating strike suits,
the bill's reach is simply too broad, and would result in too great of
a disincentive to plaintiffs with meritorious cases.
The approach taken in this amendment is vastly superior to the
philosophy underlying the loser almost always pays rule contained in
H.R. 1058.
{time} 1730

Mr. Chairman, despite the so-called bipartisan support for this bill,
I want my colleagues to be aware that virtually all witnesses with a
reasonable claim to being objective and impartial strenuously oppose
H.R. 1058's severe proposal to shift attorney's fees to investors.
The Securities and Exchange Commission opposes it. The group
regulating the securities regulators from all 50 States oppose it. The
group representing the officials in State and local governments who
issue municipal bonds oppose it. The AARP, the National Association of
Senior Citizens, and the Gray Panthers oppose it.
Consumer Reports, the Consumer Federation of America, and a host of
other consumer groups oppose it. At least 65 of the Nation's leading
corporate and securities law professors oppose it.
And the Economist, for years one of the world's leading voices in
support of conservatism and the free market, believes that this type of
fee shifting offends one of the most basic principles of a free
society, and threatens to expel the middle class from the courts. The
Economist concluded that this issue has by itself undermined the
legitimacy of the entire British civil justice system. I can think of
no reason why we would want to adopt any such rule in the United States
Make no mistake, my amendment is necessary to ensure that H.R. 1058
does not require average citizens to pay, that is, to post a bond,
before they can have their day in court after they have been defrauded.
In a nutshell, this bill will require plaintiffs in a class action,
who have lost the value of their nest egg because of corporate fraud,
to put up good money after bad in order to simply earn the privilege of
entering the courtroom.
My amendment clarifies Congress' intention with regard to whom this
bill is designed to affect. It makes clear that it is only those cases
which are frivolous or brought in bad faith which we want to
discourage.
By eliminating meritless securities suits, we will serve to protect
industry, but, and this is equally important, we will ensure that cases
of actual securities fraud get the undivided attention of the public
and our courts that they deserve.
Finally, I want to point out that I voted in favor of reporting
securities litigation out of the Committee on Commerce. I suggest and
recommend to all of my colleagues that if this amendment is defeated,
they vote against the bill. I certainly will.
Mr. TAUZIN. Mr. Chairman, I rise in opposition to the amendment.
Mr. Chairman, let me first commend my friend, the gentleman from New
York [Mr. Manton] for his attempt to, in effect, rewrite rule XI of the
Rules of Federal Procedure in a way that is much better than rule XI,
and to suggest that it be part of this act.
If this were the only chance we had to improve upon the condition of
allocating the cost in a lawsuit, it would certainly be better than the
existing law. His amendment is better than rule XI in two major
respects, because it does make imposition of the fees mandatory and it
does cover four clauses, not just the one clause covered under the
current rule XI.
However, there is a better provision in the bill today than rule XI,
and even this improved version of rule XI. The provision in the bill
that is before us literally says that fees are going to be shifted in
one of these cases only, and only under the following conditions:
First, that the position of the losing party was never substantially
justified; that is to say, not only did he lose the case, not only did
he dismiss the case, not only did he perhaps lose it on a motion for
summary judgment, but that he never should have brought it in the first
place. There was no substantial justification for bringing that case;
Second, that imposing the fees on the party who brought the suit with
no substantial justification would not create an injustice, so the
court has to make that substantial, substantive judgment;
And, last, that the cost of the fees on the prevailing party, the
party who was sued unjustly, that the cost of those fees on that
prevailing party indeed would be substantially burdensome and unjust,
so the court has to make three findings.
Now, the Committee on Commerce did one additional thing in our effort
to reach out to broaden support for the bill, and to make it clear that
the court should use this fee-shifting arrangement only when these
three things are proven. We put the burden of proof on all three of the
things on the prevailing party.
In other words, if I bring a suit under this 10(b)(5) section of the
law, I sue you and your company, and I lose that suit, and I lose it
either on a judgment or a motion to dismiss, or I voluntarily dismiss
it at some point, under our bill it would be your burden of proof to
prove that I did not have a substantial, justifiable reason to bring
that case. You have to prove the negative.
Second, you have to prove that it would not be unjust to make me pay
your expenses in defending a suit I should not have brought.
Third, you have to prove that it would not be too much of a burden on
me to pay my own expenses in defending that lawsuit.
What I am saying is, Mr. Chairman, that when we shifted the burden of
proof to the prevailing party, we made it extremely difficult, I think,
for the fee shift ever to occur.
Let me tell the Members two other reasons why the Manton amendment
needs to be defeated.
Mr. ROTH. Mr. Chairman, will the gentleman yield?
[[Page H2854]] Mr. TAUZIN. I am happy to yield to the gentleman from
Wisconsin.
Mr. ROTH. Mr. Chairman, in layman's terms, as I interpret the
amendment, and I agree, I respect the proponent of the amendment, the
gentleman from New York, but as I read this bill, it cuts the losers-
pay provision of the bill, because as I read this, it replaces the
losers-pay language with language that would seem to make the attorneys
of the party filing frivolous claims accountable.
Mr. TAUZIN. The answer is it could, because under rule XI the fees
can be imposed on the attorney. However, my problem with it is bigger
than that. The problems are the following:
First, rule XI does not allow sanctions in discovery proceedings. In
fact, you cannot have sanctions where discovery proceedings have been
conducted without justifiable cause. Rule XI, for example, permits the
withdrawal of your suit or voluntary dismissal of your suit in order to
avoid fee shifting.
Let's say you brought a suit against me you never should have
brought. You have made me hire attorneys, you have kept my company in
all kinds of legal trouble for a year or 2 years. Then it becomes clear
that you should not have brought suit in the first place. The judge is
about to impose sanctions on you, so you immediately withdraw the case.
Under that scenario, under the Manton amendment, the judge could not
impose sanctions, could not shift fees over to the party who should not
have brought this suit.
In short, while it is an improvement over the existing law, and I
must commend my friend for doing a good job in offering a solution that
is better than existing law, the provisions of our bill are much
better, much better, and this amendment should be defeated.
Mr. DINGELL. Mr. Chairman, I rise in support of the Manton amendment.
Mr. Chairman, I commend the gentleman from New York [Mr. Manton] on
his amendment on fee shifting. I rise in support of that amendment. As
reported by the committee, H.R. 1058 would provide for fee shifting
when the court determines that the loser's case was not substantially
justified.
The bill, however, would require the court to order a bond from a
plaintiff in a securities case. These are high hurdles in front of the
courthouse door for any person, including those who have legitimate
claims.
Let us talk first about the bond requirement. This section provides
no guidance to the court on the amount of the bond or the form of the
bond. It appears to me that a judge could require a middle-class
plaintiff to post his or her house as collateral, or their retirement
account, or the children's college savings as collateral. That is a
high admission fee to the Federal courts.
I would remind my colleagues, the requirement for the bond is
mandatory. It is absolute. The ``substantially justify'' test, as we
are told, comes
from the Equal Access to Justice Act. This act requires Government
agencies to pay back attorney's fees to small businesses they sue when
their case is not substantially justified. That is, I would note,
however, a quite different case, Government against a small defendant.

Here we are talking about a little investor against a large and
wealthy wrongdoer who has every incentive to run up the costs of the
litigation. When the SEC brings a case, it does so only after it
completes an investigation. That investigation involves the use of the
investigative authority, including the subpoena power, which is
possessed by the SEC.
Middle-class citizens have no such abilities. They do not possess
subpoena powers. They should not be held, then, to the same standard as
the SEC, nor should they be held to the same standard as the Federal
Government.
Prof. Arthur Miller of Harvard Law School, who is perhaps the
foremost expert in the area of civil procedure, has testified that fee
shifting is almost invariably an intimidation device against
plaintiffs. It is used to intimidate device against plaintiffs. It is
used to intimidate plaintiffs and to preclude them from proceeding with
the protection of their rights, using the courts as they properly
should.
This is especially true in the class action cases where one investor,
the class representative, could find himself responsible for the fees
incurred by huge corporations defending against the claims of the
entire class. Remember, these corporations use enormous numbers of
lawyers to litigate. Whole floors of hotels are peopled with attorneys
whose sole function is to run the plaintiff out of money and out of
resources.
Who could then afford to bring an action against Merrill Lynch or
Charles Keating or Baring Bank or the people who brought the Orange
County debacle if, at the end of the day, there was not just a chance
but an almost certainty that the investor would be required to foot the
entire legal bill for a corporate defendant, if it were certain that he
had to post a bond amounting to enormous sums of money to assure that
his lawsuit was not frivolous, and that he would be able to pay if the
lawsuit went against him?
Here we see a significant difference between a suit that is
unsuccessful and one that is frivolous. We are all opposed, I think, in
this body to frivolous lawsuits, and indeed, we should be. The Manton
amendment makes a clear distinction. Not all lawsuits are successful,
and many that are not should have been.
It does not have to be done to American citizens this way. We do not
have to have unfair, harsh, and restrictive bonding requirements. We do
not have to impose enormous burdens on American citizens seeking to use
their courts to protect their rights against wrongdoing and against the
loss of assets taken from them by malefactors of great wealth.
I urge my colleagues to support the Manton amendment. I urge them to
be fair to the little people of this country.
Mr. FIELDS of Texas. Mr. Chairman, I move to strike the last word.
Mr. Chairman, once again, I appreciate the manner in which my good
friend, the gentleman from New York [Mr. Manton], brings this
amendment, but it is our opinion that the language of the amendment as
it is currently drafted does not write rule XI of the Federal Rules of
Civil Procedure into the law.
The current system that this statute is dealing with makes it easy
for entrepreneurial plaintiffs' lawyers to file speculative suits
simply for their settlement value. There is little risk. Plaintiffs'
lawyers take these cases on a contingency basis, and since over 90
percent of the cases settle, they are basically guaranteed a recovery.
That is why we have come in with the language that we have. It is
essential that reforms to the system must change the incentives so
plaintiffs' lawyers will weigh the merits of the lawsuit before racing
to the courthouse.
The language that is in the statute is not an automatic loser-pay
type of situation. Judges retain ample discretion under the statute as
it is drafted. The court may impose attorney fees only when a party
pursues a case that lacks substantial justification, and imposing the
fee on the loser or making the winner pay his own fees would not be
unjust.
These will not be shifted in close cases, only those that should
never have been brought. That is the purpose of this particular section
of the statute.
The court has discretion to require all or part of the winner fees to
be paid by the loser's attorney, rather than the losing parties
themselves. This discretion allows the court to avoid undue hardship,
while still sending the message that bringing frivolous litigation will
result in penalties.
Armed with the knowledge that their fees are recoverable, defendants
will have greater resolve to resist settling what many have begun to
call nuisance lawsuits. Plaintiffs who prevail will not lose any of
their rightful damages in paying huge attorney fees because the
defendant will be forced to pay for having chosen to fight the
plaintiff's meritorious claim.
Mr. Chairman, I would also like to go to the statute for just a
moment, because much has been made of the undertaking required. I want
to read this section of the bill that is labeled ``Security for payment
of cost in class actions.''
It says in the statute that,

