[Congressional Record Volume 141, Number 104 (Friday, June 23, 1995)]
[Senate]
[Pages S8966-S8979]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                PRIVATE SECURITIES LITIGATION REFORM ACT

  The PRESIDING OFFICER. Under the previous order, the hour of 9:30 
a.m. having arrived, the Senate will now proceed to consider S. 240, 
which the clerk will report.
  The assistant 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 Senate resumed consideration of the bill.
  Mr. D'AMATO. Mr. President, Senator Shelby has an amendment dealing 
with proportionate liability. It is an amendment really that goes to 
the heart of the legislation. He is going to offer it and take it up at 
this time. I believe we have agreed that at 10:55 we will have a vote 
on it. At this time, I yield the floor.
  The PRESIDING OFFICER. The Senator from Alabama.
  Mr. SHELBY. Mr. President, I would like to commend Chairman D'Amato, 
Senators Domenici, Dodd, and Gramm for their hard work in trying to 
forge a consensus behind reforming our securities litigation system to 
weed out abuses and eliminate frivolous suits.
  I am concerned and disappointed, however, that the bill before the 
Senate will do more to impair the rights of the small investor than it 
will to place checks on abusive conduct and frivolous litigation. For 
this reason, I continue to oppose S. 240.
  Earlier this spring, Senator Bryan and I introduced a bill aimed at 
striking a balance between preserving the rights of the small investor 
and eliminating incentives for frivolous and abusive litigation.
  Senate bill 667 incorporated many of the widely supported provisions 
incorporated in the bill before us like prohibiting referral fees, and 
the payment of attorney fees from the SEC disgorgement fund, increasing 
fraud detection and enforcement, and ensuring adequate disclosure of 
settlement terms.
  In addition, our bill addressed many of the concerns that Chairman 
Levitt and the SEC have raised against S. 240 regarding pleading 
requirements, liability standards, and statute of limitations issues.
  While the bill before us responds to some of these concerns--it still 
fails to ensure adequate protection of the rights of the innocent 
victim of securities fraud and effectively leaves the little guy who 
seeks redress for professional wrongdoing out in the cold.
  On several key issues, S. 240 fails to preserve the important role 
that legitimate private securities litigation plays in checking abusive 
conduct and, in fact, makes it more difficult for the small investor to 
gain access to the courts and obtain full recovery for securities 
fraud.
  I believe that individual investors, particularly small shareholders, 
must be assured a full recovery against professional wrongdoers if we 
are to maintain integrity in our securities markets.
  Like Chairman Levitt and many other colleagues, I believe the bill 
can still be improved.
  I, therefore, intend to offer a couple of amendments that I believe 
will help assure that meritorious claims are not inhibited in our 
effort to prevent frivolous and abusive ones.
  Mr. President, S. 240 makes important reforms, many of which I 
support. Sadly, however, the bill would come at too great a cost to the 
small individual shareholder.
  I urge my colleagues to oppose S. 240 as currently drafted and 
support

[[Page S8967]]

amendments to reinstate important investor protections against 
securities fraud.


                           Amendment No. 1468

 (Purpose: To amend the proportionate liability provisions of the bill)

  Mr. SHELBY. Mr. President, I send an amendment to the desk.
  The PRESIDING OFFICER. The clerk will report.
  The assistant legislative clerk read as follows:

       The Senator from Alabama [Mr. Shelby], for himself and Mr. 
     Bryan, proposes an amendment numbered 1468.
       On page 134, strike lines 5 through 24, and insert 
     ``uncollectible share in proportion to the percentage of 
     responsibility of that defendant, as determined under 
     subsection (c).''.

  Mr. SHELBY. Mr. President, the amendment that I am offering I am 
offering on behalf of myself and the Senator from Nevada, Senator 
Bryan.
  S. 240, which is the bill before us, provides for proportionate 
liability for defendants found guilty of reckless conduct by limiting 
joint and several liability to defendants found guilty of knowing 
securities fraud.
  As an equitable matter, I generally support proportionate liability 
as between wrongdoers. Less culpable defendants should not, I believe, 
necessarily be liable to the same extent as more culpable defendants. I 
think that is just common sense.
  However, proportionate liability should not act to deprive the 
innocent victim of a full recovery--in other words, defraud people of 
their basic rights. Much more important than ensuring equity among 
defendants, I believe is ensuring that as between the wrongdoer and the 
innocent victim, it is the wrongdoer that bears the burden--yes, Mr. 
President, bears the burden--of any uncollectible judgment caused by an 
insolvent defendant, not the victim.
  S. 240 turns the principle on its head. S. 240 before us today would 
make the innocent victim bear the loss of an insolvent defendant by 
capping the liability of proportionate defendants to only an additional 
50 percent of their share. Beyond that, the victim bears the loss.
  Additionally, S. 240 would only allow the victim to recover his full 
damages against the remaining defendants if his or her net worth is 
less than $200,000 and the victim's damages are greater than 10 percent 
of their net worth.
  Mr. President, why we would want to place restrictions on a victim's 
full recovery, to limit a defendant's liability is beyond me in the 
first place. But the provision also fails in its purpose. Many retirees 
own their own homes and have significant equity in their property. Many 
have saved and invested for years and years for retirement. This is not 
a bad thing. We usually encourage such behavior. Yet, many older 
retirees would be precluded from a full recovery here because their net 
worth is over $200,000 and their damages are less than 10 percent or 
$20,000. Why we would want to intentionally punish an individual who is 
productive, who saves and invests for the future, is not completely 
clear to me.
  Further, Mr. President, I must seriously question, as others have, a 
bill like this that makes a judgment that these productive members of 
our society should somehow be less entitled to recovery because they 
have more net worth than the next guy.
  Mr. President, as I have stated, this amendment that I offer on 
behalf of myself and Senator Bryan is simple. It would strike the net 
worth and damage requirements and make proportionate defendants 
responsible for the uncollectible share of an insolvent codefendant in 
proportion to their percentage of responsibility or culpability. It 
puts the victim before the defendant, as I believe it should in this 
society, as it rightly should. I urge my colleagues to support it.
  This bill has some good things in it, but this is not one of them. I 
think it is time we think up here today--and I hope we will--about the 
victim and not the perpetrator of fraud and abuse in securities.
  I urge my colleagues to support this amendment.
  Mr. D'AMATO. Mr. President, I feel this amendment addresses one of 
the areas that is in the most significant need of reform.
  Imagine yourself being named as a defendant in a class action suit 
where the damage claims are $100 million. Further imagine that a jury 
finds you reckless or negligent, because you are an insurance company, 
or because you are a securities firm, or because you are a bank, or 
because you are a large accounting firm associated with the people who 
committed the fraud. Your liability could be 2 percent, because you 
failed to see the violation and take action against it; you, therefore, 
were negligent and should be held accountable.
  Well, you could settle and pay that 2 or 3 or 5 percent, or you might 
want to fight and say that given your tangential relation to the fraud, 
the duty was not yours to uncover it, but if you are found liable you 
could be held accountable for the full $100 million. For example, an 
accounting firm who cannot go beyond the numbers that were put forth in 
the audits that they conducted, who has had almost nothing to do with 
the alleged grievance, could be named as a defendant because they have 
a large asset base--we call these firms deep pockets.
   I, myself, would never have to worry about being named as one of 
those defendants because I do not have deep pockets. Deep pockets are 
generally firms of economic substance who are generally well insured. 
They find themselves dragged into these suits, and their lawyers tell 
them it will cost $700,000, $800,000, maybe $1 million to defend 
themselves, even if the company has had literally little, if anything, 
to do with the alleged fraud that was perpetrated on stockholders. Let 
me say again, that these firms are brought in only because they 
represent an economic interest of some substance. As I said last night, 
in these lawsuits, they sue everybody and anything that moves and some 
things that do not move. Your involvement in the fraud could as little 
as you walked into the building on the days the fraud was committed, 
but if you have deep pockets you will be sued. They will sue an 
outsider on the board of directors, who had no knowledge of the 
schemes, but he will face a $100 million suit, notwithstanding the fact 
that he had little or nothing to do with the fraud. Even the standard 
of proof does not help the director; the plaintiffs will claim he 
should have know, or could have found out about this, or with more 
diligence could have stopped the fraud, the distinction legally between 
reckless conduct and negligent conduct is rather unclear. Let me say 
that again. It is very blurry.
  So now the director, or the accounting firm, has a corporate decision 
to make. Whether they will settle the case for what is nothing more 
than a legal payoff to get rid of the suit, or whether they try to 
defend themselves, because they think they can win. By staying in the 
suit the firm could risk a $100 million when they could settle it for 
$2, $3, or $4 million, and avoid the legal costs. Ordinarily, I expect, 
firms would fight it out, but under joint and several liability, it 
does not matter what damage the firm caused, because they have the deep 
pockets; they can be held liable for the full amount of the settlement.
  Now, we hear that we should not put the burden on the victims, nor do 
I think we should. What we have said here is that if somebody committed 
a tortious act, he will be held responsible for his portion of the 
damage. If it is 2 percent, he will pay 2 percent of the damages. We 
even went beyond that. If the fraudulent defendant is bankrupt and 
cannot pay, we would double the liability of the other defendants. So 
if a defendant was found 5 percent negligent, but the main defendant 
was not able to pay, the 5 percent negligent defendant would be held 
responsible for 10 percent of the damages.
  If we really want to be fair, and we all want fairness, we should 
protect the small investor who is legitimately aggrieved but, also 
protect people who are unfairly dragged into a suit that is nothing 
less than legal blackmail. These firms are forced to settle because 
their business cannot be subjected to years of this litigation, or the 
possibility of having to pick up the entire cost --notwithstanding that 
their contribution to this scheme was not fraudulent. If a person has 
contributed 2 percent to the fraud, they should pay the 2 percent of 
the damages.

[[Page S8968]]

