[Congressional Record Volume 141, Number 103 (Thursday, June 22, 1995)]
[Senate]
[Pages S8885-S8924]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                PRIVATE SECURITIES LITIGATION REFORM ACT

  The PRESIDING OFFICER. The clerk will report.
  The legislative clerk read as follows:

       A bill (S. 240) to amend the Securities Exchange Act of 
     1934 to establish a filing deadline and to provide certain 
     safeguards to ensure that the interests of investors are well 
     protected under the implied private action provisions of the 
     Act.

  The PRESIDING OFFICER. Is there objection to the immediate 
consideration of the bill?
  There being no objection, the Senate proceeded to consider the bill, 
which had been reported from the Committee on Banking, Housing, and 
Urban Affairs, with an amendment to strike out all after the enacting 
clause and inserting in lieu thereof the following:
     SECTION 1. SHORT TITLE; TABLE OF CONTENTS.

       (a) Short Title.--This Act may be cited as the ``Private 
     Securities Litigation Reform Act of 1995''.
       (b) Table of Contents.--The table of contents for this Act 
     is as follows:

Sec. 1. Short title; table of contents.

                TITLE I--REDUCTION OF ABUSIVE LITIGATION

Sec. 101. Elimination of certain abusive practices.
Sec. 102. Securities class action reform.
Sec. 103. Sanctions for abusive litigation.
Sec. 104. Requirements for securities fraud actions.
Sec. 105. Safe harbor for forward-looking statements.
Sec. 106. Written interrogatories.
Sec. 107. Amendment to Racketeer Influenced and Corrupt Organizations 
              Act.
Sec. 108. Authority of Commission to prosecute aiding and abetting.
Sec. 109. Loss causation.
Sec. 110. Applicability.
              TITLE II--REDUCTION OF COERCIVE SETTLEMENTS

Sec. 201. Limitation on damages.
Sec. 202. Proportionate liability.
Sec. 203. Applicability.

            TITLE III--AUDITOR DISCLOSURE OF CORPORATE FRAUD

Sec. 301. Fraud detection and disclosure.
                TITLE I--REDUCTION OF ABUSIVE LITIGATION

     SEC. 101. ELIMINATION OF CERTAIN ABUSIVE PRACTICES.

       (a) Prohibition of Referral Fees.--Section 15(c) of the 
     Securities Exchange Act of 1934 (15 U.S.C. 78o(c)) is amended 
     by adding at the end the following new paragraph:
       ``(8) Prohibition of referral fees.--No broker or dealer, 
     or person associated with a broker or dealer, may solicit or 
     accept, directly or indirectly, remuneration for assisting an 
     attorney in obtaining the representation of any person in any 
     private action arising under this title or under the 
     Securities Act of 1933.''.
       (b) Attorney Conflict of Interest.--
       (1) Securities act of 1933.--Section 20 of the Securities 
     Act of 1933 (15 U.S.C. 77t) is amended by adding at the end 
     the following new subsection:
       ``(f) Attorney Conflict of Interest.--In any private action 
     arising under this title, if a plaintiff is represented by an 
     attorney who directly owns or otherwise has a beneficial 
     interest in the securities that are the subject of the 
     litigation, the court shall make a determination of whether 
     such ownership or other interest constitutes a conflict of 
     interest sufficient to disqualify the attorney from 
     representing the party.''.
       (2) Securities exchange act of 1934.--Section 21 of the 
     Securities Exchange Act of 1934 (15 U.S.C. 78u) is amended by 
     adding at the end the following new subsection:
       ``(i) Attorney Conflict of Interest.--In any private action 
     arising under this title, if a plaintiff is represented by an 
     attorney who directly owns or otherwise has a beneficial 
     interest in the securities that are the subject of the 
     litigation, the court shall make a determination of whether 
     such ownership or other interest constitutes a conflict of 
     interest sufficient to disqualify the attorney from 
     representing the party.''.
       (c) Prohibition of Attorneys' Fees Paid From Commission 
     Disgorgement Funds.--
       (1) Securities act of 1933.--Section 20 of the Securities 
     Act of 1933 (15 U.S.C. 77t) is amended by adding at the end 
     the following new subsection:
       ``(g) Prohibition of Attorneys' Fees Paid From Commission 
     Disgorgement Funds.--Except as otherwise ordered by the court 
     upon motion by the Commission, or, in the case of an 
     administrative action, as otherwise ordered by the 
     Commission, funds disgorged as the result of an action 
     brought by the Commission in Federal court, or as a result of 
     any Commission administrative action, shall not be 
     distributed as payment for attorneys' fees or expenses 
     incurred by private parties seeking distribution of the 
     disgorged funds.''.
       (2) Securities exchange act of 1934.--Section 21(d) of the 
     Securities Exchange Act of 1934 (15 U.S.C. 78u(d)) is amended 
     by adding at the end the following new paragraph:
       ``(4) Prohibition of attorneys' fees paid from commission 
     disgorgement funds.--Except as otherwise ordered by the court 
     upon motion by the Commission, or, in the case of an 
     administrative action, as otherwise ordered by the 
     Commission, funds disgorged as the result of an action 
     brought by the Commission in Federal court, or as a result of 
     any Commission administrative action, shall not be 
     distributed as payment for attorneys' fees or expenses 
     incurred by private parties seeking distribution of the 
     disgorged funds.''.

     SEC. 102. SECURITIES CLASS ACTION REFORM.

       (a) Recovery Rules.--
       (1) Securities act of 1933.--Section 20 of the Securities 
     Act of 1933 (15 U.S.C. 77t) is amended by adding at the end 
     the following new subsection:
       ``(h) Recovery Rules for Private Class Actions.--
       ``(1) In general.--The rules contained in this subsection 
     shall apply in each private action arising under this title 
     that is brought as a plaintiff class action pursuant to the 
     Federal Rules of Civil Procedure.
       ``(2) Certification filed with complaints.--
       ``(A) In general.--Each plaintiff seeking to serve as a 
     representative party on behalf of a class shall provide a 
     sworn certification, which shall be personally signed by such 
     plaintiff and filed with the complaint, that--
       ``(i) states that the plaintiff has reviewed the complaint 
     and authorized its filing;
       ``(ii) states that the plaintiff did not purchase the 
     security that is the subject of the complaint at the 
     direction of plaintiff's counsel or in order [[Page S 
     8886]] to participate in any private action arising under 
     this title;
       ``(iii) states that the plaintiff is willing to serve as a 
     representative party on behalf of a class, including 
     providing testimony at deposition and trial, if necessary;
       ``(iv) sets forth all of the transactions of the plaintiff 
     in the security that is the subject of the complaint during 
     the class period specified in the complaint;
       ``(v) identifies any action under this title, filed during 
     the 3-year period preceding the date on which the 
     certification is signed by the plaintiff, in which the 
     plaintiff has sought to serve as a representative party on 
     behalf of a class; and
       ``(vi) states that the plaintiff will not accept any 
     payment for serving as a representative party on behalf of a 
     class beyond the plaintiff's pro rata share of any recovery, 
     except as ordered or approved by the court in accordance with 
     paragraph (3).
       ``(B) Nonwaiver of attorney-client privilege.--The 
     certification filed pursuant to subparagraph (A) shall not be 
     construed to be a waiver of the attorney-client privilege.
       ``(3) Recovery by plaintiffs.--The share of any final 
     judgment or of any settlement that is awarded to a 
     representative party serving on behalf of a class shall be 
     calculated in the same manner as the shares of the final 
     judgment or settlement awarded to all other members of the 
     class. Nothing in this paragraph shall be construed to limit 
     the award of reasonable costs and expenses (including lost 
     wages) directly relating to the representation of the class 
     to any representative party serving on behalf of the class.
       ``(4) Restrictions on settlements under seal.--The terms 
     and provisions of any settlement agreement of a class action 
     shall not be filed under seal, except that on motion of any 
     party to the settlement, the court may order filing under 
     seal for those portions of a settlement agreement as to which 
     good cause is shown for such filing under seal. For purposes 
     of this paragraph, good cause shall exist only if publication 
     of a term or provision of a settlement agreement would cause 
     direct and substantial harm to any party.
       ``(5) Restrictions on payment of attorneys' fees and 
     expenses.--Total attorneys' fees and expenses awarded by the 
     court to counsel for the plaintiff class shall not exceed a 
     reasonable percentage of the amount of damages and 
     prejudgment interest awarded to the class.
       ``(6) Disclosure of settlement terms to class members.--Any 
     proposed or final settlement agreement that is published or 
     otherwise disseminated to the class shall include each of the 
     following statements, along with a cover page summarizing the 
     information contained in such statements:
       ``(A) Statement of plaintiff recovery.--The amount of the 
     settlement proposed to be distributed to the parties to the 
     action, determined in the aggregate and on an average per 
     share basis.
       ``(B) Statement of potential outcome of case.--
       ``(i) Agreement on amount of damages.--If the settling 
     parties agree on the average amount of damages per share that 
     would be recoverable if the plaintiff prevailed on each claim 
     alleged under this title, a statement concerning the average 
     amount of such potential damages per share.
       ``(ii) Disagreement on amount of damages.--If the parties 
     do not agree on the average amount of damages per share that 
     would be recoverable if the plaintiff prevailed on each claim 
     alleged under this title, a statement from each settling 
     party concerning the issue or issues on which the parties 
     disagree.
       ``(iii) Inadmissibility for certain purposes.--A statement 
     made in accordance with clause (i) or (ii) concerning the 
     amount of damages shall not be admissible in any Federal or 
     State judicial action or administrative proceeding, other 
     than an action or proceeding arising out of such statement.
       ``(C) Statement of attorneys' fees or costs sought.--If any 
     of the settling parties or their counsel intend to apply to 
     the court for an award of attorneys' fees or costs from any 
     fund established as part of the settlement, a statement 
     indicating which parties or counsel intend to make such an 
     application, the amount of fees and costs that will be sought 
     (including the amount of such fees and costs determined on an 
     average per share basis), and a brief explanation supporting 
     the fees and costs sought.
       ``(D) Identification of lawyers' representatives.--The 
     name, telephone number, and address of one or more 
     representatives of counsel for the plaintiff class who will 
     be reasonably available to answer questions from class 
     members concerning any matter contained in any notice of 
     settlement published or otherwise disseminated to the class.
       ``(E) Reasons for settlement.--A brief statement explaining 
     the reasons why the parties are proposing the settlement.
       ``(F) Other information.--Such other information as may be 
     required by the court.''.
       (2) Securities exchange act of 1934.--Section 21 of the 
     Securities Exchange Act of 1934 (15 U.S.C. 78u) is amended by 
     adding at the end the following new subsection:
       ``(j) Recovery Rules for Private Class Actions.--
       ``(1) In general.--The rules contained in this subsection 
     shall apply in each private action arising under this title 
     that is brought as a plaintiff class action pursuant to the 
     Federal Rules of Civil Procedure.
       ``(2) Certification filed with complaints.--
       ``(A) In general.--Each plaintiff seeking to serve as a 
     representative party on behalf of a class shall provide a 
     sworn certification, which shall be personally signed by such 
     plaintiff and filed with the complaint, that--
       ``(i) states that the plaintiff has reviewed the complaint 
     and authorized its filing;
       ``(ii) states that the plaintiff did not purchase the 
     security that is the subject of the complaint at the 
     direction of plaintiff's counsel or in order to participate 
     in any private action arising under this title;
       ``(iii) states that the plaintiff is willing to serve as a 
     representative party on behalf of a class, including 
     providing testimony at deposition and trial, if necessary;
       ``(iv) sets forth all of the transactions of the plaintiff 
     in the security that is the subject of the complaint during 
     the class period specified in the complaint;
       ``(v) identifies any action under this title, filed during 
     the 3-year period preceding the date on which the 
     certification is signed by the plaintiff, in which the 
     plaintiff has sought to serve as a representative party on 
     behalf of a class; and
       ``(vi) states that the plaintiff will not accept any 
     payment for serving as a representative party on behalf of a 
     class beyond the plaintiff's pro rata share of any recovery, 
     except as ordered or approved by the court in accordance with 
     paragraph (3).
       ``(B) Nonwaiver of attorney-client privilege.--The 
     certification filed pursuant to subparagraph (A) shall not be 
     construed to be a waiver of the attorney-client privilege.
       ``(3) Recovery by plaintiffs.--The share of any final 
     judgment or of any settlement that is awarded to a 
     representative party serving on behalf of a class shall be 
     calculated in the same manner as the shares of the final 
     judgment or settlement awarded to all other members of the 
     class. Nothing in this paragraph shall be construed to limit 
     the award to any representative party serving on behalf of a 
     class of reasonable costs and expenses (including lost wages) 
     directly relating to the representation of the class.
       ``(4) Restrictions on settlements under seal.--The terms 
     and provisions of any settlement agreement of a class action 
     shall not be filed under seal, except that on motion of any 
     party to the settlement, the court may order filing under 
     seal for those portions of a settlement agreement as to which 
     good cause is shown for such filing under seal. For purposes 
     of this paragraph, good cause shall exist only if publication 
     of a term or provision of a settlement agreement would cause 
     direct and substantial harm to any party.
       ``(5) Restrictions on payment of attorneys' fees and 
     expenses.--Total attorneys' fees and expenses awarded by the 
     court to counsel for the plaintiff class shall not exceed a 
     reasonable percentage of the amount of damages and 
     prejudgment interest awarded to the class.
       ``(6) Disclosure of settlement terms to class members.--Any 
     proposed or final settlement agreement that is published or 
     otherwise disseminated to the class shall include each of the 
     following statements, along with a cover page summarizing the 
     information contained in such statements:
       ``(A) Statement of plaintiff recovery.--The amount of the 
     settlement proposed to be distributed to the parties to the 
     action, determined in the aggregate and on an average per 
     share basis.
       ``(B) Statement of potential outcome of case.--
       ``(i) Agreement on amount of damages.--If the settling 
     parties agree on the average amount of damages per share that 
     would be recoverable if the plaintiff prevailed on each claim 
     alleged under this title, a statement concerning the average 
     amount of such potential damages per share.
       ``(ii) Disagreement on amount of damages.--If the parties 
     do not agree on the average amount of damages per share that 
     would be recoverable if the plaintiff prevailed on each claim 
     alleged under this title, a statement from each settling 
     party concerning the issue or issues on which the parties 
     disagree.
       ``(iii) Inadmissibility for certain purposes.--A statement 
     made in accordance with clause (i) or (ii) concerning the 
     amount of damages shall not be admissible in any Federal or 
     State judicial action or administrative proceeding, other 
     than an action or proceeding arising out of such statement.
       ``(C) Statement of attorneys' fees or costs sought.--If any 
     of the settling parties or their counsel intend to apply to 
     the court for an award of attorneys' fees or costs from any 
     fund established as part of the settlement, a statement 
     indicating which parties or counsel intend to make such an 
     application, the amount of fees and costs that will be sought 
     (including the amount of such fees and costs determined on an 
     average per share basis), and a brief explanation supporting 
     the fees and costs sought.
       ``(D) Identification of lawyers' representatives.--The 
     name, telephone number, and address of one or more 
     representatives of counsel for the plaintiff class who will 
     be reasonably available to answer questions from class 
     members concerning any matter contained in any notice of 
     settlement published or otherwise disseminated to the class.
       ``(E) Reasons for settlement.--A brief statement explaining 
     the reasons why the parties are proposing the settlement.
       ``(F) Other information.--Such other information as may be 
     required by the court.''.
       (b) Appointment of Lead Plaintiff.--
       (1) Securities act of 1933.--Section 20 of the Securities 
     Act of 1933 (15 U.S.C. 77t) is amended by adding at the end 
     the following new subsection:
       ``(i) Procedures Governing Appointment of Lead Plaintiff in 
     Class Actions.--
       ``(1) Early notice to class members.--
       ``(A) In general.--In any private action arising under this 
     title that is brought on behalf of a class, not later than 20 
     days after the date on which the complaint is filed, the 
     plaintiff or [[Page S 8887]] plaintiffs shall cause to be 
     published, in a widely circulated national business-oriented 
     publication or wire service, a notice advising members of the 
     purported plaintiff class--
       ``(i) of the pendency of the action, the claims asserted 
     therein, and the purported class period; and
       ``(ii) that, not later than 60 days after the date on which 
     the notice is published, any member of the purported class 
     may move the court to serve as lead plaintiff of the 
     purported class.
       ``(B) Additional notices may be required under federal 
     rules.--Notice required under subparagraph (A) shall be in 
     addition to any notice required pursuant to the Federal Rules 
     of Civil Procedure.
       ``(2) Appointment of lead plaintiff.--
       ``(A) In general.--Not later than 90 days after the date on 
     which a notice is published under paragraph (1)(A), the court 
     shall consider any motion made by a purported class member in 
     response to the notice, and shall appoint as lead plaintiff 
     the member or members of the purported plaintiff class that 
     the court determines to be most capable of adequately 
     representing the interests of class members (hereafter in 
     this subsection referred to as the `most adequate plaintiff') 
     in accordance with this paragraph.
       ``(B) Consolidated actions.--If more than one action on 
     behalf of a class asserting substantially the same claim or 
     claims arising under this title has been filed, and any party 
     has sought to consolidate those actions for pretrial purposes 
     or for trial, the court shall not make the determination 
     required by subparagraph (A) until after the decision on the 
     motion to consolidate is rendered. As soon as practicable 
     after such decision is rendered, the court shall appoint the 
     most adequate plaintiff as lead plaintiff for the 
     consolidated actions in accordance with this paragraph.
       ``(C) Rebuttable presumption.--
       ``(i) In general.--Subject to clause (ii), for purposes of 
     subparagraph (A), the court shall adopt a presumption that 
     the most adequate plaintiff in any private action arising 
     under this title is the person or group of persons that--

       ``(I) has either filed the complaint or made a motion in 
     response to a notice under paragraph (1)(A);
       ``(II) in the determination of the court, has the largest 
     financial interest in the relief sought by the class; and
       ``(III) otherwise satisfies the requirements of Rule 23 of 
     the Federal Rules of Civil Procedure.

       ``(ii) Rebuttal evidence.--The presumption described in 
     clause (i) may be rebutted only upon proof by a member of the 
     purported plaintiff class that the presumptively most 
     adequate plaintiff--
       ``(I) will not fairly and adequately protect the interests 
     of the class; or
       ``(II) is subject to unique defenses that render such 
     plaintiff incapable of adequately representing the class.

       ``(iii) Discovery.--For purposes of clause (ii), discovery 
     relating to whether a member or members of the purported 
     plaintiff class is the most adequate plaintiff--

       ``(I) may not be conducted by any defendant; and
       ``(II) may be conducted by a plaintiff only if the 
     plaintiff first demonstrates a reasonable basis for a finding 
     that the presumptively most adequate plaintiff is incapable 
     of adequately representing the class.

       ``(D) Selection of lead counsel.--The most adequate 
     plaintiff shall, subject to the approval of the court, select 
     and retain counsel to represent the class.''.
       (2) Securities exchange act of 1934.--Section 21 of the 
     Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.) is 
     amended by adding at the end the following new subsection:
       ``(k) Procedures Governing Appointment of Lead Plaintiff in 
     Class Actions.--
       ``(1) Early notice to class members.--
       ``(A) In general.--In any private action arising under this 
     title that is brought on behalf of a class, not later than 20 
     days after the date on which the complaint is filed, the 
     plaintiff or plaintiffs shall cause to be published, in a 
     widely circulated national business-oriented publication or 
     wire service, a notice advising members of the purported 
     plaintiff class--
       ``(i) of the pendency of the action, the claims asserted 
     therein, and the purported class period; and
       ``(ii) that, not later than 60 days after the date on which 
     the notice is published, any member of the purported class 
     may move the court to serve as lead plaintiff of the 
     purported class.
       ``(B) Additional notices may be required under federal 
     rules.--Notice required under subparagraph (A) shall be in 
     addition to any notice required pursuant to the Federal Rules 
     of Civil Procedure.
       ``(2) Appointment of lead plaintiff.--
       ``(A) In general.--Not later than 90 days after the date on 
     which a notice is published under paragraph (1)(A), the court 
     shall consider any motion made by a purported class member in 
     response to the notice, and shall appoint as lead plaintiff 
     the member or members of the purported plaintiff class that 
     the court determines to be most capable of adequately 
     representing the interests of class members (hereafter in 
     this subsection referred to as the `most adequate plaintiff') 
     in accordance with this paragraph.
       ``(B) Consolidated actions.--If more than one action on 
     behalf of a class asserting substantially the same claim or 
     claims arising under this title has been filed, and any party 
     has sought to consolidate those actions for pretrial purposes 
     or for trial, the court shall not make the determination 
     required by subparagraph (A) until after the decision on the 
     motion to consolidate is rendered. As soon as practicable 
     after such decision is rendered, the court shall appoint the 
     most adequate plaintiff as lead plaintiff for the 
     consolidated actions in accordance with this paragraph.
       ``(C) Rebuttable presumption.--
       ``(i) In general.--Subject to clause (ii), for purposes of 
     subparagraph (A), the court shall adopt a presumption that 
     the most adequate plaintiff in any private action arising 
     under this title is the person or group of persons that--

       ``(I) has either filed the complaint or made a motion in 
     response to a notice under paragraph (1)(A);
       ``(II) in the determination of the court, has the largest 
     financial interest in the relief sought by the class; and
       ``(III) otherwise satisfies the requirements of Rule 23 of 
     the Federal Rules of Civil Procedure.

       ``(ii) Rebuttal evidence.--The presumption described in 
     clause (i) may be rebutted only upon proof by a member of the 
     purported plaintiff class that the presumptively most 
     adequate plaintiff--
       ``(I) will not fairly and adequately protect the interests 
     of the class; or
       ``(II) is subject to unique defenses that render such 
     plaintiff incapable of adequately representing the class.

       ``(iii) Discovery.--For purposes of clause (ii), discovery 
     relating to whether a member or members of the purported 
     plaintiff class is the most adequate plaintiff--

       ``(I) may not be conducted by any defendant; and
       ``(II) may be conducted by a plaintiff only if the 
     plaintiff first demonstrates a reasonable basis for a finding 
     that the presumptively most adequate plaintiff is incapable 
     of adequately representing the class.

       ``(D) Selection of lead counsel.--The most adequate 
     plaintiff shall, subject to the approval of the court, select 
     and retain counsel to represent the class.''.

     SEC. 103. SANCTIONS FOR ABUSIVE LITIGATION.

       (a) Securities Act of 1933.--Section 20 of the Securities 
     Act of 1933 (15 U.S.C. 77t) is amended by adding at the end 
     the following new subsection:
       ``(j) Sanctions for Abusive Litigation.--
       ``(1) Mandatory review by court.--In any private action 
     arising under this title, upon final adjudication of the 
     action, the court shall include in the record specific 
     findings regarding compliance by each party and each attorney 
     representing any party with each requirement of Rule 11(b) of 
     the Federal Rules of Civil Procedure.
       ``(2) Mandatory sanctions.--If the court makes a finding 
     under paragraph (1) that a party or attorney violated any 
     requirement of Rule 11(b) of the Federal Rules of Civil 
     Procedure, the court shall impose sanctions on such party or 
     attorney in accordance with Rule 11 of the Federal Rules of 
     Civil Procedure.
       ``(3) Presumption in favor of attorneys' fees and costs.--
       ``(A) In general.--Subject to subparagraphs (B) and (C), 
     for purposes of paragraph (2), the court shall adopt a 
     presumption that the appropriate sanction for failure of the 
     complaint to comply with any requirement of Rule 11(b) of the 
     Federal Rules of Civil Procedure is an award to the opposing 
     party of all of the reasonable attorneys' fees and other 
     expenses incurred as a direct result of the violation.
       ``(B) Rebuttal evidence.--The presumption described in 
     subparagraph (A) may be rebutted only upon proof by the party 
     or attorney against whom sanctions are to be imposed that--
       ``(i) the award of attorneys' fees and other expenses will 
     impose an undue burden on that party or attorney; or
       ``(ii) the violation of Rule 11(b) of the Federal Rules of 
     Civil Procedure was de minimis.
       ``(C) Sanctions.--If the party or attorney against whom 
     sanctions are to be imposed meets its burden under 
     subparagraph (B), the court shall award the sanctions that 
     the court deems appropriate pursuant to Rule 11 of the 
     Federal Rules of Civil Procedure.''.
       (b) Securities Exchange Act of 1934.--Section 21 of the 
     Securities Exchange Act of 1934 (15 U.S.C. 78u) is amended by 
     adding at the end the following new subsection:
       ``(l) Sanctions for Abusive Litigation.--
       ``(1) Mandatory review by court.--In any private action 
     arising under this title, upon final adjudication of the 
     action, the court shall include in the record specific 
     findings regarding compliance by each party and each attorney 
     representing any party with each requirement of Rule 11(b) of 
     the Federal Rules of Civil Procedure.
       ``(2) Mandatory sanctions.--If the court makes a finding 
     under paragraph (1) that a party or attorney violated any 
     requirement of Rule 11(b) of the Federal Rules of Civil 
     Procedure, the court shall impose sanctions in accordance 
     with Rule 11 of the Federal Rules of Civil Procedure on such 
     party or attorney.
       ``(3) Presumption in favor of attorneys' fees and costs.--
       ``(A) In general.--Subject to subparagraphs (B) and (C), 
     for purposes of paragraph (2), the court shall adopt a 
     presumption that the appropriate sanction for failure of the 
     complaint to comply with any requirement of Rule 11(b) of the 
     Federal Rules of Civil Procedure is an award to the opposing 
     party of all of the reasonable attorneys' fees and other 
     expenses incurred as a direct result of the violation.
       ``(B) Rebuttal evidence.--The presumption described in 
     subparagraph (A) may be rebutted only upon proof by the party 
     or attorney against whom sanctions are to be imposed that--
       ``(i) the award of attorneys' fees and other expenses will 
     impose an undue burden on that party or attorney; or
       ``(ii) the violation of Rule 11(b) of the Federal Rules of 
     Civil Procedure was de minimis.
       ``(C) Sanctions.--If the party or attorney against whom 
     sanctions are to be imposed meets its burden under 
     subparagraph (B), the court shall award the sanctions that 
     the court deems [[Page S 8888]] appropriate pursuant to Rule 
     11 of the Federal Rules of Civil Procedure.''.

     SEC. 104. REQUIREMENTS FOR SECURITIES FRAUD ACTIONS.

       (a) Securities Act of 1933.--
       (1) Stay of discovery.--Section 20 of the Securities Act of 
     1933 (15 U.S.C. 77t) is amended by adding at the end the 
     following new subsection:
       ``(k) Stay of Discovery.--In any private action arising 
     under this title, during the pendency of any motion to 
     dismiss, all discovery and other proceedings shall be stayed 
     unless the court finds, upon the motion of any party, that 
     particularized discovery is necessary to preserve evidence or 
     to prevent undue prejudice to that party.''.
       (2) Preservation of evidence.--Section 20 of the Securities 
     Act of 1933 (15 U.S.C. 77t) is amended by adding at the end 
     the following new subsection:
       ``(l) Preservation of Evidence.--It shall be unlawful for 
     any person, upon receiving actual notice that a complaint has 
     been filed in a private action arising under this title 
     naming that person as a defendant and that describes the 
     allegations contained in the complaint, to willfully destroy 
     or otherwise alter any document, data compilation (including 
     any electronically recorded or stored data), or tangible 
     object that is in the custody or control of that person and 
     that is relevant to the allegations.''.
       (b) Securities Exchange Act of 1934.--Title I of the 
     Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.) is 
     amended by adding at the end the following new section:

     ``SEC. 36. REQUIREMENTS FOR SECURITIES FRAUD ACTIONS.

       ``(a) Misleading Statements and Omissions.--In any private 
     action arising under this title in which the plaintiff 
     alleges that the defendant--
       ``(1) made an untrue statement of a material fact; or
       ``(2) omitted to state a material fact necessary in order 
     to make the statements made, in the light of the 
     circumstances in which they were made, not misleading;

     the complaint shall specify each statement alleged to have 
     been misleading, the reason or reasons why the statement is 
     misleading, and, if an allegation regarding the statement or 
     omission is made on information and belief, the plaintiff 
     shall set forth all information on which that belief is 
     formed.
       ``(b) Required State of Mind.--In any private action 
     arising under this title in which the plaintiff may recover 
     money damages only on proof that the defendant acted with a 
     particular state of mind, the plaintiff's complaint shall, 
     with respect to each act or omission alleged to violate this 
     title, specifically allege facts giving rise to a strong 
     inference that the defendant acted with the required state of 
     mind.
       ``(c) Motion To Dismiss; Stay of Discovery.--
       ``(1) Dismissal for failure to meet pleading 
     requirements.--In any private action arising under this 
     title, the court shall, on the motion of any defendant, 
     dismiss the complaint if the requirements of subsections (a) 
     and (b) are not met.
       ``(2) Stay of discovery.--In any private action arising 
     under this title, during the pendency of any motion to 
     dismiss, all discovery and other proceedings shall be stayed 
     unless the court finds upon the motion of any party that 
     particularized discovery is necessary to preserve evidence or 
     to prevent undue prejudice to that party.
       ``(3) Preservation of evidence.--It shall be unlawful for 
     any person, upon receiving actual notice that a complaint has 
     been filed in a private action arising under this title 
     naming that person as a defendant and that describes the 
     allegations contained in the complaint, to willfully destroy 
     or otherwise alter any document, data compilation (including 
     any electronically recorded or stored data), or tangible 
     object that is in the custody or control of that person and 
     that is relevant to the allegations.
       ``(d) Loss Causation.--In any private action arising under 
     this title, the plaintiff shall have the burden of proving 
     that the act or omission alleged to violate this title caused 
     any loss incurred by the plaintiff. Damages arising from such 
     loss may be mitigated upon a showing by the defendant that 
     factors unrelated to such act or omission contributed to the 
     loss.''.

     SEC. 105. SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS.

       (a) Securities Act of 1933.--Title I of the Securities Act 
     of 1933 (15 U.S.C. 77a et seq.) is amended by inserting after 
     section 13 the following new section:

     ``SEC. 13A. APPLICATION OF SAFE HARBOR FOR FORWARD-LOOKING 
                   STATEMENTS.

       ``(a) Safe Harbor.--
       ``(1) In general.--In any private action arising under this 
     title that is based on a fraudulent statement, an issuer that 
     is subject to the reporting requirements of section 13(a) or 
     section 15(d) of the Securities Exchange Act of 1934, a 
     person acting on behalf of such issuer, or an outside 
     reviewer retained by such issuer, shall not be liable with 
     respect to any forward-looking statement, whether written or 
     oral, if and to the extent that the statement--
       ``(A) projects, estimates, or describes future events; and
       ``(B) refers clearly (and, except as otherwise provided by 
     rule or regulation, proximately) to--
       ``(i) such projections, estimates, or descriptions as 
     forward-looking statements; and
       ``(ii) the risk that actual results may differ materially 
     from such projections, estimates, or descriptions.
       ``(2) Effect on other safe harbors.--The exemption from 
     liability provided for in paragraph (1) shall be in addition 
     to any exemption that the Commission may establish by rule or 
     regulation under subsection (e).
       ``(b) Definition of Forward-Looking Statement.--For 
     purposes of this section, the term `forward-looking 
     statement' means--
       ``(1) a statement containing a projection of revenues, 
     income (including income loss), earnings (including earnings 
     loss) per share, capital expenditures, dividends, capital 
     structure, or other financial items;
       ``(2) a statement of the plans and objectives of management 
     for future operations;
       ``(3) a statement of future economic performance contained 
     in a discussion and analysis of financial condition by the 
     management or in the results of operations included pursuant 
     to the rules and regulations of the Commission;
       ``(4) any disclosed statement of the assumptions underlying 
     or relating to any statement described in paragraph (1), (2), 
     or (3); or
       ``(5) a statement containing a projection or estimate of 
     such other items as may be specified by rule or regulation of 
     the Commission.
       ``(c) Exclusions.--The exemption from liability provided 
     for in subsection (a) does not apply to a forward-looking 
     statement that is--
       ``(1) knowingly made with the expectation, purpose, and 
     actual intent of misleading investors;
       ``(2) except to the extent otherwise specifically provided 
     by rule, regulation, or order of the Commission, made with 
     respect to the business or operations of the issuer, if the 
     issuer--
       ``(A) has been, during the 3-year period preceding the date 
     on which the statement was first made, convicted of any 
     felony or misdemeanor described in clauses (i) through (iv) 
     of section 15(b)(4)(B), or has been made the subject of a 
     judicial or administrative decree or order arising out of a 
     governmental action that--
       ``(i) prohibits future violations of the anti-fraud 
     provisions of the securities laws, as that term is defined in 
     section 3 of the Securities Exchange Act of 1934;
       ``(ii) requires that the issuer cease and desist from 
     violating the anti-fraud provisions of the securities laws; 
     or
       ``(iii) determines that the issuer violated the anti-fraud 
     provisions of the securities laws;
       ``(B) makes the forward-looking statement in connection 
     with an offering of securities by a blank check company, as 
     that term is defined under the rules or regulations of the 
     Commission;
       ``(C) issues penny stock, as that term is defined in 
     section 3(a)(51) of the Securities Exchange Act of 1934, and 
     the rules, regulations, or orders issued pursuant to that 
     section;
       ``(D) makes the forward-looking statement in connection 
     with a rollup transaction, as that term is defined under the 
     rules or regulations of the Commission; or
       ``(E) makes the forward-looking statement in connection 
     with a going private transaction, as that term is defined 
     under the rules or regulations of the Commission issued 
     pursuant to section 13(e) of the Securities Exchange Act of 
     1934; or
       ``(3) except to the extent otherwise specifically provided 
     by rule or regulation of the Commission--
       ``(A) included in a financial statement prepared in 
     accordance with generally accepted accounting principles;
       ``(B) contained in a registration statement of, or 
     otherwise issued by, an investment company, as that term is 
     defined in section 3(a) of the Investment Company Act of 
     1940;
       ``(C) made in connection with a tender offer;
       ``(D) made by or in connection with an offering by a 
     partnership, limited liability corporation, or a direct 
     participation investment program, as those terms are defined 
     by rule or regulation of the Commission; or
       ``(E) made in a disclosure of beneficial ownership in a 
     report required to be filed with the Commission pursuant to 
     section 13(d) of the Securities Exchange Act of 1934.
       ``(d) Stay Pending Decision on Motion.--In any private 
     action arising under this title, the court shall stay 
     discovery during the pendency of any motion by a defendant 
     (other than discovery that is specifically directed to the 
     applicability of the exemption provided for in this section) 
     for summary judgment that is based on the grounds that--
       ``(1) the statement or omission upon which the complaint is 
     based is a forward-looking statement within the meaning of 
     this section; and
       ``(2) the exemption provided for in this section precludes 
     a claim for relief.
       ``(e) Authority.--In addition to the exemption provided for 
     in this section, the Commission may, by rule or regulation, 
     provide exemptions from liability under any provision of this 
     title, or of any rule or regulation issued under this title, 
     that is based on a statement that includes or that is based 
     on projections or other forward-looking information, if and 
     to the extent that any such exemption is, as determined by 
     the Commission, consistent with the public interest and the 
     protection of investors.
       ``(f) Commission Disgorgement Actions.--
       ``(1) In general.--If the Commission, in any proceeding, 
     orders or obtains (by settlement, court order, or otherwise) 
     a payment of funds from a person who has violated this title 
     through means that included the utilization of a forward-
     looking statement, and if any portion of such funds is set 
     aside or otherwise held for or available to persons who 
     suffered losses in connection with such violation, no person 
     shall be precluded from participating in the distribution of, 
     or otherwise receiving, a portion of such funds by reason of 
     the application of this section.
       ``(2) Judgment for losses suffered.--In any action by the 
     Commission alleging a violation of this title in which the 
     defendant or respondent is alleged to have utilized a 
     forward-looking statement in furtherance of such violation, 
     the Commission may, upon a sufficient showing, in addition to 
     all other remedies available to the Commission, obtain a 
     judgment for the payment [[Page S 8889]] of an amount equal 
     to all losses suffered by reason of the utilization of the 
     forward-looking statement.
       ``(g) Effect on Other Authority of Commission.--Nothing in 
     this section limits, 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 any other statute under 
     which the Commission exercises rulemaking authority.''.
       (b) Securities Exchange Act of 1934.--Title I of the 
     Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.) is 
     amended by adding at the end the following new section:

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

       ``(a) Safe Harbor.--
       ``(1) In general.--In any private action arising under this 
     title that is based on a fraudulent statement, an issuer that 
     is subject to the reporting requirements of section 13(a) or 
     section 15(d) of the Securities Exchange Act of 1934, a 
     person acting on behalf of such issuer, or an outside 
     reviewer retained by such issuer, shall not be liable with 
     respect to any forward-looking statement, whether written or 
     oral, if and to the extent that the statement--
       ``(A) projects, estimates, or describes future events; and
       ``(B) refers clearly (and, except as otherwise provided by 
     rule or regulation, proximately) to--
       ``(i) such projections, estimates, or descriptions as 
     forward-looking statements; and
       ``(ii) the risk that actual results may differ materially 
     from such projections, estimates, or descriptions.
       ``(2) Effect on other safe harbors.--The exemption from 
     liability provided for in paragraph (1) shall be in addition 
     to any exemption that the Commission may establish by rule or 
     regulation under subsection (e).
       ``(b) Definition of Forward-Looking Statement.--For 
     purposes of this section, the term `forward-looking 
     statement' means--
       ``(1) a statement containing a projection of revenues, 
     income (including income loss), earnings (including earnings 
     loss) per share, capital expenditures, dividends, capital 
     structure, or other financial items;
       ``(2) a statement of the plans and objectives of management 
     for future operations;
       ``(3) a statement of future economic performance contained 
     in a discussion and analysis of financial condition by the 
     management or in the results of operations included pursuant 
     to the rules and regulations of the Commission;
       ``(4) any disclosed statement of the assumptions underlying 
     or relating to any statement described in paragraph (1), (2), 
     or (3); or
       ``(5) a statement containing a projection or estimate of 
     such other items as may be specified by rule or regulation of 
     the Commission.
       ``(c) Exclusions.--The exemption from liability provided 
     for in subsection (a) does not apply to a forward-looking 
     statement that is--
       ``(1) knowingly made with the expectation, purpose, and 
     actual intent of misleading investors;
       ``(2) except to the extent otherwise specifically provided 
     by rule, regulation, or order of the Commission, made with 
     respect to the business or operations of the issuer, if the 
     issuer--
       ``(A) has been, during the 3-year period preceding the date 
     on which the statement was first made, convicted of any 
     felony or misdemeanor described in clauses (i) through (iv) 
     of section 15(b)(4)(B), or has been made the subject of a 
     judicial or administrative decree or order arising out of a 
     governmental action that--
       ``(i) prohibits future violations of the anti-fraud 
     provisions of the securities laws;
       ``(ii) requires that the issuer cease and desist from 
     violating the anti-fraud provisions of the securities laws; 
     or
       ``(iii) determines that the issuer violated the anti-fraud 
     provisions of the securities laws;
       ``(B) makes the forward-looking statement in connection 
     with an offering of securities by a blank check company, as 
     that term is defined under the rules or regulations of the 
     Commission;
       ``(C) issues penny stock;
       ``(D) makes the forward-looking statement in connection 
     with a rollup transaction, as that term is defined under the 
     rules or regulations of the Commission; or
       ``(E) makes the forward-looking statement in connection 
     with a going private transaction, as that term is defined 
     under the rules or regulations of the Commission issued 
     pursuant to section 13(e); or
       ``(3) except to the extent otherwise specifically provided 
     by rule or regulation of the Commission--
       ``(A) included in financial statements prepared in 
     accordance with generally accepted accounting principles;
       ``(B) contained in a registration statement of, or 
     otherwise issued by, an investment company;
       ``(C) made in connection with a tender offer;
       ``(D) made by or in connection with an offering by a 
     partnership, limited liability corporation, or a direct 
     participation investment program, as those terms are defined 
     by rule or regulation of the Commission; or
       ``(E) made in a disclosure of beneficial ownership in a 
     report required to be filed with the Commission pursuant to 
     section 13(d).
       ``(d) Stay Pending Decision on Motion.--In any private 
     action arising under this title, the court shall stay 
     discovery during the pendency of any motion by a defendant 
     (other than discovery that is specifically directed to the 
     applicability of the exemption provided for in this section) 
     for summary judgment that is based on the grounds that--
       ``(1) the statement or omission upon which the complaint is 
     based is a forward-looking statement within the meaning of 
     this section; and
       ``(2) the exemption provided for in this section precludes 
     a claim for relief.
       ``(e) Authority.--In addition to the exemption provided for 
     in this section, the Commission may, by rule or regulation, 
     provide exemptions from liability under any provision of this 
     title, or of any rule or regulation issued under this title, 
     that is based on a statement that includes or that is based 
     on projections or other forward-looking information, if and 
     to the extent that any such exemption is, as determined by 
     the Commission, consistent with the public interest and the 
     protection of investors.
       ``(f) Commission Disgorgement Actions.--
       ``(1) In general.--If the Commission, in any proceeding, 
     orders or obtains (by settlement, court order, or otherwise) 
     a payment of funds from a person who has violated this title 
     through means that included the utilization of a forward-
     looking statement, and if any portion of such funds is set 
     aside or otherwise held for or available to persons who 
     suffered losses in connection with such violation, no person 
     shall be precluded from participating in the distribution of, 
     or otherwise receiving, a portion of such funds by reason of 
     the application of this section.
       ``(2) Judgment for losses suffered.--In any action by the 
     Commission alleging a violation of this title in which the 
     defendant or respondent is alleged to have utilized a 
     forward-looking statement in furtherance of such violation, 
     the Commission may, upon a sufficient showing, in addition to 
     all other remedies available to the Commission, obtain a 
     judgment for the payment of an amount equal to all losses 
     suffered by reason of the utilization of the forward-looking 
     statement.
       ``(g) Effect on Other Authority of Commission.--Nothing in 
     this section limits, 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 any other statute under 
     which the Commission exercises rulemaking authority.''.
       (c) Investment Company Act of 1940.--Section 24 of the 
     Investment Company Act of 1940 (15 U.S.C. 80a-24) is amended 
     by adding at the end the following new subsection:
       ``(g) Regulatory Authority for Forward-Looking 
     Statements.--
       ``(1) In general.--The Commission shall review and, if 
     necessary to carry out the purposes of this title, promulgate 
     such rules and regulations as may be necessary to describe 
     conduct with respect to the making of forward-looking 
     statements that the Commission deems does not provide a basis 
     for liability in any private action arising under this title.
       ``(2) Requirements.--A rule or regulation promulgated under 
     paragraph (1) shall--
       ``(A) include clear and objective guidance that the 
     Commission finds sufficient for the protection of investors;
       ``(B) prescribe such guidance with sufficient particularity 
     that compliance shall be readily ascertainable by issuers 
     prior to issuance of securities; and
       ``(C) 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 shall be deemed not to be in violation of 
     this title.
       ``(3) Effect on other authority of commission.--Nothing in 
     this subsection limits, 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 any other statute under 
     which the Commission exercises rulemaking authority.''.

