[Congressional Record Volume 141, Number 106 (Tuesday, June 27, 1995)]
[Senate]
[Pages S9133-S9141]
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.
  The PRESIDING OFFICER. Under the previous order, the Chair recognizes 
the Senator from Maryland to offer an amendment.


                           Amendment No. 1478

       (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 assistant legislative clerk read as follows:

       The Senator from Maryland [Mr. Sarbanes] proposes an 
     amendment numbered 1478.

       On page 114, strike lines 7 and 8, and insert the 
     following:
       ``(1) made with the actual knowledge that it was false or 
     misleading;
       On page 121, strike lines 1 and 2, and insert the 
     following:
       ``(1) made with the actual knowledge that it was false or 
     misleading;

  The PRESIDING OFFICER. The Senator from Maryland.
  Mr. SARBANES. Mr. President, the previous amendment, the one we just 
considered, which was not adopted on a vote of 43 to 56, would have 
sent the matter of defining the parameters of the safe harbor exemption 
to the Securities and Exchange Commission.
  I, of course, argued very strenuously in the consideration of the 
amendment 

[[Page S 9134]]
that that is where this ought to be done, that it ought not to be done, 
well, in the committee and now in this Chamber, because the existing 
definition in the bill has already been amended.
  The Senate did not adopt that provision, and the question now arises, 
if you are going to have a statutory definition, what should it be? 
What should it be?
  This amendment that has been sent to the desk would strike out the 
language that is in the bill. What the bill says is that the exemption 
from the liability provided does not apply to a forward-looking 
statement that is knowingly made with the expectation, purpose, and 
actual intent of misleading investors.
  Earlier the Senator from New York modified that and struck the word 
``expectation,'' but the problem still remains, the essential problem 
which prompted the Chairman of the Securities and Exchange Commission 
to say, and I quote him, ``I cannot embrace proposals which allow 
willful fraud to receive the benefit of safe harbor protection.''
  So we are now into the question, if the standard in the bill is 
inappropriate, as I believe strongly it is, and as has been indicated 
by the Chairman of the Securities and Exchange Commission, and indeed 
by other securities regulators, State securities regulators, by 
Government finance officers and others, all of whom in a sense are 
outside the controversy amongst the economic interests associated with 
this bill, and represent the public interest, the question now is, is 
this standard so difficult that all but the most egregious fraudulent 
efforts would be exempted from liability. And I submit that it is, and 
the amendment I have sent to the desk is an effort to modify that. The 
standard provided for in that amendment is made with the actual 
knowledge that it was false or misleading.
  Let me repeat that: Made with the actual knowledge that it was false 
or misleading.
  There are forward-looking statements that would be exempted from 
liability under the standard in the bill that would not be exempted 
from liability under the standard of this amendment.
  The question then becomes, is the standard in this amendment an 
appropriate one? And I defy anyone to advance a rationale why a 
forward-looking statement made with the actual knowledge that it was 
false or misleading should be protected from liability. I have heard 
people talk, oh, we are not going to allow knowing fraud to be 
protected.
  That is exactly what this amendment provides. It says that the 
exemption from liability provided for in this bill does not apply for a 
forward-looking statement that is made with the actual knowledge that 
it was false or misleading. And I want to hear from others, if they 
oppose the amendment, why they believe a forward-looking statement made 
with the actual knowledge that it was false or misleading ought to be 
protected from liability.
  Mr. President, this is an issue of significance and moment. We have 
heard from the various securities regulators in opposition to the 
provision in the committee bill. The National Association of Securities 
Dealers has written to us in opposition to it, as has the Government 
Finance Officers Association. SEC, of course, I have already quoted 
their statement. But let me just point out the Government Finance 
Officers Association, which represents more than 13,000 State and local 
government financial officials, county treasurers, city managers, and 
so on, and which issues securities and invests billions of dollars of 
public pension and public taxpayer funds every year, wrote of the safe 
harbor provision in the bill, the standard that we are seeking to 
change, the one in the bill which says knowingly made with the purpose 
and actual intent of misleading investors, ``We believe this opens a 
major loophole through which wrongdoers could escape liability while 
fraud victims would be denied recovery.''
  Let me repeat that: ``We believe this opens a major loophole through 
which wrongdoers could escape liability while fraud victims would be 
denied recovery.''
  The provision in the bill requires you to show the actual intent of 
the parties making the forward-looking statement. Not only that, you 
have to show that it was knowingly made with the purpose of misleading 
investors. And as originally written also the expectation, although 
that was stricken earlier in our consideration. So it is now knowingly 
made with the purpose and actual intent of misleading the investors.
  That is what you have to demonstrate in order for the forward-looking 
statement to lose its immunization from liability. And that is a 
standard that is so extreme that the Chairman of the Securities and 
Exchange Commission wrote to us and said, ``I cannot embrace proposals 
which allow willful fraud to receive the benefit of safe harbor 
protection.'' And that is the provision which the Government Finance 
Officers Assocation said, ``We believe this opens a major loophole 
through which wrongdoers could escape liability while fraud victims 
would be denied recovery.''
  The amendment that I have sent to the desk very simply states that 
the exemption from liability is lost for a forward-looking statement 
that is made with the actual knowledge that it was false or misleading, 
very simply put. You make a forward-looking statement, and you make it 
with the actual knowledge that it was false or the actual knowledge 
that it was misleading, and you lose your immunity. You lose your 
immunity.
  Why should anyone who makes a forward-looking statement with an 
actual knowledge that it was false or misleading have immunity from 
liability for that forward-looking statement?
  That is the issue that is before us by this amendment. It was my 
preference that this issue be worked out by the Commission. I thought 
that is where it ought to go in terms of expertise.
  If Members want to deal with it here on the floor, then we need to 
examine it on the standard, address the standard that is in the bill, 
why I think it opens, as the Government Finance Officers said, a major 
loophole, or which, as the Chairman of the Commission said, would allow 
willful fraud to receive the benefit of safe harbor protection. That 
ought not to be the case. Therefore, I propose to substitute the 
language ``made with actual knowledge that it was false or 
misleading.'' No statement made with the actual knowledge that it was 
false or with the actual knowledge that it was misleading ought to have 
safe harbor protection.
  Mr. President, I yield the floor.
  Mr. D'AMATO addressed the Chair.
  The PRESIDING OFFICER. The Senator from New York.
  Mr. D'AMATO. Mr. President, what we are talking about now is what we 
call in legal jargon the scienter standard. It is not an easy one. It 
can be difficult to understand. And indeed it can open up an incredible 
loophole, one that we are attempting to deal with; that is, to permit 
people to make projections. And they must state--I can have that 
disclaimer--they must state this is a projection, this is a projection, 
and that it may not be accurate. I will get the exact verbiage. It may 
not be accurate.
  Whole classes of issuers are exempted, the penny stocks, the mergers 
and acquisitions. ``Refers clearly that such projections, estimates, or 
descriptions are forward-looking statements and the risk that the 
actual results may differ materially from such projections, estimates, 
or descriptions'' has to be included.
  Now, let us read the language, because I have heard this, and I have 
seen it written, too. It is inaccurate to describe this bill as giving 
a license to people to knowingly, with intent, defraud. It is just 
wrong.
  Here is the language in the bill. We modified it today because I 
thought there was one standard that might go above and beyond. The 
exemption from liability provided for in subsection A does not apply. 
It does not apply. In other words, you get no exemption. Then on page 
114, line 4, it says:

       (c) Exclusions.--The exemption from liability provided for 
     in subsection (a) does not apply to a forward-looking 
     statement that is--

  In other words, you get no exemption.

       (1) knowingly made with the expectation, purpose, and 
     actual intent of misleading investors.

  So if you knowingly make a false statement, knowingly, with the 
purpose and actual intent of misleading 

[[Page S 9135]]
investors, you are not protected. And that is as it should be. These 
are projections. Now, I have to ask the question, who knows what 
someone knows, what is knowledge to them? And once you have that, once 
you say, if you knowingly made this, all they have to do--the 
plaintiffs bar this particular group, very small group --is allege that 
you knowingly made a false statement.
  The burden now comes upon that person who has this complaint filed 
against them to prove that they did not. How do you prove it? How do 
you prove it? That is why we say, look, it has to be a little tougher. 
You cannot say, ``You knowingly made this. You knowingly made this, 
knowingly, with intent, with the purpose to mislead investors.'' It 
seems to me that that is pretty reasonable.
  If a person does that, then you should go after them and hold them. 
We do. They are not exempt. We get down to the issue of splitting legal 
hairs and opening the doors for this group of bandits. That is what 
they are, bandits, absolute bandits; this is the group that, you know, 
suggests that we make it easier to bring these kinds of suits. We do 
not want to make it easier to bring suits that have no merit, where 
people allege someone knowingly, falsely made these statements. All you 
have to do is allege someone made the statement. Bingo, we have not 
solved the problem. That brings us right back into court and brings us 
into the situation where a person gets sued for millions, and has to 
settle for millions of dollars and/or pay millions of dollars in legal 
fees against claims that would otherwise be worthless and should get no 
dollars.
  I have to tell you something; that we have sat back for far too long 
in dealing with this because it was really a very small and almost 
insignificant portion of the population that was affected. We did not 
see on a daily basis lawsuits being brought with no claim. We did not 
see where we had, for example, of 229 cases filed, 229 cases filed, 38 
percent used the same repeat plaintiffs; 38 percent used the same 
cadre. In other words, they were professional plaintiffs. And I have to 
tell you why we may have cured that and said--by the way, they were 
paid bonuses. These people, for letting their names be used, got 
$15,000, $20,000, $25,000 for being professional plaintiffs.
  So when we talk about protecting the little guy, we are not 
protecting the little guy. What we are trying to do is put a stop to 
and really protect the investors who have their money invested in these 
small companies, who have the mutual funds, who have those pension 
funds, which represent trillions of dollars and truly represent 
millions of people. Give them an opportunity. Give them a say. And do 
not have their companies savaged by people who are only looking to take 
care of their own interests. And those are the buccaneering barristers, 
those lawyers. The term was coined, at least the first time I heard it, 
by Senator Dodd. He happens to be correct. They are sharks who are 
looking to eat whatever they can and the devil may care as it relates 
to the harm and the injury that they bring, in many cases, to good 
people simply by being able to allege that someone knowingly made a 
misleading statement.
  We say, no, you have to go a little further. Knowingly, and you have 
to show intent. Because who knows what ``knowingly'' is. Show me. You 
say: I allege you knew it. I say I did not know. But if one has to 
allege that you knew and you had intent, that is a little more 
difficult; is it not? I think people are entitled to that presumption. 
I do not think they should be subjected to these scurrilous lawsuits. 
And they have taken place. That is why we say ``knowingly, with 
intent,'' and that you deliberately did this to mislead investors.
  It is one thing to have people subjected to suits where there is 
intent to deliberately mislead, and it is another thing where people 
have made accidents and now are held to a standard whereby that was an 
accident and they say, ``You knew.'' You say, ``I did not know.'' You 
did and you actually made, if the fellow actually made the statement, 
he made the statement. Nobody can say he actually did not. So the word 
``actually,'' that is nothing. They say you have knowledge, claim you 
have knowledge. Wait, I did not know that it was wrong. I got you in 
court because all I had to do is say that, well, you did. You had 
actual knowledge, and if you checked your papers, you would have found 
out that the projections you were making were off. Now I have him in 
under a claim of actual knowledge.
  Did he really have actual knowledge? No. But it is very easy to 
allege. And once you allege it, you have him in this revolving door, in 
the chain. What do his lawyers say to him? ``We can fight it. We may be 
able to win it.'' But you know what? You may stand to lose, if they get 
a judgment against you, tens of millions of dollars, and put the 
company--a startup company --out of business. Or if you are an 
accountant, yes, we can probably win it. But you can get hit pretty 
hard. Because you know, these people made this and you saw it and they 
dragged you in.
  I think that when you look at and read what we have put in, not what 
somebody puts in substitution, tell me how you can read this bill and 
say, anybody, that we say that you can deliberately lie and mislead 
with intent, and that we give you safe harbor for that? We do not.
  I want to do it, and I will sit down and read once more, there is no 
exemption from liability where, line 7, a forward looking statement is:

       (1) knowingly made with the expectation, purpose, and 
     actual intent of misleading investors.