In any private action arising under this title that is
certified as a class action pursuant to the Federal Rules of
Civil Procedure, the court shall require an undertaking from
the attorneys for the plaintiff class, the plaintiff class,
or both in such proportions and at such times as the court
determines are just and equitable for the payment of the
[[Page H2855]] fees and expenses that may be awarded under
paragraph 1.
{time} 1745

We believe, Mr. Chairman, that this statute grants wide latitude and
great discretion to that trial judge. We did that for a very important
reason. Because there are cases in which the judge may come in and say
that stock is put up to satisfy that undertaking, or perhaps a dollar.
So that is why that was built into this particular statute. By striking
this, I think it makes the effort that we have mounted today defective
and therefore I urge rejection of the Manton amendment.
Mr. TAUZIN. Mr. Chairman, will the gentleman yield?
Mr. FIELDS of Texas. I yield to the gentleman from Louisiana.
Mr. TAUZIN. I thank my friend for yielding. He stated very well the
case against this amendment. If the case against this amendment were
ever made perhaps even more eloquently than my friend from Texas, it
would have been the judge in the 1989 decision entitled Necklin versus
Weatherly Securities, Inc. In that case the judge held, and I quote,
plaintiffs have not alleged a single fact which supports an inference
of fraud.
He dismissed the case. But he declined to impose sanctions. The
bottom line is that even in a case where the judge found that there was
not even an allegation of an inference of fraud, he declined to impose
sanctions under rule 11. I know the gentleman makes it mandatory under
his amendment. The problem is that rule 11 has been terribly
ineffective and even codifying it is not going to work. The provisions
we have adopted out of the Committee on Commerce in this bill are much
stronger and at the same time they give the judge great discretion to
do what justice requires. If someone brings a lawsuit and they should
not have brought it, not even substantially justified, but it would
still be unjust for the judge to impose costs on them, when he
dismisses the suit, he can do so.
But the gentleman knows as we have discussed this thing even further,
there is even one greater reason to oppose the gentleman from New
York's amendment, and, that is, if you want to avoid the deterrent
sanction of this bill, under the gentleman from New York's amendment,
all you have to do is hurriedly dismiss your suit right before the
judge imposes the sanctions, because his amendment lets you do that.
Under our amendment, you cannot get away with that.
The CHAIRMAN. The time of the gentleman from Texas [Mr. Fields] has
expired.
(By unanimous consent, Mr. Fields of Texas was allowed to proceed for
2 additional minutes.)
Mr. FIELDS of Texas. I asked for 2 minutes so that I could first of
all compliment the gentleman from New York and just say how much I
appreciate the gentleman's sincere efforts in working out this section.
I appreciate that deeply. I wish that we could have come to closure,
but I did want to make this statement that the gentleman has made an
honest attempt. I wish we could have come to closure.
Mr. MANTON. Mr. Chairman, will the gentleman yield?
Mr. FIELDS of Texas. I yield to the gentleman from New York.
Mr. MANTON. I thank the gentleman for his kind words, Having the
time, I would direct the question to the gentleman from Louisiana,
referring to the case he just cited, if I understood correctly, in that
case the judge found that the plaintiff's case was not meritorious, but
if I understand the legislation before us that I am attempting to
amend, you have to put the bond up in advance, it is a precondition
before the judge decides anything. Am I correct?
Mr. TAUZIN. If the gentleman from Texas will yield, the judge may
impose the requirement of a bond under the bill. He may impose the bond
at $1, $1,000, whatever he thinks----
Mr. MANTON. If the gentleman will yield, that has been the rule since
1933, on both sides, both the plaintiff and the defendant could be
subjected to having to put up an undertaking.
Mr. TAUZIN. If the gentleman would further yield to me so I can
respond, this legislation does say now that we are providing a method
by which the judge can impose fees upon the losing party if in fact the
suit never should have been brought if it would not be unjust to do so
and if it would not be undburdensome for the winning defendant to carry
those fees.
He has got to find all three things. It does allow the judge to do
that. Therefore, the requirement is that a bond be established, the
lawyer can put up the bond if he has got an indigent plaintiff or the
client can put up a bond, the judge determines how much of a bond, and
the bond satisfies the requirements if it is ordered.
Mr. FIELDS of Texas. If I could reclaim my time, I just point out to
the gentleman from Louisiana, the defendant is not there voluntarily.
The CHAIRMAN. The time of the gentleman from Texas [Mr. Fields] has
again expired.
(At the request of Mr. Manton and by unanimous consent, Mr. Fields of
Texas was allowed to proceed for 1 additional minute.)
Mr. MANTON. I have one last question from the gentleman from
Louisiana if I could have the time.
Mr. FIELDS of Texas. I yield to my friend the gentleman from New
York.
Mr. MANTON. I ask the gentleman from Louisiana, is it not a little
unfair that the legislation that I am seeking to amend has the word
``shall'' when it refers to plaintiffs before they file suit, put up a
bond, it makes no mention as does the old rule 11-E
that everybody's familiar with that goes back to 1933, that has been
in the act from the very beginning, it gave the judge discretion to
impose a bond on either the plaintiff or the defendant.

Yet in this legislation, it says plaintiffs ``shall'' before there is
any indication that this might be a spurious lawsuit or might be one
without merit. Does that not seem a little unfair, a little one-sided
to the gentleman?
Mr. TAUZIN. Mr. Chairman, will the gentleman yield?
Mr. FIELDS of Texas. I yield to the gentleman from Louisiana.
Mr. TAUZIN. The answer is that the judge has discretion to fix that
undertaking. He can fix it at $1, $1,000, $2,000 $10,000 whatever it
requires to guarantee that in effect the losing party is going to be
able to respond to his order to shift the fees if it should occur and
the judge still maintains a great deal of discretion.
Mr. MANTON. Should not the judge also say to the defendant, because
it might be that the prevailing party might be the plaintiff who would
then seek costs. Why is it that only the plaintiff class has to put up
a bond, and it does say ``shall,'' whereas no mention at all is made of
the defendants who might not be the prevailing party?
The CHAIRMAN. The time of the gentleman from Texas [Mr. Fields] has
again expired.
(At the request of Mr. Tauzin and by unanimous consent, Mr. Fields of
Texas was allowed to proceed for 30 additional seconds.)
Mr. FIELDS of Texas. I yield to the gentleman from Louisiana.
Mr. TAUZIN. The answer is that plaintiff has brought the lawsuit and
has incurred those costs upon the defendant in a case where the judge
has found the lawsuit never should have been brought. That is what fee
shifting is all about.
If the plaintiff wins the case, the judge has the capacity to award
the plaintiff such damages as the plaintiff incurred, and in many cases
that includes much of his expenses.
It is only in the case where the judge says you never should have
brought this case and it would not be unjust for you to have to pay the
fees of a person you made hire an attorney and go through all this mess
for nothing that we require the bond.
Mr. ROTH. Mr. Chairman, I move to strike the last word.
Mr. Chairman, I will attempt to be brief. I want to say that I
respect our friend the gentleman from New York in introducing this
amendment, but I am opposed to this amendment because as I interpret
this amendment, it guts the loser-pay provisions of the bill and that
is one of the key provisions of this bill. It would replace the loser-
pays language with language that when you look at it would seem to make
the attorneys for the parties filing frivolous claims accountable.
However, its conditions would be so numerous that very few attorneys,
if any, would ever be penalized.
[[Page H2856]] To analyze just a couple of these conditions: It would
require that the defendant prove that the plaintiff's complaint was
meant to harass or to increase the cost of the litigation. That is a
whole new standard of proof.
This amendment is a poor substitute for discouraging frivolous
claims. It shifts the burden of responsibility on attorneys, not to the
parties filing the frivolous claims. Those filing the frivolous claims
should be held accountable.
A major purpose of this bill is to discourage frivolous strike
lawsuits that are costing American businesses billions of dollars in
unnecessary expenses and billions of hours in wasted time.
Worse still, the costs of the legal liability are passed on to the
consumers. That is, you and me and all the people that we represent
wind up paying more than is necessary, and the legal costs make
American products less competitive overseas. That is the real reason I
took these few minutes to speak on this bill, because as chairman of
the Subcommittee on International Economic Policy and Trade, I have
been working to strengthen American exports and this amendment will not
help in that endeavor. When American products cost more, fewer
companies can export. My friends, we already have a $150 billion trade
deficit. How much more do we want?
Further, according to the Rand study, 90 percent of all American
companies can expect to become parties to litigation. I want to repeat
that. According to the Rand study, 90 percent of all of American
companies can expect to become parties to litigation. Already 15
percent of American companies lay off employees out of fear of excess
liability.
Mr. BRYANT of Texas. Mr. Chairman, will the gentleman yield?
Mr. ROTH. I yield to the gentleman from Texas.
Mr. BRYANT of Texas. The Rand study says 90 percent of these
companies will be parties to litigation, but not tort litigation and
not securities litigation. It is commercial litigation. Give the House
the full benefit of the Rand study.
Mr. ROTH. Let me take back my time.
You are correct, the Rand study does say that 90 percent of all
American companies can expect to be parties to litigation. That is just
nuts. We cannot continue to operate that way. That is why the American
people are out there screaming and asking this Congress to do something
about reform. Too many jobs are being lost and too many people are
being harmed. How long can we continue to let this happen? No wonder
the American people are demanding reform.
Yes, the gentleman who offered this amendment is a nice guy, but this
is a terrible amendment. We cannot vote for this amendment. The
securities litigation reform bill is more than legal reform. That is
the point. It is not only legal reform. That is the point. It is not
only legal reform, this should be a job creation bill. That is what we
have to vote on.
For that reason, I would hope that the Members would vote against the
amendment.
Mr. BRYANT of Texas. Mr. Chairman, I move to strike the requisite
number of words.
The CHAIRMAN. If the Chair might, the gentleman was correct in
suggesting that there be alternating recognition. The gentleman from
Wisconsin had been on his feet when no one else was standing at the
time. The Chair had thought earlier that the other colloquy had ended.
The Chair wants to make sure the gentleman understood that.
Mr. BRYANT of Texas. I thank the Chair. The Chair has done a fine job
in presiding. I appreciate his remarks.
The CHAIRMAN. The Chair was trying to be fair.
Mr. BRYANT of Texas. Mr. Chairman, I move to strike the requisite
numbers of words.
Mr. Chairman, the comments by the previous speaker I think really say
a great deal about yesterday's bill, today's bill and the one we are
going to take up tonight and tomorrow. The Rand study was quoted, when
he said 90 percent of all companies are going to be a party to the
litigation. Yes, they are going to be a party to the litigation,
commercial litigation. Not securities litigation like we are talking
about today or tort litigation like we are going to be talking about
tonight and tomorrow, but commercial litigation. I think it is
incumbent upon us to stick with the facts. If the real purpose of this
bill is to get rid of frivolous suits and that was the only purpose,
first we would have some evidence, some kind of scientific evidence,
economic evidence, something to show us that there really was a growing
number of frivolous lawsuits against securities dealers, and second, we
would have the Securities and Exchange Commission down here talking in
favor of this bill and they are not doing that.
I think it is important for us in this last amendment to get this
thing in perspective. What has the gentleman from New York [Mr. Manton]
proposed? What he has proposed is a reasonable standard for shifting
the cost of the lawsuit to the plaintiff. If the lawsuit was found to
have been brought by an improper purpose, or if the lawsuit was found
to have been rewarded by existing law, or if the lawsuit lacked
evidentiary support or would be lacking any evidentiary support after
an opportunity for further investigation, or denials of factual
contentions are unwarranted on the evidence, any four of those could
work. If that happens, what does the judge do? The judge on motion
shifts the costs of the case to the plaintiff.
This is rule 11, but it is rule 11 made mandatory and it is rule 11
including the shifting of fees, not just sanctions. It is a reasonable
approach. What does it replace? It replaces the standards in this bill
which really, I think, is a fitting end to this debate today. Hardly
anything now is actionable any longer. Almost anything a securities
dealer wants to do now, he can do and get away with. This bill has
eliminated the ability to recover. The final provision we are debating
in the bill today eliminates the ability of a person even to go to
court. Why?
Because nobody has the money to post a bond in advance which the bill
requires, or to face the possibility that they might have to pay the
enormous fees of these firms.
I would just point out to the Members of the House here what The
Economist, perhaps the most respected British journal, says about the
British system which ha rules like these fellows would like to put into
law. It is interesting that the Republican bill here would sort of take
us back to the royalist way of doing things. It says that the worst
aspect of Britain's civil justice system is that it denies access to
justice to huge numbers of people. Only the very wealthy can afford the
costs and risks of most litigation. This offends one of the most basic
principles of a free society. The best way to open the doors of the
courts to everyone is to learn from a county whose legal system is
closely modeled on that of Britain, America.
That was written in January 1995 by the Economist, hardly a liberal
socialist fuzzy-headed group of theorists.
I would just conclude by saying that to rewrite the law so that the
securities dealers always win, to rewrite the law so that a plaintiff
or a class of plaintiffs or a city or a county or a pension plan or
somebody who has lost their life savings cannot win a case against a
securities dealer who has all the resources in the world at his
disposal is bad enough, but to add into this bill a loser pay rule
which says you have got to post a bond before you go to court and that
you do not dare take your case to court because you might lose your
home, your savings, everything you put aside for the kids' college,
your farm or your ranch, that in my view is absolutely reprehensible.