  Why does the plaintiff's bar not want this? Because more firms would 
be willing to stand up and say, ``Okay, we will battle it out,'' and 
because more of the charges that the cases are frivolous would be 
proven. These lawyers are suing the people because they are given an 
opportunity to hold them up.
  Now the victim is fighting back. The victim in this is not just the 
shareholder. The victims in many of these cases are the people with 
deep pockets who may just associated with the fraudulent company, and 
because of their connection with a company, they are dragged in.
  That is not what the law should be about. If you do the act, then you 
should pay. I absolutely agree. But do not bring in some guy who just 
happens to be in close proximity or has some connection with the 
company, has not really participated in this.
  But let me tell you, if you commit fraudulent conduct, or intentional 
wrongdoing, there is no escape from paying the full settlement.
  In our attempt to be fair, we have said quite clearly, that if you 
are knowingly participating--knowingly--in a fraudulent act then even 
if you committed only 2 percent of the fraud, you can be held liable 
for all of it. If you intentionally participate--intentionally--then 
even though you may have been only 1, 2, or 3 percent liable, who can 
be held responsible for the entire amount.
  We do not, as some have claimed, make it possible for people to lie, 
to cheat, and escape their liability. That is an oversimplification. It 
demonstrates the lack of knowledge of this legislation on the part of 
some of the editorial writers. I wish their newspapers had to be held 
to the same standard that they would ask the business community to be 
held to. That would be nice. That would be incredible.
  Imagine, they would have to be accurate, and truthful. It would be 
quite something. Quite something.
  We want to be fair, and I think we have tailored this legislation in 
such a way that we make it clear--if you intentionally mislead, even if 
that act causes only 1 to 2 percent in damages, you will be held for 
the whole. We have not changed that.
  I hope the Senate will not however, make it possible for people to 
become further exposed to these plots of extortion. That is wrong. Our 
Founding Fathers did not want it that way. This has developed over the 
years, and it has come about as a result of the lawyers practicing law, 
who act not on behalf of the poor stockholders, but on behalf of their 
own economic aggrandizement. That is not what the practice of law 
should be about.
  Mr. DODD. Will my colleague yield?
  Mr. D'AMATO. I am happy to yield to the Senator.
  Mr. DODD. I think something deserves to be repeated here, and that 
is, of course what we are talking about here is the process of 
intimidation, quite frankly, to achieve settlement.
  What needs to be pointed out, rarely do these cases ever go to court. 
We have seen that 98 percent, I think, is the number, ends up being 
settled. The reason is because, as our colleague from New York has 
pointed out, is because of that protracted lengthy process, where a 
person who is marginally involved can end up being held accountable for 
the entire cost.
  Of course, who pays for all of that? It is also investors who pay for 
this. At the end of the day, this is not a cost that is just absorbed 
by one group of business people or another. This ends up being passed 
on.
  The very investors that we talk about that can be damaged, and where 
there is intentional fraud, obviously, they collected from anyone who 
is involved, but in the cases where it was not fraudulent intent, then 
the investors on the other side of this end up paying, because those 
costs get shifted.
  So my colleagues make the point here, it is not just the individual 
companies that end up being damaged as a result of this, where they 
literally today write into their budgets in preparation for these kinds 
of lawsuits being filed, which ends up costing consumers, costing 
business, costing jobs, as a result of a present scheme which allows 
for people who literally happen to be hanging around, as the 
distinguished chairman has pointed out, on the margins of this, being 
drawn into this. That is patently unfair by anyone's standard.
  In fact, Jane Bryant  Quinn, whose column has been referred to on 
numerous occasions here in the last 24 hours, makes the point in a 
column. She has criticisms about some aspects of the bill and supports 
others. She makes a point that the issue of the proportional liability, 
to quote her column, she says ``Some sort of proportional payment is 
fair,'' as the proposal suggests here, and what we have tried to do is 
fashion a scheme that would make those who are even marginally 
involved, fully culpable, where you have fraudulent intent; where that 
is not the case, at all, then proportional liability would trigger in.
  What the amendment from the distinguished Senator from Alabama would 
do is eliminate virtually that entirely.
  Again, whatever differences people may have with this bill on safe 
harbor and securities, statute of limitations and so forth, there is, I 
think, some general consensus that some notion of proportional 
liability and protection against the small investor, particularly the 
investor who does not have the kind of resources which this bill also 
protects, ought to be a part of this legislation.
  We have tried to do that here in a way that is fair and balanced, and 
takes into consideration the legitimate concerns of bona fide 
plaintiffs that have been intentionally defrauded, those who are even 
intentionally defrauded, but fall into the smaller category, so there 
is a way to protect their particular interest.
  We also must try and keep in mind the legitimate interests of those 
who are not fully culpable. Those businesses out there that are then 
being drawn in and asked to pay the entire freight on a matter where 
they are not at fault to that extent. That is fair, as well.
  This amendment would gut that, destroy that entirely. We would go 
back to the status quo, and once again we get into this hijacking 
process here where those individuals and those companies have to be 
held accountable.
  In fact, the Supreme Court observed in the Central Bank of Denver,

       Newer and small companies may find it difficult to obtain 
     advice from professionals because professionals may fear that 
     a newer or smaller company may not survive, that business 
     failure would generate securities litigation against the 
     professional. In addition, the increased costs incurred by 
     professionals because of the litigation and settlement costs 
     may be passed on to their client companies and in turn 
     incurred by the company's investors, and intended 
     beneficiaries of the statute.

  The point being they are the investors that pay the price as result 
of destroying the proportional liabilities provisions of this 
legislation.
  I hope this amendment would be defeated.
  Mr. D'AMATO. I yield the floor.
  Mr. SHELBY addressed the Chair.
  The PRESIDING OFFICER (Mr. Jeffords). The Senator from Alabama.
  Mr. SHELBY. Mr. President, I think what we need to do here this 
morning is focus on what we are really doing here; focus between a 
wrongdoer, perpetrator of wrong, and the victim of the action.
  It is not the process of intimidation--I would reject that--but the 
process of wrongdoing that we should be concerned with.
  We should not, Mr. President, we should not protect the perpetrator 
of wrongdoing over the victim. That turns American jurisprudence upside 
down. I believe here in the Senate today that we should be thinking 
about the innocent victim and not the perpetrator, not the people who 
put these things in motion and then they want a statute to protect them 
to some extent. That is what that is about here. I think, if the 
Members of the Senate would really focus on the content of this bill 
and what it will do to the innocent victim, they would feel a lot 
better about the amendment.

  The phrase ``hijacking'' was using. That is right, ``hijacking.'' Who 
is going to be hijacked if this bill passes? I will tell you who it is 
going to be, it is going to be the innocent victims, it is going to be 
the innocent people who are going to be hard pressed to press their 
claims or to collect anything for the wrongdoing in the future.
  I am real concerned and really disappointed that this bill before the 
Senate will do more to impair the rights of

[[Page S8969]]

the small investors in America--and there are millions of them--than it 
will do to place checks on abusive conduct and frivolous litigation. 
None of us are interested in frivolous litigation. There is no room for 
that in our courts. You know, that is one of the reasons, I suppose--
one of the reasons, not the only reason--this bill was brought.
  But there are bona fide cases in America and there will be in the 
future where, if this bill passes, the innocent victims will not be 
able to redress their injuries.
  Mr. President, I ask unanimous consent that an article that appeared 
in Newsweek by Jane Bryant Quinn, ``Losing Your Right To Sue? Congress 
may make it hard for you to pursue a case of securities fraud,'' be 
printed in the Record.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  (See exhibit 1.)
  Mr. SHELBY. Mr. President, something I thought was ironic here, if 
you look at S. 240 it starts out and says:

       A bill to amend the Securities Exchange Act of 1934, to 
     establish a filing deadline and [listen to this] to provide 
     certain safeguards to ensure that the interests of investors 
     are well protected.

  Is that what this bill is really about? I submit that it is not. I 
hope the Members of the Senate will focus on this amendment because it 
has a lot of merit to it. It will strengthen this bill. It will 
strengthen the rights of victims in America, victims of securities 
fraud. I do commend my colleague from Nevada, Senator Bryan, for his 
cosponsoring this, and his leadership in this direction.

                     [From Newsweek, June 26, 1995]

                               Exhibit 1

                       Losing Your Right To Sue?


 Congress may make it hard for you to pursue a case of securities fraud

                         (By Jane Bryant Quinn)

       Talk about a twist of fate. Rep. Christopher Cox, a 
     California Republican, wrote a tough, aggressive bill on 
     securities-law reform, which passed the House of 
     Representatives in March. If it becomes law, investors who 
     think they've been defrauded will find it incredibly hard to 
     bring a class-action lawsuit to recoup their loss.
       Just two months after this bill passed, Cox found himself 
     tagged by just such a suit, brought by some victims of the 
     noxious First Pension fraud. In a second suit last week, 
     First Pension's court-appointed receiver charged Cox, among 
     others, with contributing to the hoax. ``Defamatory and 
     wildly false,'' Cox fumes.
       First Pension handled the paperwork for tax-deferred 
     retirement accounts. It also sold clients fraudulent real-
     estate investments and secretly tapped their accounts for 
     cash. The company is in receivership, its principals in jail 
     and its customers out $136 million. To recover some money, 
     investors are going after the supporting players. That 
     includes Cox and his former law firm, Latham & Watkins. Cox's 
     job was to set up a company that could have absorbed the 
     purported mortgage investments. The lawsuits allege that he 
     knew, or recklessly failed to find out, that the mortgages 
     weren't sound. Says Cox, ``I did not know. First Pension 
     concealed the fraud.''
       So is Cox the innocent victim of scorched-earth lawyering? 
     Or is he an enabler who deserves to be called to account? The 
     courts will decide this specific case. But the issue 
     encapsules the conflicts that swirl around securities-law 
     reform.
       The objective of reform is to staunch what companies claim 
     is a flood of frivolous lawsuits. Greedy lawyers, they say, 
     sue on flimsy grounds. The companies pay as the cheapest way 
     out. But the Cox bill and another bill before the Senate 
     would stifle honest lawsuits, too. Among other things, they:
       Preserve a Supreme Court decision that sharply limits the 
     time for bringing a securities suit. Formerly, you had three 
     years to sue in federal court, starting from when the fraud 
     was discovered. In 1991, the court cut that back to just one 
     year but in no event more than three years after the date you 
     bought. So if a crook can deceive you long enough, you lose 
     the protection of these laws. Most of First Pension's 
     investors have been caught in that trap, says San Diego 
     attorney Michael Aguirre. The scam began more than a decade 
     ago but investors just recently found it out. So they can't 
     sue for securities fraud, either in federal or state court. 
     Aguirre is suing for common-law fraud, but says that it's not 
     an easy fit.
       Preserve another Supreme Court decision that lets some of 
     the people who helped with a fraud escape liability for the 
     loss. It's the lawyers/accountants/consultants self-
     protection clause (although those who are central to the 
     fraud remain on the hook). This rule would have limited the 
     sums recovered by those who bought bad bonds from the 
     notorious Charles Keating, chief of the Lincoln S & L. 
     Keating's company went broke and he went to jail. His duped 
     investors got most of their money back, says San Diego lawyer 
     Bill Lerach, but only because they successfully sued the 
     minions who helped him operate. (I do think, however, that 
     marginal players shouldn't have to foot the entire bill. Some 
     sort of proportional payment is fair, as the proposals 
     suggest.)
       Make it harder to sue a company that grievously misleads 
     investors. Under current law, it's OK for execs to make good-
     faith business predictions, even if their guess is wrong. 
     They're liable only for deliberate fibs. But because they 
     worry about lawsuits, they may suppress even reasonable 
     forecasts that might help investors make a decision about the 
     stock. Hence, this proposal, which makes it safer for 
     managers to talk. But like so much else in these slipshod 
     bills, it goes too far. A shady promoter could safely say 
     almost anything. You'd call it a lie; he'd say it was 
     innocent optimism. To win a lawsuit you'd have to prove that 
     the speaker intended to deceive--which is pretty tough to do. 
     Cox's bill (but not the bill in the Senate) could protect 
     even a deliberate lie.
       Put investors and their lawyers at risk of owing the 
     defendants' legal fees if they lose their case. Cox scoffs at 
     the thought that judges would actually order individuals to 
     pay. ``The lawyer would pay'' and adds the cost to your fee, 
     he says. But the mere threat of owing a corporation's costs 
     will scare people off--and scare all but the best-funded 
     lawyers, too. Sen. Richard Bryan has a better idea. He 
     proposes a screening process that would test the merits of a 
     suit. If the screener thought it was frivolous--and you 
     brought it and lost--then you'd risk paying all the costs. 
     Ditto on the other side, if the company refused to settle 
     what looked like a meritorious claim.
       Some reasonable, Bryan-like compromises need to be reached 
     because Congress (especially the House) is throwing a bomb at 
     a problem that just needs a switchblade. There's not even a 
     litigation explosion, says James Newman, publisher of 
     Securities Class Action Alert in Cresskill, N.J. The number 
     of lawsuits is up, but that's because more are filed in each 
     dispute. The number of companies sued remains in a constant 
     range. There were only 140 in 1993, he says.
       Another myth is the oft-heard claim that ``vulture 
     lawyers'' automatically sue if a company's stock falls by 10 
     percent in a single day. Baruch Lev, a professor at the 
     University of California, Berkeley, tested a version of this 
     idea for the three years ending in 1990. Of 589 companies 
     whose stock price dropped by more than 20 percent in the five 
     days around the time of a disappointing earnings report, only 
     20 were hauled into court. And rarely on the strength of the 
     price drop alone, says Jonathan Cuneo, general counsel of the 
     National Association of Securities and Commercial Law 
     Attorneys. In many of these cases, he says, ``executives are 
     telling the public that everything is going to be great while 
     they're bailing out and selling their own stock.''
       There's some good stuff in these bills, especially in the 
     Senate version. They stop lawyers from paying a bounty to 
     people who find them clients, block stockholders who sue for 
     a living and try to discourage frivolous suits. But they 
     overreach. In a nation of laws, you're disenfranchised if you 
     lose your day in court.