  They are not protected. You can be sued. And if that is the case, you 
should be sued, no doubt; absolutely. There is nothing that keeps the 
SEC from doing this, from bringing these suits. Our bill does not 
protect fraudulent statements or conduct. The administration does not 
say that it does. It does not say that it does.
  A letter, from Abner Mikva, counsel to the President, asked for 
clarification. I do not think that our bill is unclear on this point. I 
can clarify it. If it is, this debate should provide important guidance 
that the bill does not and will not protect fraud. I think this is 
clarification enough. How many times should we state it? We do not do 
it, we will not do it, that is not my intent, and I urge my colleagues 
to oppose the amendment by my distinguished colleague and friend from 
Maryland.
  Mr. SARBANES addressed the Chair.
  The PRESIDING OFFICER. The Senator from Maryland.
  Mr. SARBANES. Mr. President, the distinguished Senator from New York 
read the standard that is in the bill, and that is the problem, that 
standard. Those who are knowledgeable in the securities field have 
looked at that standard and reached the conclusion that it is an 
enormous loophole, and it will enable people to engage in willful 
fraud.
  The amendment which I sent to the desk, which would change that 
language, would not allow a forward-looking statement to claim 
exemption from liability where the statement was made with the actual 
knowledge that it was false or misleading.
  What every Member has to ask themselves is on what possible basis 
would you want to give immunity to a forward-looking statement that was 
made with the actual knowledge that it was false or with the actual 
knowledge that it was misleading? I submit to you, statements of that 
sort ought not to be protected from immunity. The bill, as written, 
would, in effect, allow statements made of that sort to have protection 
from immunity.
  The standard in the bill is so high and so narrow that virtually any 
forward-looking statement is going to have immunity. The burden of 
showing purpose and actual intent--before, of course, we also had 
expectation which the Senators struck from the bill--but to show 
purpose and actual intent is so heavy that a lot of very fast games by 
some very fast artists are going to be played on the investing public 
and is going to cause a lot of people a great deal of grief and harm 
and damage.
  So I urge Members to examine this issue very carefully. This is one 
of those issues that will come back to haunt you because people are 
going to be swindled, they are not going to be reachable because of the 
immunity which the bill provides, and everyone is going to look at what 
they did and say, ``Why should these people be immunized from 
liability,'' and the responsibility for immunizing them is going to 
rest on the people voting on this 

[[Page S 9136]]
amendment and voting on this legislation.
  So I very strongly urge the adoption of the amendment.
  Now, the letter to which my colleague referred is a letter from the 
counsel to the President, Judge Mikva. I ask unanimous consent that the 
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 quote:

       The White House
                                        Washington, June 27, 1995.
       Dear Senator Sarbanes: I am writing to express the 
     administration's support of your amendment to S. 240. The 
     administration strongly believes the bill's safe harbor 
     provision should not protect a statement made with the actual 
     knowledge that it was false or misleading.

  Let me repeat that:

       . . . should not protect a statement made with the actual 
     knowledge that it was false or misleading.
       The bill's current safe harbor standard would exclude 
     forward-looking statements ``knowingly made with the 
     expectation, purpose, and actual intent of misleading 
     investors.''

  And as I noted, let me depart from the text of the letter for a 
moment, not very long ago, earlier in our proceedings, the Senator from 
New York struck the word ``expectation'' from the standard that is in 
the bill.
  So he continues then, it now reads:

       ``knowingly made with the purpose, and actual intent of 
     misleading investors.''

  I double checked, and I am told that does not affect the import of 
this letter, and that knowing of that change, the letter still stands 
as sent to us. I double checked that in order to be very accurate with 
my colleagues.
  The letter goes on to say:

       The Securities and Exchange Commission has opposed the use 
     of this standard because it might allow some defendants to 
     avoid liability for certain false statements.
       In the Statement of Administration Policy forwarded to the 
     Senate on June 23, 1995, the administration urged the Senate 
     to clarify whether the safe harbor's current language would 
     protect statements known to be materially false or misleading 
     when made. The Senate can best ensure that the safe harbor 
     would not protect fraudulent statements by adopting an actual 
     knowledge standard, as your amendment proposes.

  Let me repeat that:

       The Senate can best ensure that the safe harbor would not 
     protect fraudulent statements by adopting an actual knowledge 
     standard, as your amendment proposes.
           Sincerely,
                                                   Abner J. Mikva,
                                         Counsel to the President.