{time} 1800

The gentleman from New York [Mr. Manton] has done a fine job of
bringing this amendment forward and I urge Members to vote for the
amendment.
Mr. DOGGETT. Mr. Chairman, will the gentleman yield?
Mr. BRYANT of Texas. I yield to the gentleman from Texas.
Mr. DOGGETT. Mr. Chairman, I would like the gentleman to go back to
the Rand study again. Do you mean as presented by the last speaker that
the Rand study is saying that 90 percent of the businesses that get
sued or involved in suits that would involve the collection of debt
between businesses, for example?
Mr. BRYANT of Texas. Of course.
[[Page H2857]] Mr. DOGGETT. It has absolutely nothing to do with this
bill, does it?
Mr. BRYANT of Texas. That is exactly right.
Mr. DOGGETT. Yet it is the kind of statistic that has been brought
out every day this week and I guess we will hear it tonight and
tomorrow also. It is totally and completely misleading, and this bill
is going to do nothing about that statistic. Any business that is out
there that has a commercial dispute with a supplier, either trying to
collect a debt or because it thinks it has a legitimate defense to a
debt, those suits are going to go on. And of that 90 percent, the vast
majority of them will not be touched by one bill that is being
considered on the floor of this House this week.
Mr. BRYANT of Texas. The gentleman's point is very well-taken; that
is exactly right.
Mr. MARKEY. Mr. Chairman, will the gentleman yield?
Mr. BRYANT of Texas. I yield to the gentleman from Massachusetts.
Mr. MARKEY. Is it not true that out of the 270,000 cases in Federal
district court that this bill is only going to touch 300 of them, which
only affects 125 companies per year, and yet the number of tens of
thousands we are talking about a half of a half of a half of 1 percent
of all of the law cases brought in Federal court in the course of a
year? And the gentleman from Wisconsin is completely wrong in his
statistical representations.
The CHAIRMAN. The time of the gentleman from Texas [Mr. Bryant] has
expired.
(On request of Mr. Roth, and by unanimous consent, Mr. Bryant of
Texas was allowed to proceed for 30 additional seconds.)
Mr. ROTH. Mr. Chairman, will the gentleman yield?
Mr. BRYANT of Texas. I yield to the gentleman from Wisconsin.
Mr. ROTH. Mr. Chairman, if 90 percent of the business being sued is
not high enough for the gentleman, does he think we should say have it
100 percent, if I say if you go into business you are absolutely
automatically a criminal?
Mr. BRYANT of Texas. Of course not. The gentleman follows the point
we are making, and he got up and quoted a figure that has no relevance.
Eighty percent of the courts have commercial suits, and the Rand study
the gentleman quoted was talking about commercial suits and he knows
it.
Mr. COX of California. Mr. Chairman, I move to strike the requisite
number of words.
Mr. Chairman, I will just pick up where this discussion has left off
because I think the gentleman from Wisconsin is right on point when he
talks about the litigiousness of our society, the crowded dockets, et
cetera, in our Federal and State courts and the sense that every
American is left with, that the civil justice system is not for them.
They know when they go to the Federal courthouse near me in the
Southern District of California, downtown Los Angeles, that they are
looking at the second most crowded docket in America. They wonder why
it takes them 5, 7 years to get to trial. Maybe all they have got is a
case to collect a debt, but they have to wait in line behind these
mammoth class action litigation suits that are taking years to resolve.
The fact of the matter is one out of every eight companies traded on
the New York Stock Exchange has been hit with a strike suit. That is
according to Vincent O'Brien and Richard Hodges in their study of class
action securities fraud cases from 1988 to 1993 published in Law and
Economics Consulting.
Mr. TAUZIN. Mr. Chairman, will the gentleman yield on that point?
Mr. COX of California. Yes, I yield to the gentleman from Louisiana.
Mr. TAUZIN. I think a more important statistic, if the gentleman
wants to argue statistics, is that the regime of law that they are
defending they do not want to change today, according to that Vincent
O'Brien-Richard Hodges study, found that investors received an average
of 6 cents on the dollar in this legal dispute system under 10(b)5.
The only people making money are the attorneys. The investors get 6
cents on the dollar and that is the system being defended down here,
the system people do not want to change. I suggest that is the most
important statistic that has ever been quoted on the floor in this
debate.
Mr. COX of California. I thank the gentleman for that elucidating
point. What the Manton amendment does is merely import the requirements
of rule XI of the Federal Rules of Civil Procedure into our bill and
takes the post-December 1993 version of it, except it makes the
imposition of fees mandatory as they were in the pre-December 1993 rule
XI.
I went down and spoke at the American Bar Association winter meeting
of their litigations sections, several hundred lawyers, and we talked
in some detail about this legislation. We also talked about other
pending legislation, legal reform, and when it came to rule XI, which
is not part of our bill, the lawyers who were there to argue for and
against every single one of these issues were unable to do so. The
fellow who got up to argue the pro cases for rule XI, and he was just
assigned the job, said I know I am a layer; I can take both sides of
every issue, usually, but in this case rule XI, there is not any
argument in favor of it. It does not work.
And that is what we know about rule XI. It has been tested and it
does not work. It has been field tested, it has not accomplished its
purpose.
Unlike the bill as it is presently written, the Manton amendment
would permit the reduction of awards to the extent that the prevailing
party unreasonably delays, but the Manton amendment requires imposition
of fees on the attorney unless the court determines that the losing
party was principally responsible for violation. In contrast, the bill
as written leaves the issue of who to impose the sanction on in the
discretion of the court. One of the reasons that all of those folks at
the ABA meeting did not like rule XI was this very element of what the
gentleman from New York [Mr. Manton] would be introducing into the
bill.
Mr. WHITE. Mr. Chairman, will the gentleman yield?
Mr. COX of California. I yield to the gentleman from Washington.
Mr. WHITE. I think the gentleman is making an excellent point. It is
clear to all of us that rule XI is virtually never invoked in court.
That is why we need this legislation so badly.
I also would like to point out we do not need to get caught in the
minutia of this bill; we are coming to the end, I think it is important
to realize what is at stake.
I come from a suburb of Seattle that represents the future of the
United States economy. It is home to Microsoft, McCaw Cellular, home to
hundreds and hundreds of other small companies who are affected by
these sorts of lawsuits, and I can tell you this bill is for them.
That is what this bill is all about. It is designed to allow our
future economy to prosper without the sort of sword of Damocles of this
sword hanging over them.
If I could, for just 1 minute I would like to read a letter I got
from the founder of one of these small companies in my district,
because I think it points out exactly what is at stake here. This comes
from Mr. Darland, founder of Digital Systems in my district, a company
that did not exist 10 years ago but was started in Mr. Darland's garage
and has grown to be a very successful company.
Mr. MARKEY. Mr. Chairman, I move to strike the requisite number of
words.
The CHAIRMAN. The gentleman from Massachusetts [Mr. Markey] is
recognized for the balance of the time.
Mr. MARKEY. Mr. Chairman, I rise in support of the Manton amendment.
The Manton amendment seeks to prevent the scrapping of 200 years of
American law being used to ensure that plaintiffs can bring cases where
they feel they have been wronged in the financial marketplace. The
English rule in this bill creates a burden on a plaintiff, a set of
obstacles on a plaintiff that are higher than the set of obstacles that
were in yesterday's loser-pay bill that was out here to be considered
in diversity cases. It is an even stricter burden.
Loser pays is un-American. It is something that is completely outside
of the traditions of the American jurisprudential history. It is
absolutely impossible to imagine a situation where an investor who has
lost only $5,000 or $10,000 or $15,000 would even consider
[[Page H2858]] bringing a case against a major financial institution,
against a large company, if they feel that they have been defrauded;
and if they lose the case, not lose the case and be out of court, but
then have to prove that in fact the case was substantially justified,
not just that it was not frivolous, but have to go through an entirely
new proceeding to avoid having all of the costs that have been assumed
by the large financial institution, by the large corporation, and
hiring the largest law firms in New York or California or Boston to
represent them.
It is un-American. The Manton amendment seeks to preserve the
American tradition, where individuals can go to court and ensure that
their case can be heard and not risk losing their house, losing
everything they have saved in trying to fight to restore that which
they have been wrongfully defrauded.
So this is a critical moment again for the House. It is once again
going to vote on whether or not we want to impose the English rule, the
loser-pay standard, upon American investors.
My heartfelt recommendation to every Member who is about to come out
here and to vote is to continue, those who stood against loser pay
yesterday to stand with the Manton amendment, to ensure that we retain
that 200-year tradition of giving every American the right to go to
court, the right to vindicate themselves before the bar of justice,
without having to risk everything that they have ever earned in their
life in paying the legal bills incurred by large corporations in trying
to defend themselves against average Americans.
The CHAIRMAN. All time for consideration of the amendment has
expired.
The question is on the amendment offered by the gentleman from New
York [Mr. Manton].
The question was taken; and the Chairman announced that the ayes
appeared to have it.

