[Congressional Record Volume 141, Number 107 (Wednesday, June 28, 1995)]
[Senate]
[Pages S9318-S9320]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]


                PRIVATE SECURITIES LITIGATION REFORM ACT

  Mr. ROCKEFELLER. Mr. President, today, I joined a large number of my 
Senate colleagues in voting for S. 240, the Private Securities 
Litigation Reform Act of 1995. The 70-to-29 vote for this bill in its 
revised form demonstrated strong bipartisan commitment to repairing and 
changing the country's securities litigation system.
  Like any effort to change the status quo, especially through 
legislation that must win a majority of support from diverse corners, 
this final product cannot be called perfect. Compromises and tough 
judgment calls had to be made throughout the process of grappling with 
a very complex set of issues posed by securities and the legal system. 
After much consultation and reflection, today I felt the vote for a 
more rational, less costly, and improved system was a vote for this 
bill.
  This bill's fundamental purpose is to reduce and deter frivolous and 
meritless lawsuits in the securities area. The idea is by no means just 
to protect potential defendants. the need for legislation is based on 
the costs and problems created by the current system for investors when 
they cannot get helpful information on investment opportunities; for 
working Americans when the legal costs of the current system saps jobs, 
capital, and growth; and for participants like accountants who are at 
risk of liability that's far beyond their fault. In other words, 
repairing the system is designed to resolve problems that are hurting 
small and large investors, workers and our communities, and specific 
people professionally involved in securities.
  Thirty-one years ago I went to Emmons, WV, to be a VISTA worker 
because I wanted to make some small difference in the lives of other 
people. I quickly learned that West Virginians are people who value 
hard work, and are ready to earn their fair share of what society has 
to offer.
  But there were not enough jobs in Emmons, or in many other places in 
West Virginia. After deciding to make public service my career and West 
Virginia my permanent home, I also made creating long-term, well-paying 
jobs for West Virginians one of my main goals. Three decades later, it 
is still my focus. Almost everything I do for West Virginia must be 
weighed against that goal of creating the opportunity for West 
Virginians to earn a living, and, through work, to achieve the quality 
of life they seek.
  And when West Virginians are able to earn a decent living, and are 
able perhaps to invest a few dollars for their futures through savings 
or investment, I want to make sure that they are treated fairly and are 
protected.
  It was for both of these reasons--protecting the small companies in 
West Virginia that create quality jobs and protect wage-earner 
investors--that I have sponsored the current legislation regarding 
securities litigation. The bill I sponsored would go a long way toward 
curtailing what I believe is an epidemic of frivolous securities fraud 
lawsuits that are brought by a small cadre of lawyers against often 
small and start-up companies, and against their lawyers and accountants 
who may have little to do with the operation of the company.
  The stated purpose of S. 240, as introduced last January, was to 
facilitate the ability of companies to gather capital for investment, 
the underlying theory being that frivolous lawsuits against 
corporations make it very difficult to do so. While American securities 
markets have been very successful, the Banking Committee, after 
extensive hearings, reported that class action suits, as well as the 
fear of being sued in a class action by professional plaintiffs has the 
capital formation markets in terror. From this flows the need to come 
to a better balance between protecting the rights of investors and the 
standards of recovery. In my view, this is an appropriate goal.
  When I was asked to cosponsor S. 240 in January, I carefully analyzed 
its provisions to make sure that it struck a fair balance, and I came 
to the conclusion that it did. Regarding frivolous lawsuits, the bill 
contained many important provisions to assure that meritless lawsuits 
can be dealt with in an expeditious and less costly way. And there were 
several important protections for investors as well, including a 1-year 
extension of the statute of limitations for securities suits, the 
creation of a self-disciplinary auditor oversight board to assure 
truthfulness of securities statements; and encouragement of alternative 
dispute resolution for both plaintiffs and defendants, rather than 
resorting to lengthy and costly litigation in the courts. 
Unfortunately, several of these investor protection provisions have 
been deleted from the bill.
  The Banking Committee's action was not one-sided, however, and the 
bill contains a number of valuable provisions, and changes, to help 
deter frivolous lawsuits. A review of these changes reveals that the 
Committee did:
  Lower the pleading requirements, somewhat, to a standard set by the 
leading Federal circuit.
  Eliminate an onerous ``loser pays'' provision, but replaced it with a 
mandatory requirement that judges review pleadings in these cases under 
Federal Rule 11, which will most often mean that investor-plaintiffs, 
but not defendants, may be punished. Judges already have this 
responsibility under Rule 11, and it should be equally applied to 
plaintiffs and defendants--An amendment by Senator Bingaman has now 
made this provision more balanced.
  Eliminate an investor-plaintiff ``steering committee'' to manage the 
securities class action, but replaced it with a troublesome lead 
plaintiff provision which will likely result in large institutional 
investors--to the exclusion of small investors--controlling class 
actions--An amendment by the Senator Boxer, which would have corrected 
this shortcoming was defeated during earlier consideration of the bill.
  Eliminate a dollar threshold to be the named plaintiff.
  Partially restore SEC enforcement against those who aid and abet the 
commission of a fraud by another, but failed to restore a private right 
of action.
  Other changes included in the committee bill include:
  Expanding the protections of the legislation to include the 1933 
Securities Act.
  Creating a legislative safe harbor for forward-looking economic 
statements about a company, thus ending an ongoing rulemaking on this 
subject by the SEC.
  An extension of the proportional liability protections.
  Providing that investors with the largest financial interest, will 
control securities class action suits.
  Eliminating the loser pays provision, as stated earlier, and 
replacing it with a provision with a strong presumption of fee-shifting 
against investors only.
  During the Senate's floor consideration of the legislation over the 
past week, a number of amendments were proposed by some of my 
colleagues from the Banking Committee. I strongly supported a number of 
these initiatives, and want to review
 each of them.