  The PRESIDING OFFICER. The Senator from New York is recognized.
  Mr. D'AMATO. I see my good friend, Senator Bryan, would like to speak 
and although I do not want to dominate this debate I think it is 
important to note that as a result of the give and take in shaping a 
bill that is balanced, we have put into this bill a provision, on page 
138 of the bill, called the Audited Disclosure Of Corporate Fraud. That 
provision was suggested by our colleague from Massachusetts, Senator 
Kerry.
  By the way, I do not think including this provision is going to 
change his final vote on the bill, nor was it an attempt to do that. It 
was an attempt to make this bill better at the suggestion of our 
colleague. Senator Kerry pointed out that after our accountants come 
across situations which are fraudulent, they have a duty to report that 
to the board but they should not be allowed to sit back and relax and 
say, ``I reported it to the board.'' When we say we are trying to 
protect the little guy, we are. This provision means that if the board 
does not do anything the accountants have to follow up on their report. 
They must then go to the Securities and Exchange Commission and report 
this wrongdoing.
  Why do I mention this? Because when the bill has been characterized 
in some of the media, there is no mention of the protections we have 
built in. I continue to hear that this bill allows people to commit 
fraud. Let me say, as it relates to proportional liability, if you 
knowingly are involved in a fraud you do not escape being liable for 
the entire suit. And that is the way it should be. In other words, if 
you participate in a fraudulent scheme then you should be and would be 
accountable for the entire loss.
  Let us understand what this legislation does is not let the 
fraudulent conduct, or the people who participate in that, off the 
hook.

[[Page S8970]]

  I yield the floor.
  The PRESIDING OFFICER. The Senator from Nevada is recognized.
  Mr. BRYAN. Mr. President, I acknowledge this is an extraordinarily 
complicated area of the law. But it has profound implications for 
millions of Americans who have lost money as a result of investment 
fraud. So, as I commented last night, this is not just an argument 
among lawyers, accountants, bankers and securities underwriters. 
Everybody who has one nickel in a retirement fund, who invests in the 
stock market, everybody who owns a single share of stock, can be 
potentially affected by this.
  Historically, under the law, since ``the memory of man runneth not to 
the contrary,'' defendants were jointly and severally liable, 
irrespective of their degree of culpability. That is to say, in a case 
in which several defendants are joined and are found liable, an 
individual who is 5 percent liable was jointly and severally liable 
just as the individual who may have been 50, 60, or 70 percent liable.
  The theory is one of equity, balancing the scales of justice that are 
such an important symbol of the American judicial system. And that is, 
basically, who ought to bear the burden? The innocent plaintiff--in 
this case the investor? Or an individual whose conduct was responsible 
for the loss? I think it is important to understand that under the 
Securities Act of 1934, if a defendant is guilty of ordinary 
negligence--no recovery at all; no recovery at all. An individual 
defendant who is guilty of gross negligence--no recovery at all.
  In order for liability to attach to any defendant under the 
Securities Act, the conduct must be either intentional or knowing or 
reckless conduct. So when we are talking about balancing the burden we 
are not talking about somebody who just made a little mistake. We all 
make mistakes. We are not talking about somebody who did something 
accidental. We are talking about somebody whose conduct was intentional 
or knowing, or somebody whose conduct was reckless. In my judgment that 
is not an unreasonable standard to hold somebody liable for.
  What S. 240 does is to change centuries of American jurisprudence by 
dividing categories of defendants, some jointly and several, and some 
proportionate liability. Let me say, I agree in part with what our 
colleagues who drafted S. 240 have attempted to do. The amendment, 
which my distinguished colleague from Alabama offers, recognizes that 
distinction.
  What we say, and what S. 240 in its current form says, is that if the 
conduct is intentional or knowing, then all such defendants whose 
conduct rises to that level of misconduct are jointly and severally 
liable, which means that a plaintiff can recover against any one of 
those the full 100 percent of his or her or its loss.
  A new category is established under S. 240, and also under the 
amendment offered by my distinguished colleague from Alabama, that says 
with respect to those who are reckless---not intentional, not knowing 
misconduct, but reckless misconduct, they will be guilty in a 
proportionate liability sense. That is their legal responsibility.
  I am willing to recognize that in terms of trying to seek that 
equilibrium on the scales of justice that is not an unreasonable 
proposition. But here is the fundamental distinction between S. 240 in 
this, and the amendment of my distinguished colleague that I am happy 
to support. Remember the basic premise: Who ought to bear the burden, 
the totally innocent investor or those whose conduct rises to the level 
of intentional and knowing fraud or reckless misconduct? That is not a 
difficult proposition for me. I think, between those two categories, 
those who are totally innocent of any misconduct ought to have the 
right to recover for their economic loss.
  I might just say, over my years as a Member of this institution, we 
have debated product liability endlessly.
  That was one of the titanic battles of the last Congress, the 
Congress before that, and this Congress. And, as the distinguished 
occupant of the chair and my colleagues on the floor know, we passed 
product liability. Some of us were against it; some of us for it. But 
it is interesting to note that with respect to product liability and 
economic loss as opposed to pain and suffering, there was never a 
suggestion that we ought to, in effect, make some of those defendants 
proportionately liable and not jointly and severally liable.
  So for those who followed that debate closely, it was never suggested 
that someone who was only 5 or 10 or 15 percent liable for the economic 
loss in a product liability lawsuit would only be responsible for 10 or 
15 percent. Each and every defendant is jointly and severally liable 
under the new product liability bill that passed this Congress.
  So whether the misconduct is 5 or 95 percent, the plaintiff has the 
right to recover 100 percent of his or her or its economic loss. The 
only thing we did--many of us disagreed with that--is we put a cap on 
pain and suffering but not economic damage.
  What we are talking about in this legislation is not pain and 
suffering. We are talking about economic loss for investors who have 
purchased securities and, as a result of securities fraud, they have 
lost money.
  So I just share with my colleague the irony that all of this great 
ordeal that we have gone through over the past--this will be the fourth 
Congress that I have been privileged to serve in--it was never 
suggested in product liability that we ought to, in effect, create 
these categories of proportionate or joint and several liability. The 
plaintiff was entitled to 100 percent of his or her or its recovery.
  This is in the abstract. My distinguished colleague from California, 
my distinguished colleague from Maryland, and I yesterday mentioned the 
Keating case. The reason why we mentioned the Keating case is, if you 
look at the malefactors' greed in that great decade of the eighties and 
you look at the icons, you see the Milkens, the Boeskys and the Charles 
Keatings. Those are household names in terms of frauds perpetrated upon 
the American people costing innocent people hundreds of millions of 
dollars.
  Somehow it has been suggested that this action 240 has nothing to do 
with the Keating case. Let me remind my colleagues that I will be 
offering in the Record that the actions brought on behalf of a class of 
defrauded investors against Mr. Keating were brought under the 
Securities Act, the very act that we are amending. We are talking about 
the Securities Act of 1934, the RICO provisions, and the Securities Act 
of 1933.
  Mr. D'AMATO. Mr. President, will my colleague yield?
  Mr. BRYAN. Yes. I am happy to yield.
  Mr. D'AMATO. I am not certain, but I believe--and I know that we all 
watch legal proceedings today--that the securities actions that were 
brought against Charles Keating were brought by the Government. Is not 
that true?
  Mr. BRYAN. That is not true. In responding to my good friend and 
distinguished chairman, they were brought as part of a private cause of 
action on behalf of a class. Mr. Keating was a defendant together with 
a whole host of others. I will not belabor the chairman's time. But it 
was a whole category.
  The point I want to make in responding to my good friend's question 
is that the heart and soul and essence of the recovery, $262 million, 
was brought under the Securities Act. That was the underpinning, the 
foundation, the premise, the essence of the cause of action.
  Mr. D'AMATO. Is it not true, though, that there was knowing fraud 
being committed?
  Mr. BRYAN. The answer to that would be, in some instances, yes. But 
there were other defendants which, under S. 240, would fit under the 
proportionate liability classification. And in the Keating case, as the 
distinguished chairman knows, Mr. Keating was bankrupt. There is no 
question he was a primary offender; no question he would be jointly and 
severally liable under the bill as drafted by the chairman.
  But what makes the Keating case so significant is that the amount of 
recovery by the plaintiffs would have been reduced dramatically because 
there were others who were not in the category of potential and knowing 
fraud whose conduct was knowingly reckless.
  Mr. D'AMATO. In fairness, my friend did answer that. I would like to 
make the point that those people whose conduct under this bill was 
knowingly fraudulent, even if they were only partially responsible, 
will still be liable

[[Page S8971]]