recorded vote

Mr. MANTON. Mr. Chairman, I demand a recorded vote.
A recorded vote was ordered.
The vote was taken by electronic device, and there were--ayes 167,
noes 254, answered ``present'' 1, not voting 12, as follows:

[Roll No. 214]

AYES--167

Ackerman
Baldacci
Barcia
Barrett (WI)
Becerra
Beilenson
Bentsen
Berman
Bevill
Bishop
Bonior
Borski
Boucher
Brewster
Browder
Brown (CA)
Brown (FL)
Brown (OH)
Bryant (TX)
Buyer
Cardin
Chapman
Clay
Clayton
Clement
Clyburn
Coburn
Coleman
Collins (IL)
Collins (MI)
Conyers
Costello
Coyne
Cramer
de la Garza
DeFazio
DeLauro
Dellums
Deutsch
Dicks
Dingell
Dixon
Doggett
Doyle
Duncan
Durbin
Edwards
Engel
Eshoo
Evans
Fattah
Fazio
Fields (LA)
Filner
Flake
Foglietta
Ford
Fox
Frost
Furse
Gejdenson
Gephardt
Gonzalez
Gordon
Green
Gutierrez
Hall (OH)
Hamilton
Hastings (FL)
Hefner
Hilliard
Hinchey
Holden
Hoyer
Jackson-Lee
Jacobs
Johnson, E. B.
Johnston
Kanjorski
Kaptur
Kennedy (MA)
Kennedy (RI)
Kildee
King
Kleczka
Klink
LaFalce
Lantos
Levin
Lewis (GA)
Lincoln
Lipinski
Lofgren
Luther
Maloney
Manton
Markey
Martinez
Mascara
Matsui
McCarthy
McDermott
McHale
McNulty
Meehan
Menendez
Mfume
Miller (CA)
Mineta
Moakley
Mollohan
Murtha
Nadler
Oberstar
Obey
Olver
Ortiz
Owens
Pallone
Pastor
Payne (NJ)
Pelosi
Peterson (FL)
Pomeroy
Poshard
Rahall
Reed
Reynolds
Richardson
Rivers
Rose
Roybal-Allard
Rush
Sabo
Sanders
Sawyer
Schroeder
Schumer
Scott
Serrano
Skaggs
Slaughter
Spratt
Stark
Studds
Stupak
Taylor (MS)
Tejeda
Thompson
Thornton
Thurman
Torres
Torricelli
Towns
Traficant
Velazquez
Vento
Visclosky
Ward
Waters
Watt (NC)
Waxman
Wise
Woolsey
Wyden
Wynn
Yates

NOES--254

Abercrombie
Allard
Andrews
Armey
Bachus
Baesler
Baker (CA)
Baker (LA)
Ballenger
Barr
Barrett (NE)
Bartlett
Barton
Bass
Bateman
Bereuter
Bilirakis
Bliley
Blute
Boehlert
Boehner
Bonilla
Bono
Brownback
Bryant (TN)
Bunn
Bunning
Burr
Burton
Callahan
Calvert
Camp
Canady
Castle
Chabot
Chambliss
Chenoweth
Christensen
Chrysler
Clinger
Coble
Collins (GA)
Combest
Condit
Cooley
Cox
Crane
Crapo
Cremeans
Cubin
Cunningham
Danner
Davis
Deal
DeLay
Diaz-Balart
Dickey
Dooley
Doolittle
Dornan
Dreier
Dunn
Ehlers
Ehrlich
Emerson
English
Ensign
Everett
Ewing
Farr
Fawell
Fields (TX)
Flanagan
Foley
Forbes
Fowler
Frank (MA)
Franks (CT)
Franks (NJ)
Frelinghuysen
Frisa
Funderburk
Gallegly
Ganske
Gekas
Geren
Gilchrest
Gillmor
Gilman
Goodlatte
Goodling
Goss
Graham
Greenwood
Gunderson
Gutknecht
Hall (TX)
Hancock
Hansen
Harman
Hastert
Hastings (WA)
Hayes
Hayworth
Hefley
Heineman
Herger
Hilleary
Hobson
Hoekstra
Hoke
Horn
Hostettler
Houghton
Hunter
Hutchinson
Hyde
Inglis
Istook
Johnson (CT)
Johnson (SD)
Johnson, Sam
Jones
Kasich
Kelly
Kennelly
Kim
Kingston
Klug
Knollenberg
Kolbe
LaHood
Largent
Latham
LaTourette
Laughlin
Lazio
Leach
Lewis (CA)
Lewis (KY)
Lightfoot
Linder
Livingston
LoBiondo
Longley
Lucas
Manzullo
Martini
McCollum
McCrery
McHugh
McInnis
McIntosh
McKeon
Metcalf
Meyers
Mica
Miller (FL)
Minge
Mink
Molinari
Montgomery
Moorhead
Moran
Morella
Myers
Myrick
Nethercutt
Neumann
Ney
Norwood
Nussle
Orton
Oxley
Packard
Parker
Paxon
Payne (VA)
Peterson (MN)
Petri
Pickett
Pombo
Porter
Portman
Pryce
Quillen
Quinn
Radanovich
Ramstad
Regula
Riggs
Roberts
Roemer
Rogers
Rohrabacher
Ros-Lehtinen
Roth
Roukema
Royce
Salmon
Sanford
Saxton
Scarborough
Schaefer
Schiff
Sensenbrenner
Shadegg
Shaw
Shays
Shuster
Sisisky
Skeen
Skelton
Smith (MI)
Smith (NJ)
Smith (TX)
Smith (WA)
Solomon
Souder
Spence
Stearns
Stenholm
Stockman
Stump
Talent
Tanner
Tate
Tauzin
Taylor (NC)
Thomas
Thornberry
Tiahrt
Torkildsen
Tucker
Upton
Volkmer
Vucanovich
Waldholtz
Walker
Walsh
Wamp
Watts (OK)
Weldon (FL)
Weldon (PA)
Weller
White
Whitfield
Wicker
Williams
Wilson
Wolf
Young (AK)
Young (FL)
Zeliff

ANSWERED ``PRESENT''--1

Lowey

NOT VOTING--12

Archer
Bilbray
Gibbons
Jefferson
McDade
McKinney
Meek
Neal
Rangel
Seastrand
Stokes
Zimmer

