[Congressional Record Volume 141, Number 106 (Tuesday, June 27, 1995)]
[Senate]
[Pages S9109-S9126]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                PRIVATE SECURITIES LITIGATION REFORM ACT

  The Senate continued with the consideration of the bill.


                           Amendment No. 1474

  Mr. BRYAN. Mr. President, if I might inquire of the Chair, it is my 
understanding that on the Bryan amendment, there is a time agreement in 
which the distinguished chairman of the Banking Committee has 15 
minutes allotted to him and the proponents of the Bryan amendment have 
15 minutes; is that correct?
  The PRESIDENT pro tempore. The Senator is correct.
  Mr. BRYAN. Mr. President, I yield myself 8 minutes out of my 
allocated time.
  Mr. President, for the benefit of my colleagues, for six decades, the 
foundation upon which public confidence in the American securities 
market has been built rests upon two fundamental premises: First, 
effective regulation by the Securities and Exchange Commission; second, 
the right of individual investors who have been defrauded to pursue a 
private cause of action against those wrongdoers.
  Mr. President, I greatly fear that S. 240, as it is being processed 
through this Chamber, will, for all intents and purposes, emasculate 
that private cause of action, which has been so important in keeping 
the American securities market safe and sound and investor confidence 
high. Those are not just statements made by the Senator from Nevada. 
The former Chairman of the SEC, Mr. Breeden, the last Republican 
Chairman, made similar statements in 

[[Page S 9110]]
testimony before the Banking Committee during his tenure. The current 
Chairman, Mr. Levitt, has also made that proposition.
  The amendment before us seeks to correct a decision by the Supreme 
Court decided last year by a narrow 5-to-4 margin that wipes out 
liability for aiders and abettors.
  Now, there has been much debate on the floor of the Senate about 
proportionate liability, joint and several liability, intentional 
misconduct, knowing misconduct, and reckless misconduct. None of those 
distinctions makes a whit of difference if this amendment is not 
granted, because under the current State of the law, no aider and 
abettor is liable under that theory, irrespective of his or her 
misconduct. Everyone is home free.
  I cannot conceive of a public policy that would support that 
conclusion. And, indeed, the prime sponsors of this legislation have 
previously written--I refer to the distinguished Senator from 
Connecticut and the senior Senator from New Mexico--expressing their 
support for restoration of aider and abettor liability.
  Interspersed throughout all of this debate has been a great antipathy 
to plaintiff's lawyers. I understand that antipathy and I do not, for a 
moment, doubt that there has been some misconduct, and some provisions 
in S. 240 deal with that misconduct. But let me point out that aiders 
and abettors are also lawyers, and if misconduct on the part of the 
plaintiff's bar ought to be addressed--as it ought to--under what 
theory of social or economic justice, can we assert that those who are 
part of the conspiracy itself--lawyers and accountants, primarily, and 
to some extent bankers--in effect, be given a blank check? If they did 
not sign their names to any of the statements, in effect, they have no 
liability.
  Now, is this theoretical? Is it esoteric? No. If the state of law at 
the time of the Keating actions--one of the most notorious securities 
frauds of this century--were in the form that it is today, here is what 
would occur. My colleagues will recall that Mr. Keating, the primary 
wrongdoer, was bankrupt. No recovery from him. Some $262 million were 
recovered as a result of the Keating fraud by private investors. Jeri 
Mellon, a retired woman who lives in Henderson, NV, a suburb of Las 
Vegas, who came back, most of her savings were lost as a result of the 
fraud. She joined with others similarly situated in a class action to 
recover money. They recovered $262 million.
  If that action were brought today, because aiding and abetting is no 
longer a part of the law as a result of the Central Bank of Denver 
case--I might add, the Court, in deciding that case, said, look, we do 
not believe that the statute can be construed to apply to aider and 
abettor liability, but we sure as the devil believe that there ought to 
be liability. So this was not a value judgment made by the Court that 
aiders and abettors ought not to be available. Here are some of the 
aiders and abettors: Parker Milliken, Kay Sholer, Sidley & Austin, 
Michael Milken; $121 million of the overall value of $262 million would 
be wiped out if that action was filed today. So we are down now to $141 
million.
  Previously, I offered for the consideration of the Senate a 
recommendation shared by the SEC, by the State Securities Association, 
by every regulator, by consumer groups, by those charged with public 
finance responsibilities at the State and local government level, to 
extend the statute of limitations, which is currently limited to 1 to 
3, to make it a 2-year to 5-year statute of limitations.
  Had the action against Charles Keating been brought today, 20 percent 
of the class claims would have been barred because of this restricted 
statute of limitations. Another $28 million in recovery, wiped out.
  These are people like the Jeri Mellons. I suspect that virtually 
every Member of this Senate has had individuals who lost money as a 
result of the Keating fraud.
  The recovery is down $262 million, to $113 million. Joint and several 
liability: Under the provisions of S. 240, in order to be jointly and 
severally liable, you have to either have knowing misconduct or 
intentional misconduct. Reckless misconduct no longer does it.
  Although I recognize a distinction can be made between the two of 
those, the amendment that Senator Sarbanes and I sought to offer in one 
form or another, sought to make sure that if the primary violator is 
insolvent, that those who are guilty of reckless misconduct--it is not 
ordinary negligence, not simple negligence--if a Member of this Chamber 
goes out this evening, gets in his or her automobile, is involved in an 
accident and is negligent, that Member is responsible to the party to 
whom he or she has inflicted the injury. Not so with securities law. 
Only if they are guilty of reckless misconduct.
  In effect, as a result of the changes we make in the joint and 
several liability, those who are proportionally liable pay only their 
share. It is estimated that another $67 million would be wiped out in 
terms of investor recovery if the Keating case were brought today. S. 
240 also wipes out the Rico treble damages provision, and another $30 
million.
  So if the Keating case were brought today, with the state of the law 
as it exists on this morning as this debate continues, rather than $262 
million recovered by innocent investors, many of whom lost their life 
savings--and a disproportionately large number, small, elderly, retired 
investors who had little likelihood of ever regaining their loss--$262 
million of recovery would be reduced to $16 million.
  Mr. President, I ask my colleagues, under what theory of social or 
economic justice do we want to do this? Sure, we want to get at the 
plaintiff's lawyers that file frivolous actions, and the enhanced 
provisions of rule 11 under the Federal Rules of Civil Procedure 
address that issue.
  The amendment before the Senate would simply restore aiding and 
abetting liability. Zippo, no recovery at all. Intentional misconduct, 
knowing misconduct, reckless misconduct--not 1 cent could be recovered 
under a theory of aider and abettor liability under the state of the 
law today, unless the Bryan amendment is enacted.
  May I inquire, I have used my time; how is the time being charged at 
this point?
  The PRESIDING OFFICER (Mr. Coverdell). The Senator has approximately 
3 minutes remaining on his side.
  Mr. D'AMATO. Mr. President, this is, admittedly, a very complex 
subject. We must distinguish between knowingly and intentionally having 
committed a fraudulent act and recklessly committing an act.
  What is the difference between reckless conduct and intentional and 
knowing fraud? What standard of proof is there between gross 
negligence, negligence, and recklessness? These are not clear 
distinctions and it is because of these blurred distinctions that there 
has been a large body of case law, over the years, trying to make the 
definitions clear. This is particularly true in the area of reckless 
conduct; over the years a number of courts have given the 
interpretation that someone who was not the primary wrongdoer, but 
participated in the fraud and knowingly and substantially assisted in 
the fraud could be held liable. This does not seem to me to be reckless 
conduct but knowing fraud.
  Courts have found, over the years, that a firm could be held fully 
liable for conduct which the average person would consider imprudent, 
negligent, or careless. Some circuit courts have recognized this so-
called aiding and abetting liability as part of the recklessness 
standard.
  Aiding and abetting liability holds the business community to an 
incredibly high standard, particularly when they can be held liable for 
damages that are far greater that any damage that they have caused. 
There is a real culprit to hold liable. The primary wrongdoer is 
somebody that has really committed fraud, who has practiced avarice and 
greed, who has wantonly and knowingly broken the law.
  The Supreme Court decided that aiding and abetting liability applies 
to someone who is not the primary wrongdoer but participated in a fraud 
and knowingly and substantially assisted in the fraud. In the Central 
Bank of Denver case, the Court decided there was no aiding and abetting 
liability for private lawsuits involving fraud.
  The Supreme Court did not believe that section 10(b) intended to 
cover aiding and abetting liability. Providing for aiding and abetting 
liability under 

[[Page S 9111]]
section 10(b) would be contrary to the goals of this legislation.
  This bill is aimed at reducing frivolous litigation. Even the Supreme 
Court recognized that expanding 10(b) to include aiding and abetting 
liability would lead many defendants to settle to avoid the expense and 
risk of going to trial.
  The Supreme Court said, ``Litigation under rule 10b-a presents a 
danger vexatiousness, different in degree and in kind, and would 
require secondary actors to expend large sums even for pretrial defense 
and the negotiation of settlement.''
  As I have said, aiding and abetting liability would require secondary 
actors--not the primary wrongdoer, the person who has committed the 
fraud--to expend large sums, even for pretrial defense, and the 
negotiation of settlement.
  Indeed, I do not believe that just because people have made 
settlements that they were guilty of fraud or that it was right and 
proper that they were sued.
  When 93 percent of the cases--and I know not all the defendants were 
brought in to these suits for aiding and abetting, I grant that--but 93 
percent of the defendants settled. These aiders and abettors are people 
tangentially involved in the fraud; they are brought into the suits 
only because they were involved with a scoundrel--a Keating--who was 
deliberately breaking the law. Often these aiders and abettors are 
accountants who did not notice the fraud, but possibly should have, yet 
we would hold them liable as if they committed the fraud. The Supreme 
Court said last year that aiding and abetting liability did not belong 
in private lawsuits involving fraud.
  Of course, if someone has knowingly, intentionally, misled investors 
or been involved in committing fraud, they are no longer just aiders 
and abettors, and can be held liable for their actions.
  Under S. 240, people who commit fraud will be treated as primary 
wrongdoers, as the culpable party, and can be held jointly and 
severally.
  Further, S. 240 grants the Securities and Exchange Commission express 
authority to prosecute cases against wrongdoers who knowingly aid and 
abet primary wrongdoers.
  This issue is both very interesting and very complex. It is not easy. 
First, the circuit courts recognized aiding and abetting liability, 
then the Supreme Court decided there is no place in these lawsuits for 
this liability. Using the aiding and abetting liability to proceed 
under rule 10(b) with a lawsuit, which is what this amendment would do, 
would take us to a standard that the Supreme Court decided should not 
be applied. Again, I quote that this liability standard ``presents a 
danger of vexatiousness, different in degree in kind and would require 
secondary actors to expend large sums, even for pretrial defense and 
negotiations of settlements.''
  This amendment would actually destroy a good part of what this 
legislation attempts to do in terms of keeping lawyers honest and 
protecting those people who did not commit fraud, but were associated 
with those who did. It is my belief that these firms, the so-called 
aiders and abettors, are only brought in to these suits because of 
their deep pockets.
 They are professionals; securities analysts, accountants, and bankers 
who are involved in some way with the fraudulent party. They get 
brought in to the lawsuits and have to spend millions of dollars 
defending themselves. And their lawyers tell them that there is a 
chance that ``you may be held liable for the full amount.'' Why? 
Because when the name of a primary wrongdoer like Keating comes up, you 
are ``guilty by association.''

  Any prudent lawyer would have to say that there is a chance you will 
be held liable if you were involved with a rogue--and there will be 
more rogues, make no mistake about it. I do not care what kind of 
legislation we pass here, there will be others who break the laws, who 
will do terrible things. It is not right that an accountant, law firm 
or securities broker is dragged in and linked to the fraud because they 
were asked to counsel and they gave some advice. They did not tell the 
wrongdoers to lie, they did not participate in fraud, but if they 
rendered some professional service, by virtue of their being linked 
with by that fraud they may be held liable by a jury. Do you think that 
a defendant is going to be able to establish clearly what is reckless 
conduct and what is not? The jury can find against them and then hold 
them for hundreds of millions of dollars in damages. That risk is why 
you have the incredible percentage of settlements.
  You heard Senator Dodd last evening explain how it was that a 
prominent firm, one of the big six accounting firms, did $15,000 worth 
of work, a contract to review something, and was then brought in to the 
suit. This accounting firm did defend itself and won the case, but in 
winning the case expended over $6 million. We cannot subject people to 
that kind of choice. I tell you when that accounting firm is hauled in 
the next time, it will settle. This amendment would allow a firm that 
was associated with the fraudulent firm to be fully liable for the 
damages. This would move us in the wrong direction, so I have to oppose 
this amendment.
  I yield the floor.
  The PRESIDING OFFICER. Who seeks recognition?
  Mr. BRYAN. Mr. President, may I inquire what the state of time is?
  The PRESIDING OFFICER. The Senator from Nevada has 2\1/2\ minutes. 
The Senator from New York has 2 minutes.
  Mr. BRYAN. Mr. President, let me, in 2\1/2\ minutes, tell my 
colleagues this amendment has nothing to do with frivolous lawsuits, 
absolutely nothing. This amendment simply indicates whether or not the 
Senate of the United States believes that those who counsel, who aid, 
who provide assistance to those who perpetrate investor fraud, ought to 
be held responsible. Under the current law, aiders and abettors are not 
liable. Among that group are the lawyers who have been the focus of 
much criticism during the course of the debate.
  Sidley & Austin, Jones Day. These are law firms. A vote against the 
Bryan amendment places the individual Senator and this Congress on 
record as saying this kind of conduct--misconduct in my view--ought to 
be tolerated, approved, and tacitly accepted. I cannot conceive of such 
a result.
  A decade ago the Congress of the United States enacted a piece of 
legislation, Garn-St Germain, that led, within a decade, to a savings 
and loan industry which cost the American taxpayers tens and tens of 
billions of dollars.
  It is my view that S. 240, in its present form, without the kinds of 
amendments the distinguished Senator from Maryland and I have tried to 
add, will cause investor losses of those magnitudes over the ensuing 
years, and essentially private causes of action will be destroyed.
  Mr. SARBANES. Will the Senator yield for a question?
  Mr. BRYAN. I will be pleased to yield to the Senator.
  Mr. SARBANES. Am I correct, under the legislation before us, there 
could be no liability whatever imposed in a private action for aiding 
and abetting?
  Mr. BRYAN. The Senator is correct, no liability.
  Mr. SARBANES. In the Keating case, a large part of the recovery of 
the victims came from aiders and abettors, did it not?
  Mr. BRYAN. If I might respond to the Senator, out of $262 million 
recovered in a private cause of action--because Mr. Keating himself was 
bankrupt--$121 million of the $262 million was recovered from aiders 
and abettors. Under the state of law currently, that $121 million is 
wiped out.
  Mr. SARBANES. What public policy reason could there possibly be for 
letting aiders and abettors go completely free? I understand there 
could be an argument about what standards to impose. But on what basis 
in public policy is it that aiders and abettors go free?
  The PRESIDING OFFICER. The time of the Senator from Nevada has 
expired.
  Mr. BRYAN. Might I inquire if the acting floor manager will yield me 
1 minute to respond to the question of the Senator from Maryland?
  Mr. SARBANES. Mr. President, I ask unanimous consent the Senator be 
allotted 1 additional minute.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  Mr. BRYAN. Mr. President, in responding to the question of the 
Senator from Maryland, I am at a total loss. It 

[[Page S 9112]]
is beyond my comprehension, whether one positions himself or herself in 
the political spectrum to the left of Fidel Castro or to the right of 
the Sheriff of Nottingham, under what theory you could say this kind of 
conduct ought to be encouraged and to simply say to these folks, by and 
large: Hey, as long as you are looking the other way and not signing 
any documents, you can, with total impunity under the private cause of 
action, counsel, aid, and provide tangible help to perpetrators of 
investor fraud. It is simply incomprehensible, I respond to my good 
friend.
  Mr. SARBANES. I thank the Senator.
  The PRESIDING OFFICER. Does the Senator from Colorado seek 
recognition? You have 2 minutes left. The Chair recognizes the Senator 
from Colorado.
  Mr. BROWN. Mr. President, the distinguished Senator from Nevada, I 
think, is a very thoughtful Member and brings persuasive arguments to 
the floor on this and other issues that he takes on. The concern I 
find, as I listen to this, is the potential of holding someone liable 
for another's actions when they had no idea that fraud, that action, 
was taking place. That is what this amendment does. This would hold 
someone, an accountant, someone else involved in this process who has 
no idea that a fraud is taking place, this would hold them liable even 
though they did not commit the fraud and they did not even know about 
the fraud.
  Making someone liable, taking millions of dollars away from them, 
putting them through this when they did not even know about the action 
seems to me to be outrageous.
  We yield the remainder of our time on this side.