     SEC. 106. WRITTEN INTERROGATORIES.

       (a) Securities Act of 1933.--Section 20 of the Securities 
     Act of 1933 (15 U.S.C. 77t) is amended by adding at the end 
     the following new subsection:
       ``(m) Defendant's Right to Written Interrogatories.--In any 
     private action arising under this title in which the 
     plaintiff may recover money damages only on proof that a 
     defendant acted with a particular state of mind, the court 
     shall, when requested by a defendant, submit to the jury a 
     written interrogatory on the issue of each such defendant's 
     state of mind at the time the alleged violation occurred.''.
       (b) Securities Exchange Act of 1934.--Section 21 of the 
     Securities Exchange Act of 1934 (15 U.S.C. 78u) is amended by 
     adding at the end the following new subsection:
       ``(m) Defendant's Right to Written Interrogatories.--In any 
     private action arising under this title in which the 
     plaintiff may recover money damages, the court shall, when 
     requested by a defendant, submit to the jury a written 
     interrogatory on the issue of each such defendant's state of 
     mind at the time the alleged violation occurred.''.

     SEC. 107. AMENDMENT TO RACKETEER INFLUENCED AND CORRUPT 
                   ORGANIZATIONS ACT.

       Section 1964(c) of title 18, United States Code, is amended 
     by inserting before the period ``, except that no person may 
     rely upon conduct that would have been actionable as fraud in 
     the purchase or sale of securities to establish a violation 
     of section 1962''.

     SEC. 108. AUTHORITY OF COMMISSION TO PROSECUTE AIDING AND 
                   ABETTING.

       Section 20 of the Securities Exchange Act of 1934 (15 
     U.S.C. 78t) is amended--
       (1) by striking the section heading and inserting the 
     following:
    ``liability of controlling persons and persons who aid and abet 
                           violations''; and

       (2) by adding at the end the following new subsection:
       ``(e) Prosecution of Persons Who Aid and Abet Violations.--
     For purposes of any action brought by the Commission under 
     paragraph (1) or (3) of section 21(d), any person that 
     knowingly provides substantial assistance to another person 
     in the violation of a provision of this title, or of any rule 
     or regulation issued under this title, shall be-- [[Page S 
     8890]] 
       ``(1) deemed to be in violation of such provision; and
       ``(2) liable to the same extent as the person to whom such 
     assistance is provided.''.

     SEC. 109. LOSS CAUSATION.

       Section 12 of the Securities Act of 1933 (15 U.S.C. 77l) is 
     amended--
       (1) by inserting ``(a) In General.--'' before ``Any 
     person'';
       (2) by inserting ``, subject to subsection (b),'' after 
     ``shall be liable''; and
       (3) by adding at the end the following:
       ``(b) Loss Causation.--In an action described in subsection 
     (a)(2), the liability of the person who offers or sells such 
     security shall be limited to damages if that person proves 
     that any portion or all of the amount recoverable under 
     subsection (a)(2) represents other than the depreciation in 
     value of the subject security resulting from such part of the 
     prospectus or oral communication, with respect to which the 
     liability of that person is asserted, not being true or 
     omitting to state a material fact required to be stated 
     therein or necessary to make the statement not misleading, 
     and such portion or all of such amount shall not be 
     recoverable.''.

     SEC. 110. APPLICABILITY.

       The amendments made by this title shall not affect or apply 
     to any private action arising under title I of the Securities 
     Exchange Act of 1934 or title I of the Securities Act of 1933 
     commenced before the date of enactment of this Act.
              TITLE II--REDUCTION OF COERCIVE SETTLEMENTS

     SEC. 201. LIMITATION ON DAMAGES.

       Section 36 of the Securities Exchange Act of 1934, as added 
     by section 104 of this Act, is amended by adding at the end 
     the following new subsection:
       ``(e) Limitation on Damages.--
       ``(1) In general.--Except as provided in paragraph (2), in 
     any private action arising under this title, the plaintiff's 
     damages shall not exceed the difference between the purchase 
     or sale price paid or received, as appropriate, by the 
     plaintiff for the subject security and the value of that 
     security, as measured by the median trading price of that 
     security, during the 90-day period beginning on the date on 
     which the information correcting the misstatement or omission 
     is disseminated to the market.
       ``(2) Exception.--In any private action arising under this 
     title in which damages are sought, if the plaintiff sells or 
     repurchases the subject security prior to the expiration of 
     the 90-day period described in paragraph (1), the plaintiff's 
     damages shall not exceed the difference between the purchase 
     or sale price paid or received, as appropriate, by the 
     plaintiff for the security and the median market value of the 
     security during the period beginning immediately after 
     dissemination of information correcting the misstatement or 
     omission and ending on the date on which the plaintiff sells 
     or repurchases the security.''.

     SEC. 202. PROPORTIONATE LIABILITY.

       Title I of the Securities and Exchange Act of 1934 (15 
     U.S.C. 78a et seq.) is amended by adding at the end the 
     following new section:
     ``SEC. 38. PROPORTIONATE LIABILITY.

       ``(a) Applicability.--This section shall apply only to the 
     allocation of damages among persons who are, or who may 
     become, liable for damages in any private action arising 
     under this title. Nothing in this section shall affect the 
     standards for liability associated with any private action 
     arising under this title.
       ``(b) Liability for Damages.--
       ``(1) Joint and several liability.--A person against whom a 
     judgment is entered in any private action arising under this 
     title shall be liable for damages jointly and severally only 
     if the trier of fact specifically determines that such person 
     committed knowing securities fraud.
       ``(2) Proportionate liability.--Except as provided in 
     paragraph (1), a person against whom a judgment is entered in 
     any private action arising under this title shall be liable 
     solely for the portion of the judgment that corresponds to 
     that person's degree of responsibility, as determined under 
     subsection (c).
       ``(3) Knowing securities fraud.--For purposes of this 
     section--
       ``(A) a defendant engages in `knowing securities fraud' if 
     that defendant--
       ``(i) makes a material representation with actual knowledge 
     that the representation is false, or omits to make a 
     statement with actual knowledge that, as a result of the 
     omission, one of the material representations of the 
     defendant is false; and
       ``(ii) actually knows that persons are likely to rely on 
     that misrepresentation or omission; and
       ``(B) reckless conduct by the defendant shall not be 
     construed to constitute knowing securities fraud.
       ``(c) Determination of Responsibility.--
       ``(1) In general.--In any private action arising under this 
     title in which more than 1 person is alleged to have violated 
     a provision of this title, the court shall instruct the jury 
     to answer special interrogatories, or if there is no jury, 
     shall make findings, concerning--
       ``(A) the percentage of responsibility of each of the 
     defendants and of each of the other persons alleged by any of 
     the parties to have caused or contributed to the violation, 
     including persons who have entered into settlements with the 
     plaintiff or plaintiffs, measured as a percentage of the 
     total fault of all persons who caused or contributed to the 
     violation; and
       ``(B) whether such defendant committed knowing securities 
     fraud.
       ``(2) Contents of special interrogatories or findings.--The 
     responses to interrogatories, or findings, as appropriate, 
     under paragraph (1) shall specify the total amount of damages 
     that the plaintiff is entitled to recover and the percentage 
     of responsibility of each person found to have caused or 
     contributed to the damages sustained by the plaintiff or 
     plaintiffs.
       ``(3) Factors for consideration.--In determining the 
     percentage of responsibility under this subsection, the trier 
     of fact shall consider--
       ``(A) the nature of the conduct of each person; and
       ``(B) the nature and extent of the causal relationship 
     between that conduct and the damages incurred by the 
     plaintiff or plaintiffs.
       ``(d) Uncollectible Share.--
       ``(1) In general.--Notwithstanding subsection (b)(2), in 
     any private action arising under this title, if, upon motion 
     made not later than 6 months after a final judgment is 
     entered, the court determines that all or part of a 
     defendant's share of the judgment is not collectible against 
     that defendant or against a defendant described in subsection 
     (b)(1), each defendant described in subsection (b)(2) shall 
     be liable for the uncollectible share as follows:
       ``(A) Percentage of net worth.--Each defendant shall be 
     jointly and severally liable for the uncollectible share if 
     the plaintiff establishes that--
       ``(i) the plaintiff is an individual whose recoverable 
     damages under the final judgment are equal to more than 10 
     percent of the net financial worth of the plaintiff; and
       ``(ii) the net financial worth of the plaintiff is equal to 
     less than $200,000.
       ``(B) Other plaintiffs.--With respect to any plaintiff not 
     described in subparagraph (A), each defendant shall be liable 
     for the uncollectible share in proportion to the percentage 
     of responsibility of that defendant, except that the total 
     liability under this subparagraph may not exceed 50 percent 
     of the proportionate share of that defendant, as determined 
     under subsection (c)(2).
       ``(2) Overall limit.--In no case shall the total payments 
     required pursuant to paragraph (1) exceed the amount of the 
     uncollectible share.
       ``(3) Defendants subject to contribution.--A defendant 
     against whom judgment is not collectible shall be subject to 
     contribution and to any continuing liability to the plaintiff 
     on the judgment.
       ``(e) Right of Contribution.--To the extent that a 
     defendant is required to make an additional payment pursuant 
     to subsection (d), that defendant may recover contribution--
       ``(1) from the defendant originally liable to make the 
     payment;
       ``(2) from any defendant liable jointly and severally 
     pursuant to subsection (b)(1);
       ``(3) from any defendant held proportionately liable 
     pursuant to this subsection who is liable to make the same 
     payment and has paid less than his or her proportionate share 
     of that payment; or
       ``(4) from any other person responsible for the conduct 
     giving rise to the payment that would have been liable to 
     make the same payment.
       ``(f) Nondisclosure to Jury.--The standard for allocation 
     of damages under subsections (b) and (c) and the procedure 
     for reallocation of uncollectible shares under subsection (d) 
     shall not be disclosed to members of the jury.
       ``(g) Settlement Discharge.--
       ``(1) In general.--A defendant who settles any private 
     action arising under this title at any time before final 
     verdict or judgment shall be discharged from all claims for 
     contribution brought by other persons. Upon entry of the 
     settlement by the court, the court shall enter a bar order 
     constituting the final discharge of all obligations to the 
     plaintiff of the settling defendant arising out of the 
     action. The order shall bar all future claims for 
     contribution arising out of the action--
       ``(A) by any person against the settling defendant; and
       ``(B) by the settling defendant against any person, other 
     than a person whose liability has been extinguished by the 
     settlement of the settling defendant.
       ``(2) Reduction.--If a person enters into a settlement with 
     the plaintiff prior to final verdict or judgment, the verdict 
     or judgment shall be reduced by the greater of--
       ``(A) an amount that corresponds to the percentage of 
     responsibility of that person; or
       ``(B) the amount paid to the plaintiff by that person.
       ``(h) Contribution.--A person who becomes liable for 
     damages in any private action arising under this title may 
     recover contribution from any other person who, if joined in 
     the original action, would have been liable for the same 
     damages. A claim for contribution shall be determined based 
     on the percentage of responsibility of the claimant and of 
     each person against whom a claim for contribution is made.
       ``(i) Statute of Limitations for Contribution.--Once 
     judgment has been entered in any private action arising under 
     this title determining liability, an action for contribution 
     shall be brought not later than 6 months after the entry of a 
     final, nonappealable judgment in the action, except that an 
     action for contribution brought by a defendant who was 
     required to make an additional payment pursuant to subsection 
     (d) may be brought not later than 6 months after the date on 
     which such payment was made.''.

     SEC. 203. APPLICABILITY.

       The amendments made by this title shall not affect or apply 
     to any private action arising under title I of the Securities 
     Exchange Act of 1934 commenced before the date of enactment 
     of this Act.
            TITLE III--AUDITOR DISCLOSURE OF CORPORATE FRAUD

     SEC. 301. FRAUD DETECTION AND DISCLOSURE.

       (a) In General.--The Securities Exchange Act of 1934 (15 
     U.S.C. 78a et seq.) is amended by inserting immediately after 
     section 10 the following new section:

     ``SEC. 10A. AUDIT REQUIREMENTS.

       ``(a) In General.--Each audit required pursuant to this 
     title of the financial statements of an [[Page S 
     8891]] issuer 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--
       ``(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 that are material to the financial statements or 
     otherwise require disclosure therein; and
       ``(3) an evaluation of whether there is substantial doubt 
     about the ability of the issuer to continue as a going 
     concern during the ensuing fiscal year.
       ``(b) Required Response To Audit Discoveries.--
       ``(1) Investigation and report to management.--If, in the 
     course of conducting an 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 financial statements of the issuer) 
     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 management of the issuer and assure that the audit 
     committee of the issuer, or the board of directors of the 
     issuer in the absence of such a committee, is adequately 
     informed with respect to illegal acts that have been detected 
     or have 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, 
     after determining that the audit committee of the board of 
     directors of the issuer, or the board of directors of the 
     issuer in the absence of an audit committee, is adequately 
     informed with respect to illegal acts that have been detected 
     or have otherwise come to the attention of the accountant in 
     the course of the audit of such accountant, the independent 
     public accountant concludes that--
       ``(A) the illegal act has a material effect on the 
     financial statements of the issuer;
       ``(B) the 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 the illegal 
     act; and
       ``(C) the failure to take remedial action is reasonably 
     expected to warrant departure from a standard report of the 
     auditor, 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 receives a report 
     under paragraph (2) shall inform the Commission by notice not 
     later than 1 business day after the receipt of such report 
     and shall furnish the independent public accountant making 
     such report with a copy of the notice furnished to the 
     Commission. If the independent public accountant fails to 
     receive a copy of the notice before the expiration of the 
     required 1-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) not later than 1 
     business day following such failure to receive notice.
       ``(4) Report after resignation.--If an independent public 
     accountant resigns from an engagement under paragraph (3)(A), 
     the accountant shall, not later than 1 business day following 
     the failure by the 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 rule 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, 
     that an independent public accountant has willfully violated 
     paragraph (3) or (4) of subsection (b), 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 to impose a civil penalty 
     and the amount of the penalty shall be governed by the 
     standards set forth in section 21B.
       ``(e) Preservation of Existing Authority.--Except as 
     provided in subsection (d), nothing in this section shall be 
     held to limit or otherwise affect the authority of the 
     Commission under this title.
       ``(f) Definition.--As used in this section, the term 
     `illegal act' means an act or omission that violates any law, 
     or any rule or regulation having the force of law.''.
       (b) Effective Dates.--The amendment made by subsection (a) 
     shall apply to each annual report--
       (1) for any period beginning on or after January 1, 1996, 
     with respect to any registrant that is required to file 
     selected quarterly financial data pursuant to the rules or 
     regulations of the Securities and Exchange Commission; and
       (2) for any period beginning on or after January 1, 1997, 
     with respect to any other registrant.

  The PRESIDING OFFICER. The Senator from New York.
  Mr. D'AMATO. Mr. President, S. 240, the Private Securities Litigation 
Reform Act of 1995, is the bill we take up today. There is no doubt 
that this bill is considered by some to be rather contentious. But this 
legislation is important and necessary to fix the problem caused by 
frivolous lawsuits that are making it difficult for companies to raise 
the capital needed to fuel our economy.
  This bill seeks to strike the right balance, which is always 
difficult, between protecting the rights of those who are truly 
aggrieved and yet not opening the door to frivolous litigation. This 
legislation is necessary as there has developed a small but very 
effective cadre of lawyers who bring suits not to help recover losses 
for those who are truly aggrieved but because they see an opportunity 
to strike it rich for themselves.
  There is a term for this kind of lawsuit, they are called ``strike 
suits.'' A strike suit occurs when a lawyer searches very carefully for 
negative news announcements by a company or a decline in a company 
stock price. Then these lawyers race to the courthouse to file a suit 
alleging securities frauds, alleging mismanagement, or misinformation. 
I look to my colleagues on the floor from Alaska for an analogy--there 
is gold in the hills if a firm offers a security. There are lawyers who 
are mining that gold for themselves. Sometimes, even if a stock price 
goes up, lawyers will race to bring suits because they allege that they 
were not given information that this company would have higher earnings 
than anticipated. Imagine. If there is bad news, you are vulnerable. If 
there is good news, you are vulnerable.
  Mr. President, the purpose of the courts and the American judicial 
system is not to make these lawyers rich. It is to legitimately protect 
those who have been aggrieved; those who have been taken advantage of, 
who have suffered due to fraud, or who have suffered due to the 
deliberate withholding of information or insider trading.
  The question is not should these suits be stopped. The contentious 
nature of this legislation comes from the question of how to protect 
the rights of our citizens and the integrity of the capital markets to 
assure there is not insider trading, taking advantage of information, 
withholding information, or misrepresenting facts to steal people's 
money, and at the same time protect companies from strike suits.
  Let me first commend my distinguished colleagues, Senators Domenici 
and Dodd, for their tireless work in spearheading the effort to reform 
securities litigation. I also want to thank Senator Gramm for his 
leadership on this issue as chairman of the Securities Subcommittee.
  Over the past 2 years, the Banking Committee has heard substantial 
testimony that certain lawyers file frivolous strike suits alleging 
violations of Federal securities laws in
 hopes that defendants will quickly settle. These suits, which 
unnecessarily interfere with, and increase the cost of, raising 
capital, are often based on nothing more than a company's announcement 
of bad news, not evidence of fraud. In addition, the fact that many of 
these lawsuits are brought as class actions has produced an in terrorem 
effect on corporate America.

  S. 240 provides a strong disincentive for filing abusive lawsuits. It 
hits strike suit artists where it hurts--in the pocketbook. S. 240 does 
not contain a loser-pays provision. That would go too far. A loser-pays 
provision makes it difficult, if not impossible, for injured investors 
to maintain a legitimate cause of action.
  Instead, the bill requires courts to make specific findings about 
whether an attorney violated rule 11 and to sanction attorneys who do.
  One study showed that, in the early 1980's every company in one part 
of the business sector that had a market loss of $20 million or more in 
its capitalization was sued. Another survey of venture-backed companies 
in existence for less than 10 years--small companies that are the 
engine of economic growth--showed that one in six of [[Page S 
8892]] those companies had been sued at least once.
  These lawsuits are expensive. The statistics show that although many 
suits are still pending, these suits have consumed on average over 
1,000 hours of management time and legal cost--per case--of over 
$690,000 that the company has had to pay out. That is a lot of time and 
that is a lot of money.
  Does Congress want to let this trend continue? This Senator cannot 
sit idly by and permit small businesses to be the target of abusive 
lawsuits. Most of these companies are startup or high-technology 
businesses, which play an important role in our economy. These 
businesses provide new, innovative products to consumers, improving the 
quality of life and the way we conduct business.
  Small startup, high-technology firms depend on research and 
development for their new products. As products succeed, fail, or 
sometimes just take longer to develop, the stock price of these 
companies may fluctuate. This stock price fluctuation or product 
development slowdown is not, on its face, evidence of fraud. Yet, in 
many States, alleging that a product did not succeed and the price of 
the company's stock dropped is enough to sustain a complaint in a 
securities fraud lawsuit.
  S. 240 creates a uniform pleading standard that will help to weed out 
frivolous complaints before companies must pay heavy legal bills. S. 
240, codifies the pleading standard of the second circuit in New York, 
which requires that a plaintiff plead facts giving rise to a strong 
inference of the defendant's fraudulent intent.
  Small, startup, and high-technology companies have become sitting 
ducks for securities fraud lawsuits. The costs of defending a 
securities fraud complaint, which does not have to show any evidence of 
fraud, is enormous. According to the American Electronics Association, 
who testified at one of the committee's hearings, of the 300 or so 
lawsuits filed every year, almost 93 percent settle at an average 
settlement cost of $8.6 million.
  Furthermore, it is not just the company that is sued. Other, 
peripheral, deep-pocket defendants are joined to ensure there is enough 
money available to produce a meaningful recovery. As a result, 
underwriters, lawyers, accountants, and other professionals have become 
prime targets of securities fraud lawsuits. Insurance companies that 
provide director and officer liability insurance also pay up in these 
settlements. In 1994 alone, insurers and companies paid out $1.4 
billion to settle securities fraud lawsuits.
  Mr. President, this is not to say that some of those suits may not 
have been bona fide. But all too often companies are paying simply to 
stop the litigation because they cannot afford the legal bills or they 
cannot afford the incredible negative exposure that a case can bring, 
especially under the system of joint and several liability.
  S. 240 modifies the doctrine of joint and several liability for 
peripheral defendants, who are named in the lawsuit more for their deep 
pockets than their culpability.
  In the current system, if you have any connection to the defendant 
companies, if they can tie you in at all, you can be held liable for 
the full amount of the judgment. Even that defendant who has only a 
scintilla of liability for wrongdoing, or culpability or negligence--
not gross negligence, not knowing or wanton misconduct, not fraud--has 
a chance of being held 100 percent liable for damages. That is just not 
fair. That is wrong.
  Who benefits from these settlements? Not the plaintiffs. According to 
the statistics, the victims of these so-called frauds generally get 
pennies on the dollar. They are just being used.
  Not only is this unfair, but often the investors do not understand 
exactly what the settlement represents, what their portion of the 
settlement is, or why the lawyers even recommended the settlement.
  S. 240 requires that certain information be provided to class members 
and that counsel be available to answer questions about the settlement.
  No longer will attorneys be able to make a settlement for $6 million, 
$7 million, and not properly inform the people in the class. Nor will 
the attorneys be able to pocket most of the settlement while class 
members receive pennies for their losses.
  As one witness told the committee, and I quote:

       As a stockholder, I feel that lawyers use the stockholders 
     as a steppingstone, preying on their misfortune, as a means 
     to file a lawsuit that will inevitably settle, in which the 
     lawyers will reap millions in fees while their clients 
     recover pennies on the dollar in their losses.

  S. 240 limits the award of the attorney's fees to a ``reasonable'' 
percentage of the damages awarded to investors. Notably, it is the 
investors who end up paying the costs of these lawsuits.
  Institutional investors, with about $9.5 trillion in assets, 
approximately $4.5 trillion of which are pension funds, are long-term 
investors. This means that the value of retirees' pension fund 
investments are adversely affected by abusive litigation. As the 
Council for Institutional Investors advised the committee, and I quote:

       We are . . . hurt if the system allows someone to force us 
     to spend huge sums of money in legal costs by merely paying 
     ten dollars and filing a meritless cookie cutter complaint 
     against a company or its accountants.

  Abusive litigation also severely impacts the willingness of corporate 
managers to disclose information to the marketplace. Many companies 
refuse to talk or write about future business plans, knowing that 
projections that do not materialize will inevitably lead to lawsuits, 
many of which will simply allege that a prediction did not come true. 
Once discovery begins, plaintiff's counsel begins what we call a 
fishing expedition for evidence. And as one witness told the committee, 
the over-broad discovery request in this typical case ended up with the 
company producing over 1,500 boxes of documents at an expense of $1.4 
million. Companies cannot continue to spend the time and the money that 
these cases cost. So many times they are forced to settle meritless 
cases.
  As a result, investors do not have the benefit of knowing about the 
future plans of a company because companies are afraid to make that 
information available. As a former SEC Chairman told the committee, and 
I quote:

       Shareholders are also damaged due to the chilling effect of 
     the current system on the robustness and candor of 
     disclosure. Understanding a company's own assessment of its 
     future potential would be amongst the most valuable 
     information shareholders and potential investors could have.

  S. 240 will encourage companies to make what we call forward-looking 
statements by reducing the threat of abusive litigation. Companies that 
make projections and that provide a clear warning to investors that the 
projections may not be accurate will be protected from costly 
litigation.
  Some have said that this safe harbor for forward looking statements 
would give license for companies to say anything. That it will give 
license to the quick buck artist, the penny stock guys, the people who 
come out with IPO's. This is not true. We have excluded newly started 
companies which have not established a track record from this 
protection. Only recognized companies with substantial interests will 
get this protection. Most importantly, if a defendant knowingly makes a 
false or misleading forecast, they are not protected.
  The statement that this legislation will allow companies to knowingly 
lie and get away with it--and that statement has been made--is just not 
true. If you knowingly lie, if you intentionally mislead, you can be 
held liable. There is no safe harbor for initial public offerings, for 
blank check offerings, for rollups, for penny stocks, for tender offers 
and leveraged buyouts. Safe harbor does not affect the power to bring 
an enforcement case.
  Now, exactly who are the victims of securities fraud? Many times, 
there is no victim. Instead there is just a professional plaintiff 
whose name appears in the lawsuits, these names appear time after time 
after time. In one case, a retired lawyer appeared as the lead 
plaintiff in 300 lawsuits, he bought small numbers of shares in many 
companies and then served when they were sued. Last year, an Ohio judge 
refused to permit class action certification, noting that the lead 
defendant had filed 182 class action suits in 12 years.
  Now, that is not what the private right of action is intended to do.
  S. 240 discourages the use of professional plaintiffs by eliminating 
the bonus payments to plaintiffs and prohibiting referral fees. In 
other words, if [[Page S 8893]] you are one of these people who bought 
10 shares in 700, 800, or 900 companies you can no longer receive a 
bonus when a lawyer uses your name for a suit.
  The practice of using professional plaintiffs permits the lawyers to 
hire the client. Professional plaintiffs also permit the lawyer to win 
the ``race to the courthouse'' in filing a complaint. Often whoever 
files a claim first becomes the lead plaintiff, the lead counsel, even 
when multiple complaints are filed against the companies alleging 
securities fraud.
  Because the huge settlements in these cases provide significant fees 
to counsel, the competition is fierce. This bill creates a new 
procedure to ensure that the plaintiffs who are legitimately damaged, 
who have a real stake, who are not these professional plaintiffs, who 
own 1 share or 10 shares in multiple companies, can control the suit. 
This bill says the institutional investors, the people who have 
billions in pension funds, the retirees, those managers will have a 
greater stake in the case.
  Can you imagine empowering somebody who owns 10 shares to represent 
you when you represent 500 million. Someone who has a half billion 
dollars invested could have no say in who the attorney will be, or what 
the eventual settlement will be while the case is managed by someone 
who has only 10 shares.
  Mr. DOMENICI. Will the Senator yield for some observations?
  Mr. D'AMATO. Certainly.
  Mr. DOMENICI. The Senator said it would be managed by shareholders 
with 10 shares.
  Mr. D'AMATO. That is what is taking place now.
  Mr. DOMENICI. Actually, it is even worse than that because it is 
managed by the lawyer of the shareholder of 10 shares.
  Mr. D'AMATO. Correct. Because in many cases the shareholder receives 
a bonus from the lawyer but is not otherwise involved in the case.
  Mr. DOMENICI. The lawyer calls himself an entrepreneurial lawyer in 
this case. He is in business. It is not the shareholder; it is the 
lawyer who is in the business of managing the lawsuit. In fact, I will 
quote some courts that have found that to be the case.
  Mr. D'AMATO. That is correct. I thank the Senator for bringing this 
point to the floor. Again I would like to commend Senator Domenici and 
Senator Dodd who have labored for years to craft a bill that is fair, 
that is balanced, that protects those investors, the small investors, 
the pension people, who have invested their life savings and also 
protects businesses who raise the capital that keeps our communities 
healthy, from lawyers who go after deep pocket firms and file suits 
against people just because their projections did not come true.
 This bill will curb private securities fraud lawsuits, but only the 
frivolous ones that result from abusive practices. Victims of 
securities fraud will not be left without remedy. The time for reform 
of this system is now. This bill has 51 cosponsors and I urge all of my 
colleagues to support this legislation. It is well crafted. It is 
contentious only because it tries to strike a balance. Whenever you try 
to find a middle ground there are people on either side who think you 
should go further in their direction. No one can doubt that the system 
is out of control and it needs fixing; that is what we attempt to do 
with this legislation.

  Mr. President, I yield the floor.
  Mr. DOMENICI. Senator Dodd, why do you not proceed and I will follow 
you, if it is all right?
  Mr. DODD. Let me inquire, Mr. President, of my colleague from 
Maryland, does my colleague from Maryland, the ranking member of the 
banking committee if he wishes to proceed first. I am obviously 
interested in the bill, but I also appreciate immensely the seniority 
system.
  Mr. SARBANES. We are quite happy to hear the three proponents of the 
bill who are on the floor now. We heard from Senator D'Amato, and we 
would be happy to hear from the Senator from Connecticut and Senator 
Domenici. And then those of us who oppose it might have a chance to 
make our statements. But I would be happy to defer to the Senator from 
Connecticut. Then we can address his comments.
  Mr. DODD. I thank my colleague from Maryland.
  Mr. President, let me begin by thanking my colleague from New Mexico. 
I worked with him for a long time on this issue, Mr. President. We go 
back several years. This is not a recent event but rather goes back 
into the previous Congress and before, so I thank him for his 
tremendous efforts in helping us fashion a piece of legislation here 
that we hope will attract the support of a substantial number of our 
colleagues. It has already, as my colleague from New York pointed out--
and I thank my colleague from New York, the chairman of the Banking 
Committee, for his leadership on this issue for setting up a set of 
hearings for us, timely hearings, and a markup of this legislation and 
bringing the bill to the floor.
  I also want to commend my colleague from Maryland who has a different 
point of view on this legislation but nonetheless is working 
cooperatively with us, expressing his points of view very forcefully 
and offered various amendments in the committee, and I am confident he 
will again on the floor.
  Mr. President, this is an important day for American investors and 
for the American economy. This is the day we start a full Senate debate 
on a bill that would restore, in my view, fairness and integrity to our 
securities litigation system.
  To some this may sound like a dry and technical subject. But in 
reality it is crucial to our investors, our economy and our 
international competitiveness. We are all counting on our high-
technology firms to fuel our economy into the 21st century. We are 
counting on them to lead the charge for us in the global marketplace, 
so to speak. Those are the same firms that are most hamstrung, I would 
point out, by a securities litigation system that, frankly, works for 
no one, save plaintiffs' attorneys.
  Over the past year-and-a-half the process by which private 
individuals bring securities lawsuits has been under the microscope. 
The result of this intense scrutiny has been to dramatically change the 
terms of the debate. We are no longer arguing about whether the current 
system needs to be repaired. We are now focused on how best to repair 
it. Even those who once maintained that the litigation system needed no 
reform are now conceding that substantive and meaningful changes are 
required if we are to maintain the fundamental integrity of private 
securities litigation.
  The flaws, Mr. President, of the current system are simply too 
obvious to deny. The record is replete with examples of how the system 
is being abused, and misused. In fact, the Chairman of the Securities 
and Exchange Commission, Arthur Levitt, said at the beginning of this 
year--and I quote him--``There is no denying,'' he said, ``that there 
are real problems in the current system,''--speaking of securities 
litigation--``problems that need to be addressed not just because of 
abstract rights and responsibilities, but because investors and markets 
are being hurt by litigation excesses.''
  The legislation under consideration today is based upon a bill that 
the distinguished Senator from New Mexico and I have introduced for the 
last several Congresses. While there are some provisions from the 
original version of S. 240 that, frankly, I would have liked to have 
seen included in this bill--and we will discuss that later--I 
understand, as I think my colleagues do, the need to produce a 
consensus document if you are going to proceed. Producing a balanced 
bill is never easy. The old saw, Mr. President, that ``if a compromise 
makes everyone somewhat angry, then it must be fair'' is perfectly apt 
for today's debate. But that is what we have today, Mr. President, a 
bill that carefully and considerately balances the need for our high-
growth industries with the legitimate rights of investors, large and 
small.
  I am proud of the spirit of fairness and equity that permeates this 
legislation. I am also proud, Mr. President, of the fact that this 
legislation tackles a very complicated and difficult issue in a 
thoughtful way that avoids excess and achieves, I believe, and I think 
my colleagues from New York and New Mexico do, a meaningful equilibrium 
under which all of the interested parties can survive and thrive.
  Moreover, Mr. President, perhaps most importantly, this is a broadly 
bipartisan effort. This bill passed the [[Page S 8894]] Banking 
Committee 11-4, with strong support from both sides of the political 
aisles. And the 51 cosponsors of S. 240 in this body are composed of 
U.S. Senators from both parties, reflecting all points on the so-called 
ideological spectrum. H.L. Mencken once said, every problem has a 
solution that is neat, simple, and usually wrong. Believe me, if there 
were a simple solution to the problem besetting securities litigation 
today almost everyone in this Chamber would have jumped at it. But 
those problems are so pervasive and complex that we have moved far 
beyond the point where the public interest is served by waiting for the 
courts or other bodies to fix them for us.
  The private securities litigation system is far too important to the 
integrity and vitality of American capital markets to continue to allow 
it to be undermined by those who seek to line their own pockets with 
abusive and meritless suits. Let me be clear, Mr. President, private 
securities litigation is an indispensable tool with which defrauded 
investors can recover their losses without having to rely upon 
Government action.
  Mr. President, I cannot possibly overstate just how critical 
securities lawsuits brought by private individuals are to ensuring 
public and global confidence in our capital markets. I believe that 
very deeply. These private actions help deter wrongdoing, help 
guarantee that corporate officers, auditors and directors, lawyers and 
others properly perform their jobs. That is the high standard to which 
this legislation seeks to return the securities litigation system. But 
as it stands today, the current system has drifted so far from that 
noble role that we see more buccaneering barristers taking advantage of 
the system than we do corporate wrongdoers being exposed by it.
  But there is more at risk, Mr. President, if we fail to reform this 
flawed system. Quite simply put, the way the private litigation system 
works today is costing millions of investors, the vast majority of whom 
do not participate in these lawsuits, their hard-earned cash. As Ralph 
Whitworth of the United Shareholders Association told the securities 
subcommittee--I quote him--``The winners in these suits are invariably 
lawyers who collect huge contingency fees, professional 'plaintiffs,' 
who''--as our colleague from New York has already described-- ``collect 
bonuses, and, in cases where fraud has been committed, executives and 
board members who use corporate funds and corporate-owned insurance 
policies to escape personal liability. The one constant,'' he went on 
to say, ``is that the shareholders pay for it all.''
  And Maryellen Anderson from the Connecticut Retirement and Trust 
Funds testified that the participants in the pension funds,

       * * * are the ones who are hurt if a system allows someone 
     to force us to spend huge sums of money in legal costs * * * 
     when that plaintiff is disappointed in his or her investment.
       Our pensions and jobs depend on our employment by and 
     investment in our companies.
       If we saddle our companies with big and unproductive costs 
     * * *. We cannot be surprised if our jobs and raises begin to 
     disappear and our pensions come up short as our population 
     ages.