                    statute of limitations amendment

  In 1991, the Supreme Court decided in the Lampf versus Gilbertson 
case to establish a uniform statute of limitations applicable to 
implied private actions under the Securities Exchange Act of 1934. 
Before this decision, Federal courts had followed the statute of 
limitations in the applicable State. 

[[Page S9319]]
The timeframe established was consistent with that for express causes 
of action for false statements, misrepresentation, and manipulation 
under the 1934 Act: One year from the date of discovery of the 
violation or discovery of the facts constituting the violation, or 3 
years from the date of the violation.
  In 1991, an extension of this statute of limitations was proposed as 
part of the FDIC Improvement Act. Its supporters sought to change the 
statute of limitations to 2 years after the plaintiff knew of the 
securities violation, but in no event more than 5 years after the 
violation occurred. This provision was dropped because of the argument 
that it should only be enacted as part of a bill with further reform of 
the securities litigation system, as we are now doing.
  The extension of the statute of limitations was part of both the 
Domenici/Dodd bill from the 103d Congress, and the original version of 
S. 240 this year that I cosponsored.
  The original S. 240 also provided that a violation that should have 
been discovered through the exercise of reasonable diligence would fall 
under the 2-year category.
  An amendment rejected by the Senate would have returned the statute 
of limitation provision to that which was in the original version of S. 
240. In the committee markup, the statute of limitation provision was 
taken out, returning to a shorter 1-year/3-year provision.
  A good number of our colleagues believed that this provision was 
harmful to business in that it would establish, at least de facto, a 5-
year statute of limitation; that 3 years is a reasonable cap because 
after that, cases become stale and more difficult to defend; that a 1-
year minimum is enough time to get a suit ready; that there are other 
adequate remedies including State actions, blue sky laws, and 
occasionally awarding of disgorgement funds by the SEC; and that the 
amendment would invite claim speculation--allowing investors to sit 
back and see if they turn a profit before suing.
  There were persuasive arguments put forth by supporters, as well. For 
example, the Senator from Nevada [Mr. Bryan] argued that:
  The bill as reported has a statute of limitations that is shorter 
than that in 31 states. Thirteen States also allow tolling of the 
statute until fraud is discovered.
  Under current law, it is too easy for a claim to be barred through no 
fault of the investor, especially because fraud is difficult to detect.
  I supported the amendment because I did not believe that it would 
adversely impact capital formation, and thus job creation.