                           Amendment No. 1475

  The PRESIDING OFFICER. Under the previous order, there will now be 30 
minutes debate on the Boxer amendment No. 1475, to be equally divided 
in the usual form.
  The Senator from Colorado.
  Mr. BROWN. Mr. President, if the Senator from California is willing, 
I would like to address an inquiry to her concerning her amendment.
  Mrs. BOXER. Certainly.
  Mr. BROWN. On the first page of the amendment, on page 98, following 
through line 100, you put in a subsection and insert the following 
subsection that reads:

       Not later than 90 days after the date on which a notice is 
     published under subparagraph (A) or (B) of paragraph (1), the 
     court shall determine whether all named plaintiffs acting on 
     behalf of the purported plaintiff's class who have moved the 
     court to be appointed to serve as lead plaintiff under 
     paragraph (1)(A)(ii) have unanimously selected a named 
     plaintiff or plaintiffs to serve as lead plaintiff or 
     plaintiffs of the purported plaintiff class . . . .
  I did not read all of that. My question relates to it, and I frankly 
find it a bit confusing. When we say ``all named plaintiffs acting on 
behalf of the purported plaintiff class,'' who is it we are describing?
  Mrs. BOXER. Everyone in the class. We took it right from your bill. I 
guess the bill the Senator is supporting; that you have to advertise 
that class actions are about to take place and every named plaintiff 
has a chance to vote on who the lead plaintiff shall be. We think this 
is very democratic. Unlike your bill, the richest investor will be the 
lead plaintiff.
  Mr. BROWN. If the Senator would, my question is I think very 
specific. When it says all named plaintiffs, who are those? Are those 
solely the ones who brought the suit?
  Mrs. BOXER. Every plaintiff of the class who responded to become part 
of the suit. There is a 90-day period where they go out and advertise.
  Mr. BROWN. It would be the people who brought the suit as well as 
people who decided to add their names?
  Mrs. BOXER. Everyone; all plaintiffs who are interested in being part 
of the suit gets to vote on who the lead plaintiff shall be.
  Mr. BROWN. If that is the case, why do we have language ``acting on 
behalf of the purported plaintiff class who have moved the court to be 
appointed to serve as lead plaintiff?'' What if one of the outside 
plaintiffs has not moved the court to serve to be plaintiff?
  Mrs. BOXER. I think the Senator is confusing a very simple 
straightforward point. We take the language straight out of S. 240. In 
90 days, there are newspaper advertisements of general circulation, and 
everyone who is part of the class is invited to join in the class. At 
that point in time, all the plaintiffs who are in the suit--and 
everyone is invited to be in--get to vote on who they want the lead 
plaintiff to be. If there is not a unanimous selection then the judge 
appoints.
  Mr. BROWN. My question was very specific. The question I have is 
this: If the intention is to have it include all plaintiffs, why do we 
modify this by saying ``who have moved the court to be appointed to 
serve as lead plaintiff''? What if one of the outside plaintiffs that 
joined the suit does not petition the court to serve as lead plaintiff? 
Does that mean that they have no voice under subparagraph (a) and they 
are not required to consent to the naming of lead plaintiff?
  Mrs. BOXER. My understanding of this amendment is clear. Everyone who 
has joined in the suit has an equal say. And if they cannot agree, then 
the court shall appoint. In S. 240 it is the richest investor. So the 
answer is all the plaintiffs get to choose.
  Mr. BROWN. Let me just say, at least for this Member, I was intrigued 
by the arguments of the Senator from California last night. As I read 
the bill, it appears to me that the language here seems to imply that 
someone who is not in the original filing, or more specifically had not 
moved the court to be appointed to serve as lead plaintiff, would not 
have a voice in that unanimous consent required under selection for 
subparagraph (a).
  Mrs. BOXER. No. I would address my friend to page 3 on the selection 
of lead counsel. The lead plaintiff or plaintiffs appointed under 
paragraph 2 shall be subject to the approval of the court selecting the 
named counsel. So everyone has a chance. All the plaintiffs have a 
chance to vote.
  Mr. BROWN. My suggestion would be if the Senator does not want to 
limit that plaintiff class, having the words ``who have moved the court 
to be appointed to serve as lead plaintiff,'' I think gives the 
impression that you have to have been in that group. But the Senator 
mentioned ``rich'' under the bill. I have looked in the bill. I do not 
find that term. Could she show me where in the bill this indicates that 
the richest one determines?
  Mrs. BOXER. Certainly I will. Unfortunately, at this point I would 
need a quorum call to find the exact place because I am working off my 
amendment. My friend did not tell me he was going to question me about 
the exact wording of the bill itself. So could we put a quorum call in 
place? I could find the section.
  Mr. BROWN. Mr. President, I suggest the absence of a quorum.
  Mr. SARBANES. If the Senator will withhold, the bill says ``in the 
determination of the court has the largest financial interest in the 
relief sought by the class'' on page 99 of the bill.
  The PRESIDING OFFICER. Who yields time?
  Mr. SARBANES. Will the Senator yield so I may respond to his 
question?
  Mr. BROWN. Surely.
  Mr. SARBANES. On page 99 of the bill, the language is ``in the 
determination of the court has the largest financial interest in the 
relief sought by the class.'' That is the language.
  Mr. BROWN. That was not the question. That is an unresponsive answer. 
The question was where in the bill is ``rich''? The Senator had made 
the point.
  Mr. SARBANES. ``The largest financial interest in the relief sought 
by the class.''
  Mr. BROWN. The Senator from Maryland is telling me ``rich'' is not in 
the bill, that they use terms with regard to the ``largest financial.''
  Mr. SARBANES. The richest person in the sense of having the ``largest 
financial interest in the relief sought by the class'' is the one you 
are putting forward.
  Mr. BROWN. Mr. President, let me simply note this.
  Mr. SARBANES. ``The largest financial interest.''
  Mr. BROWN. I believe it is my time.
  Mr. President, who has the time?
  The PRESIDING OFFICER. The Senator from Colorado has the floor.
  Mr. BROWN. Mr. President, we all make mistakes in debate on the 
floor. I certainly am included. The point I wanted to make was that the 
terms used by the Senator from Maryland 

[[Page S 9113]]
and the Senator from California are in fact not in the bill. The 
recitation and description of what was in the bill is not in the bill. 
What was said was inaccurate. Mr. President, I think there is an 
important point here.
  Let us assume you have two lawyers from New York who bring a class 
action against Wells Fargo. Each one of them is worth $10 million each. 
The public employees pension fund is also a shareholder of Wells Fargo. 
The manager of that public employees association has total assets about 
one-tenth of what the lawyers from New York have. Who is rich? Who is 
the richest? Are the people worth $10 million, the lawyers in New York, 
who are professional plaintiffs, the poor ones in this? The answer is 
obvious. The professional plaintiffs who are worth $10 million each are 
a lot richer than the person who happens to work for a living and 
manage the assets of the California employees' pension fund. But the 
California employees' pension fund has a great deal larger financial 
interest.
  Mr. President, I simply want to assure the Senator from California, 
for whom I have great respect, that if she is concerned about improving 
on who we select to be the lead plaintiff, I will join her. But setting 
up a provision where professional litigants get to name the lead 
plaintiff and close other people out I think is a problem. The way I 
read this measure is it says that the people who bring the suit agree, 
and they may only have one share each. They may be in this only for the 
purposes of getting a lawsuit and naming the plaintiff and getting to 
name the lawyer. But if the people who are professional litigants agree 
and bring the suit, they can name the lead plaintiff. They can control 
the lawsuit. They can name the lawyer and they can benefit indirectly 
from the attorney's fees. That is what this is all about.
  The Senator has indicated that it is not her intention to exclude 
those who did not specifically move the court to be appointed as lead 
plaintiff. It is not her intention to exclude plaintiffs. It may not 
have done that. But that is the wording of the amendment. If that is 
not the intention, the language ought to be corrected.
  Mr. President, more important than anything else, if her purpose is 
to get the best lead plaintiff possible, I would suggest that we ought 
to focus on that question, and that we should not carve out an 
exception for those who are professional litigants who may have brought 
the suit.
  I reserve the remainder of my time.
  Mrs. BOXER addressed the Chair.
  The PRESIDING OFFICER. The Chair recognizes the Senator from 
California.
  Mrs. BOXER. I have heard a lot of distortions on this floor, but this 
one takes the cake. I say to my friends on the other side, if you ask 
the public who they stand and represent, most people would say it is 
those in the upper income brackets. And this argument proves the point 
better than I ever could.
  That is correct, I said the ``richest'' investor, and my friend takes 
great umbrage with that. Let us just say largest investor. That is what 
you say in the bill. Let us stick with that. Because let me tell you, 
if S. 240 had been the law of the land during the Keating case, you 
know who the largest investor was? A company that turned out to be 
guilty in that case, a codefendant in that case. So just because 
somebody has the largest investment should not make them automatically 
the lead plaintiff.
  Now, my friend can ignore it all he wants, all he wants, but that is 
exactly what S. 240 does. And I think it is elitist, I think it is 
antidemocratic, and I say to my friend that just because you may be 
wealthier, richer, if you will--and I am not going to change my 
language--have a bigger investment than everyone else does not make you 
better than anyone else. And if America stands for anything, it stands 
for that premise.
  Now, I want my friend to know--and he cares a lot about process--that 
this provision he defends here today--and I ask my friend, was my 
friend involved in the writing of this bill? I ask my friend from 
Colorado, did he participate in the markup on this bill?
  Mr. BROWN. I am not a member of the committee.
  Mrs. BOXER. I think that is a point. He stands up here, and he argues 
about something he never marked up. The fact is we held a lot of 
hearings on this, and no one ever brought this issue forward about 
selecting the lead plaintiff. It was brought 4 days before the markup, 
with not one hearing. The SEC has concerns about it. The SEC is very 
concerned about it. They do not know how it would work. They think it 
is going to lead to more litigation, because what if what the Senator 
from California says is accurate, that in many cases you are going to 
have the lead plaintiff be someone who is eventually named as a 
coconspirator, a codefendant? Imagine the kind of lawsuits that would 
bring about.
  Look, I do not care who is appointed attorney. I could care less. 
There is going to be an attorney for the class. The question is, should 
it be automatically the prerogative of the largest investor to 
determine the course of the case?
  Now, in the Boxer amendment, we say, if the plaintiffs cannot agree 
unanimously--and any plaintiff can be part of that discussion--then the 
judge gets to select the lead plaintiff based on a number of criteria.
  I am very proud that Senator Bingaman and many others are supporting 
me in this amendment. We can twist and turn and chastise people for 
using plain English on this floor, and maybe my friend just wants to 
talk about the exact language in the bill. I never thought we did that 
around here. I thought we tried to get it down to where people can 
understand. My friend wants me to say the ``largest'' investor? I say 
the ``richest'' investor, and he takes me on as if I have committed 
some kind of a sin. I stand by it. I think we need the Boxer amendment. 
I think we need to send a message from this Chamber that just because 
you are the largest investor does not give you the right to take over 
from everybody else, because let me tell you sometimes the largest 
investor does not really stand that much to lose because maybe he has a 
very large dollar investment but in accordance with his net worth it is 
not much, and someone who has invested $5,000 or $10,000 or $20,000 has 
much more to lose.
  I brought to my colleagues' attention yesterday a woman from 
California who was bilked of $20,000 by Charles Keating. That may not 
sound like a lot to my Republican friend on the other side, who 
chastised me for using the word ``rich,'' but I can tell you that 
$20,000 was the difference for this woman in being able to sleep at 
night and pay her bills and have a sense of security.
  Mr. President, at this time I reserve the remainder of my time and 
ask, if there is a quorum call, it be divided from each side equally.
  The PRESIDING OFFICER. Who yields time?
  Mr. BROWN addressed the Chair.
  The PRESIDING OFFICER (Mr. Campbell). The Senator from Colorado.
  Mr. BROWN. Mr. President, I feel bad that the Senator from California 
has responded the way she has. At least my experience in this Chamber 
and the legislative process is that when you read the language and 
there is a problem with the language and you offer to work on that, 
Senators are grateful. All of us have an interest in good legislation.
  As I read this amendment--and I have quoted the exact language--it 
says, ``acting on behalf of the purported plaintiff class who have 
moved the court to be appointed as lead plaintiff.''
  As I read that--and I certainly could be wrong; I do not mean to hold 
myself out as the authority--I think it suggests in very plain English 
you have to move the court to be appointed as lead plaintiff to come 
under that category. That means some people could be plaintiffs that 
would be excluded. That is a drafting problem. It may not be a drafting 
problem, but it certainly ought to be clarified, and it ought to be 
clarified for the benefit of the Senator from California.
  Now, the Senator from California has talked about democracy in this 
process. Mr. President, what we are involved with here today, if this 
amendment passes, is stuffing the ballot box. And let me be specific. 
You can have one share of stock and bring the class action, and the 
California public employees trust fund that may have a 

[[Page S 9114]]
million shares of stock and represent 100,000 people may be excluded 
from the process of selecting the lead plaintiff.
  Now, that is not right, and that is not democracy. Should the 
California public employees trust fund, a retirement fund, that owns a 
million times as many shares as a professional plaintiff, have more 
voice? I think they should. If they own a million times as many shares, 
they surely should have a larger voice in the selection of this.
  This amendment stuffs the ballot box. It says the people who brought 
the suit and who have moved the court to be appointed to serve as lead 
plaintiff end up, under the first option, being able to dictate who the 
lead plaintiff is and end up being able to dictate who the lawyer is 
who gets the fees and ends up being able to help guide the case.
  Now, that is wrong. To have a person with one share or five shares 
control an action where the California public employees trust fund may 
have a million shares is wrong.
  Let me reiterate. If there is interest in adding fairness to this 
process, we ought to do it. One thing I might mention, because I think 
what was mentioned on this floor was that the person who has the 
largest financial interest may well have a conflict of interest, the 
bill deals with that on page 100.