{time} 1828

Mr. FAZIO and Mr. DEUTSCH changed their vote from ``no'' to ``aye.''
So the amendment was rejected.
The result of the vote was announced as above recorded.
Mr. POMEROY. Mr. Chairman, I rise today in opposition to the bill,
H.R. 1058.
Before coming to Congress, I served 8 years as North Dakota's
insurance commissioner. I was the State's chief regulator for insurance
and came to know the job of protecting consumers very well.
It is with this background that I place great importance on the
position of the State and Federal securities regulators with regard to
this legislation. They unequivocally oppose H.R. 1058. The sole purpose
of these regulators is the protection of investing consumers, and their
opposition to this bill comes directly from that purpose. They believe
it deals an unfair blow to the investing public.
Regulators have no financial stake in this legislation and I weigh
their position as highly credible. We have regulators to provide a
check in the system--to make sure someone is looking out for the
consumer. In considering legislation like this, I believe it is
imperative that we listen to their expertise. While I approve of the
goal of H.R. 1058--to deter frivolous claims or curtail strike suits--
this bill goes too far and limits the ability of aggrieved investors to
pursue just recovery from fraud.
I regret the committee did not work with the financial regulators to
devise a carefully tailored response to this important issue.
Mrs. COLLINS of Illinois. Mr. Chairman, I rise in opposition to H.R.
1058, the Securities Litigation Reform Act. This legislation, as was
the case with the ill-conceived Attorney Accountability Act we just had
before us, would slam the doors of justice on hard-working Americans
who unwittingly fall victim to corporate misconduct and fraud. H.R.
1058's anti-consumer, pro-big-business, special-interests-at-any-
expense outlook falls right in line with the rest of the GOP Contract
With America.
I believe all of us in this Chamber recognize that there continue to
be isolated cases in which meritless securities class action lawsuits
[[Page H2859]] are brought and we should take steps to deter such
behavior. But the GOP's approach on this issue, as with all other
issues during this first 100 days of the 104th Congress, has been to
isolate instances of meritless suits, blow them out of proportion, and
then attack them with a sledgehammer rather than with the laser-beam
specificity they deserve. This is irresponsible politicking, not
sensible legislating, Mr. Chairman.
H.R. 1058 couldn't offer a more favorable climate for corporate
misconduct. The number of egregious provisions in this legislation is
overwhelming. For starters, H.R. 1058 would require defrauded
investors, prior to the discovery stage of a suit, to establish the
fact that a defendant acted knowingly or recklessly. This is an almost
impossible task that goes way beyond the already stringent judicial
standard now in place that requires investors to allege facts providing
a strong inference that they were wronged.
However, the bill perpetrates an even greater miscarriage of justice
by allowing parties against whom suits are brought to employ an ``I
forgot to obey the law'' defense. You got it--all a defendant in a
securities fraud case will have to do if this bill passes is to say
``Oops, I'm sorry, I just didn't remember to disclose that pertinent
information,'' and they will be excused from prosecution. You can bet
that this provision alone is making a whole bunch of unethical
corporate wolves out there salivate at the prospects of an easy way out
in cases of fraudulent activity.
Yet most distressing, as we have heard for a couple of days now from
several Members, is the fact that H.R. 1058 imposes loser-pays
requirements forcing a losing small investor in a securities fraud suit
to shoulder the legal fees of the investment banking houses, accounting
firms, megacorporations, and so forth. I don't want to tell my
constituents who lose their life savings that they had invested in
mutual funds, IRA's, or pension plans because of a fraudulent action
that they must then risk their homes and whatever else they may have
left to have even a chance of recovering a small portion of what they
lost. Do you think these investors will pursue any suit? Get real, Mr.
Chairman.
Conspicuously absent from this bill are provisions which would
effectively balance the scales of justice in securities cases such as a
restoration of aiding and abetting liability standards, restrictions on
secret settlements and protective orders, and mandated preservation of
evidence to name a few.
The fact remains that private securities lawsuits have been a
powerful deterrent to fraud and have been invaluable in supplementing
and enhancing Securities and Exchange Commission [SEC] enforcement of
Federal securities laws. The Lincoln S&L debacle and the Drexel Burnham
disaster were just two high-profile cases of many that were initiated
as a result of private investor action. It is not justifiable to throw
the baby out with the bath water in the name of so-called reform.
Mr. Chairman, the SEC is strongly opposed to this legislation. SEC
Chairman Arthur Levitt testified before the Commerce Committee last
year on this issue that ``in the balance between the interests of
investors and the interests of a better system, a better system is
important, but it can't be at the expense of those investors.'' In
follow-up comments this year the SEC reiterated that their first
priority is ``the rights of American investors and the integrity of the
American capital markets,'' something this legislation is weak in
addressing.
Obviously my Republican friends don't agree with the No. 1 priority
of the Commission. Otherwise, we would not be debating the misguided
legislation we have before us today.
I urge my colleagues to vote ``no'' and prevent what will amount to a
grave injustice to our Nation's consumers and small investors should
H.R. 1058 pass.
Mr. REED. Mr. Chairman, I believe legislation is needed to deter the
meritless strike suits that are siphoning resources away from so many
of our innovative bio-technology and high-technology companies. I also
strongly support the sections of the bill dealing with proportionate
liability for defendants who did not act knowingly. In fact, I have
been a cosponsor of bills to correct these problems with securities
litigation that were introduced by the gentleman from Louisiana [Mr.
Tauzin] in past Congresses.
However, I am troubled by some of the extraneous provisions that have
been included in the legislation before us today. I am particularly
concerned about the redefinition of the recklessness standard.
Initially, section 204(a)(4) of the bill would have allowed any
defendant to escape liability by asserting they genuinely forgot or
that disclosure did not come to mind. Fortunately the drafters of this
provision realized this sentence created a giant loophole for
wrongdoers. Unfortunately, instead of deleting this absurd provision, a
hastily drafted amendment was adopted that, to my mind, confuses the
issue even further.
There are other troubling provisions. For example, the bill limits
the plaintiff to only one amended complaint: there were six amended
complaints in the suite against Charles Keating. An amendment to exempt
municipalities from some of the bills restrictions was defeated.
Municipalities are hardly the professional plaintiffs we are attempting
to stop and should not be barred from protecting their--and the
taxpayer's--interests.
As Arther Levitt, the chairman of the Securities Exchange Commission,
has said, ``Our markets are the best in the world, partly because our
securities laws are the best in the world. We tamper with the
securities regulation system at our peril.''
If this bill comes back from the Senate in a more reasonable form, I
intend to support it. But I cannot support it as it now stands.
Responsible legislation is needed to stop frivolous lawsuits. But we
should not hinder our ability to police future calamities like the
savings and loan frauds, the Orange County bankruptcy, and an
increasing number of derivatives scandals.
Mr. BAKER of California. Mr. Chairman, I rise today to express my
support for H.R. 1058, the Securities Litigation Reform Act.
As a member of the leader's task force on legal reform, I am
particularly pleased that we are passing the second of three major
legal reform bills in this the first 100 days of the Contract With
America.
The Securities Litigation Reform Act will limit the practice of
frivolous strike suits against companies merely because their stock
prices experience sudden fluctuations.
Under current law, we have witnessed the emergence of a cottage
industry of attorneys who prey upon companies with volatile stock
prices. To correct the problem of professional plaintiffs, H.R. 1058
restricts these unlucky investors from filing more than five class
action suits within a 3-year period.
Additionally, the bill imposes loser-pays sanctions where the court
determines that the position of the losing party was not substantially
justified. In such cases, the loser is responsible for paying all court
and legal fees. This provides a disincentive for litigants to
flippantly file suits without merit.
Finally, H.R. 1058 creates a safe harbor from frivolous lawsuits to
protect companies that publish market predictions. This forewarns
potential investors of risk inherent in investing.
In my home State of California, and the bay area in particular, there
are many small, high-growth, high-technology firms which are volatile
by nature. These firms are often victimized by frivolous securities
litigation.
For the good of the bay area, the State of California, and the entire
United States, I am proud that the House of Representatives is passing
this monumental legislation.
Mr. CARDIN. Mr. Chairman, there is no question that the securities
litigation system can be improved. Too often, class actions are filed
which result in each investor receiving a check for an insubstantial
amount such as 50 cents while the attorney who filed the case reaps
inordinace fees.
Changes to our securities laws must encourage innovation and
investment, while at the same time deter white-collar crime and ensure
the integrity of the financial markets. It must target frivolous
lawsuits and other problems in the litigation process without impairing
the ability of defrauded investors to sue.
While I support reasonable reforms, time has demonstrated that
taxpayers and honest business people can suffer greatly from fraud and
improper behavior. Although I supported final passage of H.R. 1058,
there were some provisions--were too extreme. I voted in favor of the
Securities Litigation Reform Act in order to show support for reform
and to push the process forward. However, if the bill returns to the
House, in the same form as it is presently drafted, I would find it
difficult to support this legislation.
My concerns regarding H.R. 1058 include: Elimination of recklessness
as a cause of action in securities fraud cases, enhanced pleading
requirements which force plaintiffs to establish, before the discovery
process occurs, that the defendant acted with the intent to deceive or
defraud, requirement for class plaintiff to post a bond covering the
legal fees and expenses of the defendants should the class plaintiffs
not prevail and severe limitation of cases based on a fraud on the
market.
Mr. Chairman, we must create reforms which control outrageous
securities litigation without hurting investors. I am hopeful that a
good compromise bill can be reached in conference with the Senate and
that the House of Representatives will have an opportunity to vote on a
bill that is reasonable but strong security litigation reform.
Mr. BILIRAKIS. Mr. Chairman, today we are considering an important
piece of legislation, H.R. 1058, the Securities Litigation Reform Act.
This bill reforms Federal securities law to stop the proliferation of
strike lawsuits--suits filed by class-action attorneys on behalf of
[[Page H2860]] shareholders whose stock investments have failed to live
up to their expectations.
Prior to the full Commerce Committee markup, I received numerous
phone calls from constituents who were concerned that the Securities
Litigation Reform Act would limit the ability of stockholders to sue if
they are the victims of fraud. Normally, constituent communication is
one of the most important sources of information that I rely upon to
represent my district. However, in this particular case, I am not sure
that the phone calls I received truly represent the views of my
constituents.
Whenever Congress debates a controversial issue, all of my
congressional offices are inundated with phone calls from concerned
constituents. However, my district offices did not receive one phone
call on this bill.
In fact, many of the calls my Washington office received were not
even generated directly from individuals in my district. Rather, groups
opposed to this legislation called my constituents and transferred
their calls to Washington. These organizations instructed my
constituents to say they were opposed to securities litigation reform.
In many instances, my constituents were given very little information
regarding this important legislation.
I find this practice abhorrent and misleading, Under the
circumstances, I find it hard to believe that my constituents were
presented with all of the facts regarding this legislation.
Over the last 5 years, the number of securities fraud suits has
tripled. One of every eight companies traded on the New York Stock
Exchange has been hit with a strike suit, and the most frequent targets
of strike suits are small, fast-growing companies. In many instances,
lawsuits are filed just hours after the news of a stock price decline
with no evidence of wrongdoing.
Opponents of H.R. 1058 argue that investors will be hurt by the
reforms included in this legislation. However, current law hurts
victims of real fraud in several key ways.
First, individual shareholders who are part of the class action do
not reap anywhere near the full amount of damages that are claimed in
the suit. A study by the National Economic research Associates showed
that the average investor recovers only seven cents for every dollar
lost in the market, prior to the award of attorney's fees.
Second, current law encourages lawyers to file as many suits as
possible and to settle them quickly, regardless of their merit. The
sheer cost of going to trial is enough to compel most companies to
settle out of court, even if they have done nothing wrong.
Approximately 90 percent of companies sued eventually decide to settle.
In many cases, the plaintiffs would be better off going to trial but
the cases are settled because a settlement guarantees a significant
attorney's fee and eliminates any risk of failure to recoup funds
already invested in the case.
To correct these shortcomings, H.R. 1058 creates plaintiff steering
committees that are appointed by the court to make sure that class
action lawyers act in the best interests of their clients.
This legislation will also make it easier for plaintiffs to
understand a settlement agreement reached on their behalf. H.R. 1058
requires that class action plaintiffs receive a simple, easy-to-
understand summary of the proposed settlement terms, including the full
amount of attorney's fees and costs.
The present system shortchanges victims of real fraud because even
successful plaintiffs must pay their own attorney's fees out of their
judgment, thus ensuring that victims of fraud do not recover all they
are owed. In some cases, victims of fraud must pay as much as one-third
of the compensation they receive to their own lawyers.
H.R. 1058 allows prevailing parties to recover their attorney's fees
from the losing side, ensuring that victims of fraud recover everything
they are entitled to receive.
Under H.R. 1058, the court may impose attorney's fees only when a
party pursues a case that lacks substantial justification and imposing
the fees on the loser would not be unjust. The court also has the
discretion to require all or part of the winner's fees to be paid by
the loser's attorney rather than the losing parties themselves.
The bottom line is that strike lawsuits hurt investors by diminishing
the value of their holdings. Investors lose when the stock price
declines because of litigation, and they lose again when the company
has to deplete its assets for defense fees and settlement costs.
Moreover, strike suits harm the economy. Instead of spending money on
research and development, hiring more employees or reducing the cost of
their products, companies end up spending a great deal of money on
strike suit insurance and legal fees.
Mr. Chairman, I urge my colleagues to support H.R. 1058. I believe
this is an important piece of legislation which will benefit both
companies and investors.
Mr. DeLAY. Mr. Chairman, today we consider legislation to end
widespread abuses in our legal system--to end a litigation tax on many
of the most productive companies in America.
The securities litigation reform bill before us today--H.R. 1058--
will restore common sense to the Federal securities laws. When Congress
wrote these statutes 60 years ago, the private right of action that
H.R. 1058 addresses was not even contemplated. But 60 years of judge-
made law have created a system that Congress never anticipated and that
no one can defend. Today, the Federal securities laws are compensating
defrauded investors little, but are making plaintiffs' lawyers rich.
The consensus for reform is overwhelming--SEC Chairman Arthur Levitt,
pension fund managers from some of our largest cities and States,
investor representatives, issuers, auditors, academics, business
leaders, entrepreneurs, Democrats and Republicans--all agree that
meaningful reform is necessary. And this is the legislation to do it.
Mr. Chairman, H.R. 1058 is a good bill that will protect jobs and
stimulate economic growth--particularly for high-tech companies that
are frequently the targets of these securities strike suits. It will
end the legal extortion practiced today against many of America's most
promising companies. It will free-up resources for investment in R&D,
business expansion and job creation--rather than in lawyers and
litigation expenses.
H.R. 1058 is a compromise bill that has been amended since its
introduction to address many of the concerns expressed by our friends
on the other side of the aisle.
And it is a bipartisan bill that includes among its original
cosponsors my good friend from Louisiana and enjoys the support of many
of my colleagues from the Democratic Party.
Mr. Chairman, Congress has avoided its responsibility to fix the
securities litigation system for 60 years. But today we have the
opportunity to act. Today we have the opportunity to restore the
Federal securities laws to their intended purpose--to protect investors
and keep America's securities markets the safest and most liquid in the
world.
I urge my colleagues to pass H.R. 1058 and put an end to abusive
securities litigation.
Mr. BILBRAY. Mr. Chairman, a core component of the American Dream is
that hard work, creativity, and innovation is encouraged, and more
often than not, rewarded with success. Unfortunately, for a vast number
of small, fast-growing high-technology and biotech companies in
southern California, the Silicon Valley, and elsewhere around the
country, this dream has turned into a nightmare. A small fraternity of
attorneys have discovered that exploitation of loopholes in our
existing securities laws can be extremely lucrative, and they have
elevated the cunning application of meritless class action lawsuits to
an art form.
Class action lawsuits, or strike suits, have had a devastating effect
on biotech and high-technology firms, whose traits--volatile stock
prices, rapid product development, and constantly evolving technology--
make them an easy target for strike suits. If a company's stock shifts
abruptly in one direction or another, or quarterly earnings are less
than projected, it is likely to be targeted by a strike suit filed by
plaintiffs' attorneys alleging fraud. Often, these suits are filed
within hours of the stock fluctuation.
These suits have the effect of draining massive amounts of time and
money from some of America's most competitive industries. A perverse
result of these situations is that once hit with a strike suit, for
many small companies it is cheaper to settle out of court--despite
their innocence--in order to avoid a prolonged and costly court
process. This amounts to legalized blackmail, and makes a mockery of
that quaint concept of innocent until proven guilty.
Far from benefiting investors--on whose behalf these suits are
ostensibly filed--these settlements typically recover only pennies on
the dollar for investors, while the attorneys who brought the suit
recover an average of 30 percent from large pretrial settlements.
Investors are also penalized in the long run, as another side effect of
strike suits is to reduce the incentive for voluntary disclosure of
forward-looking information by a given company.
From my district in San Diego, up the State to the bay area, and
elsewhere across the United States, these predatory strike suits have
hamstrung some of our most competitive and growth-oriented industries,
with predictable results. If a company is fortunate enough not to have
to downsize or lay off employees, it is often forced to divert its
resources from R&D, or product improvement.
In many instances, these companies are researching cures for such
diseases as Alzheimers', AIDS, or breast cancer, or are developing
medical implant devices which can help prolong or improve the quality
of life for the ill and the elderly. If such research is discouraged,
as it now is, and these products are kept from the market, as many have
been, who is actually benefiting? Certainly not the little guys whom
the strike suit attorneys claim to represent. A cursory review of the
average
[[Page H2861]] fees garnered by strike suit attorneys indicates exactly
whose interests are truly being furthered.
The bottom line is that American people are being taken for a ride
under the current system--here's how:
First, new drugs and medical products that American consumers need
and want are being priced out of reach, or kept from the market
altogether by meritless strike suits;
Second, American taxpayers are footing the bill for the lengthy trial
and appeal processes forced by these meritless strike suits; and
Third, America's competitive advantage in high-technology and
biotechnology markets is being crippled by meritless strike suits,
which adversely affect local and regional economies through lost jobs
and business opportunities, in addition to hamstringing our ability to
compete in the international markets.
H.R. 1058 will address these abuses, making rational, substantive,
and fair changes in our system. It will benefit our economy, our
competitiveness, and most importantly, the American people. Mr.
Chairman, I urge my colleagues to rise in strong support of the
Securities Litigation Reform Act; it's been a long time coming.
Mr. GANSKE. Mr. Chairman, I rise today in strong support of H.R.
1058. We must end the abuse that is eroding our legal system.
As so poignantly stated by SEC Chairman Arthur Levitt:

Private actions are intended to compensate defrauded
investors and deter securities violations. If the current
systems fails to distinguish between strong and weak cases,
it serves neither purpose effectively.

I couldn't agree more. Unfortunately, this is precisely what we are
left with today--an ineffective system.
The changes mandated by the Securities Litigation Reform Act
currently before the House help restore responsibility and
respectability to our court system.
First, the provision that imposes the loser-pays rules when the court
determines the position of the losing party was not substantially
justified. This prevents the consummate race to the courthouse.
Plaintiffs with have to weigh the merits of their case before filing
suit.
Opponents claim this will have a chilling effect on a plaintiff's
right to sue. This simply is not the case. The modified loser-pays
provision will only result in fee shifting in cases which should not
have been brought in the first place. The only thing chilled by this
provision will be meritless suits, which I believe deserve to be put in
the deep freeze.
Second, as for the definition of recklessness, the current law is
vague and uncertain. Parties may engage in nearly identical conduct,
yet courts will reach completely different results. The vagueness and
uncertainty of the current standard has led to a great deal of
inconsistency, confusion and unfairness in our judicial system. I think
all of us would agree that by creating consistency, we increase
fairness and decrease the possibility of injustice in our legal system.
In general, strike suits under current law do more harm than good.
Reform is needed for two main reasons. No. 1, proper plaintiffs must
have a place to redress valid grievances in a system ensuring fraud
victims recover their losses and not merely the estimated pennies on
the dollar.
Number two, the securities industry must be allowed to get back to
its intended functions. We must help foster a market that allows the
industry to do its job and not spend all of its time defending
meritless strike suits.
H.R. 1058 accomplishes both of these goals. I urge my colleagues to
support this legislation which protects both the securities industry
and individual investors.
The CHAIRMAN. Under the rule, the Committee rises.
Accordingly, the Committee rose; and the Speaker pro tempore (Mr.
McInnis) having assumed the chair, Mr. Combest, Chairman of the
Committee of the Whole House on the State of the Union, reported that
that Committee, having had under consideration the bill (H.R. 1058) to
reform Federal securities litigation, and for other purposes, he
reported the bill back to the House with sundry amendments adopted by
the Committee of the Whole.

{time} 1830

The SPEAKER pro tempore (Mr. McInnis). Under rule the previous
question is ordered.
Is a separate vote demand had on any amendment? If not, the Chair
will put them en gros.
The amendments were agreed to.
The SPEAKER pro tempore. The question is on the engrossment and third
reading of the bill.
The bill was ordered to be engrossed and read a third time, and was
read the third time.

motion to recommit offered by mr. markey

Mr. MARKEY. Mr. Speaker, I offer a motion to recommit.
The SPEAKER pro tempore. Is the gentleman from Massachusetts opposed
to the bill?
Mr. MARKEY. I am opposed to the bill in its present form, Mr.
Speaker.
The SPEAKER pro tempore. The Clerk will report the motion to
recommit.
The Clerk read as follows:

Mr. Markey moves to recommit the bill, H.R. 1058, to the
Committee on Commerce with instructions that the committee
report the bill back to the House forthwith, with the
following amendments:
Page 7, beginning on line 19, strike subsection (c)
through page 11, line 8, and insert the following:
``(c) Award of Fees and Expenses.--
``(1) Authority to award fees and expenses.--If the court
in any private action arising under this title enters a final
judgment against a party litigant on the basis of a default,
a motion to dismiss, motion for summary judgment, or a trial
on the merits, the court shall, upon motion by the prevailing
party, determine whether--
``(A) the compliant or motion is being presented for any
improper purpose, such as to harass or to cause unnecessary
delay or needless increase in the cost of litigation;
``(B) the claims, defenses, and other legal contentions in
the complaint or motion, taken as a whole, are unwarranted by
existing law of by a nonfrivolous argument for the extension,
modification, or reversal of existing law or the
establishment of new law;
``(C) the allegations and other factual contentions in the
complaint or motion, taken as a whole, lack any evidentiary
support or would be likely to lack any evidentiary support
after a reasonable opportunity for further investigation or
discovery; or
``(D) the denials of factual contentions are unwarranted on
the evidence or are not reasonably based on a lack of
information or belief.
``(2) Award to prevailing party.--If the court determines
that the losing party has violated any subparagraph (1), the
court shall award the prevailing party reasonable fees and
other expenses incurred by that party. The determination of
whether the losing party violated any such subparagraph shall
be made on the basis of the record in the civil action for
which fees and other expenses are sought.
``(3) Application for fees.--A party seeking an award of
fees and other expenses shall, within 30 days of a final, non
appealable judgment in the action submit to the court an
application for fees and other expenses that verifies that
the party is entitled to such an award under paragraph (1)
and the amount sought, including an itemized statement
from any attorney or expert witness representing or
appearing on behalf of the party stating the actual time
expended and the rate at which fees and other expenses are
computed.
``(4) Sanctions against attorney.--The court----
``(A) shall award the fees and expenses against the
attorney for the losing party unless the court determines
that the losing party was principally responsible for the
actions described in subparagraph (A), (B), (C), or (D) of
paragraph (1); and
``(B) may, in its discretion, reduce the amount to be
awarded pursuant to this section, or deny an award, to the
extent that the prevailing party during the course of the
proceedings engaged in conduct that unduly and unreasonably
protracted the final resolution of the matter in controversy.
``(5) Rule of construction.--Nothing in this subsection
shall be construed to limit or impair the discretion of the
court to award costs pursuant to other provisions of law.
``(6) Definitions.--For purpose of this subsection, the
term `fees and other expenses' includes the reasonable
expenses of expert witnesses, the reasonable cost of any
study, analysis, report, test, or project which is found by
the court to be necessary for the preparation of the party's
case, and reasonable attorney fees and expenses. The amount
of fees awarded under this section shall be based upon
prevailing market rates for the kind and quality of services
furnished.