                     aiding and abetting amendment

  Prior to 1994, courts in every circuit supported the right of 
investors to sue those who aid and abet securities fraud. This right 
arose from common law, but was not specifically provided for in Federal 
securities statutes. For primarily this reason, the Supreme Court--in 
1994--eliminated the right of investors to sue aiders and abettors of 
fraud.
  The Senator from Connecticut [Mr. Dodd] upon whose advice I depend 
heavily in this matter, as well as the SEC, the administration, and 
even the Supreme Court, has expressed the belief that the private right 
of action to pursue those who aid and abet should be replaced by 
statute. At the Committee hearing, Senator Dodd said, ``This is conduct 
that must be deterred, and Congress should enact legislation to restore 
aiding and abetting liability in private actions.''
  The SEC testified before the Banking Committee strongly in favor of 
restoring this investor right because of its deterrent effect on 
fraudulent behavior. Otherwise, those who knowingly or recklessly 
assist in a fraud will be shielded.
  However, the committee failed to restore the private right of action, 
but did empower the SEC to bring aid and abet actions, although not 
authorizing any additional resources for the SEC to undertake this 
added responsibility.
  In my opinion, protecting aiding and abetting has nothing to do with 
capital formation, since it is not applicable to the primary investment 
company. I thus supported an amendment, offered by the Senator from 
Nevada [Mr. Bryan] which sought to restore this important right of 
investors to seek redress only against those who knowingly or 
recklessly provide substantial assistance to another who commits fraud.
          Safe Harbor For Forward-Looking Statements Amendment

  The term ``forward-looking statements'' is broadly defined in S. 240 
to include financial projections on items such as revenues, income, and 
dividends, as well as statements of future economic performance 
required in documents filed with the SEC. As with any attempt to 
foresee the future, such statements always have an element of risk to 
them, and prudent investors must be careful in relying on them.
  Up until 1979, the SEC prohibited disclosure of such forward-looking 
information because it felt that this information was unreliable, and 
it feared that investors would place too much emphasis on these 
materials. After extensive review, the SEC adopted a safe harbor 
regulation for forward-looking statements in 1979. This regulation--
known as rule 175--offers protection for specified forward-looking 
statements when made in documents filed with the SEC. The theory for 
the safe harbor was to encourage voluntary disclosure by companies to 
the SEC. To sustain a fraud suit, a plaintiff/investor needed to show 
that the forward-looking information lacked a reasonable basis and was 
not made in good faith.
  The effectiveness of this regulation has been widely criticized, and 
as recently as May 19, 1995, SEC Chairman Arthur Levitt acknowledged 
``a need for a stronger safe harbor than currently exists.'' In fact, 
the SEC is currently conducting a rulemaking on its safe harbor 
regulation.
  The original S. 240 bill required the SEC to consider adopting rules 
or making recommendations for expanding the safe harbor. This idea was 
strongly endorsed by SEC Chairman Levitt, among others.
  However, the Banking Committee abandoned this approach in favor of 
enacting a statutory safe harbor provision. Many have argued that the 
SEC is in the best position. Many have argued that the SEC is in the 
best position to tailor rules for this issue. The SEC will be able to 
closely monitor the effects of any new policy and quickly modify it if 
need be. The SEC also has the advantage of having already examined this 
problem in great detail.
  More important, however, is the way the committee did this. Under the 
committee version of S. 240, a forward-looking statement can only be 
the basis for fraud finding if the investor-plaintiff can prove that 
the statement is knowingly made with the expectation, purpose, and 
actual intent of misleading investors. Expectation, purpose, and actual 
intent are to be treated as separate elements, each of which must be 
proven independently. This is an
 extremely difficult standard to meet--an amendment adopted by voice 
vote removed the ``expectation'' requirement.