       1. Will not fairly and adequately protect the interests of 
     the class.

  Now, that is one of the grounds in which you can exclude someone, 
even though they may have the largest financial interest.

       2. Is subject to unique defenses that render such plaintiff 
     incapable of adequately representing the class.

  Both of those, Mr. President, would apply as we have talked.
  The PRESIDING OFFICER. The Senator's time has expired.
  The Senator from California has 7 minutes 52 seconds remaining.
  Mr. SARBANES. Will the Senator yield me just 1 minute?
  Mrs. BOXER. Certainly.
  The PRESIDING OFFICER. The Senator from Maryland is recognized for 1 
minute.
  Mr. SARBANES. Mr. President, I wish to say to the Senator from 
Colorado that my perception of the dispute that arose as between him 
and the Senator from California was his taking issue with her reference 
to the ``richest'' plaintiff being named as the lead plaintiff under 
the bill.
  The Senator says, well, the word ``richest'' is not in the bill. That 
is correct. But what is in the bill is that the lead plaintiff shall be 
the one who has the largest financial interest, and in that sense I 
think it is fair to say that is the richest of the plaintiffs, the 
largest financial interest.
  Now, second, the Senator says, well, we have covered the problem of a 
conflict of interest in the bill. That is a rebuttable presumption and, 
as someone said last night, it is really written to be almost 
irrebuttable.
  The SEC, which examined this provision of the legislation, having 
looked at it and having looked at the very provision the Senator is 
making reference to, said that:

       It may create additional litigation concerning the 
     qualifications of the lead plaintiff, particularly when the 
     class member with the greatest financial interest in the 
     litigation has ties to management or interests that may be 
     different from other class members.

  So clearly there is a problem here. And the way the bill is written 
it may place the lead plaintiff position in the hands of people about 
whom the SEC has raised large and significant questions.
  I thank the Senator for yielding.
  Mrs. BOXER. I thank my friend.
  Mr. BROWN. May I respond?
  Mrs. BOXER. Mr. President, how much time do I have?
  The PRESIDING OFFICER. Five minutes fifty seconds.
  Mrs. BOXER. How much time does the Senator from Colorado have 
remaining?
  The PRESIDING OFFICER. The Senator from Colorado has none.
  Mrs. BOXER. I will be glad to yield if I have time at the end, but we 
are getting down to the last 5 minutes of this discussion.
  Mr. SARBANES. Mr. President, I ask unanimous consent that the Senator 
from Colorado have 1 minute--I had 1 minute--to make a point in 
response, so the Senator from California can preserve her time in order 
to make her closing statement.
  The PRESIDING OFFICER. Without objection, it is so ordered. The 
Senator from Colorado has an additional 1 minute.
  Mr. BROWN. Mr. President, I want to thank the Senator from Maryland 
for his kindness. I simply want to join the Senator from Maryland to 
indicate that I think he has a valid point. If someone has a conflict 
of interest, obviously that ought to be addressed.
  I believe the plain language of the bill on page 100 covers that: 
``will not fairly and adequately protect the interest of the class.'' I 
think that covers it. But if there is better language or more language, 
I want to assure him I will support it, and I will be glad to join him 
in that effort.
  But, Mr. President, the point remains, we are not dealing with 
disqualifications on that basis. What we are dealing with is a whole 
new way to stack the deck, where someone with very few shares who 
brings the suit can control the action and pick the attorney, and 
someone who has a lot more shares and yet not be as rich, as has been 
used on this floor, will be closed out of the process. Stacking the 
deck is the problem with this amendment. If we eliminate that portion 
of it, I think we would have something that all parties could work 
together on.
  I yield back any remaining time.
  The PRESIDING OFFICER. The Senator's time has expired. Who yields 
time?
  Mrs. BOXER. Mr. President, I want to ask my friend from Colorado a 
question. My friend from Colorado made two attacks on this Senator's 
amendment, certainly not on the Senator, so I do not take it personally 
at all. The two attacks were, one, that the Senator from California 
said the richest investor and he took umbrage and said, ``Well, wait a 
minute, the word 'richest' is not in the bill.'' OK, that is right, the 
largest investor--I say the richest investor. I stand by that, with all 
due respect.
  Second, the Senator says that only a certain number of the plaintiffs 
can, in fact, vote on who the plaintiff should be. The fact is if the 
Boxer amendment becomes law, every single potential plaintiff in the 
country, member of the class action, has an opportunity to be part of 
the selection. This is not some secret thing of stuffing the ballot 
box. Any plaintiff who joins the class, petitions the court, votes.
  Now, if the Senator believes that the largest investor would not get 
involved in that, I do not know what the Senator thinks. But the fact 
is I do not care who the attorney is who gets to represent either side. 
It does not make a whit's worth of difference to me. What I care is 
that the lead plaintiff be selected in a way that is fair.
  The fact of the matter is that the Banking Committee never held a 
hearing on this and it shows up in the bill 4 days before the markup. 
It is wrong to legislate this way. I believe it is elitist.
  I pointed out to this Chamber last night that if S. 240 had been law 
during the Keating case and the richest investor, or as my friend would 
prefer, the largest investor had been named lead plaintiff, it would 
have been someone who was guilty along with Keating, someone who 
actually wound up paying to make those----
  Mr. DODD. Will my colleague yield?
  Mrs. BOXER. I will not yield at this time. I have very little time. I 
ask my friend from New Mexico if he wishes to have a couple of minutes 
in this debate. I will reserve that for him.
  Mr. BINGAMAN. Mr. President, I will respond that I would like a 
couple minutes to support the amendment by the Senator from California.
  Mrs. BOXER. I say to my friend, how much time do I have?
  The PRESIDING OFFICER. The Senator has 3 minutes.
  Mrs. BOXER. I yield 2 minutes to my friend, and then I will conclude.
  The PRESIDING OFFICER. The Senator from New Mexico.
  Mr. BINGAMAN. Let me briefly say I support the effort of the Senator 
from California to amend the bill in this regard. This provision, this 
most adequate plaintiff idea, as I understand, was proposed as part of 
a substitute in committee. There was no hearing held on it. I believe 
that is the case.
  Mr. SARBANES. If I could say, the Senator is correct, there have been 
no 

[[Page S 9115]]
hearings on this issue. It was not considered at any point until it 
appeared in the draft.
  Mr. BINGAMAN. Mr. President, I think one of the hallmarks of our 
legal system has always been that a person's right to go to court or a 
person's right to have his or her case presented in court should not be 
strictly tied to the person's financial condition. We should not means 
test justice, as the saying goes.
  I think where you get a provision like this where there is a 
presumption that the plaintiff who has the most invested is the most 
adequate plaintiff and, therefore, should control the litigation, that 
comes very close to means testing justice. It causes me great concern 
that we would have this kind of a provision.
  Clearly, there have been groundless lawsuits brought, and that is the 
purpose. The purpose of this legislation is to deal with that. I 
understand that. I support this legislation. I am a cosponsor of this 
legislation, but when I cosponsored it, there was no provision in it 
for most adequate plaintiff.
  Now there is a presumption that those who have the most invested 
should control the litigation. I do not know that that is always true. 
I do not know that that should always be the case. Therefore, I do have 
problems with the bill as it now stands.
  The PRESIDING OFFICER. The Senator's 2 minutes have expired.
  Mrs. BOXER. I yield the Senator another 25 seconds.
  Mr. BINGAMAN. I will just say, the Senator from California has made a 
very good-faith effort to correct this. I support her efforts. I hope 
the Senate will adopt her amendment.
  The PRESIDING OFFICER. The Senator has 43 seconds remaining.
  Mrs. BOXER. Mr. President, I gave an example of if S. 240 was the law 
and who would be the lead plaintiff in the Keating case. Let me give 
another example.
  The Wall Street Journal reported last night that a Wall Street 
investment bank filed a class action suit against Avon Products for 
securities fraud. That Wall Street bank was supposed to represent the 
interest of small investors, but the Journal reported that that Wall 
Street bank tried to get Avon to settle the case by giving them $50 
million to invest. That is the way they thought they would act in the 
best interest of the class.
  Now I say to my friends, this is absurd. There is no way that small 
investors would have benefited from that type of a settlement, and this 
bill would prevent those small investors from discovering the secret 
deal because they would have to know about it before they could use 
subpoenas.
  I hope my colleagues will support the Boxer-Bingaman amendment.
  Mr. BENNETT. Section 102 of the legislation would require courts to 
consider a motion by a purported class member to become a lead 
plaintiff and would require courts to appoint as lead plaintiff the 
class member ``most capable of adequately representing the interests of 
the class member.'' The bill sets up a rebuttable presumption that the 
most adequate plaintiff is the person who has made such a motion, who 
has the largest financial interest in the relief sought by the class, 
and who satisfies the requirements of rule 23 of the Federal Rules of 
Civil Procedure. This presumption may be rebutted if a member of the 
class proves that the presumptively most adequate plaintiff will not 
fairly and adequately protect the interests of the class or is subject 
to unique defenses.
  What is the purpose of this provision?
  Mr. DODD. This provision has two essential purposes. First, it will 
improve class member choice, by giving class members an opportunity to 
request service as lead plaintiff. Second, it will enhance a court's 
ability to appoint as lead plaintiff any class member who has requested 
service and who otherwise meets the conditions of the provision.
  Mr. BENNETT. Would this provision require courts to name any 
institutional investor as lead plaintiff?
  Mr. DODD. No. Under the bill, a court may only appoint a plaintiff 
who has asked, in a motion to the court, to serve as lead plaintiff. 
Moreover, the institutional investor who asks to serve must satisfy the 
conditions of rule 23, which authorizes the court to determine whether 
such a party should serve as representative plaintiff in order to 
facilitate management of the case. The court also has to determine that 
the party who asks to serve has the largest financial interest in the 
relief sought. Finally, the presumption as to most adequate lead 
plaintiff could be rebutted under the bill.
  Mr. BENNETT. Would the bill require any institutional investor to 
request that its be appointed as lead plaintiff?
  Mr. DODD. No. The bill merely gives each class member the opportunity 
to request service. In no way does it obligate any member to do so. 
Institutional and other investors would continue to have the right 
simply to remain class members and not serve as lead plaintiff, and 
they may select that approach independent of any responsibility to the 
other class members or to anyone else.
  Mr. BENNETT. Does this bill impose any new fiduciary duty on an 
institutional investor to its shareholders or beneficiaries, or to 
other class members, to request service as lead plaintiffs?
  Mr. DODD. No. The bill imposes no fiduciary or other obligation on 
institutions or other plaintiffs to serve or not to serve as lead 
plaintiffs. Moreover, the court would have no authority to impose such 
an obligation. For example, rule 23 authorizes the court to make 
certain determinations about who should serve as representative 
plaintiff. These determinations concern management of the case, and 
they do not authorize the court to require a plaintiff to serve as 
representative due to any perceived responsibility to the other class 
members or to anyone else.
  The PRESIDING OFFICER. All time has expired.


                           Amendment No. 1474

  The PRESIDING OFFICER. Under the previous order, the question now is 
on agreeing to amendment No. 1474, offered by the Senator from Nevada 
[Mr. Bryan]. The yeas and nays have been ordered.
  Mr. SARBANES addressed the Chair.
  The PRESIDING OFFICER. The yeas and nays have not been ordered. The 
Senator from Maryland.
  Mr. SARBANES. Mr. President, I believe under the procedure we are 
following, the Senator has 1 minute to set out his amendment; is that 
correct?
  The PRESIDING OFFICER. That is 2 minutes for debate prior to the 
second vote.
  Mr. D'AMATO. I ask unanimous consent that there be 1 minute equally 
divided for Senator Bryan.
  The PRESIDING OFFICER. Is there objection? Without objection, it is 
so ordered.
  Mr. D'AMATO. I do not believe the yeas and nays have been ordered.
  The PRESIDING OFFICER. The Senator is correct.
  Mr. D'AMATO. I request 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. As relates to the Boxer amendment, have the yeas and 
nays have been ordered?
  The PRESIDING OFFICER. The yeas and nays have not been ordered.
  Mr. D'AMATO. I request the yeas and nays.
  The PRESIDING OFFICER. Is there a sufficient second?
  There is a sufficient second.
  The yeas and nays were ordered.
  The PRESIDING OFFICER. The Senator from Nevada is recognized.
  Mr. BRYAN. Mr. President, I want to make this very clear. I have said 
it ad nauseam. The Bryan amendment has nothing to do with frivolous 
lawsuits. The question is whether or not the Senate wants to go on 
record as tolerating, allowing, and permitting the conduct of aiders 
and abettors, whether intentional, knowingly, or reckless, to go 
unpunished. That is the state of the law.
  This amendment would say that lawyers, accountants, bankers, and 
others that aid and abet securities fraud will be held liable. That was 
the law until the Central Bank case was decided, and the Supreme Court 
in deciding that case made it clear that they were not saying that 
aiders and abettors ought not to be liable. They just very narrowly 
interpreted the statute. We have hit the plaintiffs' lawyers for their 
frivolous actions, but how can we ignore the conduct of lawyers who 
counsel 