  There lies the risk of allowing the current securities litigation 
system to continue to run out of control. Ultimately, it is the average 
investor, the retired pensioner who will pay the enormous costs clearly 
associated with this growing problem.
  Much of the problem lies in the fact that private litigation has 
evolved over the years as a result of court decisions rather than 
explicit congressional action.
  Private actions under rule 10(b) were never expressly set out by 
Congress, but have been construed and refined by courts, with the tacit 
consent of Congress.
  But the lack of congressional involvement in shaping private 
litigation has created conflicting legal standards and has provided too 
many opportunities for abuse of investors and companies.
  First, it has become increasingly clear that securities class actions 
are extremely vulnerable to abuses by entrepreneurs masquerading as 
lawyers. As two noted legal scholars recently wrote in the Yale Law 
Review:

       * * * The potential for opportunism in class actions is so 
     pervasive and evidence that plaintiffs' attorneys sometimes 
     act opportunistically so substantial that it seems clear that 
     plaintiffs' attorneys often do not act as investors' 
     ``faithful champions.''

  It is readily apparent to many observers in business, academia--and 
even Government--that plaintiffs' attorneys appear to control the 
settlement of the case with little or no influence from either the 
``named'' plaintiffs or the larger class of investors.
  For example, during the extensive hearings on the issue before the 
Subcommittee on Securities, a lawyer cited one case as a supposed 
showpiece--using his words--of how well the existing system works. This 
particular case was settled before trial for $33 million.
  The lawyers asked the court for more than $20 million of that amount 
in fees and costs. The court then awarded the plaintiffs' lawyers $11 
million and the defense lawyers for the company $3 million.
  Investors recovered only 6.5 percent of their recoverable damages. 
That is 6\1/2\ cents on the dollar.
  That is a case cited by those who are opposed to this legislation as 
a show-case example of how the system works.
  This kind of settlement sounds good for entrepreneurial attorneys, 
but it does little to benefit companies, investors or even the 
plaintiffs on whose behalf the suit was brought.
  It should not surprise anyone that those who benefit most from the 
flaws in the current system are the same people who are the most 
vociferous in opposing the provisions in this bill that would clean up 
the mess.
  It is not the companies, nor investors nor even plaintiffs--large or 
small--who are fueling the opposition.
  The loudest squeals come from the lawyers who will no longer be able 
to feather their nests by picking clean as many corporate defendants as 
possible.
  A second area of abuse is frivolous litigation. Companies, 
particularly in the high-technology and bio-technology industries, face 
groundless securities litigation days or even hours after adverse 
earnings announcements.
  In fact, the chilling consequence of these lawsuits is that 
companies, especially new companies in emerging industries, frequently 
release only the minimum information required by law so that they will 
not be held liable for any innocent, forward-looking statement that 
they may make.
  In fact, I received a letter just this past Monday from Raytheon Co., 
one of the Nation's largest high-technology firms.
  Raytheon made a tender offer of $64 a share for E-Systems, Inc., a 
41-percent premium over the closing market price. Let me allow Raytheon 
to explain what happened next:

       Notwithstanding the widely held view that the proposed 
     transaction was eminently fair to E-Systems shareholders, the 
     first of eight purported class action suits was filed less 
     than 90 minutes after the courthouse doors opened on the day 
     that the transaction was announced. Ninety minutes, Mr. 
     President. This was a letter sent to me on June 19.
  You tell me we do not have a problem here. Minutes after 
announcement, the lawsuits, before any examination, any inquiry is 
made, 90 minutes later there is a lawsuit being filed for millions of 
dollars claiming unfairness. That is what is wrong, and that is what 
this bill tries to correct. This ought not to be a matter of division 
in this body. This is a mess, and it should be cleaned up.
  No one lawyer could possibly have investigated the facts this 
quickly. What the lawyers want is to force a quick settlement. That is 
all this is. This is a holdup. You would get arrested in most States if 
you try to do this to a retailer.
  The Supreme Court in Blue Chip Stamps versus Manor Drug Store echoed 
this concern about abusive litigation, pointing out:

       [I]n the field of Federal securities laws governing 
     disclosure of information, even a complaint which by 
     objective standards may have very little success at trial has 
     a settlement value to the plaintiff out of any proportion to 
     its prospect of success at trial . . . the very pendency of 
     the lawsuit may frustrate or delay normal business activity 
     of the defendant which is totally unrelated to the lawsuit.

  The third area of abuse is that the current framework for assessing 
liability is simply unfair and creates a powerful incentive to sue 
those with the [[Page S 8895]] deepest pockets, regardless of their 
relative complicity in the alleged fraud.
  The result of the existing system of joint and severable liability is 
that plaintiffs' attorneys seek out any possible corporation or 
individual that has little relation to the alleged fraud--but which may 
have extensive insurance coverage or otherwise may have financial 
reserves.
  Although these defendants could frequently win their case were it to 
go to trial--we all know it happens--the expense of protracted 
litigation and the threat of being forced to pay all the damages makes 
it more economically efficient for them to settle with the plaintiffs' 
attorneys, and that is what happens.
  The current Chairman of the SEC, Arthur Levitt, as well as two former 
Chairmen, Richard Breeden and David Ruder, have all spoken out against 
the abuses of joint and several liability.
  Chairman Levitt said at the April 6 hearing of the Securities 
subcommittee that he was concerned, in particular, ``about accountants 
being unfairly charged for amounts that go far beyond their involvement 
in particular fraud.''
  Frequently, these settlements do not appreciably increase the amount 
of losses recovered by the actual plaintiffs, but instead add to the 
fees collected by the plaintiff's attorneys.
  Again, the current system has devolved to a point where it favors 
those lawyers who are looking out for their own financial interest over 
the interest of virtually everybody else involved, and that is the 
fact.
  The bill before us today contains four major initiatives to deal with 
these complex problems. Let me identify them briefly.
  First, the legislation empowers investors so that they, not their 
lawyers, have greater control over their class action cases by allowing 
the plaintiff with the greatest claim to be the named plaintiff and 
allowing that plaintiff to select their counsel.
  That sounds so commonsensical, I do not know why we have to write it 
into law, but that is what you have to do. In fairness to the 
plaintiff, that ought to be the lead plaintiff.
  Second, it gives investors better tools to recover losses and 
enhances existing provisions designed to deter fraud, including 
providing a meaningful safe harbor for legitimate forward-looking 
statements so that issuers are encouraged, instead of discouraged, from 
volunteering much-needed disclosures that potential investors ought to 
have in making decisions about whether to invest or not.
  Third, it limits opportunities for frivolous or abusive lawsuits and 
makes it easier to impose sanctions on those lawyers who violate their 
basic professional ethics.
  Fourth, it rationalizes the liability of deep-pocket defendants, 
while protecting the ability of small investors to fully collect all 
damages awarded them through a trial or settlement.
  I would like to go into each of these provisions in a bit more 
detail.


                          empowering investors

  The legislation ensures that investors, not a few marauding 
attorneys, decide whether to bring a case, whether to settle, and how 
much the lawyers should receive, and that is the way it ought to work.
  The bill strongly encourages the courts to appoint the investor with 
the greatest losses--usually an institutional investor like a pension 
fund--to be the lead plaintiff.
  This plaintiff would have the right to select the lawyer to pursue 
the case on behalf of the class.
  So for the first time in a long time, plaintiffs' lawyers would have 
to answer to a real client, not one they have hired.
  We are bringing an end to the days when a plaintiffs' attorney can 
crow to Forbes magazine that ``I have the greatest practice of law in 
the world. I have no clients.''
  That is one of the lawyers talking. A practice without clients, and 
that is what this has turned into.
  The bill requires that notice of settlement agreements that are sent 
to investors clearly spell out important facts such as how much 
investors are getting--or giving up--by settling and how much their 
lawyers will receive in the settlement.
  This means that plaintiffs would be able to make an informed decision 
about whether the settlement is in their best interest--or in their 
lawyers' best interest.
  Again, what a radical thought to be included in the bill, allowing 
the plaintiffs to decide what is in their interest rather than the 
attorneys deciding it. The fact we even have to write this into law 
tells you volumes about the mess the present system is in.
  And the bill would end the practice of the actual plaintiffs 
receiving, on average, only 6 to 14 cents for every dollar lost, while 
33 cents of every settlement dollar goes to the plaintiffs' attorneys. 
This is the average you get back as a plaintiff under the present 
system.
  The bill would require that the courts cap the award of lawyers' fees 
based upon how much is recovered by the investors. And that is what it 
ought to be, how much do the investors get back as plaintiffs, then you 
set the fees.
  Simply putting in a big bill will not guarantee the lawyers 
multimillion-dollar fees if their clients are not the primary 
beneficiaries of the settlement.
  Taken together, Mr. President, these provisions should ensure that 
defrauded investors are not cheated a second time by a few unscrupulous 
lawyers who siphon huge fees right off the top of any settlement.
  The bill requires auditors to detect and report fraud to the SEC, 
thus enhancing the reliability of independent audits.
  The bill maintains current standards of joint and several liability, 
for those persons who knowingly engage in a fraudulent scheme, thus 
keeping a heavy financial penalty for those who would commit knowing 
security fraud.
  The bill restores the ability of the Securities and Exchange 
Commission to pursue those who aid and abet in securities fraud, a 
power that was diminished by the Supreme Court in last year's Central 
Bank decision.
  The bill clarifies current requirements that lawyers should have some 
facts to back up their assertion of securities fraud by adopting the 
reasonable standards established by the Second Circuit Court of 
Appeals. Again, Mr. President, imagine that--you have to have facts to 
back up your assertion. I thought that is what they taught you. I 
learned that in the first year of law school. Now I have to write it 
into the legislation here because we get these 90-minute lawsuits being 
filed. So we require that in the bill as well.
  This legislation is there for using a pleading standard that has been 
successfully tested in the real world. This is not some arbitrary 
standard pulled out of a hat or crafted in committee; it follows the 
Federal courts.
  The bill requires the courts, at settlement, to determine whether any 
attorney violated rule 11 of the Federal Rules of Civil Procedure, 
which prohibits lawyers from filing claims that they know to be 
frivolous.
  If a violation has occurred, the bill mandates that the court must 
levy sanctions against the offending attorney. Though the bill does not 
change existing standards of conduct, it does put some teeth into the 
enforcement of these standards.
  The bill provides a moderate and, I think, thoughtful statutory safe 
harbor for predicative statements made by companies that are registered 
with the SEC.
  Further, the bill provides no such safety for third parties, like 
brokers, or in the case of merger offers, tenders, roll-ups, or the 
issuance of penny stocks. There are a number of other exceptions to the 
safe harbor provisions, as well, Mr. President, which my colleagues can 
look at.
  Importantly, anyone who deliberately makes a false and misleading 
statement in a forecast is not protected by the safe harbor. My 
colleague from New York made that point, and I emphasize it again here 
this afternoon.
  By adopting this provision, the Senate will encourage, we think, 
responsible corporations to make the kind of disclosures about 
projected activities that are currently missing in today's investment 
climate.
  This legislation preserves the rights and claims of small investors. 
The legislation preserves the rights of investors whose losses are 10 
percent or more of their total net worth of $200,000.
  These small investors will still be able to hold all defendants 
responsible for paying off settlements, regardless of the relative 
guilt of each of the named parties. [[Page S 8896]] 
  But while the bill will fully protect small investors, so that they 
will recover all of the losses to which they are entitled, the bill 
establishes a proportional liability system to discourage the naming of 
deep-pocket defendants, merely because they have deep pockets.
  The court would be required to determine the relative liability of 
all the defendants and thus deep-pocket defendants would only be liable 
to pay a settlement amount equal to their relative role in the alleged 
fraud.
  A defendant who was only a 10 percent responsible for the fraudulent 
actions would be required to pay 10 percent of the settlement amount.
  In some circumstances, the bill requires solvent defendants to pay 
150 percent of their share of the damages to help make up for any 
uncollectible amount in the lawsuit.
  By creating a two-tiered system of both proportional liability and 
joint and several liability, the bill preserves the best features, I 
think, of both systems.
  There has been an unfortunate tendency during the course of many 
debates on these proposed reforms for advocates on both sides to 
increase the rhetoric, to use increasingly extreme examples in order to 
politicize and polemicize the atmosphere of this debate.
  When the steam of overheated rhetoric blows off, when the extremists 
on both sides have been discounted, I believe we are left with the 
inescapable conclusion: Action is needed--and needed now, Mr. 
President--to make the securities litigation system work in the manner 
for which it was designed.
  A system of litigation in which merits and facts matter little, in 
which plaintiffs recover less than lawyers, in which defendants are 
named solely on the basis of the amount of their insurance coverage, or 
the size of their wallets, does not serve us well at all.
  In short, we have a system in which there is increasingly little 
integrity and confidence--a system incapable of producing confidence 
and integrity in our Nation's capital markets.
  This bill is an important step in repairing an ailing system. It is a 
bill that has strong bipartisan support within this Chamber. And it has 
broad support outside these walls, as well, from virtually every 
segment of the business and investment community.
  Mr. President, this legislation needs to be enacted and I urge my 
colleagues to support it.
  Mr. President, I noted that our colleague from New Mexico was on the 
floor. I do not know whether or not he is still here. I see him now.
  I yield the floor, and we will now hear from the Senator from New 
Mexico.
  The PRESIDING OFFICER (Mr. Inhofe). The Senator from New Mexico is 
recognized.
  Mr. DOMENICI. Mr. President, might I first say that when I first 
started working on this legislation--actually, it came to me after 
reading some articles about the litigation and the contention of both 
sides as to what was happening to class action lawsuits as they applied 
to securities and to companies that issued stocks and securities and 
bonds--I came to a conclusion that it would be a very interesting thing 
to look into and, perhaps, see what I could do.
  I made one glaring mistake. I had arrived at the conclusion that 
there was something very, very wrong, but I failed to understand, I say 
to my friend and cosponsor--and we varied. I put it in one time and the 
Senator put it in the next time. It was Domenici-Dodd and then Dodd-
Domenici. But I failed to recognize how those lawyers, small in number, 
for this is not the whole of America, this is a small group. I failed 
to recognize or perceive how tough they were going to be in saving 
their domain--and tough they are, and tough they are to this day. They 
are getting people to run advertisements in our States--in my State, it 
is not so easy because Representative Richardson, a Democrat, voted for 
the House reform; I am for it here, and all the Representatives from 
New Mexico voted for it. I do not know where Senator Bingaman is, but 
he was a cosponsor. Maybe he does not like the bill on the floor. So I 
am not talking for myself on these ads. Can you imagine what point we 
have reached, in terms of lawyering, and the old concept of who the 
lawyers work for? Who do they belong to? They belong to the justice 
system and they work for the courts of America. Here they are running 
ads and protecting their domain. It is rather amazing. I never thought 
we were going to get into this when we started down this path, but I 
soon found out.
  I want to say that, while this cries out for reform, apparently our 
judges are not going to make the reform, although they created the 
rules; these are court-created private rights of action, as I 
understand it. Section 10b private lawsuits are not statutory. Judges 
created it. They are not going to fix it. Although, there seems to be a 
tendency, in the last 6 months, for the judges to be a little more 
through this process. Senator Dodd explained that somewhere they caught 
them red-handed. Ninety minutes after an announcement of a merger 
intention, they are suing for collusion or fraud and just claiming huge 
damages. The courts are beginning to say, ``What is this?''
  But I began to find out, when we started having our first hearings, 
that we were talking about some very, very rich lawyers--not rich over 
40 years of practice or an accumulation of assets, but because they 
made millions every year--not a few hundred thousand dollars, but 
millions. And surely it would be tough for them to ever appreciate that 
maybe they were not adding very much of a positive nature to the United 
States society, or to securities or bonds or stocks, or to the 
plaintiffs that they sued for as a class.
  Now, our country is suffering from hyperlexia. That is a nice word, 
and I believe it means a serious disease caused by an excessive 
reliance on law and lawyers. Hyperlexia. It is a disease--and a disease 
it is. For those who think that hyperlexia, relying upon law and 
lawyers, is the basic ingredient for good regulation, for good 
behavior, you have just told the American people that it is going to 
cost you an awful lot of money for that, because it is inconclusive, 
and very vague. Each case sets its own pattern. So people do not know 
how to behave and what the law is.
  So from this Senator's standpoint, I do not think we would be here if 
it were not for the chairman of the Banking Committee, the 
distinguished Senator from New York, Senator D'Amato, who took this 
cause on and, obviously, is leading it here on the floor today. He 
brought a balance to it, because he had a feel for both sides. I thank 
him tonight because we are going to make some good, solid law. When it 
is interpreted by our courts and by the bar of America, we are going to 
end up doing right, because those who are cheating and ripping off 
stockholders--they are going to still get stuck, but those doing almost 
nothing wrong, except their company's stock price goes up or down, they 
are no longer going to get stuck for millions in settlements just to 
pay to the lawyers.
  So, from this Senator's standpoint, I do not usually use words like 
vexatious or vexatiousness, but I found that the Supreme Court 
described this confusing system, ``presents a danger of vexatiousness, 
different in degree and kind from that which accompanies litigation in 
general.'' I believe my good friend Senator Dodd alluded to that; that 
is, there is a degree and a kind of vexatiousness about this that is 
much different from a normal complaint in a lawsuit in negligence or 
other Common Law torts.
  So let me define the word. I tried to find out what does the word 
means, because to me it meant to bring fear or such. It comes from a 
verb, to vex, which means, ``to harass, to torment, to annoy, to 
irritate and to worry.'' And, as a noun it is synonymous with 
``troublesome.'' In the legal context it means ``a case without 
sufficient grounds brought in order to cause annoyance to the defendant 
or a proceeding instituted maliciously and without probable cause.''
  It is time that we stop vexatious securities litigation, and fix it 
we will. During our hearings--and I am no longer on the Banking 
Committee, and I will help the chairman out wherever I can for the next 
couple of days as we attempt to pass this legislation, but obviously 
the responsibility and the credit is to the Banking Committee and those 
who are working on it now.
  During the hearings, we found that the threat of a huge jury award is 
being misused to sue emerging, rapidly [[Page S 8897]] growing 
companies, especially in the high-technology and biomedical 
technologies where stock prices are volatile under the best of 
circumstances. A drop in a stock price is all that these--and I will 
call them, for the remainder of my discussion on the floor, I will name 
those lawyers involved in this as a new kind of lawyer. I will call 
them entrepreneurial lawyers, because they are in it to manage the 
suit, and in a very real sense the lawsuit becomes their business 
rather than the business of the plaintiff. The way it is currently 
structured, they do not even have to respond to anyone.
  Let me proceed.
  Cases settle regardless of merit. We could go on with many, many 
reasons for this litigation not serving the public good. But let me 
wrap up with just one on this first part of my comments. This system is 
not deterring fraud because insurance companies, most of the time, make 
the settlements and pay the money. So what we have and what is wrong 
with this system is very, very fundamental. Lawyers, not clients, 
control these cases. That is number one.
  Number two, this system obstructs voluntary disclosure of 
information. Who will voluntarily disclose information when they are 
apt to be liable for just doing that?
  And the last is defendants are forced to settle meritless cases. When 
you add that up, it is time to change the system.
  The Wall Street Journal labeled these cases as ``the class action 
shakedown racket.'' That is what it is, a shakedown racket.
  Let me talk about who wins when one of these lawsuits is settled, for 
this is the most significant part of it all. Investors are only 
recovering about 7 cents on the dollar when compared with the amount of 
losses alleged. The lawyers earned on average $2.12 million per 
settlement, about 30 percent of the whole, during a 12-month period 
ending July of 1993 according to a study by the National Economic 
Research Association.
  Other studies confirm that investors recover only 6 to 14 cents under 
the system. Obviously, the system is not working, because the SEC and 
others who have analyzed it say that a system, to be working, is 
supposed to do the following. The primary yardstick is that it enables 
defrauded investors to seek compensatory damages and thereby recover 
the full amount of their losses. So we ought to start by measuring this 
system against the criterion of full amount of losses recovered. You 
will find it fails. On a scale of A through F--F being failure. It gets 
worse than an F in terms of its ineffectiveness.
  As investors are recovering a few cents on the dollar, attorneys are 
boasting that these securities class actions are a perfect practice, 
according to--I think my friend from Connecticut quoted this one--one 
of these distinguished lawyers, who said in Forbes magazine, ``The 
reason this is a great practice is because there are no clients.''
  These are clientless lawsuits. These are clientless lawyers who claim 
to be acting in the best interests of investors. The institutional 
investors believe that these lawsuits are merely transferring money 
from one set of shareholders to another with the plaintiffs' class 
action lawyers taking a lion's share. That looks a lot like greenmail.
  Mr. BENNETT. Will the Senator yield for a question?
  Mr. DOMENICI. I will be pleased to yield.
  Mr. BENNETT. You speak of clientless lawyers and clientless cases. Is 
that the reason all of the money goes to the lawyers and not to the 
clients?
  Mr. DOMENICI. You got it. As a matter of fact, what it really means 
is that the lawyers have quickly become more interested in settling a 
lawsuit on terms that are satisfactory to their pockets. So, if it 
looks like they can fight on but they are going to get $6 million in 
this settlement and the others are going to get 8 cents on their 
shares, that is looking pretty good.
  What prevents it from happening? Maybe the judges are getting more 
involved now. But, normally, for many and many a year, nobody had 
anything to say about it. In reality, although if you had a lawyer 
here, he would tell you that he is bound by this and he is bound by 
that and the judge can do this and the judge can do that. But history 
says they are getting the lion's share of the money and the client or 
plaintiff is not getting very much.
  Does one think the client is managing the case and calling the shots? 
In many cases the members of the class do not even know what is 
happening. Let me also tell you, plaintiffs are not making very much 
unless they are very fortunate. If they are professional plaintiffs, 
they are doing pretty well because they receive bonuses of $10,000 to 
$15,000 for letting the lawyers use their names, and, frankly, we are 
going to prohibit that. I think that ought to be prohibited and should 
have been prohibited. It has no place in solid lawyering. What happens 
is some people have shares in 300 or 400 companies and the lawyers the 
same person's name on 20, 30, 50 lawsuits. These are individuals with 
10 shares and the lawyers give them this bonus. The rest of the class 
does not make very much, but that fellow does very well. I think we had 
one, Mr. President, who was 92 or 94 years old that we found out--do 
you remember that case? He had a lot of these. He had 10 shares of 
stock and he was a very big friend of these entrepreneurial law firms. 
He was readily available. He pulled the trigger.
  Mr. BENNETT. Will the Senator yield further?
  Mr. DOMENICI. I am pleased to.
  Mr. BENNETT. It is my understanding that the judge referred to him in 
one case as ``the unluckiest investor in the world'' because he was 
always suing for losses. He did not invest in order to make any money. 
He invested so he could be a professional plaintiff, and he was in 
court so often the judge referred to him in that manner.
  Mr. DOMENICI. I was not there when that was done and I do not recall 
it, but it surely seems right to me. And if you say it, it happened. It 
is exactly what is happening.
  The race to the courthouse has been described by both the chairman of 
the full committee and by Senator Dodd. I will not proceed beyond 
saying that whenever you find, in the American judicial system, that a 
substantial portion of a certain kind of lawsuit is based upon the 
premise that whoever gets to the courthouse first gets to control the 
lawsuit, then it seems to me you do not have to have that situation 
very long until you ought to look and see what is this all about? 
Because it is an invitation to craft poor complaints, to state anything 
you want or invent things and then waste a year and a half of time, 
money, and take depositions to try to find out whether you have a 
lawsuit or not. When I started practicing law--maybe that is passe--
that was not the way to practice. Now it seems to be for many of those, 
and they would like to keep it that way for this system.
  It also makes us do sloppy legal work--not us but those who are doing 
it--sloppy legal work. The cookie-cutter complaint, which is probably 
the one the Senator referred to as to Raytheon--cookie-cutter 
complaint. All the allegations are the same, case after case. Senator 
D'Amato, we have one, they always use the same allegations and the same 
words. The lawyers just change the name of the company being sued--it 
pops out of the computer. In fact, I think some of them have terminals 
where they are hooked into the stock market. The stock is going to 
fluctuate and the computer is going to spit out a lawsuit.
  The lawyer just signs his name on it. But a judge took one of these 
not so lightly because a plaintiff's lawyer inserted in the complaint 
the name of the company he was suing: Philip Morris. They accused 
Philip Morris of fraudulently manufacturing toys, t-o-y-s, not 
cigarettes. Philip Morris does not manufacture toys, a typical cookie 
cutter complaint--a demand for hundreds of millions of dollars in 
damages. This bill is about stopping this kind of lawsuit. It is shoot, 
aim, ready. Instead of ready, aim, shoot, it is shoot, aim, ready.
  The National Association of Securities and Commercial Lawyers 
suggests that 56 percent of the cases they had hand picked to provide 
data on to the Securities Subcommittee were filed within 30 days of the 
triggering event. A triggering event is usually a missed earnings 
projection, a so-called earnings surprise. Twenty-one percent of the 
cases were filed within 48 hours of [[Page S 8898]] the triggering 
event. The stock prices dropped, and class action suits are filed with 
little due diligence to investigate the basis of the case.
  But you can count on it. If the lawyer is a good entrepreneur and 
sticks with it, he will get paid something even for that kind of suit, 
whether there is anything to the suit. Companies have to settle.
  Of the 111 cases filed in 1990 and 1991, 25 percent were filed by pet 
plaintiffs, the plaintiff that we described a while ago. In 25 percent 
of the cases, they went out and hired the plaintiff and paid them a 
bonus. Even if they had a lawsuit that was decent, the point of it is 
that was an effort to get to the courthouse quick with the pet 
plaintiff. So you could be the lead counsel, or at least you could 
maybe be representing $500 million worth of securities for a $150, 
$200, $300 pet plaintiff.
  So from this Senator's standpoint, the bill before us is a very good 
approach to settling and solving these problems. As I see it, the 
details of this bill will be debated and amendments will be offered. So 
I am not going to go into details.
  But I would like to just close with one current situation. I know 
about it because a company has one of its biggest production plants in 
New Mexico. The general counsel for Intel testified that Intel had been 
sued. When it was a startup, such a suit probably would have bankrupted 
the company long before it investigated in microchips.
  This is an example of the innovation and entrepreneurship that these 
cases are threatening to snuff out. So let me give you one about Intel. 
If this had been filed when it was a young company, we would not have 
Intel.
  On December 19, 1994, Intel was sued over the flaw in the Pentium 
chip. Despite the fact that it would take 29,000 years for the chip's 
flaw to become apparent, and despite the fact that on December 20, 
1994, Intel responded to market concerns about the chip by implementing 
its ``no questions asked'' replacement policy. The lawyers who filed on 
December 19 are asking $6 million in fees for 1 day's work. Even though 
they dropped the suit and Intel did not have to pay anything to the 
shareholders, the lawyers have inserted a provision in the settlement 
which forbids defendants, the defendant Intel, from publicly discussing 
the fee or any other provision of the settlement.
  S. 240 before this Senate would require disclosure of settlements, 
even this kind of settlement--nothing to the plaintiffs, everything to 
the lawyers. With better disclosure I doubt whether that will happen 
very often.
  Can you imagine a public disclosure for that? We did not do anything 
for anyone, but we get $6 million. That is nice. It is interesting. 
Would you not like to be doing that? It is pretty good. It might even 
be better than being a Senator. Who knows?
  Well, there are many more like this. I have a great deal of 
explanation.
  Prof. Joseph Grundfest of Stanford Law School has said that the 
plaintiffs lawyers have done little if anything to earn their hefty 
request.
  Says Grundfest: ``much of the settlement would have come about even 
if no lawsuit was filed * * * to reward lawyers for that at all is the 
equivalent of double-dipping.''
  Mesa Airlines' officers and directors were sued for keeping their 
mouth shut. They had a corporate policy not to talk to analysts. The 
analysts make some projections about Mesa. The airline neither 
confirmed nor denied whether they agreed or disagreed with the 
analysts. The mesa officers just tried to run an efficient airline. The 
plaintiff's lawyers have alleged that Mesa's failure to talk about 
analysts' projections was ``deemed to be acceptance'' of the content of 
the analysts' prediction. The company missed the earnings projections, 
their stock price dropped, and they got sued.
  Prudential Bache Securities. Investors represented by the firm who 
testified before the committee received 4 cents on the dollar under the 
class action lawsuit settlement. The firm took $6 million plus 
expenses. Other investors who hired their own lawyers, and went to 
arbitration came away fully compensated.
  Frivolous litigation is time-consuming and distracts chief executive 
and other corporate officials from productive economic activity. It has 
been estimated that defending one of these lawsuits is as costly as 
starting up a totally new product line.
  These frivolous lawsuits are such a menace to publicly traded 
companies on the NASDAQ that the NASDAQ Self-Regulatory Organization 
decided to recommend reforms to Senator Dodd and me.


                            system is broken

  The conclusion of any one who has examined the issue carefully is: 
The current securities implied private litigation system is broken. The 
system is broken because too many cases are pursued for the purpose of 
extracting settlements from corporations and other parties, without 
regard to the merits of the case. The settlements yield large fees for 
plaintiffs' lawyers but compensate investors only for a fraction of 
their actual losses. Janet Cooper Alexander of Stanford University has 
proven that most securities class actions are settled by the parties 
without regard to whether the case has merit. Chairman of the SEC, 
Arthur Levitt acknowledged that ``virtually all securities class 
actions are settled for some fraction of the claimed damages, and some 
alleged that settlements often fail to reflect the underlying merits of 
the cases. If true, this means that weak claims are overcompensated and 
strong claims are undercompensated.'' Prof. John Coffee has concluded 
the plaintiffs' attorneys in many securities class actions appear to 
``sell out their clients in return for an overly generous fee award,'' 
and that the defendants may also join in this collusion by passing on 
the cost of the settlement to absent parties, such as insurers.''
  The plaintiffs' lawyers like to sue the officers and directors, and 
the accountants, underwriters and issuers. These cases are brought 
under joint and several liability which means that any one defendant 
could be made to pay the entire judgment even if he or she were only 
marginally responsible. If a person is one percent liable he/she could 
be asked to write a check for 100 percent of the awarded damages. That 
is not fair.
  Our bill builds upon the State law trend of imposing proportionate 
liability.
  Under proportionate liability each person found responsible pays a 
share of the damages that is equivalent to the harm he or she caused.
  Our bill would retain joint and several liability for the really bad 
actors, but would provide proportionate liability for those parties 
only incidentally involved. In response to the Securities and Exchange 
Commission's staff concern we also included a special provision to 
address the problem of the insolvent codefendant. We believe this 
provision strikes the correct balance. This liability reform is 
important to outside officers and directors, auditors and others who 
often get named in the law suit but who have little if any true 
liability. It helps change the economics that drive these frivolous 
cases.


                           BIG MONEY DAMAGES

  The system seeks huge monetary recoveries from outside directors, 
outside lawyers, and independent accountants who may be only marginally 
involved in activities for which corporate officers should be primarily 
liable. Experienced people are declining to serve on boards because of 
the liability exposure. This denies growing companies the expertise 
they need to succeed. The system is not deterring fraud because 
insurance companies pay most of the settlement amount.
  The current system also discriminates against defendants. People who 
have deep pockets are often named in the law suits to coerce 
settlements. Accountants bear the brunt of our current system of joint 
and several liability. Suing the accountant insures that the settlement 
will be 50 percent larger because of their deep pocket.
  The fundamental purposes of the Federal securities laws are to 
promote investor confidence and deter fraud. But the system is failing 
its deterrent mission. A system where the merits don't matter isn't a 
deterrent. A system where most settlement funds are paid by insurance 
companies isn't a deterrent.
  A system that is having a chilling effect on corporate disclosure is 
actually working at cross-purposes with its objective. Class action 
securities cases inhibit voluntary disclosure by corporations, 
discouraging them from making any public statements except [[Page S 
8899]] when absolutely required, for fear that anything they say which 
might move the company's stock price might trigger a lawsuit.
  In order for our capital markets to function efficiently, for Wall 
Street analysts to evaluate stocks, or for main street investors to 
buy, hold, or sell a stock, they need a lot of information. An 
important type of information is the projections of how the company 
will do in the future--the so-called forward-looking statement.
  By its definition, a forward looking statement is a prediction about 
the future. Earnings projections, growth rate projections, dividend 
projections, and expected order rates are examples of forward looking 
statements. Predictions about the future have become one of the more 
common types of frivolous securities lawsuits filed.
  Few people know why it is important for the bill to provide a safe 
harbor for predictive statements. Let me ask a few questions to help my 
colleagues understand.
  First, do you believe that earnings projections about the future are 
promises?
  Second, do you believe stock volatility is stock fraud?
  Third, do you believe that projections about future earnings should 
be unanimous among every single employee in the company in order for 
that prediction to be eligible for protection for abusive lawsuits?
  Fourth, do you believe that it is fraud when an officer or director 
or other employee receives a significant portion of his compensation in 
stock options sells stock regularly?
  Fifth, if you believe that any statement about future performance 
can, and should be used against you no matter how well intended, no 
matter how well reasoned, regardless of how dramatic circumstances 
change?
  The five statements I just read are the basis for most predictive 
statement, class action securities cases.
  To me, these cases represent everything that I find discouraging 
about our legal system--professional plaintiffs, fishing expeditions 
for documents, boiler-plate fraud accusations, contingency fee lawyers, 
and settlement that resemble legal blackmail.
  A safe harbor is needed to encourage companies to make information 
available. To keep the system honest, there are laws on the books to 
make sure that executive trades do not create even the appearance of 
illegal insider trading, the process is highly regulated by the SEC. In 
addition, most companies have their own internal policies regulating 
when executives can make trades. These controls ensure that executives 
do not trade during lengthy black out periods within months of 
important announcements. The SEC also has imposed rules regarding 
executive selling that require prompt reports, which are then available 
to the investing public.
  First, if you believe that efficient capital markets need 
information, you agree with investors, the SEC, and securities 
analysts. As the California Public Employees Retirement System 
[CALPERS] recently stated, ``forward-looking statements provide 
extremely valuable and relevant information to investors.''
  SEC Commissioner Arthur Levitt recently wrote: ``There is a need for 
a stronger safe harbor than currently exists. The current rules have 
largely been a failure * * *.''
  Former SEC Chairman Richard Breeden testified:

       Shareholders are also damaged due to the chilling effect of 
     the current system on the robustness and candor of 
     disclosure. . . . Understanding a company's own assessment of 
     its future potential would be among the most valuable 
     information shareholders and potential investors could have 
     about a firm.