for the entire amount if the others have gone bankrupt. In other words, 
and in layman's terms, if you committed fraud intentionally, and others 
have gone bankrupt, you can be held liable for the entire amount. I 
think we need to keep that fact in sight. That was my the point.
  Mr. BRYAN. Before responding to a question from my colleague from 
California, the chairman is correct that those who are intentional in 
their fraud, and knowingly, are jointly and severally liable. In the 
Keating case, there was a whole list of people, however, who would be 
aiders and abettors. Under the provisions of S. 240, aiders and 
abettors are home scot-free; no recovery at all.
  There was another category of individuals. Some of them were firms 
and some of them were securities underwriters who would fit under the 
new classification of reckless conduct. And they would come under only 
the proportionate liability. Much of the recovery, much of the $260 
million the innocent plaintiffs in the Keating case recovered, was from 
the reckless category.
  I say in all due respect to the chairman, whom I greatly respect, 
that recovery would be greatly and dramatically reduced because under 
S. 240 there is only proportionate liability.
  Mr. SARBANES. Will the Senator yield?
  Mr. BRYAN. Yes.
  Mr. SARBANES. Mr. President, I just want to point out that the 
recklessness standard has long been a part of the common law for 
purposes of fraud. It is a very high standard. The chairman of the 
committee earlier said, Well, you know, someone could come in and be 
negligent, and they are going to be held jointly and severally liable. 
That has never been the law. It is not the law. It will not be the law 
under the amendment of the distinguished Senator from Alabama.
  The definition of reckless conduct--let me read the definition that 
is generally used by the courts: ``A highly unreasonable omission 
involving not merely simple or even gross negligence''--so it is higher 
than simple negligence, it is higher than gross negligence--``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.''
  The way the bill is written now, the phrase ``ignorance is bliss'' is 
going to take on a meaning that just staggers the imagination.
  The problem that is being talked about, about the strike suits, is 
dealt with up front in the bill. You try to make it harder to bring 
those suits. We support a lot of those provisions. This is, simply put, 
a question whether fraud participants are going to be put ahead of 
innocent victims and individual investors. I mean, why in the world, if 
a fraud has been committed, should the burden fall on the innocent 
victim of the fraud and not on the people who have been participants in 
the fraud?
  I defy anyone to explain to me the logic or the rationale for 
protecting the participant of the fraud ahead of the innocent victim of 
the fraud.
  I thank the Senator for yielding.
  Mr. BRYAN. Mr. President, I yield to the Senator from California. I 
just assure my friend from North Carolina that I intend to be very 
brief because I know he wishes to speak. It is not my purpose to 
preempt the time of those who share a different point of view.
  I am delighted to respond to my friend.
  Mrs. BOXER. I thank my friend from Nevada and my friend from Alabama 
for this amendment because if we are not here to protect innocent 
victims, then what are we here for? That is the bottom line. Yes, we 
want to correct problems and we want to do it right, but we have to 
look at the bottom line. That is why I am so grateful to my friend for 
bringing up the Keating case, because when this Senator brought up the 
Keating case late in the night she was told--in some very agitated 
tones, frankly--that the Keating case had nothing to do with this 
section of the law we are amending.
  Well, I have the documents in front of me, and it is very clear they 
are class action lawsuits based on violations of the Securities Act of 
1934 and the Securities Act of 1933. And at some point I am going to 
put these in the Record, as I promised my chairman last night that I 
would do, for all to see.
  I am so grateful to my friend from Nevada for bringing this up. This 
bill is about the Charles Keatings of the future and whether they are 
going to commit the kind of financial atrocities they committed in the 
past.
  Now, that is not the goal of the authors of this, but it is an 
unintended consequence of this if we are not careful, if we do not 
listen to Arthur Levitt of the SEC, if we do not listen to the 
consumers, if we do not listen to the securities people in each and 
every State including my own State, including those in Connecticut, 
including those in New York, and all over this country who are against 
this bill, and a New York Times editorial today, which really takes on 
this bill.
  So the question I have for my friend is this. The Senator from 
Alabama and the Senator from Nevada are putting before us what they 
consider to be a correction. It is technical; it is difficult for 
people to understand, but I wish to ask my friend a direct question 
because I know he is a student of the Keating case and I know he has 
stated that the Keating case is involved here.
  If S. 240 had been in effect and the joint and several liability had 
been changed, would it have adversely affected those people who 
eventually collected because they were able to go to these other actors 
in the suit?
  Mr. BRYAN. To answer my distinguished colleague from California, it 
would have adversely affected the plaintiffs. It would have reduced 
their amount of recovery by tens of millions of dollars. The overall 
amount of the recovery was $262 million as a result of the class action 
filed under the securities laws. It would have reduced that amount by 
tens of millions of dollars, and I will try--I do not have the number 
right before me--to develop that number to give more particularity.
  Mrs. BOXER. I am finished with my questions. But what I really 
appreciate about his presentation is it is not some academic debate. 
You are telling this Senate, and I hope they are listening, that if we 
change the laws too much, if we go too far--and, yes, we should correct 
it--the people who collected in the Keating case would not have 
collected tens of millions of dollars, and it includes this amendment 
that is standing before us.
  I thank my friend.
  Mr. BRYAN. I thank the Senator from California. I am going to be very 
brief, as I assured my colleague----
  Mr. DODD. Will my colleague yield on that point?
  Mr. BRYAN. I would be happy to yield. I recognize that others want to 
speak on this issue, and I do not want to dominate, and I do need to 
make a couple other points. But I would be happy to yield.
  Mr. DODD. I just ask my colleague here: If the provisions of this 
legislation, in fact, had been in place at the time, my colleague from 
Nevada is not suggesting, I hope, by his comments that the Keating case 
would have, as it was finally concluded as we know, changed necessarily 
the awards to the plaintiffs in that case because of the proportionate 
liability provisions of this legislation, because we are not dealing 
with that?
  Mr. BRYAN. I would respond with all due respect--the Senator knows 
how greatly I respect his insight into this process--dramatically, 
categorically and emphatically. If S. 240 had been in effect at the 
time of the Keating action, the recoveries would have been tens of 
millions of dollars, maybe even more than $100 million, less.
  Mr. DODD. I say to my colleague, I totally disagree with that 
conclusion. In fact, I think we might have enhanced, had the provisions 
of this bill been in place, the collection rather than deny, because of 
the requirement of accountants to actually report the kind of problems 
that they were not required to under existing law at the time of the 
Keating proceedings.
  Mr. BRYAN. I thank the Senator. I am just going to make one point. 
The fundamental difference between the Bryan-Shelby amendment and S. 
240 is that it recognizes, as does the chairman and the distinguished 
Senator from Connecticut, that we create two classes of liability. One 
is joint and

[[Page S8972]]

several, and the other is proportionate. But the fundamental 
distinction is that in the Shelby-Bryan amendment, if those who are 
jointly and severally liable are judgment proof, that is, they are 
insolvent, they are in prison, they have taken flight, they are unable 
to respond to the full amount of damages, our legislation in the 
amendment would require you to look first to the joint and several 
liability. But if the innocent investor was unable to recover the full 
amount of his or her losses, then you could look to the proportionate 
liability, those people whose conduct was reckless, and the plaintiff 
can fully recover.
  Under the print before us, that would not be possible; there is a 
limitation, and you can only recover against the proportionate 
liability the amount that is determined to be the proportionate 
liability plus another 50 percent.
  So let us say, for example, that the loss was $1 million, that there 
was a 10-percent responsibility on the part of a reckless defendant. 
With proportionate liability, the full amount that you could recover 
would be $100,000. Under the bill that is currently before us, the full 
amount that you could recover would be $150,000, even though the loss 
might be $1 million.
  Mr. SARBANES. Would the Senator yield for a question?
  Mr. BRYAN. I would be happy to.
  Mr. SARBANES. Who would bear the burden of the other $850,000 in that 
case?
  Mr. BRYAN. The innocent plaintiff.
  Mr. SARBANES. The plaintiff.
  Mr. BRYAN. The investor, who was not at fault at all.
  Mr. SARBANES. Why should that investor, who was the victim of a 
fraud, have to swallow $850,000 of the loss when there are parties who 
were participants in the fraud who ought to be held accountable?
  Mr. BRYAN. I would agree with the observation made by the Senator 
from Maryland. I cannot comprehend the public policy of saying, look, 
those who are active and are involved in reckless misconduct in this 
case, they should have their liability limited so that the innocent 
plaintiff, innocent investor, should bear the loss. I do not think that 
is responsible public policy, I would say in response to the Senator.
  Mr. SARBANES. If the Senator would yield further, because I wish to 
be fair to my friend from Connecticut and the distinguished chairman of 
the committee, they say, well, there are these strike suits and we have 
to try to preclude them because these deep pocket people are being held 
up, as it were.
  The way you handle that problem, as is done in this bill, is you make 
it more difficult to bring the strike suit so you clear out the so-
called frivolous suits that have been asserted. And we agree that that 
is a desirable objective. But by definition, the cases we are talking 
about are cases where there is liability and there has been fraud, and 
in that instance there is no rationale that I can think of that 
warrants putting the participant in the fraud ahead of the innocent 
victim of the fraud.
  Mr. BRYAN. I simply respond to my friend's question by saying I share 
that view.
  I know others desire to speak. I must say the view shared by the 
Senator from Maryland and the distinguished Senator from Alabama and I 
is a view that is endorsed by the Securities and Exchange Commission 
and the North American Association of Securities Administrators. So we 
are not alone in making that determination.
  Mr. SHELBY. I wonder if the distinguished Senator from Nevada would 
yield for one question.
  Mr. BRYAN. I am happy to yield.
  Mr. SHELBY. Does the Senator from Nevada know anywhere in American 
jurisprudence where the victim is left out in the cold like they would 
be if this bill passes?
  Mr. BRYAN. In responding to the question, I would not presume to know 
all jurisprudence, but I can think of no instance in which, as a matter 
of public policy, a determination is made where the wrongdoer should 
benefit and that the innocent victim should suffer the consequence of 
the wrongdoer's conduct.
  Mr. SHELBY. I thank the Chair.
  Mr. BRYAN. I yield the floor.
  Mr. FAIRCLOTH addressed the Chair.
  The PRESIDING OFFICER. The Senator from North Carolina is recognized.
  Mr. FAIRCLOTH. Mr. President, I heard the questions and the arguments 
back and forth on the Shelby-Bryan amendment, and certainly both are 
distinguished Senators and very good friends, so I somewhat with 
hesitation oppose the Shelby-Bryan amendment. But as I mentioned 
yesterday, one of the key provisions of this bill is the reform of the 
proportionate liability rules. This is unethical lawyers going after 
deep pockets.
  It says very simply that you or a company pay your fair share of the 
losses that you or your company might have caused. If 10 percent was 
your share of the loss, then you pay 10 percent. I think it is a 
reasonable provision that you pay for the damages that you cause, but 
not others.
  Moreover, Mr. President, the bill already goes several steps in the 
direction that Mr. Shelby and Mr. Bryan would like.
  First, for those persons or companies that engage in knowing fraud, 
they become jointly and severally liable. So they do not come under the 
proportionate rules. They will have to pay more than their share and if 
any of the fellow defendants--anybody else in the suit--are insolvent, 
then they are committed to paying that portion. If knowing fraud was 
committed, they are not covered, and they simply have to pay it all if 
they are the only ones with any money.
  Second, investors with a financial net worth under $200,000 will be 
made whole even if there are insolvent defendants. This is not a small 
pool of people. This is about 99 percent of America. This was supposed 
to be the so-called widows and orphans provision that I assume was one 
of the things being talked about this morning.
  This was a provision whereby we protect the small investor. I think 
the current bill goes further, so the bill is already protecting 
widows, orphans and a lot more.
  The Shelby-Bryan amendment would go even further. His amendment 
proposes to protect the little fellow, which we have already covered, 
but also it would protect the sophisticated investor without 
distinction.
  I have to oppose the amendment. Too often the lawyers that deal in 
these type of securities suits go after one thing: The deep pockets, 
knowing that the deep pockets will have to pick up the whole tab of the 
litigation. That is why they get sued in the first place. The fact that 
they can go after the deep pockets is probably one of the principal 
reasons the suit was filed to begin with.
  Of course, the lawyers hope it will never go to trial. They hope that 
the person with the deep pockets will simply settle the case and they 
will simply never have to take a weak case to court. We know that the 
lawyers collect the lion's share of the money that is settled before or 
during court. The investors get pennies, if even that, on the dollar.
  Mr. President, as I say, I have a great deal of respect for both 
Senator Bryan and Senator Shelby, but I am adamantly in opposition to 
this amendment.
  I yield the floor.
  Mr. D'AMATO addressed the Chair.
  The PRESIDING OFFICER. The majority manager of the bill is 
recognized.
  Mr. D'AMATO. Mr. President, let us take a look at this. My 
distinguished colleague from Nevada has put forth a very compelling 
case on the principles underlying joint and several.
  Let us turn to the abstract--let us look at reality. Do you want to 
know what the reality is? About 300 cases being brought a year--and, 
believe me, they are not being brought on behalf of stockholders, the 
stockholders are being used; 93 percent of those cases are settled. Do 
you think they are being settled because the people have done something 
wrong? The vast majority of those cases are being settled because an 
innocent person cannot face the exposure and cost of this kind of suit.
  Minimal participation, not knowing fraud, but just being around the 
company, being the auditor, being the lawyers, being the investment 
adviser can bring you to the case. Let me tell you something, when you 
are facing a $100 million or a $200 million lawsuit and you can buy 
your way out for $6 or $7