[[Page S 9116]]
those perpetrating securities fraud? If we fail to adopt the Bryan 
amendment, we are simply saying to that group of lawyers that you can 
continue and be free to continue your activities, and that may cost 
literally hundreds of millions of dollars to innocent investors.
  Mr. D'AMATO. Mr. President, I yield 1 minute to Senator Dodd.
  Mr. DODD. Mr. President, very briefly, what the Senator from Nevada 
is doing here is raising a whole new standard that was never 
universally the case prior to the Central Bank of Denver. Here, in the 
amendment, the standard is knowing and reckless--knowing or reckless. 
And to include recklessness here, a standard that is so vague the 
courts have had great difficulty defining it, would be to open up a 
whole new area of law and allow proportionate liability to be gutted as 
a result of this amendment. What we have done with this bill is, of 
course, allowed the SEC to bring a Government action in the aiding and 
abetting.
  Where you do have fraudulent intent, joint and several applies. 
Proportionate liability does not. In that case, where you have even the 
casual conduct of an aider and abettor, they would be trapped. We try 
to avoid when you do not have that standard being met, just a small 
mistake, which can be the case of a lawyer or accountant, In the 
process, should not be held fully accountable for the entire cost. So 
the adoption of this amendment would destroy that very effort which is 
central to this bill. So, for those reasons, because recklessness is 
used here--were this to be an actual knowledge--words of art in 
describing that--I might have some different views on this amendment. 
But the fact of it is, using the recklessness standard, I think, takes 
this far beyond where we even were before--before the Supreme Court 
ruled in the Central Bank of Denver case, where certain courts in this 
land held it to a much higher standard than recklessness.
  So for that reason, I reluctantly urge my colleagues to reject this 
amendment.
  Mr. D'AMATO. May I inquire? I did not know if the Senator from 
California wanted to use her 1 minute now.
  Mrs. BOXER. In between the votes, I believe, is what the unanimous-
consent says. I would prefer it before the next vote, before the vote 
on the Boxer amendment, which is what it said in the unanimous-consent 
request.
  Mr. D'AMATO. Fine.
  The PRESIDING OFFICER. The question is on agreeing to amendment No. 
1474 offered by Mr. Bryan.
  The clerk will call the roll.
  The legislative clerk called the roll.
  Mr. BOND (when his name was called). Present.
  The PRESIDING OFFICER. Are there any other Senators in the Chamber 
desiring to vote?
  The result was announced--yeas 39, nays 60, as follows:
                      [Rollcall Vote No. 286 Leg.]

                                YEAS--39

     Akaka
     Baucus
     Biden
     Boxer
     Bradley
     Breaux
     Bryan
     Bumpers
     Byrd
     Cohen
     Conrad
     Daschle
     Dorgan
     Feingold
     Feinstein
     Ford
     Glenn
     Graham
     Harkin
     Heflin
     Hollings
     Inouye
     Jeffords
     Kennedy
     Kerrey
     Kerry
     Kohl
     Lautenberg
     Leahy
     Levin
     McCain
     Moynihan
     Pryor
     Robb
     Rockefeller
     Sarbanes
     Shelby
     Simon
     Wellstone

                                NAYS--60

     Abraham
     Ashcroft
     Bennett
     Bingaman
     Brown
     Burns
     Campbell
     Chafee
     Coats
     Cochran
     Coverdell
     Craig
     D'Amato
     DeWine
     Dodd
     Dole
     Domenici
     Exon
     Faircloth
     Frist
     Gorton
     Gramm
     Grams
     Grassley
     Gregg
     Hatch
     Hatfield
     Helms
     Hutchison
     Inhofe
     Johnston
     Kassebaum
     Kempthorne
     Kyl
     Lieberman
     Lott
     Lugar
     Mack
     McConnell
     Mikulski
     Moseley-Braun
     Murkowski
     Murray
     Nickles
     Nunn
     Packwood
     Pell
     Pressler
     Reid
     Roth
     Santorum
     Simpson
     Smith
     Snowe
     Specter
     Stevens
     Thomas
     Thompson
     Thurmond
     Warner

                        ANSWERED ``PRESENT''--1

       
     Bond
       
  So the amendment (No. 1474) was rejected.
  Mr. D'AMATO. Mr. President, I move to reconsider the vote.
  Mr. DOMENICI. I move to lay that motion on the table.
  The motion to lay on the table was agreed to.


                           Amendment No. 1475

  The PRESIDING OFFICER. Under the previous order there will now be 2 
minutes equally divided for debate prior to the second vote, which will 
be on the Boxer amendment No. 1475. The Senator will withhold until we 
have order. The Senate will be in order.
  The Senator from California [Mrs. Boxer] has 1 minute.
  Mr. FORD. Mr. President, the Senate is still not in order. She 
deserves to be heard.
  The PRESIDING OFFICER. The Senate will be in order. The Senator from 
California.
  Mrs. BOXER. Mr. President, very briefly, if S. 240 as currently 
written had been the law then, the lead plaintiff in the Keating case 
would have been one of the guilty parties in the Keating case. That is 
because S. 240 says the judge must choose the largest investor as the 
lead plaintiff and the largest investor in the Keating case turned out 
to be a party to the fraud.
  Let us not allow this outrage. This ``largest investor'' language was 
added, without public hearings, 4 days before markup. The SEC has 
problems with it.
  The Boxer-Bingaman amendment says the following, that after 
advertising for 90 days, all the plaintiffs----
  The PRESIDING OFFICER. The Senator will withhold until we have order. 
The Senate will be in order.
  The Senator from California.
  Mrs. BOXER. The Boxer-Bingaman amendment says that after advertising 
for 90 days, all the plaintiffs get to select the lead plaintiff. If 
they cannot agree unanimously, then the judge will choose the lead 
plaintiff, taking into consideration all factors, including conflicts 
of interest, who the largest investor is, et cetera. Just because 
someone is rich should not automatically make them the lead plaintiffs. 
Support Boxer-Bingaman.
  The PRESIDING OFFICER. The Senator from New York [Mr. D'Amato] is 
recognized for 1 minute.
  Mr. D'AMATO. Mr. President, our bill stops the kind of outrageous 
conduct where the same handful of plaintiffs bring multiple complaints. 
Mr. Cooperman has been a plaintiff 14 times and has always chosen the 
same law firm.
  Mr. Shore, 10 times, a professional plaintiff.
  Mr. Shields, seven times.
  Mr. Steinberg, seven times.
  William Steiner, six times. They become the lead plaintiffs, they 
pick the attorneys. Our legislation would prohibit that.
  This legislation would give due deference to lead the case to someone 
who has a real financial stake, not a phony professional plaintiff. 
This amendment would keep alive that race to the courthouse. That is 
why I urge a ``no'' vote.
  The PRESIDING OFFICER. Does the Senator yield the remainder of his 
time?
  Mr. D'AMATO. Yes.
  The PRESIDING OFFICER. The question occurs on the amendment of the 
Senator from California. The yeas and nays have been ordered.
  The clerk will call the roll.
  The bill clerk called the roll.
  Mr. BOND (when his name was called). Present.
  The PRESIDING OFFICER (Mr. Thomas). Are there any other Senators in 
the Chamber who desire to vote?
  The result was announced--yeas 41, nays 58, as follows:
                      [Rollcall Vote No. 287 Leg.]

                                YEAS--41

     Akaka
     Baucus
     Biden
     Bingaman
     Boxer
     Bradley
     Breaux
     Bryan
     Bumpers
     Byrd
     Conrad
     Daschle
     Dorgan
     Feingold
     Ford
     Glenn
     Graham
     Harkin
     Heflin
     Hollings
     Inouye
     Jeffords
     Kennedy
     Kerrey
     Kerry
     Kohl
     Lautenberg
     Leahy
     Levin
     McCain
     Moynihan
     Pell
     Pryor
     Robb
     Rockefeller
     Roth
     Sarbanes
     Shelby
     Simon
     Specter
     Wellstone

                                NAYS--58

     Abraham
     Ashcroft
     Bennett
     Brown
     Burns
     Campbell
     Chafee
     Coats
     Cochran
     Cohen
     Coverdell
     Craig
     D'Amato
     DeWine
     Dodd
     Dole
     Domenici
     Exon
     Faircloth
     Feinstein
     Frist
     Gorton
     Gramm
     Grams
     Grassley
     Gregg
     Hatch
     Hatfield
     Helms
     Hutchison 

[[Page S 9117]]

     Inhofe
     Johnston
     Kassebaum
     Kempthorne
     Kyl
     Lieberman
     Lott
     Lugar
     Mack
     McConnell
     Mikulski
     Moseley-Braun
     Murkowski
     Murray
     Nickles
     Nunn
     Packwood
     Pressler
     Reid
     Santorum
     Simpson
     Smith
     Snowe
     Stevens
     Thomas
     Thompson
     Thurmond
     Warner

                        ANSWERED ``PRESENT''--1

       
     Bond
       
  So the amendment (No. 1475) was rejected.
  Mr. D'AMATO. Mr. President, I move to reconsider the vote.
  Mr. SARBANES. I move to lay that motion on the table.
  The motion to lay on the table was agreed to.


                           Amendment No. 1476

  Mr. D'AMATO. Mr. President, I believe under the consent order my 
friend and colleague from Maryland, Senator Sarbanes, is to be 
recognized for the purpose of offering an amendment. I have asked him 
to give me the opportunity--and if it looks like I am looking around, I 
am, because staff was supposed to prepare an amendment dealing with the 
issue of safe harbor. And in that provision we call for knowingly, 
intent, and expectation.
  If I could have a copy of the bill itself, at page 121 of the bill it 
says, ``knowingly made.'' These are statements that are knowingly made 
with the expectation, purpose and actual intent of misleading 
investors.
  There is a very real question as to what do we mean by 
``expectation,'' and do we go too far? I do not believe it is a word 
that is necessary. I think it is gilding the lily, and for that purpose 
I would submit an amendment, the purpose of which is to delete the word 
``expectation,'' so that it would then read: ``knowingly made with the 
purpose and actual intent of misleading investors.''
  I ask unanimous consent that I might be able to submit this amendment 
and have it considered at this time.
  The PRESIDING OFFICER. Is there objection? Without objection, it is 
so ordered.
  The clerk will report the amendment.
  The bill clerk read as follows:

       The Senator from New York [Mr. D'Amato] proposes an 
     amendment numbered 1476:
       On page 121, line 1, delete the word ``expectation,''.

  Mr. D'AMATO. Mr. President, I have no illusions. I recognize that 
this amendment does not answer all those questions or go as far as some 
might like. But I certainly think it clears up something that would 
raise a question and is a move in the right direction, and I urge its 
adoption.
  Mr. SARBANES. Mr. President, I welcome the amendment from the Senator 
from New York. We spoke earlier about introducing it at this point 
ahead of the general debate on safe harbor. I am quite amenable to that 
because I want to get a substantive result. This provision was going to 
be a part of the debate had this not happened, I think as the Senator 
from New York well recognizes, but we are willing to forego the debate 
points in order to try to clean something out of the bill. There is 
still plenty wrong with it, and I am going to address that when we have 
the general debate on safe harbor. But I support this modification that 
is being made in the bill, and I hope the Senate will accept the 
amendment.
  The PRESIDING OFFICER. The question is on agreeing to the amendment.
  Mr. D'AMATO. I am advised--and I mention this to my colleague and 
friend--that there is another area of the bill that we will have to 
modify because it is referred to a second time. But rather than do that 
at this point in time, I suggest that we go forward, and then later on 
I will make that modification.
  Mr. SARBANES. Why not go ahead?
  Mr. D'AMATO. On page 114, line 7, we delete the word ``expectation'' 
as well. This was not done in the first. I ask that the amendment be 
modified.
  The PRESIDING OFFICER. The amendment is so modified.
  The amendment, as modified, is as follows:

       On page 121, line 1, delete the word ``expectation,''.
       On page 114, line 7, delete the word ``expectation,''.

  The PRESIDING OFFICER. The question is on agreeing to the amendment.
  So the amendment (No. 1476), as modified, was agreed to.
  Mr. D'AMATO. Mr. President, I move to reconsider the vote.
  Mr. SARBANES. I move to lay that motion on the table.
  The motion to lay on the table was agreed to.
  Mr. SARBANES. Mr. President, I think under the order I am to be 
recognized at this point?
  The PRESIDING OFFICER. The Senator is correct.


                           Amendment No. 1477

       (Purpose: To amend the safe harbor provisions of the bill)

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

       The Senator from Maryland [Mr. Sarbanes], for himself and 
     Mr. Lautenberg, proposes an amendment numbered 1477.

  Mr. SARBANES. 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:

       Beginning on page 112, strike line 1 and all that follows 
     through page 126, line 14, and insert the following:

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

       (a) Consideration of Regulatory or Legislative Changes.--In 
     consultation with investors and issuers of securities, the 
     Securities and Exchange Commission shall consider adopting or 
     amending rules and regulations of the Commission, or making 
     legislative recommendations, concerning--
       (1) criteria that the Commission finds appropriate for the 
     protection of investors by which forward-looking statements 
     concerning the future economic performance of an issuer of 
     securities registered under section 12 of the Securities 
     Exchange Act of 1934 will be deemed not be in violation of 
     section 10(b) of that Act; and
       (2) procedures by which courts shall timely dismiss claims 
     against such issuers of securities based on such forward-
     looking statements if such statements are in accordance with 
     any criteria under paragraph (1).
       (b) Commission Considerations.--In developing rules or 
     legislative recommendations in accordance with subsection 
     (a), the Commission shall consider--
       (1) appropriate limits to liability for forward-looking 
     statements;
       (2) procedures for making a summary determination of the 
     applicability of any Commission rule for forward-looking 
     statements early in a judicial proceeding to limit protracted 
     litigation and expansive discovery;
       (3) incorporating and reflecting the scienter requirements 
     applicable to implied private actions under section 10(b); 
     and
       (4) providing clear guidance to issuers of securities and 
     the judiciary.
       (c) Securities Exchange Act of 1934.--Title I of the 
     Securities Exchange Act of 1934 (15 U.S.C. 73a et seq.) is 
     amended by inserting after section 13 the following new 
     section:

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

       ``(a) In General.--In any implied private action arising 
     under this title that alleges that a forward-looking 
     statement concerning the future economic performance of an 
     issuer registered under section 12 was materially false or 
     misleading, if a party making a motion in accordance with 
     subsection (b) requests a stay of discovery concerning the 
     claims or defenses of that party, the court shall grant such 
     a stay until the court has ruled on the motion.
       ``(b) Summary Judgment Motions.--Subsection (a) shall apply 
     to any motion for summary judgment made by a defendant 
     asserting that a forward-looking statement was within the 
     coverage of any rule which the Commission may have adopted 
     concerning such predictive statements, if such motion is made 
     not less than 60 days after the plaintiff commences discovery 
     in the action.
       ``(c) Dilatory Conduct; Duplicative Discovery.--
     Notwithstanding subsection (a) or (b), the time permitted for 
     a plaintiff to conduct discovery under subsection (b) may be 
     extended, or a stay of the proceedings may be denied, if the 
     court finds that--
       ``(1) the defendant making a motion described in subsection 
     (b) engaged in dilatory or obstructive conduct in taking or 
     opposing any discovery; or
       ``(2) a stay of discovery pending a ruling on a motion 
     under subsection (b) would be substantially unfair to the 
     plaintiff or to any other party to the action.''.