  Mr. President, my colleague from New York has suggested, well, we are 
just splitting legal hairs here. We are engaged in some difficult legal 
analysis, that is quite true. And I suggested that when we did the 
previous amendment that the place where this ought to be done is by the 
SEC. The Senator from New York did not agree with that, and a fairly 
narrow margin of the Members of this body supported him in that view 
and, therefore, the burden falls upon us to define the standard here.
  The SEC and the State regulators have told us that the standard, as 
written in the bill, will protect fraud artists. In effect, the bill 
swings the pendulum too far and the language of the bill goes too far 
and, therefore, will end up protecting fraud and hurting investors.
  This amendment is an effort to bring the pendulum back toward the 
middle. It still will provide an enhanced safe harbor over what now 
exists, but it will not go to the extreme lengths of the provision in 
the bill which all the experts tell us, all the people whose 
responsibility it is to deal with securities fraud, who work in the 
field full-time all the time, they all tell us that this will end up 
protecting fraud artists. As I said, the Chairman of the SEC said:

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

  That is what we are talking about here. The substitute standard which 
I am proposing simply says that you are not going to give protection 
from liability to a forward-looking statement --listen very carefully 
to this--to a forward-looking statement that is made with the actual 
knowledge that it was false or misleading. You cannot make the 
statement with actual knowledge that it is false or actual knowledge 
that it is misleading and be protected from liability.
 And I invite anyone to explain to me why that kind of statement ought 
to get protection from liability. I would think it is as clear as can 
be that is the very sort of statement that ought not to get protection 
from liability. Therefore, I say to my colleagues, if--as apparently 
has been decided--we are going to write the standard right here, 
clearly, we must rewrite the standard in the bill. I submit that the 
standard contained in the amendment is an appropriate standard, if we 
are going to be concerned about a proper balance that will help to 
provide some insurance that investors will not be subjected to fraud.

  Mr. President, I yield the floor.
                               Exhibit 1


                                              The White House,

                                    Washington, DC, June 27, 1995.
     Hon. Paul Sarbanes,
     U.S. Senate,
     Washington, DC.
       Dear Senator Sarbanes: I am writing to express the 
     Administration's support of your amendment to S. 240. The 
     Administration strongly believes the bill's safe harbor 
     provision should not protect a statement made with the actual 
     knowledge that it was false or misleading.
       The bill's current safe-harbor standard would exclude 
     forward-looking statements ``knowingly made with the 
     expectation, purpose, and actual intent of misleading 
     investors.'' The Securities and Exchange Commission has 
     opposed the use of this standard because it might allow some 
     defendants to avoid liability for certain false statements.
       In the Statement of Administration Policy forwarded to the 
     Senate on June 23, 1995, the Administration urged the Senate 
     to clarify whether the safe harbor's current language would 
     protect statements known to be materially false or misleading 
     when made. The Senate can best ensure that the safe-harbor 
     would not protect fraudulent statements by adopting an actual 
     knowledge standard, as your amendment proposes.
           Sincerely,
                                                   Abner J. Mikva,
                                         Counsel to the President.

  Mr. D'AMATO. Mr. President, I think we have debated this point now 
over and over. First, let me say, that if the Securities and Exchange 
Commission has constructive suggestions to make in this area, we stand 
ready, willing, and able to adopt them. We would be happy to have 
hearings. But, we have been waiting for the safe harbor standards for 3 
years, and we finally have felt compelled to create the safe harbor 
ourselves. Once again, I direct my colleagues to the letters from 
Chairman Levitt. He has shared with us the frustration and problems 
that the business community face. He alludes to these problems and he 
has recognized that there is a need to begin solving these problems.
  Now, if you look at the language of my friend and colleagues' 
amendment, and then look at the language in S. 240, as it currently 
exists, it is very clear that the current language means that if you 
knowingly make a statement with the purpose and intent of misleading 
investors you will be held liable. This current standard means that you 
have to demonstrate that this statement was made with an intent to 
mislead investors. However, the Sarbanes amendment would reduce that 
standard to just knowing a misstatement was made. That is too easy to 
allege. That opens the door to meritless suits and that then forces 
firms to pay huge settlements. That is what we are attempting to stop.
  We cannot countenance lying nor can we countenance the making of 
false statements. But the fact of the matter is, if we use this 
scienter provision, it will open the door to meritless litigation based 
only on allegation. This will prove to be a nearly impossible 
standard--how does one prove that he actually did not know and was not 
aware of the misstatement? How does one prove that? That is the high 
burden that we place on the defendant with this standard. With this 
standard, I feel that firms will be forced to settle and that means 
payments of millions of dollars.
  Mr. President, I ask for the yeas and nays.
  The PRESIDING OFFICER. Is there a sufficient second?
  There is a sufficient second.
  The yeas and nays were ordered.
  Mr. DODD. Mr. President, how much time remains?
  The PRESIDING OFFICER. There is no control of time.
  Mr. DODD. Thank you. Mr. President, let me commend my colleague from 
Maryland, first of all, for offering a creative amendment here. It 
looks tempting with the language that is offered and the arguments he 
has given 

[[Page S 9137]]
as to why not just support the replacement language that he has 
offered, which would strike paragraph one on page 121 and paragraph one 
on another page--I apologize for not having the page number--and 
replace what we now have, ``knowingly made with the purpose and intent 
of misleading investors,'' to ``actual knowledge of false and 
misleading information,'' I believe is the language of the amendment.
  Let me begin, Mr. President, by stating what I hope all of our 
colleagues will accept is the point here. That is, that we are all 
after the same goal--certainly, those of us who have spent time over 
the last 3 or 4 years in trying to deal with the broader issue that 
this legislation attempts to address. I have tried to strike a balance 
that will deal with an existing problem that we have identified over 
these last several days in our debate.
  Let us also assume that we have some six, seven, eight pages here in 
the bill that deal with the issue of safe harbor. An amendment being 
offered by the Senator from Maryland deals with one clause--an 
important clause, but nonetheless one aspect of safe harbor.
  I said earlier today, Mr. President, that the purpose of safe harbor 
is designed to encourage the disclosure of information, to encourage 
the disclosure of information. There is no requirement, under law, that 
companies disclose information to potential investors. There may be 
those who want to require that, but the law does not require it.
  So the very purpose of having a safe harbor is not just to create 
some island where people can make statements, futuristic statements, 
and avoid litigation or be immune, but because we think it is important 
to elicit from businesses, from industry, from corporations, statements 
about what they believe the company is likely to be doing.
  Good news and bad news. It is not just good news. A forward-looking 
statement can be bad news about what may happen--product lines that are 
not necessarily going to live up to earlier expectations.
  I hope that everyone would agree that it is in the interests of our 
country economically to encourage businesses to be forthcoming about 
information which they possess that will allow for investors to make 
intelligent, reasonable decisions about whether to buy stock, sell 
stock, whatever else they may be engaged in. That is why we create a 
safe harbor. That is the only reason for it.
  If you had a law that required businesses to tell everything they 
know, you would not need safe harbor. No one is suggesting we do that. 
Proprietary information, businesses trying to make plans for the 
future, should remain private. In the whole area of securities 
litigation, the notion of safe harbor is a longstanding notion.
  The problem, today, as identified by the Chairman of the Securities 
and Exchange Commission is that the present safe harbor is not working.
  We have heard at length earlier today, and maybe I ought to put in 
the letter again, the letter of May 19, in which the Chairman of the 
SEC identifies in paragraph 3 of that letter, ``There is a need for 
stronger safe harbor than currently exists.''
  Mr. President, I ask unanimous consent this letter be printed in the 
Record, because the Chairman of the SEC lays out why that problem 
exists.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