Page 28, line 12, insert before the period the following:
``, except that this Act and the amendments made by this Act
shall not apply to any action commenced by any State or local
government, or any agency or instrumentality of any State or
local government, before the date which is 3 years after such
date of enactment.''.
Mr. MARKEY (during the reading). Mr. Speaker, I ask unanimous consent
that the motion to recommit be considered as read and printed in the
Record.
The SPEAKER pro tempore. Is there objection to the request of the
gentleman from Massachusetts?
There was no objection.
The SPEAKER pro tempore. The gentleman from Massachusetts [Mr.
Markey] is recognized for 5 minutes.
Mr. MARKEY. Mr. Speaker, this recommittal motion contains two of the
worst elements of the legislation which is pending before the House
right now and seeks to correct those two portions of the legislation.
[[Page H2862]] The first part of the recommittal motion deals with
the issue of the English rule versus the American rule. That is the
question of whether or not a plaintiff, when they file a case and lose,
should be subject to having to pay the legal bills of the prevailing
side.
The English rule is completely outside the traditions of American
jurisprudence. What we seek to do in the recommittal motion is to
insure that there is a correction made that does not in fact impose
upon plaintiffs who happen to lose cases which they have brought
against large financial or industrial institutions in this country the
responsibility of shouldering the legal bills of those financial or
industrial firms.
The Manton amendment, which we just considered, dealt with this issue
extensively in debate. We are sure all the Members understand this
issue. We debated a similar form of this ``loser pays'' proposal all
day yesterday on the floor of this House.
The second part of the recommittal motion deals with the Dingell
amendment, which was made unsuccessfully earlier this evening. The
Dingell amendment seeks to deal with the reality that no municipality,
no mayor, no city council in this country has ever been charged with
bringing a frivolous action in a case where they believe that the
municipality has been defrauded.
As a result, the Dingell amendment sought to insure that there is a
3-year period in which the onerous burdens of this legislation are not
imposed upon a municipality, that those municipalities can still bring
actions up to 3 years based upon financial irregularities. So the heart
of the Dingell amendment was that any State government, any
municipality, any county in the United States can sue under existing
law without the much higher burden which is imposed by the bill which
is now pending before the House.
This measure insures that those mayors, those Governors, those city
councilmen, those county commissioners who have never had a single
charge levied against them that they ever brought a frivolous case, can
continue to bring actions under the existing
law. So, if the case exists where the derivatives, where fraudulent
financial instruments have in fact been sold to municipalities, to
State governments, to county governments, that they in fact are able to
continue to bring lawsuits under the existing standard which had served
our country well for the last 60 years in this country in securities
fraud cases.

So this is a very simple case. The National Association of Mayors
support the Dingell amendment and want the language in the existing
bill to be deleted. The National Association of Government Securities
Officials want this language to be deleted from the language. The
recommittal language sends back to committee the portions which deal
with ``loser pays.''
This bill is a much harsher version of the English rule than the
``loser pays'' rule that was voted on yesterday. Under this bill, if
the 3-part test of not substantially justified, imposing fees and
expenses on the losing party or its attorney would be just and the cost
of the fees to the prevailing party is burdensome or unjust, then the
loser must pay all of the attorney fees for the entire case.
In contrast, yesterday's bill just required the loser to pay that
part of the attorneys' fees occurring after an offer of settlement was
made and rejected or if the verdict was lower than the offer. The
Manton language, in contrast, would require the losing party to pay the
winner's fees if the case was frivolous or brought in bad faith. This
responds to exactly the concern that the Republicans are complaining
about.
If you are serious about wanting to penalize the attorneys when they
have brought frivolous cases, then vote for this motion.
If you want the investors who have just lost their life savings to
bet the house and put up a bond at the beginning of the case, then that
would be incredibly intimidating. It would have a chilling effect on
the willingness of investors to sue.
The recommittal motion seeks to insure that we do not establish
insurmountable barriers to investors to be able to sue large industrial
and financial powers in this country and insures the State, county, and
municipal elements have the same laws they have always been able to use
in order to protect their rights in court.
I hope there is an affirmative vote by this House to send this
recommittal motion successfully back to committee so we can have an
inclusion of these matters.
Mr. FIELDS of Texas. Mr. Speaker, I rise in opposition to the motion
to recommit.
The SPEAKER pro tempore. The gentleman from Texas [Mr. Fields] is
recognized for 5 minutes.
Mr. FIELDS of Texas. Mr. Speaker, I will try to be very brief.
Both portions of the motion to recommit we have already voted on. The
Dingell amendment, we do not want to see a dual standard: one standard
that applies to municipalities and cities, and another standard that
applies to everyone else.
In regard to the Manton amendment, we do not want to see the ``loser
pays'' provision weakened.
What we do want to see, Mr. Speaker, is H.R. 1058 should not be
changed as it was brought to the House because it revolutionizes the
standard by which disputes arising under the securities laws are
litigated.
This truly is a historic moment. This legislation will introduce for
the first time the concept of proportional liability into the Federal
securities laws. A defendant may be liable for joint and several
damages only if found to have acted knowingly. Defendants found liable
for recklessness will be held proportionately liable. Arguably, this is
the most significant development in private securities litigation in
the 61 years since the Securities Act was passed.
The bill also provides that the losing party, his attorney, or both,
will pay the prevailing party's legal fees if the court enters a final
judgment against them. The court has the discretion not to award fees
if the losing party establishes that its position was substantially
justified. The court will require the attorney, class, or both to post
security for costs to insure that funds are available to pay the legal
fees if they are awarded.
The Manton amendment would strike this out.
Mr. Speaker, I know the hour is late, and I will stop at this
particular moment other than to say this is an historic moment for
those who believe that we need commonsense legal reform.
Mr. Speaker, what I would like to do, for a moment, is to yield to
the gentleman from Louisiana [Mr. Tauzin], who has played such an
important role not only in this Congress but in previous Congresses in
moving a very important piece of legislation.
Mr. Speaker, I yield to the gentleman from Louisiana.
Mr. TAUZIN. I thank my friend for yielding. I will be brief. I do ask
him to yield just to say a word thanks, a word of thanks not only to
the chairman, who has been extraordinarily cooperative, the gentleman
from California [Mr. Cox], and others who have worked with us to
moderate this bill, but also, more importantly, to Members of this body
who are original cosponsors of this effort 4 years ago and have
remained faithful to this effort to bring this bill to a conclusion.
Members like Mr. Parker, like Mr. Hall, Mr. Montgomery, Mr. Shaw, Mr.
Moran, Members like Mr. Rush, Mr. Towns, and Mr. Brown, who have helped
bring us to this point. I think we are about to pass a good bill.
Defeat this motion to recommit, and we can pass this very historic
bill.
I want to again thank all of those who persevered for 4 years to
bring us to this point.
Mr. FIELDS of Texas. In closing, Mr. Speaker, I just want to thank
the gentleman from Oregon [Mr. Wyden] for his improving amendment
regarding accounting reform. Also, Mr. Mineta for his amendment
regarding safe harbor.
Mr. Speaker, with that, I urge my colleagues to vote down this motion
to recommit and then vote for passage.
The SPEAKER pro tempore. Without objection, the previous question is
ordered on the motion to recommit.
There was no objection.
The SPEAKER pro tempore. The question is on the motion to recommit.
The question was taken, and the Speaker pro tempore announced that
the noes appeared to have it.
[[Page H2863]] recorded vote

Mr. MARKEY. Mr. Speaker, I demand a recorded vote.
A recorded vote was ordered.
The vote was taken by electronic device, and there were--ayes 172,
noes 251, answered ``present'' 1, not voting 10, as follows:
[Roll No 215]

AYES--172

Abercrombie
Ackerman
Andrews
Baldacci
Barrett (WI)
Becerra
Beilenson
Bentsen
Berman
Bevill
Bishop
Bonior
Borski
Boucher
Browder
Brown (CA)
Brown (FL)
Brown (OH)
Bryant (TX)
Cardin
Chapman
Clay
Clayton
Clement
Clyburn
Coleman
Collins (IL)
Collins (MI)
Conyers
Costello
Coyne
Cramer
de la Garza
DeFazio
DeLauro
Dellums
Deutsch
Dicks
Dingell
Dixon
Doggett
Dooley
Doyle
Duncan
Durbin
Edwards
Engel
Eshoo
Evans
Fattah
Fazio
Fields (LA)
Filner
Flake
Foglietta
Ford
Frank (MA)
Frost
Furse
Gejdenson
Gephardt
Gonzalez
Gordon
Green
Gutierrez
Hall (OH)
Hall (TX)
Hamilton
Hastings (FL)
Hilliard
Hinchey
Holden
Hoyer
Jackson-Lee
Jacobs
Jefferson
Johnson (SD)
Johnson, E. B.
Kanjorski
Kaptur
Kennedy (MA)
Kennedy (RI)
Kennelly
Kildee
King
Kleczka
Klink
LaFalce
Lantos
Laughlin
Levin
Lewis (GA)
Lincoln
Lipinski
Lofgren
Luther
Maloney
Manton
Markey
Martinez
Mascara
Matsui
McCarthy
McDermott
McHale
McNulty
Meehan
Menendez
Mfume
Miller (CA)
Mineta
Mink
Moakley
Mollohan
Moran
Murtha
Nadler
Oberstar
Obey
Olver
Ortiz
Owens
Pallone
Pastor
Payne (NJ)
Pelosi
Peterson (FL)
Pomeroy
Poshard
Rahall
Reed
Reynolds
Rivers
Roemer
Roybal-Allard
Rush
Sabo
Sanders
Sawyer
Schroeder
Schumer
Scott
Serrano
Skaggs
Spratt
Stark
Stokes
Studds
Stupak
Tanner
Taylor (MS)
Tejeda
Thompson
Thornton
Thurman
Torres
Torricelli
Towns
Traficant
Tucker
Vento
Visclosky
Volkmer
Waters
Watt (NC)
Waxman
Williams
Wise
Woolsey
Wyden
Wynn
Yates