  Mr. SARBANES. Mr. President and Members of the Senate, this is the 
issue of safe harbor. I know many Members have heard about this issue. 
In my judgment, it is an extremely important issue which we now seek to 
develop. We have actually addressed five major issues in this bill: 
Joint and several liability, statute of limitations, aiding and 
abetting, and safe harbor, and the lead plaintiff amendment that was 
offered by my distinguished colleague from California. 

[[Page S 9118]]

  Now, Mr. President, this is an extremely important amendment. It is a 
very complex issue and some very able people have worked very hard to 
understand it and try to address it. I hope to develop it here over a 
reasonably short period.
  This amendment that I have sent to the desk, this particular 
amendment, does not try to define in the statute the standard for safe 
harbor. That may come later. What this amendment seeks to do is simply 
to put into this bill the provision on the issue of safe harbor that 
was in the bill introduced by Senator Dodd and Senator Domenici.
  I want to say to my colleagues who sponsored that bill that this 
amendment is the provision you cosponsored. The provision that is in 
the bill before us dealing with safe harbor is not the provision that 
was in the bill which you cosponsored.
  Some may say, ``Well, that's all right, I want the provision that's 
in this bill.'' But others may not say that. Every Member should 
understand that the provision that was in the bill which they 
cosponsored--a significant number of Members cosponsored--is the 
provision that is in the amendment at the desk. That is the safe harbor 
provision that people signed on to.
  And what Senator Dodd and Senator Domenici had done is, in effect, 
create a regulatory safe harbor. They had placed the burden, as it 
were, on the Securities and Exchange Commission to come up with a 
definition of safe harbor, and it set out certain standards by which 
the Commission would be governed.
  This is an extremely important matter. It is one about which the 
Chairman of the Commission is very much concerned. And I submit to my 
colleagues, at some point in this legislative process, Members ought to 
stop, look and listen and ask themselves whether they want to continue 
to be at variance or at odds with very strongly held opinions of the 
regulators, of the Chairman of the SEC, of the States securities 
regulators, particularly in a matter as difficult and as complex as the 
safe harbor issue.
  The regulators disagree with a majority of this body on the statute 
of limitations issue, but the statute of limitations issue is a 
relatively easily understood issue. The question was, are you going to 
have 1 and 3 years, or 2 and 5 years? That is not the safe harbor 
issue.
  On May 19, the Chairman of the Securities and Exchange Commission 
wrote to the Banking Committee a four-page letter entirely devoted to 
the safe harbor issue. Only the safe harbor issue was discussed in that 
four-page letter.
  The letter itself is complex, let alone the issue. The letter 
reflects the complexity of the issue.
  In that letter, the Chairman states his interest in trying to have 
changes in the securities litigation issue. He concedes that he would 
like to see improvements in existing safe harbor provisions. He talks 
about the need to get accurate forward projections, but he also talks 
about the need to protect investors.
  Mr. President, I ask unanimous consent that the full letter be 
printed in the Record at the end of my remarks.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  (See exhibit 1.)
  Mr. SARBANES. Mr. President, I am quoting:

       A carefully crafted safe harbor protection for meritless 
     private lawsuits should encourage public companies to make 
     additional forward looking disclosure that would benefit 
     investors. At the same time, it should not compromise the 
     integrity of such information which is vital to both investor 
     protection and the efficiency of the capital markets, the two 
     goals of the Federal securities law.

  Later he says, and I quote him:

       A safe harbor must be balanced. It should encourage more 
     sound disclosure without encouraging either omission of 
     material information or irresponsible and dishonest 
     information.

  Let me repeat that:

       A safe harbor must be balanced. It should encourage more 
     sound disclosure without encouraging either omission of 
     material information or irresponsible and dishonest 
     information.
       A safe harbor must be thoughtful so that it protects 
     considered projections but never fraudulent ones. A safe 
     harbor must also be practical. It should be flexible enough 
     to accommodate legitimate investor protection concerns that 
     may arise on both sides of the issue.
       This is a complex issue in a complex industry and it raises 
     almost as many questions as it answers. Should the safe 
     harbor apply to information required by Commission rule, 
     including predictive information contained in the financial 
     statements, for example, pension liabilities and over-the-
     counter derivatives? Should it extend to oral statements? 
     Should there be a requirement that forward looking 
     information that has become incorrect be updated if the 
     company or its insiders are buying or selling securities? 
     Should the safe harbor extend to disclosures made in 
     connection with a capital raising transaction on the same 
     basis as more routine disclosures as well? Are there 
     categories of transactions, such as partnership offerings or 
     going private transactions, that should be subject to 
     additional conditions?
       There are many more questions that have arisen in the 
     course of the Commission's exploration of how to design a 
     safe harbor. We have issued a concept release, received a 
     large volume of comment letters in response and held 3 days 
     of hearing, both in California and Washington. In addition, I 
     have met personally with most groups that might conceivably 
     have an interest in the subject--corporate leaders, 
     investment groups, plaintiffs lawyers, defense lawyers, State 
     and Federal regulators, law professors and even Federal 
     judges.
       The one thing I can state unequivocally is that this 
     subject eludes easy answers.

  Let me repeat that last statement. This is Chairman Levitt:

       The one thing I can state unequivocally is that this 
     subject eludes easy answers.

  Then he goes on to say:

       Given these complexities and in light of the enormous 
     amount of care, thought and work that the Commission has 
     already invested in the subject, my recommendation would be 
     that you provide broad rulemaking authority to the Commission 
     to improve the safe harbor.

  He then goes on to address considerations if the committee tries to 
put in a legislative standard, instead of having a regulatory safe 
harbor. I think Chairman Levitt was absolutely right. That is obviously 
what Senators Dodd and Domenici thought when they put in their bill. I 
do not know how many other people who cosponsored that bill agreed 
that, in effect, giving this assignment to the Securities and Exchange 
Commission was the way to do it. As Chairman Levitt said:

       Given these complexities and in light of the enormous 
     amount of care, thought and work that the Commission has 
     already invested in the subject, my recommendation would be 
     that you provide broad rulemaking authority to the Commission 
     to improve the safe harbor.

  That is not what was done. The provision that was in the original 
bill, which is the amendment that is at the desk, was dropped from the 
bill and instead a legislative standard was substituted.
  The provision that was in the bill that is on Members' desks, the 
original bill, is at page 19 through 22, and those pages, as Members 
can all see, have been stricken. That is what Members originally signed 
on to, and that provision has been, as you can see, lined out in this 
bill, and instead an effort has been made for this body to define the 
standard in an extremely complex matter. As Chairman Levitt said:

       The one thing I can state unequivocally is that this 
     subject eludes easy answers.

  We have just seen an example of that. My distinguished colleague from 
New York, just before I offered this amendment, got up to offer an 
amendment to amend the standard that is in the bill. In other words, 
here we are, they are conceding that the standard in the bill goes too 
far and needs to be corrected, so we just amended it. I indicated I 
welcome that amendment because I think this standard that is in the 
bill, even with the amendment, is an improper standard. But the fact 
that the amendment was offered is a demonstration of the point I am 
trying to make about the complexity of this issue and the wisdom of the 
original approach to, in effect, charge the Commission with the 
responsibility of defining the safe harbor provision,
 a matter which the chairman has indicated he was, in fact, working on. 
Now, as people who were here just a few minutes ago noted, not only was 
it amended, but then my distinguished colleague from New York neglected 
to amend another section of the bill which also needed to be amended. 
So you get some sense of how we are dealing with a very difficult 
issue. Here we are trying to jury-rig it at the last minute. Now, 
later, if I have to, I will try to deal with the legislative standard, 
but I think that fools are rushing in where angels fear to tread, 

[[Page S 9119]]
with all due respect to my colleagues. This is a matter that ought to 
be put to the Securities and Exchange Commission, just as Senators Dodd 
and Domenici proposed in their initial legislation.

  On May 19, Chairman Levitt wrote the Banking Committee a four-page 
letter on safe harbor only. This safe harbor is a catastrophe waiting 
to happen. And Members must keep in mind the danger that the safe 
harbor is going to become a haven for pirates. As I have said earlier, 
it will turn into a pirate's cove. That is where they will shield 
themselves in order to really perpetrate some egregious frauds on the 
investing public.
  Subsequent to the letter of May 19 from the Chairman of the 
Securities and Exchange Commission, the majority within the Banking 
Committee, including the sponsors of the earlier bill, departed from 
their approach in terms of charging the Commission with the 
responsibility of developing a safe harbor. I mean, the Commission are 
the experts, they can hold the hearings, and I will discuss in a minute 
the hearings they held in trying to resolve this matter. But a majority 
decided that, well, no, they were going to do a legislative standard.
  Efforts began to develop an appropriate legislative standard in 
discussions with the SEC and others and with members of the committee 
on both sides, including those of us that are now opposing this 
legislation. But the end result of that discussion, unfortunately, was 
an inability to come to an agreement. The definition, the standard in 
the bill I think is just fraught with danger. In fact, it was just 
amended by the proponents of this legislation here on the floor only a 
moment or two ago. They took out one element of it right here, 
obviously recognizing themselves the deficiencies in it. That 
illustrates the problem with this body trying to formulate a 
legislative standard.
  I welcome that substantive change, but I do think it illustrates, in 
a rather demonstrative way, the problem with this body trying to write 
the legislative standard rather than letting the SEC do it. Now, if we 
have to write it, I will try to do it, but I think it is a mistake. 
This is an opportunity for Members, in effect, to go back to the 
provision that was in the bill.
  Let me read what Chairman Levitt said about the provision that was in 
the markup document. In other words, after this week of working, the 
committee moved with a document that had this definition, and this is 
what the Chairman said:

       As Chairman of the Securities and Exchange Commission--

  This letter came on the morning of the markup.

     I cannot embrace proposals which allow willful fraud to 
     receive the benefit of safe harbor protection.

  And then he discussed the problems that he saw with the provision 
that is in this legislation. The Chairman of the Securities and 
Exchange Commission said, ``I cannot embrace proposals which allow 
willful fraud to receive the benefit of safe harbor protection.''
  Mr. DOMENICI. Will the Senator yield for a question?
  Mr. SARBANES. Certainly.
  Mr. DOMENICI. Does not the safe harbor provision do just that--make 
sure that willful fraud is still covered, expressly stating that the 
safe harbor does not apply to knowing fraud?
  Mr. SARBANES. I say to the Senator that I do not believe it does so.
  Mr. DOMENICI. I do not know what else we can put in.
  Mr. SARBANES. That is why Chairman Levitt wrote the letter. He read 
the provision in the bill.
  Mr. DOMENICI. He wrote the letter about a lot of other issues besides 
that. We addressed his concerns about willful fraud. We have knowledge 
and intent, which exempt people from the safe harbor.
  Mr. SARBANES. This letter was written the morning of the markup and 
was directed to the very provision in the bill, as brought out of the 
committee. Senator Levitt wrote an earlier letter, which I quoted from 
earlier. I do not know if the Senator was on the floor.
  Mr. DOMENICI. He is not a Senator yet, is he? Arthur Levitt is not a 
Senator.
  Mr. SARBANES. Chairman Levitt.
  Mr. DOMENICI. I wanted to correct the Record.
  Mr. SARBANES. I am not sure who to apologize to about that.
  Mr. DOMENICI. Just to clear up the Record.
  Mr. SARBANES. I will not try to reach a conclusion, but I do lay out 
a general apology for anyone who may have been offended by it. There 
may be differing views of the matter.
  But Chairman Levitt wrote an earlier letter, which I quoted from at 
some length. At one point, it looked like maybe, if we were going to do 
a statutory definition, we might be able to arrive at an appropriate 
one. That did not work. The comment I just quoted is what he had to say 
about the provision that is in the bill. This came to us on the morning 
of the markup.
  Now, the Dodd-Domenici bill--and I must say to my two colleagues that 
had we stuck with your bill, the number of issues in dispute here on 
the floor would have been fewer. There still would have been some.
  Your bill also had in it the statute of limitations issue, and it had 
an approach on safe harbor which I think was acceptable, which left us, 
of course, with the joint and several, on which there is, I think, a 
sharp difference in perception and philosophy. I recognize that. And 
there is the aiding and abetting issue.
  But the bill was introduced in the last Congress on March 24, 1994. I 
believe I am correct. If I am in error about that, I hope the two 
cosponsors will correct me, both of whom are here on the floor.
  Now, that bill contained in it this charge to the SEC, which is in 
the amendment that is at the desk, I say to my distinguished 
colleagues. This amendment is your language, verbatim, from the bill as 
you introduced it and the bill which a lot of Members cosponsored.
  The SEC put out their concept release on safe harbor on October 13, 
1994. Let me just read the summary of their concept release and notice 
of hearing:

       The Securities and Exchange Commission is soliciting 
     comment on current practices relating to disclosure of 
     forward-looking information. In particular, the Commission 
     seeks comment on whether the safe harbor provisions for 
     forward-looking statements set forth in rule 175 under the 
     Securities Act of 1933, rule 3b-6 under the Securities 
     Exchange Act of 1934, rule 103(a) under the Public Utility 
     Holding Company Act of 1935, and rule 0-11 under the Trust 
     Indenture Act of 1939 are effective in encouraging disclosure 
     of voluntary forward-looking information and protecting 
     investments, or, if not, should be revised, and if revised, 
     how?
       The Commission also seeks comment on various changes to the 
     existing safe harbor provisions that have been suggested by 
     certain commentators. Finally, the Commission is announcing 
     that public hearings will be held beginning February 13, 
     1995, to consider these issues.

  They went on to say:

       Comments should be received on or before January 11, 1995. 
     Public hearings will begin at 10 a.m. on February 13, 1995. 
     Those who wish to testify at the hearings must notify the 
     Commission in writing of their intention to appear on or 
     before December 31, 1994.