                           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, but 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 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 

[[Page S 9138]]
     that should be subject to additional conditions?
       There are many more questions that have arisen in the 
     course of the Commission's exploration of how to design a 
     safe harbor. We have issued a concept release, received a 
     large volume of comment letters in response, and held three 
     days of hearings, both in California and Washington. In 
     addition, I have met personally with most groups that might 
     conceivably have an interest in the subject: corporate 
     leaders, investor groups, plaintiff's lawyers, defense 
     lawyers, state and federal regulators, law professors, and 
     even federal judges. The one thing I can state unequivocally 
     is that this subject eludes easy answers.
       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. DODD. Mr. President, if you disagree with safe harbor, and wish 
to apply a standard here that is appealing on its face, but actually 
undercuts the very intention of the safe harbor, then it seems to me 
you run the risk of destroying a very important vehicle that causes 
businesses to voluntarily give information out that is critical. 
Information, as I say, that could be positive or negative information. 
So that is the reason it exists.
  Now let me cite examples where I believe that the actual knowledge 
standard, as tempting as it is, can actually just bring us back to the 
point we are trying to get away from, and that is the litigation that 
has swamped up in many ways in terms of the ability of these companies 
to move forward and to, as I said earlier, to give the kind of 
information that may be necessary.
  We all want safe harbor, as I mention. We want a safe harbor that 
will work. When the chief executive officer of a large industry goes to 
his general counsel in a very practical way, and says ``Should I tell 
pension fund investors,''--remember, that is primarily who we are 
talking about-- ``that,'' returning to an earlier example, ``a new disk 
drive at the heart of their investment in this company, may not quite 
work as well as we planned.''
  We should have a safe harbor that will allow the general counsel to 
say ``Yes, you can say this without being sued.'' It is so the company 
now has this information, not required by law, that it share that 
information. But the CEO says, ``I do not think this disk drive will 
work quite as well as I planned, and I want to know whether or not to 
let people know,'' knowing full well what may be the implication in 
terms of the investors.
  Pension funds obviously, I think, are entitled to information even if 
it is not required to be disclosed. We want to make sure that CEO's can 
say and tell us what is going on without the fear of millions of 
dollars in litigation costs. That is the point of this bill--trying to 
reduce litigation costs.
  If we do not make this a very clear division, a very clear division, 
as to when safe harbor does not apply, it is not going to be safe 
enough, and that general counsel is then going to say to that CEO, 
``You are not required to say anything--don't say anything. Don't say 
anything.''
  Who are the winners and losers, when that decision is made? The 
general counsel says ``Don't say anything here, don't you dare say 
anything. You are not required to by law.'' You can never be sued for 
what he did not say in this case. So they do not do anything.
  Mr. SARBANES. Will the Senator yield?
  Mr. DODD. If I could finish this train of thought, I will be glad to 
yield for a question.
  We are trying here to get this information out. As the Council of 
Institutional Investors, representing literally millions of small 
investors in this country with hundreds of billions of dollars in 
assets, said in testifying before the SEC, the safe harbor must be 100 
percent safe.
  Let me go back at that point quickly. There is a fear that Members 
will think that anything that anybody does in relationship to 
securities can fall into this safe harbor category. That is not the 
case at all.
  As pointed out by the distinguished junior Senator from Utah today, 
by the Senator from New York, and myself, let me go back, there are 6 
or 7 pages in the bill dealing with safe harbor. This is one line in 
that entire section.
  Safe harbor only applies to statements by issuance and reviewers 
hired. Statements by stockbrokers are not included. Certain issuers are 
excluded from safe harbor, including anyone found to have violated 
securities law, anyone involved in penny stocks, blank check companies, 
investment companies, IPO's, tender offers, roll-up transactions--all 
are exempted. Historical information contained in historical financial 
statements is excluded as well.
  I forget to mention this earlier, but in this bill we require 
cautionary language be included in forward-looking statements so 
investors can pick up the kind of language that ought to give them a 
better sense to put them on notice that maybe these predictions are not 
going to turn out to either be as bad or as good as the company may 
utter and say. That was never before required.
  In the discussion of safe harbor, remember, we are dealing with 
narrow fact situations here.
  Mr. D'AMATO. Will my friend yield for a question?
  Mr. DODD. I yield.
  Mr. D'AMATO. Is it not true that one of the other provisions never 
included, safe harbor will now permit the SEC to bring suits for 
disgorgement, for violation of safe harbor provisions?
  Mr. DODD. I was just about to get to that point. That is a second 
added new provision.
  Mr. D'AMATO. That has never been in before?
  Mr. DODD. Never before in this legislation. It is all new authority 
we are extending to the SEC.
  To listen to this debate, we would think we have been stripping away 
and stripping away. What we are doing is providing different vehicles. 
As we listened and heard testimony, the Council of Institutional 
Investors represents, I said, millions of people in the country, 
involving billions of dollars.
  They want that information. These pension funds want to know what is 
going on in these companies. If these companies do not provide that 
kind of information, these pension funds are not making decisions with 
all of the information they have when they decide whether or not to 
invest or not to invest.
  So the safe harbor is a critical issue in soliciting that kind of 
information. That is why it is so important. I think their testimony 
before the SEC on truly a safe harbor, a 100 percent safe harbor is 
absolutely critical. Again in the context of what we are talking about, 
those that are excluded, from the protections of safe harbor.
  Now, returning to my earlier example, I illustrate the problem with 
the amendment of my colleague from Maryland. The CEO in the fact 
situation I described does not think it will work out as well as it is, 
and goes to 