  Second, if you believe that disclosure of information helps investors 
make intelligent decisions you should be calling for reform because the 
very nature of forward-looking statements makes them particularly 
fertile ground for abusive lawsuits. If a company fails to meet 
analysts' profit expectations, or production of a new product is 
delayed, it is often faced with a law suit. As a result, companies are 
increasingly reluctant to disclose forward-looking information. 
Numerous studies have documented this trend. According to testimony 
given by James Morgan, National Venture Capital Association, one study 
found that over two-thirds of venture capital firms were reluctant to 
discuss their performance with analysts or the public because of the 
threat of litigation.
  Keeping quiet is not an escape route from these frivolous cases. One 
company in my State had a policy not to talk to analysts which 
developed from a fear of being sued. But they were sued anyway for 
failing to disagree with an analysts' projection. The legal theory was 
that the company incorporated by silence the analysis's estimations. 
Mesa Airlines is not the only company to be sued for keeping its mouth 
shut.
  Third, if you recognize that predictions about the future do not 
always come true and that investing has some risks attached, you should 
support the statutory safe harbor: Institutional investors are the most 
professional, sophisticated investors in our markets. In addition, they 
have a fiduciary duty to retirees to prudently manage their pension 
funds. These institutional investors have argued that forward looking 
statements accompanied by warnings should be per se immune from 
liability. The Council of Institutional Investors told the SEC that any 
safe harbor must be 100 percent safe. This means that all information 
in it must be absolutely protected from law suits even if it is 
irrelevant or unintentionally or intentionally false or misleading. The 
bill does not go as far as the institutional investors suggested. We 
think it strikes the correct balance.
  The SEC Rule 175 permits issuers to make forward looking statements 
about certain categories of information provided that the prediction is 
made in good faith with a reasonable basis. Currently, this SEC safe 
harbor rule actually discourages issuers from voluntarily disclosing 
this information. To quote the SEC:

       Some have suggested that companies that make voluntary 
     disclosure of forward-looking information subject themselves 
     to a significantly increased risk of securities antifraud 
     class actions.'' As such, ``contrary to the Commission's 
     original intent, the safe harbor is currently invoked on a 
     very limited basis in the litigation context.'' Critics state 
     that the safe harbor is ineffective in ensuring quick and 
     inexpensive dismissal of frivolous private lawsuits. (SEC 
     Securities Act of 1993 Release No. 7101, October 1994)

  An American Stock Exchange survey supports that conclusion. It found 
that 75 percent of corporate CEO's limit the information disclosed to 
investors out of fear that greater disclosure would lead to an abusive 
lawsuit.
  As the SEC has realized, forward-looking statements are predictions--
not promises. This bill recognizes that a reasonable basis for such 
information doesn't have to be a unanimous basis. This bill creates a 
statutory safe harbor which:
  Provides a clear definition of ``forward looking statement'' for both 
the 1933 and 1934 acts;
  Covers written and oral statements;
  Requires that the predictive statement contain a Miranda warning 
describing the statement as a prediction and a disclosure that there is 
a risk that the actual results may differ materially from those 
predicted;
  No safe harbor protection for statements knowingly made with the 
expectation, purpose, and actual intent of misleading investors. There 
is no so-called license to lie under this bill;
  Protects statements made by issuers, persons acting on their behalf 
such as officers, directors, employees, and outside reviewers retained 
by the issuer. Accounting and law firms are eligible for the safe 
harbor, brokers and dealers are not;
  No safe harbor protection for initial public offerings [IPOs], penny 
stocks, roll-up transactions and issuers who have violated the 
securities laws;
  Provides the SEC with new authority to sue for damages on behalf of 
investors in predictive statement cases. The SEC's recovery should be 
much better than the average of 6 cents on the dollar currently 
recovered by private attorneys;
  Encourages SEC to review the need for additional safe harbors.
  New Mexico is a high-technology State. It is the home to Los Alamos 
and Sandia National Laboratories. We have more engineers and PhD's per 
capita than any State in the Union. High technology and high growth 
companies are our future, yet they are the companies that are hit most 
often by frivolous lawsuits. They have volatile stock. I do not really 
see how New Mexico can expect to develop the spinoff companies from the 
labs and to [[Page S 8900]] grow high technology companies unless we 
pass legislation that has a meaningful safe harbor for predictions 
about the future.
  I am pleased that the final bill includes a statutory safe harbor. 
Originally, S. 240 contained an instruction to the SEC to develop a new 
safe harbor. However, the SEC has been working on it for more than a 
year and they are gridlocked. They held some very good hearings and 
some of the material presented before them has been very useful to the 
committee in developing its statutory safe harbor.
  We want to get back to basics. The central principle underlying the 
securities laws is that investors should receive accurate and timely 
disclosure of the financial condition of publicly traded companies.
  The objective of this bill is to recognize that litigation isn't 
George Orwell's 1994 version of Big Brother looking out for investors' 
best interest. We reject ``stock volatility is fraud''; we reject 
``justice is pennies for lawyers''; We reject ``equity is millions for 
lawyers.''
  S. 240 will encourage disclosure, strengthen confidence, realine the 
role of the entrepreneurial plaintiffs' lawyers with the best interests 
of their clients, and change the risk/benefit equation of taking cases 
to the jury.
  The basis of our bill is to make the plaintiffs' bar, ``Stop, think, 
investigate, and research.''
  The spirit motivating this bill is the obligation that Chairman 
Levitt identified, ``to make sure the current system operates in the 
best interest of all investors. This means focusing not just on the 
interests of those who happen to be aggrieved in a particular case, but 
also on the interests of issuers and the markets as a whole.''
  With S. 240, we have decided to take a historic step. For the first 
time since Congress created the Federal securities laws in 1933 and 
1934, we have decided to revisit section 10(b) and rule 10b-5 in order 
to fix many of the problems created by the courts and our own failure 
to act during the past 60 years. If you would like to put an end to the 
inconsistency and confusion, you should support S. 240. If you would 
like to relieve the courts of the burden of revisiting 10b-5 every year 
and put an end to the judicial activism associated with this area of 
the law, vote for this bill. If you want to allow the abuse of 
investors and companies, the stifling of job creation and the continued 
shaping of the contours of the law to continue, you should vote against 
it. In the end, S. 240 will give courts greater guidance to deal with 
meritorious securities class actions and greater incentive to eliminate 
most, if not all, of the frivolous ones. We owe it to investors, 
companies, and our capital markets to take this historic step.
  Mr. President, hopefully, in the next few days, we will change this 
law and go to conference with the House, and maybe before this year is 
out, set some of these things straight.
  I yield the floor.
  Mr. SARBANES addressed the Chair.
  The PRESIDING OFFICER (Mr. Bennett). The Senator from Maryland is 
recognized.
  Mr. SARBANES. Mr. President, I have listened to my colleagues now for 
well over an hour very carefully. This is an important piece of 
legislation, and it deserves very careful attention. I think perhaps 
the best summary, in a sense, of some of the statements we have heard 
was the comment made by my distinguished colleague from Connecticut, 
who said that there might well be a tendency in the course of debating 
this bill to use increasingly extreme examples and overheated rhetoric. 
I think that was his exact quote. And we have already seen some of that 
at work over the opening debate that has taken place now for well over 
an hour.
  I do not know of anyone who differs with the goal of deterring 
frivolous lawsuits, and sanctioning appropriate parties when such 
lawsuits are filed. My colleague from Connecticut at one point said 
this bill is an important step in repairing an ailing system. Parts of 
this bill are an important step in doing that. Other parts of this bill 
will, in my judgment, contribute to an unhealthy system. And the 
challenge that is before the Senate over the next few days as we work 
through this legislation is to be able to distinguish between those 
parts in this legislation.
  In the course of this consideration, amendments will be offered. 
Amendments were offered in committee. Some were decided by very close 
votes. We hope by proposing those amendments to be able to focus on 
what the problems are. But let me just generally make the point that 
this legislation as now drafted will affect far more than frivolous 
suits. The examples that have been cited, the horror cases, are 
examples that any of us would want to address and try to deal with. 
This bill goes beyond that. This bill overreaches that mark and, in 
fact, in my judgment, will make it more difficult for investors to 
bring legitimate fraud actions. That is the essential question. That is 
the discernment we have to make here.
  Jane Bryant Quinn said in an article less than a week ago in the 
Washington Post, entitled ``Making it Easier to Mislead Investors,'' 
and I quote from the opening of this article:

       A lawsuit protection bill speeding through Congress will 
     give freer rein to Wall Street's eternal desire to hype 
     stocks. It's cast as a law against frivolous lawsuits that 
     unfairly torture corporations and their accountants, but the 
     versions in both the House and Senate do far more than that. 
     They effectively make it easier for corporations and 
     stockholders to mislead investors. Class action suits against 
     the deceivers would be costly for small investors to file and 
     incredibly difficult to win. I'm against frivolous lawsuits. 
     Who is not? But these bills would choke meritorious lawsuits, 
     too.

  At the end of this long article, she concludes as follows, and I 
quote:

       Baseless lawsuits do indeed exist. Lawyers may earn too 
     much from a suit, leaving defrauded investors too little. The 
     incentives to sue should be reduced, but not with these 
     bills. They let too many crooks get away.

  And an article in the U.S. News & World Report, the most recent 
issue, by Jack Egan entitled, ``Will Congress Condone Fraud,'' says in 
part, and I quote, speaking about this legislation:

       It just might come to be remembered as legislation that has 
     steeply tilted the playing field against investors. It makes 
     it very hard for shareholders to sue over legitimate 
     grievances.

  And, at the end, it goes on to say:

       The pendulum has swung too far toward the lawyers, and now 
     it is swinging too far the other way. Unfortunately, some 
     major investor frauds may have to take place before it again 
     moves back toward the center.

  The challenge for the Senate is to get this pendulum in the right 
place to begin with, here, now, over the course of the next few days so 
that they do not have to have major investor frauds in order to swing 
the pendulum back toward the center.
  This legislation, and certain of its provisions, goes too far. In 
fact, two provisions that were in the original bill as introduced were 
dropped in the course of evolving this legislation. Those provisions, 
had they remained in the bill, would deal with a number of the problems 
which we intend to outline over the next few days in the course of its 
consideration. That was in the original proposed legislation, and was 
taken out. As a consequence, the legislation, in my judgment, has been 
weakened, and the balance has tilted in an unfair and unjust way.
  The fact is that this bill will make it harder to bring securities 
fraud actions and to recover losses. Individual investors, local 
governments, pension plans, all will find it more difficult to bring 
fraud actions and to recover their full damages as a result of this 
legislation.
  I know examples are going to be used, but I say to my colleagues, you 
have to move beyond those examples. The provisions in the bill which 
deal with the egregious examples that would be cited ought to be in 
this bill and they ought to be passed. The difficulty is that the bill 
overreaches and it goes too far. Let me give you some instances of 
that.
  The safe harbor provision will for the first time protect fraudulent 
statements within the Federal securities laws. Individual investors 
will not be able to sue people who make fraudulent projections of 
important items such as revenues and earnings.
  The SEC has been working to address the question of forward looking 
statements, but the Chairman of the SEC, Arthur Levitt, has raised very 
serious questions about the safe harbor provision in this legislation. 
If I wanted to engage in the Senator's rhetorical combat that he spoke 
about earlier, I would say, rather than safe harbor, it is a pirate's 
cove that is in this legislation. The proportionate liability provision 
will for the first time put fraud [[Page S 8901]] participants ahead of 
innocent victims and individual investors. Fraud victims will not 
recover their full damages.
  The argument is made that you have people who are held liable, they 
vary in their proportionate share of the responsibility, and the deep-
pocket people are held entirely liable when the principal malefactor 
goes bankrupt or cannot pay the award. This is in a suit that is proven 
to be successful, been upheld as being meritorious in court. Well, 
there is a problem amongst the malefactors. But to throw the burden on 
the innocent victim as a solution to that problem is a departure which 
really astounds one.
  In other words, you are the victim of the fraud. A number of people 
have participated in it in varying degrees, and you are going to be 
held to assume a large part of the burden before the participants in 
the fraud have to be responsible. As a consequence, fraud victims will 
not recover the full damages.
  The managers of the bill speak about its balance. In fact, the bill 
has a tilt, as this column in U.S. News & World Report said, and I 
quote it again:

       It just might come to be remembered as legislation that's 
     steeply tilted the playing field against investors.

  There is not included in this legislation provisions that the SEC and 
the State securities regulators feel are necessary to protect victims 
of securities fraud. I was interested that the Senator from Connecticut 
quoted Arthur Levitt as saying in a hearing there is a need for change.
  That is quite true. But Chairman Levitt criticizes the measure that 
is now before us. If you are going to cite Arthur Levitt as supporting 
the proposition for change, which actually none of us is contending 
against here--we are not coming to the floor and saying do nothing, 
just leave the existing law. We are saying that there are some 
provisions in this legislation that ought to be passed, but there are 
other provisions that overreach and go too far, and Arthur Levitt says 
the same.
  The very person cited in a sense as an expert for the proposition 
that change ought to be made has also told us that some of the changes 
contained in this legislation are undesirable.
  In addition to the safe harbor issue, which we will come back and 
revisit in the course of the amending process, is the proportionate 
liability issue. This bill does not extend the statute of limitations 
for securities fraud actions. Fraud victims will not have time to bring 
their cases to court. That in fact was a provision that was in the 
original bill as introduced and has been dropped from the provision now 
before us.
  The bill does not restore the ability of investors to sue individuals 
who aid and abet violations of the securities laws. Fraud victims will 
not be able to pursue everyone who helped commit a securities fraud.
  It is asserted that this bill as is has reached the proper balance, 
but the fact remains that it is opposed, the legislation as before us, 
by a host of securities regulators, by State and local government 
officials, by consumer groups, by labor unions, by bar associations, 
and others, including the North American Securities Administrators 
Association, the Government Finance Officers Association, the National 
League of Cities, the U.S. Conference of Mayors, the Consumer 
Federation of America, and a number of the large trade unions, 
including the Teamsters and the United Auto Workers.
  The assault from the other side has been on the lawyers. These groups 
do not represent the lawyers. These groups represent the public, 
consumers, investors, and they have all reached the judgment that this 
bill is unbalanced--unbalanced.
  Let me just speak for a moment or two about the background. It is 
asserted by some that there is a crisis in the securities litigation 
system that is threatening our capital markets. Let us take a look very 
quickly at our capital markets and some statistics about it.
  For 1993, the U.S. equity market capitalization stood at $5.2 
trillion, over one-third of the world total. More than 600 foreign 
companies from 41 different countries are listed on our exchanges and 
more foreign companies come every year. Average daily trading volume on 
the New York Stock Exchange has increased from 45 million shares in 
1980 to 291 million shares in 1994. From 1980 to 1993, mutual fund 
assets increased by more than 10 times to $1.9 trillion.
  In effect, Mr. President, what this demonstrates is that the U.S. 
capital markets remain the largest and the strongest in the world.
  Now, this, I would submit, is not in spite of the Federal securities 
laws but in part because of the Federal securities laws. This 
tremendous growth in the American marketplace and its preeminent 
position worldwide is not in spite of Federal securities laws but in 
part because of Federal securities laws. The Federal securities laws 
have generally provided for sensible regulation and self-regulation of 
exchanges, brokers, dealers, and issues.
  This regulation has helped to sustain investor confidence in our 
markets. Without that confidence in the markets, you are not going to 
get the kind of dominant position that we have had. And confidence in 
the markets on the part of investors is a consequence not only of the 
public regulatory scheme administered by the SEC but also because 
investors know that they have effective remedies against people who try 
to swindle them.
  In other words, if you weaken unreasonably or improperly these 
remedies, you are going to affect investor ability to have recourse in 
instances in which they have been unfairly or improperly exploited, and 
the consequence of that is you begin to cast a doubt over the integrity 
of the securities markets.
  Both Republican and Democratic Chairmen of the Securities and 
Exchange Commission have stressed the crucial role of the private right 
of action in maintaining investor confidence.
  In 1991, then-Chairman Richard Breeden testified before the Banking 
Committee, and I quote:

       Private actions . . . have long been recognized as a 
     ``necessary supplement'' to actions brought by the Commission 
     and as an ``essential tool'' in the enforcement of the 
     Federal securities laws. Because the Commission does not have 
     adequate resources to detect and prosecute all violations of 
     the Federal securities laws, private actions perform a 
     critical role in preserving the integrity of our securities 
     markets.

  Current Chairman Arthur Levitt echoed this very point in testimony 
delivered this year.
  The Securities Subcommittee held hearings over the past 2 years 
reviewing the Federal securities litigation system. It received 
testimony from plaintiffs' lawyers, from corporate defendants, from 
accountants, from academics, from securities regulators, and from 
investors. There was considerable disagreement among the witnesses over 
how well the existing securities litigation system is functioning. Some 
argued, and my colleagues who have already spoken argue, American 
business, particularly younger companies in the high-technology area, 
face a rising tide of frivolous securities litigation. Corporate 
executives suggested that securities class actions are filed when a 
company fails to meet projected earnings or its stock drops.
  Clearly, some frivolous securities cases are filed as, indeed, some 
frivolous cases of every sort are filed. However, the Director of the 
SEC's Division of Enforcement testified in June 1993 with respect to 
statistics from the Administrative Office of the U.S. Courts:

       The approximate aggregate number of securities cases, 
     including Commission cases, filed in Federal district courts 
     does not appear to have increased over the past 2 decades. 
     Similarly, while the approximate number of securities class 
     actions filed during the past 3 years is significantly higher 
     than during the 1980's, the numbers do not reveal the type of 
     increase that ordinarily would be characterized as an 
     ``explosion.''

  Some said that these actions were inhibiting the capital formation 
process. In fact, initial public offerings have been setting records in 
recent years: $39 billion in 1992; $57 billion in 1993. The $34 billion 
in initial public offerings in 1994 was exceeded only by the records 
set in the previous 2 years.
  On May 22, the New York Times reported, and I quote:

       One of the great booms in initial public offerings is now 
     under way, providing hundreds of millions in new capital for 
     high-tech companies, windfalls for those with good enough 
     connections to get in on the offerings and millions in profit 
     for the Wall Street firms underwriting the deals.

  Asserting a crisis in securities litigation, which the figures do not 
seem to bear out, this bill makes it harder to bring lawsuits. We 
should ask ourselves [[Page S 8902]] not simply whether these changes 
will result in fewer lawsuits, but whether each proposed change will 
make the securities laws serve our Nation better. We should ask whether 
legitimate cases can still be brought or whether the provisions in this 
legislation, which it is asserted are designed to screen out the 
frivolous cases, will go beyond that and, in effect, make it difficult 
to bring legitimate cases.
  I hope Members will focus on this very issue. It is very important 
not to become, as it were, mesmerized by these extreme examples which 
my colleague from Connecticut said would obviously be cited, because no 
one is protecting the extreme examples.
  The question is whether the provisions here will make it impossible 
or highly difficult to bring legitimate actions, whether it will swing 
the pendulum too far in the other direction. One of the articles I 
quoted said:

       Unfortunately, some major investor frauds will have to take 
     place before it, again, moves back toward the center.

  We do not want that to happen. We have an opportunity here on the 
floor by correcting this legislation to prevent that from happening.
  Let me very quickly turn to some of the major defective provisions in 
the legislation.
  First is the so-called safe harbor provision. This legislation has a 
statutory definition of an exemption from liability for forward-looking 
statements which the bill broadly defines to include both oral and 
written statements. Examples include projections of financial items 
such as revenues and income for the quarter or for the year, estimates 
of dividends to be paid to shareholders, and statements of future 
economic performance, such as sales trends and development of new 
products. In short, forward-looking statements include precisely the 
type of information that is most important to investors deciding 
whether to purchase a particular stock.
  The SEC currently has a safe harbor regulation for forward-looking 
statements that protects specified forward-looking statements that were 
made in documents filed with the SEC. To sustain a fraud suit, the 
investor must show that the forward-looking information lacked a 
reasonable basis and was not made in good faith.
  The SEC, recognizing the desirability of having some safe harbor for 
forward-looking statements, has been seeking to define it in 
regulation.
  It has been conducting, in fact, a comprehensive review of its safe 
harbor regulation. This legislation, as originally introduced by 
Senators Domenici and Dodd, would have allowed the SEC to continue this 
regulatory effort. And Chairman Levitt endorsed that approach. However, 
the committee print substitute for S. 240, unlike the bill as 
introduced, abandoned this approach in favor of enacting a statutory 
safe harbor.
  The committee print now before us, in effect, protects fraudulent 
forward-looking statements. For the first time, such statements would 
find shelter under the Federal securities law. In a letter to the 
committee, Chairman Levitt, expressing his personal views about a 
legislative approach to safe harbor, stated:

       A safe harbor must be thoughtful so that it protects 
     considered projections but never fraudulent ones.

  The bill, as reported, provides safe harbor protection for all 
statements except those knowingly made with the expectation, purpose, 
and actual intent of misleading investors. The committee report states 
that expectation, purpose, and actual intent are separate elements, 
each of which must be proven by the investor, otherwise the maker of 
the statement is shielded.
  This language so troubled Chairman Levitt that he wrote to committee 
members on May 25, the morning of the markup. He stressed that the 
substitute committee print failed to adhere to his belief that a safe 
harbor should never protect fraudulent statements.
  I want to be very clear about this. No one is arguing whether there 
should be some provision for a safe harbor. The question is: What 
should that provision be? What is reasonable? What is proper? What is 
balanced? What constitutes overreaching? The chairman of the SEC said 
the following in that letter to the committee on the morning of the 
markup:

       I continue to have serious concerns about the safe harbor 
     fraud exclusion as it relates to the stringent standard of 
     proof that must be satisfied before a private plaintiff can 
     prevail. As Chairman of the Securities and Exchange 
     Commission, I cannot embrace proposals which would allow 
     willful fraud to receive the benefit of safe harbor 
     protection. The scienter standard in the amendment may be so 
     high as to preclude all but the most obvious frauds.

  He warned that the bill's standard of ``knowingly made with the 
expectation, purpose, and actual intent of misleading investors'' was a 
far more stringent standard than currently used by the SEC and the 
courts. The committee report states that the safe harbor provision is 
intended to encourage disclosure of information by issuance. 
Encouraging reasonable disclosure is one thing. Encouraging fraudulent 
projections is obviously yet another.
  The safe harbor provision that is in this bill, which was not in the 
original bill as introduced by Senators Dodd and Domenici--this safe 
harbor provision before us would hurt investors trying to make 
intelligent investment decisions and penalize companies trying to 
communicate honestly with their shareholders. It runs counter to the 
entire philosophy of Federal securities laws, the very laws that have 
helped give us such strong markets, laws that rest on the premise that 
fraud must be deterred and punished when it occurs. That is one of the 
major areas in which attention will have to be focused over the next 
few days.
  Next I turn to the proportionate liability provision in the bill. The 
difficulty with the proportionate liability section in the bill is we 
need to understand the issue of liability for reckless conduct.
  In 1976, the Supreme Court held that a defendant is liable under 
Federal securities antifraud provisions only if he or she possesses the 
state of mind known in the law as ``scienter.'' Conduct that is 
intended to deceive or mislead investors satisfies the scienter 
requirement. While the Supreme Court did not decide the question, 
courts in every Federal circuit have held that reckless conduct also 
satisfies the scienter requirement. This follows the guidance of 
hundreds of years of court decisions in fraud cases. As the Restatement 
of Torts states, ``The common law has long recognized recklessness as a 
form of scienter for the purposes of proving fraud.''
  Now, the most commonly accepted definition of reckless conduct was 
set forth by the Seventh Circuit in the Sundstrand case. That 
standard--and I will quote it, an order which attached joint and 
several liability--said:

       A highly unreasonable omission involving not merely simple, 
     or even gross, negligence, but an extreme departure from the 
     standards of ordinary care and which present 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.

  Now, recklessness liability is often applied to the issuers' 
professional advisers--attorneys, underwriters, accountants. And under 
joint and several liability, all parties who participate in a fraud are 
liable for the entire amount of the victim's damages--both those 
parties who intended to mislead the investors, and those whose conduct 
was reckless.
  The rationale for this is that a fraud cannot succeed without the 
assistance of each participant, so each wrongdoer is held equally 
liable.
  This bill limits joint and several liability under the Federal 
securities laws to certain defendants, specifically excluding 
defendants whose conduct was reckless. This change will hurt investors 
in cases where the perpetrator of the fraud is bankrupt, has fled, or 
otherwise cannot pay the investors' damages. In those cases, innocent 
victims of fraud will be denied full recovery of their damages. 
Chairman Levitt said:

       The Commission has consistently opposed proportionate 
     liability.

  Before the Securities Subcommittee, he said:

       Proportionate liability would inevitably have the greatest 
     effect on investors in the most serious cases (for example, 
     where an issuer becomes bankrupt after a fraud is exposed). 
     It is for this reason that the Commission has recommended 
     that Congress focus on measures directly targeted at 
     meritless litigation before considering any changes to the 
     liability rules.

  Now, even the authors of the measure before us recognize something of 
a problem, so they have tried to make [[Page S 8903]] some compensating 
features with respect to proportionate liability, and we will address 
those in greater detail when we propose an amendment.
  Let me just simply make this point. They would provide coverage to 
victims with a net worth under $200,000 who lose more than 10 percent 
of that net worth. Well, that hardly is meaningful. Virtually anyone 
who owns a home has a net worth of $200,000. And to require many small 
investors to lose more than 10 percent of that net worth--in other 
words, you would have to lose $20,000 before you would be made whole by 
those who have participated in or condoned the fraud.
  There is another provision for a 50-percent overage, but neither 
provision will make fraud victims whole. They will protect only a tiny 
number of investors. For most investors, the balance of their losses 
may be uncollectible. So the innocent party is going to be called upon 
to bear this burden. Just think of the equities of that.
  Reckless participation. Participants will no longer be responsible 
for the result of their conduct. Innocent investors--individuals, 
pension funds, county governments--will have to make up the loss. This 
is not fairness--certainly not to the investors.
  In addition, I am disappointed that this legislation, as reported, 
does not contain provisions to help investors bring meritorious suits. 
In his letter to the members of the Banking Committee, Chairman Levitt 
stated:

       In addition to my concerns about the safe harbor, there is 
     not complete resolution of two important issues for the 
     Commission. First, there is no extension of the statute of 
     limitations for private fraud actions from 3 to 5 years.

  My very able, distinguished colleague from Nevada, who is a member of 
the subcommittee that considered this legislation, and is extremely 
knowledgeable on all aspects of it, will later, in the course of the 
amending process, address this specific provision.
  For over 40 years, courts held that the statute of limitations for 
private rights of action under section 10(b) of the Securities Exchange 
Act of 1934, the principal antifraud provision of the Federal 
securities laws, was the statute of limitations determined by 
applicable State law. While these statutes varied, they generally 
afforded securities fraud victims sufficient time to discover and bring 
suit.
  In 1991, in the Lampf case, the Supreme Court significantly shortened 
the period of time in which investors may bring such securities fraud 
actions. By a 5 to 4 vote, the Court held that the applicable statute 
of limitations is 1 year after the plaintiff knew of the violation and 
in no event more than 3 years after the violation occurred. This is 
shorter than the statute of limitations for private securities actions 
under the law of more than 60 percent of the States today.
  This shorter period does not allow individual investors adequate time 
to discover and pursue violations of securities laws. Testifying before 
the Banking Committee in 1991, SEC Chairman Richard Breeden stated 
``the timeframes set forth in the [Supreme] Court's decision is 
unrealistically short and will do undue damage to the ability of 
private litigants to sue.'' Chairman Breeden pointed out that in many 
cases,

       Events only come to light years after the original 
     distribution of securities and the . . . cases could well 
     mean that by the time investors discover they have a case, 
     they are already barred from the courthouse.

  The FDIC and the State securities regulators joined the SEC in favor 
of overturning the Lampf decision.
  On this basis, the Banking Committee in 1991 without opposition 
adopted an amendment to a banking bill. The amendment lengthened the 
statute of limitations for securities fraud actions to 2 years after 
the plaintiff knew of the securities law violation, but in no event 
more than 5 years after the violation occurred.
  When the bill reached the Senate floor in November 1991, some 
Senators indicated they would seek to attach additional provisions 
relating to securities litigation. They argued that the statute of 
limitations should not be lengthened without additional reform of the 
litigation system. No arguments were raised specifically against the 
extension of the statute of limitations. To expedite consideration of 
the bill, the extension of the statute of limitations was dropped. 
Senators Domenici and Dodd included the extended statute of limitations 
in their comprehensive securities litigation reform bill, both in the 
last Congress and in this Congress.
  There was no rationale for dropping that provision out. Chairman 
Levitt testified before the Securities Subcommittee in April 1995, 
``extending the statute of limitations is warranted because many 
securities frauds are inherently complex, and the law should not reward 
the perpetrator of a fraud who successfully conceals its existence for 
more than 3 years.''
  I defy any of my colleagues to explain to us why the perpetrator of 
the fraud ought to be given a shorter period of time in which to get 
away with this fraudulent conduct.
  Finally, let me turn to the failure to restore aiding and abetting 
liability. This was another matter touched on by Chairman Levitt when 
he expressed his disappointment that ``the draft bill does not fully 
restore the aiding and abetting liability eliminated in the Supreme 
Court's Central Bank of Denver opinion.''
  Prior to that decision, courts in every circuit in the country had 
recognized the ability of investors to sue aiders and abettors of 
securities frauds. Most courts required that an investor show that a 
securities fraud was committed, that the aider and abettor gave 
substantial assistance to the fraud, and that the aider and abettor has 
some degree of scienter--intent to deceive or recklessness toward the 
fraud.
  Why should the aiders and abettors of the fraud escape any liability? 
As Senator Dodd stated at a May 12, 1994, Securities Subcommittee 
hearing, ``aiding and abetting liability has been critically important 
in deterring individuals from assisting possible fraudulent acts by 
others.'' Testifying at that hearing, Chairman Levitt stressed the 
importance of restoring aiding and abetting liability for private 
investors:

       persons who knowingly or recklessly assist the perpetration 
     of a fraud may be insulated from liability to private parties 
     if they act behind the scenes and do not themselves make 
     statements, directly or indirectly, that are relied upon by 
     investors. Because this is conduct that should be deterred, 
     Congress should enact legislation to restore aiding and 
     abetting liability in private actions.

  The North American Securities Administrators Association and the 
Association of the Bar of the City of New York also endorsed 
restoration of aiding and abetting liability in private actions.
  In summing up, let me simply say I support the goal of deterring and 
sanctioning frivolous securities litigation. This bill, though, will 
deter legitimate fraud actions as well. By protecting fraudulent 
forward looking statements, and by restricting the application of joint 
and several liability, this bill may undermine the investor confidence 
on which our markets depend. Further, it fails to include provisions 
that are needed to ensure that investors have adequate time and means 
to pursue securities fraud actions.
  We are not alone in concluding this legislation will threaten our 
markets by undermining investor confidence. Since the Banking Committee 
approved this bill we have received letters of opposition from 
securities regulators, State and local government officials, consumer 
groups and others, which I will place in the Record following this 
statement.
  The assertion is, on the other side, there is a certain private 
interest involved. We are trying to get at the abuse of the existing 
securities laws. But, in effect, independent observers, as it were, the 
securities regulators, local government officials, State government 
officials, have looked at this thing and they say this is excessive. 
This is overreaching.
  In a June 8, 1995 letter, the Government Finance Officers Association 
[GFOA] strongly supported our position. Consisting of more than 13,000 
State and local government financial officials, the GFOA's members both 
issue securities and invest billions of dollars of public pension and 
taxpayer funds. In its letter, the GFOA opposed S. 240 as reported:

       We support efforts to deter frivolous securities lawsuits, 
     but we believe that any legislation to accomplish this must 
     also maintain an appropriate balance that ensures the rights 
     of investors to seek recovery against those who engage in 
     fraud in the securities markets. We believe that S. 240 does 
     not [[Page S 8904]] achieve this balance, but rather erodes 
     the ability of investors to seek recovery in cases of fraud.

  The North American Securities Administrators Association, which 
represents the 50 State securities regulators, wrote earlier this week 
``to express * * * opposition to S. 240 as it was reported out of the 
Banking Committee.'' The letter expresses ``NASAA's view that the bill 
succeeds in curbing frivolous lawsuits only by making it equally 
difficult to pursue rightful claims against those who commit securities 
fraud.''
  And they mention the amendments pertaining to safe harbor, 
proportional liability, the statute of limitations, and aiding and 
abetting liability as being desirable changes to be made in this 
legislation.
  On May 23, 1995, 12 separate groups wrote to the Committee, including 
the National League of Cities, the American Council on Education, and 
the California Labor Federation of the AFL-CIO They wrote that the 
committee print ``has not moved at all in the direction of the 
achieving the balance we believe is so critical.''
  The St. Louis Post Dispatch had an editorial headed ``Don't Protect 
Securities Fraud''; the Los Angeles Times, ``This Isn't Reform--It's a 
Steamroller: GOP bill curbing lawsuits would flatten the small 
investor''; the Philadelphia Inquirer, ``Going easy on crooks in 3-
piece suits''; and other papers across the country.
  Mr. President, I ask unanimous consent that the letters that I cited 
and earlier made reference to, the articles, and these editorials be 
printed in the Record at the end of my statement.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  (See Exhibit 2)
  Mr. SARBANES. Mr. President, the securities markets are crucial to 
our economic growth; we should evaluate efforts to tamper with them 
very, very carefully. I hope in the course of our consideration of this 
measure over the next few days that Members will focus on the issues. I 
mean, the issue is not an extreme example for which there are 
provisions in the bill to deal with, with which no one quarrels. The 
issues are these items which I have cited about which we have heard 
from the Chairman of the Securities and Exchange Commission, from the 
Government Finance Officers Association, from the North American 
Securities Administrators Association, from a broad range of consumer 
groups, and from leading editorials and columnists across the country.
  I very much hope my colleagues will support amendments to correct the 
flaws in this legislation. If that were to be done, then we could move 
forward with a piece of legislation that I think would accomplish the 
proper balance.
  Mr. President, I yield the floor.
                               Exhibit 1


                           Securities and Exchange Commission,

                                     Washington, DC, May 19, 1995.
     Hon. Alfonse M. D'Amato,
     Chairman, Committee on Banking, Housing, and Urban Affairs, 
         U.S. Senate, Washington, DC.
       Dear Mr. Chairman: As Chairman of the Securities and 
     Exchange Commission I have no higher priority than to protest 
     American investors and ensure an efficient capital formation 
     process. I know personally just how deeply you share these 
     goals. In keeping with our common purpose, both the SEC and 
     the Congress are working to find an appropriate ``safe 
     harbor'' from the liability provisions of the federal 
     securities laws for projections and other forward-looking 
     statements made by public companies. Several pieces of 
     proposed legislation address the issue of the safe harbor and 
     the House-passed version, H.R. 1058, specifically defines 
     such a safe harbor.
       Your committee is now considering securities litigation 
     reform legislation that will include a safe harbor provision. 
     Rather than simply repeat the Commission's request that 
     Congress await the outcome of our rulemaking deliberations, I 
     thought I would take this opportunity to express my personal 
     views about a legislative approach to a safe harbor.
       There is a need for a stronger safe harbor than currently 
     exists. The current rules have largely been a failure and I 
     share the disappointment of issuers that the rules have been 
     ineffective in affording protection for forward-looking 
     statements. Our capital markets are built on the foundation 
     of full and fair disclosure. Analysts are paid and investors 
     are rewarded for correctly assessing a company's prospects. 
     The more investors know and understand management's future 
     plans and views, the sounder the valuation is of the 
     company's securities and the more efficient the capital 
     allocation process. Yet, corporate America is hesitant to 
     disclose projections and other forward-looking information, 
     because of excessive vulnerability to lawsuits if predictions 
     ultimately are not realized.
       As a businessman for most of my life, I know all too well 
     the punishing costs of meritless lawsuits--costs that are 
     ultimately paid by investors. Particularly galling are
      the frivolous lawsuits that ignore the fact that a 
     projection is inherently uncertain even when made 
     reasonably and in good faith.
       This is not to suggest that private litigation under the 
     federal securities laws is generally counterproductive. In 
     fact, private lawsuits are a necessary supplement to the 
     enforcement program of the Commission. We have neither the 
     resources nor the desire to replace private plaintiffs in 
     policing fraud; it makes more sense to let private forces 
     continue to play a key role in deterrence, than to vastly 
     expand the commission's role. the relief obtained from 
     Commission disgorgement actions is no substitute for private 
     damage actions. Indeed, as government is downsized and 
     budgets are trimmed, the investor's ability to seek redress 
     directly is likely to increase in importance.
       To achieve our common goal of encouraging enhanced sound 
     disclosure by reducing the threat of meritless litigation, we 
     must strike a reasonable balance. A carefully crafted safe 
     harbor protection from meritless private lawsuits should 
     encourage public companies to make additional forward-looking 
     disclosure that would benefit investors. At the same time, it 
     should not compromise the integrity of such information which 
     is vital to both investor protection and the efficiency of 
     the capital market--the two goals of the federal securities 
     law.
       The safe harbor contained in H.R. 1058 is so broad and 
     inflexible that it may compromise investor protection and 
     market efficiency. It would, for example, protect companies 
     and individuals from private lawsuits even where the 
     information was purposefully fraudulent. This result would 
     have consequences not only for investors, but for the market 
     as well. There would likely be more disclosure, but would it 
     be better disclosure? Moreover, the vast majority of 
     companies whose public statements are published in good faith 
     and with due care could find the investing public skeptical 
     of their information.
       I am concerned that H.R. 1058 appears to cover other 
     persons such as brokers. In the Prudential Securities case, 
     prudential brokers intentionally made baseless statements 
     concerning expected yields solely to lure customers into 
     making what were otherwise extremely risky and unsuitable 
     investments. Pursuant to the Commission's settlement with 
     Prudential, the firm has paid compensation to its defrauded 
     customers of over $700 million. Do we really want to protect 
     such conduct from accountability to these defrauded 
     investors? In the past two years or so, the Commission has 
     brought eighteen enforcement cases involving the sale of more 
     than $200 million of interests in wireless cable partnerships 
     and limited liability companies. Most of these cases involved 
     fraudulent projections as to the returns investors could 
     expect from their investments. Promoters of these types of 
     ventures would be immune from private suits under H.R. 1058 
     as would those who promote blank check offerings, penny 
     stocks, and roll-ups. It should also address conflict of 
     interest problems that may arise in management buyouts and 
     changes in control of a company.
       A safe harbor must be balanced--it should encourage more 
     sound disclosure without encouraging either omission of 
     material information or irresponsible and dishonest 
     information. A safe harbor must be thoughtful--so that it 
     protects considered
      projections, but never fraudulent ones. A safe harbor must 
     also be practical--it should be flexible enough to 
     accommodate legitimate investor protection concerns that 
     may arise on both sides of the issue. This is a complex 
     issue in a complex industry, and it raises almost as many 
     questions as one answers: Should the safe harbor apply to 
     information required by Commission rule, including 
     predictive information contained in the financial 
     statements (e.g. pension liabilities and over-the-counter 
     derivatives)? Should it extend to oral statements? Should 
     there be a requirement that forward-looking information 
     that has become incorrect be updated if the company or its 
     insiders are buying or selling securities? Should the safe 
     harbor extend to disclosures made in connection with a 
     capital raising transaction on the same basis as more 
     routine disclosures as well? Are there categories of 
     transactions, such as partnership offerings or going 
     private transactions that should be subject to additional 
     conditions?
       There are many more questions that have arisen in the 
     course of the Commission's exploration of how to design a 
     safe harbor. We have issued a concept release, received a 
     large volume of comment letters in response, and held three 
     days of hearings, both in California and Washington. In 
     addition, I have met personally with most groups that might 
     conceivably have an interest in the subject: corporate 
     leaders, investor groups, plaintiff's lawyers, defense 
     lawyers, state and federal regulators, law professors, and 
     even federal judges. The one thing I can state unequivocally 
     is that this subject eludes easy answers.
       [[Page S 8905]] Given these complexities--and in light of 
     the enormous amount of care, thought, and work that the 
     Commission has already invested in the subject--my 
     recommendation would be that you provide broad rulemaking 
     authority to the Commission to improve the safe harbor. If 
     you wish to provide more specificity by legislation, I 
     believe the provision must address the investor protection 
     concerns mentioned above. I would support legislation that 
     sets forth a basic safe harbor containing four components: 
     (1) protection from private lawsuits for reasonable 
     projections by public companies; (2) a scienter standard 
     other than recklessness should be used for a safe harbor and 
     appropriate procedural standards should be enacted to 
     discourage and easily terminate meritless litigation; (3) 
     ``projections'' would include voluntary forward-looking 
     statements with respect to a group of subjects such as sales, 
     revenues, net income (loss), earnings per share, as well as 
     the mandatory information required in the Management's 
     Discussion and Analysis; and (4) the Commission would have 
     the flexibility and authority to include or exclude classes 
     of disclosures, transactions, or persons as experience 
     teaches us lessons and as circumstances warrant.
       As we work to reform the current safe harbor rules of the 
     Commission, the greatest problem is anticipating the 
     unintended consequences of the changes that will be made in 
     the standards of liability. The answer appears to be an 
     approach that maintains flexibility in responding to problems 
     that may develop. As a regulatory agency that administers the 
     federal securities laws, we are well situated to respond 
     promptly to any problems that may develop, if we are given 
     the statutory authority to do so. Indeed, one possibility we 
     are considering is a pilot safe harbor that would be reviewed 
     formally at the end of a two year period. What we have today 
     is unsatisfactory, but we think that, with your support, we 
     can expeditiously build a better model for tomorrow.
       I am well aware of your tenacious commitment to the 
     individual Americans who are the backbone of our markets and 
     I have no doubt that you share our belief that the interests 
     of those investors must be held paramount. I look forward to 
     continuing to work with you on safe harbor and other issues 
     related to securities litigation reform.
       Thank you for your consideration.
           Sincerely,
     Arthur Levitt.
                                                                    ____