  So the Commission is moving to try to develop a safe harbor. I think 
it moved relatively promptly after it saw this signal of, in effect, 
charging them with this mandate.
  The Commission received 150 responses on the safe harbor issue. That 
is more witnesses, by far, more witnesses by far, than the Banking 
Committee has heard from on all securities litigation issues. The 
Banking Committee hearings with respect to the safe harbor were 
eclipsed by the SEC.
  The SEC held public hearings, 2 days in Washington, February 13 and 
February 14. Then a day in California on February 16.
  At those public hearings they had 62 witnesses in all. Venture 
capitalists, law professors, corporate executives, plaintiff's lawyers, 
defense lawyers, institutional investors.
  Mr. President, these are the hearing records of the SEC with respect 
to the matter of safe harbor for forward-looking statements.
  Now, I submit to my colleagues that it is--I do not want to say sheer 
folly, because at some point we may have to try to work out a 
legislative standard--but it is certainly imprudent conduct, at the 
least, to be trying to develop a standard here instead of allowing the 
Securities and Exchange Commission to develop the standard, which was 
recognized by the original sponsors of this legislation.
  I assume they will argue, ``Well, the Commission had not done it, and 
therefore we are going to go ahead and do 

[[Page S 9120]]
it.'' The fact is, the Commission is working to do it and trying to 
struggle through some very difficult and complex issues as the Chairman 
of the Commission has stated.
  He set out a number of questions which I read earlier, and I defy any 
Member of this body to take those questions and go through them and 
give me an easy answer to them. Not only do I defy the Members, I defy 
their staffs to go through it, to go through those questions and work 
through them--the ones that the Chairman outlined in his letter; of 
course, there are many others, as he indicated--and give me an easy 
response.
  As the Chairman pointed out, ``A safe harbor must be balanced. It 
should encourage more sound disclosure without encouraging either 
omission of material information, or irresponsible and dishonest 
information.''
  Actually, Chairman Levitt and others recognize the need to have more 
disclosure of information. That is a desirable objective. The question 
is, what safeguards do we have to ensure that this disclosure of 
information is not going to set people up to be exploited in fraudulent 
schemes?
  Chairman Levitt went on to say, ``A safe harbor must be thoughtful so 
that it protects considered projections but never fraudulent ones. A 
safe harbor must also be practical. It should be flexible enough to 
accommodate legitimate investor protection concerns that may arise on 
both sides of the issue. This is a complex issue and a complex 
industry. It raises almost as many questions as one answers.''
  He then details some of those questions, and then goes on to say, 
``There are many more questions that have arisen in the course of the 
Commission's exploration of how to design a safe harbor. We have issued 
a concept release, received a large volume of comment letters and 
response, and held 3 days of hearings, both in California and 
Washington. In addition, I have met personally with most groups that 
might conceivably have an interest in the subject. Corporate leaders, 
investor groups, plaintiff's lawyers, defense lawyers, State and 
Federal regulators, law professors, and even Federal judges. The one 
thing I can state unequivocally, is that this subject eludes easy 
answers.''
  He then goes on to state his basic conclusion, which is, ``Given 
these complexities and in light of the enormous amount of care, 
thought, and work that the Commission has already invested in the 
subject, my recommendation would be that you provide broad rulemaking 
authority to the Commission to improve the safe harbor.''
  Mr. President, that is what the amendment at the desk does. I urge 
its adoption. I yield the floor.
                               Exhibit 1

                                               U.S. Securities and


                                          Exchange Commission,

                                     Washington, DC, May 19, 1995.
     Hon. Alfonse M. D'Amato,
     Chairman, Committee on Banking, Housing, and Urban Affairs, 
         U.S. Senate, Washington, DC.
       Dear Mr. Chairman: As Chairman of the Securities and 
     Exchange Commission I have no higher priority than to protect 
     American investors and ensure an efficient capital formation 
     process. I know personally just how deeply you share these 
     goals. In keeping with our common purpose, both the SEC and 
     the Congress are working to find an appropriate ``safe 
     harbor'' from the liability provisions of the federal 
     securities laws for projections and other forward-looking 
     statements made by public companies. Several pieces of 
     proposed legislation address the issue of the safe harbor and 
     the House-passed version, H.R. 1058, specifically defines 
     such a safe harbor.
       Your committee is now considering securities litigation 
     reform legislation that will include a safe harbor provision. 
     Rather than simply repeat the Commission's request that 
     Congress await the outcome of our rulemaking deliberations 
     and thereby run the risk of missing an opportunity to provide 
     input for your own deliberations, I thought I would take this 
     opportunity to express my personal views about a legislative 
     approach to a safe harbor.
       There is a need for a stronger safe harbor than currently 
     exists. The current rules have largely been a failure and I 
     share the disappointment of issuers that the rules have been 
     ineffective in affording protection for forward-looking 
     statements. Our capital markets are built on the foundation 
     of full and fair disclosure. Analysts are paid and investors 
     are rewarded for correctly assessing a company's prospects. 
     The more investors know and understand management's future 
     plans and views, the sounder the valuation is of the 
     company's securities and the more efficient the capital 
     allocation process. Yet, corporate America is hesitant to 
     disclose projections and other forward-looking information, 
     because of excessive vulnerability to lawsuits if predictions 
     ultimately are not realized.
       As a businessman for most of my life, I know all too well 
     the punishing costs of meritless lawsuits--costs that are 
     ultimately paid by investors. Particularly galling are the 
     frivolous lawsuits that ignore the fact that a projection is 
     inherently uncertain even when made reasonably and in good 
     faith.
       This is not to suggest that private litigation under the 
     federal securities laws is generally counterproductive. In 
     fact, private lawsuits are a necessary supplement to the 
     enforcement program of the Commission. We have neither the 
     resources nor the desire to replace private plaintiffs in 
     policing fraud; it makes more sense to let private forces 
     continue to play a key role in deterrence, than to vastly 
     expand the Commission's role. The relief obtained from 
     Commission disgorgement actions is no substitute for private 
     damage actions. Indeed, as government is downsized and 
     budgets are trimmed, the investor's ability to seek redress 
     directly is likely to increase in importance.
       To achieve our common goal of encouraging enhanced sound 
     disclosure by reducing the threat of meritless litigation, we 
     must strike a reasonable balance. A carefully crafted safe 
     harbor protection from meritless private lawsuits should 
     encourage public companies to make additional forward-looking 
     disclosure that would benefit investors. At the same time, it 
     should not compromise the integrity of such information which 
     is vital to both investor protection and the efficiency of 
     the capital markets--the two goals of the federal securities 
     laws.
       The safe harbor contained in H.R. 1058 is so broad and 
     inflexible that it may compromise investor protection and 
     market efficiency. It would, for example, protect companies 
     and individuals from private lawsuits even where the 
     information was purposefully fraudulent. This result would 
     have consequences not only for investors, but for the market 
     as well. There would likely be more disclosure, but would it 
     be better disclosure? Moreover, the vast majority of 
     companies whose public statements are published in good faith 
     and with due care could find the investing public skeptical 
     of their information.
       I am concerned that H.R. 1058 appears to cover other 
     persons such as brokers. In the Prudential Securities case, 
     Prudential brokers intentionally made baseless statements 
     concerning expected yields solely to lure customers into 
     making what were otherwise extremely risky and unsuitable 
     investments. Pursuant to the Commission's settlement with 
     Prudential, the firm has paid compensation to its defrauded 
     customers of over $700 million. Do we really want to protect 
     such conduct from accountability to these defrauded 
     investors? In the past two years or so, the Commission has 
     brought eighteen enforcement cases involving the sale of more 
     than $200 million of interests in wireless cable partnerships 
     and limited liability companies. Most of these cases involved 
     fraudulent projections as to the returns investors could 
     expect from their investments. Promoters of these types of 
     ventures would be immune from private suits under H.R. 1058 
     as would those who promote blank check offerings, penny 
     stocks, and roll-ups. It should also address conflict of 
     interest problems that may arise in management buyouts and 
     changes in control of a company.
       A safe harbor must be balanced--it should encourage more 
     sound disclosure without encouraging either omission of 
     material information or irresponsible and dishonest 
     information. A safe harbor must be thoughtful--so that it 
     protects considered
      projections, but never fraudulent ones. A safe harbor must 
     also be practical--it should be flexible enough to 
     accommodate legitimate investor protection concerns that 
     may arise on both sides of the issue. This is a complex 
     issue in a complex industry, and it raises almost as many 
     questions as one answers: Should the safe harbor apply to 
     information required by Commission rule, including 
     predictive information contained in the financial 
     statements (e.g. pension liabilities and over-the-counter 
     derivatives)? Should it extend to oral statements? Should 
     there be a requirement that forward-looking information 
     that has become incorrect be updated if the company or its 
     insiders are buying or selling securities? Should the safe 
     harbor extend to disclosures made in connection with a 
     capital raising transaction on the same basis as more 
     routine disclosures as well? Are there categories of 
     transactions, such as partnership offerings or going 
     private transactions that should be subject to additional 
     conditions?
       There are many more questions that have arisen in the 
     course of the Commission's exploration of how to design a 
     safe harbor. We have issued a concept release, received a 
     large volume of comment letters in response, and held three 
     days of hearings, both in California and Washington. In 
     addition, I have met personally with most groups that might 
     conceivably have an interest in the subject: corporate 
     leaders, investor groups, plaintiff's lawyers, defense 
     lawyers, state and Federal regulators, law professors, and 
     even Federal 

[[Page S 9121]]
     judges. The one thing I can state unequivocally is that this subject 
     eludes easy answers.
       Given these complexities--and in light of the enormous 
     amount of care, thought, and work that the Commission has 
     already invested in the subject--my recommendation would be 
     that you provide broad rulemaking authority to the Commission 
     to improve the safe harbor. If you wish to provide more 
     specificity by legislation, I believe the provision must 
     address the investor protection concerns mentioned above. I 
     would support legislation that sets forth a basic safe harbor 
     containing four components: (1) protection from private 
     lawsuits for reasonable projections by public companies; (2) 
     a scienter standard other than recklessness should be used 
     for a safe harbor and appropriate procedural standards should 
     be enacted to discourage and easily terminate meritless 
     litigation; (3) ``projections'' would include voluntary 
     forward-looking statements with respect to a group of 
     subjects such as sales, revenues, net income (loss), earnings 
     per share, as well as the mandatory information required in 
     the Management's Discussion and Analysis; and (4) the 
     Commission would have the flexibility and authority to 
     include or exclude classes of disclosures, transactions, or 
     persons as experience teaches us lessons and as circumstances 
     warrant.
       As we work to reform the current safe harbor rules of the 
     Commission, the greatest problem is anticipating the 
     unintended consequences of the changes that will be made in 
     the standards of liability. The answer appears to be an 
     approach that maintains flexibility in responding to problems 
     that may develop. As a regulatory agency that administers the 
     Federal securities laws, we are well situated to respond 
     promptly to any problems that may develop, if we are given 
     the statutory authority to do so. Indeed, one possibility we 
     are considering is a pilot safe harbor that would be reviewed 
     formally at the end of a two year period. What we have today 
     is unsatisfactory, but we think that, with your support, we 
     can expeditiously build a better model for tomorrow.
       I am well aware of your tenacious commitment to the 
     individual Americans who are the backbone of our markets and 
     I have no doubt that you share our belief that the interests 
     of those investors must be held paramount. I look forward to 
     continuing to work with you on safe harbor and other issues 
     related to securities litigation reform.
       Thank you for your consideration.
           Sincerely,
                                                    Arthur Levitt.

  Mr. BENNETT. Mr. President, I ask the Senator from Maryland to pay 
attention closely to this since it concerns him directly.
  I ask unanimous consent that the vote occur on or in relation to the 
Sarbanes amendment No. 1477 at 2:15 today and that the time between the 
beginning of the debate and 2:15 be equally divided in the usual form.
  Mr. SARBANES. Reserving the right to object, first of all, could I 
inquire of the Chair, what is the time situation?
  The PRESIDING OFFICER. We began consideration of this amendment at 
11:09.
  Mr. SARBANES. So the Senator has used 30 minutes.
  The PRESIDING OFFICER. Thirty-five.
  Mr. SARBANES. Mr. President, I am agreeable to dividing the time 
between now and 12:30 equally, and then having half an hour after 
lunch, equally divided, and then going to a vote on the amendment.
  Mr. BENNETT. Mr. President, I would like to confer with the chairman 
of the Banking Committee before agreeing to that. I have no personal 
objection to it. I would think we ought to bring Senator D'Amato into 
the discussion.
  Mr. SARBANES. Fine. I was not aware of this request until I just 
heard it. I do think we should have some time after the caucus on the 
debate--after the conference luncheon.
  Mr. BENNETT. Mr. President, I propound a unanimous-consent request 
that the time between now and 12:30 be equally divided on this issue, 
and leave the unanimous-consent request as to the exact time of the 
vote for a later request.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  Mr. BENNETT. Mr. President, I have heard the Senator from Maryland 
talk at great length about all of the hearings and the comments and the 
legal aspects of this.
  Once again, I would like to talk about it from the standpoint of the 
chief executive officer, struggling to maintain the investor confidence 
in his company, and bring an appropriate return to investors, and talk 
about how this safe harbor circumstance would actually work.
  A chief executive officer, having been one, sees dozens, maybe 
hundreds, of memorandum, every week. He engages in any number of 
conversations with individuals in the company in any given week about 
any particular subject. That is the fact against which I want to paint 
the picture of how this thing works.
  We have been having this discussion about weakening a standard, safe 
harbor; where should the threshold be? I think the issue comes down, do 
we want a safe harbor or not? If we want one, it has to be safe, or we 
should not go through the exercise.
  Now, the opponents have suggested that the safe harbor in the bill 
is, in fact, a pirate's cove.
  Let me list, Mr. President, the pirates who are not welcome in this 
cove. That is, the pirates who would be denied the right to sail into 
this particular harbor, by the bill.
  A blank check company, a blind investment pool that does not tell 
anybody how they invest, a penny stock company, a rollup transaction, a 
going private transaction. Not to imply these people are pirates, but 
they could not get into the cove. A mutual fund. It is very significant 
that that is on the list because that is where most of the seniors 
invest their money. They do not go out and individually pick stocks 
unless they have some experience at that. They buy a mutual fund. A 
mutual fund cannot come into this particular harbor. A limited 
partnership. A tender officer. Anyone filing certain ownership reports 
with the SEC. Or information in the financial statements is excluded. 
And of course any company that has recently committed a violation of 
the antifraud provisions of the securities laws cannot sail into the 
harbor.
  Those kinds of restrictions are already out there. So the safe harbor 
is not for the pirates. It is for the people who do not fall into those 
categories.
  Now, for those in the harbor, they have some requirements written 
into the bill. They must clearly state that any projection they are 
making is, in fact, a statement about the future, and they must clearly 
state, here in the words of the bill, ``The risk that actual results 
may differ materially from such projections, states, or descriptions.''
  In other words, there is not a risk that we might be off a day or 
two. There is not a risk that we might be off a penny or two. There is 
a risk that the actual results may differ materially from the 
projections or estimates. Then, of course, we have the language that 
the bill does not permit companies to take advantage of the safe harbor 
if they act with ``the purpose and actual intent of misleading 
investors.'' This is the language of the bill that we have before us.
  Those are the requirements in this particular harbor; those that 
prevent people from coming in in the first place and those who govern 
the people who are there.
  Let me explain why it is important that we not further lower the 
threshold that we have established with the words ``purpose'' and 
``actual intent of misleading investors.'' Here is how things work in 
an actual company, as I say speaking from experience as a chief 
executive officer. You gather all of your people around you. You look 
at the memos and the other reports that come out, and you inevitably 
find that there is a difference of opinion about just about everything 
going on in your company. Let us talk about a new product.
  Some of your people say to you, ``Oh. Our product, product X, will be 
available right on schedule in August. You can depend on it. You can 
take it to the bank.'' Others will say, ``No. We are a little worried. 
We may not make it in August. We have this problem. We have that 
problem. Our supplier may not come through. We may miss the target 
date.'' You are the chief executive officer. You have to decide. You 
have a meeting coming up with a group of security analysts, and they 
are going to ask you point blank, ``When will product X be on the 
market?'' You want to give them the very best information you can.
  So you sift through all of this and ultimately you have to make a 
decision. And you decide based on the track record of the people who 
are advising you that you think product X is a pretty good bet to be on 
line in August just as you anticipated it would. You go before the 
analyst meeting. And they say 