[[Page S 9139]]
the general counsel and says, ``should I share this information?''
  It turns out the disk drive prediction that he had made was a panic 
decision; that, in fact, the disk drive turns out to be fine, turns out 
not to be as bad as he thought. But many shareholders, based on the 
earlier prediction, sold their stock. Now they sue them for actually 
knowing that the disk drive was really OK.
  Of course when he gets before a jury he will be able to make his 
case. But the problem is, Mr. President, before you get to the jury, 
you are probably going to end up with a settlement involving millions 
of dollars, because there were memos or other information that came 
across his desk that said, ``Mr. CEO, we think this disk drive will be 
OK.'' During the discovery period, as a practical matter in litigation, 
every single paper that crossed that CEO's desk is going to be subject 
to discovery.
  So there on the table is a memo or two or three that says, ``We think 
this disk drive is not as bad as you think,'' but he felt based on his 
feelings about this, with the advice of general counsel that he said 
``I don't think it will do that well.''
  Now you have yourself with actual knowledge--not with intent, not 
with purpose, to mislead, but with actual knowledge of information--
that suggested a different result than what the CEO predicted when he 
put out a statement that he thought the pension funds ought to know 
about.
  I do not believe that it is in our interest in the safe harbor 
context--not in other issues of aiding and abetting and joint and 
several and proportional liability, but in safe harbor context, if it 
is a standard of actual knowledge of something that existed that 
contradicted your own statement, thereby you said something misleading, 
because there was information that reached a different conclusion, and 
you end up with a lawyer saying ``Look, you know, I don't know how a 
jury will find with this.'' The Sarbanes language in this bill says 
``actual knowledge.''
  Mr. SARBANES. Actual knowledge that it was false. Why should anyone 
be able to make a statement that they have actual knowledge that is 
false.
  Mr. DODD. Misleading. That could be the subject of litigation here. 
You made a statement that you said you thought this disk drive was 
going to do poorly. You had information before you that said something 
else. I sold my stock on the basis of that prediction you put out, that 
it was not going to do well.
  Now I know you had information from your people in your divisions 
that said it would do fine. You made a prediction it would do poorly. 
You had actual knowledge there was different information available to 
you. You cannot tell me about that. As a result, I am suing you, and I 
think I can collect.
  Mr. SARBANES. Do you think he should have told? Do you think he 
should have had a forward-looking statement that said some have said we 
have a problem; others say we do not have a problem. Would that not be 
an honest statement to the potential investors?
  Mr. DODD. Let me say to my colleague, another aspect of this bill, 
here in the safe harbor context, in the safe harbor context, it is our 
common desire to solicit information from these businesses that do not 
have to make it forthcoming. I think, frankly, going to the intent and 
purpose, to disregard intent and purpose of that CEO, and have the mere 
standard actual knowledge, I think, creates a nightmare. That is my 
view.
  Mr. SARBANES. Is it the Senator's view--will the Senator yield for a 
question?
  Mr. McCAIN. Regular order. If the Senator asked for the Senator to 
yield for a question, fine.
  The PRESIDING OFFICER (Mr. Grams). The Chair reminds the Senator----
  Mr. DODD. I am happy to yield to my colleague.
  Mr. SARBANES. I just asked the Senator if he would yield for a 
question.
  The PRESIDING OFFICER. A reminder that the Senator must address the 
Chair to ask a question.
  Mr. SARBANES. Mr. President, I ask the Senator if he will yield.
  Mr. DODD. I am happy to yield to my colleague.
  Mr. SARBANES. Is it the Senator's view that all forward-looking 
statements are voluntary? As I understand it, the Senator says you are 
going to dissuade forward-looking statements because these are 
voluntary things; and, if they have a problem with what the standard 
is, they will not volunteer the information.
  Is that your position?
  Mr. DODD. That is the difficulty here. Yes.
  Mr. SARBANES. What is your explanation of the language on page 113 of 
the bill which includes within the definition of a forward-looking 
statement in paragraph 3, lines 18 through 22, a statement of future 
economic performance contained in the discussion and analysis of 
financial condition by the management, or in the results of operations 
included pursuant to the rules and regulations of the Commission.
  Mr. DODD. I do not understand the purpose of the statement.
  Mr. SARBANES. It is my understanding that currently under the rules 
and regulations of the Commission you are required to provide certain 
information that is in effect a forward-looking statement.
  Does the Senator agree to that?
  Mr. DODD. I understand that. How much information you have to----
  Mr. SARBANES. But you earlier made the statement in effect that this 
was all voluntary, and that people, if they were dissuaded, would 
provide no information. The fact is under current SEC requirement they 
are required to provide some forward-looking information.
  Is that correct?
  Mr. DODD. The Senator is correct. I stand corrected.
  My point here is that soliciting all the necessary information one 
would like to have is not required by law. Some statements are. The 
point I was trying to make was in the case of the one that I ascribed 
to. But the condition of a particular product line, a case could be 
made that that information would not necessarily be required to be 
forthcoming.
  So my point is that while the temptation to adopt the actual 
knowledge standard here, in effect we may be undoing the very purpose 
that I presume is unanimous here. Maybe there are some who disagree 
with us, but you want a good safe harbor. The purpose of having a safe 
harbor is that it be safe. If it just be a harbor that is sometimes 
safe or never safe or rarely safe, then the very purpose for its 
existence is undermined. As a result, you defeat the very purpose of 
creating it.
  My point here is that a simple standard of actual knowledge can 
undermine that very desire that I believe is unanimously held in this 
body to create that safe harbor. So while the standard of actual 
knowledge is a difficult standard to overcome rhetorically in the 
subject of debate, in the practical application of it, then I think it 
is a standard that undermines the very purpose of safe harbor.
  I say to my colleague from Maryland and others, they know I have some 
difficulty even with this standard. I am worried about having a good 
one that does create the safe harbor, and that does apply to those 
efforts. My colleague from New York and I and Senator Domenici have 
discussed this at some length. And there are many different ways we may 
finally get some language here that can be appropriate. But 
establishing just actual knowledge with no intent or no purpose to 
mislead, it seems to me, runs the risk of having the very purpose of 
the safe harbor destroyed.
  I cite the factual kind of example involving a good meaning, well 
intended person--let us assume that most of the people we are talking 
about here are not inherent crooks. We are talking about decent, 
competent people who want to do their business appropriately and 
properly. And sharing information that can then undermine them and end 
up with significant litigation costs is not exactly serving the purpose 
of the intent when we desire to put in a safe harbor in the 
legislation.
  The SEC itself, as I said earlier, feels as though the safe harbor 
needs to be strengthened. Their present standard is ``acted in good 
faith and reasonable basis for believing what you are saying.'' That, 
of course, created a mountain of problems over the issue of reasonable 
basis.
  But as I mentioned a moment ago, we have added language here that 
requires 