                           Securities and Exchange Commission,

                                     Washington, DC, May 25, 1995.
     Hon. Alfonse M. D'Amato,
     Chairman, Committee on Banking, Housing, and Urban Affairs, 
         U.S. Senate, Washington, DC.
       Dear Mr. Chairman: I understand that this morning you and 
     the members of the Banking Committee will be considering S. 
     240 and that you will be offering an amendment in the nature 
     of a substitute. While I have not had the opportunity to 
     analyze fully the May 24th manager's amendment to the 
     Committee print, I appreciate your leadership and efforts to 
     address the concerns of the Commission in drafting your 
     alternative.
       The safe harbor provision in the amendment, in my opinion, 
     is preferable to the blanket approach of H.R. 1058. It 
     addresses a number of the concerns pertaining to the size of 
     the safe harbor and the exclusions from the safe harbor. The 
     Committee staff appears to be genuinely interested in the 
     Commission's views of its draft legislation and has attempted 
     to be responsive. I was pleased to see the latest draft 
     deleted the requirement that a plaintiff must read and 
     actually rely upon the misrepresentation before a claim is 
     actionable. Your attempt to tailor the breadth of the safe 
     harbor of the Securities Exchange Act of 1934 to the more 
     narrow safe harbor of the Securities Act of 1933 was 
     encouraging. However, I continue to believe that the 
     definition should be further narrowed to parallel the items 
     contained in my letter of May 19th. Moreover, there remain a 
     number of troubling issues.
       I continue to have serious concerns about the safe harbor 
     fraud exclusion as it relates to the stringent standard of 
     proof that must be satisfied before a private plaintiff can 
     prevail. As Chairman of the Securities and Exchange 
     Commission, I cannot embrace proposals which allow willful 
     fraud to receive the benefit of safe harbor protection. The 
     scienter standard in the amendment may be so high as to 
     preclude all but the most obvious frauds. I believe that 
     there should be a direct relationship between the level of 
     scienter required to prove fraud and the types of statements 
     protected by the safe harbor. My letter of May 19th indicated 
     the discreet list of subjects that are suitable for safe 
     harbor protection, assuming a simple ``knowing'' standard. 
     Accordingly, if the Committee is unwilling to lower the 
     proposed scienter level to a simple ``knowing'' standard, the 
     safe harbor should not protect forward-looking statements 
     contained in the management's discussion and analysis 
     section. This would be better left to Commission rulemaking.
       In addition to my concerns about the safe harbor, there is 
     no complete resolution of two important issues for the 
     Commission. First there is no extension of the statute of 
     limitations for private fraud actions from three to five 
     years. Second, the draft bill does not fully restore the 
     aiding and abetting liability eliminated in the Supreme 
     Court's Central Bank of Denver opinion. I am encouraged by 
     the Committee's willingness to restore partially the 
     Commission's ability to prosecute those who aid and abet 
     fraud; however, a more complete solution is preferable.
       I also wish to call your attention to a potential problem 
     with the provision relating to Rule 11 of the Federal Rules 
     of Civil Procedure. I worry that the standard employed in 
     your draft may have the unintended effect of imposing a 
     ``loser pays'' scheme. The greater the discretion afforded 
     the court, the less likely this unintended consequence may 
     appear.
       I would like to express my particular gratitude for the 
     courtesy and openness displayed by the Committee and its 
     staff. I hope we will continue to work together to improve 
     the bill so as to reduce costly litigation without 
     compromising essential investor protections.
       Thank you for your consideration.
           Sincerely,
     Arthur Levitt.
                                                                    ____

                                                Government Finance


                                         Officers Association,

                                     Washington, DC, June 8, 1995.
     Hon. Paul S. Sarbanes,
     U.S. Senate, Washington, DC.
       Dear Senator Sarbanes: I am writing on behalf of the more 
     than 13,000 state and local government financial officials 
     who comprise the membership of the Government Finance 
     Officers Association (GFOA) to bring to your attention 
     serious concerns we have with the Securities Litigation 
     Reform Act, S. 240, recently approved by the Senate Banking 
     Committee. As you know, the GFOA is a professional 
     association of state and local officials who are involved in 
     and manage all the disciplines of public finance. The state 
     and local governmental entities our members represent bring a 
     unique perspective to this proposed legislation because they 
     are both investors of billions of dollars of public pension 
     funds and temporary cash balances, and issuers of debt 
     securities as well.
       We support efforts to deter frivolous securities lawsuits, 
     but we believe that any legislation to accomplish this must 
     also maintain an appropriate balance that ensures the rights 
     of investors to seek recovery against those who engage in 
     fraud in the securities markets. We believe that S. 240 does 
     not achieve this balance, but rather erodes the ability of 
     investors to seek recovery in cases of fraud.
       The strength and stability of our nation's securities 
     markets depend on investor confidence in the integrity, 
     fairness and efficiency of these markets. To maintain this 
     confidence, investors must have effective remedies against 
     those persons who violate the antifraud provisions of the 
     federal securities laws. In recent years, we have seen how 
     investment losses caused by securities laws violations can 
     adversely affect state and local governments and their 
     taxpayers. It is essential, therefore, that we fully maintain 
     our rights to seek redress in the courts.
       S. 240 would drastically alter the way America's financial 
     system has worked for over 60 years--a system second to none. 
     Following are the major concerns state and local governments 
     have with this ``reform'' legislation:
       Fraud victims would face the risk of having to pay the 
     defendant's legal fees if they lost. S.
      240 imposes a modified ``loser pays'' rule that carries the 
     presumption that if the loser is the plaintiff, all legal 
     fees should be shifted to the plaintiff. The same 
     presumption, however, would not apply to losing 
     defendants. The end result of this modified ``loser pays'' 
     rule is that it would strongly discourage the filing of 
     securities fraud claims by victims, regardless of the 
     merits of the cases. This is particularly true for state 
     and local governments that have lost taxpayer funds 
     through investments, involving financial fraud in 
     derivatives, for example, but who simply cannot afford to 
     risk further taxpayer funds by taking the risk that they 
     might lose their case and have to pay the legal fees of 
     large corporations. The argument is made that a modified 
     loser pays rule is necessary to deter frivolous lawsuits, 
     but we understand there are only 120 companies sued 
     annually--out of over 14,000 public corporations, and that 
     the number of suits has not increased from 1974.
       Fraud victims would find it exceedingly difficult to fully 
     recover their losses. Our legal standard of ``joint and 
     several'' liability has enabled defrauded investors to 
     recover full damages from accountants, brokers, bankers and 
     lawyers who help engineer securities frauds, even when the 
     primary wrongdoer is bankrupt, has fled or is in jail. S. 240 
     sharply limits the traditional rule of joint and several 
     liability for reckless violators. This means that fraud 
     victims would be precluded from fully recovering their 
     losses.
       Wrongdoers who ``aid and abet'' fraud would be immune from 
     cases brought by fraud victims. As you know, aiders had been 
     held liable in cases brought by fraud victims for 25 years 
     until a 5-4 Supreme Court ruling last year eliminated such 
     liability because there was not specific statutory language 
     in federal securities law. If aiders and abettors are immune 
     from liability, as issuers of debt securities, state and 
     local governments would become the ``deep pockets,'' and as 
     investors they would be limited in their ability to recover 
     losses. The Securities and Exchange Commission and the state 
     securities regulators have recommended full restoration of 
     liability of aiders and abettors and GFOA supports that 
     recommendation.
       Wrongdoers would be let off the hook by a short statute of 
     limitations. We had supported the modest extension of the 
     statute-- [[Page S 8906]] from one year from discovery of the 
     fraud but no more than three years after the fraud to two 
     years after the violation was, or should have been, 
     discovered but not more than five years after the fraud was 
     committed--that was contained in an earlier version of S. 
     240. We are disappointed that this extension was removed in 
     the Committee's markup of the legislation and hope it will be 
     restored when the full Senate considers the bill.
       Under S. 240, corporations could deceive investors about 
     future events and be immunized from liability in cases 
     brought by defrauded investors. Corporate predictions are 
     inherently prone to fraud as they are an easy way to make 
     exaggerated claims of favorable developments to attract 
     investors. The ``safe harbor'' in S. 240 is a very broad 
     exemption and immunizes a vast amount of corporate 
     information so long as it is called a ``forward-looking 
     statement'' and states that it is uncertain and there is risk 
     it may not occur. Such statements are immunized even if they 
     are made recklessly. We believe this opens a major loophole 
     through which wrongdoers could escape liability while fraud 
     victims would be denied recovery.
       Access to fair and full compensation through the civil 
     justice system is an important safeguard for state and local 
     government investors, and is a strong deterrent to securities 
     fraud. We believe. S. 240 as written does not provide such 
     access to state and local governments or to other investors. 
     Just as state and local government investors are urged to use 
     extreme caution in investing public funds, the Senate should 
     use extreme caution in reforming the securities regulation 
     system.
       We hope you will work to bring about needed changes in the 
     legislation when it is considered by the full Senate. If 
     there is any way we can help in this effort, please do not 
     hesitate to call on us.
           Sincerely,
                                               Catherine L. Spain,
     Director, Federal Liaison Center.
                                                                    ____

                                         North American Securities


                             Administrators Association, Inc.,

                                    Washington, DC, June 20, 1995.
     Re S. 240, the ``Private Securities Litigation Reform Act.''

     Hon. Paul S. Sarbanes,
     U.S. Senate, Hart Senate Office Building, Washington, DC.
       Dear Senator Sarbanes: The full Senate may consider as 
     early as Wednesday or Thursday of this week, S. 240, the 
     ``Private Securities Litigation Reform Act of 1995.'' On 
     behalf of the North American Securities Administrators 
     Association (NASAA), we are writing today to express the 
     Association's opposition to S. 240 as it was reported out of 
     the Banking Committee. In the U.S., NASAA is the national 
     voice of the 50 state securities agencies responsible for 
     investor protection and the efficient functioning of the 
     capital markets at the grassroots level.
       While everyone agrees on the need for changes to the 
     current securities litigation system, not everyone is 
     prepared to deny justice to defrauded investors in the name 
     of such reform. Proponents of the bill make two claims: 
     first, that they have modified the bill to satisfy many of 
     the objections to the earlier version; and second, that the 
     bill will not prevent meritorious claims from going forward. 
     Neither claim is accurate. First, the changes made to the 
     bill do little to resolve the serious objections to S. 240 
     raised by NASAA and its members. In fact, it may be argued 
     that during the Banking Committee's deliberations the bill 
     was made less acceptable from the perspective of investors. 
     Second, it is NASAA's view that the bill succeeds in curbing 
     frivolous lawsuits only by making it equally difficult to 
     pursue rightful claims against those who commit securities 
     fraud.
       The reality is that the major provisions of S. 240 will 
     work to shield even the most egregious wrongdoers among 
     public companies, brokerage firms, accountants and others 
     from legitimate lawsuits brought by defrauded investors. Do 
     we really want to erect protective barriers around future 
     wrongdoers?
       NASAA agrees that there is room for constructive 
     improvement in the federal securities litigation process. The 
     Association supports reform measures that achieve a balance 
     between protecting the rights of defrauded investors and 
     providing relief to honest companies and professionals who 
     may unfairly find themselves the targets of frivolous 
     lawsuits. Regrettably, S. 240 as approved by the Senate 
     Banking Committee fails to achieve this necessary balance.
       Although this bill has been characterized in some quarters 
     as an attempt to improve the cause of defrauded investors in 
     legitimate lawsuits, that simply is not the case. Attempts to 
     incorporate into the bill provisions that would work to the 
     benefit of defrauded investors were rejected when the Banking 
     Committee considered the bill. At the same time, the few 
     provisions in the original bill that may have worked to the 
     benefit of defrauded investors were deleted.
       For example, during the Committee' deliberations: (1) the 
     rather modest extension of the statute of limitations for 
     securities fraud suits contained in the original version was 
     deleted; (2) attempts to fully restore aiding and abetting 
     liability under the securities laws were rejected; (3) a 
     regulatory safe harbor for forward-looking statements 
     contained in the original version of S. 240 was replaced with 
     an overly broad safe harbor for such information, making it 
     extremely difficult to sue when misleading information causes 
     investors to suffer losses; and (4) efforts to loosen the 
     strict limitations on the applicability of joint and several 
     liability were rejected, making it all but impossible for 
     more than a very few to ever fully recover their losses when 
     they are defrauded. The truth here is that this is a one-
     sided measure that will benefit corporate interests at the 
     expense of investors.
       As state government officials responsible for administering 
     the securities laws in our jurisdictions, we know the 
     important role private actions play in the enforcement of our 
     securities laws and in protecting the honesty and integrity 
     of our capital markets. The strength and stability of our 
     nation's securities markets depend in large measure on 
     investor confidence in the fairness and integrity of these 
     markets. In order to maintain this confidence, it is critical 
     that investors have effective remedies against persons who 
     violate the anti-fraud provisions of the securities laws.
       When S. 240 is considered on the Senate floor, it is 
     expected that several pro-investor amendments will be offered 
     in an attempt to inject some balance into the measure. Among 
     the amendments we expect to be offered are those that would: 
     (1) extend the statute of limitations for private securities 
     fraud actions; (2) fully restore aiding and abetting 
     liability under the securities laws; (3) replace the
      expansive safe harbor for foward-looking statements with a 
     directive to the Securities and Exchange Commission to 
     continue its rulemaking efforts and report back to 
     Congress; and (4) lift the severe limitations on joint and 
     several liability so that defrauded investors may fully 
     recover their losses.
       On behalf of NASAA, we respectfully encourage you to vote 
     in favor of all such amendments when they are offered on the 
     Senate floor. If all four amendments are not adopted, we 
     respectfully encourage you to oppose S. 240 on final passage.
       NASAA regrets that the Association cannot support the 
     litigation reform proposed as reported out of the Senate 
     Banking Committee. The Association believes that this issue 
     is an important one and one that should be addressed by 
     Congress. However, NASAA believes that is more important to 
     get it done right than it is to get it done quickly. S. 240 
     as it was reported out of the Banking Committee should be 
     rejected and more carefully-crafted and balanced legislation 
     should be adopted in its place.
       If you have any questions about NASAA's position on this 
     issue, please contact Maureen Thompson, NASAA's legislative 
     adviser.
           Sincerely,
     Philip A. Feign,
       Securities Commissioner, Colorado Division of Securities, 
     President, North American Securities Association.
     Mark J. Griffin,
       Director, Utah Securities Division, Chairman, Securities 
     Litigation Reform Task Force of the North American Securities 
     Administrators Association.
                                                                    ____

         American Council on Education, California Labor 
           Federation--AFL-CIO, Congress of California Seniors--LA 
           Country, Consumer Federation of America, Consumers for 
           Civil Justice, International Brotherhood of Teamsters, 
           Government Finance Officers Association, Gray Panthers, 
           National League of Cities, New YOrk State Council of 
           Senior Citizens, North American Securities 
           Administrators Association, U.S. Public Interest 
           Research Group,
                                                     May 23, 1995.
     Re: securities litigation reform.

     Hon. Alfonse D'Amato,
     Chairman, Committee on Banking, Housing and Urban Affairs, 
         U.S. Senate, Dirksen Senate Office Building, Washington, 
         DC.
       Dear Chairman D'Amato: Our organizations have been actively 
     involved in the securities litigation reform debate. We are 
     writing today to express the very serious concerns our 
     organizations and individual members have with the major 
     provisions of S. 240, the ``Private Securities Litigation 
     Reform Act,'' introduced by Senators Dodd and Domenici, and 
     with the substitute language that emerged on Monday.
       Let us be clear: our organizations strongly believe that 
     any securities litigation reform must achieve a balance 
     between protecting the rights of defrauded investors and 
     providing relief to honest companies and professionals who 
     may find themselves the target of a frivolous lawsuit. We 
     agree that abusive practices should be deterred, and where 
     appropriate, sternly sanctioned. At the same time, the 
     doorway to the American system of civil justice must remain 
     open for those investors who believe they have been 
     defrauded.
       Although we understand that some of the specifics of S. 240 
     remain under discussion, [[Page S 8907]] we are extremely 
     disappointed to see that the substitute language now being 
     circulated (and expected to be marked up on Thursday, May 
     25th) has not moved at all in the direction of achieving the 
     balance we believe is so critical to resolving this debate. 
     While we appreciate the fact that some of the provisions we 
     found most objectionable in the bill as introduced were 
     deleted, we are dismayed to find other equally troubling 
     provisions inserted in the new draft. Perhaps most disturbing 
     is that the one pro-investor provision found in S. 240 as 
     introduced--the extension of the statute of limitations--has 
     been dropped entirely in the latest version of the bill.
       Collectively, our organizations and those with which we 
     have worked closely on this issue represent tens of millions 
     of ordinary Americans who increasingly must rely on 
     investments to build retirement nest eggs, finance the 
     college education of children, and to save for major 
     purchases, such as a home. The organizations represent the 
     thousands of state and local governments, that participate in 
     the securities markets both as investors of pension funds and 
     temporary cash balances and as issuers of municipal debt. Our 
     ranks also include colleges and universities and other 
     institutions of higher learning, as well as labor 
     organizations, that participate in the securities markets as 
     investors of endowment and pension funds.
       Our general and primary concerns with respect to the 
     provisions of S. 240, as well as with other proposals that 
     now are under discussion or are present in the House version 
     of this legislation, include;
       Unreasonable standards for fraud pleadings, burden of proof 
     and damages;
       Any form of ``means testing'' for access to justice of 
     recovery, including conferring a special status on certain, 
     larger investors;
       Limits on joint and several liability that will work to 
     immunize from liability certain professional groups;
       ``Loser pays'' rules;
       Expansive safe harbor exemptions from private liability for 
     forward looking statements (we believe the more appropriate 
     response is SEC rulemaking in this area); and
       Expanding the scope of this bill to go beyond cases 
     involving private class actions brought under the 1934 
     Securities Exchange Act.
       At the same time, we have expressed support for major 
     reform proposals, including:
       An early evaluation procedure designed to weed out clearly 
     frivolous cases, with sanctions imposed in certain instances;
       A more rational system of determining liability based on 
     proportionate liability for reckless violators and joint and 
     several liability for knowing violators, with provisions made 
     for special circumstances in which knowing securities 
     violators are unable to satisfy a judgment;
       The right to contribute among liable defendants according 
     to proportionate responsibility.
       Certification of complaints and improved case management 
     procedures;
       Improved disclosure of settlement terms;
       Curbs on potentially abusive practices on the part of 
     plaintiffs' attorneys;
       A reasonable extension of the statute of limitations for 
     securities fraud suits; and
       Restoration of liability for aiding and abetting securities 
     fraud.
       Although some people may mistakenly believe that the 
     markets run on money, the truth is that the markets run on 
     public confidence. As investors ourselves and as 
     representatives of investors, we can tell you that the 
     confidence we have in the marketplace will be dramatically 
     altered if we come to believe that not only are we at risk of 
     being defrauded, but that we will have no recourse to fight 
     back against those who have victimized us. We fear that is 
     exactly what will be the case if S. 240 or its substitute 
     version is enacted. There should be little doubt that under 
     such a scenario many investors will seriously reconsider 
     whether they want to remain in the marketplace.
       Finally, we want to take this opportunity to put to rest 
     the frequently voiced claim that no defrauded investor with a 
     meritorious case will be denied justice under these reform 
     proposals. That is just plainly and demonstrably untrue.
       Any questions about this letter should be directed to any 
     of the contacts listed below:
       Contacts;
       American Council on Education: Shelly Steinbach.
       CA Labor Federation--AFL-CIO: Bill Price.
       Congress of CA Seniors--LA County: Max Turchen.
       Consumer Federation of America: Mern Horan.
       Consumers of Civil Justice: Walter Fields.
       International Brotherhood of Teamsters: Bart Naylor.
       Government Finance Officers Association: Cathy Spain.
       Gray Panthers: Dixie Horning.
       National League of Cities: Frank Shafroth.
       New York State Council of Senior Citizens: Eleanor Litwak.
       North American Securities Administrators Association: 
     Maureen Thompson.
       U.S. Public Interest Research Group: Ed Mierzwinski.
                                                                    ____

                                                     May 24, 1995.
     Re oppose S. 240--devastating for consumers, seniors, 
         investors.

     Hon. Paul S. Sarbanes,
     Senate Committee on Banking, Housing, and Urban Affairs, Hart 
         Senate Office Building, Washington, DC.
       Dear Senator Sarbanes: We are writing to express our strong 
     opposition to S. 240, the so-called ``Private Securities 
     Litigation Reform Act.'' In our earlier analysis of the bill 
     (January 25, 1995), we discussed the eight most harmful 
     provisions for consumers, seniors, and investors. We stressed 
     that S. 240 would effectively eliminate private enforcement 
     of the securities law and greatly reduce the likelihood that 
     innocent victims of fraud could recover their losses from 
     corporate and individual wrongdoers.
       Now that the Banking Committee's substitute has been issued 
     in preparation for the markup on Thursday, May 25, we are 
     deeply concerned that the bill has not moved in the direction 
     of balanced reform. On the whole, the bill is now even worse 
     for average Americans. The intentions of the Senate Banking 
     Committee's substitute bill are clear--to promote the 
     interests of big corporations, big accounting firms, big 
     brokerage firms and big investment banking houses at the 
     expense of average Americans. The bill is now entirely anti-
     consumer, anti-senior, anti-investor, and pro-defendant, pro-
     industry, and pro-wealthy. Any pretensions of protecting 
     small investors and meritorious fraud actions have been 
     abandoned.
       Only one of our concerns (the insider-dominated 
     disciplinary board for accountants) has been addressed, while 
     seven deeply troubling provisions remain or have gotten even 
     worse. We have attached a consumer critique of the Banking 
     Committee's substitute which explains our strong opposition, 
     as well as a recent article which highlights the urgency of 
     our concerns.
       S. 240 strikes a blow to the heart of the middle class and 
     average, hard-working Americans who depend on the federal 
     securities system to protect their savings, investments, and 
     retirements. A study published in the 1991 Maine Law Review 
     found that 87% of managers surveyed were willing to commit 
     financial statement fraud, more than 50% were willing to 
     overstate assets, 48% were willing to understate loss 
     reserves, and 38% would ``pad'' a government contract. In 
     addition, securities fraud is increasing at an alarming rate. 
     Cases brought by federal and state regulators have increased 
     by more than 45% in just five years.
       Moreover, a new major financial fraud that could rival the 
     savings and loan fiasco--involving high-risk, highly 
     speculative derivative securities--is just being discovered. 
     Orange County is not alone. Already, 40 American communities 
     and public institutions across the country have reported 
     derivatives losses totalling some $3 billion. And indications 
     are that fraud may have played a large role in many of those 
     disasters.
       Clearly, this is no time to be immunizing fraud and 
     removing vital investor protection laws that have served 
     American consumers so well for decades. We urge you to vote 
     against S. 240 in the markup on Thursday.
           Sincerely,
     Richard Vuernick,
       Legal Policy Director, Citizen Action.
     Mern Horan,
       Legislative Representative, Consumer Federation of America.
     Mary Griffin,
       Counsel, Consumers Union.
     Joan Claybrook,
       President, Public Citizen.
     Edmund Mierzwinski,
       Consumer Program Director, U.S. Public Interest Research 
     Group.
     M. Kristen Rand,
       Director of Federal Policy, Violence Policy Center.
       Attachment.
                [From the New York Times, May 22, 1995]

                           Friends of Fraud?

                           (By Anthony Lewis)

       Of all the bills making their way through this Congress, 
     the most devastating to its area of the law may be one that 
     has had relatively little attention: legislation to weaken 
     the protection of the public against securities fraud.
       The House passed a bill in March. Now the Senate Banking 
     Committee is working on its version. To judge how devastating 
     the legislation would be, consider what it would have done to 
     some of the most notorious recent fraud cases.
       In the 1980's Prudential Securities brokers lure customers 
     to invest in risky securities with deliberately false 
     statements about how much they would make. The defrauded 
     investors and the Securities and Exchange Commission sue 
     Prudential Securities, and in the S.E.C. case alone the firm 
     agreed to repay more than $700 million to the victims.
       The victims would probably have been unable to sue if one 
     section of the current House bill had been law. Known as the 
     ``safe harbor'' provision, it immunizes from suits by the 
     defrauded all ``forward-looking statements'' about 
     securities. Companies and their agents could make false 
     ``projections'' and ``estimates'' of future performance, even 
     if they were deliberate lies, without fear of lawsuits by 
     those defrauded.
       The chairman of the S.E.C., Arthur Levitt Jr., is concerned 
     about the ``safe harbor'' provision. He has just written to 
     the Senate [[Page S 8908]] committee urging it not thus to 
     protect ``purposefully fraudulent'' financial predictions.
       That is not the only part of the pending legislation that 
     would make it difficult--perhaps impossible--for victims of 
     fraud to sue. Another is a provision of the House bill 
     requiring anyone who brings a securities fraud suit to show 
     at once, when he or she sues, the state of mind of the 
     defendant indicating fraudulent intent. That kind of 
     information is usually found only during the discovery phase 
     of a case.
       For example, two months ago shareholders in Koger 
     Properties Inc. won an $81.3 million judgment in a fraud suit 
     against its accounting firm, Deloitte & Touche. During 
     pretrial discovery, the plaintiffs' lawyers found that the 
     partner in charge of the audit owned stock in Koger, a 
     violation of accounting standards. They could not have known 
     that when they sued.
       Still another provision of the House bill, and the Senate's 
     as it stands, would limit what is called ``joint and several 
     liabilities.'' That allows the victims of fraud to recover 
     from others involved if the principal fraud perpetrator is 
     not able to pay.
       Last month, for example, Steven Hoffenberg of Towers 
     Financial Corporation pleaded guilty to securities fraud and 
     criminal conspiracy in a Ponzi scheme that cost investors 
     $460 million. He said his accountants and lawyers helped 
     carry out the fraud by issuing false financial statements and 
     making misleading statements to the S.E.C. Towers is 
     bankrupt, so the victims are suing the lawyers and 
     accountants.
       Some of the worst scams in recent history would have left 
     the defrauded investors with little or no recourse if the 
     ``joint and several liability'' limit had been in effect. The 
     victims of Charles Keating, the great savings and loan 
     swindler, would have been out of luck when he went to prison 
     and said he was broke.
       The legislation sounds highly specialized, and it is. But 
     it would have widespread effects on real people. In addition 
     to individual investors who have been defrauded, many local 
     governments have lost large sums in recent years and are 
     suing brokerage firms and others. The big example is Orange 
     County, California, which lost more than $1 billion, but 
     there are dozens more.
       It is a peculiar time to weaken legal protections: a time 
     of spectacular financial frauds. The latest involves the 
     Foundation for New Era Philanthropy, whose scam attracted 
     many charities and such investors as Lawrence S. Rockefeller 
     and William E. Simon. New Era collapsed last week, and the 
     S.E.C. charged its founder with ``massive'' securities fraud.
       But this Congress evidently does not care a lot about the 
     victims of fraud. It is listening to the lobbyists for 
     accounting firms and insurance companies, whose political 
     action committees have made large campaign contributions, and 
     others who want to operate without fear of being sued for 
     securities fraud.
                                                                    ____

         Consumers Union, Consumer Federation of America, U.S. 
           Public Interest Research Group, Citizen Action, Public 
           Citizen, Violence Policy Center


  consumer critique of S. 240 ``Private Securities Litigation Reform 
                                 Act''

       (1) Abrogation of joint and several liability, which would 
     effectively immunize professional wrongdoers. The original S. 
     240 eliminated joint and several liability in a wide class of 
     cases, favoring large corporations, accountants, brokers and 
     bankers--who have been found liable--over defrauded victims. 
     The substitute S. 240 restricts joint and several liability 
     even further.
       Under joint and several liability, if one wrongdoer is 
     found liable but has no assets, the victim can be reimbursed 
     fully by the other wrongdoers, without whose assistance the 
     fraud could not have succeeded. This traditional aspect of 
     America's legal system for fraud is based on the policy that 
     it is more fair for other wrongdoers to pay for a loss that 
     cannot be collected from one of the co-conspirators than it 
     is for the victims to go uncompensated. The rule has enabled 
     swindled consumers to recover full damages from accountants, 
     brokers, bankers, lawyers and other wrongdoers who 
     participate in securities scams, even when the primary 
     wrongdoer has no assets left, has fled, or is in jail.
       The original S. 240 sharply limited this rule, immunizing 
     reckless wrongdoers from joint and several liability. If S. 
     240 had been in effect, most investors would not have 
     recovered their life savings in the Charles Keating/Lincoln 
     Savings & Loan debacle. Although Keating had become bankrupt, 
     the victims recovered their damages from the accountants, 
     bankers, and lawyers who assisted Keating. Despite extensive 
     testimony to Congress that restricting joint and several 
     liability will reduce recoveries for defrauded victims and 
     encourage more fraud, the substitute bill restricts joint and 
     several liability even further.
       Under the substitute, in the all-too-often cases where a 
     knowing violator's share is uncollectible, the liability of 
     reckless violators for the uncollectible share would be 
     subject to a lower ``cap'' than under the original bill. The 
     rest of the uncollectible share simply will be lost to the 
     defrauded victims. Although the ``cap'' would not apply to 
     victims with a net worth over $200,000 and recoverable 
     damages of more than 10% of their net worth, that basically 
     eliminates anyone who owns a house.
       Adjudged perpetrators of securities fraud are given a gift 
     while fraud victims are denied full recover of the money that 
     was stolen from them--that is the policy of S. 240. Under the 
     substitute, it will be virtually impossible for many victims 
     of fraud to recover a large part of their losses.
       (2) Failure to restore the liability of those who aid and 
     abet fraud. The original S. 240 failed to restore aiding and 
     abetting liability for accountants, lawyers, brokers, bankers 
     and others who assist primary wrongdoers in committing 
     securities fraud. The substitute also fails to do so.
       Last year, in the Central Bank of Denver case, the Supreme 
     Court overturned in a 5-4 ruling 25 years of established 
     precedent (including all 11 federal appellate courts that 
     addressed the issue) by wiping out aiding and abetting 
     liability of accountants, lawyers, brokers, bankers and 
     others who assist primary wrongdoers in committing securities 
     fraud. This right of action has played a vital role in 
     compensating swindled consumers in the major financial frauds 
     of the last several decades and must be restored by Congress. 
     Central Bank severely weakens the deterrence of securities 
     fraud because it sends a dangerous signal to the markets that 
     a primary enforcement tool has been eliminated. That not only 
     hurts defrauded consumers, it hurts all Americans. S. 240 
     fails to address this issue for obvious reasons--the entire 
     thrust of the bill is to further immunize defendants from 
     liability.
       In their Congressional testimony, the Securities and 
     Exchange Commission (``SEC'') and state regulators 
     recommended restoring aiding and abetting liability. Even 
     Senator Dodd has stressed the importance of restoring the 
     liability of those who aid and abet securities fraud. During 
     a May 12, 1994 hearing before the Senate Subcommittee on 
     Securities, Senator Dodd stated ``Lawyers, accountants, and 
     other professionals should not get off the hook, in my view, 
     when they assist their clients in committing fraud . . . The 
     Supreme Court has laid down a gauntlet for Congress . . .  In 
     my view, we need to respond to the Supreme Court decision 
     promptly and I emphasize promptly.''
       (3) Discrimination against small shareholders. The original 
     S. 240 contained a blatantly discriminatory wealth-test for 
     filing securities fraud class actions. The substitute 
     replaces the wealthiest with an equally discriminatory 
     wealth-control provision.
       The substitute adds a new provision that sets up a strong 
     presumption that the ``most adequate plaintiff'' in any 
     private class action is the plaintiff that has the largest 
     financial interest in the outcome of the action. The bill 
     then grants this ``most adequate plaintiff'' the power to 
     select the lead counsel and control the case, including 
     settling for any amount or even dismissing the case.
       Perhaps no other change to S. 240 makes plainer the real 
     motives behind the bill and makes hollower any pretensions to 
     protect meritorious fraud actions. This ``most affluent 
     plaintiff'' requirement would have a devastating effect on 
     average consumers who are defrauded in the
      securities markets. Mutual funds and large investors, who 
     may have close ties to big corporate fraud defendants 
     (e.g., mutual fund managers enjoy ready access to 
     information from corporate managers) and who may care less 
     about full recovery because its loss reflects a smaller 
     proportion of total investment than smaller investors' 
     losses, can afford to accept less than full recoveries, 
     would have complete control over class actions at the 
     expense of average investors. What makes a mutual fund 
     that has lost $1 million of its $1 billion portfolio more 
     adequate to represent a class of defrauded investors than 
     an elderly widow who has lost $27,000 out of her $30,000 
     net worth?
       Aside from raising the specter of collusive intervention by 
     large investors simply to dismiss cases or enter into 
     sweetheart settlements, the substitute virtually precludes 
     small investors from being able to obtain attorneys willing 
     to invest their time on cases in which they can have no 
     control and may not be paid fairly (or at all) by lead 
     counsel.
       This provision also directly contradicts the primary 
     rationale for class actions--to give average investors who 
     cannot afford to litigate against major corporate defendants 
     on their own a means by which they could band together to 
     seek a remedy for their losses.
       (4) Inadequate efforts to deal with unwarranted secrecy. As 
     we outlined in our January letter, the original S. 240 made 
     no effort to address the serious problem of defendant-coerced 
     secrecy orders covering all the underlying documents relevant 
     to the fraud. These orders remain in effect throughout the 
     litigation and generally require that, once a case is 
     terminated, the documents be destroyed or returned to the 
     defendants. Such secrecy orders block significant corporate 
     wrongdoing from public scrutiny and allow defendants, at the 
     time of settlement, to proclaim their innocence without fear 
     of contradiction. The substitute continues to ignore this 
     problem, further demonstrating that the bill is not really 
     intended to solve the real problems in securities litigation.
       (5) Imposition of ``loser pays'' fee shifting. The original 
     S. 240 abrogated a 200-year-old legal principle reflecting 
     our national policy in favor of access to justice. It did so 
     by requiring losing parties who decline to accept out-of-
     court resolution of their cases to pay all of the prevailing 
     parties' legal fees and costs.
       The substitute simply replaces this ``loser pays'' rule 
     with a different ``loser pays'' [[Page S 8909]] rule--
     mandatory sanctions under Rule 11 of the Federal Rules of 
     Civil Procedure which includes a strong presumption in favor 
     of shifting all legal fees and costs to the loser. The new 
     provision suffers from the same flaw as the original--average 
     consumers who have just lost their retirement savings in a 
     financial fraud cannot afford to take the risk that they 
     might lose their house as well if they lose their case. 
     Moreover, the new rule would prolong cases, waste more 
     resources on litigating additional issues, and add to the 
     money spent on legal fees by requiring the court to make 
     specific findings regarding compliance by every party and 
     every attorney, even when no party requests it.
       The end result of this ``loser pays'' rule will be a severe 
     chill on the assertion of securities fraud claims, regardless 
     of their merits.
       (6) Free reign for false statements. The original S. 240 
     allowed the SEC to consider creating a safe harbor exemption 
     for corporate predictive statements--the substitute creates a 
     ``safe ocean'' exemption from fraud liability for corporate 
     predictions that essentially grants would-be wrongdoers a 
     license to lie. The substitute adopts a wholesale exemption 
     which would completely immunize a vast amount of corporate 
     information (``any statement, whether made orally or in 
     writing, that projects, estimates, or describes future 
     events'') so long as it is called a forward-looking statement 
     and states that it is uncertain and may not occur, even if 
     they are made with reckless disregard for their accuracy. 
     This is a gaping loophole through which wrongdoers could 
     escape liability while fraud victims would be denied 
     recovery.
       Corporate ``forward-looking statements'' are prone to fraud 
     as they are an easy way to make exaggerated claims of 
     favorable developments in order to attract cash. They 
     continue to be a favorite tool of con artists, promoters and 
     illegal insider traders to artificially pump up the price of 
     public company stock in order to profit at investors' 
     expense. The substitute's safe harbor provision creates an 
     incentive to provide bad information to consumers and a 
     disincentive to provide the best available information. It 
     would effect an upheaval in the mandatory corporate 
     disclosure system in the United States, with immense 
     potential adverse market consequences.
       Finally, by itself, the safe harbor would eliminate many, 
     if not most, fraud class actions. The safe harbor provision 
     would require, with limited exemptions, that every class 
     action member prove actual knowledge of and reliance on the 
     fraudulent statement, an (almost) impossible requirement in 
     class action suits. Under this provision, even purposefully 
     fraudulent forward-looking statements could be made without 
     the possibility of redress through a class action lawsuit.
       The SEC is currently in the middle of a rulemaking 
     proceeding to study forward-looking statements and has 
     requested that Congress allow it to complete its process. We 
     believe that Congress should defer establishing a safe harbor 
     provision until the agency experts have thoroughly reviewed 
     this matter.
       (7) A flawed limitations period. The current statute of 
     limitations--1 year from discovery of the fraud but in no 
     event more than 3 years after the fraud--is generally 
     regarded as too short. The original S. 240 extended the 
     period to 2 years after the violation was or should have been 
     discovered but not more than 5 years after the fraud. Rather 
     than heed the SEC and the state securities regulators, who 
     testified that the limitations period should be even longer, 
     the substitute simply drops the extension entirely. There is 
     now not a single provision in the bill that would increase 
     recoveries for fraud victims--it is totally one-sided and 
     should really be called the ``Wrongdoer Protection Act of 
     1995.''
       (8) An insider-dominated disciplinary board for 
     accountants. The substitute deletes the provision of the bill 
     that would have allowed the trade association for the 
     accountants--the AICPA--to be a sham self-disciplinary board 
     for public accountants. This is the only one of our original 
     concerns that has been adequately addressed by the substitute 
     bill.
                                                                    ____