[[Page S8973]]

million, and your lawyer says and the board of directors says settle 
it, you have no choice but to settle. These cases take people and put 
them up against a wall. They cannot fight; they have to surrender. It 
is as if you held them up. We are providing the ability for legal 
blackmail. We have to stop that.
  This bill does assign greater responsibility. If you know the fraud 
is taking place, that this business that is going on, this hanky-panky 
in the company, if you are the auditor, you have to report it.
  Some people in the past did report it. They said, ``We reported it to 
the managing directors,'' and that is the end of our responsibility. We 
go further and say you have to report it and see that the directors 
act, and if they do not, you have to go to the SEC. That is how you 
deal with fraud.
  I want to assure you that Senator Domenici and Senator Dodd do not 
want to protect fraudulent acts. But just because they are alleged does 
not mean the companies should be forced to settle without a chance to 
defend themselves. Is it right to force people who are coerced into 
settling to pay for the losses of the so-called victims? I say so-
called. Some of these cases are totally without merit. I am not talking 
about the Keating case. Of the 300 cases that are settled, most of them 
are meritless, but what we have constructed is a system where a person 
cannot defend him or herself because the cost of that defense, is 
prohibitive and the effects of the negative exposure, even though the 
exposure may be minimal, are so great.
  A company can be wiped out by these suits, a company can be hit for 
$300, $400 million, so how can they not settle for $2 or $3 million? 
Investors are not being made whole. You would believe and think somehow 
investors are being made whole, but they get pennies for their losses.
  What we are talking about is giving people the ability to defend 
themselves. Most of these defendants have not even reached negligence 
standards. But the law is not clear on those standards, and a jury 
decision is never a sure thing. How can a firm put in the hands of the 
jury the decision of whether they are totally wiped out? Some 600, 700, 
800, 900 people who everyday go to work and depend on those jobs, wiped 
out? They cannot afford to defend themselves. A lawyer can say, ``Look, 
I think you are going to win; you have a 90-percent chance of 
winning.''
  ``Ninety percent? You mean to tell me that I have a 10-percent chance 
of losing and getting hit with the entire settlement which could wipe 
out this firm just because I'm the guy with the deep pockets?"
  The answer is yes. This causes a huge cost to society? When you pay 
your insurance premiums, you are paying for these settlements. Also, 
the cost of insurance for the firms has gotten so high, because the 
insurance firm is worried it will be sued, that many small firms cannot 
afford it. These costs are passed out to everybody.
  We are not protecting somebody who commits fraud. What we want to do 
is give people a reasonable opportunity to defend themselves; to have 
that opportunity and not to face this incredibly destructive process in 
which they really cannot defend themselves; 93 percent of these cases 
are being settled because the firms cannot afford to defend themselves.
  That is not what the American justice system is about: You should 
send somebody a summons and they have to surrender. That is what is 
happening. You have the entrepreneurial lawyers who have made this an 
art form, who basically hire these plaintiffs. They have them on the 
payroll. They bring them in and race to the courthouse. They are not 
interested in getting money back for poor defrauded people and, in many 
cases, there has been no fraud.
  I will tell you what is a fraud in this system. When you coerce 
somebody to pay and they have not done anything wrong, that is a 
fraud. I have not heard anybody say anything about the fraud of 
coercing honest, hard-working people because they find they would face 
financial ruin if they defended themselves or there were some finding 
against them and they would be responsible for the entire settlement. 
They cannot even fight it out because the risks are so great, they must 
surrender.

  What about that kind of fraud? Is that what our system is about--that 
we strip away the ability of a person to stand up for his or her rights 
because to do so would be totally destructive to them? I do not think 
that is what our system is about, but that is what they have turned the 
system into. If you intentionally committed fraud you should pay the 
piper. That is what we are saying.
  Do you know why the lawyers are against this? I will tell you why. It 
is because this will give to the entrepreneur who built a building, the 
fellow that is the accountant, the securities people, the investors, 
the ability to stand up and fight. The strike suit lawyers do not want 
that. These lawyers be able to hit everyone with that summons--just 
like holding a gun to them--and then say, OK, how much you are going to 
pay us. They do not want the guy to have the ability to reach back and 
take that gun and say, in return, OK, let us fight it out. They do not 
want cases to be heard on whether or not there was real fraud.
  This Senator does not want to protect anybody who commits fraud. That 
is nonsense that I read in these insipid editorials--insipid. We want 
to give people their day in court. If you want to protect the holdup 
artists we should we should keep joint and several liability.
  I hear people say, you are going to be defending the Keatings. No 
way. If the fraud is intentional, we are going to get you. Charles 
Keating was selling products for a bank and suggested that the Federal 
Government was insuring it. Senator Dodd and I cosponsored legislation 
we introduced on May 5, 1995, that financial institutions cannot sell 
these products and imply they are backed by the Government. That is how 
you stop the Charles Keating types. We will hold these people 
responsible, and we are going to stop them from conducting these 
actions. Let us not talk about defending fraudulent conduct. We do not. 
But we must give a person an opportunity to fight for himself instead 
of giving up to the holdup artists.
  Mr. DODD. Mr. President, let me try to bring this back to the point 
at hand here. Let us get some matters off the table. We are not talking 
about intentional and knowing fraud. ``Joint and several'' still 
applies on intentional and knowing fraud. We have tried to deal in this 
legislation with the issue of recklessness, because it is in that area 
of recklessness that we feel the issue of proportionate liability ought 
to have some application--not intentional, not knowing, but in reckless 
behavior.
  Let me share with my colleagues the thoughts of those who spent a 
great deal of time on this issue. In fact, as pointed out by one 
authority, the vagueness of the recklessness standard is one of the 
principal reasons, Mr. President, that the joint and several liability 
provisions ought to be modified. In practice, the legal standard does 
not provide protection against unjustified and abusive claims, because 
juries can--and as a practical matter do--misapply the standard. Juries 
today, quite frankly, have considerable difficulty in distinguishing 
innocent mistakes, negligence, and even gross negligence--none of 
which, by the way, Mr. President, is actionable under rule 10(b)(5) 
from recklessness.
  One commentator observed that the courts have been less than precise 
in defining what exactly constitutes a reckless misrepresentation. The 
imprecision of the court, he went on to say, has resulted in ad hoc, if 
not arbitrary and reckless, determinations. The result is that the 
actual and potential parties to section 10 and rule 10(b)(5) actions 
cannot predict with any degree of certainty how a trier of fact would 
characterize alleged conduct and thus whether it may serve the basis 
for liability.
  There is a whole series of discussions about the problems in 
determining that particular criteria. So in the recklessness area, we 
apply the proportional liability provisions. Much of the reason goes to 
the heart of what the Senator from New York was talking about. Once you 
are into it, and if it is only joint and several, and if you are a 
marginal player and you could be held for the whole amount, that is 
unfair and lacks balance, just as it would be if

[[Page S8974]]

you would deprive a legitimate plaintiff of any kind of compensation at 
all.
  Go back and look, if you will, at the statements of all of the 
preceding members of the Securities and Exchange Commission on this 
very point.
  Carter Bees said:

       Allocating liability on the basis of the proportion of each 
     defendant's contribution to a plaintiff's harm would address 
     these problems by changing incentives. Plaintiffs may be less 
     likely to name secondary market participants if the potential 
     recovery from these entities was relatively small. Secondary 
     market participants who are nonetheless sued would be more 
     willing to defend those cases they believed were without 
     merit, rather than entering into a quick settlement in order 
     to avoid broader liability exposure.

  Adversely, I point out, affecting these investors as well.
  The Senator from New York is correct. Let us make the system work. 
Let us get to court if that is where you have to go. This involves very 
little court participation because of this particular standing. ``You 
are an idiot not to pay.'' That is what their lawyers and accountants 
tell them, rather than jeopardize the entire operation, in some cases, 
because of the size of the claims.
  Richard Breeden, former SEC Chairman noted:

       The current application of joint and several liability 
     results in a system that should perhaps be called inverted 
     disproportionate liability. Under this system, parties who 
     are central to a perpetrating of fraud often pay little if 
     anything. At the same time, those whose involvement might be 
     only peripheral and lack any deliberate or knowing 
     participation in the fraud often pay the most in damages.

  That is not right. That is unfair, Mr. President. He concluded by 
saying:

       Paying your fair share but no more than your fair share of 
     liability is hardly a radical proposal.

  That is what we are suggesting.
  David Ruder, a former Chairman of the SEC, said:

       The threat that the secondary defendants can become liable 
     for all of the damage caused by the primary wrongdoers has 
     had a dramatic affect upon the settlement negotiations in 
     large class action suits. These actions frequently have been 
     settled by secondary defendants for significant sums because 
     of the possibility that they will be required to pay the 
     entire amount claimed and thus destroying them.

  He concluded:

       Reform of joint and several liability is necessary because 
     the fees received by accountants, lawyers, and banks for 
     their commercial services do not justify enormous dollar 
     judgments against them on securities class action cases.

  So, Mr. President, what we have tried to do in this bill is to strike 
that balance that everybody talks about rhetorically but denies we have 
achieved here. We do not include the intentional knowing specifically. 
We protect the small investor--$200,000. Only 1 percent of the people 
in this country have incomes in excess of $100,000. We are talking 
about a very small number of people who would actually be affected. The 
overwhelming majority are still protected as a result of the widows or 
orphans provision we put in.
  Also, recent data indicate that the median net worth of American 
families is $47,200. So we protect those people when we have 
intentional and knowing fraud. Even if you are marginally involved, you 
pay all of it. That is what we have tried to do. To wipe all of that 
out strikes out the balance of this legislation. That is what the years 
of work have tried to achieve here.
  Now, do we know how perfectly it is going to work? No. To my 
colleagues who cite potential future cases, how do I argue against a 
potential future case without knowing the facts except to cite some 
draconian case that conjures up the worst fears in people. I do not 
know the exact application. I know that presently the system stinks. 
That much I know. We have made an effort to change this, to avoid the 
kind of problem that exists where 93 percent of the cases are settled 
because people make the conclusion you would be an idiot not to do so 
because you are jeopardizing your entire business.
  There is something wrong with the system that results in that kind of 
conclusion.
  Now, we hope this will work. Time will tell whether or not we have 
done it absolutely perfectly. I suspect we have not done it perfectly.
  This much we know: The present system does not work. It says to 
innocent, relatively innocent, marginal players, ``You must assume the 
entire responsibility for the vague standard of recklessness,'' I think 
is unfair.
  Intentional knowing--pay the price. Protect the widows and orphans--
that you must do. To say we are sorry, those on the periphery here will 
pay a full tab where a reckless standard is applied, I think is unfair.
  We have applied the standard in the law to see if we can get some 
balance into the system, get people to court. If there is a real fight, 
fight it out. Do not just achieve these huge awards because people are 
afraid to go into court, knowing what the price would be if they are 
ultimately asked to pay the entire tab, when they are only marginally 
involved.
  That is the whole purpose. Citing future cases and what may happen 
down the road, engaging in the scare tactic approach--the Senator from 
New York, the Senator from New Mexico, myself, and others who put this 
bill together--do my colleagues really believe we are trying to do 
something here that would potentially expose people to future Keatings? 
By God, how could any Member possibly draw that conclusion?
  We are trying to get balance into a system that is out of balance. 
That is all this is intended to do. My hope is that the Shelby 
amendment will be resoundingly defeated.
  Mr. SHELBY. Mr. President, I ask unanimous consent that Senators 
Boxer and Sarbanes be added as original cosponsors.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  Mr. SHELBY. Mr. President, I ask that a statement by the Chairman of 
the Securities and Exchange Commission regarding proportionate 
liability be printed in the Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

       SEC Chairman Levitt has been forceful about the need to 
     protect fraud victims in the insolvency situation, even when 
     it forces parties who are only partially responsible for the 
     harm to bear more than their proportionate share of the 
     damages. In 1994 House testimony, Levitt explained:
       ``Since securities fraud cases often involve insolvent 
     issuers or individuals, however, some defendants in such 
     cases may not be able to pay their fair share of the damages 
     they have jointly caused. Advocates of proportionate 
     liability argue that joint and several liability produces an 
     inequitable result in such circumstances because it forces 
     parties who are only partially responsible for the harm to 
     bear more than their proportionate share of the damages. . . 
     .''
       ``The response to this argument is that, although the 
     traditional doctrine of joint and several liability may cause 
     accountants and others to bear more than their proportional 
     share of liability in particular cases, this is because the 
     current system is based on equitable principles that operate 
     to protect innocent investors. In essence, as between 
     defrauded investors and the professional advisers who assist 
     a fraud by knowingly or recklessly failing to meet 
     professional standards, the risk of loss should fall on the 
     latter. Defrauded investors should not be denied an 
     opportunity to recover all of their losses simply because 
     some defendants are more culpable than others.''