  Any safe harbor provision, whether statutory or by regulation, places 
a greater burden on the investor to uncover fraudulent 
misrepresentations. However, in order to encourage companies to file 
information with the SEC, most believe it is important to have some 
safe harbor provision. Because I believed that the committee's changes 
to S. 240 might make it more difficult for investors to prove that 
forward-looking statements should be liable for fraud--and thus that 
the SEC promulgated rule currently is a much better standard and that 
the Congress should leave this to the SEC--I supported the amendment to 
return this provision to the original S. 240 version.
  That amendment failed, and the Senator from Maryland, Mr. Sarbanes, 
proposed an amendment to modify the standard for recovery for 
fraudulent forward looking statements to require a showing that it was 
made with actual knowledge it was false or actual intent of misleading. 
This was what I believed was a reasonable middle-ground standard 
between what all agreed to be an ineffective current rule on safe 
harbor--reasonable basis/good faith--and the stringent actual intent 
standard inserted in the bill by the committee. Unfortunately, this 
amendment was tabled.


                    proportional liability amendment

  Under current law, each defendant who conspires to commit a 
securities violation is joint and severally liable, and thus can be 
held accountable for 

[[Page S9320]]
100 percent of damages found by a court. Most agree that this unfairly 
treats defendants who have only a small percentage of responsibility.
  As originally introduced, S. 240 provided for joint and several 
liability to be maintained only for primary wrongdoers, knowing 
violators, and those controlling knowing violators.
  As the bill reported by the committee, only knowing violators are 
held joint and severally liable. Knowing securities fraud is defined in 
the bill to exclude reckless violators, whose liability would be 
reduced to proportional liability. Additionally, if the judgment is 
uncollectible, proportionally liable defendants can be held to pay an 
additional 50 percent of their share, and can be made to pay the 
uncollectible share to investors with net worth less than $200,000 and 
who have lost more 10 percent of their net worth. Under the 50 percent 
provision, a defendant could be liable for up to 150 percent of their 
proportional share.
  The bill's proportionality provision is an improvement over current 
law, but may not fully protect investors when a judgment is 
uncollectible from a primary defendant. An exception was carved out so 
that those who have invested more than 10 percent of their net worth 
might still recover at least some portion of the damages even from the 
non-primary defendant.
  An amendment proposed by Senators Bryan and Shelby would have allowed 
for full reallocation of uncollectible shares among culpable 
defendants, while maintaining a system of proportionality as contained 
in the committee bill, to protect minimally responsible defendants, who 
are usually the accountants and attorneys, but at the same time would 
have been, I believe, fairer to victims of investment fraud.
  I supported this important amendment because I believed that it was a 
vast improvement over the current system of joint and several 
liability, but also as a stronger protection for investors.
  To conclude, Mr. President, I am disappointed that the managers 
supporting S. 240 rejected the amendments offered that I voted for. 
Perhaps some further enlightenment and discussion will inspire the 
conferees to incorporate some of them to ensure the balance that I 
think the legal system also calls for.
  Because the current system and its problems should not be left alone, 
I still came to the conclusion that a vote for the bill was in the 
interests of the people I represent and the country. Most of us may not 
be aware of the way the securities litigation system ultimately affects 
jobs, economic growth, and opportunity. The proponents of this bill 
have reminded us of these very real-life and serious effects. Today, I 
felt it was time to support action to revise and change the system so 
that it's more about common sense than a proliferation of lawyers and 
legal costs.


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