[[Page S 9140]]
cautionary language. The Senator from New York has pointed out that we 
extended to the SEC the authority to go after these matters which may 
be the best way of recovering, I would say anyway, because they are not 
necessarily out to just win for themselves but rather win for the 
investors where they have the knowingly intentionally and with purpose 
attempted to mislead the investor. That may not be a perfect standard 
but I think our desire here to have a higher standard makes sense if 
you understand the value of safe harbor.
  Again I will state what I said at the outset. For those who do not 
believe in safe harbor, adoption of the Sarbanes amendment makes sense 
because in my view that undermines the safe harbor.
  So I would respectfully disagree with my colleague in his amendment, 
as appealing as it is to the rhetorical sense. I think the net effect 
of it at the end of the day is that we are going to abandon the safe 
harbor protection. Information will not be forthcoming that could 
otherwise help your institutional investors, particularly in terms of 
deciding whether or not to buy or sell the stock in a particular 
company.
  I think that is a shortcoming, if we adopt this language as part of 
this bill. I think it will hurt what we have tried to do here with this 
legislation in trying to strike the balance.
  With that, Mr. President, I yield the floor.
  Several Senators addressed the Chair.
  The PRESIDING OFFICER. The Senator from Arizona.
  Mr. LAUTENBERG. Mr. President, the Chair has an obligation to 
recognize the Senator who stood up first.
  Mr. McCAIN. Mr. President, last September the United States----
  Mr. LAUTENBERG addressed the Chair.
  The PRESIDING OFFICER. The Senate is out of order. The Senate will be 
in order. Both Senators were standing. The Senator from Arizona has 
been standing.
  Mr. LAUTENBERG. I have been standing. With all due respect, I have 
been here, was here before the Senator from Arizona, and I called for 
recognition from the Chair. And the Chair, as I saw it, deliberately 
chose to ignore my appeal for recognition. The Chair I guess has that 
right. But that is not the way this body is to operate.
  The PRESIDING OFFICER. The Senator from Arizona has the floor.
  Mr. McCAIN. Mr. President, my friend from New Jersey is obviously 
upset. Could I ask how long the Senator from New Jersey intended to 
speak?
  Mr. LAUTENBERG. Probably 15 minutes. I am not upset at the Senator 
from Arizona. I am upset because of common courtesy.
  Mr. McCAIN. I understand. May I say that I believe it is a very close 
call. And, Mr. President, I ask unanimous consent to yield 15 minutes 
to the Senator from New Jersey, and that as I do so, I have been in 
these similar situations with very tough calls from the Chair as to who 
speaks first. I believe the rule of the Senate is who is on their feet 
and speaks first is who seeks recognition. I believe we were both on 
our feet. I do not believe that the rule of the Senate is who has been 
standing the longest.
  With that, I ask unanimous consent that the Senator from New Jersey 
is to be recognized for 15 minutes, and then I would be recognized for 
my remarks.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  Mr. LAUTENBERG. The Senator from Arizona is very courteous.
  The PRESIDING OFFICER. The Senator from New Jersey.
  Mr. LAUTENBERG. I respect and appreciate it.
  How long does he intend to speak?
  Mr. McCAIN. About 10 minutes. Please go ahead. The Senator was on the 
floor. Please go ahead.
  Mr. LAUTENBERG. I thank the Senator from Arizona.
  Mr. President, I ask unanimous consent to be added as a cosponsor of 
the Sarbanes amendment.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  Mr. LAUTENBERG. Mr. President, as the Senator from Maryland 
explained, this amendment would modify a provision of S. 240 that I 
find very troubling. I know that earlier today our colleague from New 
York tempered somewhat the existing language relating to the safe 
harbor provision, but Mr. President, I do not think he went far enough.
  One goal of this bill is to minimize the existing disincentives to 
provide detailed forward-looking statements about the economic 
prospects of their companies.
  Everyone agrees that is a desirable goal.
  I certainly do.
  Indeed, my support is based on personal experience.
  Prior to coming to the Senate, I worked in the private sector. I 
cofounded a company with two others, three of us from poor working-
class homes, that today employs over 20,000 people. It is an American 
success story. I say that because I think it is important to 
occasionally call on one's background as we review some of the 
legislation that is proposed in front of us. After the company went 
public in 1961, I filed countless statements with the SEC as its CEO. 
As the CEO, I believed that it was important for investors to have as 
much information as possible.
  Each year, I made it a practice to project earnings for the following 
year. And if it needed modification during the period due to changes 
and conditions, I quickly went to the public to alert them to any 
revision. This process had significant rewards because investor 
confidence in ADP--my company--caused our stock, which is listed on the 
New York Stock Exchange, to sell at among the highest price-earnings 
ratios of all listed securities on any exchange.
  There used to be a company in the investment business, an old name in 
the financial world, Kidder-Peabody. And each month they would publish 
a list known as The Nifty 50. These were the highest price-earnings 
ratio companies that were listed. They did that for over 265 months, 
for more than 22 years. Every month they would publish lists of the 
companies that were among the investors' favorites. The company that 
led that list was my company, ADP. It was on the list 215 out of 265 
months, far more than the next best company which listed among the top 
list more than 200 times. Obviously, the company did well. It performed 
well year after year. But it was the investors' belief, the investors' 
confidence, that they could always count on ADP to tell the truth about 
what was happening that caused the stock price to swell as the earnings 
grew.
  As I look back at that period, I know that I was in the forefront of 
CEO's who provided investors with forward-looking statements on my 
company's financial health. It made sense to me then. It makes sense to 
me now.
  One of the things that I know this bill would like to accomplish is 
to make sure that the public is as well informed as possible. It is not 
simply to focus on whether or not litigation is possible or whether 
there ought to be ceilings on certain claims but, rather, to give the 
public a chance to know what is going on and at the same time not to 
encourage frivolous or whimsical lawsuits.
  It is important that investors have as much information as they can. 
Everyone knows, especially in the larger companies, that senior 
executives in the company know very well what they are expecting to 
happen over a year, 2, 3, 4, 5 years in advance. It may not be precise, 
but they have a target; they have a goal. Everyone knows that in 
addition to the executives within the company, the board of directors 
has to be notified if there are any changes.
  What does that represent? It represents an advantage that people on 
the inside have over those on the outside who are investing their 
money. And there is nothing, no reason at all why anyone on the inside 
ought to have privileged information with which to sell stock or buy 
stock ahead of the investing public. It is critical that all investors 
have as much information about the company as they can to make informed 
investment decisions.
  Despite the desire to provide information, many issuers, many 
companies do not provide sufficient information. They do not because 
they are concerned about their potential liability, which this bill 
addresses, should these forecasts turn out to be off the mark. Well, if 
things change, as I said in my comments, then what ought to happen is 
the company ought to say: Investors, be prepared. We have to take a hit 
on 