  Mr. SHELBY. Mr. President, I believe the bottom line here is balance. 
The balance is, who should bear the cost of fraud? That is the question 
before the Senate today. Who should bear the cost of fraud?
  Should it be the perpetrators, or should it be the victims? It should 
be the perpetrators, and never the victims. I think that is a bottom 
line of American jurisprudence.
  This bill, if it were to pass, would change that, unless we adopted 
the amendment that I have offered on behalf of myself, Senators Bryan, 
Boxer, and Sarbanes.
  This amendment makes sense. Why do we think the Chairman of the 
Securities and Exchange Commission supports it? We do not need any more 
Keatings in America. We did not need anything close to that in America. 
We do not need to pass a bill up here without protection of the 
innocent people that invest. We should never, never, Mr. President, try 
to protect the perpetrators of wrong in America.
  I believe this amendment makes a lot of sense. I urge my colleagues 
at the proper time to vote for it.
  Mr. D'AMATO. Mr. President, 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.
  Mr. D'AMATO. Mr. President, under the agreement, we indicated we 
would

[[Page S8975]]

vote at 10:55. Let me suggest at 10:55 we vote.
  I yield the floor to Senator Domenici.
  Mr. DOMENICI. Mr. President, first, I want to commend both Senator 
D'Amato and Senator Dodd for their splendid arguments today.
  While I normally find the distinguished Senator, Senator Shelby, to 
be rational and reasonable, let me suggest in this case I would 
summarize this, this way: What we have had heretofore in the United 
States, before this new approach, is a cookie-cutter complaint.
  What they do is draft up a complaint, and it contains the right 
words, regardless of the facts.
  Now, we can count on it, I say to my good friend from Mississippi, 
make this joint and several, dependent upon recklessness--which nobody 
understands--and every complaint will accuse the whole crowd of being 
reckless.
  It will not be just a case of ``under certain circumstances.'' The 
issue will be, those reckless people will have to be subject to joint 
and several total liability for a little tiny bit of negligence. It 
will be all of them in the same suit, under the word ``reckless,'' and 
we are right back where we started, and we will not have accomplished 
the reforms that we seek, to balance a very unfair system.
  I yield the floor.
  (At the request of Mr. Dole, the following statement was ordered to 
be printed in the Record.)
 Mr. McCAIN. Mr. President, because of a longstanding 
commitment to address the Veterans of Foreign Wars, I will be 
necessarily absent on Friday. If I were to be present, I would vote for 
the Shelby-Bryan amendment on joint and several liability.
  This amendment would continue to allow victims of securities fraud to 
recover their losses by holding all those who participated in the fraud 
joint and severally liable for the damages.
  In many instances, the primary culprit in a securities fraud declares 
bankruptcy. The only resource for an innocent victim is to recover 
their full losses from others who contributed to the fraudulent 
activity.
  While the pending bill would hold those who ``knowingly'' contribute 
to a fraud severally liable, it would limit the liability of those who 
``recklessly'' contribute. This provision means that innocent victims 
will pay for the fraud inflicted on them, rather than those who 
recklessly contributed to their victimization. That is simply not 
right.
  Mr. President, there is serious abuse of our litigation system. Too 
often, frivolous suits are brought in order to wrest money from 
defendants who find it far easier and less expensive to settle the case 
out of court than to pay the exorbitant cost of defending themselves. 
While we must take steps to address such abuse, we must take great care 
that in that effort we do not unfairly diminish the ability of truly 
innocent victims of fraud to fully recover their losses from those who 
participated.
  The PRESIDING OFFICER. Under the previous order, the hour of 10:55 
a.m. having arrived, the Senate will now proceed to vote on or in 
relation to the Shelby amendment.
  The question is on agreeing to the amendment. The yeas and nays have 
been ordered.
  The clerk will call the roll.
  The bill clerk called the roll.
  Mr. LOTT. I announce that the Senator from Colorado [Mr. Campbell], 
the Senator from Texas [Mr. Gramm], the Senator from Idaho [Mr. 
Kempthorne], the Senator from Arizona [Mr. Kyl], the Senator from 
Arizona [Mr. McCain], the Senator from Wyoming [Mr. Simpson], the 
Senator from Pennsylvania [Mr. Specter], and the Senator from Wyoming 
[Mr. Thomas] are necessarily absent.
  I further announce that, if present and voting, the Senator from 
Wyoming [Mr. Simpson] would vote ``nay.''
  Mr. FORD. I announce that the Senator from Arkansas [Mr. Bumpers], 
the Senator from Iowa [Mr. Harkin], the Senator from New York [Mr. 
Moynihan], the Senator from Arkansas [Mr. Pryor], and the Senator from 
Illinois [Mr. Simon] are necessarily absent.
  The result was announced--yeas 30, nays 56, as follows:

                      [Rollcall Vote No. 282 Leg.]

                                YEAS--30

     Akaka
     Biden
     Boxer
     Bradley
     Breaux
     Bryan
     Cohen
     Daschle
     Dorgan
     Exon
     Feingold
     Feinstein
     Graham
     Heflin
     Hollings
     Inouye
     Jeffords
     Kennedy
     Kerrey
     Kerry
     Kohl
     Lautenberg
     Leahy
     Levin
     Rockefeller
     Sarbanes
     Shelby
     Snowe
     Thompson
     Wellstone

                                NAYS--56

     Abraham
     Ashcroft
     Baucus
     Bennett
     Bingaman
     Brown
     Burns
     Byrd
     Chafee
     Coats
     Cochran
     Conrad
     Coverdell
     Craig
     D'Amato
     DeWine
     Dodd
     Dole
     Domenici
     Faircloth
     Ford
     Frist
     Glenn
     Gorton
     Grams
     Grassley
     Gregg
     Hatch
     Hatfield
     Helms
     Hutchison
     Inhofe
     Johnston
     Kassebaum
     Lieberman
     Lott
     Lugar
     Mack
     McConnell
     Mikulski
     Moseley-Braun
     Murkowski
     Murray
     Nickles
     Nunn
     Packwood
     Pell
     Pressler
     Reid
     Robb
     Roth
     Santorum
     Smith
     Stevens
     Thurmond
     Warner

                        ANSWERED ``PRESENT''--1

       
     Bond
       

                             NOT VOTING--13

     Bumpers
     Campbell
     Gramm
     Harkin
     Kempthorne
     Kyl
     McCain
     Moynihan
     Pryor
     Simon
     Simpson
     Specter
     Thomas
  So the amendment (No. 1468) was rejected.
  The PRESIDING OFFICER (Mr. Abraham). The majority leader is 
recognized.


                      Unanimous-Consent Agreement

  Mr. DOLE. Mr. President, a number of my colleagues are inquiring 
about the schedule for the remainder of the day, and I want to 
congratulate the managers for their good work until late last evening 
after somewhere around 10:30. This is a major bill.
  What I would like to do is propound a unanimous-consent request. I 
have been told it has been worked out with the managers for action on 
Monday, and if we can do this on Monday, then there will be no more 
votes today.
  So I would ask consent that when the Senate resumes S. 240 at 12 noon 
on Monday--there is going to be additional debate this afternoon. This 
refers only to Monday. We go on the bill at 12 noon--Senator Sarbanes 
be recognized to offer an amendment relative to proportional liability, 
and there be a time limitation of 2 hours to be equally divided in the 
usual form, with no second-degree amendments in order.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  Mr. DOLE. I further ask that at 2 p.m. the Sarbanes amendment be laid 
aside, and that Senator Boxer be recognized to offer a relevant 
amendment, on which there be 90 minutes equally divided, with no 
second-degree amendment in order prior to a failed motion to table.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  Mr. SARBANES. Could I just make an inquiry, reserving the right to 
object.
  The PRESIDING OFFICER. The Senator from Maryland.
  Mr. SARBANES. I have no objection. In other words, we are leaving the 
Boxer amendment open to a second-degree amendment, is that right?
  Mr. DOLE. Right. We were not certain what the subject matter is.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  Mr. DOLE. And I further ask that at 3:30 p.m. the Senate resume the 
Bryan statute of limitations amendment, and there be 90 minutes of 
debate to be divided in the usual form.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  Mr. DOLE. The Senator indicated he needed additional time.
  I further ask that at 5 o'clock on Monday, the Senate proceed to vote 
on or in relation to the Bryan amendment, to be followed by a vote on 
or in relation to the Sarbanes amendment, to be followed by a vote on 
or in relation to the Boxer amendment; that there be 2 minutes for 
explanation between the second and third stacked votes to be in the 
usual form. In other words, Members get a brief explanation. Senator 
Byrd suggested, I think, a good idea. So that when they vote, they will 
have the latest information on that particular amendment.
  Mr. SARBANES. There will be 2 minutes to a side?
  Mr. DOLE. One.
  Mr. SARBANES. One minute to each side.
  Mr. DASCHLE. Reserving the right to object, I would ask the majority 
leader--I am told we have one Member

[[Page S8976]]

who is returning at 5 o'clock--if we could move that to 5:15 to 
accommodate his schedule I think it would probably work a little bit 
better.
  Mr. DOLE. As long as it does not cause any problem. The time of 5:15 
is fine with me.
  Mr. SARBANES. Senator Burns actually spoke to me earlier, and we 
slipped it from 4:30 to 5 to accommodate him, or as I understood it was 
slipped from 4:30 to 5 to accommodate Senator Burns, and if we could 
slip it another 15 minutes----
  Mr. DOLE. At 5:15.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  Mr. DOLE. The first vote will be at 5:15, and the rest will follow.
  Mr. BYRD. Mr. President, before the distinguished majority leader 
proceeds--reserving the right to object, and I will not object--I thank 
the distinguished majority leader for providing time for explanation 
before the vote on each of the stacked amendments. My question is, Will 
there only be three stacked votes for Monday?
  Mr. DOLE. Yes.
  Mr. BYRD. I thank the majority leader.
  Mr. DODD. There may be votes after 5:15.
  Mr. BYRD. That was not my question.
  Mr. DODD. Stacked votes.
  Mr. BYRD. Only three stacked votes. I thank all leaders.
  I have no objection.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  Mr. DOLE. For the information of all Senators, a lot of amendments 
will be debated during the day on Monday and the first vote will occur 
at 5:15. We will notify all offices, certainly the Democratic side and 
the Republican side, and I again wish to thank the managers for the 
progress. It is a very important bill. I listened to the debate last 
night and learned a little bit after I got home. You were still 
debating. It is an important bill, very important bill. In view of the 
progress made and the fact there is going to be an amendment debated 
this afternoon, I think it is safe to announce--and I have checked with 
the Democratic leader--no more votes today.
  Mr. D'AMATO addressed the Chair.
  The PRESIDING OFFICER. The Senator from New York.
  Mr. D'AMATO. Mr. President, as we return to the bill, Senator Bryan 
has an amendment to offer.
  Mr. FEINGOLD addressed the Chair.
  The PRESIDING OFFICER. The Senator from Wisconsin.
  Mr. FEINGOLD. I ask unanimous consent to speak in morning business.
  Mr. D'AMATO. May I say to the Senator, because others have asked to 
proceed in morning business, we are ready to take the amendment which 
our colleague wants to put up, and if it is going to be protracted, I 
do not want to open the door.
  Mr. FEINGOLD. I only asked to speak in morning business for 10 
minutes.
  Mr. D'AMATO. Might I ask my colleague--because he has a time problem, 
we have provided that we would go to this--that Senator Bryan be at 
least permitted to proceed and then I would have no objection to moving 
forward.
  Mr. BRYAN. If I might, I can assure my colleague that I am simply 
going to lay an amendment down, speak for approximately 5 minutes, so 
that I do not in any way--we did make a commitment to lay this down, 
and I have a time commitment in terms of a flight to get so I will 
accommodate the Senator.
  Mr. FEINGOLD. Mr. President, in light of that comment, I will defer 
for a few moments. And I thank the Senator from New York and the 
Senator from Nevada.
  The PRESIDING OFFICER. The Senator from Nevada.