NOES--251

Allard
Archer
Armey
Bachus
Baesler
Baker (CA)
Baker (LA)
Ballenger
Barcia
Barr
Barrett (NE)
Bartlett
Barton
Bass
Bateman
Bereuter
Bilirakis
Bliley
Blute
Boehlert
Boehner
Bonilla
Bono
Brewster
Brownback
Bryant (TN)
Bunn
Bunning
Burr
Burton
Buyer
Callahan
Calvert
Camp
Canady
Castle
Chabot
Chambliss
Chenoweth
Christensen
Chrysler
Clinger
Coble
Coburn
Collins (GA)
Combest
Condit
Cooley
Cox
Crane
Crapo
Cremeans
Cubin
Cunningham
Danner
Davis
Deal
DeLay
Diaz-Balart
Dickey
Doolittle
Dornan
Dreier
Dunn
Ehlers
Ehrlich
Emerson
English
Ensign
Everett
Ewing
Farr
Fawell
Fields (TX)
Flanagan
Foley
Forbes
Fowler
Fox
Franks (CT)
Franks (NJ)
Frelinghuysen
Frisa
Funderburk
Gallegly
Ganske
Gekas
Geren
Gilchrest
Gillmor
Gilman
Goodlatte
Goodling
Goss
Graham
Greenwood
Gunderson
Gutknecht
Hancock
Hansen
Harman
Hastert
Hastings (WA)
Hayes
Hayworth
Hefley
Hefner
Heineman
Herger
Hilleary
Hobson
Hoekstra
Horn
Hostettler
Houghton
Hunter
Hutchinson
Hyde
Inglis
Istook
Johnson (CT)
Johnson, Sam
Jones
Kasich
Kelly
Kim
Kingston
Klug
Knollenberg
Kolbe
LaHood
Largent
Latham
LaTourette
Lazio
Leach
Lewis (CA)
Lewis (KY)
Lightfoot
Linder
Livingston
LoBiondo
Longley
Lucas
Manzullo
Martini
McCollum
McCrery
McHugh
McInnis
McIntosh
McKeon
Metcalf
Meyers
Mica
Miller (FL)
Minge
Molinari
Montgomery
Moorhead
Morella
Myers
Myrick
Nethercutt
Neumann
Ney
Norwood
Nussle
Orton
Oxley
Packard
Parker
Paxon
Payne (VA)
Peterson (MN)
Petri
Pickett
Pombo
Porter
Portman
Pryce
Quillen
Quinn
Radanovich
Ramstad
Regula
Richardson
Riggs
Roberts
Rogers
Rohrabacher
Ros-Lehtinen
Rose
Roth
Roukema
Royce
Salmon
Sanford
Saxton
Scarborough
Schaefer
Schiff
Seastrand
Sensenbrenner
Shadegg
Shaw
Shays
Shuster
Sisisky
Skeen
Skelton
Slaughter
Smith (MI)
Smith (NJ)
Smith (TX)
Smith (WA)
Solomon
Souder
Spence
Stearns
Stenholm
Stockman
Stump
Talent
Tate
Tauzin
Taylor (NC)
Thomas
Thornberry
Tiahrt
Torkildsen
Upton
Vucanovich
Waldholtz
Walker
Walsh
Wamp
Ward
Watts (OK)
Weldon (FL)
Weldon (PA)
Weller
White
Whitfield
Wicker
Wilson
Wolf
Young (AK)
Young (FL)
Zeliff
Zimmer

ANSWERED ``PRESENT''--1

Lowey

NOT VOTING--10

Bilbray
Gibbons
Hoke
Johnston
McDade
McKinney
Meek
Neal
Rangel
Velazquez

{time} 1901

Ms. ESHOO and Mr. EDWARDS changed their vote from ``no'' to ``aye.''
So the motion to recommit was rejected.
The result of the vote was announced as above recorded.
A motion to reconsider was laid on the table.
The SPEAKER. The question is on the passage of the bill.
The question was taken; and the Speaker announced that the ayes
appeared to have it.

recorded vote

Mr. MARKEY. Mr. Speaker, I demand a recorded vote.
A recorded vote was ordered.
The SPEAKER. This is a 5-minute vote.
The vote was taken by electronic device, and there were--ayes 325,
noes 99, answered ``present'' 1, not voting 10, as follows:

[Roll No. 216]

AYES--325

Ackerman
Allard
Andrews
Archer
Armey
Bachus
Baesler
Baker (CA)
Baker (LA)
Baldacci
Ballenger
Barcia
Barr
Barrett (NE)
Barrett (WI)
Bartlett
Barton
Bass
Bateman
Bentsen
Bereuter
Bevill
Bilirakis
Bishop
Bliley
Blute
Boehlert
Boehner
Bonilla
Bono
Brewster
Browder
Brown (OH)
Brownback
Bryant (TN)
Bunn
Bunning
Burr
Burton
Buyer
Callahan
Calvert
Camp
Canady
Cardin
Castle
Chabot
Chambliss
Chapman
Chenoweth
Christensen
Chrysler
Clement
Clinger
Coble
Coburn
Collins (GA)
Combest
Condit
Cooley
Cox
Cramer
Crane
Crapo
Cremeans
Cubin
Cunningham
Danner
Davis
de la Garza
Deal
DeLauro
DeLay
Deutsch
Diaz-Balart
Dooley
Doolittle
Dornan
Doyle
Dreier
Duncan
Dunn
Edwards
Ehlers
Ehrlich
Emerson
English
Ensign
Eshoo
Everett
Ewing
Farr
Fawell
Fazio
Fields (LA)
Fields (TX)
Flanagan
Foley
Forbes
Fowler
Fox
Frank (MA)
Franks (CT)
Franks (NJ)
Frelinghuysen
Frisa
Frost
Funderburk
Furse
Gallegly
Ganske
Gejdenson
Gekas
Geren
Gilchrest
Gillmor
Gilman
Gingrich
Goodlatte
Goodling
Gordon
Goss
Graham
Green
Greenwood
Gunderson
Gutknecht
Hall (TX)
Hamilton
Hancock
Hansen
Harman
Hastert
Hastings (WA)
Hayes
Hayworth
Hefley
Hefner
Heineman
Herger
Hilleary
Hobson
Hoekstra
Hoke
Holden
Horn
Hostettler
Houghton
Hoyer
Hunter
Hutchinson
Hyde
Inglis
Istook
Jackson-Lee
Johnson (CT)
Johnson, E. B.
Johnson, Sam
Jones
Kasich
Kelly
Kennedy (RI)
Kennelly
Kim
King
Kingston
Kleczka
Klug
Knollenberg
Kolbe
LaHood
Largent
Latham
LaTourette
Laughlin
Lazio
Leach
Lewis (CA)
Lewis (KY)
Lightfoot
Lincoln
Linder
Lipinski
Livingston
LoBiondo
Lofgren
Longley
Lucas
Maloney
Manzullo
Martini
McCarthy
McCollum
McCrery
McHale
McHugh
McInnis
McIntosh
McKeon
McNulty
Meehan
Menendez
Metcalf
Meyers
Mica
Miller (FL)
Mineta
Minge
Molinari
Montgomery
Moran
Morella
Myers
Myrick
Nethercutt
Neumann
Ney
Norwood
Nussle
Oberstar
Olver
Ortiz
Orton
Oxley
Packard
Pallone
Parker
Paxon
Payne (VA)
Peterson (FL)
Peterson (MN)
Petri
Pickett
Pombo
Porter
Portman
Pryce
Quillen
Quinn
Radanovich
Ramstad
Regula
Richardson
Riggs
Roberts
Roemer
Rogers
Rohrabacher
Ros-Lehtinen
Rose
Roth
Roukema
Royce
Rush
Sabo
Salmon
Sanford
Sawyer
Saxton
Scarborough
Schaefer
Schiff
Schroeder
Schumer
Seastrand
Sensenbrenner
Shadegg
Shaw
Shays
Shuster
Sisisky
Skaggs
Skeen
Skelton
Slaughter
Smith (MI)
Smith (NJ)
Smith (TX)
Smith (WA)
Solomon
Souder
Spence
Spratt
Stearns
Stenholm
Stockman
Stump
Talent
[[Page H2864]] Tanner
Tate
Tauzin
Taylor (NC)
Tejeda
Thomas
Thornberry
Thornton
Tiahrt
Torkildsen
Torricelli
Towns
Traficant
Upton
Vento
Visclosky
Volkmer
Vucanovich
Waldholtz
Walker
Walsh
Wamp
Ward
Watts (OK)
Weldon (FL)
Weldon (PA)
Weller
White
Whitfield
Wicker
Wilson
Wolf
Wyden
Young (AK)
Young (FL)
Zeliff
Zimmer

NOES--99

Abercrombie
Becerra
Beilenson
Berman
Bonior
Borski
Boucher
Brown (CA)
Brown (FL)
Bryant (TX)
Clay
Clayton
Clyburn
Collins (IL)
Collins (MI)
Conyers
Costello
Coyne
DeFazio
Dellums
Dicks
Dingell
Dixon
Doggett
Durbin
Engel
Evans
Fattah
Filner
Flake
Foglietta
Ford
Gephardt
Gonzalez
Gutierrez
Hall (OH)
Hastings (FL)
Hilliard
Hinchey
Jacobs
Jefferson
Johnson (SD)
Johnston
Kanjorski
Kaptur
Kennedy (MA)
Kildee
Klink
LaFalce
Lantos
Levin
Lewis (GA)
Luther
Manton
Markey
Martinez
Mascara
Matsui
McDermott
Mfume
Miller (CA)
Mink
Moakley
Mollohan
Murtha
Nadler
Obey
Owens
Pastor
Payne (NJ)
Pelosi
Pomeroy
Poshard
Rahall
Reed
Reynolds
Rivers
Roybal-Allard
Sanders
Scott
Serrano
Stark
Stokes
Studds
Stupak
Taylor (MS)
Thompson
Thurman
Torres
Tucker
Velazquez
Waters
Watt (NC)
Waxman
Williams
Wise
Woolsey
Wynn
Yates

ANSWERED ``PRESENT''--1

Lowey

NOT VOTING--10

Bilbray
Coleman
Dickey
Gibbons
McDade
McKinney
Meek
Moorhead
Neal
Rangel

{time} 1911

Mr. TAYLOR of Mississippi changed his vote from ``aye'' to ``no.''
Mr. MEEHAN changed his vote from ``no'' to ``aye.''
So the bill was passed.
The result of the vote was announced as above recorded.
A motion to reconsider was laid on the table.

____________________