               [From the Washington Post, June 18, 1995]

                 Making It Easier to Mislead Investors

                         (By Jane Bryant Quinn)

       A lawsuit-protection bill speeding through Congress will 
     give freer rein to Wall Street's eternal desire to hype 
     stocks.
       It's cast as a law against frivolous lawsuits that unfairly 
     torture corporations and their accountants. But the versions 
     in both the House and Senate do far more than that. They 
     effectively make it easier for corporations and stockbrokers 
     to mislead investors. Class action suits against the 
     deceivers would be costly for small investors to file and 
     incredibly difficult to win.
       I'm against frivolous lawsuits. Who isn't? But these bills 
     would choke meritorious lawsuits, too. They affect only 
     claims filed in federal court, so bilked investors would 
     still have the option of seeking justice in a state courts. 
     But the federal law would set a terrible precedent and leave 
     the markets more open to fraud.
       The congressional proposals started out as a way of 
     protecting companies against so-called strike suits--lawsuits 
     filed against companies whose stock price unexpectedly 
     plunges.
       The companies complain that ``vulture lawyers'' lie in wait 
     for these drops in price. When they occur, the lawyers find 
     willing plaintiff and immediately file suit. The usual 
     charge: that the firm, its executives and accountants misled 
     investors with falsely optimistic statements. That's not 
     true, the companies say, but they tend to settle just to 
     avoid the legal expense. If so, this represents a grave 
     cost--on corporations, shareholders and economic efficiency.
       But are strike suits really overwhelming corporations? 
     There's evidence on both sides of this issue, but most of it 
     fails to document the executives' broad complaints.
       As an example, take the new study by Baruch Lev, a 
     professor at the University of California at Berkeley. He 
     looked at public companies whose share price fell more than 
     20 percent in the five days around the time of a 
     disappointing quarterly earnings report. There were 589 such 
     cases, from 1988 through 1990. But related class action suits 
     were filed against only 20 of the firms.
       Lev compared those 20 companies with similar firms where no 
     lawsuits were filed. Among other things, the litigated 
     companies tended to put out rosy statements--in some cases, 
     just before releasing the bad earnings report. By contrast, 
     the firms that weren't sued tended to publish more sober 
     statements and to warn investors in advance that earnings 
     would be lower than expected.
       Lev warns that his sample is too small to reach statistical 
     conclusions. But his basic data undermine the claims that 
     companies are bombarded with lawsuits whenever their stock 
     goes down.
       The new bills contain many provisions to worry investors. 
     For example, if you lost a class action suit, you might have 
     to pay the legal fees for the other side. Psychologically, 
     that could stop you from suing no matter how badly you'd been 
     burned.
       The bills also give excessive protection to so-called 
     forward statements, which are the business projections that 
     corporations make.
       Under current law, it's all right to make a reasonable 
     projection, even if it doesn't come true. But a company can 
     be held liable for making an unreasonable projection that 
     misleads investors. In many of the cases where lawsuits are 
     brought, ``executives are telling the public that everything 
     is going to be great while they're bailing out and selling 
     their own stock,'' Jonathan Cuneo, general counsel of the 
     National Association of Securities and Commercial Law 
     Attorneys, told my associate Louise Nameth.
       If these bills become law, however, companies could get 
     away with making misleading, even reckless statements. To win 
     a class action lawsuit, you would have to prove that a 
     falsehood was uttered with a clear intent to deceive. That's 
     incredibly tough to do.
       This provision, in particular, troubles Arthur Levitt Jr., 
     chairman of the Securities and Exchange Commission. ``The law 
     should not protect persons who make material statements they 
     know to be false or misleading,'' he says, ``nor should it 
     protect offerings such as penny stocks, nor persons who have 
     committed fraud in the past.''
       Baseless lawsuits do indeed exist. Lawyers may earn too 
     much from a suit, leaving defrauded investors too little. The 
     incentives to sue should be reduced. But not with these 
     bills. They'd let too many crooks get away.
                                                                    ____

             [From U.S. News & World Report, June 26, 1995]

                      Will Congress Condone Fraud?

                             (By Jack Egan)

       Some of the most unpopular people in Washington these days 
     are shareholders' lawyers who sue companies at the drop of a 
     stock, usually claiming that management deceived investors 
     about the outlook and is liable for losses when shares fall.
       Lawmakers have concluded--without much supporting 
     evidence--that this happens far too frequently, hamstringing 
     corporations and causing executives to be wary of making 
     forecasts. And so legislation is zipping through Congress to 
     curb ``frivolous'' or ``speculative'' lawsuits against public 
     companies. The high-sounding Private Securities Litigation 
     Reform Act of 1995 easily passed the House in March. It was 
     approved by the Senate's banking panel and will soon be taken 
     up by the full body.
       It just might come to be remembered as legislation that 
     steeply tilted the playing field against investors. The bill 
     may make executives feel easier about discussing what they 
     see ahead, with shareholders benefiting from more candid 
     disclosure. But it makes it very hard for shareholders to sue 
     over legitimate grievances. The House version even protects 
     management when it lies, provided the deception is a 
     projection.
       Unhappy Levitt. The Securities and Exchange Commission, 
     which has always viewed private actions as complementing its 
     own limited enforcement abilities, is not happy. In a letter 
     to Senate Banking Committee Chairman Alfonse D'Amato 
     sympathizing with ``the punishing costs of meritless 
     lawsuits,'' SEC Chairman Arthur Levitt also wrote that the 
     House-passed bill might ``compromise investor protection.'' 
     And while the Senate Banking Committee's bill is more 
     moderate, the SEC chairman complained in another letter that 
     shareholders were still hampered from bringing suits against 
     ``all but the most obvious frauds.''
       The crusade to throttle shareholder lawsuits has been 
     spearheaded by high-tech companies and the big accounting 
     firms. The stocks of technology companies tend to be quite 
     volatile, flying high and suddenly nose- [[Page S 
     8910]] diving, often when companies fail to meet ambitious 
     earnings expectations. That makes them especially vulnerable 
     to mugging by lawsuit; according to the American Electronics 
     Association, which represents the industry, 9 out of 10 suits 
     are settled out of court--averaging $8.6 million--simply to 
     avoid the cost of lengthier litigation.
       But claims that nuisance lawsuits are hurting the ability 
     of such companies to raise capital come at a time when 
     technology shares have led the stock market to an all-time 
     high and initial public offerings are running at record 
     levels. ``There are 200 to 300 companies sued each year out 
     of 20,000 that are registered,'' notes Democratic Sen. 
     Richard Bryan of Nevada--about the same as 20 years ago. ``I 
     also oppose frivolous lawsuits, but that issue is really a 
     trojan horse for firms that simply want to limit their 
     liability.''
       The accounting firms felt stung by large liability verdicts 
     against them in connection with the S&L scandal of the early 
     1990s. But the cases that produced the biggest judgments were 
     brought not by individual shareholders but by the federal 
     government, seeking to recoup its depleted S&L insurance 
     fund. Nevertheless, the ``Big Six'' are eagerly backing the 
     bill because it would bar shareholders from suing outsiders 
     who are parties to securities fraud--like accountants.
       When the full Senate debates the bill, perhaps at the end 
     of June, efforts may be made to make it less hostile to 
     shareholders and to deal with some of the SEC's objections. 
     The Clinton administration has yet to weight in. But a veto 
     threat from the president would be risky, since the lopsided 
     vote in the House is enough for an override.
       Shareholders already are barred from suing brokerages and 
     must arbitrate instead. ``The pendulum had swung too far 
     toward the lawyers, and now it's swinging too far the other 
     way,'' notes Richard Kraut, an attorney with Washington-based 
     Storch & Brenner, which specializes in securities law. 
     ``Unfortunately, some major investor frauds may have to take 
     place before it again moves back toward the center.''
                                                                    ____

          [From the St. Louis (MO) Post-Dispatch, May 9, 1995]

                     Don't Protect Securities Fraud

       The House has passed and the Senate is considering a bill 
     to make it much harder for defrauded investors to bring 
     class-action suits against investment firms that defraud 
     them, as well as the accountants who helped them. The impetus 
     for such legislation is the same as that driving tort 
     revision, only with even less justification.
       The Senate bill is sponsored by New Mexico Republican Pete 
     Domenici and, surprisingly, Christopher Dodd, Democrat of 
     Connecticut. Though its final provisions have yet to be 
     settled, it is likely to restrict significantly the rights of 
     small investors to sue for fraud.
       The industry's complaint: The explosion of securities 
     litigation needs to be curbed. But there isn't one; the 
     number of suits has remained nearly constant in the last 20 
     years, despite huge growth in the volume of securities. 
     However, recent events have created a new problem: Many 
     accounting firms that put their names to false documents 
     during the junk bond craze and the thrift debacle are finding 
     themselves in court more often than ever before. They want 
     protection. This bill would give it to them.
       It would prohibit lawyers and accountants from being named 
     as primary defendants in a class action unless the plaintiffs 
     first can show that these defendants had actual knowledge of 
     the fraud and the precise state of mind of those they helped 
     perpetrate it. That can only be done by the discovery process 
     in a lawsuit, not beforehand. The bill would also bar any 
     plaintiff from suing who had less than 1 percent or $10,000 
     invested in the securities in question. This will keep a lot 
     of people out of court.
       When they do get in, if they lose, they will be responsible 
     for court costs if they have holdings of more than very 
     limited size, clearly a deterrent to small-investor suits for 
     securities fraud.
       These are just the highlights of a complex bill whose 
     provisions work against not only the rights of small 
     investors, but even large government bodies, such as Orange 
     County or the city of Joplin, Mo., which lost huge amounts on 
     derivatives that may have been sold to them without full 
     disclosure.
       Among those senators on the Banking Committee who are in a 
     position to slow down the bill is Missouri's Christopher S. 
     Bond. He should do so. His new colleague from Missouri, John 
     Ashcroft, who has yet to take a position on the bill, should 
     join him.
                                                                    ____

            [From the Los Angeles (CA) Times, Mar. 12, 1995]

This Isn't Reform--It's a Steamroller: GOP Bill Curbing Lawsuits Would 
                       Flatten the Small Investor

       Once again House Republicans have put the timetable for 
     their ``contract with America'' ahead of the substance of the 
     bills they are ramming through the lower chamber. On 
     Wednesday the House approved a drastic revision of the 
     nation's securities laws as part of the GOP's agenda for 
     legal reform. The proposed Securities Litigation Reform Act, 
     which is a key provision in the ``contract,'' would sharply 
     curb the ability of investors and shareholders to sue 
     stockbrokers, accounting firms and companies for fraud.
       The measure, authored by Rep. Christopher Cox (R-Newport 
     Beach), simply goes too far. It is one thing to craft 
     legislation directed at curbing specific abuses of securities 
     litigation, but the House measure would amount to a wholesale 
     dismantling of the system that enables investors and 
     shareholders to seek redress for financial fraud.
       Opponents, including state securities administrators as 
     well as consumer groups, maintain that the bill would 
     virtually destroy the ability of citizens of modest means to 
     sue when they are victims of fraud. Arthur Levitt Jr., the 
     chairman of the Securities and Exchange Commission, who has 
     worked to improve investor protections, has reservations 
     about the measure. So has U.S. Atty. Gen. Janet Reno. Small 
     wonder.
       The proposed law would tilt the legal system in favor of 
     corporations and their accounting firms, lawyers and 
     investment firms by making it too easy for them to defend 
     themselves against shareholder suits.
       What might such a law portend for cases like Orange County? 
     County officials are seeking legal recourse against Merrill 
     Lynch Co., which sold high-risk securities to the county's 
     ill-fated investment pool, utilmately triggering its 
     bankruptcy. The fear is that the proposed law could be 
     interpreted by the courts in ways that would work against 
     plaintiffs in cases like this one.
       Under the House bill, a judge could require the losers in a 
     securities fraud case to pay the legal expenses of the winner 
     if the judge determined that the investors' complaint did not 
     originally possess substantial merit. Currently there is no 
     ``loser pays'' general provision. The proposed law also would 
     demand that the plaintiff show that the company or its 
     officials acted knowingly and recklessly in committing the 
     fraud. The current standards are simpler: They allow 
     investors to sue for fraud if a company withholds information 
     or issues misleading information that affects the market 
     price.
       Between these two standards there perhaps is a sensible 
     middle ground--but that's not to be found in the House bill.
       Cox casts his bill as a limitation against so-called 
     ``strike suits,'' brought by shareholders who file lawsuits 
     when the share price drops in a company in which they own a 
     small part of the stock. The congressman likes to point out 
     that high-technology companies are a favorite target of such 
     lawsuits. Abuses of such lawsuits absolutely do exist and 
     should certainly be curbed, but the House bill, as drawn, is 
     overly broad in its potential application.
       The Senate will take up the securities reform bill soon. We 
     urge it to take a reasoned approach to the problems posed by 
     frivolous securities lawsuits. The current House bill is not 
     the answer.
                                                                    ____

          [From the Philadelphia (PA) Inquirer, June 4, 1995]

                 Going Easy on Crooks in 3-Piece Suits

                            (By Jeff Brown)

       True or false: Republicans are the law-and-order people who 
     want to see more crooks go to jail and stay there longer?
       True--unless the crook wears a three-piece suit instead of 
     a ski mask. Corporate executives, accountants, securities 
     industry pooh-bahs--they need special protection against 
     claims they're thieves.
       This, in a nutshell, is the point of the Private Securities 
     Litigation Reform Act of 1995, approved, 11 to 4, by the 
     Senate Banking Committee on May 24 and likely to reach the 
     Senate floor this month. It's meant to discourage 
     ``frivolous'' claims. But what about legitimate ones?
       Unlike a similar House bill passed in March, the version 
     sponsored by Sen. Alfonse D'Amato (R., N.Y.), the committee 
     chairman, doesn't include a sweeping requirement that the 
     loser in a stock-fraud case pay the winner's legal fees. But 
     a trial judge could implement ``loser pays'' by finding the 
     plaintiff had engaged in ``abusive litigation.''
       Loser pays could deter stockholders from filing legitimate 
     lawsuits by making it too risky to challenge rich 
     corporations.
       The D'Amato bill has other flaws as well, says Securities 
     and Exchange Commission Chairman Arthur Levitt. ``Willful 
     fraud'' would be made easier by a ``safe harbor'' provision, 
     he says, because executives would be overly protected from 
     lawsuits regarding misleading projections about a company's 
     performance.
       Stock frauds usually use bloated financial projections to 
     entice investors. D'Amato would require a new, higher level 
     of proof--essentially, that a company intended to mislead, 
     giving defrauded investors the nearly insurmountable task of 
     establishing a corporate executive's state of mind. An 
     executive could make virtually any projection, then insulate 
     himself against a fraud verdict by adding that things might 
     not turn out that way.
       The bill has some good provisions to protect investors 
     joining in a class action from abuse by their own attorneys, 
     and it would ensure that plaintiffs are illegitimate victims 
     and not stooges for ambulance-chasers.
       But federal court figures don't support Republican claims 
     there's a flood of frivolous suits. There are only a few 
     hundred class-action securities cases filed a year, while 
     there are more than 14,000 public companies. And, of course, 
     many securities suits are legitimate--just ask the victims in 
     the Crazy Eddie or Lincoln Savings & Loan cases. Class 
     actions are the cheapest way for small investors to fight 
     abuses by well-heeled corporations.
       SEC lawyers say most people who commit stock fraud could be 
     charged with criminal [[Page S 8911]] violations that carry 
     prison terms. But they aren't because in criminal cases, 
     prosecutors need proof beyond a reasonable doubt. So most 
     stock-fraud cases, which are tough for jurors to grasp, go to 
     civil court, where only a preponderance of evidence is 
     required.
       Still, a crook is a crook, whether he burgled your home or 
     lied to sell you stocks at an inflated price. And the D'Amato 
     bill would relax the penalties for many stock crooks.
       It would scrap rules that make each participant in a fraud 
     liable for the entire sum-ordered returned to investors or 
     paid in fines. Under the current ``joint and several'' 
     liability rules if one defendant can't come up with his 
     share, the others have to pay it.
       Instead, D'Amato would establish ``proportional 
     liability,'' in which, with few exceptions, each defendant 
     would pay a percentage of the penalty equal to his share of 
     guilt, as determined at trial. Thus, if the defendant who 
     owes 80 percent is bankrupt, the defrauded investors would be 
     unable to recover most of what they are owed, even if another 
     defendant has the money.
       This provision was aggressively sought by the accounting 
     profession after some firms were assessed hefty penalties for 
     S&L frauds.
       Proportional liability is like letting the getaway driver 
     off with a speeding ticket if he didn't intend for his 
     partner to shoot the bank teller. It protects the partially 
     guilty at the expense of the investor who is completely 
     innocent.
       Surely, most corporate executives are honest. But since 
     there's little evidence that frivolous lawsuits are a real 
     problem, it looks as if business groups seek ``reform'' 
     legitimat lawsuits.
       A cynic could guess what goes through their minds when they 
     see a thief in a three-piece suit held to account:
       ``There, but for the grace of God, go I.

  Mr. FAIRCLOTH addressed the Chair.
  The PRESIDING OFFICER. The Senator from North Carolina.
  Mr. FAIRCLOTH. Mr. President, I rise in strong support of S. 240. I 
was an original cosponsor of this bill in this Congress, and in the 
last Congress.
  Mr. President, securities litigation reform is not a household issue. 
It is not one that many people follow. But the fact is that it is very 
important for our economy, and very important for job creation in our 
country.
  Very simply, this bill will attempt to put an end to frivolous class 
action lawsuits that are filed against America's publically traded 
companies.
 These are lawsuits that have little and often no bearing. They are 
filed for the sole purpose of blackmailing the companies. They are not 
lawsuits; they are legalized blackmail into settling suits rather than 
going to court. Everyone that has followed the issue at all knows, or 
who has ever been sued knows, that it is often cheaper to settle up 
front than it is to go all the way to trial with the cost of lawyers 
today. Of course, once the suit is settled, the attorneys that brought 
them keep the money. They keep the larger portion of it. It has become 
a cottage industry for certain lawyers that has been created over the 
last 20 years. I think it is time to put an end to it. And that is the 
purpose of this bill.
  The problem is dramatic. Since 1980, there has been a 73-percent 
increase in the number of civil suits filed in Federal court. It is 
estimated that class action suits have increased three fold in just the 
last 5 years.
  The cost of these suits is no small matter. At the end of 1993, class 
action suits were seeking $28 billion in damages.
  The impact of these suits is having a detrimental effect on our 
economy. Many companies are afraid to go public and sell stock. By 
remaining private, they can avoid these kinds of suits, but they also 
sacrifice an increase in growth and jobs that can come from going 
public. This is costing America jobs.
  Some have suggested that companies from overseas are afraid to 
establish businesses in America out of fear that they too will fall 
victim to these suits. This is costing America jobs as well and 
economic growth.
  Money that would otherwise be spent on new job growth, and on 
research and development is paid out to lawyers to settle these suits 
or money is spent fighting them.
  Furthermore, excessive costs are passed along to consumers in the 
form of higher prices. All of this has a ripple affect on our economy. 
Mr. President, it is making America less competitive and creating fewer 
jobs
 at a time in this country's history when we should become competitive, 
and we should be creating more jobs in order to stay competitive.

  In my home State of North Carolina alone, 116 companies have 
contacted me and asked for help in passing this bill. They are united 
in their effort to end the abusive lawsuits that are being filed. 
Together, these companies in one small State alone, in North Carolina, 
employ 118,000 people. That is why the bill is so important not only to 
North Carolina but to the Nation as a whole.
  Mr. President, let me assure you that nothing in this bill will 
prevent anyone from filing a legitimate fraud case against any company. 
Not one sentence in this bill will restrict anyone's rights who has a 
legitimate complaint.
  If it did, I do not think 50 Members of the Senate would have 
cosponsored the bill.
  Also, please do not be fooled by the ads you are seeing or hearing on 
this bill. They are not paid for by consumers. They are paid for by 
trial lawyers--wanting to protect their lucrative industry.
  Consumers will be helped by this bill. Any consumer that has a job--
or wants a job--or wants to keep a job will be helped by this bill.
 Not one consumer with a legal, legitimate lawsuit will be hurt by this 
bill.

  Mr. President, a point that is not often made is that the consumers 
and plaintiffs in the class action suits rarely benefit from these 
lawsuits. You would think that the consumers and plaintiffs are 
receiving the benefits. But they are not. Study after study shows that 
lawyers get the vast major portion of any settlement.
  We had testimony that the average investor received 6 or 7 cents for 
every $1 lost in the market because of these suits--and this is before 
the lawyers are paid. So after the lawyers are paid, there is 
practically nothing left.
  Mr. President, I particularly want to note that an important part of 
this bill is the reform of proportionate liability rules. This bill 
requires that those who are responsible for causing a loss pay their 
fair share. But it does not require them to pay more than their fair 
share except in certain extenuating circumstances.
  This will stop the tactic of going after the deep pockets--like the 
accountants. The rule is sue everybody and anybody, and then get the 
rich defendants to do the paying.

       Under this bill, if a party to the suit is found to have 
     contributed to a loss but did not do so knowingly, that 
     person pays only the percentage of the loss he or she caused. 
     For example, if this person caused 2 percent of the loss, 
     they pay 2 percent of the liability claim.

  Mr. President, I strongly support S. 240. I think we need to act on 
it now. And I am going to oppose any amendment that I think will weaken 
this bill. I think it needs to be passed as it is. This bill has 
already been moderated enough in committee to give it bipartisan 
support. So I urge the Senate to pass S. 240 as soon as possible.
  Mr. President, I yield the floor.
  Mr. BRYAN addressed the Chair.
  The PRESIDING OFFICER (Mr. Mack). The Senator from Nevada.
  Mr. BRYAN. Mr. President, I thank the Chair.
  Mr. President, I rise in opposition to S. 240. I should like to make 
a couple of preliminary observations.
  This is not the kind of riveting stuff that keeps everybody in 
America who is watching on television at the edge of their seats. Much 
of this discussion is esoteric, technical, and full of legal nuances, 
but no one should conclude from that preliminary observation that it 
does not have an enormous impact on millions and millions of Americans. 
Everyone who has a retirement account in which he or she has invested 
in securities, millions of small investors, all have a stake in this 
legislation.
  The American securities market is acknowledged by all to be the 
world's safest and most effectively regulated, and the underpinning for 
this system has been twofold. No. 1, the powers which the Congress has 
vested in the Securities and Exchange Commission to regulate and keep 
the marketplace honest, fair and open to investors is one important 
aspect, in addition to the adjunctive support provided by State 
securities administrators in the respective 50 States. But as has been 
pointed out by my distinguished colleague, the senior Senator from 
Maryland, the ranking member of the Banking Committee, private causes 
of action are recognized by security regulators to be an equally 
important part [[Page S 8912]] in keeping the marketplace free from 
fraud.
  Mr. President, we are not talking about something that is academic, 
as if there were problems in the past and all of those have been taken 
care of. The New York Times in an article dated Friday, June 9 of this 
year makes this observation, and I quote:

       Securities regulators say they are opening investigations 
     into insider trading at a rate not seen since the mid 1980's, 
     the era in which Ivan Boesky, who went to jail for trading on 
     inside information, became a household name.

  And then later I quote again.

       ``It's a growth industry,'' said William McLucas, Director 
     of the Division of Enforcement of the Securities and Exchange 
     Commission. ``In terms of raw numbers, we have as many cases 
     as we have had since the 1980's, when we were in the heyday 
     of mergers and acquisition activity.''

  The North American Association of Securities Administrators estimates 
that each year there is approximately $40 billion of fraud in the 
securities marketplace. So millions of investors, people who do not 
think of themselves as stock barons but have their small retirements 
invested in the securities market, can be affected by what this 
Congress does on this legislation.
  In my view, Mr. President, the bill pits innocent investors, many of 
whom are elderly and are dependent upon those investments for their 
sole source of retirement, on one side and those who are trying to 
immunize themselves from liability by reason of their own fraud on the 
other side.
  I recognize the need for some changes in our securities litigation 
system. I do not appear before my colleagues this evening as a defender 
of the status quo.
  I commend the distinguished chairman and the sponsors of this bill 
because in a number of areas the bill which they have introduced 
improves the present system, and it does so in these areas without 
disadvantaging the innocent investors who may have been defrauded. 
These areas include the prohibition of referral fees to brokers, 
prohibition on attorney's fees paid from SEC settlements, no bonus 
payments to class plaintiffs, elimination of conflicts of interest, 
payment of attorney's fees on a percentage basis, and improved 
settlement notices.
  Mr. President, I think all of us would agree that those are important 
and positive changes which impact the securities litigation system in 
America. And if we are not in unanimity, there is virtually a consensus 
everywhere that these go a long way to correcting abuses in the 
securities litigation system. But any system must be balanced, and it 
must be fair so that it does not preclude meritorious suits.
  The Trojan horse that brings this legislation to the floor unfurls 
the ensign of preventing frivolous lawsuits. I share that conclusion, 
as does the distinguished ranking member, who previously spoke in the 
Chamber. But the passengers inside this Trojan horse have very little 
interest in deterring frivolous lawsuits. Their primary objective is to 
shield themselves, to immunize themselves from liability as a result of 
their own, in some instances, intentional fraud and, in other 
instances, reckless misconduct.
  It is for that reason my colleague and friend, the junior Senator 
from Alabama, Senator Shelby, and I introduced our own bill earlier 
this year, S. 667, as an alternative to the legislation that is before 
us today. Our bill is a carefully tailored, fair approach that would 
prevent frivolous actions from proceeding while at the same time 
protecting meritorious actions.
  Let me make a comment about frivolous lawsuits. I think there is a 
legitimate problem there, but the way in which we deal with frivolous 
lawsuits is to impose sanctions on attorneys who file frivolous 
lawsuits and make them be financially responsible for their misconduct 
in filing those frivolous lawsuits. I favor enhancements to rule 11 
under the Federal Rules of Civil Procedure, and earlier this year I was 
privileged to offer the Frivolous Lawsuit Prevention Act which is 
designed to provide an additional power to Federal judges once a 
determination is made that a frivolous lawsuit or claim is made to 
impose sanctions, and that means financial responsibility so that the 
defendant who is required to defend that frivolous lawsuit can make his 
or her or its expenses whole again. I support that.
  I submit to my colleagues that this legislation which we have before 
us this evening is far more than an attempt to curb frivolous lawsuits 
because if that were its purpose, I would be in the vanguard of urging 
my colleagues to adopt this legislation.
  S. 667, which has been endorsed by numerous groups including the 
North American Association of Securities Regulators, the U.S. 
Conference of Mayors, and the Government Finance Officers Association 
contains reform measures that will improve the system for all 
Americans.
  S. 667 also contains many provisions to eliminate abusive suits and 
to protect all parties to litigation including a novel proposal for an 
early evaluation procedure designed to weed out those cases that are 
clearly frivolous cases and, as I said previously, to impose sanctions 
when necessary.
 It provides for a rational, proportionate liability system.

  Mr. President, it protects the defrauded investors fully so that when 
there is an uncollectible judgment against the primary wrongdoer, they 
can fully recover the amounts of their losses. It provides a reasonable 
regulatory safe harbor provision, as my distinguished friend and 
colleague, the Senator from Maryland, pointed out earlier this evening. 
And importantly, S. 667 also contains other measures to preserve 
meritorious suits.
  It restores aiding and abetting liability eliminated last year by the 
Supreme Court in the Central Bank of Denver case by a 5 to 4 decision. 
The effect of that case was to wipe out liability of aiders and 
abetters and to immunize them from lawsuits based upon their own 
reckless misconduct that has been responsible for losses incurred by 
innocent investors.
  S. 667 would also extend the statute of limitations for security 
fraud action in a manner suggested by the SEC and virtually every other 
unbiased witness who appeared before the Banking Committee. It codifies 
the reckless standard of liability with current law with the Sunstrand 
case, which Senator Sarbanes referred to, and it restricts, Mr. 
President, secret settlements, protective orders, and the sealing of 
cases so that the public really knows what happens in these cases.
  In my judgment, the bill that Senator Shelby and I sponsored is 
reasonable, targeted, and balanced. It solved those problems that have 
been identified while preserving the system that has made our capital 
markets the envy of the world as the strongest and most safe. By 
contrast, Mr. President, the bill before us today makes radical changes 
in our securities laws, laws that have worked exceedingly well over the 
past six decades.
  Let me discuss some of the arguments made for these radical changes. 
The primary premise of those who support S. 240 deals with an 
allegation that there has been an explosion of class action security 
lawsuits and that we must undertake these radical reforms in order to 
prevent this abuse.
  The Congressional Research Service, at my request, prepared a report 
that was issued on May 16 of this year and entitled ``Securities 
Litigation Reform: Have frivolous shareholder suits exploded?'' Let me 
read to you some of the findings of the CRS study. Again, Mr. 
President, I quote:

       While some current legislation . . . and the outcry of 
     various corporate executives suggest that the volume of 
     warrantless securities litigation has exploded to crisis 
     proportions, evidence of this ``explosion'' is far from 
     definitive. We know that in the 1990's, the number of annual 
     Federal class action, securities cases filed has returned to 
     the proximate level of such filings during the early and mid-
     1970's.

  And I continue with the quote.

       By the standards of the docket sizes faced by Federal 
     courts, the upper limits of these potentially ``abusive'' 
     securities suits remain exceptionally small; the filings have 
     never exceeded 315 yearly in 20 years.

  ``* * * 315 cases a year in the past 20 years.'' Let me reiterate 
that point again. ``* * * 315 cases in 20 years.''
  In fact, when multiple filings are consolidated, because some 
companies face more than one lawsuit as a result of the allegation of 
securities fraud, approximately 120 to 150 companies are sued each 
year.
  Mr. President, that is out of some 14,000 registered companies --
14,000 registered companies. And approximately 120 to 150 companies get 
sued each year.
  The CRS goes on to say:


[[Page S 8913]]

       There are observers who argue that shareholder suits 
     legally and unfairly exploit the high stock price volatility 
     often observed among high tech firms.

  However, another analysis of these high tech firms indicates that 
their unusually short, and unpredictable product cycles may, in fact, 
predispose their management toward a greater tendency to suppress 
proper disclosure or to provide false ones.

       On balance, the evidence does not appear to be compelling 
     enough for one to definitively assert that warrantless class 
     action suits have exploded.

  Mr. President, let us take an even closer look at the underlying 
premise upon which opponents would rewrite, in my view, in a radical 
way, our highly successful 60-year-old securities law. First, we are 
told there is an explosion of securities fraud cases. The CRS report 
demonstrates that this simply is not the case.
  Let me invite my colleagues' attention to a chart that I have had 
prepared. These are securities class action lawsuits filed from 1974 to 
1993. In 1974, over here, perhaps 290 cases; 20 years later, in 1993, 
approximately 290 cases. So in more than 20 years, when the population 
of America has geometrically increased, when the amount of general 
civil litigation--general civil litigation, not securities class 
actions--has grown dramatically, the number of class actions brought on 
behalf of securities plaintiffs has remained relatively constant, 
somewhere at the highest point, 315, and currently 290 cases.
  Mrs. BOXER. Will the Senator yield for a question on that point?
  Mr. BRYAN. I will be pleased to yield.
  Mrs. BOXER. I am astounded by this chart. The proponents of this bill 
have been saying, since we started in the committee, that there has 
been an explosion in class action lawsuits filed--an explosion. We are 
going to hear tonight from all quarters. What the Senator is showing us 
tonight is really extraordinary. There has been no explosion.
  Mr. BRYAN. My colleague is correct. Over the past 20 years, the 
numbers have been relatively constant. This represents one-tenth of 1 
percent of the 235,000 Federal suits filed in 1994--one-tenth of 1 
percent. There were 235,000 cases filed in the Federal court system in 
America last year, and one-tenth of 1 percent involved class action 
securities lawsuits. So my distinguished colleague is correct in her 
observation.
  Mrs. BOXER. May I just say to my friend, thank you for this very 
straightforward chart because we are going to hear it all over the 
place in this U.S. Senate. And I am going to refer back to your chart, 
I say to my friend. Thank you very much for setting the record 
straight. There is no explosion of these class action lawsuits. Those 
are the facts. And I thank my friend for presenting it in such a clear 
fashion.
  Mr. BRYAN. And I thank my colleague for posing the question. 
Securities class action suits have actually declined sharply in the 
last 20 years relative to both the number and the proceeds--the number 
and the proceeds--of initial and secondary public offerings, stock 
market trading volume, and every other measure of economic activity. To 
claim that suits by victims of financial swindles have constituted an 
explosion in civil litigation is patently false.
  Now, we are also told, Mr. President, that so many companies are 
being sued that they are being distracted from other businesses. This 
is simply not true. According to figures from Securities Class Action 
Alert, only about 140 public companies were sued in securities fraud 
actions last year out of some 14,000 public companies reporting to the 
SEC. The only suits that have been going up are business suits against 
each other; that is, companies suing companies--companies suing 
companies, not suits by individuals against businesses. So if the 
companies who are suing each other are so troubled by litigation, why 
do they not just stop suing each other?
  Mr. President, I think I have the answer. It is because they do not 
want to prevent themselves from being able to sue. They just want to 
prevent private individuals from being able to sue them. It is as 
simple as that. These companies would also have us believe that because 
of these suits, companies are fearful of going public, that they cannot 
raise the capital in the securities market.
  Mr. President, there is no credible evidence that I am aware of that 
supports this astounding proposition. The existence of these suits has 
had no discernible impact on capital formation of business. The Dow 
Jones Industrial Average has just surpassed 4,000--an all-time high. I 
would invite my colleagues' attention to this chart. In terms of the 
initial public offerings, over the period of time that we have 
referenced here, they have gone up by approximately 9,000 percent in 
the last 20 years.
  In the last 20 years, initial public offerings have risen by 9,000 
percent--now, that is the number, Mr. President, of initial public 
offerings--while the capital raised, that is the amount raised by these 
initial public offerings, has increased by 58,000 percent. So both in 
terms of numbers and in terms of the dollars raised, they have gone up 
9,000 and 58,000 percent, respectively. Let me say, I am glad to hear 
that, because that is important that we have the necessary capital 
formation to finance new enterprises. That is the essence of the free 
enterprise system.
  The contention is invariably made that every time a stock drops to 
any degree, regardless of the reason, that there is a great rush to the 
courthouse and lawsuits are filed based solely upon the fact that the 
stock has declined in value. I want to address that assertion.
  In examining this contention, there are three studies that have been 
called to my attention that reject that thesis.
  One study by Prof. Baruch Lev of the University of California at 
Berkeley, involved public companies whose share price dropped by more 
than 20 percent in the 5 days following a disappointing earnings 
report.
  Although there were 589 such cases where the stock dropped at least 
20 percent from 1988 through 1990, class action suits were filed 
against only 20 of those firms, approximately 3.4 percent.
  Moreover, Professor Lev compared those 20 firms with similar firms 
that were not sued and found that the firms that faced litigation 
tended to put out rosy projections, or forward-looking statements, just 
before releasing the bad earnings report, the issue that my 
distinguished colleague from Maryland so ably addressed that operates 
under the rubric of safe harbor, of which much more will be said during 
the course of this debate by him and, I am sure, my other colleagues.
  By contrast, the firms that were not sued tended to publish more 
sober statements warning investors in advance that earnings would be 
lower than expected.
  There was another study conducted by the firm of Francis, Philbrick, 
Schipper from the University of Chicago which searched for lawsuits 
against companies sustaining 20 percent declines in earnings and sales.
  The author reported that, out of 51 such at-risk firms during 1988 to 
1992, only 1 of the 51 was the target of a shareholder suit related to 
an earnings announcement.
  And still a third such study performed by Princeton Venture Research 
shows that between 1986 and 1992, less than 3 percent of the companies 
whose stock dropped by more than 10 percent a day were sued.
  So the claim that companies are bombarded with suits whenever their 
stock goes down is simply not supported by the studies I have seen. 
None of these studies, even using a 20-percent stock drop, found even 
3.5 percent of the companies in this classification that were sued.
  Even the Senate Banking Committee staff report published last year, 
under the able direction and support of Senator Dodd and his staff, 
concluded, and I quote:

       There is also no clear evidence of the extent to which 
     price declines drive securities class actions to be filed.