                           Amendment No. 1469

(Purpose: To amend the Securities Exchange Act of 1934 to provide for a 
        limitations period for implied private rights of action)

  Mr. BRYAN. Mr. President, I send an amendment to the desk and ask for 
its immediate consideration.
  The PRESIDING OFFICER. The clerk will report.
  The assistant legislative clerk read as follows:

       The Senator from Nevada [Mr. Bryan] proposes an amendment 
     numbered 1469.

  Mr. BRYAN. Mr. President, I ask unanimous consent that reading of the 
amendment be dispensed with.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  The amendment is as follows:

       On page 129, between lines 16 and 17, insert the following:

     SEC. 111. STATUTE OF LIMITATIONS.

       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. 38. STATUTE OF LIMITATIONS.

       ``(a) In General.--Except as otherwise provided in this 
     title, an implied private right of action arising under this 
     title may be brought not later than the earlier of--
       ``(1) 5 years after the date on which the alleged violation 
     occurred; or
       ``(2) 2 years after the date on which the alleged violation 
     was discovered.
       ``(b) Effective Date.--The limitations period provided by 
     this section shall apply to all proceedings commenced after 
     the date of enactment of this section.''.
       On page 131, strike line 1, and insert the following:

     ``SEC. 39. PROPORTIONATE LIABILITY.''

       Amend the table of contents accordingly.

  Mr. BRYAN. I thank the Chair.
  Mr. President and my colleagues, this is an amendment dealing with 
the statute of limitations. Some of my colleagues will recall that in 
1991, the Supreme Court of the United States decided by a 5-to-4 vote a 
case that is referred to as the Lampf decision. The Supreme Court in 
that decision determined that there would be with respect to securities 
actions a statute of limitations that would limit an investor from 
bringing a cause of action to 1 year from the point that the fraud was 
discovered and in no event longer than 3 years.
  The Supreme Court gave that a retrospective interpretation as well as 
a prospective interpretation. A number of us came to the floor in 1991, 
because this would have wiped out a number of the cases in which 
Charles Keating had been named the defendant, and the Congress 
corrected it. It changed the law--that it would be 2 to 5 years.
  Now, this deals prospectively. Under the Lampf case, the 1- to 3-year 
statute was identified as the appropriate statute of limitation. This 
amendment would provide rather than a 1- to 3-year statute of 
limitation, a 2- to 5-year statute of limitation.
  I must say that S. 240 in its original form as introduced contained 
the identical provision.
  So, in effect, this amendment, if adopted, would restore S. 240 to 
its original form.
  The importance of the statute of limitations, as the Securities and 
Exchange Commission and other regulators point out, is that by the very 
nature of these securities frauds, they are not easily detected. The 
last thing in the world we would want to do is to give comfort to those 
who are clever enough to conceal their fraud to effectively preclude a 
plaintiff from bringing his or her cause of action.
  There will be much more debate on this on Monday, but suffice it to 
say what we are trying to do is to provide 2 years from the date of 
discovery, in no event longer than 5 years, recommended by the 
Securities and Exchange Commission, recommended by the North American 
Association of Securities Administrators, and just one point for my 
colleagues to contemplate.
  In testimony before the Banking Committee, the Chairman of the SEC 
advised us that even with the enormous resources available to the SEC, 
all of the staffing that they have, and the sophistication that they 
have acquired over the past 60 years, it takes approximately 2.25 years 
to conduct such an investigation.
  Obviously, individual plaintiffs have much less in the way of 
resources available, and their likelihood of completing an 
investigation in the timeframe is considerably more limited.
  What we seek to do is provide a 2- to 5-year statute of limitations 
prospectively, and we will point out in the debate with more detail on 
Monday the overwhelming public policy argument in favor of this.
  Suffice it to say this has nothing to do with frivolous lawsuits--
nothing to do with frivolous lawsuits. There are provisions in the mark 
which deal with enhanced enforcement provisions under rule 11 of the 
Federal Rules of Civil Procedure to deal with the issue of frivolous 
lawsuits. This simply is a provision that will provide some fairness to 
investors to be able to present their claim in the first instance.
  I thank my colleagues for permitting me to go forward at this time.
  Mr. SARBANES. Will the Senator yield?

[[Page S8977]]


  Mr. BRYAN. I will be pleased to do so.
  Mr. SARBANES. Mr. President, I want to underscore the importance of 
this amendment.
  I ask the distinguished Senator from Nevada, did the Banking 
Committee not report an amendment lengthening the statute of 
limitations for securities fraud actions to 2 years after the plaintiff 
knew of the violation and to 5 years after the violation occurred, 
following that Supreme Court decision?
  Mr. BRYAN. Responding to the distinguished ranking member, that was, 
in fact, what the Banking Committee did, and on the floor of the 
Senate, the Senate followed the lead of the Banking Committee and 
ultimately, as the Senator from Maryland will recall, we protected 
those cases that were pending in the 1991 action we took.
  Mr. SARBANES. So the proposal, your amendment, in effect, is seeking 
to put into the law the very provision that we had previously reported.
  Mr. BRYAN. That is essentially correct. This operates prospectively. 
What we did, as the Senator from Maryland will recall, is to try to 
protect all of those actions that were pending in 1991 which had been 
wiped out by the Supreme Court decision and we, in effect, provided at 
that time that the operable State law would apply, which had been, in 
effect, the interpretation of the courts over the years.
  In essence, we kept those cases active so that they could be decided 
on their merits, not having been precluded by a decision, which 
surprised many, that the Court gave and particularly the retroactive 
portion of that.
  Mr. SARBANES. As I understand it, following the Supreme Court 
decision in the Lampf case, the then-Chairman of the Securities and 
Exchange Commission, Richard Breeden, a Republican nominee--because I 
think it is very important to understand, as far as Chairman of the SEC 
is concerned, they are bipartisan in their view about this matter--
testified or stated, and I quote him:

       The timeframe set forth in the 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.

  As I understand it, the States securities regulators and the FDIC at 
the time joined the SEC in this position. As I understand it, the 
States securities regulators today feel very strongly that the 
amendment which the Senator is offering is an extremely important 
amendment.
  Mr. BRYAN. The Senator from Maryland is correct. This has had 
bipartisan support with the Commission. Chairman Breeden, as the 
Senator points out, strongly urged upon the committee a 2- to 5-year 
statute of limitations. That same position has been taken by Chairman 
Levitt under the current administration.
  The North American Association of Securities Administrators then and 
now have urged this course of action. I simply point out to my friend 
and colleague that S. 240, in the last session of the Congress its 
counterpart, had a 2- to 5-year statute of limitations, and in this 
Congress, the very bill we are debating in its original form, as 
introduced by Senators Dodd, Domenici, and others, had a 2- to 5-year 
statute of limitations.
  So what this amendment would do is simply restore S. 240, with 
respect to the statute of limitations, to its original form as 
introduced by a number of colleagues.
  Mr. SARBANES. Mr. President, this is an extremely important 
amendment. The 1- and 3-year time periods are unrealistically short, 
and the danger that is associated with an unrealistically short time 
period for the application of the statute of limitations is that people 
with meritorious causes will be barred from the courthouse door.
  We have statute of limitations because we say, ``Well, we do not want 
this thing just hanging out there indefinitely, and people ought to 
assert their rights,'' and so forth and so on. But the time periods 
have to be reasonable.
  Under the amendment, there is a 5-year time period regardless, so 
that the victim may never know of it. If 5 years goes by, he is closed 
out. The bill would reduce that to 3 years. People have to make their 
judgment, but why should you come down on the side of concealment 
instead of on the other side in terms of protecting the investor?
  The 1 and the 2 years is very important because you may discover, or 
think you have discovered, the fraud, but then you have to work it up 
to determine whether you have a case or not, and 1 year is a very 
unrealistically short time period. In fact, I think the Senator 
yesterday quoted a time period that it took the SEC from when they 
began working on a case before they felt they could bring it. Was I 
correct in that?
  Mr. BRYAN. The Senator is correct. I cited Chairman Breeden, I 
believe, who indicated it was 2.25 years for the average case to fully 
investigate. I might just say in response to the distinguished 
Senator's point about the inherent complexity, Chairman Levitt 
testified earlier this year on April 6, and I will read a very short 
quote, in support of the proposition before us:

       Extending the statute of limitations is warranted because 
     many securities frauds are inherently complex and the law 
     should not reward a perpetrator of fraud who successfully 
     conceals its existence for more than 3 years.

  I think that is a compelling policy argument, I say to my good friend 
from Maryland.
  Mr. SARBANES. I think that is an extremely important point. This does 
not affect the basis on which you can bring the suit in any way. All 
the other provisions are unaffected. This only affects the time period 
within which the suit must be brought.
  Mr. BRYAN. The Senator is correct.
  Mr. SARBANES. I say to my colleagues, this is a very rough bill on 
innocent investors who have been victimized, as it were swindled, and I 
certainly hope that at a minimum, the Senate would be willing to 
restore an appropriate statute of limitations back to the time periods 
that have prevailed, generally speaking, throughout most of our 
experience with the securities laws. It has been related to the State 
laws, and most of the State laws are 2 to 5 and some even longer than 
that, if I am not mistaken.

  Mr. BRYAN. The Senator is correct, and I think his observation is 
particularly insightful. If you look at S. 240 in its original form, 
there is only one provision that could reasonably, arguably be 
supported in providing a consumer, investor, a victim of fraud, with an 
additional benefit, and that is the statute of limitations provision. 
That was in the original bill, as the distinguished Senator from 
Maryland knows. During the course of processing that legislation, for 
reasons which I do not understand, the provision was deleted.
  But even those who are the most fervent advocates of the bill--I know 
our distinguished colleague, Senator Dodd, has spoken eloquently on 
behalf of the statute of limitations--we may have differences with 
respect to proportionate liability and some other issues. But I point 
out, in response to the Senator's question, that the introducers of the 
bill, Senator Dodd, Senator Domenici, and many others on both sides of 
the aisle, felt that it was inherently fair for the reasons which the 
Senator from Maryland so aptly pointed out, and that the statute of 
limitations needs to be extended to 2 to 5 years so those who 
perpetrate fraud do not benefit by the cleverness of their ability to 
conceal.
  I yield the floor.
  Mr. BOND. Mr. President, S. 240, the private securities litigation 
legislation addresses a very important issue of concern to many 
Americans, securities litigation reform. While this is a subject that I 
believe needs to be addressed and one I have some personal views and 
experience in, I will not be participating in the debate or votes on 
the floor.
  I inform the Senate that I am currently engaged in securities 
litigation of the kind this legislation seeks to reform. As a result, I 
have decided to recuse myself from the debate. Given the status of my 
current suit and the issues before the Senate, I have been advised that 
I should not participate in the proceedings or voting on the floor.
  Mr. DOLE. Mr. President, the high cost of litigation imposes an 
enormous burden on our economy. According to some estimates, legal 
judgments account for 2.3 percent of our gross national product. 
Plaintiffs' lawyers earn