[[Page S 9141]]
our earnings because of this product or this market or what have you, 
but we have confidence in the future and this is what we expect. The 
investors will stay with the ship. This is especially true for the 
small high-tech companies, which is what my company was. These are 
companies whose growth we want to encourage. It is not in the public 
interest for these companies to go out of business because of a lawsuit 
based on a financial forecast or information which despite the 
company's best efforts later turns out to be inaccurate. And that can 
happen despite the best intentions of the company.
  I remember how much the stock of biotech companies dropped when we 
were discussing health care last year. And should those biotech 
companies be held accountable for this drop? Of course not. We want to 
protect the research and the innovation that develops from such firms. 
But I believe that this bill goes too far in the effort to do that.
  The recently amended language in S. 240 provides a safe harbor from 
liability unless the issuer's statement is knowingly made with the 
purpose and actual intent of misleading investors, and on its face that 
legislative language looks reasonable. But the committee report notes 
that purpose and actual intent are separate elements that must be 
proven by the investor.
  To me, this standard, although an improvement over the version 
reported out of the Banking Committee, is still too high a threshold. 
This amendment provides safe harbor protections for issuers who make 
forecasts, but we narrow this protection so that issuers who make 
statements with the knowledge that the information was false or 
misleading would be liable. That is a reasonable standard, and it is a 
standard supported by the SEC and by the administration. It protects 
those who should be protected. And it does so without creating a safe 
harbor for those who should be subject to litigation.
  It may seem to those listening or who may be watching this debate 
that the Senator from Maryland and I are splitting hairs with single 
word changes. However, when the next financial scandal rocks our 
markets and investors are prevented from recovering their losses caused 
by intentionally misleading forecasts because they are unable to 
demonstrate actual intent, those affected investors will certainly feel 
the difference. We do not want to hurt those investors who are able to 
demonstrate that an issuer intentionally made a misleading statement 
but are unable to show actual intent.
  I cannot understand this. I say that again as a person who has been 
on both sides of the matter--as an investor and as an issuer. I believe 
that the amendment as proposed provides the right balance. If you make 
a forward-looking statement knowing it was false or misleading, you 
should not be immune from liability. You have to pay the price for the 
deception.
  Now, I understand why the Senator from New York would want to expand 
the current safe harbor. Everyone wants that, including the SEC. But I 
think this bill has gone too far in the other direction. We should not 
be encouraging or protecting fraudulent statements, which I believe is 
what S. 240 might inadvertently do.
  Mr. President, we have the most efficient markets in the world, and 
this is due in large part to the reliability of information available 
to investors. I do not understand why we would want to enact 
legislation that might jeopardize this.
  Once again, I thank my colleague from Arizona for yielding the floor.
  I urge my colleagues to support this amendment, and now I yield the 
floor.
  Mr. McCAIN addressed the Chair.
  The PRESIDING OFFICER. The Senator from Arizona.
  Mr. McCAIN. Mr. President, I thank my friend from New Jersey. I say 
to him I understand the sensitivity of recognition. I remained in the 
minority party for some 12 years, and I appreciate the sensitivity 
involved with that. I believe that in all fairness the Chair is 
required to recognize the person that the Chair hears first, and I as 
always appreciate his courtesy.
  Mr. President, I rise in support of the amendment.
  

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