[[Page S 9122]]
to you, ``When will product X be available?'' You say, ``Well, it is my 
best judgment that it will be available in August. I have to qualify 
that by saying that is my estimate. I tell you there are some people in 
the company who do not think it will be available in August. But the 
best I can tell, my guess, my prediction, is that we will deliver 
product X in August.'' He can maybe put some other caveats in. You 
know, this is very sophisticated. The analysts do not hear any of that. 
They are like pollsters. ``Who is ahead? Who is going to win the 
election?'' ``No. We want to know what your numbers say right now.'' 
And they do not listen to the caveats. The CEO can put in all the 
caveats he wants. But they are going to walk away saying, ``He 
predicted that is going to come out in August.''
  Now we get to August. What happens? Any one of a number of things 
happens. Frankly, they do not have to be the kinds of things projected 
in the memo that the division manager who said it might not happen in 
August included. There could be a hurricane in Florida where one of 
your suppliers is and the supplier cannot provide the parts that you 
were depending on. There was no way you could predict that. There are 
any number of things that could have happened. But you get to August, 
and the company puts out a press release saying product X has been 
delayed and will not be introduced until sometime later in the fall.
  Bang--the analysts pound the stock. There is wild speculation. I have 
seen those. We have all seen those. They go through the marketplace--
all kinds of rumors, the company has serious problems, their management 
is in difficulty, so and so is going to get fired, the stock drops 10 
percent, and within a week strike suits are filed naming the company, 
its chief executive officer, and a bunch of other officers for 
conspiring to put out false information about product X and misleading 
the marketplace.
  Product X comes out in September. It is a great hit. The stock price 
recovers. Presumably nobody is hurt. But, frankly, all of that is 
irrelevant because the legal machinery is now in motion and they do not 
care what is happening to the product or the company. Whether they want 
to or not, the top management of that company must now focus on an 
issue that is irrelevant to the management of the business; and, if I 
may, Mr. President, to the detriment of the investors in that company 
because the investors in that company want top management focusing on 
sales. They want top management focusing on efficiency. They want top 
management focusing on cutting costs and opening new markets. But 
instead they have a situation where in the name of the investors the 
legal machinery is forcing the top management of that company to focus 
on something totally unproductive--coming up with a defense against the 
charges that they mislead the public.
  Discovery: That great word in the legal lexicon; discovery starts, 
and it goes to every piece of paper that has to do with product X, and 
every memorandum that may have crossed the CEO's desk. And they find 
the memo from the fellow who says, ``I don't think we are going to be 
ready in August.'' And, bingo, we have a smoking gun. No reference is 
made to the other opinions now. In court the reference is all going to 
hammer in on this one fateful memo, and, ``Mr. CEO, did you read this 
memo?'' If, he says yes, he not only has knowledge that product X was 
not going to come in, he has actual knowledge, not just imputed 
knowledge, actual knowledge. He admits he read the memo. Nail him to 
the wall.
  That is what happens if he does not have the safe harbor that we have 
written into this act. Let us assume that this company is not one of 
those that is kept out of the harbor, the list I read in the beginning. 
It is one of those that is allowed into the harbor and without the 
harbor that is what happens.
  Now suppose we have the reckless standard that people have argued 
for. This would be a very easy standard for a plaintiff's lawyer to 
meet in the circumstance I have described. Arguably any projection 
about the future is reckless. ``You do not know, Mr. CEO, that the 
future is going to produce this product in August. It was reckless of 
you to say that you would have it in August. You may have believed it 
but it was a reckless statement.'' There is no protection for the CEO 
in this circumstance with the term ``reckless.'' No. He needs the safe 
harbor of the bill.
  And the question is how safe should that harbor be? Well, if we had 
the simple knowledge standard that the SEC suggests, the question is, 
``Well, did you know that this product would not meet its date in 
August? Well, here is a memo in the company. It came over your desk. 
You read it. If you did not know, you should have known.'' Simple 
knowledge can be twisted in the hands of a careful lawyer, and the CEO 
has a very difficult time explaining this circumstance.
  So a knowledge standard, even an actual knowledge standard, is not 
going to be a safe harbor. It is not going to protect the CEO. And 
again the point, Mr. President, it is not going to be for the benefit 
of the investors because the CEO is not going to be able to be doing 
what he is hired by the investors to do--run the company. He is going 
to be worrying about this particular problem.
  This is the kind of thing that drives companies to settle out of 
court and to say, ``Well, we really did not do anything wrong but in 
order to get back to the business of making products and out of the 
business of prosecuting lawsuits, we will settle even though we are 
pretty sure we did not do anything wrong.''
  No. What we need to have is what we have in this bill, a safe harbor 
that says not only did the CEO have knowledge but he acted with the 
purpose and actual intent of misleading investors. Now that no one can 
tolerate. That clearly must not be allowed. But it must be the purpose 
and actual intent of misleading investors before the CEO is driven out 
of the harbor.
  Why actual intent? Because without it intent can be implied in a 
number of circumstances. ``You saw this memo, the very fact that you 
decided to ignore it in your presentation to the security analyst, Mr. 
CEO, implies that you intended to deceive them.'' No. The standard must 
be higher than that. You must prove that he had the actual intent, that 
he had the purpose of deceiving investors before you drag him into that 
area.
  Is this a high threshold? I think it is an appropriate threshold 
because it fits the reality of the circumstances, and it prevents 
plaintiffs from accusing companies and officers of committing fraud 
simply because documents of differing opinions exist somewhere in the 
file. You have to go beyond that. You have to prove actual intent.
  If I may stray into waters that I probably should not, since I have 
not gone to law school, but I have had some experience in this area, it 
is a little like the standards that we apply in the first amendment.
  If a newspaper inadvertently prints something that is inaccurate, 
they cannot be held for libel unless it is proven that they acted with 
malice, with actual intent, if you will, to harm the reputation of the 
individual. Thus free speech is allowed to go forward unimpeded, 
however damaging it is to the individual involved. Having been the 
individual involved in some circumstances, I know how hard sometimes 
that is to accept.
  But that is the standard we have created in that circumstance, and I 
think the language in this bill holds that same kind of standard.
  Now, Mr. President, I come to the final question, which is what I 
think we should focus on here. Whom are we trying to protect? With all 
of this legislation, whom do we seek to benefit? What is the purpose of 
all of this? Are we trying to protect CEO's? Are we trying to protect 
lawyers? Are we trying to protect security analysts and newspapers that 
report things? Whom are we trying to protect at base by all of this 
legislation? The answer, Mr. President, is the investor. The purpose of 
this legislation is to protect the investor and his or her investment.
  Look at every issue that we are talking about here through that 
particular lens. Is it good for the investor or is it bad for the 
investor? Is it good for the investor to have the CEO feel constrained 
about talking about the prospects of his company? Is it good for the 
investor to have the CEO being hedged about by lawyers who tell him 
when he goes before the security analyst: You cannot talk about this; 
you cannot talk about that; you cannot make any speculation of any kind 
lest you run 

[[Page S 9123]]
the risk of exposing yourself to these kinds of suits later on.
  I submit that it is good for the investor to have the CEO be as open 
and candid as he possibly can be and to say to the security analyst: 
Yes, it is my judgment that product X will be on the market in August. 
Because what if he is right and product X is on the market in August, 
and he did not tell anybody that and they did not have the opportunity 
to buy the stock in the expectation that that would be the case?
  Is it good for the investors to have him say: I have differences of 
opinion within the company; there are some people who do not think it 
will be.
  Yes, it is good for the investors to have him be as candid and open 
as possible. And the only way you can get that kind of candid, open 
discussion is if you have a safe harbor in which that honest CEO can 
sail knowing that he will be protected from the waves and whims of the 
shark suits that are out there.
  Is it good for the investor or is it bad for the investor to have the 
CEO's attention diverted into lawsuits that have nothing whatever to do 
with the management of the company? I submit it is bad for the investor 
to have the CEO concentrating on things other than the things for which 
he was hired. And ultimately, is it good for the investor or is it bad 
for the investor to have the company paying out millions of dollars in 
legal fees on issues that are tangential to the company's performance?
  I submit it is bad for the investor, and it becomes doubly bad for 
the investor when, as we have seen over and over again in the debate on 
this bill, the highest percentage of those fees and fines being paid 
out by the investor--those are the investor's moneys; those are not the 
CEO's moneys. When you say those are the company's moneys, there is 
only one source of company money, and that is the investor. That is the 
investor's money going out, with the vast bulk of it going out to the 
plaintiff's attorneys and not the investor. They say: Oh, look, we are 
protecting the investor. Look at the money that is going back to the 
investor.
  No, the money is going back to the lawyer, and in the meantime all of 
the money and attention and activity on behalf of the management of the 
company has been focusing on this suit.
  That is why they settle, Mr. President. They settle because it is 
good for the investors and for them to get this thing behind them. But 
it would be better for the investors if honest executives who have no 
intent and no purpose of deceiving have a safe harbor from which they 
can explain to the public the things that are going on in the company 
and make statements about the future fully hedged about with 
protections that say these are speculations so that the investor then 
has information from which to make his or her own intelligent 
decisions.
  So, Mr. President, I oppose the amendment by the distinguished 
Senator from Maryland. I enjoy serving with him on the Banking 
Committee. I enjoy the intellect and I enjoy the thoroughness with 
which he approaches these decisions, and I hope he recognizes it is not 
an act of disrespect on my part when I say I disagree with him on this 
amendment and intend to vote against it and urge my colleagues to do 
the same.
  Now, Mr. President, I ask unanimous consent that at 2:15 p.m. today, 
Senator Kassebaum be recognized in morning business for not to exceed 5 
minutes, and that at the hour of 2:20 p.m. there be 40 minutes of 
debate on the Sarbanes amendment No. 1477, equally divided in the usual 
form, with the vote occurring on or in relation to the Sarbanes 
amendment at 3 p.m. today, with no second-degree amendments in order to 
the amendment; further, that following the disposition of the Sarbanes 
amendment No. 1477, Senator Sarbanes be recognized to offer an 
amendment regarding safe harbor.
  Mr. SARBANES. Reserving the right to object, Mr. President, I have 
indicated a desire to have an up-or-down vote on the amendment. Does 
the Senator have any problem with that?
  Mr. BENNETT. Mr. President, I have no problem with that, but I cannot 
bind other Senators who may wish to make a motion to table.
  Mr. President, I would have no objection to that.
  Mr. SARBANES. So with that amendment to the unanimous consent 
request, I have no objection.
  Mr. BENNETT. Yes, on the Sarbanes amendment there would be no motion 
to table.
  Mr. SARBANES. Right.
  The PRESIDING OFFICER (Mr. Ashcroft). Without objection, it is so 
ordered.
  Mr. DODD addressed the Chair.
  The PRESIDING OFFICER. The Senator from Connecticut.
  Mr. DODD. Mr. President, I thank the Chair.
  Let me just, if I can, make a couple of observations here about this 
amendment and the history----
  The PRESIDING OFFICER. Who yields time?
  Mr. DODD. How much time remains?
  The PRESIDING OFFICER. All of the time remaining is under the control 
of the Senator from Maryland.
  Mr. SARBANES. Mr. President, I do not think that is correct, in all 
fairness to my colleague. I wish to be fair. I think the agreement was 
we would divide equally the time between 11:10, as I understood it, 
when we went----
  Mr. BENNETT. Mr. President, I ask unanimous consent that the previous 
unanimous-consent be amended to be as the Senator from Maryland 
remembers it.
  Mr. SARBANES. I thought that is what it was.
  It would not be fair to divide the time from 11:45 equally since the 
time before 11:45 was consumed, not quite but primarily, on one side. 
That is not really fair to my colleagues, and I recognize that. I think 
if we divided it--was it from 11:15 on?
  Mr. BENNETT. It was 11:09.
  Mr. SARBANES. If that time were divided equally, what would the time 
situation now be?
  The PRESIDING OFFICER. The Senator from Maryland would have 10 
minutes, and the Senator from Utah would have 10 minutes.
  Mr. BENNETT. I ask unanimous consent that that be the state of the 
time from this time until we break for lunch.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  The PRESIDING OFFICER. Who yields time?
  Mr. SARBANES. And that would mean from the time we went on this 
amendment, all time would have been equally divided; is that correct?
  The PRESIDING OFFICER. That is correct.
  Mr. SARBANES. Yes.
  Mr. BENNETT. Mr. President, I yield such time as he may consume to 
the Senator from Connecticut.
  The PRESIDING OFFICER. The Senator from Connecticut.
  Mr. DODD. I thank my colleague from Utah. I yield myself 5 minutes. 
If the Chair would remind me at the end of 5 minutes so as not to take 
too much time on this because a lot has been said already about it.
  Mr. President, let me make a couple of observations to underscore the 
point that my colleague from Utah has already addressed. Some of my 
colleagues have said that the safe harbor provisions of S. 240 do not 
go as far as some would suggest. First, our provisions of safe harbor 
limit significantly the circumstances in which the safe harbor applies.
  I think it is very important to lay out as clearly as I can here, 
what is included and what is excluded.
  The safe harbor provisions of S. 240 apply only--only--to statements 
made by issuers or outside reviewers retained by issuers. Statements by 
stockbrokers are not protected at all under S. 240's safe harbor. 
Certain issuers are excluded. Not all issuers are included; some are 
excluded from safe harbor, including anyone who has violated securities 
laws within the prior 3 years. Penny stock companies, blank check 
companies, investment companies, all companies, Mr. President, are 
excluded from the safe harbor when they engage in certain types of 
transactions such as IPO's, initial public offerings. The tender 
offers, rollup transactions, all of those are excluded. So this is a 
very narrow provision here. All information contained in historical 
financial statements is excluded as well.
  Second, Mr. President, the safe harbor applies only to projections or 
estimates that are identified--they must be identified--as forward 
looking statements and that refer ``clearly and 