[[Page S8978]]

nearly $20 billion annually in legal fees, often as a result of 
contingency-fee arrangements guaranteeing a 30 or 40 percent share of 
any jury award.
  These are the big-picture statistics. But, as we all know, the fear 
of litigation can hit much closer to home:
  Playgrounds and little leagues shut down because local communities 
can't afford the insurance. Boy Scout troops disband because there 
aren't any adults around who are willing to be troop leaders. Doctors 
practice defensive medicine, increasing the cost of health care in the 
process. Volunteers stay home instead of offering their services to the 
community. Police officers start second-guessing their own actions, 
wondering whether they're going to be hauled into court for some minor 
misstep.
  Even worse, people start to lose faith in the system. They begin to 
view the system not with respect, but as an opportunity to make a quick 
buck. Everyone becomes a potential victim. Every social transaction, no 
matter how minor or benign, becomes a potential lawsuit leading to a 
multimillion-dollar jackpot.
  That is why comprehensive legal reform is so important--not only to 
reduce costs for businesses and consumers alike, not only to protect 
the innocent from frivolous lawsuits, but also to restore a sense of 
perspective and personal responsibility.
  So, earlier this year, the Senate took the historic step of passing 
landmark product liability reform legislation.
  And, today, we continue the reform process in another key area--the 
area of securities litigation.
  Why securities litigation? Because our securities markets provide the 
fuel that drives our economy. When these markets run efficiently, 
allocating capital to established companies and to newer, emerging 
businesses, we all win out with more economic growth, more jobs, a 
stronger economy.
  Of course, those who seek to invest in our securities markets need to 
be confident that these markets operate efficiently and fairly. And 
that is why Congress acted more than 60 years ago to promote investor 
confidence by passing the Landmark Securities Act of 1933 and the 
Securities Exchange Act of 1934.
  Unfortunately, a handful of lawyers today devote their professional 
lives to gaming the system by filing strike suits alleging violations 
of the Federal securities laws--all in the hope that the defendant will 
quickly settle in order to avoid the expense of prolonged litigation. 
The lawyers who file these suits often rely on professional plaintiffs, 
shareholders with only small stake in the company being sued, but who 
are nonetheless willing to stand on the sidelines ready to lend their 
names to the litigation.
  Needless to say, these strike suits are often baseless, triggered not 
by any evidence of fraud, but by a drop in stock price or the 
announcement of some bad news by the company. In effect, the lawsuits 
act as a litigation tax that raises the cost of capital and chills 
disclosure of important corporate information to shareholders. High-
technology, high-growth companies are particularly vulnerable to these 
baseless strike suits because of the volatility of their stock prices.
  S. 240, the Private Securities Litigation Reform Act of 1995, seeks 
to reduce the number of meritless securities fraud cases, while 
protecting investors, by proposing several commonsense reforms:
  First, it puts an end to the use of professional plaintiffs by 
requiring that the court appoint as the lead plaintiff the party 
willing to serve in this capacity who has the greatest financial stake 
in the outcome of the litigation.
  Second, it clamps down on skyrocketing attorney's fees by requiring 
that fees be awarded as a percentage of the actual recovery based on 
the efforts of the attorney.
  Third, it retains joint and several liability for those who knowingly 
commit fraud, but establishes a system of proportionate liability for 
other, less culpable defendants.
  Fourth, it adopts the second circuit's pleading standard, which 
requires specificity when pleading securities fraud cases. As a result, 
general allegations of fraud will no longer be enough to justify a 
lawsuit.
  And fifth, it creates a statutory safe harbor for those companies 
whose good-faith estimates about future earnings do not materialize. 
Statements that are knowingly false, however, are not protected by the 
safe harbor.
  Mr. President, I want to commend my colleagues, the chairman of the 
Banking Committee, Senator D'Amato, and the chairman of the Budget 
Committee, Senator Domenici, for their leadership in moving this bill 
through Senate. I also want to commend my colleague from Connecticut, 
Senator Dodd, whose involvement in this issue is proof that there is 
nothing partisan about securities litigation reform.
  Mr. BURNS. Mr. President, I rise today to add my voice to those who 
are supportive of this legislation and to also take the opportunity to 
commend the sponsors of S. 240, Senator Domenici and Senator Dodd. It 
is through their hard work and effort that we now have a balanced bill 
that protects both investors, and defendants of securities litigation.
  It almost seems as if the class--action securities fraud suit has 
become a feature of doing business for just about every size and type 
of company in the United States. In 1990 and 1991, a record 614 
securities class action suits were filed in Federal courts against 
American businesses. In an article printed in the Wall Street Journal 
on September 10, 1991, Mr. Vincent O'Brien reported that he collected 
data on more than 330 Federal class-action securities-fraud cases 
involving common stock. In every case, the plaintiffs alleged material 
misrepresentations and omissions by management regarding the true 
health and potential of the defendant company. Of the 330 case sample, 
only 3 cases were decided by a jury; an additional 5 were dismissed or 
withdrawn, and an astonishing 96 percent were settled out of court.
  Proponents of securities class actions say that the suits prevent 
fraud and help maintain the integrity of financial markets. It is 
certainly true that one aspect of a fair marketplace is that those 
persons who have been injured by fraud in connection with a securities 
transaction, have some avenue available to retrieve their losses.
  While the current system does provide for a means to address fraud, 
the evidence is overwhelming that the real victims of securities fraud 
are not receiving adequate compensation for their losses. In fact, the 
plaintiffs in a lawsuit, those who were actually damaged, obtain only 
about 60 percent of the settlement while attorneys' fees and litigation 
expenses eat up the rest. Moreover, because plaintiffs' attorneys only 
pursue cases involving large offerings, the lion's share of the stock 
at issue tends to be held by institutional investors. Small investors 
often account for only an insignificant percentage of the shares at 
issue.
  Many of these lawsuits, whether they are with or without merit, 
generally come to the same end. Settlement amounts depend entirely on 
the amount of damages claimed or the defendants' insurance coverage. 
The sad part is, that between 5 and 15 cents on each dollar sought is 
actually returned to the plaintiffs while the lawyers average $1 
million in fees for each case.
  Mr. President, it has become far too easy and profitable to file 
securities suits. Computer tracking of stock prices has led to nearly 
instantaneous suits filed by class action plaintiffs' attorneys. The 
incentive to the lawyers for being first is simple: Usually the judge 
who ultimately presides over the case will name the lawyers who got 
their cases filed first to be lead counsel. On what basis do they file? 
If a company's earnings are less than projected, a suit is filed 
claiming shareholders were not told of the dangers. If earnings shoot 
through the roof, they can be sued for withholding good information 
that would have prevented impatient stockholders from selling their 
stock. Such suits, or threats of suits, have a serious consequence of 
deterring valuable risk-taking and cause qualified persons to be 
unwilling to serve as directors because of the risks of liability. 
American business and the American consumers are the big losers.
  Mr. President, once a suit is filed, defendants face enormous 
incentives to settle. Those who choose to fight the allegations face 
large legal fees even if they ultimately prevail. For some defendants, 
the stakes are even higher because the law currently does not 
distinguish differing degrees of fault and you could very well be 
liable for losses

[[Page S8979]]

attributed to other parties. Even though claims might be completely 
meritless, firms feel coerced to settle rather than assume the open-
ended risk.
  The legislation we have before us today will go a long way toward 
curbing abuses in securities litigation. It will provide a filter at 
the earliest stage of a lawsuit to screen out those that have no 
factual basis. A complaint should outline the facts supporting the 
lawsuit and not just a simple assertion that the defendant acted with 
intent to defraud. If the complaint does not set forth the facts 
supporting each of the alleged misstatements or omissions, the law suit 
may be terminated.
  In order for the judge to be able to determine whether the case has 
any merit prior to subjecting the defendants to the time and expense of 
turning over the company's records, a stay of discovery is included in 
this bill. A typical tactic of plaintiff lawyers is to request an 
extensive list of documents and to schedule an ambitious agenda of 
depositions that take up the time and resources of a company. The 
discovery costs comprise 80 percent of the expense of defending a 
securities class action lawsuit. The stay of discovery provision will 
provide the defendants with the opportunity to have a motion for a 
dismissal considered prior to entering into the costly discovery 
process.

  Securities laws are intended to help investors by ensuring a flow of 
accurate information about public companies. However, the present 
system reduces the amount of information as companies limit their 
public statements to avoid allegations of fraud. In fact, an American 
Stock Exchange survey 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. To encourage disclosure of 
information, the bill will create a statutory safe harbor.
  To deter plaintiffs' attorneys from filing meritless securities class 
actions, judges will have the authority to review the conduct of 
attorneys and discipline those who file frivolous suits. Suits filed 
with little or no research into their merits can cost companies 
thousands of dollars in legal fees and company time. According to a 
sample of cases provided by the National Association of Securities and 
Commercial Law Attorneys [NASCAT] 21 percent of the class action cases 
were filed within 48 hours of a triggering event such as the 
announcement of a missed earnings projection. Innocent companies pay 
millions of dollars defending these frivolous cases and are left with 
large attorney bills even when they win. If a judge finds that an 
attorney filed a frivolous suit, he can award sanctions as appropriate.
  This bill ensures that those primarily responsible for the 
plaintiff's loss bear the primary burden in making the plaintiff whole. 
Under current law, codefendants each have liability for 100 percent of 
the damages irrespective of their role in a fraudulent scheme. In this 
bill, the courts would determine who has committed knowing securities 
fraud, and hold them fully responsible for all damages. Any other 
defendants named in the suit would be held proportionately liable.
  As we all know, there are instances when a defendant is insolvent and 
is unable to pay their share of damages. This bill contains provisions 
to ensure that investors are compensated in cases where there is an 
insolvent codefendant. When plaintiffs are unable to collect a portion 
of their damages from an insolvent codefendant, the proportionally 
liable codefendants would be required to pay up to 150 percent of their 
share of damages.

  Mr. President, we have heard a lot of talk that this legislation 
would adversely impact small investors. Nothing could be further from 
the truth because this bill actually provides special protection for 
them. All defendants, whether they are jointly and severally liable or 
proportionately liable, would be held fully responsible for the 
uncollectible shares of plaintiffs whose damages are more than 10 
percent of their net worth, if their net worth is less than $200,000. 
Providing special protection for small investors is a critical 
component of this bill and one I support strongly.
  Mr. President, there has been an effort by the critics of this bill 
to misrepresent the facts. Several opponents have claimed that if the 
bill had been law during the savings and loan crisis, investors 
defrauded by Charles Keating would have been left without remedy. 
However, they fail to tell you that most of the losses from the S&L 
crisis did not result from securities fraud and this bill would not 
apply. The primary enforcement mechanism in dealing with the S&L crisis 
was the bank regulatory system, not the Federal securities law.
  Finally, oppoinents allege that S. 240 would make it impossible for 
municpalities to recoup losses from securities fraud involving 
derivatives. However, the Domenici-Dodd bill preserves investors' 
rights to sue. Just as under current law, defrauded investors who 
purchased or sold derivatives would still be able to sue defendants who 
had actual knowledge of the fraud or who acted recklessly.
  In concluding, Mr. President, legislative reform is needed to return 
rationality to the system so that meritorious claims are compensated 
and meritless claims are neither rewarded nor encouraged. Business 
desperately needs relief from both the financial and management burdens 
attending these abusive suits. I encourage my colleagues to support 
this legislation and I once again want to commend Senator Domenici and 
Senator Dodd for their tremendous work on this bill.
  Mr. FEINGOLD. Mr. President, I ask unanimous consent to speak as in 
morning business.
  The PRESIDING OFFICER. Without objection, it is so ordered.

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