  But the proponents of S. 240 tell us, most of these suits are filed 
just so the plaintiffs can get a settlement. Again, the documentation 
does not support this conclusion.
  The Senate staff report, to which I previously referred, examined 
sentiments of Federal judges regarding meritless litigation and found, 
and this again is directly from the staff report:

       Seventy-five percent of the judges surveyed . . . thought 
     that frivolous litigation was a small problem or no problem 
     at all.

  [[Page S 8914]] The SEC told the subcommittee that surveys had shown 
that ``most judges believed that frivolous litigation was not a major 
problem and could be dealt with through prompt dismissals.'' And I 
believe the enhanced provisions of the Federal Code of Civil 
Procedures, that deals with frivolous lawsuits, is an absolutely 
appropriate and responsible way to deal with errant and irresponsible 
lawyers who file clearly frivolous lawsuits.
  I believe the strengthening of those provisions under the law, 
targeted and tailored, is the most effective way of curtailing lawyer 
abuse.
  The evidence clearly shows we ought not to throw the baby out with 
the bathwater.
  S. 240 goes well beyond what is needed to deal with the abuses that 
exist in today's system. Every Member has cause to be concerned, 
because once this bill is passed and the next fraud comes along, 
whether it be a derivative disaster in your State, another Keating, a 
Milken or a Boesky, your constituents will want to know why you 
supported legislation that took their rights away to recover for their 
losses as a result of such fraudulent activity.
  Unfortunately, there are provisions in S. 240 that would effectively 
gut private actions under the securities laws, eliminate deterrence and 
hurt average Americans who depend on the system to protect their 
savings, their investments, and their retirements. These provisions 
would give free rein to the next Charles Keating and could cause 
incalculable damage to States and localities that suffer the same fate 
that Orange County has recently faced.
  Among the most troublesome provisions in S. 240 is the safe harbor 
exemption from fraud liability for forward-looking statements that 
essentially allows executives to say almost anything and be immunized 
from liability as a result of such misstatements.
  Senator Sarbanes has indicated he will be offering an amendment to 
correct this problem, and I intend to join him as a cosponsor of that 
amendment. It is something that concerns the Federal and State 
regulators; the SEC has written, the National Association of Securities 
Administrators has written, government finance officers, and consumer 
groups all have written the committee expressing their concern.
  Corporate predictions, called forward-looking statements, inherently 
are prone to fraud as they are an easy way to make exaggerated claims 
of favorable developments to attract investors to part with their cash.
  In fact, the Federal securities laws were passed in large part 
because of the speculative stock projections that led to the stock 
market crash in 1929.
  Recognizing the inherent potential for exaggerated claims, forward-
looking statements by public companies were not even permitted until 
1979.
  I think that bears repeating. Until 1979, no forward-looking 
statements were made as a result of the experience that we had in the 
1920's and the predilection of those seeking to embellish their own 
prospects for earnings to attract investors to invest as a result of 
these extravagant and flamboyant claims.
  Since 1979, the SEC, recognizing some forward-looking statements may 
be important, has allowed limited predictions and protected them from 
liability if they are made in good faith and with a reasonable basis. 
Nevertheless, false predictions continue to be a favored tool of con 
artists, promoters and the illegal inside traders to pump up the price 
of their stock in order to profit at the expense of innocent investors.
  S. 240 sponsors have not explained to my satisfaction why corporate 
statements that are made in bad faith with no reasonable basis or even 
with reckless disregard for their falsity need to be immunized from 
liability when fraud has occurred. I hope during the course of this 
debate we might have such an explanation. We are talking about 
statements made in bad faith with no reasonable basis and with reckless 
disregard for their falsity. I know of no public policy, Mr. President, 
that suggests that kind of conduct ought to be shielded from liability. 
Unhappily, S. 240 in its present form would do just that.
  Moreover, the SEC is in the middle of a rulemaking process to study 
forward-looking statements and has asked Congress to allow it to 
complete its process. The original S. 240, as my colleague from 
Maryland has pointed out, would have done so. It is a technical area, 
highly complex and, frankly, it is a subject best left to the 
administrative agency in a rulemaking process rather than in a broad 
legislative enactment.
  However, in committee, a virtual unlimited exemption or safe harbor--
my colleague has aptly referred to this, not as a safe harbor but a 
pirate's cove, and I think he makes a compelling argument. Any 
statement either made orally or in writing that projects estimates or 
describes future events, so long as it is called a forward-looking 
statement, is immunized as a result of the legislative draft that is 
before us, even if that statement is made recklessly.
  This is a gaping loophole through which wrongdoers or victims of 
fraud would be denied recovery. The effects of these changes, I think, 
are difficult to forecast, but I think they would have a devastating 
impact on the market.
  I remind my colleagues that it is already extremely difficult to win 
a securities case. Under the 1934 Securities Act, a plaintiff must 
prove fraud or reckless behavior. Recklessness is defined as ``highly 
unreasonable conduct that involves not merely simple or even gross 
negligence, but an extreme departure from standards of ordinary care.''
  So I think it is important for our colleagues to understand that no 
one under the 1934 act is liable as a result of his or her simple 
negligence, ordinary negligence, or even gross negligence. It requires 
a higher standard of misconduct--namely, reckless conduct. That seems 
tough enough to me. Anyone who makes a projection and meets this 
standard ought to pay his or her victims.
  A second troublesome provision in S. 240 is the severe limits on 
joint and several liability, even when the primary wrongdoer is 
insolvent. America's legal system for fraud traditionally has been 
based on joint and several liability. Under this standard, if one 
wrongdoer is found liable but has no assets, the victim can be 
reimbursed fully by the other wrongdoers without whose assistance the 
fraud could not have succeeded. The underlying premise for this legal 
rationale is in that scale of justice--in the balance. Who should bear 
the burden of the loss? The innocent investor, who is totally without 
fault--no fault whatsoever--or a defendant whose conduct is at least 
reckless and may be subject to intentional fraud? Who ought to bear the 
burden? The philosophy that undergirds the American system of 
jurisprudence for centuries has said that under those cases, the scales 
of justice weigh in favor of the innocent victim, the one who had no 
responsibility, did not in any way contribute to the misdeed which 
caused the loss.
  The rule has enabled swindle victims to recover full damages from 
accountants, brokers, bankers and lawyers who participate in securities 
scams when the primary wrongdoer has no assets left, has fled the 
jurisdiction, or may be in jail. The original S. 240 sharply limited 
this rule, immunizing reckless wrongdoers from joint and several 
liability.
  If that had been the law, most investors would not have recovered 
their life savings in the Charles Keating/Lincoln Savings & Loan 
debacle. Although Keating had become bankrupt, the victims recovered 
their damages from the accountants, bankers, and lawyers who assisted 
Mr. Keating. Of the $240 million in judgments imposed in favor of class 
action plaintiffs, nearly 50 percent--or $100 million of those 
recoveries--were against accountants, bankers and lawyers--not the 
primary wrongdoers, but individuals who conducted and assisted Mr. 
Keating in perpetrating the fraud.
  Despite extensive testimony, particularly by the SEC, that 
restricting joint and several liability will reduce recoveries for 
defrauded victims and encourage more fraud, the bill, as reported, 
restricts joint and several liability even further.
  In the all-too-often cases in which a knowing violator is bankrupt, 
in jail, has fled, the liability of reckless violators to the 
uncollectible share would be capped. That is, there would be a 
limitation. Those who are proportionately [[Page S 8915]] liable under 
the system that is incorporated in this print of S. 240 would be 
subject only to their proportionate share, even though the innocent 
victim is unable to recover his or her full amount.
  There is one exception, as was pointed out, and that would be with 
respect to victims whose net worth is under $200,000 and have 
recoverable damages of more than 10 percent of their net worth.
  May I suggest, Mr. President, that is a very narrow window of 
opportunity. People who own their own homes, automobiles, and have the 
most modest of assets frequently might have a net worth of $200,000. So 
we are not talking about the goliaths of business people who are 
extraordinary affluent; we are talking about tens of millions of 
Americans who would be excluded from recovery under this provision. 
That cap on joint and several liability means it will be virtually 
impossible for a great many of those victims to recover their losses.
  The bill also does several other very damaging things. The bill would 
also turn over control of class actions to the wealthiest investors, 
even though their interests may not be as extensive as the small 
investors' that the class action device was designed to protect. It 
relegates small investors to a second-class status and makes the 
securities markets strictly a playgrounds for the big boys--the 
wealthy.
  In committee, a new provision was added that requires courts to 
designate the ``most adequate plaintiff''--words of art--in a private 
class action. This ``most adequate plaintiff''--defined as the 
plaintiff with the largest financial interest in the case--is given the 
power to select lead counsel, control the case, and even to make 
settlement agreements for any amount or even dismissing the case.
  This change to S. 240 makes plain the real motives behind the bill 
and makes hollow any protections that this is to protect meritorious 
fraud actions. This ``most affluent plaintiff" requirement would simply 
wipe out average investors who are defrauded. The wealthiest investors 
may have close ties to big corporate defendants who can afford to 
accept less than the full recoveries. But it gives them complete 
control over class actions at the expense of average investors.
  Aside from raising a specter of collusive intervention by large 
investors, and simply dismiss cases or enter into sweetheart 
settlements, the substitute virtually precludes small investors from 
being able to obtain attorneys willing to invest their time on cases 
over which they have no control and for which they may not be paid.
  This also directly contradicts the reason why class actions were 
devised in the first instance, and that is to give average investors, 
who cannot afford to fight big corporations by their own means, the 
ability to band together and collectively seek a remedy for their 
relief. Instead, this provision gives preference to wealthy investors 
who can afford to seek redress for their losses on their own.
  S. 240 also eliminates a principal investor protection provision that 
was originally part of S. 240, as the distinguished ranking member of 
the committee, the senior Senator from Maryland, points out. That deals 
with the statute of limitations issue. Currently, the statute of 
limitations is 1 year from the point of the discovery of the fraud on 
the part of the victim, but in no event for more than 3 years after the 
fraud. The SEC, the North American Association of Securities 
Administrators--every regulator that I am aware of, who offered 
testimony or correspondence, indicated that this period is simply too 
short. It provides insufficient time for meritorious, legitimate 
plaintiffs to bring their action. The original S. 240 extended the 
period to 2 years after the violation was, or should have been, 
discovered by the injured plaintiff, not more than 5 years after the 
fraud itself.
  As the Senator from Maryland pointed out, we dealt with this issue 
back in 1991 under the Lampf case. That case will have particular 
relevance to a number of my colleagues, because immediately after the 
Lampf case, which gave a retroactive interpretation to the law, 
surprising most securities litigators by concluding that there was only 
a one to three-year statute of limitations, immediately thereafter, 
Charles Keating filed a motion to dismiss.
  A number of my colleagues joined me in supporting an amendment to the 
legislation that restored the 2-5 year provision retroactively, so that 
those cases for dismissal would not find themselves dismissed simply 
because the statute of limitation provision came as a surprise.
  What this provision seeks to do with respect to the prospective cases 
is the same 2-5 year. As the distinguished Senator from Maryland 
pointed out, when this proposal came to the floor to correct the 
retroactive abridgement or shortening of the statute of limitation from 
2-5 to 1-3, there was no objection. Everyone agreed.
  The only issue--and it was a legitimate question--should we not take 
a broader look at security litigation reform? There was no objection to 
the premise you need a longer period of time.
  I must say that the SEC has been very clear, and their testimony has 
been compelling, that even with all of the resources that the SEC can 
command and marshal, it takes an average of 2.25 years to complete an 
investigation of an alleged securities fraud. That is the SEC, with 
immense resources.
  We, by failing to provide for the statute of limitations correction 
which was originally part of this bill and in rejecting the advice of 
the SEC, the North American Association of Security Administrators, and 
virtually everyone that testified from a regulatory public policy point 
of view, we give comfort to those who perpetrate fraud on innocent 
investors.
  I will offer an amendment that deals with that issue either later 
this evening or tomorrow, as our time permits.
  I might just add that Senator Dodd, one of the prime sponsors, 
indicated he, too, believes S. 240 needs to be amended to reflect that 
statute of limitations issues we just talked about. Obviously we will 
welcome his support.
  S. 240 also fails to restore the aiding and abetting liability for 
private suits and eliminates the ability of the SEC to sue aiders and 
abettors for reckless behavior as opposed to fraudulent conduct.
  Members will recall, Mr. President, I cited in the Keating case that 
recovery of $100 million was from aiders and abettors. If S. 240, as 
this legislation is being processed today, was the law back in 1991, 
that $100 million could not have been recovered. It could not have been 
recovered because the court, just last year, in another case that was a 
surprise to those who follow the securities industry issues, held that 
a ruling that had been in effect for 25 years, namely, that aiders and 
abettors were covered under the provisions of the securities law, that 
aiders and abettors were, in fact, not covered, and under a 5-4 Supreme 
Court decision, Central Bank of Denver, such liability for aiders and 
abettors is eliminated.
  We are not talking about proportionately. We are not talking about 
joint and several liability. We are talking about aiders and abettors. 
They have a free ride. They are home free. All you need to do is get 
yourself in the aider and abettor category and you can have a field 
day. It is ``Katie bar the door,'' do whatever you wish, and insofar as 
a private cause of action, you are precluded from recovery.
  Mr. President, no matter how anyone feels on securities litigation 
reform, can it possibly be in the best interest of America to insulate 
from liability a category of persons whose conduct has inflicted upon 
innocent investors enormous financial loss, maybe even wiping out 
everything that a retired person might have in his or her investment?
  I indicated that the Supreme Court also imposed a limitation even on 
the SEC--even on the SEC. They can only move against aiders and 
abettors under a much stricter standard. The defendant must knowingly--
and that is the standard which even the SEC is forced to meet now as a 
consequence of the decision. We will be offering an amendment on this, 
Mr. President.
  I note that Senator Dodd, who has worked for many, many years--and 
all who work with him on the committee and consider ourselves his 
friend and close colleague acknowledge Senator Dodd's fine work. Last 
year, in an April 29, 1994, ``Dear Colleague'' letter, Senator Dodd 
made this observation:


[[Page S 8916]]

       Allowing private actions against aiders and abettors is an 
     indispensable part of our securities enforcement system, and 
     I believe Congress must consider legislation to reinstate 
     liability in this area.

  Senator Dodd was absolutely right on the mark in 1994. The reason is 
even more compelling in 1995, based upon some of the information that I 
shared with Members earlier from those on the SEC that tell us about 
the amount of fraudulent activity. In this particular instance we 
talked of insider trading.
  Senator Dodd reiterates:

       Lawyers, accountants and other professionals should not get 
     off the hook, in my view, when they assist their clients in 
     committing fraud. . . . The Supreme Court has laid down a 
     gauntlet for Congress. . . . In my view, we need to respond 
     to the Supreme Court's decisions promptly and I emphasize 
     promptly.

  As Senator Dodd so often does, he speaks with precision, eloquence, 
and cogency. He is right on the mark, Mr. President. We need to do that 
in the course of processing any securities legislation.
  Mr. President, this bill, also as reported by the Banking Committee, 
deals with the Securities Act of 1933--that is another provision--not 
the 1934 act. The 1933 act targets fraud in initial offerings of 
securities to the public. Initial public offerings historically have 
been rife with fraud by huckster promoters peddling new securities.
  The 1993 act holds such wrongdoers strictly liable. The bill as 
reported, however, makes it nearly impossible to hold crooks who sell 
phony securities strictly liable for their fraud.
  S. 240 also retains some highly burdensome pleading requirements--
burdens that must be met by fraud victims, plaintiffs in these class 
actions. By ``pleadings,'' we are talking about an illegal document 
that commences a lawsuit in which a plaintiff--in this instance a 
victim of fraud--states forth his cause of action. Those pleading 
requirements under S. 240 are exceedingly burdensome.
  Under current law, fraud plaintiffs are not required to state 
specific facts establishing the defendant's intent. That is a 
subjective state of mind. It seems pretty reasonable. It is a pretty 
onerous burden to be able to allege with particularity what the 
subjective thought process would be of a defendant.
  The reason for that is because such facts are normally only uncovered 
later during a deposition or discovery process when there is a chance 
to examine the defendant or defendants under oath.
  One of the ways the original S. 240 tried to block cases was through 
impossible pleading standards requiring plaintiffs to state specific 
acts demonstrating the state of mind of each defendant. Witness after 
witness indicated that this would prevent, for all practical purposes, 
many fraud victims from recovering their money.
  The bill as reported merely replaces the impossible standard with the 
harshest standard currently used. In my view, and in the view of those 
who regulate the securities market, it is not much of an improvement 
over the original language and would prevent legitimate plaintiffs from 
even asserting a cause of action.
  S. 240 also contains an unfair and inflexible limit on victims for 
recovery. The bill contains a formula designed to limit the amount 
wrongdoers have to pay their victims. Basically, if the company stock 
goes up during a 3-month period following public exposure of the fraud, 
for whatever reason, the victims' recovery is reduced accordingly.
  Finally, Mr. President, S. 240 would shield evidence of fraud from 
the public. S. 240 purports to attempt to eliminate secret settlements. 
The bill fails to ban the almost universal secrecy orders that are 
required by defendants as a condition of producing documents during 
discovery.
  These orders remain in effect throughout litigation and generally 
require that, once a case is over, documents be destroyed or returned.
  Such secrecy orders block significant corporate wrongdoing from 
public scrutiny.
  Moreover, these orders allow defendants to proclaim their innocence 
after settlement without fear of contradiction--and permit them to 
claim the cases are frivolous when they visit with Members of Congress. 
And because the documents upon which the case was predicated are 
sealed, there is no effective rebuttal.
  I would note one final irony of S. 240.
  The bill violates one of the primary tenets of Republican theory--
this is, returning government functions to the private sector.
  For 60 years, private attorneys general have supplemented the 
antifraud efforts of Federal regulators at the SEC and at the Justice 
Department.
  Such an enforcement scheme is entirely consistent with the Republican 
contract.
  But as CBO noted in its cost estimate on S. 240, if private rights of 
action are curtailed, substantial government involvement, including 
increased SEC efforts, will be needed to assure that the markets remain 
fair.
  Morever, as CBO stated in its June 19 letter to the committee, the 
SEC will have to double or triple its resources allocated to this 
function--and the cost to the American taxpayer could be up to $250 
million over the next 5 years.
  That is to say, by reason of the restrictions placed on private 
causes of action, if one has a view of regulating the marketplace 
effectively the burden essentially now falls almost exclusively to the 
SEC, and they would have to up staff and the cost as estimated by CBO 
is $250 million; $250 million paid by the American taxpayer.
  I invite my colleagues' attention to pages 30-32 of the committee 
report for CBO's estimate.
  This confirms the view of the last Republican Chairman of the SEC, 
Richard Breeden, who testified that the elimination of private actions 
would require the Commission to hire 800-900 more lawyers to police the 
markets.
  Even if Congress should choose to appropriate the added money--which 
I seriously doubt--the system will not be as effective.
  I hope each Member of this body will remember that when the next 
financial debacle hits, average Americans, many of whom may be people 
who live in your district, will be unable to runner their losses.
  Last week, my constituents who were victims of the Keating scandal 
visited Washington, along with other Keating victims from other States.
  One way Jeri Mellon from Henderson, NV, a community just 10 miles out 
of Las Vegas. She is head of the Lincoln bondholders committee. She and 
Joy Delfosse came to see me.
  Every Member of Congress should be standing up for the Joy Delfosses 
and Jeri Mellons in their States, not the Charles Keatings.
  These are retirees whose life savings would have been wiped out if 
they had not been able to recover as a result of the Keating fraud. And 
that ability to recover would have been lost if aiders and abettors had 
not been liable. And that ability to recover may have been lost if the 
statute of limitations had not been extended. And that recovery may 
have been lost as a result of the proportionate liability proposal 
contained in this legislation.
  Mrs. BOXER. Will the Senator yield for a question?
  Mr. BRYAN. I will be pleased to do so.
  Mrs. BOXER. The Senator is right to bring up real people in this 
conversation. Because oftentimes we get into the legalese and we forget 
what we are doing here. So I appreciate the fact that the Senator from 
Nevada brings up the people that he met. I was with him at that 
occasion. We met people from Florida. We met people from Arizona. We 
met people from Nevada and California.
  I want to ask the Senator a question, because I think anyone watching 
this debate ought to listen to the response of the Senator. My friend 
from Nevada who is addressing this Chamber is a learned attorney. He 
has great experience in seeking justice for people.
  Is it the Senator's opinion that the people who were bilked by 
Charles Keating would have recovered as much as they have recovered, 
which as I understand it is between 40 percent and 60 percent of their 
losses, if S. 240 had been the law of the land?
  Mr. BRYAN. The answer to the question of the Senator is unequivocally 
clear. They would have been unable to recover as much as they did. I 
would simply point out to my distinguished colleague from California, 
these are innocent people. These are not people who in any way 
participated in any scam. They are not lawyers. They are ordinary folks 
whose retirement was on the line. These were retirees. [[Page S 8917]] 
  It is interesting. As I know the distinguished Senator knows, they 
went to what they describe kind of as a neighborhood bank, Lincoln 
Savings and Loan. They knew everybody and they would come in and say, 
``How are you Suzy?'' And, ``How are you John?'' And, ``How is the golf 
game and how are you enjoying retirement?''
  And they would say, ``Look, what is this stock offering you have, 
American Continental Corp.?''
  And they were told, ``You know, you would be crazy not to put money 
in that, absolutely crazy. There is a much larger return than you would 
get just if you put this in a regular savings account in the bank.''
  These are the people, I tell my distinguished colleague from 
California, real Americans from every State of all political 
persuasions, of all political philosophies--real people, and the impact 
upon them is what this debate is all about this evening.
  Mrs. BOXER. I have one last question for my friend. As we saw these 
people tell their stories, it was very moving. They are older. They 
were targeted by Charles Keating. And what they told us is--and this is 
the question for my friend--they went to file their suits, because they 
were clearly led to believe that their investments were protected, and 
the salespeople for Charles Keating were told to lead them down this 
primrose path. They called them the meek and the ignorant. They sought 
out ``the meek, the weak and the ignorant.'' That is a quote from 
Charles Keating's brochures to their salesmen.
  We know that Charles Keating put his whole family on the payroll and 
drained all this money that he stole. And is it not true, I say to my 
friend, that he went bankrupt?
  Mr. BRYAN. He went bankrupt.
  Mrs. BOXER. I say to my friend, he could not be touched by these 
people because he had a lot of lawyers who protected him. And he went 
bankrupt.
  Is it not true that these good, decent senior citizens had to go to 
the aiders and abettors?
  Mr. BRYAN. That is precisely the case.
  As the distinguished California Senator knows, having read the 
provisions of the print before us, the thing that is particularly 
alarming is that there are several provisions in this law that is being 
proposed in its current form, as to the pleading standard, safe harbor, 
the ability to stay or to prevent discovery--that is ascertaining what 
the facts are--so long as there is a motion to dismiss; all of those 
were tactics that were used by Mr. Keating and his lawyers. All of 
those.
  If the law in 1991 was the same as it will be if this is passed, 
together with the Supreme Court decisions that S. 240 fails to correct, 
those people might never have gotten into the courthouse door.
  Mrs. BOXER. Let me thank my friend again for bringing this down to 
what happens to people when we act here in this body, and to say to my 
friend that we ought to make any bill pass the Keating test.
  We ought to look at any bill when we are done amending it. I hope we 
amend this bill and make it better, and put it to the Keating test. 
Would those good people, those innocent senior citizens, be able to 
recover when we are ``done with reforming,'' I put in quotes, the 
securities law? Yes. We should go after those frivolous lawsuits. We 
all want to do that. But there are an awful lot of good companies out 
there that need to have the frivolous lawsuit aspect of this bill 
looked at. But, my goodness, let us not forget the real people, the 
retirees, the people who are the targets. Let us not forget them 
because it reminds me of the S&L scandal. We made one mistake once. I 
do not want to see us make another one.
  I thank my friend for yielding.
  Mr. BRYAN. Mr. President, I thank my distinguished colleague from 
California. I know some of my colleagues have waited for a while. I 
will finish, and yield the floor in a couple of minutes.
  The Senator from California speaks with such clarity and conviction. 
She is absolutely right to remind us that a little more than a decade 
ago a big mistake was made with respect to the savings and loan 
industry. We spent billions and billions of dollars as a result. If we 
do not correct this legislation, as my distinguished colleague from 
Maryland, the distinguished colleague from California, and others will 
point out, we are opening the door to every charlatan and con artist in 
America to prey on innocent investors with impunity, and there almost a 
sense of deja vu. It may not happen tomorrow. But it will happen, and 
the consequences will be frightening. I do not think we want to make 
that mistake. America's securities markets have served as the world's 
finest. The Lincoln Savings & Loan in Orange County could be in my 
State. It could be in your State. I do not want to have to explain to 
the good citizens of my State why I allowed this happen, and why my 
failure to take action precluded them from being recovered as a result 
of frauds perpetrated upon them. Each and every one of us share that 
concern.
  I have a number of letters from State and local officials. I am not 
going to belabor my colleagues this evening with all of those. But let 
me point out as this issue has been framed that it is the lawyers. 
Frankly, the lawyers do bear some responsibility here.
  We talked about rule 11. And I am in favor of banging the lawyers 
that file frivolous lawsuits over the head and hit them in the 
pocketbook. Count me at the head of the line for them. But under the 
guise of getting the lawyers, unpopular since Shakespeare's time. 
``Kill the lawyers first''--every student of Shakespeare recalls that 
quote. Let us try to give here a more objective view.
  You have people such as the Association of Governing Boards of 
Universities and Colleges who have expressed their concern and support 
the kinds of amendments that we are going to be offering, and oppose 
the legislation in its current form; the Association of Jesuit Colleges 
and Universities; the Council of Independent Colleges; the Government 
Finance Officers Association. These are not closet groups of trial 
lawyers. The Association of Clerks and Recorders; Election Officials 
and Treasurers; the Municipal Treasurers Association of the United 
States and Canada; the National Association of College and University 
Business Officers; the National Association of County Treasurers and 
Finance Officers; the National Association of State Universities and 
Land Grant Colleges; the North American Security Administrators.
  Mr. President, I do not believe that one can make the case that these 
are simply closet advocates for trial lawyers, who I understand are the 
most disdained group of professionals in America. I understand that. I 
am not unmindful of that.
  But we ought not with the antipathy that we feel toward them for 
whatever reason wipe out the right of innocent investors to sue. And 
the bill before us in its current print will do precisely that unless 
we accept the amendments that the Senator from Maryland, the Senator 
from California, and I believe the Senator from Florida as well maybe 
have.
  I thank my colleagues for yielding.
  Ms. MOSELEY-BRAUN. Mr. President, I would like to speak on the bill.
  Mr. President, the United States has the largest and the best capital 
markets in the world. In no small part that is because markets in the 
United States are seen as open and fair. And it is one important reason 
over 50 million Americans are able to participate in our securities 
markets. Every investor can be confident that our markets are honest, 
and it is very clear that private securities litigation has played an 
important role in keeping them honest.
  At the same time, there is real need for reform. One study conducted 
in the 1980's that was cited in the Banking Committee's report on S. 
240 found that every single American corporation that suffered a market 
loss of $20 million or more in its capitalization had been sued. In 
other words, every corporation whose stock at one time declined in 
value by $20 million or more was sued for securities fraud during the 
period covered by the study.
  Another study included in the committee report stated that one out of 
every six companies less than 10 years old that received venture 
capital had been sued at least once and that such lawsuits consumed an 
average of over 1,000 hours of time of the management of these 
companies and an average of $692,000 in legal fees. [[Page S 8918]] 
  What these statistics demonstrate is that either our capital markets 
are literally overrun with fraud or that there are at least some 
unsupportable lawsuits being filed. The clear consensus of the Banking 
Committee was that the evidence did not and does not support the 
conclusion that our markets are suffering an epidemic of fraud. Rather, 
the committee's conclusion was very clear that there are abusive 
security lawsuits being filed, that these suits result in significant 
adverse consequences for our capital markets and for our economy 
generally and that, therefore, the reform is necessary. The fact is 
that securities fraud litigation can be very lucrative, even in cases 
where there is no fraud. Some would say particularly in cases where 
there is no fraud.
  The Supreme Court made that point very clear in the case of Blue Chip 
Stamps versus Manor Drug Store. The Court in dictum stated that in 
securities fraud cases ``even a complaint which by objective standards 
may have very little success at trial has a settlement value to the 
plaintiff out of proportion to its prospect of success * * *.''
  The Court's opinion was, of course, stated in the driest possible 
language. In the language of my hometown of Chicago what the Court was 
really saying was in this area of the law plaintiffs and lawyers who 
are willing to game the system have all the clout. These few people, 
and they are a few people, know that they have the corporations and 
other ancillary parties over a barrel, and they are taking advantage of 
that fact. They win settlements in all too many cases because of that 
leverage rather than because of the merits of the case.
  What is more, Mr. President, under current law, small investors in a 
class action case do not really control the case, their lawyers do. One 
plaintiff lawyer demonstrated the temptation that a few lawyers have 
succumbed to all too clearly. He said:

       I have the greatest practice of law in the world; I have no 
     clients.

  The opportunity for coercive settlements is not the only problem in 
this area. The Supreme Court made it clear again in the Blue Chip case 
that ``the very pendency of the lawsuit may frustrate or delay normal 
business activity of the defendant which is totally unrelated to the 
lawsuit.''
  The reason for that is not just the cost of defending against 
litigation, it is the cost and disruption that flow from the company's 
attempts to respond to plaintiff's request for discovery, and discovery 
is not a minor matter. The committee report again stated:

       According to the general counsel of an investment bank, 
     ``discovery costs account for roughly 80 percent of the total 
     litigation costs in security fraud cases.''

  Companies have had to produce over 1,500 boxes of documents and to 
spend well over $1 million just to comply with the costs of fact-
finding, of discovery. It is not just a matter of documents. The time 
the key employees of the company may have to spend responding to 
requests for information may keep them and, often does keep them, from 
tending to the business of the company and, therefore, that also works 
to coerce settlements.
  Some might argue that this is a technical legal issue and one that is 
not important to the general American public. However, I would suggest 
that just the opposite is true. Every American, whether he or she 
invests in our capital markets or not, has an interest in seeing to it 
that reform is enacted.
  The Director of Enforcement of the Securities and Exchange Commission 
made that point very well. Testifying before the Senate Banking 
Committee in the last Congress, he stated that:

       There is a strong public interest in eliminating frivolous 
     cases because, to the extent that baseless claims are settled 
     solely to avoid the costs of litigation, the system imposes 
     what may be viewed as a tax on capital formation.

  Chairman Arthur Levitt of the SEC reinforced the point in his 
testimony before the Banking Committee. He stated that:

       There is no denying that there are real problems in the 
     current system--problems that need to be addressed not just 
     because of abstract rights and responsibilities, but because 
     investors and markets are being hurt by litigation excesses.

  Mr. President, these excesses and the tax they impose on our capital 
markets and on our economic growth are particularly onerous because 
they do not even achieve what they are ostensibly designed to achieve--
the protection of investors who suffer losses. All too often, under the 
current system, investors receive settlements that amount to only about 
10 percent, or even less, of their damages, and that is another whole 
set of problems, to hold out false hopes to people in which they may 
receive less than 10 percent recovery.
  The direct legal expenses in settlements paid are, again, only part 
of the tax. There are also a variety of indirect costs, costs that fall 
particularly heavy on the entrepreneurial and high-tech companies on 
which our future economy depends.
  Of course, investors want to be protected from fraud, but they also 
want to be able to get as much information as possible, and they also 
want to be sure that their companies are focused on their business 
instead of on potential lawsuits and litigation.
  Mr. President, it is important for us all to remember that investors 
are not just investors. Investors are also employees who want their 
companies to do well. There are also parents who want to see expanded 
economic opportunity for their children. They are also participants in 
the United States economy, and they want to see the kind of strong 
growth and job creation that goes along with a strong economy.
  Our world economy is more and more competitive. Our future prosperity 
depends on our ability to meet and beat that international competition, 
and that means we need a continuing supply of new ideas, new products, 
and new companies that can produce the jobs for tomorrow. These major 
issues may seem a long way from the arcane securities law issues we are 
debating and discussing this evening. But, Mr. President, the 
connection is both strong and direct.
  A recent book by Hendrick Smith entitled ``Rethinking America,'' I 
think, illustrates the connection. That book has chapter after chapter 
recounting the challenges facing American business in this new global 
economy. It talks about how some American businesses are succeeding and 
how some are not.
  One of the points it makes in some detail is the short-term focus 
that afflicts so many American corporations, an affliction that is not 
shared by our major international competition.
  American corporations are all too often intensely focused on the 
short-term price of their stock instead of the long-term growth and 
prosperity of the business. This short-term focus, which the current 
state of our securities laws helps to foster, distracts senior 
management, makes too many of our businesses less creative, and 
undermines the ability of American businesses to make the investments 
that have the best long-term payoff.
  Our securities laws have also rendered many of our businesses mute, 
virtually unable to talk to their investors and owners because of the 
fear of lawsuits. And that fear not only disadvantages the companies 
and investors, it also hurts all of us because it is an impediment to 
the smooth functioning of our capital markets. It makes it less likely 
that capital is allocated in a way that produces the most and best new 
jobs and new products.
  Let me emphasize that point. New jobs and new products. The engine of 
our economy depends in large part on the vitality of our capital 
markets and, in the final analysis, Mr. President, that is what this 
debate is all about.
  I cosponsored S. 240, along with Senator Dodd and other members of 
the committee because this bill has been based on the recognition of 
all of these facts. S. 240 acknowledges the multiple rolls and multiple 
interests that we all have in this area, and it is based, I think, on 
an understanding that we are all in this together. We must maintain 
strong investor protection while making it more difficult to file 
frivolous or abusive lawsuits.
  We must create a climate where new businesses that create new jobs 
and new products can get the capital they need while ensuring that 
defrauded investors have the right to recover their damages.
  S. 240, as introduced by Senators Dodd and Domenici, went a long way 
toward achieving all of those objectives. The bill attempted to reduce 
transaction costs so that investors who [[Page S 8919]] are harmed see 
a smaller portion of their recoveries consumed by attorney's fees and 
other miscellaneous costs. It was designed to help our capital markets 
create more jobs and create greater long-term economic growth, 
something that is also very good for investors.
  The original bill has been modified in a number of important ways. 
Some of these changes represent improvements in the original bill, 
others represent new concepts. The bill before us is not perfect. In 
some areas, quite frankly, I would have written it differently and I 
suspect everybody in the Senate almost always feels the same way about 
major legislation.
  I think it is clear, however, that this bill is a good-faith attempt 
to balance the competing public objectives in this area and that 
looking at the overall legislation it successfully achieves balance and 
that, I think, is a very important notion as we address this issue. 
Achieving balance is important to keeping our capital markets vital, 
and it is important to our economic prosperity.
  It is important, Mr. President, again to keep in mind what this area 
of the law is all about and what the bill does and does not do. This 
may get a little technical, but I guess a lot of the conversation here 
has gone into the particular aspects of the bill that are the most 
controversial.
  What we are talking about has to do with private rights of action for 
fraud under section 10(b) of the Securities Exchange Act and rule 10b-5 
of the Securities and Exchange Commission.
 Those laws did not expressly provide private parties with a right to 
sue corporations or other parties involved in the issuance and sale of 
securities. However, this area of law has evolved out of a long series 
of judicial decisions, not legislative actions.