[[Page S 9124]]
proximately'' to ``the risk that actual results may differ 
materially''--that is the language, ``the risk that actual results may 
differ materially''--from the projection or estimate.
  That goes right to the heart of what the Senator from Utah was 
talking about. This is a very narrow area we are talking about, and the 
point is to create a safe harbor. Why do you create a safe harbor? 
Because we are trying to solicit from these issuers as much information 
as possible so that a potential buyer can have as much awareness as 
possible about where this stock or where this company is likely to go. 
It is in the interest of the investor that we get as much of that 
information as possible.
  There is no requirement in law that an issuer even put out forward 
looking statements. In fact, what has happened lately is a lot of them 
have retreated from that very advantageous idea because of the very 
situation we find ourselves in today. So it is in our interest to 
solicit this kind of information, but in doing so, we say, ``Look, we 
want you to share as much information about where you think this 
company is going, where this stock is going so that investors will make 
intelligent decisions.''
  In doing so, if you do anything--and we say very clearly in the bill 
if you do anything that knowingly with purpose or intent of misleading 
investors, on page 121 of this bill, we now take out the word 
``expectation''--knowingly made with the purpose or intent of 
misleading investors, then you are excluded. Not only excluded, you are 
subject to the penalties of the law.
  So anyone who knowingly with intent to mislead in those forward 
looking statements is subject to the provisions of the law that apply 
in this piece of legislation before us. But the idea is to get that 
information out, and it seems to me that is in everyone's interest.
  You have to strike that balance. There are those who are opposed to 
safe harbor. I disagree with them; I understand it. I do not think 
anyone who has really looked at the larger issues would agree with it. 
So we have attempted with this legislation to craft the safe harbor 
provisions.
  My colleague from Maryland has correctly pointed out that in the 
earlier bill we introduced some 17 months ago, we asked the SEC to try 
to develop a regulatory scheme to deal with safe harbor. I must say, I 
have heard now for the last 2 days a lot of these kudos and praise over 
the bill that we introduced last March. I would very much have liked to 
have passed a bill in the previous Congress in this area, but I could 
not get that kind of support.
  I ask unanimous consent that I may be able to proceed for 5 
additional minutes.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  Mr. DODD. Mr. President, I wish we had some of that support. The very 
people today who find the previous bill so attractive, I must say 
candidly, were not exactly racing to support the legislation when it 
potentially could have been adopted in the last Congress.
  Putting that aside, let me also point out to my colleagues, having 
made the offer 17 months ago to have the SEC move, frankly, the SEC has 
not moved, and I am convinced today they would not move on this.
  There is ample evidence to indicate that that suspicion of mine is 
correct. In a June 22 edition of the Bureau of National Affairs 
publication, which follows legislation dealing with financial 
institutions, under securities, the headline is, ``SEC safe harbor 
initiative may be overtaken by litigation reform.'' Following are 
several pertinent paragraphs I think support what I am saying:

       Although one agency official stated in late March that SEC 
     action in its October concept release was imminent, that has 
     not materialized. Rather, the SEC remains at the concept-
     release stage on the initiative. Its inaction during the 8 
     months since release was issued has been attributed by some 
     observers to some differences of opinion within the 
     Commission on various issues connected with the initiative.

  Another Commissioner, Richard Roberts, told BNA June 21 that there 
are bona fide reasons that the Commission did not act quickly on the 
concept release, including questions about the agency's authority in 
the area of forward looking information.
  Again, we just were not getting the action in this area.
  It is a complex area. The Senator from Maryland is absolutely 
correct. Anyone who suggests otherwise has not spent any time looking 
at this. But I will argue, despite the fact that our original bill 
tried to get the SEC to come forward in this area--in fact they have 
not--that there is a good case to be made that leaving these matters 
just up to the regulatory bodies or, as we have seen in other cases 
dealing with aiding and abetting, for instance, to the courts, is not a 
wise way to go ultimately.
  In many matters here, we ought to be trying to establish through the 
legislative process what our intent is. So while I welcomed in the past 
the SEC's efforts in this regard, that was not forthcoming. Now it is 
being suggested by those who opposed the bill last year that I ought to 
go back to my earlier position on this matter, even though the SEC did 
not move in this area, given the 17 months they had an opportunity to 
do so.
  Letters are being bandied about. The letter of May 19 from the 
Chairman of the SEC certainly recognizes that there is a need to 
strengthen the safe harbor provisions. In fact, in paragraph 3 of 
Chairman Levitt's letter on May 19, he says:

       There is a need for a stronger safe harbor than currently 
     exists. The current rules have largely been a failure, and I 
     share the disappointment of issuers that the rules have been 
     ineffective in affording protection for forward-looking 
     statements. Our capital markets are built on the foundation 
     of full and fair disclosure. Analysts are paid and investors 
     are rewarded for correctly assessing a company's prospects. 
     The more investors know and understand management's future 
     plans and views, the sounder the valuation is of the 
     company's securities and the more efficient the capital 
     allocation process. Yet, corporate America is hesitant to 
     disclose projections and other forward-looking information 
     because of excessive vulnerability to lawsuits if predictions 
     ultimately are not realized.
  It goes on to talk about how he was a businessman all his life, and 
so forth, and lays out some specific areas and talks on page 2 of this 
letter, in the last paragraph:

       A safe harbor must be balanced, should encourage more sound 
     disclosure, without encouraging either omission or material 
     information or irresponsible and dishonest information. Safe 
     harbor must be thoughtful so that it protects considered 
     projections, but never fraudulent ones.

  I invite my colleagues to look at the language on page 121 of our 
bill, where we specifically lay out, No. 1, knowingly--talking about 
projections--knowingly made with the purpose and actual intent of 
misleading investors.
  So we clearly there are saying if you make a knowingly fraudulent 
statement, a misleading--not even fraudulent but misleading statement--
a knowingly misleading statement, that you are not protected by the 
safe harbor provisions. Is this perfect? I cannot say that it is. But I 
will say it conforms to what the Chairman of the SEC says, that the 
present situation is not working very well. We know when we see what is 
happening with the forward-looking statement; they are being contracted 
and contracted and contracted. That is the practical effect of the 
environment we live in today. That does not serve the investor 
community well, Mr. President.
  With those reasons, with all due respect and great admiration for my 
colleague from Maryland, throwing this back into the court of the SEC I 
do not think is going to advance our cause in dealing with clear reform 
in the area of safe harbor that is needed.
  I urge my colleagues to reject the amendment offered by the Senator 
from Maryland.
  Mr. SARBANES. Mr. President, I listened very carefully to both of my 
colleagues and I would like to, very quickly, address some of the 
points they made. I think the Senator from Connecticut is being 
extremely unfair to the SEC in terms of saying that they did not pick 
up on this. They have picked up on it. Whether they should have picked 
up sooner is the question. But they did issue a period for comment, and 
that was in October 1994, and they received comments--over 150. They 
then held hearings in the first part of this year. The Chairman, I 
think, of the SEC, as the Senator quoted him in the letter, has 
indicated that he wants to do something about safe harbor. The Senator 
quoted him correctly. 

[[Page S 9125]]

  Mr. President, I ask unanimous consent that a letter from Chairman 
Levitt, dated May 25, 1995, be printed in the Record at the end of my 
statement.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  (See exhibit 1.)
  Mr. SARBANES. The real question here is not whether we should improve 
safe harbor. The question is, who is going to try to do it? Where is 
the best place to do that? This amendment says that the best place to 
do that is at the SEC, and that this body is not equipped to try to 
work through this complex issue; and if it tries to do it, the law of 
unintended consequences is going to bring a lot of potentially 
devastating developments.
  The proposal to have it done at the SEC is, of course, the proposal 
which the Senators from Connecticut and New Mexico had when they first 
introduced the bill--the bill which Members cosponsored. Members who 
cosponsored this legislation were cosponsoring a provision with respect 
to safe harbor, which is exactly the amendment at the desk. That 
provision was subsequently changed in the committee. That is not the 
provision that was in the legislation which Members were signing onto 
as cosponsors.
  Chairman Levitt has warned us of the danger that the provision in the 
bill will protect fraud. Safe harbor is a grant of immunity, an 
exemption from any liability. Safe harbor, in effect, says that you are 
immunized altogether. So it is very important to properly define the 
safe harbor. I have been interested in Members--first of all, the 
chairman amended the statutory provision in the bill on safe harbor 
shortly a while ago here on the floor, recognizing that this effort to 
write this statutory standard was deficient, I assume.
  My colleague from Connecticut is citing provisions in the bill where 
certain activities cannot get safe harbor. He specifically precludes 
them from doing that and he went through some of them. All of those are 
things that developed. We got concerned about penny stocks when they 
were used as an abuse. Who knows what the next abuse is going to be 
down the road? If the SEC does this, they are in the business of being 
able to adjust to the abuses as they come. The SEC can, in effect, 
modify the framework. These listings of exceptions to the safe harbor 
standard in the rule are a demonstration, in my judgment, of the 
inappropriateness of trying to write the standard here, as opposed to 
letting it be done by the regulatory authorities.
  The forward-looking statements in this bill are broadly defined. They 
include both oral and written statements. Now, we want a lot of the 
information, but it is the kind of information investors use in 
deciding whether to purchase a particular stock.
  Now, the Chairman of the SEC himself has said they want--in fact, the 
Senator quoted one member of the SEC who said maybe they were not 
moving as quickly because they had some doubts about their statutory 
authority to do so. Of course, his original proposal would have 
provided that statutory authority. So if that is an inhibition, the 
amendment eliminates that and any doubts with respect to the SEC's 
ability to move ahead. The Commission received 150 comment letters in 
response to the release. It has worked closely with a vast 
representation of the industry. In fact, when Chairman Levitt testified 
in April of this year, he said:

       From the Commission's perspective, an appropriate 
     legislative approach is contained in the Domenici-Dodd bill. 
     This provision would allow the Commission to complete its 
     rulemaking proceeding and take appropriate action after its 
     evaluation of the extensive comments and testimony already 
     received. Based on the Commission's experience with this 
     issue to date, we believe there is considerable value in 
     proceeding with rulemaking which can more efficiently be 
     administered, interpreted and, if needed, modified than can 
     legislation.

  The North American Securities Administrators Association, the 
Government Finance Officers Association, the National League of Cities, 
and nine other groups, in a letter to the committee, on the 23d of May, 
expressed the same view, saying:

       We believe the more appropriate response is SEC rulemaking 
     in this area.

  Unfortunately, the committee print substitute to S. 240, unlike the 
bill as introduced, abandoned this approach in favor of trying to 
formulate a statutory safe harbor.
  This is contrary to all the advice we are receiving from the 
regulators. Everybody gets up here and says this interest group wants 
this and this interest group wants that. I recognize that. I have been 
the first to state that you have these interest groups clashing over 
this thing. But what are the public interest officials telling us--
those whose responsibility it is to serve the public interest, not one 
or another of these economic interest groups--what are they telling us? 
Of course, what they are telling us is that the approach in my 
amendment is the approach to follow.
  The standard that is in the legislation, I think, is going to allow 
fraud to occur. In fact, Chairman Levitt, on the morning of the markup, 
wrote about the language that is in the bill before us. He stressed 
that this language failed to adhere to his belief that a safe harbor 
should never protect fraudulent statements. Let me quote him:

       I continue to have serious concerns about the safe harbor 
     fraud exclusion as it relates to the stringent standard of 
     proof that must be satisfied before a private plaintiff can 
     prevail. As Chairman of the Securities and Exchange 
     Commission, I cannot embrace proposals which allow willful 
     fraud to receive the benefit of safe harbor protection.

  He had seen the language. That is a comment on the very language that 
is in this bill. He said:

       . . . I cannot embrace proposals which allow willful fraud 
     to receive the benefit of safe harbor protection.

  Others have criticized this provision as well. The Government Finance 
Officers Association, representing more than 13,000 State and local 
government financial officials, county treasurers, city managers, and 
so forth, wrote on the safe harbor provision in the bill:

       We believe this opens a major loophole through which 
     wrongdoers could escape liability while fraud victims would 
     be denied recovery.

  I say to my colleagues, no one is arguing here that we do not need to 
do something to improve safe harbor. The issue framed by this amendment 
is, who should do it? I submit, as I indicated earlier, in an issue of 
this complexity, it is better that it be done by the Securities and 
Exchange Commission.
  The North American Securities Administrators Association represents 
50 State securities regulators. They said:

       We believe this opens a major loophole through which 
     wrongdoers could escape liability while fraud victims would 
     be denied recovery.

  These are on the front line of defense against securities fraud. They 
are really the regulators closest to the individual investors. They 
call the provision in this bill an overly broad safe harbor, making it 
extremely difficult to sue when misleading information causes investors 
to suffer losses.
  AARP has also written calling for replacement of the safe harbor 
provision, with a directive to the SEC to issue a rule which structures 
a safe harbor that protects both legitimate business and investors.
  Given the broad definition in this legislation of forward-looking 
statements, discussed above, it is crucial that the legislation not 
shield such statements when they are false. Encouraging reasonable 
disclosures is one thing. Allowing fraudulent projections is another. 
Actually, that kind of safe harbor would hurt investors trying to make 
intelligent investment decisions and penalize companies trying to 
communicate honestly with their shareholders. It runs counter to the 
whole premise of our Federal securities laws, which has helped to give 
us strong markets. The fraud must be deterred, and the fraud must be 
punished when it occurs.
  Mr. President, I think it is important that safe harbor not protect 
fraudulent statements and, in my judgment, the best way to address this 
issue is to, in effect, use the approach that was initially in the 
legislation charging the SEC with developing a safe harbor regulation--
a process now engaged in.
  These are the transcripts of the hearings they held on the issue. 
They received over 150 comment statements and letters, and they have 
engaged in an extensive discussion with a whole range of people who 
have acquaintance and knowledge in this area.
  I very much hope the body will adopt the amendment.

[[Page S 9126]]


                               Exhibit 1

                                               U.S. Securities and


                                          Exchange Commission,

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

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