  S. 240 will help reduce frivolous and abusive security suits, and it 
achieves that objective without encouraging fraud and without 
undermining the rights of investors, and particularly small investors, 
to recover where there actually is fraud.
  Some argue that the bill is somehow unbalanced because it limits 
joint and several liability and because it does not extend the statute 
of limitations in private section 10(b) cases. The bill, however, holds 
everyone--I emphasize that--everyone who commits ``knowing'' securities 
fraud jointly and severally liable. Other defendants may be only 
``proportionately'' liable; that is, they may be only responsible for 
the share of the harm that they cause. That ensures that parties who 
may be only 1 percent or 2 percent responsible for the fraud are not 
added defendants in cases simply because they have deep pockets.
  Proportionate liability is far from a new concept. We have had it in 
the tort area in my own State of Illinois for a number of years. It is 
an important and necessary change. Without it, many people will not 
deal with the small entrepreneurial, startup companies that are the 
most likely to be sued--and I point out that are most likely to create 
jobs--because the potential liability is so much greater than the 
profit that can be earned from doing business with these companies. 
Many companies are increasingly unable to find accounting firms and law 
firms willing to do business with them and are having increasing 
difficulty in attracting the best people to sit on their boards of 
directors. And the result of that is, again, less information and less 
protection for investors and greater hurdles for the new companies on 
which our economic future depends.
  Of course, in some cases, the parties most responsible for fraud are 
judgment proof; that is, they have no assets at all that can be found. 
In those situations, this bill provides, I think, substantial 
protection for small investors. First, it says that defendants that are 
proportionately liable have their share of responsibility increased up 
to 50 percent of their proportionate share, so that all investors are 
better compensated for the losses they have suffered. For small 
investors, those with a net worth of under $200,000, who suffer a loss 
of at least 10 percent of their net worth, every defendant is jointly 
and severally liable for paying those damages--a provision in this bill 
that I think ensures that small investors get that extra protection.
  The proportionate liability provisions are not the only provisions, 
however, that have been the subject of criticism. Some argue that S. 
240 is flawed because of a provision that it does not include, and that 
is the provision that has to do with an extension of the statute of 
limitations.
  Mr. President, it is true that S. 240 is silent on the issue of the 
statute of limitations. But this is not to disadvantage small investors 
or any other investors. Four years ago, in a case known as the Lampf 
decision, the Supreme Court of the United States decided that the 
implied rights of action for private parties under section 10(b) were 
subject to the same statute of limitations that applied more generally 
in other areas of the securities law--1 year from the date of discovery 
of the fraud, or 3 years from the date of the fraud.
  It is worth noting that the court did not disadvantage section 10(b) 
cases relative to other security cases; it simply said that the same 
statute of limitations applies, which is hardly a revolutionary idea. 
In the 4 years since the Lampf decision was rendered, there has been no 
substantial evidence presented that investors are being harmed by that 
decision.
  Statutes of limitation, by their very nature, have some degree of 
arbitrariness to them. In this area, the evidence is that the 
overwhelming number of cases are being brought within a year of the 
time the alleged fraud occurs, which tends to indicate that a longer 
statute may not be needed. Most cases are not filed just before the 
statute of limitations expires, so the 1-year/3-year statute of 
limitations does not seem to be making it difficult for plaintiffs to 
prepare their complaints.
  My own conclusion is that, in light of the evidence, a case has not 
been made for giving section 10(b) implied private rights of action in 
fraud cases a longer statute of limitations than other Federal 
securities law related cases.
  Mr. President, one of the provisions of this bill that has been the 
subject of some attention has to do with the issue of whether or not it 
includes something that has been called the English rule or losers pay. 
That has been a rule that never frankly has been applied in American 
jurisprudence. It is the English rule that says if you file the lawsuit 
and you lose, then you have to pay the cost of litigation. However, 
this bill does not have loser pay in it. The bill simply requires the 
judge to look at rule 11 of the Federal Rules of Civil Procedure, a 
rule that already exists and pertains to all kinds of civil litigation 
and which calls for sanctions for frivolous lawsuits to determine in 
these securities cases whether or not any party has violated rule 11 
and, if so, to impose sanctions.
  That is a far cry, Mr. President, from the English rule, from what 
has been called ``loser pays.''
  The bill also establishes what is called a ``safe harbor.'' This 
provision in some ways offers more protection for investors and less, 
frankly, for issuers of security than do some of the leading court 
decisions in this area today.
  And so what is at issue here with the safe harbor question has to do 
with what are known as forward-looking statements, statements by 
issuers of securities that describe future events or that estimate the 
likelihood of selected future events occurring.
  SEC rule 175 states that forward-looking statements made with a 
reasonable basis and in good faith cannot be used as a basis for a 
fraud action. That is already law.
  However, Mr. President, as a practical matter, the safe harbor that 
it provides turned out to be not very safe at all. What added real 
protection was a third circuit case that recognized what is called the 
bespeaks caution doctrine, a doctrine that is now recognized in at 
least five circuits. Under this doctrine, under the bespeaks caution 
doctrine, forward-looking statements accompanied by meaningful 
cautionary statements, that is, statements that indicate the risks the 
forward-looking statements will not come true, are as a matter of law 
immaterial and therefore cannot be used as a basis for fraud action.
  Under this bill, however, the bespeaks caution doctrine would not 
apply to issuers who made statements with the actual intent of 
misleading investors even if they were accompanied by meaningful 
cautionary statements. [[Page S 8920]] 
  To that extent, Mr. President, this legislation is more protective of 
investor's interests in that regard than the evolving state of the law 
in at least five circuits in this country.
  Again, these are all highly technical areas, and there is a lot more 
that I can say about the issues and other issues raised by this 
legislation. However, I instead want to make one final point.
  A simplistic analysis of this bill says this is a fight between the 
lawyers and the corporations and that the proponents of the bill, the 
people who support the bill, are somehow engaged in lawyer bashing. I 
cannot speak for every supporter of this bill, but I wanted to make it 
as clear as I can that as a lawyer myself, I care very much about the 
profession, and my view is that lawyer bashing has no place in this 
debate. The great bulk of the work of lawyers in the securities 
litigation area has been of enormous benefit to investors and to the 
public generally. The securities plaintiffs bar, frankly, has been 
particularly helpful in helping small investors, and it has played an 
instrumental role in keeping our capital markets respected worldwide. 
They have provided a necessary check in a system that, again, presumes 
honesty.
  I would not have agreed to cosponsor this bill if I concluded that it 
would limit their important and legitimate role of the trial bar, of 
the securities bar, or if I believed this bill would take away from 
investors opportunities to recover damages from those who, in fact, had 
defrauded them.
  What makes this bill necessary, however, are the abuses by a 
relatively small number of people who have thrown the system out of 
balance. S. 240 does nothing more than restore that balance, Mr. 
President.
  I want to conclude by congratulating again Senator Dodd and Senator 
Domenici and the leadership of the Banking Committee for all the hard 
work that has been put into this legislation and for the way everyone 
has worked together in a bipartisan fashion and in good faith to 
resolve some of the complicated issues in this area as they have 
arisen.
  This bill may be a bill that leaves none of us fully satisfied, 
everybody is going to have another idea. But the compromises 
represented in S. 240 are good ones. They will be good for our capital 
markets. This bill will be good for economy. This bill will be good for 
job creation, and it will be good for the American people, generally, 
in all their roles.
  On that basis, I support this legislation and I urge its passage by 
the Senate. I yield the floor.
  Mr. SPECTER addressed the Chair.
  The PRESIDING OFFICER. The Senator from Pennsylvania.
  Mr. SPECTER. Mr. President, I thank the Chair.
  Mr. President, I have sought recognition to comment briefly on the 
pending legislation and to offer a motion on behalf of Senator Biden, 
Senator Shelby, Senator Feingold, and myself to refer the bill to the 
Committee on the Judiciary in order to consider some very important 
issues which have not had a hearing in the Banking Committee, because 
the Banking Committee under its own procedures does not customarily 
take up questions on the Federal Rules of Civil Procedure regarding 
which the pending legislation makes a great number of very significant 
changes.
  The rules which govern court procedure are customarily fashioned by 
judges, and they are established by the Supreme Court of the United 
States with an advisory committee which considers the details of these 
provisions. They are complicated on matters such as how pleadings are 
formulated, how specific you have to be, and what to say to get in 
court before you are entitled to discovery; what rules govern when you 
take depositions, for example; that is, when questions are asked by one 
side of the parties on the other side. What happens with respect to 
sanctions when lawyers do not operate in good faith or bring frivolous 
lawsuits, or what happens on class representation.
  These are the kinds of questions which I have had some experience 
with, although not recently. But I had experience when I practiced 
civil law before coming to the U.S. Senate. And on the Judiciary 
Committee, having been a member there for 14\1/2\ years, I have had 
some continuing familiarity with these issues, but nothing compared to 
the individuals who are in the courts every day.
  On that subject, I discussed some of the issues raised by this bill 
with a longstanding friend of mine going back to college days at the 
University of Pennsylvania, Judge Edward R. Becker, who is now a very 
distinguished jurist on the U.S. Court of Appeals for the Third 
Circuit, and one of the premier Federal judges in the country.
  Judge Becker was appointed to the Federal Court in 1971. He served 
for 10 years as a trial judge day in and day out, and for the past 14 
years he has been on the court of appeals and is a recognized expert on 
Federal procedure, lectures in the field, and is highly regarded as one 
of the most knowledgeable of the Federal judges.
  Some of the comments which Judge Becker has made to me in a 
relatively brief letter illustrate to some extent the problems which 
are present in the current legislation.
  I compliment the Senator from California, the Senator from Nevada, 
and the Senator from Maryland, the ranking member of the committee, the 
chairman of the committee, and also the Senator from New Mexico, 
Senator Domenici, and the Senator from Connecticut, Senator Dodd, who 
have drafted this legislation, for the very constructive work which 
they have done. But there are many very, very important provisions 
which have not been subjected to the kind of analysis which comes only 
with real experience in the courts on a day-in and day-out basis.
  Having had that experience, I know the difference between the 
legislative process and the judicial interpretive process. Those judges 
see these matters day in and day out. They know what happens in a very 
practical sense. They have a much deeper familiarity with the way they 
work out than we do in the Congress.
  As the Presiding Officer knows, and as my colleagues know, frequently 
in our hearings in the Senate, only one or two Senators are present. 
When markup occurs it is done as carefully as we can, but not with the 
kind of craftsmanship which judges employ day in and day out.
  These are some of the comments which Judge Becker has made which I 
think are worthy of consideration. They are not dispositive of all of 
the issues but are illustrative of the kinds of complex matters which 
we think require a great deal more consideration than we have had so 
far.
  This legislation is enormously important. It is enormously important 
as it governs the securities field where capital is formed so that the 
free enterprise system can function, so that when representations are 
made in the prospectuses that sufficient information is given to 
investors to know what is happening, to see to it that the 
representations are honest, and that the millions and millions of 
people who invest in securities are protected--and not that there is 
any absolute guarantee that they will earn dividends or make money on 
capital gains because there is a certain amount of risk, but that there 
are representations honestly made, that they are protected against 
fraud, and that the procedures balance the concerns of the companies, 
not subjecting them to frivolous litigation but balance the concerns of 
the investors.
  Judge Becker has made this comment, for example, on the rule of 
procedure which governs the designation of lead counsel:

       Most of the provisions prescribe things the courts already 
     do--for example, designating lead counsel--or at least can do 
     within the exercise of their discretion. Section 102 
     constitutes congressional micromanagement with the untoward 
     effect of depriving judges of the flexibility which is 
     indispensable for effective case management.

  One of the bill's important provisions relates to sanctions, which 
are important in litigation to ensure that the court has the 
flexibility to manage the case and that lawyers do not abuse the 
process, that is, they do not bring frivolous lawsuits, and frivolous 
lawsuits are brought. We know that as a matter of fact. Really no one 
contests that. Or no one contests the need for limiting frivolous 
lawsuits. And there is a generally recognized need that we ought to 
have reform in this field.
  Some of the provisions of current law, for example on joint and 
several [[Page S 8921]] liability, have imposed very extensive 
liability on accountants who do not know the inner workings of the 
representations but are held under the concept of joint liability. 
There needs to be a close look at the kind of liability imposed.
  So that when you talk about frivolous lawsuits and how to deter them, 
we do need to have very substantial review of that issue. But I have 
found that the provision of the bill regarding the rule which requires 
mandatory sanctions by the court perhaps goes too far, and we do not 
know that for sure really until we analyze it in some detail. But this 
is what Judge Becker had to say about that:

       Mandatory sanctions are a mistake and will only generate 
     satellite litigation.

  And by satellite litigation, Judge Becker was referring to the 
situation where, after the case is over, then a whole new litigation 
process starts as to whether sanctions are really required.
  Under present law, the judge has discretion to award sanctions, and 
there has to be a motion made by the party that thinks that the other 
party has acted inappropriately. Before a party can ask for sanctions, 
the party must give notice to the other party of its view that 
something wrong has been done in order to give the allegedly offending 
party an opportunity to correct it.
  That is done in litigation to try to have the parties work it out. If 
somebody does not like what the other party is doing, they say, ``Wait 
a minute; you ought to stop that.'' It gives that party a chance to 
reflect on the reasons. If it does not stop, then the party can make a 
motion for sanctions. But under this legislation, the judge has the 
obligation on his own to review the record and to impose sanctions. 
That is contrary to the American system of adversarial litigation where 
the judge does not have the responsibility for making that 
determination on his own; one of the parties who feels aggrieved says 
to the court: Something wrong has been done here, and I make a motion 
to have it corrected. This is more like the inquisitorial system which 
the French have where the judge is the moving party.
  Judge Becker has this to say after commenting on the satellite 
litigation.

       The flexibility afforded by the current regime enables 
     judges to use the threat of sanctions to manage cases 
     effectively. Well managed cases almost never result in 
     sanctions. The provision for mandatory review--

  That is, without prompting by the parties--

       will impose a substantial burden on the courts and prove 
     completely useless in the vast majority of cases. Requiring 
     courts to impose sanctions without a motion by a party also 
     places the judge in an inquisitorial rule which is foreign to 
     our legal culture, which is based on the judge as a neutral 
     arbiter model.

  The judge then refers to a rule drafted by a very distinguished 
judge, Judge Patrick Higginbotham of the Court of Appeals for the Fifth 
Circuit, who is chairman of the Judicial Conference of the Advisory 
Committee on Civil Rules. And this is what Judge Higginbotham says 
ought to be done:

       In any private action arising under this title, when an 
     abusive litigation practice is brought to the District 
     Court's attention by motion or otherwise, the Court should 
     promptly decide, with written findings of fact and 
     conclusions of law, whether to impose sanctions under rule 11 
     or rule 26(g)(3) of the Federal Rules of Civil Procedure or 
     its inherent power.

  And that is really giving discretion to the court. Perhaps on 
analysis the provision in the bill on mandatory would be retained. But 
I think it is indispensable, Mr. President, that that kind of careful 
analysis be made.
  Other provisions set out in the current bill make very substantial 
changes to the Federal rules. There is a requirement that the potential 
outcome of the suit be disclosed, and there are special disclosures 
relating to settlement terms. These provisions have an impact on rule 
23, the class action rule. The bill also contains certain unique 
provisions governing the appointment of lead counsel in class actions, 
none of which have been given a hearing.
  I discussed with the chairman of the committee, the Senator from New 
York, Senator D'Amato, the procedures used by the committee, and I 
think I am accurate in stating--and he can comment on this if the truth 
is to the contrary--that this is a provision added very late, and there 
had not been hearings.
  There are also changes in the rules relating to discovery under rule 
26, and there are differences in rules relating to the specificity of 
allegations of pleadings, affecting rule 9.
  Without going into any great detail, these are all matters which 
really ought to be reviewed by the Judiciary Committee, which has the 
expertise under our Senate rules for handling matters of this sort. It 
is not the kind of a matter which is customarily brought before the 
Banking Committee.
  This same issue was raised by the Chairman of the Securities and 
Exchange Commission, Arthur Levitt, in a letter dated May 25, 1995, to 
Senator D'Amato. Chairman Levitt commented as follows:

       I also wish to call your attention to a potential problem 
     with the provision relating to rule 11 of the Federal Rules 
     of Civil Procedure. I worry that the standard employed in 
     their draft may have the unintended effect of imposing a 
     loser-pays scheme. The greater the discretion afforded the 
     court, the less likely this unintended consequence may 
     appear.

  The loser-pays scheme, Mr. President, is one which Great Britain has 
where the loser has to pay the costs of litigation, and that is a very, 
very abrupt and drastic change in our litigation procedure.
  The bill currently provides for mandatory sanctions and contains a 
presumption that the loser will pay sanctions and that the appropriate 
sanction is the other party's attorneys' fees. This would have a very 
major, chilling effect on bringing any litigation.
 And that presumption can be overcome but it starts off on an unequal 
footing where the same requirement is not imposed on the defense, on 
the other side in the litigation. I am sure that there will be 
consideration of this substantive revision in the course of the 
analysis of this bill. But this again is something which really ought 
to have the benefit of a hearing in the Judiciary Committee.

  Mr. President, I had advised the chairman, the Senator from New York 
[Mr. D'Amato], that I would not be in the position to vote on this 
matter until others had a chance to come to the floor, specifically 
Senator Biden. I know that there are other Senators on the floor who 
wish to speak at this time. And it would be my hope that we can move to 
a vote this evening. I do not want to keep Senators here unnecessarily 
but I believe that Senators are present with the expectation of having 
a vote on final passage on the highway bill where there is still one 
matter which is left to be worked out.
  But I do want to make that stressed statement that until Senator 
Biden returns we have an opportunity to have debate on this subject. 
There are some matters I want to discuss with the Senator, the 
chairman, the Senator from New York, who is necessarily absent at this 
time.
  Before yielding the floor--I shall not hold the floor very much 
longer--there will not be more than one final statement that I will 
make, as I see my colleague from Utah, rising. I do want to make a 
brief comment about the bill generally as to information provided to me 
by the chairman of the Pennsylvania Securities Commission who has 
raised very substantial problems with the bill. I want to call those to 
the attention of my colleagues. This is a letter to me from Chairman 
Robert Lam, dated April 19, 1995, in which Chairman Lam makes this 
statement. ``I have considered the major elements of both'' Senate bill 
240, which is the one currently being considered, and Senate bill 667, 
which is a different bill introduced by Senators Shelby and Bryan. It 
is the conclusion of Chairman Lam of the Pennsylvania Securities 
Commission that the other bill, the one not on the floor, is much 
preferable. Chairman Lam concludes by saying, Senate bill ``240, on the 
other hand, tilts the balance too far in favor of corporate interests 
and would have the practical effect of depriving many defrauded 
investors the ability to cover their losses.''
  In a letter dated June 20, 1995--I shall include both of these 
letters for the record, so I do not have to take much time. Chairman 
Lam writes as follows,

       As presently constituted, S.240 not only would affect 
     negatively Pennsylvania investors but also Pennsylvania 
     taxpayers should the Commonwealth Treasury Department [[Page S 
     8922]] again become a potential victim of wrongdoing in 
     securities transactions undertaken on behalf of the 
     Commonwealth. The importance of the potential negative 
     effects of this Bill on the Commonwealth is reflected by the 
     Treasury Department's recent suit against Salomon Brothers 
     for damages resulting from alleged wrongful conduct engaged 
     in by Salomon in connection with its bidding on government 
     bonds.

  And Chairman Lam of the Pennsylvania Securities Commission concludes 
with this statement.

       As a participant in the capital formation process, I would 
     like to emphasize that our financial markets run most 
     efficiently when there is a high degree of public confidence 
     in the integrity of the marketplace. Money is merely the 
     medium of exchange between this confidence and the honest 
     entrepreneur. As written, S.240 will not advance the goal of 
     making capital available to growing U.S. companies. It will 
     result in small investors avoiding participation in our 
     capital markets when they discover that they are unable to 
     bring suit against the perpetrators of aiders and abettors of 
     a securities fraud or, upon winning such a suit, fail to be 
     made whole because the Bill adopts the concept of ``caps'' on 
     total defendant liability.

  I do ask unanimous consent, Mr. President, that the full text of 
these two letters from Chairman Lam be made a part of the record at the 
conclusion of my speech.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  (See exhibit 1)
  Mr. SPECTER. In conclusion, Mr. President--the favorite words of any 
speech, and with finality--I will pursue this motion as the evening 
progresses and do believe that it is very important that the full range 
of considerations raised by Chairman Lam be considered, issues that 
have otherwise been raised, but especially these procedural questions 
be considered by the Judiciary Committee which under our rules has the 
jurisdiction to consider them.


                            Motion to Commit

  Mr. SPECTER. On behalf of Senator Biden, Senator Shelby, Senator 
Feingold, and myself, I do move to commit the pending bill, Senate 240, 
to the Committee of the Judiciary.
  I thank the Chair and yield the floor.
                               Exhibit 1.


                          Pennsylvania Securities, Commission,

                                                   April 19, 1995.
     Hon. Arlen Specter,
     U.S. Senate, Hart Senate Office Building,
     Washington, DC.
       RE: Pending Securities Litigation Reform Bills S. 240 and 
     S. 667
       Dear Arlen: In my capacity as the Chairman of the 
     Pennsylvania Securities Commission, I am writing to express 
     my views on the two major securities litigation reform bills 
     now before the Senate. The Pennsylvania Securities Commission 
     is responsible for investor protection and overseeing the 
     capital formation process in the Commonwealth.
       It is my view that any securities litigation reform 
     legislation must be carefully balanced so that it provides 
     relief to companies and professionals who may be the subject 
     of frivolous lawsuits while preserving a meaningful private 
     remedy for defrauded investors. While much of the debate in 
     Washington has focused on how to protect honest companies and 
     professionals from vexatious lawsuits, I believe there is an 
     equally compelling need to maintain the ability to deter and 
     detect wrongdoing in the financial marketplace.
       From my vantage point, there continues to be an 
     unacceptably high level of fraud and abuse in today's capital 
     markets, particularly with respect to small investors. As the 
     limited resources of government are insufficient to pursue 
     every case of wrongdoing, the ability of defrauding investors 
     to maintain a private cause of action to recover their 
     investment without fear of financial ruin remains critically 
     important to the overall successful enforcement of the 
     securities laws.
       It is against this backdrop that I have considered the 
     major elements of both S. 240, the ``Private Securities 
     Litigation Reform Act,'' introduced by Senators Domenici and 
     Dodd, and S. 667, the ``Private Securities Enforcement 
     Improvements Act,'' introduced by Senators Shelby and Bryan. 
     It is my conclusion that S. 667 is very much the preferable 
     legislative vehicle for resolving the securities litigation 
     reform debate. S. 667 achieves the critical balance between 
     making the litigation system more fair and more efficient, 
     while preserving the critical role that private actions play 
     in maintaining the integrity of our financial markets. S. 
     240, on the other hand, tilts the balance too far in favor of 
     corporate interests and would have the practical effect of 
     depriving many defrauded investors the ability to recover 
     their losses.
       Among the provisions of S. 667 that I support are: (1) an 
     innovative early evaluation procedure designed to weed out 
     clearly frivolous cases; (2) a more rational system of 
     determining liability among defendants; (3) certification of 
     complaints and improved case management procedures; (4) curbs 
     on potentially abusive attorney practices; (5) improved 
     disclosure of settlement terms; (6) a reasonable safe harbor 
     for forward looking statements; (7) restoration of aiding and 
     abetting liability; (8) a reasonable extension of the statute 
     of limitations for securities fraud suits; (9) codification 
     of the recklessness standard of liability as adopted by 
     virtually every U.S. Circuit Court of Appeals; and (10) 
     rulemaking authority to the SEC with respect to fraud-on-the-
     market cases. A detailed comparative analysis between S. 667 
     and S. 240 is enclosed.
       S. 667 proves that it is possible to craft securities 
     litigation reform measures that target abusive practices 
     without sacrificing the opportunity for recovery by 
     defrauding investors. Therefore, I strongly encourage you to 
     become a co-sponsor of S. 667.
       Securities litigation reform is one of the most important 
     issues for small investors that will be considered by the 
     104th Congress. It is my hope that the Senate will give 
     serious consideration to S. 667 as the appropriate response 
     for constructive improvement in the federal securities 
     litigation process. If you have any questions about my 
     position on securities litigation reform, please do not 
     hesitate to contact me at (215) 635-6262 or Deputy Chief 
     Counsel G. Philip Rutledge at (717) 783-5130. I would be 
     pleased to provide you or your staff with any additional 
     information you may require on this most important issue to 
     individual Pennsylvania investors.
           Very truly yours,
                                                    Robert M. Lam,
     Chairman
                                                                    ____

                                                Pennsylvania      
                                            Securities Commission,


                                 Commonwealth of Pennsylvania,

                                                    June 20, 1995.
     Re: amendments to Senate bill 240, ``Private Securities 
         Litigation Reform Act''
     Hon. Arlen Specter,
     U.S. Senate, 530 Hart Senate Office Building,
     Washington, DC.
       Dear Arlen: It is my understanding that Senate Bill 240 is 
     now before the full U.S. Senate for consideration.
       The Pennsylvania Securities Commission is charged under the 
     Pennsylvania Securities Act of 1972 with the protection of 
     investors. While the Commission has stated its position in 
     previous correspondence (April 17, 1995) that it favors 
     certain securities litigation reforms (as contained in 
     S.667), it believes that S.240, as currently constituted, 
     does not achieve the appropriate balance between protecting 
     investors and discouraging frivolous lawsuits against honest 
     companies and professionals. Instead, the practical effect of 
     S.240 would be the elimination of private actions under 
     federal law for Pennsylvanians who found themselves to be a 
     victim of securities fraud.
       It is my understanding that amendments to S.240 will be 
     offered on the Senate floor to strengthen its investor 
     protection provisions, i.e. extending the statute of 
     limitations for civil securities fraud actions (Pennsylvania 
     recently extended its statute of limitations period for 
     securities fraud to four years); fully restoring liability 
     for aiding and abetting securities fraud; restoring joint and 
     several liability so defrauded investors can be made whole; 
     and peeling back the immunity for companies to make 
     outrageous claims of future profits or performance.
       The Commission asks you to support adoption of these 
     amendments. If, however, all these vital investor protection 
     amendments are not adopted, the Commission, on behalf of 
     Pennsylvania investors, strongly urges you to vote against 
     S.240.
       As presently constituted, S. 240 not only would affect 
     negatively Pennsylvania investors but also Pennsylvania 
     taxpayers should the Commonwealth Treasury Department again 
     become a potential victim of wrongdoing in securities 
     transactions undertaken on behalf of the Commonwealth. The 
     importance of the potential negative effects of this Bill on 
     the Commonwealth is reflected by the Treasury Department's 
     recent suit against Salomon Brothers for damages resulting 
     from alleged wrongful conduct engaged in by Salomon in 
     connection with its bidding on government bonds.
       As a participant in the capital formation process, I would 
     like to emphasize that our financial markets run most 
     efficiently when there is a high degree of public confidence 
     in the integrity of the marketplace. Money is merely the 
     medium of exchange between this confidence and the honest 
     entrepreneur. As written, S. 240 will not advance the goal of 
     making capital available to growing U.S. companies. It will 
     result in small investors avoiding participation in our 
     capital markets when they discover that they are unable to 
     bring suit against the perpetrators or aiders and abettors of 
     a securities fraud or, upon winning such a suit, fail to be 
     made whole because of the Bill adopts the concept of ``caps'' 
     on total defendant liability.
       Thank you for considering our views. If you or your staff 
     have any questions concerning how this Bill negatively 
     affects Pennsylvania and Pennsylvania investors, please 
     contact G. Philip Rutledge or K. Robert Bertram of the 
     Commission staff at (717) 783-5130.
           Very truly yours,
                                                    Robert M. Lam,
                                                         Chairman.


[[Page S 8923]]

  Mr. BENNETT addressed the Chair.
  The PRESIDING OFFICER. The Senator from Utah.
  Mr. BENNETT. Mr. President, the Senator from Illinois has been 
patient and is scheduled to be the next speaker.
  Before we hear from her, I have been asked to perform a few 
housekeeping details. Senator Hatch, the chairman of the Judiciary 
Committee, has asked me to announce on his behalf that he cannot come 
here at the moment. I am sure the Senator from Illinois is delighted 
that that means she will not be delayed further. But he did ask that 
the statement be made on his behalf that as chairman of the Judiciary 
Committee he opposes the referral contained within this motion.
  I ask unanimous consent that at 8:30 this evening Senator D'Amato be 
recognized to make a motion to table the motion to commit the bill.
  The PRESIDING OFFICER. Is there objection?
  Mr. SPECTER. Reserving the right to object, there are issues, and I 
need to discuss them with the chairman which I talked to him about 
earlier. And also my principal cosponsor, Senator Biden, is not 
available yet to make an argument.
  Mr. BENNETT. Mr. President, I renew the unanimous consent request 
that at 8:30 this evening Senator D'Amato be recognized to make a 
motion to table the motion to commit the bill.
  The PRESIDING OFFICER. Is there objection?
  Mr. SPECTER. I object.
  The PRESIDING OFFICER. Objection is heard.
  Mr. SARBANES. Mr. President, parliamentary inquiry? What is the 
parliamentary situation here?
  The PRESIDING OFFICER. There is a motion to commit the bill to the 
Judiciary Committee pending.
  Mr. SARBANES. Is there further debate in order?
  The PRESIDING OFFICER. There is.
  Mr. SARBANES. On the motion or on the bill? Either?
  The PRESIDING OFFICER. The motion is pending. You can debate either.
  Mr. D'AMATO. At the conclusion of Senator Biden's remarks, I ask 
unanimous consent that he yield the floor back to me for the purpose of 
making a tabling motion. I would like to simply state that Senator 
Hatch has indicated that he is not in favor of the motion for 
sequential referral, and that this is not a new matter. This matter has 
legislatively been on an agenda now for some four years. That is the 
only comment I will make.
  I will yield the floor.
  Mr. BIDEN addressed the Chair.
  The PRESIDING OFFICER. The Senator from Delaware is recognized.
  Mr. BIDEN. Mr. President, I thank the Senator from New York. What I 
am about to say, I say standing next to my good friend from 
Connecticut, Senator Dodd, who has worked tirelessly on this bill, with 
which I disagree, but I want to make a very brief statement.
  I strongly support the position taken by the Senator from 
Pennsylvania. This litigation makes numerous precedent-setting changes 
in the country's judicial system. While my colleagues in the Banking 
Committee had a chance to examine the changes the bill would make to 
our Nation's security laws, it seems to me that we may have skipped a 
very important step. The so-called Securities Reform Act makes 
significant revisions to the Federal rules of evidence relating to 
mandatory rule 11 sanctions and rule 26 discovery proceedings, and yet, 
it has not been referred to the Judiciary Committee.
  I hold myself partially responsible for that. In truth, I say to my 
friend from Connecticut, I should have been hollering for this in my 
committee before this time. I was mildly preoccupied with other things 
before the committee. To tell you the truth, it was called to my 
attention by my friend from Pennsylvania, and I realize this is a 
serious mistake, in my view, and that we have not had this before the 
Judiciary Committee.
  In the past, bills that have made changes to the Federal rules of 
evidence were referred to the Judiciary Committee to enable the 
committee with expertise to review the work on this legislation. This 
bills is no different. Similarly, limiting joint and several liability, 
restricting the statute of limitations, changing the rules of class 
action suits in favor of large investors, are all judiciary-related 
issues. Yet, the Judiciary Committee never had a day of hearing on any 
of these specific issues.
  If the bill becomes law, companies could potentially get away with 
making misleading, even fraudulent, statements about their earnings. 
Yet, to win a class action suit, you would have to prove a falsehood 
was made with a clear intent to deceive. That is an incredibly tough 
standard. I will admit some frivolous lawsuits are filed. Some lawyers 
do make too much from a suit, leaving defrauded investors with little. 
But I do not believe this massive bill is the answer.
  So in order to protect the small investors, it seems to me that we 
should at least look at the significant changes in the rules of 
evidence. If this bill passes, I make the prediction to us all here, we 
will be back in two, three, four years undoing it, after another Orange 
County or another insider trading scandal, or after millions of people 
are defrauded with some other scam that occurs.
  Quite frankly, I think we would be wise to take a close look, with a 
specific time for referral, if need be, to the Judiciary Committee, to 
look at these changes in the rule of ethics.
  I do not profess to have expertise in the securities industry, but we 
do know something about the rules of evidence and the shifting burden 
of truth.
  I thank my colleague for his indulgence, and I thank the Senator from 
Illinois. I thank the Senator from Connecticut for not getting up and 
saying, ``Why, Joe, did you not do this earlier?"
  I yield the floor.
  Mr. D'AMATO. Mr. President, I intend to make a motion to table.
  Mr. DODD. Mr. President, will my colleague yield?
  Mr. D'AMATO. I am happy to yield.
  Mr. DODD. Just to say, Mr. President, this has been about 4 years on 
this matter.
  This hour, we are now under consideration of the bill--I say this 
with all due respect to my good friends on the Judiciary Committee; it 
has been no secret that this legislation has been pending--at this 
particular hour to secure sequential referral, in effect, would kill 
the legislation.
  I think all of our colleagues ought to be aware of that at this 
juncture. This is our opportunity in a moment to move on this. We have 
had extensive hearings, heard from lawyers and others on all sides, and 
worked closely with them.
  With all due respect to our colleagues on the Judiciary Committee, I 
would hope this motion to table would be approved.
  Mr. D'AMATO. Mr. President, I move to table the motion. I ask for the 
yeas and nays.
  The PRESIDING OFFICER. Is there a sufficient second?
  There is a sufficient second.
  The yeas and nays were ordered.
  The PRESIDING OFFICER. The question is on agreeing to the motion to 
table the motion to commit. The clerk will call the roll.
  The legislative clerk called the roll.
  Mr. DOLE. I announce that the Senator from Texas [Mr. Gramm], the 
Senator from North Carolina [Mr. Helms], the Senator from Idaho [Mr. 
[Kempthorne], and the Senator from Mississippi [Mr. Lott] are 
necessarily absent.
  Mr. FORD. I announce that the Senator from New Mexico [Mr. Bingaman], 
the Senator from New Jersey [Mr. Bradley], the Senator from Arkansas 
[Mr. Bumpers], the Senator from Hawaii [Mr. Inouye], the Senator from 
Nebraska [Mr. Kerry], the Senator from New Jersey [Mr. Lautenberg], and 
the Senator from Arkansas [Mr. Pryor] are necessarily absent.
  The PRESIDING OFFICER. Are there any other Senators in the Chamber 
desiring to vote?
  The result was announced--yeas 69, nays 19, as follows:

                      [Rollcall Vote No. 281 Leg.]

                                YEAS--69

     Abraham
     Ashcroft
     Baucus
     Bennett
     Brown
     Burns
     Campbell
     Chafee
     Coats
     Cochran
     Cohen
     Conrad
     Coverdell
     Craig
     D'Amato
     DeWine
     Dodd
     Dole
     Domenici
     Dorgan
     Exon
     Faircloth
     Feinstein
     Ford
     Frist
     Glenn
     Gorton
     Grams
     Grassley
     Gregg
     Harkin
     Hatch
     Hatfield
     Hutchison
     Inhofe
     Jeffords [[Page S 8924]] 
     Johnston
     Kassebaum
     Kerry
     Kohl
     Kyl
     Levin
     Lieberman
     Lugar
     Mack
     McConnell
     Mikulski
     Moseley-Braun
     Moynihan
     Murkowski
     Murray
     Nickles
     Nunn
     Packwood
     Pell
     Pressler
     Reid
     Robb
     Rockefeller
     Roth
     Santorum
     Simpson
     Smith
     Snowe
     Stevens
     Thomas
     Thompson
     Thurmond
     Warner

                                NAYS--19

     Akaka
     Biden
     Boxer
     Breaux
     Bryan
     Byrd
     Daschle
     Feingold
     Graham
     Heflin
     Hollings
     Kennedy
     Leahy
     McCain
     Sarbanes
     Shelby
     Simon
     Specter
     Wellstone

                         ANSWERED 'PRESENT'--1

     Bond
       
       

                             NOT VOTING--11

     Bingaman
     Bradley
     Bumpers
     Gramm
     Helms
     Inouye
     Kempthorne
     Kerrey
     Lautenberg
     Lott
     Pryor
  So the motion to lay on the table the motion to commit was agreed to.
  Mr. DOMENICI. Mr. President, I move to reconsider the vote by which 
the motion was agreed to.
  Mr. FORD. I move to lay that motion on the table.
  The motion to lay on the table was agreed to.


                             Change of Vote

  Mr. REID. Mr. President, on rollcall vote 281, I was recorded as 
voting ``no.'' It was my intention to vote ``aye.'' Therefore, I ask 
unanimous consent that I be permitted to change my vote. This will in 
no way change the outcome of the vote.
  This request has been cleared by both the majority and the minority.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  (The foregoing tally has been changed to reflect the above order.)
  Mr. STEVENS. Regular order.

                          ____________________